Hallmark Financial Services, Inc. Announces First Quarter 2017 Earnings Results

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FORT WORTH, Texas, May 09, 2017 (GLOBE NEWSWIRE) — Hallmark Financial Services, Inc. (NASDAQ:HALL) today announced earnings results for its first quarter 2017, including the following highlights:

  • 1st quarter 2017 net income of $4.0 million, or $0.21 per diluted share
  • 1st quarter 2017 total revenues of $96.9 million, increased 8% over prior year
  • 1st quarter 2017 favorable prior year reserve development of $0.5 million
  • 1st quarter 2017 net combined ratio of 98.6%

“The first quarter of fiscal 2017 continued to see elevated losses from our automobile lines of business.  However, we are seeing improvement in our personal auto loss experience for the current accident year compared to prior year as our actions to address increased severity and frequency trends in this portfolio are beginning to have the expected impact.   In the quarter, our Personal Segment did see some adverse loss reserve development from prior accident years which included a large settlement of a homeowners claim, a line that we exited beginning in late 2014,” said Naveen Anand, President and Chief Executive Officer.

“Our Specialty Commercial Segment grew premium production by 9% and reported a profitable 92.9% combined ratio for the quarter despite elevated commercial auto losses compared to the first quarter of the prior year.  During a quarter which the industry saw significant severe convective storm losses, our Standard Commercial Segment experienced insignificant catastrophe losses as a result of our exposure reductions over the last two years and good fortune.  However, during the first quarter of 2017, this segment experienced a $0.9 million hit to pre-tax income from the runoff of our occupational accident and workers’ compensation lines of business as compared to a $0.3 million adverse impact during the same period the prior year.  These runoff lines adversely impacted our Standard Commercial Segment’s combined ratio by 6.2% and our consolidated combined ratio by 1.1% for the first quarter,” concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “We reported book value per share of $14.60 as of March 31, 2017, which is an increase of 2% during the first quarter.  Our total cash and investments increased by $7.7 million during the first three months of 2017 to $748.8 million, or $40.33 per share.  Our balance sheet remains liquid with a very short duration in our investment portfolio and cash balances (including restricted cash) of $85.8 million as of March 31, 2017 are ready to be deployed as we see opportunity.”

First Quarter  
    2017     2016     % Change
  ($ in thousands, unaudited)
Gross premiums written      135,112       128,447     5 %
Net premiums written      88,519       87,626     1 %
Net premiums earned      89,223       84,327     6 %
Investment income, net of expenses     4,479       3,879     15 %
Gain (loss) on investments (1)     2,060       74     2684 %
Other-than-temporary impairments     –        (301 )   -100 %
Total revenues      96,948       90,028     8 %
Net income     3,986       4,074     -2 %
Net income per share – basic $   0.21   $   0.21     0 %
Net income per share – diluted $   0.21   $   0.21     0 %
Book value per share $ 14.60   $ 14.00     4 %
Cash flow from operations   8,839     (1,311 )   nm  
 
(1) includes change in unrealized gain (loss) on other investment recognized in earnings

First Quarter 2017 Commentary

Hallmark reported net income of $4.0 million for the three months ended March 31, 2017 as compared to net income of $4.1 million for the same period the prior year. On a diluted basis per share, the Company reported net income of $0.21 per share for the three months ended both March 31, 2017 and 2016.

Hallmark’s consolidated net loss ratio was 69.3% for the three months ended March 31, 2017, as compared to 65.7% for the same period the prior year.  Hallmark’s net expense ratio was 29.3% for the three months ended March 31, 2017 as compared to 29.6% for the same period the prior year.  Hallmark’s net combined ratio was 98.6% for the three months ended March 31, 2017 as compared to 95.3% for the same period the prior year.  Hallmark’s reported net combined ratio includes a 1.1% adverse impact for the three months ended March 31, 2017, as compared to a 0.5% adverse impact for the same period the prior year, from the workers’ compensation and occupational accident lines of business no longer written by the Standard Commercial Segment.  Similarly, these discontinued lines of business accounted for 6.2% of the 101.6% net combined ratio of the Standard Commercial Segment for the first quarter of 2017 and 2.4% of the 100.7% net combined ratio of the Standard Commercial Segment for the first quarter of 2016.

During the three months ended March 31, 2017, Hallmark’s total revenues were $96.9 million, representing an increase of 8% from the $90.0 million in total revenues for the same period of 2016.  During the three months ended March 31, 2017, Hallmark’s income before tax was $5.8 million, representing a decrease of $0.2 million from the $6.0 million reported during the same period the prior year.

The increase in revenue for the three months ended March 31, 2017 was primarily attributable to net realized gains on the Company’s investment portfolio during the current quarter as compared to net realized losses during the same period the prior year.  Also contributing to the increase in revenue were higher net premiums earned and higher net investment income, partially offset by lower finance charge revenue and lower commission and fee revenue.  The higher net premiums earned were due mostly to increased premium production in the Specialty Commercial Segment.

The decrease in income before tax for the three months ended March 31, 2017 was due primarily to increased losses and loss adjustment expenses (“LAE”) of $6.4 million and higher operating expenses of $0.6 million, partially offset by the increase in revenue discussed above.  The increase in loss and LAE was primarily the result of higher current accident year loss trends in the Specialty Commercial Segment driven by commercial auto lines of business, as well as the increased earned premium discussed above.

During the three months ended March 31, 2017, Hallmark’s cash flow provided by operations was $8.8 million compared to cash flow used by operations of $1.3 million during the same period the prior year.  The increase in operating cash flow was primarily due to decreased paid losses (including timing of reinsurance claim settlements), increased net collected premiums, higher collected net investment income and lower income taxes paid partially offset by higher paid operating expenses and lower collected finance charges.

About Hallmark Financial Services, Inc.

Hallmark Financial Services, Inc. is a diversified specialty property/casualty insurer with offices in Dallas-Fort Worth, San Antonio, Chicago, Los Angeles and Atlanta.  Hallmark markets, underwrites and services over half a billion dollars annually in commercial and personal insurance premiums in select markets.  Hallmark is headquartered in Fort Worth, Texas and its common stock is listed on NASDAQ under the symbol “HALL.”  

Forward-looking statements in this release are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company’s products and services in the marketplace, competitive factors, interest rate trends, general economic conditions, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value)
   Mar. 31

   Dec. 31

ASSETS  2017     2016 
Investments:   (unaudited)    
Debt securities, available-for-sale, at fair value (cost: $605,438 in 2017 and $597,784 in 2016) $ 605,333     $ 597,457  
Equity securities, available-for-sale, at fair value (cost: $30,369 in 2017 and $31,449 in 2016)   53,156       51,711  
Other investment (cost; $3,763 in 2017 and 2016)   4,510       4,951  
Total investments   662,999       654,119  
Cash and cash equivalents   82,953       79,632  
Restricted cash   2,852       7,327  
Ceded unearned premiums   82,358       81,482  
Premiums receivable   94,496       89,715  
Accounts receivable   1,708       2,269  
Receivable for securities     1,254         3,047  
Reinsurance recoverable   148,588       147,821  
Deferred policy acquisition costs   19,094       19,193  
Goodwill   44,695       44,695  
Intangible assets, net   11,875       12,491  
Deferred federal income taxes, net   575       1,365  
Federal income tax recoverable   1,955       3,951  
Prepaid expenses   3,406       1,552  
Other assets   14,416       13,801  
Total Assets $ 1,173,224     $ 1,162,460  
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Liabilities:          
Revolving credit facility payable $   30,000      $    30,000  
Subordinated debt securities (less unamortized debt issuance cost of $988 in 2017 and $1,001 in 2016)     55,714         55,701  
Reserves for unpaid losses and loss adjustment expenses   486,971       481,567  
Unearned premiums   241,427       241,254  
Reinsurance balances payable   51,738       46,488  
Pension liability   2,152       2,203  
Payable for securities     9,036         14,215  
Accounts payable and other accrued expenses   25,160       25,296  
Total Liabilities   902,198       896,724  
Commitments and contingencies          
Stockholders’ equity:          
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2017 and 2016   3,757       3,757  
Additional paid-in capital   123,183       123,166  
Retained earnings   152,013       148,027  
Accumulated other comprehensive income   12,178       10,371  
Treasury stock (2,306,735 shares in 2017 and 2,260,849 shares in 2016), at cost   (20,105 )     (19,585 )
Total Stockholders’ Equity   271,026       265,736  
Total Liabilities & Stockholders’ Equity $ 1,173,224     $ 1,162,460  
 

 

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
($ in thousands, except share amounts)
  Three Months Ended
    March 31
   2017       2016 
Gross premiums written $ 135,112     $ 128,447  
Ceded premiums written   (46,593 )     (40,821 )
Net premiums written   88,519       87,626  
Change in unearned premiums   704       (3,299 )
Net premiums earned   89,223       84,327  
           
Investment income, net of expenses   4,479       3,879  
Net realized gains (losses)   2,060       (227 )
Finance charges   1,053       1,441  
Commission and fees   72       577  
Other income   61       31  
Total revenues   96,948       90,028  
           
Losses and loss adjustment expenses                       61,842       55,395  
Operating expenses   27,495       26,896  
Interest expense   1,156       1,131  
Amortization of intangible assets   617       617  
Total expenses   91,110       84,039  
           
Income before tax   5,838       5,989  
Income tax expense   1,852       1,915  
Net income $ 3,986     $ 4,074  
           
Net income per share:          
Basic $ 0.21     $ 0.21  
Diluted $ 0.21     $ 0.21  
 

 

Hallmark Financial Services, Inc. and Subsidiaries  
Consolidated Segment Data  
                                           
Three Months Ended Mar. 31  (unaudited)                                          
   
  Specialty Commercial

Segment

  Standard Commercial

Segment

  Personal

Segment

  Corporate   Consolidated

 
($ in thousands)  2017      2016       2017       2016       2017       2016       2017       2016       2017       2016    
Gross premiums written $   95,507     $   87,400     $   20,693     $   20,098     $   18,912     $   20,949     $   –      $   –      $ 135,112      $ 128,447    
Ceded premiums written   (35,924 )     (28,663 )     (1,841 )     (2,352 )     (8,828 )     (9,806 )      –              (46,593 )     (40,821 )  
Net premiums written   59,583       58,737       18,852       17,746       10,084       11,143                   88,519       87,626    
Change in unearned premiums   2,346       (1,484 )     (2,138 )     (1,096 )     496       (719 )                 704       (3,299 )  
Net premiums earned   61,929       57,253       16,714       16,650       10,580       10,424                   89,223       84,327    
                                           
Total revenues   65,835       60,583       17,726       17,992       11,863       12,090       1,524       (637 )     96,948       90,028    
                                           
Losses and loss adjustment expenses   41,590       34,413       11,046       11,069       9,206       9,913                   61,842       55,395    
                                           
Pre-tax income (loss), net of non-controlling interest   8,098       10,312       851       1,416       (758 )     (1,083 )     (2,353 )     (4,656 )     5,838       5,989    
                                           
Net loss ratio (1)   67.2 %     60.1 %     66.1 %     66.5 %     87.0 %     95.1 %             69.3 %     65.7 %  
Net expense ratio (1)   25.7 %     27.7 %     35.5 %     34.2 %     26.0 %     19.1 %             29.3 %     29.6 %  
Net combined ratio (1)   92.9 %     87.8 %     101.6 %     100.7 %     113.0 %     114.2 %             98.6 %     95.3 %  
                                           
Favorable (Unfavorable) Prior Year Development     (300 )       2,347         1,458         358         (669 )       (988 )                 489       1,717    
                                           
1  The net loss ratio is calculated as incurred losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP.  The net expense ratio is calculated as total underwriting expenses offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP.  The net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.  
                                           
For further information, please contact:Mr. Naveen Anand, President and Chief Executive Officer at 817.348.1600www.hallmarkgrp.com