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| HTH > SEC Filings for HTH > Form 8-K/A on 26-Mar-2009 | All Recent SEC Filings |
26-Mar-2009
Non-Reliance on Previous Financials, Audits or Interim Review
On March 11, 2009, management of Hilltop Holdings Inc., or the Company, concluded that the Company will be required to restate its previously issued unaudited financial statements for the three and nine months ended September 30, 2008, which appeared in the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2008. This conclusion was made following the discovery of an error in conjunction with the performance of the Company's annual internal controls over financial reporting for the year ended December 31, 2008, and an extensive review of its accounting for loss and loss adjustment expenses and payments from reinsurers.
Loss and Loss Adjustment Expense Adjustment
During the three months ended September 30, 2008, the Company incurred catastrophe losses from three hurricanes. In September 2008, the Company received a payment from a reinsurer prior to submitting a proof of claim to that reinsurer for these catastrophe losses. Upon receipt of the payment from the reinsurer, the Company applied the prepayment to loss and loss adjustments expenses during the three and nine months ended September 30, 2008, instead of correctly applying it to reinsurance payable. Due to this error in the application of the prepayment from the reinsurer related to catastrophe losses incurred and the ultimate retention per catastrophic event in the third quarter of 2008 to loss and loss adjustment expense, loss and loss adjustment expense, as set forth in the unaudited consolidated statements of operations for the three and nine months ended September 30, 2008, was understated by $3.1 million. This understatement of loss and loss adjustment expense resulted in net loss for the three and nine months ended September 30, 2008 being understated by $2.0 million, net of tax. The following table sets forth the unaudited consolidated statements of operations for the three and nine months ended September 30, 2008 as originally presented in the Quarterly Report on Form 10-Q, the effect of the required adjustment on a line item basis and the restated amounts after giving effect to adjustment.
Three Months Ended September 30, 2008 Nine Months Ended September 30, 2008
As As
Previously Effect of Previously Effect of
Reported Restatement Restated Reported Restatement Restated
(In thousands, except per share data) (In thousands, except per share data)
Revenue:
Net premiums earned $ 22,745 $ 22,745 $ 83,017 $ 83,017
Net investment income 6,716 6,716 21,887 21,887
Net realized (losses) gains
on investments (1,213 ) (1,213 ) (42,907 ) (42,907 )
Other income 1,503 1,503 4,674 4,674
Total revenue 29,751 29,751 66,671 66,671
Expenses:
Loss and loss adjustment
expenses 26,872 3,074 29,946 66,154 $ 3,074 69,228
Policy acquisition and other
underwriting expenses 10,736 10,736 32,350 32,350
General and administrative
expenses 1,750 1,750 7,207 7,207
Depreciation and
amortization 532 532 1,628 1,628
Interest expense 2,617 2,617 7,925 7,925
Total expenses 42,507 3,074 45,581 115,264 3,074 118,338
(Loss) Income from
continuing operations before
income tax benefit and
allocation to minority
interest (12,756 ) (3,074 ) (15,830 ) (48,593 ) (3,074 ) (51,667 )
Income tax benefit (expense)
from continuing operations 9,092 1,076 10,168 21,618 1,076 22,694
(Loss) Income from
continuing operations before
allocation to minority
interest (3,664 ) (1,998 ) (5,662 ) (26,975 ) (1,998 ) (28,973 )
Minority interest - - - -
(Loss) Income from
continuing operations (3,664 ) (1,998 ) (5,662 ) (26,975 ) (1,998 ) (28,973 )
Preferred stock dividend (2,579 ) (2,579 ) (7,735 ) (7,735 )
Net (loss) income
attributable to common
stockholders $ (6,243 ) $ (1,998 ) $ (8,241 ) $ (34,710 ) $ (1,998 ) $ (36,708 )
(Loss) Income per share from
continuing operations less
preferred dividends
Basic (loss) income per
share $ (0.11 ) $ (0.04 ) $ (0.15 ) $ (0.61 ) $ (0.04 ) $ (0.65 )
Diluted (loss) income per
share $ (0.11 ) $ (0.04 ) $ (0.15 ) $ (0.61 ) $ (0.04 ) $ (0.65 )
(Loss) Income per share
attributable to common
stockholders
Basic (loss) income per
share $ (0.11 ) $ (0.04 ) $ (0.15 ) $ (0.61 ) $ (0.04 ) $ (0.65 )
Diluted (loss) income per
share $ (0.11 ) $ (0.04 ) $ (0.15 ) $ (0.61 ) $ (0.04 ) $ (0.65 )
Weighted average share
information
Basic shares outstanding 56,452 56,452 56,452 56,452
Diluted shares outstanding 56,452 56,452 56,452 56,452
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Reinsurance Receivable and Payable Adjustments
In connection with and as a result of the error in the application of that prepayment to loss and loss adjustment expense, reinsurance payable, as set forth in the balance sheet at September 30, 2008, was understated by $4.1 million, reinsurance receivable was understated by $1.0 million and income taxes receivable was understated by $1.1 million. The following table sets forth the unaudited consolidated balance sheet at September 30, 2008 as originally presented in the Quarterly Report on Form 10-Q, the effect of the required adjustments on a line item basis and the restated amounts after giving effect to the adjustments.
September 30, 2008
As
Previously Effect of
Reported Restatement Restated
(In thousands, except per share data)
Assets
Investments
Fixed maturities
Available for sale securities, at fair value
(amortized cost of $125,078 and $130,253,
respectively) $ 121,434 $ 121,434
Held-to-maturity securities, at amortized cost
(fair value of $14,495 and $6,819,
respectively) 14,103 14,103
Equity securities
Available for sale securities, at fair value
(cost of $9,107 and $55,607, respectively) 8,141 8,141
Total investments 143,678 143,678
Cash and cash equivalents 750,573 750,573
Restricted cash 18,500 18,500
Accrued interest and dividends 1,402 1,402
Premiums receivable 22,396 22,396
Deferred acquisition costs 16,887 16,887
Reinsurance receivable, net of uncollectible
amounts 104,567 $ 1,000 105,567
Prepaid reinsurance premiums 4,851 4,851
Income taxes receivable 27,019 1,076 28,095
Deferred income taxes 16,278 16,278
Goodwill 23,988 23,988
Intangible assets, definite life 11,469 11,469
Intangible assets, indefinite life 3,000 3,000
Property and equipment, net 374 374
Loan origination costs, net 3,314 3,314
Other assets 1,937 1,937
Total Assets $ 1,150,233 $ 2,076 $ 1,152,309
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss adjustment
expenses $ 130,310 $ 130,310
Unearned premiums 72,494 72,494
Reinsurance payable 7,359 4,074 11,433
Accounts payable and accrued expenses 7,088 7,088
Notes payable 138,368 138,368
Dividends payable 1,719 1,719
Other liabilities 5,329 5,329
Total liabilities 362,667 4,074 366,741
Stockholders' Equity
Series A preferred stock, $.01 par value,
5,750,000 shares authorized, 5,000,000 shares
issued and outstanding at September 30, 2008
and December 31, 2007; liquidation preference
of $25 per share plus accrued but unpaid
dividends 119,108 119,108
Common stock, $.01 par value, 100,000,000
shares authorized, 56,451,884 and 56,461,465
shares issued and outstanding at September 30,
2008 and December 31, 2007, respectively 564 564
Additional paid-in capital 917,617 917,617
Accumulated other comprehensive loss (2,997 ) (2,997 )
Accumulated deficit (246,726 ) (1,998 ) (248,724 )
Total stockholders' equity 787,566 (1,998 ) 785,568
Total liabilities and stockholders' equity $ 1,150,233 $ 2,076 $ 1,152,309
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Consequences of Adjustments
In light of this error, the Company's unaudited financial statements previously included in the Company Quarterly Report on Form 10-Q for the period ended September 30, 2008 should no longer be relied upon. The Audit Committee has discussed the matters disclosed in this Current Report on Form 8-K with its independent registered public accounting firm, PricewaterhouseCoopers LLP.
Internal Controls over Financial Reporting
In addition, the Company also is reporting that its disclosure controls and procedures were not effective as of September 30, 2008, as it identified a material weakness in its internal controls over financial reporting due to this error. Accordingly, the Company did not maintain effective internal controls over the accounting for loss and loss adjustment expense and payment from its reinsurers. Specifically, the Company did not maintain effective controls to ensure that its receipt of payments from reinsurers were properly recorded at September 30, 2008, and its ultimate retention per catastrophic event was recorded in accordance with the underlying reinsurance contract and generally accepted accounting principles. The Company had an effective control in place related to this error for the annual reporting period.
Additionally, the Company performed a rigorous review of its retention limits under its existing reinsurance contracts in conjunction with the preparation of its annual consolidated financial statements. Further, following the discovery of this error during the performance of its annual internal controls over financial reporting for the year ended December 31, 2008 and a review of its accounting for loss and loss adjustment expenses and payment from reinsurers, the Company implemented an additional quarterly control to remediate this material weakness. A description of this additional control was set forth in greater detail in the Quarterly Report on Form 10-Q/A previously filed with the Securities and Exchange Commission.
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