Hallmark Financial Announces Third Quarter 2019 Earnings Results

Company Release - 11/7/2019 4:05 PM ET

DALLAS, Nov. 07, 2019 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the third quarter and nine months ended September 30, 2019.

        
 (Unaudited)Third Quarter Year-to-Date 
   2019  2018  2019 2018 
 $ in millions:       
   Net Income$5.3 $9.7 $33.3$15.4 
   Operating Earnings (1)$6.3 $4.2 $19.6$13.3 
        
 $ per diluted share:        
   Net Income$0.29 $0.53 $1.82$0.85 
   Operating Earnings (1)$0.35 $0.23 $1.07$0.73 
             
     (1) See “Non-GAAP Financial Measures” below 

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

  • Gross premiums written increased 33% to $224.2 million
     
  • Net premiums written increased 45% to $127.8 million
     
  • Net combined ratio improved to 95.8% compared to 98.1%
     
  • Net income of $5.3 million, or $0.29 per diluted share, compared to $9.7 million, or $0.53 per diluted share
     
  • Operating earnings of $6.3 million, or $0.35 per diluted share, compared to $4.2 million, or $0.23 per diluted share (see “Non-GAAP Financial Measures” below)
     
  • Net investment losses of $1.3 million, including $0.2 million in net realized gains and a $1.5 million decrease in net unrealized gains, compared to net investment gains of $7.0 million 

Year-to-Date September 30, 2019 Highlights (all comparisons to same prior year period):

  • Gross premiums written increased 27% to $629.7 million
     
  • Net premiums written increased 37% to $369.0 million
     
  • Net combined ratio improved to 95.6% compared to 97.5%
     
  • Net income of $33.3 million, or $1.82 per diluted share, compared to $15.4 million, or $0.85 per diluted share
     
  • Operating earnings of $19.6 million, or $1.07 per diluted share, compared to $13.3 million, or $0.73 per diluted share (see “Non-GAAP Financial Measures” below)
     
  • Net investment gains of $17.4 million, including $4.4 million in net realized gains and a $13.0 million increase in net unrealized gains, compared to net investment gains of $2.7 million 
     
  • Annualized return on beginning stockholders’ equity of 17.4%
     
  • Annualized operating return on beginning stockholder’s equity of 10.2%, driven by strong underwriting results (see “non-GAAP Financial Measures” below)
     
  • Book value per share grew 11% over prior year and 15% year-to-date to $16.36
         
 Third Quarter Year-to-Date 
  2019  2018 % Change  2019  2018 % Change 
($ in thousands, unaudited)      
Gross premiums written 224,178  169,112 33%  629,730  495,836 27% 
Net premiums written 127,773  88,012 45%  369,019  269,291 37% 
Net premiums earned 112,499  88,862 27%  318,028  271,787 17% 
Investment income, net of expenses 5,050  4,860 4%  15,573  13,706 14% 
Investment gains (losses), net (1,342) 6,980 -119%  17,412  2,678 550% 
Net income 5,287  9,685 -45%  33,341  15,422 116% 
Operating earnings (1) 6,347  4,170 52%  19,586  13,306 47% 
Net income per share - basic$0.29 $0.54 -46% $1.84 $0.85 116% 
Net income per share - diluted$0.29 $0.53 -45% $1.82 $0.85 114% 
Operating earnings per share - diluted (1)$0.35 $0.23 52% $1.07 $0.73 47% 
Operating cash flow 16,215  (9,088)278%  22,900  (18,983)221% 
Book value per share$16.36 $14.79 11%          
(1) See “Non-GAAP Financial Measures” below                  
  

Management Commentary
Overview
Naveen Anand, President and Chief Executive Officer, stated, “Through the first nine months of 2019, Hallmark Financial produced a stellar 17.4% annualized return on beginning equity and is well-positioned to take advantage of the current market dislocation we are seeing in many of our specialty commercial products.

“For the third quarter of 2019, we achieved a combined ratio of 95.8% as compared to 98.1% in the same period last year, an improvement of 2.3 points.  Operating earnings increased 52% for the quarter and 47% year-to-date as compared to the same periods last year.  CAT losses overall were 0.5% in the quarter, mostly seen in our Standard Commercial and Personal Lines portfolios. While our thoughts and prayers go out to our colleagues, friends and neighbors who were impacted by the recent tornadoes in and around Dallas, this fourth quarter event is unlikely to have a material impact on our CAT losses.

Premiums / Segment Overview
Mr. Anand continued, “Gross and net premiums were up sharply in the quarter, driven by double digit rate increases in most of our specialty commercial product lines, with certain lines experiencing rate increases above 20%.  Net premium growth was also impacted by increased retention from the reinsurance changes we made last year on October 1st.  Going forward, net premium growth should begin to trend more in line with gross premiums.

“Specialty Commercial Segment gross premiums for the third quarter of 2019 increased 39% over the same period of the prior year, driven by rate increases. These product lines are seeing increasing rate momentum each quarter, improving terms and conditions and more syndication of limits. This is particularly evident in our E&S property, professional liability, and commercial auto product lines.

“As I noted last quarter, the environment in commercial auto remains difficult.  In this quarter, we added to reserves for prior years to reflect the ongoing severity challenges in this line. We continue to aggressively manage our primary trucking portfolio. In-force customer count has come down 53% since 2015, while premiums have only reduced 4% in that time frame.  Since 2018, our customer count is down 16% while premiums are up 9%. We continue to aggressively close both newly arising and pending claims from older accident years.

Even with the inclusion of the prior year reserve additions, the Specialty Commercial Segment produced an excellent 87.7% combined ratio for the most recent quarter.

“Both our Standard Commercial and Personal segments saw an increase in attritional loss activity in the third quarter of 2019. In Standard Commercial, small property losses, along with 2.7 points of impact from CAT losses, drove our result in the quarter.  In Personal lines, weather related losses, both CAT and non-CAT, adversely impacted our quarterly results.  However, the Personal lines portfolio has achieved a 96.9% net combined ratio in 2019 through nine months, compared to 101.7% for the same period last year,” concluded Mr. Anand.

Book Value and Investment Overview
Mark E. Schwarz, Executive Chairman of Hallmark Financial, stated, “Book value per share increased 15% during the first nine months of 2019 to $16.36 at September 30, 2019, another high-water mark for the Company, driven largely by strong operating earnings and increased total returns from our investment portfolio.  Net investment income increased 14% to $15.6 million for the first nine months of 2019 as compared to the same prior year period, and our total investments and cash increased 9% during the first nine months of 2019 to $729.7 million or $40.26 per share.”

Third Quarter and Year-to-Date 2019 Financial Review

Gross Premiums Written
During the three and nine months ended September 30, 2019, Hallmark Financial’s gross premiums written were $224.2 million and $629.7 million, respectively, representing an increase of 33% and 27%, respectively, from the $169.1 million and $495.8 million in gross premiums written for the same periods in 2018.

Net Premiums Written
During the three and nine months ended September 30, 2019, Hallmark Financial’s net premiums written were $127.8 million and $369.0 million, respectively, representing an increase of 45% and 37%, respectively, from the $88.0 million and $269.3 million in net premiums written for the same periods of 2018.  The increase in net premiums written for the three and nine months ended September 30, 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. 

Net Premiums Earned
Hallmark Financial’s net premiums earned were $112.5 million and $318.0 million for the three and nine months ended September 30, 2019, respectively, as compared to $88.9 million and $271.8 million for the same periods in 2018. 

Pre-Tax Income
Hallmark Financial had pre-tax income of $6.7 million and $42.1 million for the three and nine months ended September 30, 2019, respectively, as compared to $12.1 million and $19.3 million reported during the same periods in 2018. 

The decrease in income before tax for the three months ended September 30, 2019 was largely due to decreased net unrealized gains on Hallmark Financial’s equity and other investments of $1.5 million as compared to an increase in net unrealized gains of $7.1 million for the same period in 2018, partially offset by increased net premiums earned, net investment income and finance charges.

The increase in income before tax for the nine months ended September 30, 2019 was largely due to increased net unrealized gains on Hallmark Financial’s equity and other investments of $13.0 million as compared to increased net unrealized gains of $2.5 million for the same period in 2018.

Also contributing to the year-to-date improvement in income before tax was increased net premiums earned, higher finance charges and higher net investment income.  Year-to-date net realized gains of $4.4 million as compared to $0.2 million for the comparable prior year period also contributed to the improvement in year-to-date income before tax.  

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratios
Increases in revenue were partially offset by increased losses and LAE for the three and nine months ended September 30, 2019 of $14.3 million and $30.3 million, respectively, as compared to the prior year periods due primarily to increased net premiums earned.  In addition, Hallmark Financial reported $6.4 million and $7.8 million, respectively, of unfavorable net prior year loss reserve development during the three and nine months ended September 30, 2019 as compared to $1.6 million and $6.1 million, respectively, of unfavorable net prior year loss reserve development during the same periods of 2018.

Hallmark Financial had a net loss ratio of 69.8% for each of the three and nine months ended September 30, 2019, as compared to 72.3% and 70.5% reported during the same periods in 2018.  Catastrophe losses contributed 0.5% and 1.5% to the net loss ratios for the three and nine months ended September 30, 2019, as compared to 1.9% and 1.7% for the same periods of the prior year. 

The expense ratio was 26.0% and 25.8% for the three and nine months ended September 30, 2019, respectively, as compared to 25.8% and 27.0% reported during the same periods in 2018.  The Company reported a net combined ratio of 95.8% and 95.6% for the three and nine months ended September 30, 2019, compared to 98.1% and 97.5% during the same periods in 2018. 

Net Income
Hallmark Financial reported net income of $5.3 million and $33.3 million for the three and nine months ended September 30, 2019 as compared to $9.7 million and $15.4 million for the three and nine months ended September 30, 2018.  

On a diluted basis per share, the Company reported net income of $0.29 per share and $1.82 per share for the three and nine months ended September 30, 2019 as compared to $0.53 per share and $0.85 per share for the three and nine months ended September 30, 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 
Third Quarter 2019      
Reported GAAP measures$6,660 $1,373 $ 5,287 18,295$ 0.29  
Excluded investment (gains)/losses$1,342 $282 $1,060 18,295$0.06  
Operating earnings$8,002 $1,655 $ 6,347 18,295$ 0.35  
       
Third Quarter 2018      
Reported GAAP measures$12,075 $2,390 $ 9,685 18,167$ 0.53  
Excluded investment (gains)/losses$(6,980)$(1,465)$(5,515)18,167$(0.30) 
Operating earnings$5,095 $925 $ 4,170 18,167$ 0.23  
       
Year-to-Date 2019      
Reported GAAP measures$42,062 $8,721 $ 33,341 18,283$ 1.82  
Excluded investment (gains)/losses$(17,412)$(3,657)$(13,755)18,283$(0.75) 
Operating earnings$24,650 $5,064 $ 19,586 18,283$ 1.07  
       
Year-to-Date 2018      
Reported GAAP measures$19,256 $3,834 $ 15,422 18,203$ 0.85  
Excluded investment (gains)/losses$(2,678)$(562)$(2,116)18,203$(0.12) 
Operating earnings$16,578 $3,272 $ 13,306 18,203$ 0.73  
       

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

Year-to-date 2019 net income  33,341 a
Excluded investment gains, net of tax  (13,755) 
Year-to-date 2019 operating earnings  19,586 b
Annualized year-to-date 2019 net income  44,455 (a / 3 * 4)
Annualized year-to-date 2019 operating earnings  26,115 (b / 3 * 4)
      
Beginning GAAP equity  255,532 c
      
Annualized return on beginning GAAP equity  17.4%(a / 3 * 4) / c
Annualized operating return on beginning GAAP equity  10.2%(b / 3 * 4) / c
      

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 approximately $800 million annually in commercial and personal insurance premiums in select markets.  Hallmark Financial is headquartered in Dallas, 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. David Webb, Senior Vice President of Corporate Development 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 2019  2018 
Investments: (unaudited)    
Debt securities, available-for-sale, at fair value (amortized cost: $564,602 in 2019 and $550,268 in 2018)$568,831 $545,870 
Equity securities (cost: $68,737 in 2019 and $68,709 in 2018) 92,099  80,896 
Other investment (cost: $3,763 in 2019 and $3,763 in 2018) 3,009  1,148 
Total investments 663,939  627,914 
Cash and cash equivalents 64,045  35,594 
Restricted cash 1,697  4,877 
Ceded unearned premiums 164,046  133,031 
Premiums receivable 140,580  119,778 
Accounts receivable 1,646  1,619 
Receivable for securities 6,351  3,369 
Reinsurance recoverable 313,552  252,029 
Deferred policy acquisition costs 21,904  14,291 
Goodwill 44,695  44,695 
Intangible assets, net 5,706  7,555 
Deferred federal income taxes, net 556  4,983 
Prepaid expenses 1,551  2,588 
Other assets 33,266  12,571 
Total Assets$1,463,534 $1,264,894 
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Liabilities:    
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $966 in 2019)$49,034 $- 
Revolving credit facility payable -  30,000 
Subordinated debt securities (less unamortized debt issuance cost of $859 in 2019 and $898 in 2018) 55,843  55,804 
Reserves for unpaid losses and loss adjustment expenses 565,296  527,247 
Unearned premiums 380,066  298,061 
Reinsurance balances payable 61,799  67,328 
Current federal income tax payable 680  4 
Pension liability 1,410  2,018 
Payable for securities 1,952  698 
Accounts payable and other accrued expenses 51,021  28,202 
Total Liabilities 1,167,101  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 20183,757  3,757 
Additional paid-in capital 123,095  123,168 
Retained earnings 194,536  161,195 
Accumulated other comprehensive income (loss) 246  (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 296,433  255,532 
Total Liabilities & Stockholders' Equity$1,463,534 $1,264,894 
 
 


Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of OperationsThree Months Ended Nine Months Ended
($ in thousands, except per share amounts)September 30, September 30,
 2019
2018
 2019
2018
 (unaudited)
(unaudited)
 (unaudited)
(unaudited)
Gross premiums written$224,178 $169,112  $629,730 $495,836 
Ceded premiums written (96,405) (81,100)  (260,711) (226,545)
Net premiums written 127,773  88,012   369,019  269,291 
Change in unearned premiums (15,274) 850   (50,991) 2,496 
Net premiums earned 112,499  88,862   318,028  271,787 
          
Investment income, net of expenses 5,050  4,860   15,573  13,706 
Investment gains (losses), net (1,342) 6,980   17,412  2,678 
Finance charges 1,778  1,347   5,309  3,548 
Commission and fees 287  869   944  2,604 
Other income 13  28   43  89 
Total revenues 118,285  102,946   357,309  294,412 
          
Losses and loss adjustment expenses 78,548  64,245   221,861  191,568 
Operating expenses 31,074  24,829   87,656  78,402 
Interest expense 1,386  1,180   3,879  3,335 
Amortization of intangible assets 617  617   1,851  1,851 
Total expenses 111,625  90,871   315,247  275,156 
          
Income before tax 6,660  12,075   42,062  19,256 
Income tax expense 1,373  2,390   8,721  3,834 
Net income$5,287 $9,685  $33,341 $15,422 
          
Net income per share:         
Basic$0.29 $0.54  $1.84 $0.85 
Diluted$0.29 $0.53  $1.82 $0.85 
      


Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data    
Three Months Ended Sept. 30          
 Specialty Commercial
Segment
Standard Commercial
Segment
Personal
Segment
CorporateConsolidated
($ in thousands, unaudited) 2019  2018  2019  2018  2019  2018  2019  2018  2019  2018 
Gross premiums written$174,695 $125,599 $23,563 $21,560 $25,920 $21,953 $- $- $224,178 $169,112 
Ceded premiums written (84,369) (66,404) (7,814) (2,398) (4,222) (12,298) -  -  (96,405) (81,100)
Net premiums written 90,326  59,195  15,749  19,162  21,698  9,655  -  -  127,773  88,012 
Change in unearned premiums (14,043) 3,203  (590) (449) (641) (1,904) -  -  (15,274) 850 
Net premiums earned 76,283  62,398  15,159  18,713  21,057  7,751  -  -  112,499  88,862 
           
Total revenues 81,341  68,302  16,344  19,857  22,943  9,355  (2,343) 5,432  118,285  102,946 
           
Losses and loss adjustment expenses 50,107  52,106  11,433  6,261  17,008  5,878  -  -  78,548  64,245 
           
Pre-tax income (loss) 14,766  2,452  62  7,264  (740) 684  (7,428) 1,675  6,660  12,075 
           
Net loss ratio (1) 65.7% 83.5% 75.4% 33.5% 80.8% 75.8%   69.8% 72.3%
Net expense ratio (1) 22.0% 22.4% 32.1% 34.1% 24.1% 20.2%   26.0% 25.8%
Net combined ratio (1) 87.7% 105.9% 107.5% 67.6% 104.9% 96.0%   95.8% 98.1%
           
Favorable (Unfavorable) Prior Year Development (6,029) (8,869) (75) 7,269  (273) (9) -  -  (6,377) (1,609)
           

(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
Segment
Standard Commercial
Segment
Personal
Segment
CorporateConsolidated
($ in thousands, unaudited) 2019  2018  2019  2018  2019  2018  2019  2018  2019  2018 
Gross premiums written$482,034 $376,491 $70,926 $65,931 $76,770 $53,414 $- $- $629,730 $495,836 
Ceded premiums written (225,100) (189,145) (23,087) (7,598) (12,524) (29,802) -  -  (260,711) (226,545)
Net premiums written 256,934  187,346  47,839  58,333  64,246  23,612  -  -  369,019  269,291 
Change in unearned premiums (47,109) 9,071  970  (3,648) (4,852) (2,927) -  -  (50,991) 2,496 
Net premiums earned 209,825  196,417  48,809  54,685  59,394  20,685  -  -  318,028  271,787 
           
Total revenues 222,900  213,507  52,027  57,979  65,542  24,891  16,840  (1,965) 357,309  294,412 
           
Losses and loss adjustment expenses 144,430  148,001  33,697  28,562  43,734  15,005  -  -  221,861  191,568 
           
Pre-tax income (loss) 33,161  20,980  3,626  11,239  3,274  661  2,001  (13,624) 42,062  19,256 
           
Net loss ratio (1) 68.8% 75.4% 69.0% 52.2% 73.6% 72.5%   69.8% 70.5%
Net expense ratio (1) 22.1% 22.8% 30.4% 33.5% 23.3% 29.2%   25.8% 27.0%
Net combined ratio (1) 90.9% 98.2% 99.4% 85.7% 96.9% 101.7%   95.6% 97.5%
           
Net Favorable (Unfavorable) Prior Year Development (11,232) (15,730) 3,508  8,829  (57) 839  -  -  (7,781) (6,062)
           

(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.