Hallmark Financial Services, Inc. Announces Second Quarter 2018 Earnings Results

Company Release - 8/7/2018 4:05 PM ET

FORT WORTH, Texas, Aug. 07, 2018 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ: HALL) today announced results for its second quarter ended June 30, 2018, including the following highlights:

  • 2nd quarter 2018 net income of $5.1 million, or $0.28 per diluted share, versus a net loss of ($3.4) million, or ($0.18) per diluted share, for 2nd quarter 2017
  • Year-to-date 2018 net income of $5.7 million, or $0.31 per diluted share, versus $0.6 million, or $0.03 per diluted share, for prior year-to-date
  • 2nd quarter 2018 operating earnings (1) of $4.7 million, or $0.26 per diluted share, versus ($1.1) million, or ($0.06) per diluted share, for 2nd quarter 2017
  • Year-to-date 2018 operating earnings (1) of $9.1 million, or $0.50 per diluted share, versus $1.6 million, or $0.08 per diluted share, for prior year-to-date
  • 2nd quarter 2018 net combined ratio of 97.0% versus 105.1% for 2nd quarter 2017
  • Year-to-date 2018 net combined ratio of 97.1% versus 101.9% for prior year-to-date
  • Year-to-date 2018 gross premiums written of $326.7 million increased 10% from $297.2 million for prior year-to-date
  • Year-to-date 2018 net premiums written of $181.3 million declined 4% from $189.4 million for prior year-to-date

(1)      See “Non-GAAP Financial Measures” below

“I am pleased to report continued progress in our results that reflect improvement and momentum from the various actions we have undertaken the past couple of years to address the challenges that had emerged in our commercial and personal auto portfolios. We are also seeing results from our efforts to diversify into new specialty product lines and re-balance the geographic footprint of our book. We reported a net combined ratio of 97.0% for the quarter which was significantly improved from last year and in line with our expectations for the quarter. We continue to see strong rate increases in many of our product lines which contributed to the 7% increase in gross premiums for the quarter,” said Naveen Anand, President and Chief Executive Officer.

“Severity and litigation trends in commercial auto continue to be challenging. In addition to having successfully transitioned our claims operations to address the new realities in this line, we continue to drive meaningful rate increases and underwriting actions within our commercial auto portfolio and our more current accident years are performing in line with expectations. We are however, seeing irresponsible new competitors buying their way into the market by underpricing business.  We continue to walk away from risks that don’t meet our pricing requirements or quality standards,” continued Naveen Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share at June 30, 2018 increased to $14.23 compared to $13.82 at December 31, 2017.  Year-to-date net investment income was $8.8 million, a 2% decline compared to the prior year-to-date.  Total cash and investments was $712.5 million, or $39.45 per share, as of June 30, 2018, a decrease of 2% from $40.12 per share as of December 31, 2017.”

Second Quarter     
  2018  2017  % Change
 ($ in thousands, unaudited)
Gross premiums written    173,219    162,056  7%
Net premiums written    89,846    100,894  -11%
Net premiums earned    90,978    90,707  0%
Investment income, net of expenses   4,406    4,587  -4%
Investment (losses) gains, net   533    (72) 840%
Other-than-temporary impairments   -     (3,407) 100%
Net income (loss)   5,090    (3,350) 252%
Operating earnings (loss)   4,669    (1,089) 529%
Net income (loss) per share - basic$  0.28 $  (0.18) 256%
Net income (loss) per share - diluted$  0.28 $  (0.18) 256%
Operating earnings per share - diluted$  0.26 $  (0.06) 533%
Book value per share$  14.23 $  14.57  -2%
Cash flow from operations 9,320  3,545  163%
          


Year-to-Date     
  2018   2017  % Change
 ($ in thousands, unaudited)
Gross premiums written    326,724     297,168  10%
Net premiums written    181,279     189,413  -4%
Net premiums earned    182,925     179,930  2%
Investment income, net of expenses   8,846     9,066  -2%
Investment (losses) gains, net   (4,302)    1,988  -316%
Other-than-temporary impairments   -      (3,407) 100%
Net income (loss)   5,737     636  802%
Operating earnings   9,136     1,558  486%
Net (loss) income per share - basic$  0.32  $  0.03  967%
Net (loss) income per share - diluted$  0.31  $  0.03  933%
Operating earnings per share - diluted$  0.50  $  0.08  525%
Book value per share$  14.23  $  14.57  -2%
Cash flow from operations (9,895)  12,384  -180%
           

Second Quarter 2018 Commentary

Hallmark reported net income of $5.1 million and $5.7 million for the three months and six months ended June 30, 2018, respectively, as compared to ($3.4) million and $0.6 million for the three months and six months ended June 30, 2017, respectively.  On a diluted basis per share, the Company reported net income of $0.28 per share and $0.31 per share for the three months and six months ended June 30, 2018, respectively, as compared to ($0.18) per share and $0.03 per share for the three months and six months ended June 30, 2017, respectively.

Hallmark's consolidated net loss ratio was 70.0% and 69.6% for the three months and six months ended June 30, 2018, respectively, as compared to 77.9% and 73.7% for the three months and six months ended June 30, 2017, respectively.  Hallmark's net expense ratio was 27.0% and 27.5% for the three months and six months ended June 30, 2018, respectively, as compared to 27.2% and 28.2% for the three months and six months ended June 30, 2017, respectively.  Hallmark’s net combined ratio was 97.0% and 97.1% for the three months and six months ended June 30, 2018, respectively, as compared to 105.1% and 101.9% for the three months and six months ended June 30, 2017, respectively. 

During the three months and six months ended June 30, 2018, Hallmark’s gross premiums written were $173.2 million and $326.7 million, representing an increase of 7% and 10%, respectively from the $162.1 million and $297.2 million in gross premiums written for the same periods in 2017.  Hallmark’s net premiums earned were $91.0 million and $182.9 million for the three months and six months ended June 30, 2018, respectively, as compared to $90.7 million and $179.9 million for the same periods in 2017.  During the three months and six months ended June 30, 2018, Hallmark’s income before tax was $6.4 million and $7.2 million, respectively, as compared to ($4.9) million and $0.9 million reported during the same periods in 2017. 

The increase in net premiums earned for both the three months and six months ended June 30, 2018 was driven by improvement in the Specialty Commercial and Standard Commercial Segments, partially offset by lower net premiums earned in the Personal Segment.  The increase in income before tax for the three months and six months ended June 30, 2018 was due primarily to the increase in net earned premiums, as well as higher commissions, fees and finance charges and decreased losses and loss adjustment expenses (“LAE”).  The quarterly results were also favorably impacted by investment gains of $0.5 million in 2018 as compared to investment losses of $3.5 million in 2017, while the year to date results were adversely impacted by higher net investment losses of $4.3 million for 2018 as compared to $1.4 million for 2017.  The decrease in loss and LAE was primarily the result of unfavorable net prior year loss reserve development of $5.0 million and $4.5 million for the three and six months ended June 30, 2018, respectively, as compared to unfavorable net prior year loss reserve development of $10.2 million and $9.7 million during the same periods of 2017.  The investment loss during the six months ended June 30, 2018 includes $3.9 million in loss attributable to the adoption effective January 1, 2018 of Accounting Standards Update No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” which requires equity investments that are not consolidated or accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net income. 

Hallmark’s effective tax rate was 20.1% for the six months ended June 30, 2018 as compared to 30.9% for the same period in 2017.  The decrease in the effective tax rate was due primarily to the lower statutory rate from the enactment of the Tax Cuts and Jobs Act on December 22, 2017.

Non-GAAP Financial Measures

The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”).  However, the Company also presents and discusses certain non-GAAP financial measures that it believes are useful to investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the effectiveness of business strategies and for planning and budgeting purposes.  However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements.  In addition, our definitions of these items may not be comparable to the definitions used by other companies. 

Operating earnings and operating earnings per share are calculated by excluding net investment gains and losses from GAAP net income.  Management believes that operating earnings and operating earnings per share provide useful information to investors about the performance of and underlying trends in the Company’s core insurance operations.  Net income and net income per share are the GAAP measures that are most directly comparable to operating earnings and operating earnings per share.  A reconciliation of operating earnings and operating earnings per share to the most comparable GAAP financial measures is presented below.

    Weighted 
 IncomeLess TaxNetAverageDiluted
($ in thousands)Before TaxEffectAfter TaxShares DilutedPer Share
      
Second Quarter 2018     
Reported GAAP measures$  6,372 $  1,282 $  5,090   18,174$  0.28 
      
Excluded investment losses/gains$  (533)   (112)   (421)  18,174$  (0.02)
      
Operating earnings$  5,839 $  1,170 $  4,669   18,174$  0.26 
      
Second Quarter 2017     
Reported GAAP measures$  (4,918)$  (1,568)$  (3,350)  18,424$  (0.18)
      
Excluded investment losses/gains   3,479    1,218    2,261   18,424$  0.12 
      
Operating loss$  (1,439)$  (350)$  (1,089)  18,424$  (0.06)
      
Year-to-Date 2018     
Reported GAAP measures$  7,181 $  1,444 $  5,737   18,230$  0.31 
      
Excluded investment losses/gains   4,302    903    3,399   18,230$  0.19 
      
Operating earnings$  11,483 $  2,347 $  9,136   18,230$  0.50 
      
Year-to-Date 2017     
Reported GAAP measures$  920 $  284 $  636   18,663$  0.03 
      
Excluded investment losses/gains   1,419    497    922   18,663$  0.05 
      
Operating earnings$  2,339 $  781 $  1,558   18,663$  0.08 
      

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, Atlanta and Jersey City.  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 2018 2017
Investments: (unaudited)
  
Debt securities, available-for-sale, at fair value (amortized cost: $566,520 in 2018 and $604,999 in 2017)$568,826 $605,746 
Equity securities (cost: $40,308 in 2018 and $30,253 in 2017) 57,914  51,763 
Other investment (cost: $3,763 in 2018 and 2017) 3,060  3,824 
Total investments 629,800  661,333 
Cash and cash equivalents 79,583  64,982 
Restricted cash 3,078  2,651 
Ceded unearned premiums 127,504  112,323 
Premiums receivable 112,188  104,373 
Accounts receivable 2,051  1,513 
Receivable for securities   3,780    5,235 
Reinsurance recoverable 215,045  182,928 
Deferred policy acquisition costs 14,058  16,002 
Goodwill 44,695  44,695 
Intangible assets, net 8,791  10,023 
Deferred federal income taxes, net 2,584  1,937 
Federal income tax recoverable 0  7,532 
Prepaid expenses 2,692  1,743 
Other assets 13,431  13,856 
Total Assets$1,259,280 $1,231,126 
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Liabilities:    
Revolving credit facility payable$  30,000  $  30,000 
Subordinated debt securities (less unamortized debt issuance cost of $924 in 2018 and $949 in 2017)   55,778    55,753 
Reserves for unpaid losses and loss adjustment expenses 520,552  527,100 
Unearned premiums 290,177  276,642 
Reinsurance balances payable 65,559  52,487 
Current federal income tax payable 187    -  
Pension liability 1,470  1,605 
Payable for securities   6,706    7,488 
Accounts payable and other accrued expenses 31,942  28,933 
Total Liabilities 1,002,371  980,008 
Commitments and contingencies    
Stockholders’ equity:    
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2018 and 20173,757  3,757 
Additional paid-in capital 123,017  123,180 
Retained earnings 156,585  136,474 
Accumulated other comprehensive income   (865) 12,234 
Treasury stock (2,814,155 shares in 2018 and 2,703,803 shares in 2017), at cost (25,585) (24,527)
Total Stockholders’ Equity 256,909  251,118 
Total Liabilities & Stockholders' Equity$1,259,280 $1,231,126 
       

 

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of OperationsThree Months Ended Six Months Ended
($ in thousands, except share amounts)June 30 June 30
 2018 2017  2018 2017 
 (unaudited)
  (unaudited)
 
Gross premiums written$173,219 $162,056  $  326,724 $297,168 
Ceded premiums written (83,373) (61,162)    (145,445) (107,755)
Net premiums written 89,846  100,894     181,279  189,413 
Change in unearned premiums 1,132  (10,187)    1,646  (9,483)
Net premiums earned 90,978  90,707     182,925  179,930 
          
Investment income, net of expenses 4,406  4,587     8,846  9,066 
Investment gains (losses), net 533  (3,479)    (4,302) (1,419)
Finance charges 1,161  936     2,201  1,989 
Commission and fees 1,032  653     1,735  725 
Other income 15  71     61  132 
Total revenues 98,125  93,475     191,466  190,423 
          
Losses and loss adjustment expenses 63,648  70,704     127,323  132,546 
Operating expenses 26,360  25,879     53,573  53,374 
Interest expense 1,128  1,193     2,155  2,349 
Amortization of intangible assets 617  617     1,234  1,234 
Total expenses 91,753  98,393     184,285  189,503 
          
Income (loss) before tax 6,372  (4,918)    7,181  920 
Income tax expense (benefit) 1,282  (1,568)    1,444  284 
Net income (loss)$5,090 $(3,350) $  5,737 $636 
          
Net income (loss) per share:         
Basic$0.28 $(0.18) $0.32 $0.03 
Diluted$0.28 $(0.18) $0.31 $0.03 
              


Hallmark Financial Services, Inc. and Subsidiaries    
Consolidated Segment Data        
Three Months Ended Jun. 30        
 Specialty Commercial SegmentStandard Commercial SegmentPersonal SegmentCorporateConsolidated
($ in thousands) 2018  2017  2018  2017  2018  2017  2018  2017  2018  2017 
Gross premiums written$  136,079 $  127,805 $  21,574 $  19,769 $ 15,566 $ 14,482 $  -  $  -  $ 173,219 $ 162,056 
Ceded premiums written (72,083) (52,386) (2,645) (2,086) (8,645) (6,690)   -     -   (83,373) (61,162)
Net premiums written 63,996  75,419  18,929  17,683  6,921  7,792    -     -   89,846  100,894 
Change in unearned premiums 2,333  (10,635) (824) (1,301) (377) 1,749    -     -   1,132  (10,187)
Net premiums earned 66,329  64,784  18,105  16,382  6,544  9,541    -     -   90,978  90,707 
           
Total revenues 72,081  69,501  19,247  17,322  7,916  10,684  (1,119) (4,032) 98,125  93,475 
           
Losses and loss adjustment expenses 48,352  50,529  10,621  11,863  4,675  8,312    -     -   63,648  70,704 
           
Pre-tax income (loss) 8,770  3,632  2,656  (199) (1) (892) (5,053) (7,459) 6,372  (4,918)
           
Net loss ratio (1) 72.9% 78.0% 58.7% 72.4% 71.4% 87.1%   70.0% 77.9%
Net expense ratio (1) 22.3% 23.2% 33.2% 34.9% 33.7% 26.6%   27.0% 27.2%
Net combined ratio (1) 95.2% 101.2% 91.9% 107.3% 105.1% 113.7%   97.0% 105.1%
           
Favorable (Unfavorable) Prior Year Development   (5,849)   (8,032)   507    (1,722)   359    (419)   -     -     (4,983)   (10,173)
                               


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        
 Specialty Commercial SegmentStandard Commercial SegmentPersonal SegmentCorporateConsolidated
($ in thousands) 2018  2017  2018  2017  2018  2017  2018  2017  2018  2017 
Gross premiums written$  250,892 $  223,312 $  44,371 $  40,462 $ 31,461 $ 33,394 $  -  $  -  $ 326,724 $ 297,168 
Ceded premiums written (122,741) (88,310) (5,200) (3,927) (17,504) (15,518)   -     -   (145,445) (107,755)
Net premiums written 128,151  135,002  39,171  36,535  13,957  17,876    -     -   181,279  189,413 
Change in unearned premiums 5,868  (8,289) (3,199) (3,439) (1,023) 2,245    -     -   1,646  (9,483)
Net premiums earned 134,019  126,713  35,972  33,096  12,934  20,121    -     -   182,925  179,930 
           
Total revenues 145,205  135,336  38,122  35,048  15,536  22,547  (7,397) (2,508) 191,466  190,423 
           
Losses and loss adjustment expenses 95,895  92,119  22,301  22,909  9,127  17,518    -     -   127,323  132,546 
           
Pre-tax income (loss) 18,528  11,730  3,975  652  (23) (1,650) (15,299) (9,812) 7,181  920 
           
Net loss ratio (1) 71.6% 72.7% 62.0% 69.2% 70.6% 87.1%   69.6% 73.7%
Net expense ratio (1) 23.0% 24.4% 33.2% 35.2% 34.6% 26.3%   27.5% 28.2%
Net combined ratio (1) 94.6% 97.1% 95.2% 104.4% 105.2% 113.4%   97.1% 101.9%
           
Favorable (Unfavorable) Prior Year Development   (6,861)   (8,332)   1,560    (264)   848    (1,088)   -     -     (4,453)   (9,684)
                               


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.
   

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