Hilltop Holdings Inc., a Dallas-based financial holding company with interests in financial services and insurance operations, announced an agreement to acquire SWS Group Inc., a holding company that provides investment and financial services through subsidiaries. SWS Group is also headquartered in Dallas.
The agreement was unanimously approved by the boards of directors of both companies. The merger is subject regulatory approvals and approval of the shareholders of SWS, and is expected close before the end of the year.
The combined broker/dealer will provide a broad range of investment banking and related financial services to individual, corporate and institutional investors, broker/dealers, government entities and financial intermediaries.
In 2011, Hilltop invested $50 million in SWS in the form of a senior unsecured loan. Hilltop Chairman Gerald J. Ford joined the board of directors of SWS and Hilltop President and Chief Executive Officer Jeremy B. Ford became a non-voting observer to the SWS board.
In conjunction with Hilltop’s investment in SWS, Hilltop was issued a warrant to purchase 8,695,652 common shares of SWS at an exercise price of $5.75 per share. Hilltop currently beneficially owns 24 percent of SWS common stock, inclusive of the warrant.
Stephens Inc. acted as financial advisor to Hilltop, and Wachtell, Lipton, Rosen & Katz acted as legal advisor. Sandler O’Neill & Partners, L.P. acted as financial advisor to the Special Committee of the SWS Board of Directors, and Davis Polk & Wardwell LLP acted as legal advisor.
Through its wholly owned subsidiary, PlainsCapital Corp., a regional commercial banking franchise, Hilltop Holdings has three operating subsidiaries: PlainsCapital Bank, PrimeLending, and First Southwest. Hilltop subsidiary National Lloyds Corp. provides property and casualty insurance through two insurance companies, National Lloyds Insurance Co. and American Summit Insurance Co.
National Lloyds, American Summit
In a separate action, ratings agency A.M. Best revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit rating (ICR) of “a” of National Lloyds Insurance Co.
Additionally, A.M. Best affirmed the FSR of A (Excellent) and ICR of “a” of National Lloyds’ affiliate, American Summit Insurance Co.
The ratings outlook for both Waco, Texas-based insurers is stable.
The revised outlook for National Lloyds’ ratings reflects its volatile operating results primarily due to continuation of adverse underwriting performance, as well as its declining risk-adjusted capitalization trend in recent years.
The unfavorable underwriting performance was driven by a variety of frequent and severe weather-related events, particularly tornado, hail and windstorm losses that occurred in recent years. As a result, National Lloyds has reported sizable underwriting losses during the last three years through 2013.
In response, management has increased rates, tightened underwriting guidelines; non-renewed unprofitable business and reduced exposure in geographical regions that are more catastrophe-prone. However, as the majority of its business is conducted in Texas, National Lloyds’ overall results will continue to be exposed to frequent and severe weather-related events as well as economic, judicial and regulatory issues.
The affirmation of National Lloyds’ ratings recognizes its adequate risk-adjusted capitalization, conservative investment strategy and local market expertise within its niche market of personal property insurance.
Furthermore, despite the unfavorable underwriting performance, National Lloyds’ net income earnings have been positive over the last five years driven by other income, net investment income and capital gains.
National Lloyds benefits from the financial flexibility of its immediate parent holding company, National Lloyds Corp. (formally known as NLASCO Inc.), which was evidenced in 2012 by its explicit support in the form of a capital contribution to offset underwriting losses.
The ratings may be downgraded if National Lloyds has a continuation of adverse underwriting results and declining risk-adjusted capitalization. Removal of the negative outlook is contingent upon National Lloyds’ ability to reverse its adverse underwriting performance and improve its overall risk-adjusted capitalization.
The ratings of American Summit acknowledge its favorable risk-adjusted capitalization, conservative investment strategy and generally positive net income earnings primarily driven by a steady stream of net investment income, other income and capital gains over the last five years.
In addition, American Summit maintains moderate underwriting leverage measures and favorable balance sheet liquidity. American Summit has reported generally favorable loss reserve development on both an accident and calendar years basis in most years.
These positive rating factors are partially offset by American Summit’s varying underwriting performance that resulted in underwriting losses in three of the last five years.
The unfavorable underwriting performance was driven by increased weather-related events and elevated losses from an affiliated quota share reinsurance agreement with National Lloyds.
American Summit maintains a prudent catastrophe reinsurance program in conjunction with National Lloyds to mitigate losses associated with severe weather-related catastrophe events.
American Summit’s product offerings are somewhat limited as it is primarily a provider of insurance for the mobile home market with most of its business conducted in Arizona.
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