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Hallmark Financial Services, Inc. Announces Third Quarter 2016 Earnings Results

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FORT WORTH, Texas, Nov. 07, 2016 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ: HALL) today announced earnings for its third fiscal quarter ended September 30, 2016, including the following highlights:

  • 3rd quarter net income of $5.0 million, or $0.27 per diluted share
  • 3rd quarter catastrophe losses of $2.2 million, or $0.08 per diluted share net of tax
  • 3rd quarter net combined ratio of 96.6%, including 2.4% attributable to catastrophe losses
  • 3rd quarter gross premiums written up 11% compared to prior year
  • 3rd quarter operating cash flow up 127% compared to prior year
  • 3rd quarter ending book value per share of $14.53, up 7% compared to September 30, 2015

"Our Specialty Commercial Segment and Standard Commercial Segment continued to perform well both in the quarter and on a year to date basis. Our investments in additional underwriting talent and new products in the Specialty Commercial Segment are beginning to deliver as expected.  We continue to find opportunities for profitable growth.  As a result, the Specialty Commercial Segment now represents over 70% of our portfolio," said Naveen Anand, President and Chief Executive Officer.

"Auto results in our Personal Segment continue to face challenging headwinds. We will continue to address these challenges by increasing rates, culling unprofitable sectors of this business and implementing changes in our claims processes to improve performance," concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Hallmark reported book value per share of $14.53 as of September 30, 2016, an increase of 7% over September 30, 2015.  Total cash and investments increased $28.9 million during the first nine months of 2016 to $730.7 million, an increase of 7% per share to $39.19 per share.  Our cash balances (including restricted cash) totaled $81.1 million as of September 30, 2016."

Third Quarter    
  2016   2015  % Change   
 ($ in thousands, unaudited)   
Gross premiums written 147,065   132,141   11%   
Net premiums written 95,685   89,924   6%   
Net premiums earned 90,795   88,406   3%   
Investment income, net of expenses 4,070   3,495   16%   
Gain on investments 1,105   28   3846%   
Other-than-temporary impairments -   (363)  -100%   
Total revenues 97,618   93,684   4%   
Net income 5,048   6,698   -25%   
Net income per share - basic$0.27  $0.35   -23%   
Net income per share - diluted$0.27  $0.35   -23%   
Book value per share$14.53  $13.62   7%   
Cash flow from operations 23,198   10,223   127%   
         
         
     
Year to Date    
  2016   2015  % Change   
 ($ in thousands, unaudited)   
Gross premiums written 419,549   390,708   7%   
Net premiums written 278,554   274,603   1%   
Net premiums earned 262,820   263,578   0%   
Investment income, net of expenses 11,943   10,051   19%   
Gain on investments 1,589   5,881   -73%   
Other-than-temporary impairments (2,888)  (2,193)  32%   
Total revenues 278,698   282,331   -1%   
Net income 10,188   18,417   -45%   
Net income per share - basic$0.54  $0.96   -44%   
Net income per share - diluted$0.54  $0.95   -43%   
Book value per share$14.53  $13.62   7%   
Cash flow from operations 25,532   43,101   -41%   
         

Third Quarter 2016 Commentary

Hallmark reported net income of $5.0 million and $10.2 million for the three and nine months ended September 30, 2016 as compared to net income of $6.7 million and $18.4 million for the same periods the prior year. On a diluted basis per share, the Company reported net income of $0.27 per share and $0.54 per share for the three and nine months ended September 30, 2016, as compared to net income of $0.35 per share and $0.95 per share for the same periods the prior year.

Hallmark's consolidated net loss ratio was 68.7% and 67.1% for the three and nine months ended September 30, 2016, as compared to 63.3% and 65.2% for the same periods the prior year.  Hallmark's net expense ratio was 27.9% and 28.9% for the three and nine months ended September 30, 2016 as compared to 27.7% and 28.2% for the same periods the prior year.  Hallmark's net combined ratio was 96.6% and 96.0% for the three and nine months ended September 30, 2016 as compared to 91.0% and 93.4% for the same periods the prior year. 

During the three and nine months ended September 30, 2016, Hallmark's total revenues were $97.6 million and $278.7 million, representing an increase of 4% and a decrease of 1%, respectively, from the $93.7 million and $282.3 million in total revenues for the same periods of 2015.  During the three and nine months ended September 30, 2016, Hallmark's income before tax was $7.2 million and $14.7 million, representing a decrease of $2.6 million and $12.1 million from the $9.8 million and $26.8 million reported during the same periods the prior year.

The increase in revenue for the three months ended September 30, 2016 was primarily attributable to realized gains recognized on the investment portfolio during the current quarter as compared to realized losses recognized during the same period the prior year.  Also contributing to the increase in revenue were higher net premiums earned, higher net investment income and higher commission and fee revenue partially offset by lower finance charge revenue and lower other income.  The higher net premiums earned were driven by higher net premiums written in the Specialty Commercial Segment and Personal Segment.

The decrease in income before tax for the three months ended September 30, 2016 was due primarily to increased loss and loss adjustment expenses ("LAE") of $6.3 million and higher interest expense of $0.4 million partially offset by the increase in revenue discussed above and lower other operating expenses of $0.1 million.  The increase in loss and LAE was primarily the result of unfavorable net prior year loss reserve development in the Specialty Commercial Segment and Personal Segment, as well as higher current accident year loss trends in the Personal Segment and Standard Commercial Segment that was partially offset by higher favorable net prior year loss reserve development in the Standard Commercial Segment.  The increase in interest expense was due to interest on a new revolving credit facility ("Facility B") entered into during the fourth quarter of 2015.

The decrease in revenue during the nine months ended September 30, 2016 was primarily attributable to realized losses recognized on the investment portfolio during the current period as compared to realized gains recognized during the same period the prior year.  Also contributing to the lower revenue was lower net premiums earned, finance charges and other income, partially offset by higher net investment income and higher commission and fee revenue.  The decrease in net premiums earned was primarily attributable to the adverse impact on the Standard Commercial Segment of ceding substantially all unearned workers' compensation premiums effective July 1, 2015, partially offset by the favorable impact of increased retention under a quota share reinsurance agreement in the Personal Segment effective October 1, 2014.

The decrease in income before tax for the nine months ended September 30, 2016 was due primarily to increased loss and LAE of $4.4 million, increased other operating expense of $3.7 million, decreased revenue discussed above and increased interest expense of $0.4 million.  The increase in loss and LAE was primarily the result of an increase in retained losses in the Personal Segment under the quota share reinsurance agreement and higher current accident year loss trends.  Hallmark incurred an aggregate of $10.4 million of net catastrophe losses during the nine months ended September 30, 2016 as compared to $5.3 million for the same period the prior year.  The Company incurred net favorable loss reserve development of $0.8 million for the nine months ended September 30, 2016 as compared to $4.6 million of favorable loss reserve development for the same period in the prior year.  Other operating expenses increased during the nine months ended September 30, 2016 primarily as the result of increased salary and related expenses in the Specialty Commercial Segment and a $1.8 million payment to settle the earn-out related to the previous acquisition of the subsidiaries comprising the Workers Compensation operating unit accrued during the second quarter of 2016, partially offset by lower production related expenses predominately in the Specialty Commercial Segment.  The increase in interest expense was due to interest on Facility B.

During the nine months ended September 30, 2016, Hallmark's cash flow provided by operations was $25.5 million compared to cash flow provided by operations of $43.1 million during the same period the prior year.  The decrease in operating cash flow was primarily due to increased paid losses, including timing of reinsurance claim settlements, partially offset by increased net collected premiums, lower taxes paid, lower net paid operating expenses and higher collected net investment income.

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, Los Angeles and Atlanta.  Hallmark markets, underwrites and services approximately 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.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets    
($ in thousands, except par value) Sept. 30 Dec. 31
ASSETS  2016   2015 
Investments: (unaudited) 
Debt securities, available-for-sale, at fair value (cost: $597,890 in 2016 and $538,629 in 2015)$ 600,791 $ 531,325 
Equity securities, available-for-sale, at fair value (cost: $30,309 in 2016 and $24,951 in 2015)  48,836   47,504 
Total investments  649,627   578,829 
Cash and cash equivalents  69,921   114,446 
Restricted cash  11,156   8,522 
Ceded unearned premiums  81,256   65,094 
Premiums receivable  95,497   83,376 
Accounts receivable  2,133   2,005 
Receivable for securities  685   10,424 
Reinsurance recoverable  133,479   114,287 
Deferred policy acquisition costs  20,701   20,366 
Goodwill  44,695   44,695 
Intangible assets, net  13,108   14,959 
Deferred federal income taxes, net  972   3,360 
Federal income tax recoverable  -   1,779 
Prepaid expenses  1,948   3,213 
Other assets  13,905   10,192 
Total Assets$ 1,139,083 $ 1,075,547 
LIABILITIES AND STOCKHOLDERS' EQUITY    
Liabilities:    
Revolving credit facility payable$ 30,000 $ 30,000 
Subordinated debt securities (less unamortized debt issuance cost of $1,014 in 2016 and $1,053 in 2015)  55,688   55,649 
Reserves for unpaid losses and loss adjustment expenses  455,000   450,878 
Unearned premiums  248,304   216,407 
Reinsurance balances payable  49,803   33,741 
Pension liability  1,987   2,496 
Payable for securities  3,955   1,097 
Federal income tax payable  1,001   - 
Accounts payable and other accrued expenses  22,407   23,253 
Total Liabilities  868,145   813,521 
Commitments and contingencies    
Stockholders' equity:    
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2016 and 2015  3,757   3,757 
Additional paid-in capital  123,263   123,480 
Retained earnings  151,689   141,501 
Accumulated other comprehensive income  11,489   7,418 
Treasury stock (2,229,441 shares in 2016 and 1,775,512 shares in 2015), at cost  (19,260)  (14,130)
Total Stockholders' Equity  270,938   262,026 
Total Liabilities & Stockholders' Equity$ 1,139,083 $ 1,075,547 
 

 

Hallmark Financial Services, Inc. and Subsidiaries     
Consolidated Statements of OperationsThree Months Ended Nine Months Ended
($ in thousands, except share amounts)September 30 September 30
 20162015 20162015
Gross premiums written$ 147,065 $ 132,141  $ 419,549 $ 390,708 
Ceded premiums written  (51,380)  (42,217)   (140,995)  (116,105)
Net premiums written  95,685   89,924    278,554   274,603 
Change in unearned premiums  (4,890)  (1,518)   (15,734)  (11,025)
Net premiums earned  90,795   88,406    262,820   263,578 
          
Investment income, net of expenses  4,070   3,495    11,943   10,051 
Net realized gains (losses)  1,105   (335)   (1,299)  3,688 
Finance charges  1,036   1,619    3,825   4,400 
Commission and fees  546   60    1,278   (41)
Other income  66   439    131   655 
Total revenues  97,618   93,684    278,698   282,331 
          
Losses and loss adjustment expenses  62,337   56,005    176,234   171,820 
Operating expenses  26,344   26,458    82,563   78,818 
Interest expense  1,144   769    3,398   3,043 
Amortization of intangible assets  617   617    1,851   1,851 
Total expenses  90,442   83,849    264,046   255,532 
          
Income before tax  7,176   9,835    14,652   26,799 
Income tax expense  2,128   3,137    4,464   8,382 
Net income$ 5,048 $ 6,698  $ 10,188 $ 18,417 
          
Net income per share:         
Basic$ 0.27 $ 0.35  $ 0.54 $ 0.96 
Diluted$ 0.27 $ 0.35  $ 0.54 $ 0.95 
      


Hallmark Financial Services, Inc. and Subsidiaries 
Consolidated Segment Data     
Three Months Ended Sept. 30(unaudited)         
 Specialty
Commercial
Segment
Standard
Commercial
Segment
Personal SegmentCorporateConsolidated 
($ in thousands) 2016  2015  2016  2015  2016  2015  2016  2015  2016  2015  
Gross premiums written$104,087 $91,446 $18,579 $19,225 $24,399 $21,470 $- $- $147,065 $132,141  
Ceded premiums written (38,064) (28,205) (1,925) (4,145) (11,391) (9,867) -  -  (51,380) (42,217) 
Net premiums written 66,023  63,241  16,654  15,080  13,008  11,603  -  -  95,685  89,924  
Change in unearned premiums (3,661) (2,909) 258  2,087  (1,487) (696) -  -  (4,890) (1,518) 
Net premiums earned 62,362  60,332  16,912  17,167  11,521  10,907  -  -  90,795  88,406  
            
Total revenues 65,855  63,395  18,253  18,477  12,759  12,716  751  (904) 97,618  93,684  
            
Losses and loss adjustment expenses 41,478  36,186  9,622  10,088  11,237  9,731  -  -  62,337  56,005  
            
Pre-tax income (loss) 8,245  11,291  3,195  2,893  (1,750) (224) (2,514) (4,125) 7,176  9,835  
            
Net loss ratio (1) 66.5% 60.0% 56.9% 58.8% 97.5% 89.2%   68.7% 63.3% 
Net expense ratio (1) 25.3% 26.1% 32.3% 32.2% 21.9% 16.1%   27.9% 27.7% 
Net combined ratio (1) 91.8% 86.1% 89.2% 91.0% 119.4% 105.3%   96.6% 91.0% 
            
Favorable (Unfavorable) Prior Year Development (3,532) 2,048  2,696  1,821  (1,138) (783) -  -  (1,974) 3,086  
                                
                                

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(unaudited)         
 Specialty
Commercial
Segment
Standard
Commercial
Segment
Personal SegmentCorporateConsolidated 
($ in thousands) 2016  2015  2016  2015  2016  2015  2016  2015  2016  2015  
Gross premiums written$295,204 $263,103 $59,701 $63,710 $64,644 $63,895 $- $- $419,549 $390,708  
Ceded premiums written (104,265) (78,804) (6,487) (8,178) (30,243) (29,123) -  -  (140,995) (116,105) 
Net premiums written 190,939  184,299  53,214  55,532  34,401  34,772  -  -  278,554  274,603  
Change in unearned premiums (11,555) (4,717) (2,311) 273  (1,868) (6,581) -  -  (15,734) (11,025) 
Net premiums earned 179,384  179,582  50,903  55,805  32,533  28,191  -  -  262,820  263,578  
            
Total revenues 189,478  188,070  54,464  58,941  36,996  33,096  (2,240) 2,224  278,698  282,331  
            
Losses and loss adjustment expenses 115,409  113,168  30,060  33,938  30,765  24,714  -  -  176,234  171,820  
            
Pre-tax income (loss) 25,843  28,739  7,623  7,247  (3,847) (596) (14,967) (8,591) 14,652  26,799  
            
Net loss ratio (1) 64.3% 63.0% 59.1% 60.8% 94.6% 87.7%   67.1% 65.2% 
Net expense ratio (1) 26.4% 25.7% 33.5% 32.6% 21.6% 19.4%   28.9% 28.2% 
Net combined ratio (1) 90.7% 88.7% 92.6% 93.4% 116.2% 107.1%   96.0% 93.4% 
            
Favorable (Unfavorable) Prior Year Development (1,938) 1,852  6,370  4,719  (3,649) (2,009) -  -  783  4,562  
                                
                                

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.

For further information, please contact: Mr. Naveen Anand, President and Chief Executive Officer at 817.348.1600 www.hallmarkgrp.com

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