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Hallmark Financial Announces Third Quarter 2019 Earnings Results

/EIN News/ -- 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    
  Income Less Tax Net Average Diluted  
($ in thousands) Before Tax Effect After Tax Shares Diluted Per 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 2018 3,757     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 Operations Three 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
Corporate Consolidated
($ 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
Corporate Consolidated
($ 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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