Hallmark Financial Services, Inc. Announces Second Quarter 2017 Results

Facebooktwittergoogle_pluspinterestby feather

FORT WORTH, Texas, Aug. 07, 2017 (GLOBE NEWSWIRE) — Hallmark Financial Services, Inc. (NASDAQ:HALL) today announced results for its second fiscal quarter ended June 30, 2017, including the following highlights:

  • 2nd quarter 2017 net loss of $3.4 million, or $0.18 per diluted share
  • Year to date 2017 net income of $0.6 million, or $0.03 per diluted share
  • Net combined ratio of 105.1% for 2nd quarter 2017 and 101.9% for year to date 2017
  • 2nd quarter 2017 unfavorable prior year reserve development of $10.2 million versus $1.0 million favorable development for prior year
  • 2nd quarter 2017 total revenues of $93.5 million, increased 3% over prior year
  • Year to date 2017 total revenues of $190.4 million, increased 5% over prior year

“Overall, I’m disappointed in our results as our progress was over-shadowed by prior year loss development from older accident years. This prior year loss development added 11.2 points to the quarter and 5.4 points to the year to date net combined ratio results. Excluding the adverse prior year reserve development, the net combined ratios would have been 93.9% for the second quarter of 2017 and 96.5% for year to date 2017. Our strategy to develop into a diversified specialty insurer is taking hold and we are bringing our commercial and personal auto product lines in balance with the rest of the portfolio,” said Naveen Anand, President and Chief Executive Officer.

“The Specialty Commercial Segment now represents over 75% of our written premium and it is well positioned for sustained growth and profitability particularly as many of our specialty lines products continue to gain traction. Gross premiums written within the Specialty Commercial Segment increased by 23% for the quarter and 17% for year to date 2017 as we continue to optimize our product mix and overall portfolio. The unfavorable prior year reserve development – primarily from commercial auto – added 12.4 points in the quarter and 6.6 points for year to date 2017 to the net combined ratio for the Specialty Commercial Segment,” continued Mr. Anand.

“Results for the Standard Commercial Segment, were adversely impacted by run-off programs, but were nonetheless profitable for the first half of 2017. Losses from severe weather events were down considerably despite a sharp increase in the number of events in our territory. In our Personal Lines Segment, year to date gross premiums written decreased by 17%. We are seeing some improvement in this segment as our underwriting actions and improved claims management processes are beginning to have the expected positive impact,” concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “We reported book value per share of $14.57 as of June 30, 2017, which is an increase of 2% during the first six months of 2017. Our total cash and investments increased by $8.8 million during the first six months of 2017 to $749.9 million, or $41.12 per share. Our balance sheet remains liquid with a very short duration in our investment portfolio and cash balances (including restricted cash) of $80.9 million as of June 30, 2017, ready to be deployed as we see opportunity.”

Second Quarter
2017 2016 % Change
($ in thousands, unaudited)
Gross premiums written 162,056 144,037 13 %
Net premiums written 100,894 95,243 6 %
Net premiums earned 90,707 87,698 3 %
Investment income, net of expenses 4,587 3,994 15 %
Gain (loss) on investments (1) (72 ) 410 -118 %
Other-than-temporary impairments (3,407 ) (2,587 ) 32 %
Total revenues 93,475 91,052 3 %
Net (loss) income (3,350 ) 1,066 -414 %
Net (loss) income per share – basic $ (0.18 ) $ 0.06 -400 %
Net (loss) income per share – diluted $ (0.18 ) $ 0.06 -400 %
Book value per share $ 14.57 $ 14.25 2 %
Cash flow from operations 3,545 3,645 -3 %
Year-to-Date
2017 2016 % Change
($ in thousands, unaudited)
Gross premiums written 297,168 272,484 9 %
Net premiums written 189,413 182,869 4 %
Net premiums earned 179,930 172,025 5 %
Investment income, net of expenses 9,066 7,873 15 %
Gain on investments (1) 1,988 484 311 %
Other-than-temporary impairments (3,407 ) (2,888 ) 18 %
Total revenues 190,423 181,080 5 %
Net income 636 5,140 -88 %
Net income per share – basic $ 0.03 $ 0.27 -89 %
Net income per share – diluted $ 0.03 $ 0.27 -89 %
Book value per share $ 14.57 $ 14.25 2 %
Cash flow from operations 12,384 2,334 431 %
(1) includes change in unrealized gain (loss) on other investment recognized in earnings

Second Quarter 2017 Commentary

Hallmark reported a net loss of $3.4 million for the three months ended June 30, 2017 and net income of $0.6 million for the six months ended June 30, 2017 as compared to net income of $1.1 million and $5.1 million for the same periods the prior year. On a diluted basis per share, the Company reported a net loss of $0.18 per share for the three months ended June 30, 2017 and net income of $0.03 per share for the six months ended June 30, 2017 as compared to net income of $0.06 per share and $0.27 per share for the same periods the prior year.

Hallmark’s consolidated net loss ratio was 77.9% and 73.7% for the three months and six months ended June 30, 2017, as compared to 66.7% and 66.2% for the same periods the prior year. Hallmark’s net expense ratio was 27.2% and 28.2% for the three months and six months ended June 30, 2017 as compared to 29.2% and 29.4% for the same periods the prior year. Hallmark’s net combined ratio was 105.1% and 101.9% for the three months and six months ended June 30, 2017, as compared to 95.9% and 95.6% for the same periods the prior year.

Hallmark’s discontinued workers’ compensation and occupational accident lines of business, previously written by the Standard Commercial Segment, adversely impacted the consolidated net combined ratio by 1.4 points and 1.3 points for the three months and six months ended June 30, 2017, compared to a favorable impact of 2.3 points and 0.9 points for the same periods the prior year. Similarly, these discontinued lines of business accounted for 7.5 points of the 107.3% net combined ratio and 6.8 points of the 104.4% net combined ratio of the Standard Commercial Segment for the three months and six months ended June 30, 2017, as compared to -12.0 points of the 88.0% net combined ratio and -5.0 points of the 94.2% net combined ratio of the Standard Commercial Segment for the same periods the prior year.

During the three months and six months ended June 30, 2017, Hallmark’s total revenues were $93.5 million and $190.4 million, representing an increase of 3% and 5%, from the $91.1 million and $181.1 million in total revenues for the same periods of 2016. During the three months and six months ended June 30, 2017, Hallmark’s income (loss) before tax was ($4.9) million and $0.9 million, as compared to $1.5 million and $7.5 million reported during the same periods the prior year.

The increase in revenue for the three months and six months ended June 30, 2017 was primarily attributable to higher net earned premiums in the Specialty Commercial Segment as well as higher net investment income. These increases in revenue were partially offset by higher realized losses recognized on our investment portfolio during the three months ended June 30, 2017 as compared to the prior year as well as lower finance charges during the three months and six months ended June 30, 2017 as compared to the same periods in 2016.

The increase in revenue for the three months and six months ended June 30, 2017 was offset by higher losses and loss adjustment expenses (“LAE”) of $12.2 million and $18.6 million, as compared to the same periods in 2016. The increase in losses and LAE was primarily the result of unfavorable net prior year loss reserve development of $10.2 million and $9.7 million for the three months and six months ended June 30, 2017 as compared to favorable net prior year loss reserve development of $1.0 million and $2.8 million for the same periods in 2016, as well as higher current accident year loss trends in the MGA Commercial Products operating unit. Other operating expenses decreased mostly as a result of a $1.8 million accrual to the earn-out related to a previous acquisition during the second quarter of 2016 and lower production related expenses due primarily to increased ceding commissions in the Specialty Commercial Segment, partially offset by increased salary and related expenses and professional service fees for the three months and six months ended June 30, 2017 as compared to the same periods of 2016.

During the six months ended June 30, 2017, Hallmark’s cash flow provided by operations was $12.4 million compared to cash flow provided by operations of $2.3 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), higher collected net investment income, lower paid operating expenses, lower income taxes paid and higher collected ceding commissions partially offset by lower collected net premiums 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.

For further information, please contact:

Mr. Naveen Anand, President and Chief Executive Officer at 817.348.1600

www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value) Jun. 30 Dec. 31
ASSETS 2017 2016
Investments: (unaudited)
Debt securities, available-for-sale, at fair value (cost: $605,986 in 2017 and $597,784 in 2016) $ 608,074 $ 597,457
Equity securities, available-for-sale, at fair value (cost: $33,220 in 2017 and $31,449 in 2016) 56,477 51,711
Other investment (cost: $3,763 in 2017 and 2016) 4,448 4,951
Total investments 668,999 654,119
Cash and cash equivalents 77,448 79,632
Restricted cash 3,458 7,327
Ceded unearned premiums 92,638 81,482
Premiums receivable 107,806 89,715
Accounts receivable 1,756 2,269
Receivable for securities 1,620 3,047
Reinsurance recoverable 164,434 147,821
Deferred policy acquisition costs 19,335 19,193
Goodwill 44,695 44,695
Intangible assets, net 11,257 12,491
Deferred federal income taxes, net 1,621 1,365
Federal income tax recoverable 1,797 3,951
Prepaid expenses 2,256 1,552
Other assets 13,720 13,801
Total Assets $ 1,212,840 $ 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 $975 in 2017 and $1,001 in 2016) 55,727 55,701
Reserves for unpaid losses and loss adjustment expenses 505,358 481,567
Unearned premiums 261,893 241,254
Reinsurance balances payable 54,178 46,488
Pension liability 2,100 2,203
Payable for securities 13,257 14,215
Accounts payable and other accrued expenses 24,627 25,296
Total Liabilities 947,140 896,724
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 123,110 123,166
Retained earnings 148,663 148,027
Accumulated other comprehensive income 13,933 10,371
Treasury stock (2,637,434 shares in 2017 and 2,260,849 shares in 2016), at cost (23,763 ) (19,585 )
Total Stockholders’ Equity 265,700 265,736
Total Liabilities & Stockholders’ Equity $ 1,212,840 $ 1,162,460

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations Three Months Ended Six Months Ended
($ in thousands, except share amounts) June 30 June 30
2017 2016 2017 2016
Gross premiums written $ 162,056 $ 144,037 $ 297,168 $ 272,484
Ceded premiums written (61,162 ) (48,794 ) (107,755 ) (89,615 )
Net premiums written 100,894 95,243 189,413 182,869
Change in unearned premiums (10,187 ) (7,545 ) (9,483 ) (10,844 )
Net premiums earned 90,707 87,698 179,930 172,025
Investment income, net of expenses 4,587 3,994 9,066 7,873
Net realized losses (3,479 ) (2,177 ) (1,419 ) (2,404 )
Finance charges 936 1,348 1,989 2,789
Commission and fees 653 155 725 732
Other income 71 34 132 65
Total revenues 93,475 91,052 190,423 181,080
Losses and loss adjustment expenses 70,704 58,502 132,546 113,897
Operating expenses 25,879 29,323 53,374 56,219
Interest expense 1,193 1,123 2,349 2,254
Amortization of intangible assets 617 617 1,234 1,234
Total expenses 98,393 89,565 189,503 173,604
(Loss) income before tax (4,918 ) 1,487 920 7,476
Income tax (benefit) expense (1,568 ) 421 284 2,336
Net (loss) income $ (3,350 ) $ 1,066 $ 636 $ 5,140
Net (loss) income per share:
Basic $ (0.18 ) $ 0.06 $ 0.03 $ 0.27
Diluted $ (0.18 ) $ 0.06 $ 0.03 $ 0.27

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Jun. 30 (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 $ 127,805 $ 103,717 $ 19,769 $ 21,024 $ 14,482 $ 19,296 $ $ $ 162,056 $ 144,037
Ceded premiums written (52,386 ) (37,538 ) (2,086 ) (2,210 ) (6,690 ) (9,046 ) (61,162 ) (48,794 )
Net premiums written 75,419 66,179 17,683 18,814 7,792 10,250 100,894 95,243
Change in unearned premiums (10,635 ) (6,410 ) (1,301 ) (1,473 ) 1,749 338 (10,187 ) (7,545 )
Net premiums earned 64,784 59,769 16,382 17,341 9,541 10,588 90,707 87,698
Total revenues 69,501 63,040 17,322 18,219 10,684 12,147 (4,032 ) (2,354 ) 93,475 91,052
Losses and loss adjustment expenses 50,529 39,518 11,863 9,369 8,312 9,615 70,704 58,502
Pre-tax income (loss), net of non-controlling interest 3,632 7,287 (199 ) 3,011 (892 ) (1,014 ) (7,459 ) (7,797 ) (4,918 ) 1,487
Net loss ratio (1) 78.0 % 66.1 % 72.4 % 54.0 % 87.1 % 90.8 % 77.9 % 66.7 %
Net expense ratio (1) 23.2 % 26.2 % 34.9 % 34.0 % 26.6 % 23.7 % 27.2 % 29.2 %
Net combined ratio (1) 101.2 % 92.3 % 107.3 % 88.0 % 113.7 % 114.5 % 105.1 % 95.9 %
Favorable (Unfavorable) Prior Year Development (8,032 ) (753 ) (1,722 ) 3,316 (419 ) (1,523 ) (10,173 ) 1,040

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.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Six Months Ended Jun. 30 (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 $ 223,312 $ 191,117 $ 40,462 $ 41,122 $ 33,394 $ 40,245 $ $ $ 297,168 $ 272,484
Ceded premiums written (88,310 ) (66,201 ) (3,927 ) (4,562 ) (15,518 ) (18,852 ) (107,755 ) (89,615 )
Net premiums written 135,002 124,916 36,535 36,560 17,876 21,393 189,413 182,869
Change in unearned premiums (8,289 ) (7,894 ) (3,439 ) (2,569 ) 2,245 (381 ) (9,483 ) (10,844 )
Net premiums earned 126,713 117,022 33,096 33,991 20,121 21,012 179,930 172,025
Total revenues 135,336 123,623 35,048 36,211 22,547 24,237 (2,508 ) (2,991 ) 190,423 181,080
Losses and loss adjustment expenses 92,119 73,931 22,909 20,438 17,518 19,528 132,546 113,897
Pre-tax income (loss) 11,730 17,599 652 4,427 (1,650 ) (2,097 ) (9,812 ) (12,453 ) 920 7,476
Net loss ratio (1) 72.7 % 63.2 % 69.2 % 60.1 % 87.1 % 92.9 % 73.7 % 66.2 %
Net expense ratio (1) 24.4 % 27.0 % 35.2 % 34.1 % 26.3 % 21.4 % 28.2 % 29.4 %
Net combined ratio (1) 97.1 % 90.2 % 104.4 % 94.2 % 113.4 % 114.3 % 101.9 % 95.6 %
Favorable (Unfavorable) Prior Year Development (8,332 ) 1,594 (264 ) 3,674 (1,088 ) (2,511 ) (9,684 ) 2,757

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.