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

Company Release - 11/7/2018 4:05 PM ET

FORT WORTH, Texas, Nov. 07, 2018 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ: HALL) today announced results for its third quarter and year-to-date ended September 30, 2018, including the following highlights:

  • 3rd quarter 2018 net income of $9.7 million, or $0.53 per diluted share, versus a net loss of $1.6 million, or $0.09 per diluted share, for 3rd quarter 2017.
  • Year-to-date 2018 net income of $15.4 million, or $0.85 per diluted share, versus a net loss of $0.9 million, or $0.05 per diluted share, for prior year-to-date.
  • 3rd quarter 2018 operating earnings (1) of $4.2 million, or $0.23 per diluted share, versus ($2.9) million, or ($0.16) per diluted share, for 3rd quarter 2017.
  • Year-to-date 2018 operating earnings (1) of $13.3 million, or $0.73 per diluted share, versus ($1.4) million, or ($0.07) per diluted share, for prior year-to-date.
  • 3rd quarter 2018 net combined ratio of 98.1% versus 108.6% for 3rd quarter 2017.
  • Year-to-date 2018 net combined ratio of 97.5% versus 104.2% for prior year-to-date.
  • Year-to-date 2018 gross premiums written of $495.8 million increased 8% from $458.3 million for prior year-to-date.
  • Year-to-date 2018 net premiums written of $269.3 million declined 5% from $284.5 million for prior year-to-date.

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

Naveen Anand, President and Chief Executive Officer, stated, “Our net combined ratio reflects improvement in our underwriting results in comparison to last year on both a quarter and year-to-date basis. These results are trending favorably despite catastrophe losses and net adverse prior year reserve development, which collectively contributed 4.0% for the quarter and 4.1% on a year-to-date basis to the net combined ratio. 

“Rate momentum continues to be strong through the third quarter and on a year-to-date basis.  However, we have seen retention dip slightly as we have held firm on pricing.  Primary commercial auto gross premium decreased by 20% over the last four quarters, following targeted rate increases and underwriting actions.  Just as we did in our Personal Segment, we have developed a proprietary predictive pricing model to support the underwriting process for this portfolio and are seeing positive results from these actions.

“Our Personal Segment produced a welcome result of a 96.0% net combined ratio for the third quarter of 2018. The loss ratio results had stabilized over the last several quarters and, as projected, our expense ratio came more in line with our run rate expectations. The actions taken on the personal auto business are similar to what we are executing in commercial auto from an underwriting, pricing and claims perspective,” said Mr. Anand.

“Our Standard Commercial Segment gross premiums written grew by 10.4% for year-to-date 2018 compared to the prior year. We have been executing our strategy to add states to our footprint and expand our distribution, as well as focusing on a limited group of classes that offer us profitable growth opportunities and where we have expertise.

“Losses from catastrophes contributed 2.2% to the net combined ratio in the third quarter of 2018 and 1.8% on a year-to-date basis, with current quarter catastrophe losses being driven by Hurricane Florence.  Although losses from Hurricane Michael are too early to project, we do not presently expect it to have a significant impact on our portfolio based on our exposure and modeled loss information.  However, this is subject to change as claims are reported and more information becomes available. Our retention on our catastrophe reinsurance program is $5 million,” concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share at September 30, 2018 was $14.79, a year-to-date increase of 7% compared to $13.82 at December 31, 2017.  Year-to-date 2018 net investment income was $13.7 million, a 5% decline compared to the prior year-to-date.  Total cash and investments was $711.2 million, or $39.38 per share, as of September 30, 2018, a decrease of 2% from $40.12 per share as of December 31, 2017.”

 Third Quarter Year-to-Date
 20182017% Change 20182017% Change
($ in thousands, unaudited)     
Gross premiums written 169,112 161,151 5%  495,836 458,319 8%
Net premiums written 88,012 95,049 -7%  269,291 284,462 -5%
Net premiums earned 88,862 88,788 0%  271,787 268,718 1%
Investment income, net of expenses 4,860 5,295 -8%  13,706 14,361 -5%
Investment gains, net 6,980 2,960 136%  2,678 4,948 -46%
Other-than-temporary impairments - (850)100%  - (4,257)100%
Net income (loss) 9,685 (1,560)721%  15,422 (924)1769%
Operating earnings (loss) 4,170 (2,931)242%  13,306 (1,373)1069%
Net income (loss) per share - basic$0.54$(0.09)700% $0.85$(0.05)1800%
Net income (loss) per share - diluted$0.53$(0.09)689% $0.85$(0.05)1800%
Operating earnings per share - diluted$0.23$(0.16)244% $0.73$(0.07)1143%
Book value per share    $14.79$14.40 3%

Third Quarter 2018 Commentary

Hallmark reported net income of $9.7 million and $15.4 million for the three months and nine months ended September 30, 2018, respectively, as compared to a net loss of $1.6 million and $0.9 million for the three months and nine months ended September 30, 2017, respectively.  On a diluted basis per share, the Company reported net income of $0.53 per share and $0.85 per share for the three months and nine months ended September 30, 2018, respectively, as compared to a net loss of $0.09 per share and $0.05 per share for the three months and nine months ended September 30, 2017, respectively.

Hallmark's consolidated net loss ratio was 72.3% and 70.5% for the three months and nine months ended September 30, 2018, respectively, as compared to 81.5% and 76.3% for the three months and nine months ended September 30, 2017, respectively.  Hallmark's net expense ratio was 25.8% and 27.0% for the three months and nine months ended September 30, 2018, respectively, as compared to 27.1% and 27.9% for the three months and nine months ended September 30, 2017, respectively.  Hallmark’s net combined ratio was 98.1% and 97.5% for the three months and nine months ended September 30, 2018, respectively, as compared to 108.6% and 104.2% for the three months and nine months ended September 30, 2017, respectively. 

During the three months and nine months ended September 30, 2018, Hallmark’s gross premiums written were $169.1 million and $495.8 million, representing an increase of 5% and 8%, respectively from the $161.2 million and $458.3 million in gross premiums written for the same periods in 2017.  Hallmark’s net premiums written were $88.0 million and $269.3 million, representing a decrease of 7% and 5%, respectively from the $95.0 million and $284.5 million in net premiums written for the same periods of 2017.  The decline in net premiums written was driven by an intentional shift in the mix of business away from a commercial auto concentration in the portfolio towards targeted growth in the Specialty Commercial operating unit, a larger portion of which is ceded to reinsurers.  Hallmark’s net premiums earned were $88.9 million and $271.8 million for the three months and nine months ended September 30, 2018, respectively, as compared to $88.8 million and $268.7 million for the same periods in 2017.  During the three months and nine months ended September 30, 2018, Hallmark’s income before tax was $12.1 million and $19.3 million, respectively, as compared to a loss before tax of $1.5 million and $0.6 million reported during the same periods in 2017. 

The stable net premiums earned for the three months ended September 30, 2018 was due to net premium growth in the Standard Commercial Segment, offset by lower net premiums earned in the Specialty Commercial and Personal Segments.  The modest increase in net premiums earned for the nine months ended September 30, 2018 was driven by improvements in both 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 nine months ended September 30, 2018 was largely due to increased investment gains and decreased losses and loss adjustment expenses.  The investment gain during the nine months ended September 30, 2018 included $3.2 million in gain 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.  The decrease in loss and LAE was primarily the result of unfavorable net prior year loss reserve development of $1.6 million and $6.1 million for the three and nine months ended September 30, 2018, respectively, as compared to unfavorable net prior year loss reserve development of $10.6 million and $20.2 million during the same periods of 2017.  Higher commissions, fees and finance charges, partially offset by lower investment income, further contributed to the increase in income before tax for the three months and nine months ended September 30, 2018.  The decrease in net investment income for the three and nine months ended September 30, 2018 was primarily the result of the final distribution on a fixed income security during the third quarter of the prior year.

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
Third Quarter 2018     
Reported GAAP measures$12,075 $2,390 $  9,685  18,167$  0.53  
Excluded investment losses/gains$(6,980)$(1,465)$(5,515)18,167$(0.30)
Operating earnings$5,095 $925 $  4,170  18,167$  0.23  
      
Third Quarter 2017     
Reported GAAP measures$(1,525)$35 $  (1,560)18,180$  (0.09)
Excluded investment losses/gains$(2,110)$(739)$(1,371)18,180$(0.07)
Operating loss$(3,635)$(704)$  (2,931)18,180$  (0.16)
      
Year-to-Date 2018     
Reported GAAP measures$19,256 $3,834 $  15,422  18,203$  0.85  
Excluded investment losses/gains$(2,678)$(562)$(2,116)18,203$(0.12)
Operating earnings$16,578 $3,272 $  13,306  18,203$  0.73  
      
Year-to-Date 2017     
Reported GAAP measures$(605)$319 $  (924)18,404$  (0.05)
Excluded investment losses/gains$(691)$(242)$(449)18,404$(0.02)
Operating earnings$(1,296)$77 $  (1,373)18,404$  (0.07)
      

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) Sept. 30 Dec. 31
ASSETS 2018 2017
Investments: (unaudited)  
Debt securities, available-for-sale, at fair value (amortized cost: $571,657 in 2018 and $604,999 in 2017)$574,470 $605,746 
Equity securities (cost: $45,426 in 2018 and $30,253 in 2017) 70,152  51,763 
Other investment (cost: $3,763 in 2018 and 2017) 3,085  3,824 
Total investments 647,707  661,333 
Cash and cash equivalents 59,925  64,982 
Restricted cash 3,519  2,651 
Ceded unearned premiums 135,567  112,323 
Premiums receivable 111,366  104,373 
Accounts receivable 1,464  1,513 
Receivable for securities 3,253  5,235 
Reinsurance recoverable 225,932  182,928 
Deferred policy acquisition costs 13,150  16,002 
Goodwill 44,695  44,695 
Intangible assets, net 8,174  10,023 
Deferred federal income taxes, net 1,042  1,937 
Federal income tax recoverable -  7,532 
Prepaid expenses 2,526  1,743 
Other assets 12,471  13,856 
Total Assets$1,270,791 $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 $911 in 2018 and $949 in 2017) 55,791  55,753 
Reserves for unpaid losses and loss adjustment expenses 530,816  527,100 
Unearned premiums 297,389  276,642 
Reinsurance balances payable 55,830  52,487 
Current federal income tax payable 144  - 
Pension liability 1,403  1,605 
Payable for securities 7,699  7,488 
Accounts payable and other accrued expenses 24,667  28,933 
Total Liabilities 1,003,739  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 2017 3,757  3,757 
Additional paid-in capital 123,053  123,180 
Retained earnings 166,270  136,474 
Accumulated other comprehensive income (443) 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 267,052  251,118 
Total Liabilities & Stockholders' Equity$1,270,791 $1,231,126 


Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of OperationsThree Months Ended Nine Months Ended
($ in thousands, except share amounts)September 30, September 30,
 20182017 20182017
  (unaudited)  (unaudited)
Gross premiums written$169,112 $161,151  $495,836 $458,319 
Ceded premiums written (81,100) (66,102)  (226,545) (173,857)
Net premiums written 88,012  95,049   269,291  284,462 
Change in unearned premiums 850  (6,261)  2,496  (15,744)
Net premiums earned 88,862  88,788   271,787  268,718 
          
Investment income, net of expenses 4,860  5,295   13,706  14,361 
Investment gains, net 6,980  2,110   2,678  691 
Finance charges 1,347  892   3,548  2,881 
Commission and fees 869  570   2,604  1,295 
Other income 28  68   89  200 
Total revenues 102,946  97,723   294,412  288,146 
          
Losses and loss adjustment expenses 64,245  72,379   191,568  204,925 
Operating expenses 24,829  25,071   78,402  78,445 
Interest expense 1,180  1,181   3,335  3,530 
Amortization of intangible assets 617  617   1,851  1,851 
Total expenses 90,871  99,248   275,156  288,751 
          
Income (loss) before tax 12,075  (1,525)  19,256  (605)
Income tax expense (benefit) 2,390  35   3,834  319 
Net income (loss)$9,685 $(1,560) $15,422 $(924)
          
Net income (loss) per share:         
Basic$0.54 $(0.09) $0.85 $(0.05)
Diluted$0.53 $(0.09) $0.85 $(0.05)


Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data    
Three Months Ended Sept. 30          
 Specialty Commercial SegmentStandard Commercial SegmentPersonal SegmentCorporateConsolidated
($ in thousands)20182017201820172018201720182017
2018

2017
Gross premiums written$  125,599 $  127,062 $  21,560 $  19,240 $ 21,953 $ 14,849 $  - $  -  $169,112 $161,151 
Ceded premiums written (66,404) (56,200) (2,398) (2,889) (12,298) (7,013)   -    -   (81,100) (66,102)
Net premiums written 59,195  70,862  19,162  16,351  9,655  7,836    -    -   88,012  95,049 
Change in unearned premiums 3,203  (6,274) (449) (420) (1,904) 433    -    -   850  (6,261)
Net premiums earned 62,398  64,588  18,713  15,931  7,751  8,269    -    -   88,862  88,788 
           
Total revenues 68,302  69,721  19,857  17,401  9,355  9,404  5,432 1,197  102,946  97,723 
           
Losses and loss adjustment expenses 52,106  53,899  6,261  11,760  5,878  6,720    -    -   64,245  72,379 
           
Pre-tax income (loss) 2,452  1,288  7,264  229  684  (661) 1,675 (2,381) 12,075  (1,525)
           
Net loss ratio (1) 83.5% 83.5% 33.5% 73.8% 75.8% 81.3%   72.3% 81.5%
Net expense ratio (1) 22.4% 21.9% 34.1% 34.2% 20.2% 31.2%   25.8% 27.1%
Net combined ratio (1) 105.9% 105.4% 67.6% 108.0% 96.0% 112.5%   98.1% 108.6%
           
Favorable (Unfavorable) Prior Year Development   (8,869)   (9,492)   7,269    (1,330)   (9)   266    -    -     (1,609)  (10,556)

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    
Nine Months Ended Sept. 30          
 Specialty Commercial SegmentStandard Commercial SegmentPersonal SegmentCorporateConsolidated
($ in thousands)2018201720182017201820172018201720182017
Gross premiums written$376,491 $350,374 $65,931 $59,702 $53,414 $48,243 $- $- $495,836 $458,319 
Ceded premiums written (189,145) (144,510) (7,598) (6,816) (29,802) (22,531) -  -  (226,545) (173,857)
Net premiums written 187,346  205,864  58,333  52,886  23,612  25,712  -  -  269,291  284,462 
Change in unearned premiums 9,071  (14,563) (3,648) (3,859) (2,927) 2,678  -  -  2,496  (15,744)
Net premiums earned 196,417  191,301  54,685  49,027  20,685  28,390  -  -  271,787  268,718 
           
Total revenues 213,507  205,057  57,979  52,449  24,891  31,951  (1,965) (1,311) 294,412  288,146 
           
Losses and loss adjustment expenses 148,001  146,018  28,562  34,669  15,005  24,238  -  -  191,568  204,925 
           
Pre-tax income (loss) 20,980  13,018  11,239  881  661  (2,311) (13,624) (12,193) 19,256  (605)
           
Net loss ratio (1) 75.4% 76.3% 52.2% 70.7% 72.5% 85.4%   70.5% 76.3%
Net expense ratio (1) 22.8% 23.6% 33.5% 34.9% 29.2% 27.7%   27.0% 27.9%
Net combined ratio (1) 98.2% 99.9% 85.7% 105.6% 101.7% 113.1%   97.5% 104.2%
           
Favorable (Unfavorable) Prior Year Development (15,730) (17,824) 8,829  (1,594) 839  (822) -  -  (6,062) (20,240)

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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Source: Hallmark Financial Services, Inc.