Hallmark Financial Reports Strong First Quarter 2019 Results

Company Release - 5/8/2019 4:05 PM ET

FORT WORTH, Texas, May 08, 2019 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the first quarter ended March 31, 2019.

    
 (Unaudited)First Quarter
 
   2019  2018 
    
 $ in millions:    
 Net Income$15.0 $0.6 
 Operating Earnings (1)$5.6 $4.5 
     
 $ per diluted share:   
 Net Income$0.83 $0.04 
 Operating Earnings (1)$0.31 $0.24 
(1) See “Non-GAAP Financial Measures” below
 

First Quarter 2019 Highlights (all comparisons to same prior year period):

  • Gross premiums written increased 22% to $187.3 million
     
  • Net premiums written increased 28% to $117.4 million
     
  • Net combined ratio improved to 96.5% compared to 97.4%
     
  • Net income of $15.0 million, or $0.83 per diluted share, compared to $0.6 million, or $0.04 per diluted share
     
  • Operating earnings of $5.6 million, or $0.31 per diluted share, compared to $4.5 million, or $0.24 per diluted share (see “Non-GAAP Financial Measures” below)
     
  • Net investment gains of $11.9 million, including $4.1 million in net realized gains and a $7.8 million increase in net unrealized capital gains, compared to net investment losses of $4.8 million
     
  • Annualized return on beginning equity of 23.5%, including the recovery of equity values
     
  • Annualized operating return on beginning tangible equity of 10.6%, driven by strong underwriting results (see “Non-GAAP Financial Measures” below)
     
  • Book value per share grew 7% to $15.10 during the first quarter
      
  First Quarter
 
   2019  2018 % Change
 
 ($ in thousands, unaudited)    
 Gross premiums written 187,316  153,505 22% 
 Net premiums written 117,403  91,433 28% 
 Net premiums earned 99,030  91,947 8% 
 Investment income, net of expenses 5,111  4,440 15% 
 Investment gains (losses), net 11,937  (4,835)347% 
 Net income 15,025  647 2,222% 
 Operating earnings (1) 5,595  4,467 25% 
 Net income per share - basic$0.83 $0.04 1,975% 
 Net income per share - diluted$0.83 $0.04 1,975% 
 Operating earnings per share - diluted (1)$0.31 $0.24 29% 
 Book value per share$15.10 $13.85 9% 
 
(1) See “Non-GAAP Financial Measures” below
 

Management Commentary
Overview
Naveen Anand, President and Chief Executive Officer, stated, “I am pleased to report a strong start to 2019, as we continue to build on the positive momentum from 2018. Operating earnings increased by 25% over the comparable prior year period, driven by improved underwriting results and increased premiums, reflecting our ability to achieve robust rate increases while pursuing targeted growth opportunities in our specialty markets. Additionally, we continue to maintain an industry superior net expense ratio as we scale the business, realizing the benefit from previous investments in technology, infrastructure and talent, while continuing to devote the necessary resources to improve our capabilities and level of expertise.”

Premiums / Segment Overview
Mr. Anand continued, “The Specialty Commercial Segment gross premiums grew by 17% for the first quarter as compared to the same period the prior year, taking advantage of the firming rate environment across most product lines. The first quarter net combined ratio for this segment was 93.9%, which included 2.4% attributable to catastrophe losses.

“The Standard Commercial Segment gross premiums grew by $2.7 million for the first quarter as compared to the same period the prior year. This segment produced a net combined ratio of 97.5%, which included 2.6% attributable to catastrophe losses.

“The Personal Segment produced a 93.7% net combined ratio for the first quarter as compared to 105.1% reported for the same period the prior year. The Personal Segment results continue to reflect the impact from our pricing and claims improvements as well as the current positive rate environment.

“Hallmark Financial has established itself as a specialty company and is well positioned to take advantage of the opportunities in the current market. There is increased pricing momentum and the rate increases we have been realizing in Commercial Auto and E&S Property are now being attained in other lines. In addition, we are seeing a meaningful uptick in the number of submissions, reflecting the growing demand for specialty insurance and the underserved nature of the markets in which we compete,” concluded Mr. Anand.

Executive Chairman’s Remarks
Mark E. Schwarz, Executive Chairman of Hallmark Financial, stated, “Book value per share increased 7% to $15.10 during the first quarter driven largely by an increase in the market valuation of our investment portfolio, particularly equities, as well as strong operating earnings. Our net investment income was $5.1 million for the quarter, representing a 15% increase compared to the prior year period and reflecting an increase in book yield to 3.5% as of March 31, 2019 on our debt portfolio. Our total investments and cash increased 2% during the first quarter to $681.6 million or $37.61 per share.”

First Quarter 2019 Financial Review

Hallmark Financial reported net income of $15.0 million for the three months ended March 31, 2019 as compared to $0.6 million for the three months ended March 31, 2018. On a diluted basis per share, the Company reported net income of $0.83 per share for the three months ended March 31, 2019 as compared to $0.04 per share for the three months ended March 31, 2018.

During the three months ended March 31, 2019, Hallmark Financial’s gross premiums written were $187.3 million, representing an increase of 22% from the $153.5 million in gross premiums written for the same period in 2018.

During the three months ended March 31, 2019, Hallmark Financial’s net premiums written were $117.4 million, representing an increase of 28% from the $91.4 million in net premiums written for the same period of 2018. The increase in net premiums written for the three months ended March 31, 2019 was primarily due to premium growth in both the Specialty Commercial and Personal Segments as well as increased net retention of business in the Personal Segment.

Hallmark Financial’s net premiums earned were $99.0 million for the three months ended March 31, 2019 as compared to $91.9 million for the same period in 2018.

Hallmark Financial had pre-tax income of $18.9 million for the three months ended March 31, 2019 as compared to $0.8 million reported during the same period in 2018.

The improvement in income before tax for the three months ended March 31, 2019 was largely due to increased net unrealized gains on our equity and other investments of $7.8 million as compared to a decrease in net unrealized gains of $4.8 million reported for the same period in 2018. Also contributing to the improvement in income before tax for the quarter is increased net premiums earned, higher finance charges and higher net investment income. These increases in income before tax was partially offset by increased losses and loss adjustment expenses (“LAE”) of $6.4 million as compared to the prior year due primarily to increased net premiums earned. Hallmark Financial reported $0.1 million of favorable net prior year loss reserve development during the three months ended March 31, 2019 as compared to $0.5 million during the same period of 2018.

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, the Company’s 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
First Quarter 2019     
Reported GAAP measures$18,918 $3,893 $15,025  18,193$0.83  
Excluded investment (gains)/losses$(11,937)$(2,507)$(9,430)18,193$(0.52)
Operating earnings$6,981 $1,386 $5,595  18,193$0.31  
      
First Quarter 2018     
Reported GAAP measures$809 $162 $647  18,293$0.04  
Excluded investment (gains)/losses$4,835 $1,015 $3,820 18,293$0.20 
Operating earnings$5,644 $1,177 $4,467  18,293$0.24  
              

Operating return on beginning tangible equity is calculated as operating earnings divided by GAAP equity at the beginning of the period excluding goodwill. Management believes that operating return on beginning tangible equity provides useful information to investors about the performance of the Company’s core insurance operations relative to its core shareholder equity exclusive of non-depreciable goodwill from prior acquisitions. Return on beginning equity is the GAAP measure that is most directly comparable to operating return on beginning tangible equity. A reconciliation of operating return on beginning tangible equity to return on beginning equity is presented below.

    
1st quarter 2019 net income15,025 a
Excluded investment gains, net of tax(9,430) 
1st quarter 2019 operating earnings5,595 b
Annualized 1st quarter 2019 net income60,100 (a x 4)
Annualized 1st quarter 2019 operating earnings22,380 (b x 4)
   
Beginning GAAP equity255,532 c
Reverse goodwill(44,695) 
Beginning tangible equity210,837 d
   
Annualized return on beginning GAAP equity23.5%(a x 4) / c
Annualized operating return on beginning tangible equity10.6%(b x 4) / d
    

About Hallmark Financial

Hallmark Financial is a specialty property and casualty insurance holding company with a diversified portfolio of insurance products written on a national platform. With six insurance subsidiaries and offices in Dallas-Fort Worth, San Antonio, Chicago, Jersey City and Atlanta, Hallmark Financial markets, underwrites and services over $650 million annually in commercial and personal insurance premiums in select markets. Hallmark Financial 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 materially 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)Mar. 31
Dec. 31
ASSETS 2019  2018 
Investments: (unaudited) 
Debt securities, available-for-sale, at fair value (amortized cost: $523,745 in 2019 and $550,268 in 2018)$522,977 $545,870 
Equity securities (cost: $68,709 in 2019 and $68,709 in 2018) 88,656  80,896 
Other investment (cost: $3,763 in 2019 and $3,763 in 2018) 1,184  1,148 
Total investments 612,817  627,914 
Cash and cash equivalents 65,490  35,594 
Restricted cash 3,322  4,877 
Ceded unearned premiums 132,799  133,031 
Premiums receivable 132,025  119,778 
Accounts receivable 1,851  1,619 
Receivable for securities 2,292  3,369 
Reinsurance recoverable 268,648  252,029 
Deferred policy acquisition costs 19,225  14,291 
Goodwill 44,695  44,695 
Intangible assets, net 6,940  7,555 
Deferred federal income taxes, net 1,727  4,983 
Prepaid expenses 4,128  2,588 
Other assets 32,772  12,571 
Total Assets$1,328,731 $1,264,894 
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Liabilities:    
Revolving credit facility payable$30,000 $30,000 
Subordinated debt securities (less unamortized debt issuance cost of $885 in 2019 and $898 in 2018) 55,817  55,804 
Reserves for unpaid losses and loss adjustment expenses 530,226  527,247 
Unearned premiums 316,201  298,061 
Reinsurance balances payable 68,681  67,328 
Current federal income tax payable 1,411  4 
Pension liability 1,982  2,018 
Payable for securities 1,503  698 
Accounts payable and other accrued expenses 49,258  28,202 
Total Liabilities 1,055,079  1,009,362 
Commitments and contingencies    
Stockholders’ equity:    
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2019 and 2018 3,757  3,757 
Additional paid-in capital 122,638  123,168 
Retained earnings 176,220  161,195 
Accumulated other comprehensive loss (3,762) (6,660)
Treasury stock (2,749,738 shares in 2019 and 2,846,131 shares in 2018), at cost (25,201) (25,928)
Total Stockholders’ Equity 273,652  255,532 
Total Liabilities & Stockholders' Equity$1,328,731 $1,264,894 


Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations Three Months Ended
($ in thousands, except per share amounts) March 31,
  2019
2018
  (unaudited)
(unaudited)
Gross premiums written $187,316 $153,505 
Ceded premiums written  (69,913) (62,072)
Net premiums written  117,403  91,433 
Change in unearned premiums  (18,373) 514 
Net premiums earned  99,030  91,947 
      
Investment income, net of expenses  5,111  4,440 
Investment gains (losses), net  11,937  (4,835)
Finance charges  1,734  1,040 
Commission and fees  293  703 
Other income  16  46 
Total revenues  118,121  93,341 
      
Losses and loss adjustment expenses  70,087  63,675 
Operating expenses  27,246  27,213 
Interest expense  1,253  1,027 
Amortization of intangible assets  617  617 
Total expenses  99,203  92,532 
      
Income before tax  18,918  809 
Income tax expense  3,893  162 
Net income $15,025 $647 
      
Net income per share:     
Basic $0.83 $0.04 
Diluted $0.83 $0.04 


Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Mar. 31
 Specialty Commercial
Segment
Standard Commercial
Segment
Personal
Segment
CorporateConsolidated
($ in thousands, unaudited) 2019  2018  2019  2018  2019  2018  2019  2018 20192018
Gross premiums written$134,399 $114,813 $25,528 $22,797 $27,389 $15,895 $- $- $187,316 $153,505 
Ceded premiums written (57,361) (50,658) (8,103) (2,555) (4,449) (8,859) -  - (69,913)(62,072)
Net premiums written 77,038  64,155  17,425  20,242  22,940  7,036  -  - 117,403 91,433 
Change in unearned premiums (12,850) 3,535  (51) (2,375) (5,472) (646) -  - (18,373)514 
Net premiums earned 64,188  67,690  17,374  17,867  17,468  6,390  -  - 99,030 91,947 
           
Total revenues 67,967  73,124  18,373  18,875  19,483  7,620  12,298  (6,278)118,121 93,341 
           
Losses and loss adjustment expenses 45,949  47,543  11,651  11,680  12,487  4,452  -  - 70,087 63,675 
           
Pre-tax income (loss) 7,968  9,758  1,507  1,319  1,573  (22) 7,870  (10,246)18,918 809 
           
Net loss ratio (1) 71.6% 70.2% 67.1% 65.4% 71.5% 69.7%  70.8%69.3%
Net expense ratio (1) 22.3% 23.8% 30.4% 33.1% 22.2% 35.4%  25.7%28.1%
Net combined ratio (1) 93.9% 94.0% 97.5% 98.5% 93.7% 105.1%  96.5%97.4%
           
Net Favorable (Unfavorable) Prior Year Development (1,926) (1,012) 1,805  1,053  187  489  -  - 66 530 
 
(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.