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

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FORT WORTH, Texas, Aug. 07, 2018 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ:HALL) today announced results for its second quarter ended June 30, 2018, including the following highlights:

  • 2nd quarter 2018 net income of $5.1 million, or $0.28 per diluted share, versus a net loss of ($3.4) million, or ($0.18) per diluted share, for 2nd quarter 2017
  • Year-to-date 2018 net income of $5.7 million, or $0.31 per diluted share, versus $0.6 million, or $0.03 per diluted share, for prior year-to-date
  • 2nd quarter 2018 operating earnings (1) of $4.7 million, or $0.26 per diluted share, versus ($1.1) million, or ($0.06) per diluted share, for 2nd quarter 2017
  • Year-to-date 2018 operating earnings (1) of $9.1 million, or $0.50 per diluted share, versus $1.6 million, or $0.08 per diluted share, for prior year-to-date
  • 2nd quarter 2018 net combined ratio of 97.0% versus 105.1% for 2nd quarter 2017
  • Year-to-date 2018 net combined ratio of 97.1% versus 101.9% for prior year-to-date
  • Year-to-date 2018 gross premiums written of $326.7 million increased 10% from $297.2 million for prior year-to-date
  • Year-to-date 2018 net premiums written of $181.3 million declined 4% from $189.4 million for prior year-to-date

(1)      See "Non-GAAP Financial Measures" below

"I am pleased to report continued progress in our results that reflect improvement and momentum from the various actions we have undertaken the past couple of years to address the challenges that had emerged in our commercial and personal auto portfolios. We are also seeing results from our efforts to diversify into new specialty product lines and re-balance the geographic footprint of our book. We reported a net combined ratio of 97.0% for the quarter which was significantly improved from last year and in line with our expectations for the quarter. We continue to see strong rate increases in many of our product lines which contributed to the 7% increase in gross premiums for the quarter," said Naveen Anand, President and Chief Executive Officer.

"Severity and litigation trends in commercial auto continue to be challenging. In addition to having successfully transitioned our claims operations to address the new realities in this line, we continue to drive meaningful rate increases and underwriting actions within our commercial auto portfolio and our more current accident years are performing in line with expectations. We are however, seeing irresponsible new competitors buying their way into the market by underpricing business.  We continue to walk away from risks that don't meet our pricing requirements or quality standards," continued Naveen Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Book value per share at June 30, 2018 increased to $14.23 compared to $13.82 at December 31, 2017.  Year-to-date net investment income was $8.8 million, a 2% decline compared to the prior year-to-date.  Total cash and investments was $712.5 million, or $39.45 per share, as of June 30, 2018, a decrease of 2% from $40.12 per share as of December 31, 2017."

Second Quarter          
    2018     2017     % Change
  ($ in thousands, unaudited)
Gross premiums written      173,219       162,056     7 %
Net premiums written      89,846       100,894     -11 %
Net premiums earned      90,978       90,707     0 %
Investment income, net of expenses     4,406       4,587     -4 %
Investment (losses) gains, net     533       (72 )   840 %
Other-than-temporary impairments     -        (3,407 )   100 %
Net income (loss)     5,090       (3,350 )   252 %
Operating earnings (loss)     4,669       (1,089 )   529 %
Net income (loss) per share - basic $   0.28   $   (0.18 )   256 %
Net income (loss) per share - diluted $   0.28   $   (0.18 )   256 %
Operating earnings per share - diluted $   0.26   $   (0.06 )   533 %
Book value per share $   14.23   $   14.57     -2 %
Cash flow from operations   9,320     3,545     163 %
                   


Year-to-Date          
    2018       2017     % Change
  ($ in thousands, unaudited)
Gross premiums written      326,724         297,168     10 %
Net premiums written      181,279         189,413     -4 %
Net premiums earned      182,925         179,930     2 %
Investment income, net of expenses     8,846         9,066     -2 %
Investment (losses) gains, net     (4,302 )       1,988     -316 %
Other-than-temporary impairments     -          (3,407 )   100 %
Net income (loss)     5,737         636     802 %
Operating earnings     9,136         1,558     486 %
Net (loss) income per share - basic $   0.32     $   0.03     967 %
Net (loss) income per share - diluted $   0.31     $   0.03     933 %
Operating earnings per share - diluted $   0.50     $   0.08     525 %
Book value per share $   14.23     $   14.57     -2 %
Cash flow from operations   (9,895 )     12,384     -180 %
                     

Second Quarter 2018 Commentary

Hallmark reported net income of $5.1 million and $5.7 million for the three months and six months ended June 30, 2018, respectively, as compared to ($3.4) million and $0.6 million for the three months and six months ended June 30, 2017, respectively.  On a diluted basis per share, the Company reported net income of $0.28 per share and $0.31 per share for the three months and six months ended June 30, 2018, respectively, as compared to ($0.18) per share and $0.03 per share for the three months and six months ended June 30, 2017, respectively.

Hallmark's consolidated net loss ratio was 70.0% and 69.6% for the three months and six months ended June 30, 2018, respectively, as compared to 77.9% and 73.7% for the three months and six months ended June 30, 2017, respectively.  Hallmark's net expense ratio was 27.0% and 27.5% for the three months and six months ended June 30, 2018, respectively, as compared to 27.2% and 28.2% for the three months and six months ended June 30, 2017, respectively.  Hallmark's net combined ratio was 97.0% and 97.1% for the three months and six months ended June 30, 2018, respectively, as compared to 105.1% and 101.9% for the three months and six months ended June 30, 2017, respectively. 

During the three months and six months ended June 30, 2018, Hallmark's gross premiums written were $173.2 million and $326.7 million, representing an increase of 7% and 10%, respectively from the $162.1 million and $297.2 million in gross premiums written for the same periods in 2017.  Hallmark's net premiums earned were $91.0 million and $182.9 million for the three months and six months ended June 30, 2018, respectively, as compared to $90.7 million and $179.9 million for the same periods in 2017.  During the three months and six months ended June 30, 2018, Hallmark's income before tax was $6.4 million and $7.2 million, respectively, as compared to ($4.9) million and $0.9 million reported during the same periods in 2017. 

The increase in net premiums earned for both the three months and six months ended June 30, 2018 was driven by improvement in 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 six months ended June 30, 2018 was due primarily to the increase in net earned premiums, as well as higher commissions, fees and finance charges and decreased losses and loss adjustment expenses ("LAE").  The quarterly results were also favorably impacted by investment gains of $0.5 million in 2018 as compared to investment losses of $3.5 million in 2017, while the year to date results were adversely impacted by higher net investment losses of $4.3 million for 2018 as compared to $1.4 million for 2017.  The decrease in loss and LAE was primarily the result of unfavorable net prior year loss reserve development of $5.0 million and $4.5 million for the three and six months ended June 30, 2018, respectively, as compared to unfavorable net prior year loss reserve development of $10.2 million and $9.7 million during the same periods of 2017.  The investment loss during the six months ended June 30, 2018 includes $3.9 million in loss 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. 

Hallmark's effective tax rate was 20.1% for the six months ended June 30, 2018 as compared to 30.9% for the same period in 2017.  The decrease in the effective tax rate was due primarily to the lower statutory rate from the enactment of the Tax Cuts and Jobs Act on December 22, 2017.

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  
  Income Less Tax Net Average Diluted
($ in thousands) Before Tax Effect After Tax Shares Diluted Per Share
           
Second Quarter 2018          
Reported GAAP measures $   6,372   $   1,282   $   5,090     18,174 $   0.28  
           
Excluded investment losses/gains $   (533 )     (112 )     (421 )   18,174 $   (0.02 )
           
Operating earnings $   5,839   $   1,170   $   4,669     18,174 $   0.26  
           
Second Quarter 2017          
Reported GAAP measures $   (4,918 ) $   (1,568 ) $   (3,350 )   18,424 $   (0.18 )
           
Excluded investment losses/gains     3,479       1,218       2,261     18,424 $   0.12  
           
Operating loss $   (1,439 ) $   (350 ) $   (1,089 )   18,424 $   (0.06 )
           
Year-to-Date 2018          
Reported GAAP measures $   7,181   $   1,444   $   5,737     18,230 $   0.31  
           
Excluded investment losses/gains     4,302       903       3,399     18,230 $   0.19  
           
Operating earnings $   11,483   $   2,347   $   9,136     18,230 $   0.50  
           
Year-to-Date 2017          
Reported GAAP measures $   920   $   284   $   636     18,663 $   0.03  
           
Excluded investment losses/gains     1,419       497       922     18,663 $   0.05  
           
Operating earnings $   2,339   $   781   $   1,558     18,663 $   0.08  
           

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)   Jun. 30   Dec. 31
ASSETS   2018   2017
Investments:   (unaudited)
   
Debt securities, available-for-sale, at fair value (amortized cost: $566,520 in 2018 and $604,999 in 2017) $ 568,826   $ 605,746  
Equity securities (cost: $40,308 in 2018 and $30,253 in 2017)   57,914     51,763  
Other investment (cost: $3,763 in 2018 and 2017)   3,060     3,824  
Total investments   629,800     661,333  
Cash and cash equivalents   79,583     64,982  
Restricted cash   3,078     2,651  
Ceded unearned premiums   127,504     112,323  
Premiums receivable   112,188     104,373  
Accounts receivable   2,051     1,513  
Receivable for securities     3,780       5,235  
Reinsurance recoverable   215,045     182,928  
Deferred policy acquisition costs   14,058     16,002  
Goodwill   44,695     44,695  
Intangible assets, net   8,791     10,023  
Deferred federal income taxes, net   2,584     1,937  
Federal income tax recoverable   0     7,532  
Prepaid expenses   2,692     1,743  
Other assets   13,431     13,856  
Total Assets $ 1,259,280   $ 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 $924 in 2018 and $949 in 2017)     55,778       55,753  
Reserves for unpaid losses and loss adjustment expenses   520,552     527,100  
Unearned premiums   290,177     276,642  
Reinsurance balances payable   65,559     52,487  
Current federal income tax payable   187       -   
Pension liability   1,470     1,605  
Payable for securities     6,706       7,488  
Accounts payable and other accrued expenses   31,942     28,933  
Total Liabilities   1,002,371     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   123,017     123,180  
Retained earnings   156,585     136,474  
Accumulated other comprehensive income     (865 )   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   256,909     251,118  
Total Liabilities & Stockholders' Equity $ 1,259,280   $ 1,231,126  
             

 

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations Three Months Ended   Six Months Ended
($ in thousands, except share amounts) June 30   June 30
  2018   2017     2018   2017  
  (unaudited)
    (unaudited)
 
Gross premiums written $ 173,219   $ 162,056     $   326,724   $ 297,168  
Ceded premiums written   (83,373 )   (61,162 )       (145,445 )   (107,755 )
Net premiums written   89,846     100,894         181,279     189,413  
Change in unearned premiums   1,132     (10,187 )       1,646     (9,483 )
Net premiums earned   90,978     90,707         182,925     179,930  
                   
Investment income, net of expenses   4,406     4,587         8,846     9,066  
Investment gains (losses), net   533     (3,479 )       (4,302 )   (1,419 )
Finance charges   1,161     936         2,201     1,989  
Commission and fees   1,032     653         1,735     725  
Other income   15     71         61     132  
Total revenues   98,125     93,475         191,466     190,423  
                   
Losses and loss adjustment expenses   63,648     70,704         127,323     132,546  
Operating expenses   26,360     25,879         53,573     53,374  
Interest expense   1,128     1,193         2,155     2,349  
Amortization of intangible assets   617     617         1,234     1,234  
Total expenses   91,753     98,393         184,285     189,503  
                   
Income (loss) before tax   6,372     (4,918 )       7,181     920  
Income tax expense (benefit)   1,282     (1,568 )       1,444     284  
Net income (loss) $ 5,090   $ (3,350 )   $   5,737   $ 636  
                   
Net income (loss) per share:                  
Basic $ 0.28   $ (0.18 )   $ 0.32   $ 0.03  
Diluted $ 0.28   $ (0.18 )   $ 0.31   $ 0.03  
                           


Hallmark Financial Services, Inc. and Subsidiaries        
Consolidated Segment Data                
Three Months Ended Jun. 30                
  Specialty Commercial Segment Standard Commercial Segment Personal Segment Corporate Consolidated
($ in thousands)   2018     2017     2018     2017     2018     2017     2018     2017     2018     2017  
Gross premiums written $   136,079   $   127,805   $   21,574   $   19,769   $  15,566   $  14,482   $   -    $   -    $  173,219   $  162,056  
Ceded premiums written   (72,083 )   (52,386 )   (2,645 )   (2,086 )   (8,645 )   (6,690 )     -        -      (83,373 )   (61,162 )
Net premiums written   63,996     75,419     18,929     17,683     6,921     7,792       -        -      89,846     100,894  
Change in unearned premiums   2,333     (10,635 )   (824 )   (1,301 )   (377 )   1,749       -        -      1,132     (10,187 )
Net premiums earned   66,329     64,784     18,105     16,382     6,544     9,541       -        -      90,978     90,707  
                     
Total revenues   72,081     69,501     19,247     17,322     7,916     10,684     (1,119 )   (4,032 )   98,125     93,475  
                     
Losses and loss adjustment expenses   48,352     50,529     10,621     11,863     4,675     8,312       -        -      63,648     70,704  
                     
Pre-tax income (loss)   8,770     3,632     2,656     (199 )   (1 )   (892 )   (5,053 )   (7,459 )   6,372     (4,918 )
                     
Net loss ratio (1)   72.9 %   78.0 %   58.7 %   72.4 %   71.4 %   87.1 %       70.0 %   77.9 %
Net expense ratio (1)   22.3 %   23.2 %   33.2 %   34.9 %   33.7 %   26.6 %       27.0 %   27.2 %
Net combined ratio (1)   95.2 %   101.2 %   91.9 %   107.3 %   105.1 %   113.7 %       97.0 %   105.1 %
                     
Favorable (Unfavorable) Prior Year Development     (5,849 )     (8,032 )     507       (1,722 )     359       (419 )     -        -        (4,983 )     (10,173 )
                                                             


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                
Six Months Ended Jun. 30                
  Specialty Commercial Segment Standard Commercial Segment Personal Segment Corporate Consolidated
($ in thousands)   2018     2017     2018     2017     2018     2017     2018     2017     2018     2017  
Gross premiums written $   250,892   $   223,312   $   44,371   $   40,462   $  31,461   $  33,394   $   -    $   -    $  326,724   $  297,168  
Ceded premiums written   (122,741 )   (88,310 )   (5,200 )   (3,927 )   (17,504 )   (15,518 )     -        -      (145,445 )   (107,755 )
Net premiums written   128,151     135,002     39,171     36,535     13,957     17,876       -        -      181,279     189,413  
Change in unearned premiums   5,868     (8,289 )   (3,199 )   (3,439 )   (1,023 )   2,245       -        -      1,646     (9,483 )
Net premiums earned   134,019     126,713     35,972     33,096     12,934     20,121       -        -      182,925     179,930  
                     
Total revenues   145,205     135,336     38,122     35,048     15,536     22,547     (7,397 )   (2,508 )   191,466     190,423  
                     
Losses and loss adjustment expenses   95,895     92,119     22,301     22,909     9,127     17,518       -        -      127,323     132,546  
                     
Pre-tax income (loss)   18,528     11,730     3,975     652     (23 )   (1,650 )   (15,299 )   (9,812 )   7,181     920  
                     
Net loss ratio (1)   71.6 %   72.7 %   62.0 %   69.2 %   70.6 %   87.1 %       69.6 %   73.7 %
Net expense ratio (1)   23.0 %   24.4 %   33.2 %   35.2 %   34.6 %   26.3 %       27.5 %   28.2 %
Net combined ratio (1)   94.6 %   97.1 %   95.2 %   104.4 %   105.2 %   113.4 %       97.1 %   101.9 %
                     
Favorable (Unfavorable) Prior Year Development     (6,861 )     (8,332 )     1,560       (264 )     848       (1,088 )     -        -        (4,453 )     (9,684 )
                                                             


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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