SSB - Hallmark Announces First Quarter Results

May, 15 2023 04:05 PM SouthState Corporation

DALLAS, May 15, 2023 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today filed its Form 10-Q and announced financial results for the first quarter ended March 31, 2023.


First Quarter


2023


2022

$ in millions:


Net loss from continuing operations
$
(39.2
)
$
(11.7
)
Net income from discontinued operations
$
0.1

$
8.5

Net loss
$
(39.1
)
$
(3.2
)
Operating loss (1)
$
(5.0
)
$
(11.7
)



$ per diluted share (2):


Net loss from continuing operations
$
(21.59
)
$
(6.43
)
Net income from discontinued operations
$
0.06

$
4.66

Net loss
$
(21.53
)
$
(1.77
)
Operating loss (1)
$
(2.74
)
$
(6.45
)

⁽¹⁾ See “Non-GAAP Financial Measures” below
⁽²⁾ Per share amounts have been restated to reflect one-for-ten reverse stock split

Highlights of results from the quarter:

American Hallmark Insurance Company of Texas, Hallmark Insurance Company, Hallmark Specialty Insurance Company, Hallmark County Mutual Insurance Company and Hallmark National Insurance Company (collectively, the “Hallmark Insurers”) are parties to a Loss Portfolio Transfer Reinsurance Contract (the “LPT Contract”) and related agreements with DARAG Bermuda Ltd. (“DARAG Bermuda”) and DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, the “Reinsurers”). The Reinsurers and the Hallmark Insurers agreed to submit to binding arbitration a dispute regarding the rights and obligations of the parties under the LPT Contract. The Company established a receivable of $58.9 million pending a resolution of the matter. An interim binding arbitration award was declared by the arbitration panel on May 4, 2023. In accordance with GAAP, the Company recognized in the current reporting period a write-off to bad debt expense of $32.9 million of the receivable established by the Company. As of March 31, 2023, our consolidated balance sheet included $4.0 million of account receivable from DARAG related to cost incurred in which we contend we have right of reimbursement. A definitive binding award is expected to be forthcoming in the near future which may increase or decrease our total write-off.
Net loss from continuing operations of $39.2 million, or $21.59 per share, in the first quarter of 2023 includes $26.0 million or $14.28 per share related to the DARAG write-off to bad debt expense, as compared to a net loss of $11.7 million, or $6.43 per share, for the same period of 2022. See Non-GAAP Financial Measures below.
Net income from discontinued operations of $0.1 million, or $0.06 per share, in the first quarter of 2023 as compared to net income from discontinued operations of $8.5 million, or $4.66 per share, for the same period of 2022.
Net loss of $39.1 million, or $21.53 per share, in the first quarter of 2023 includes $26.0 million or $14.28 per share related to the DARAG write-off to bad debt expense as compared to net loss of $3.2 million, or $1.77 per share, for the same period of 2022. See Non-GAAP Financial Measures below.
Net combined ratio of 215.7% for the three months ended March 31, 2023, compared to 136.9% for the same periods the prior year.
Underlying combined ratio (excluding net prior year development, catastrophe losses and write-off of DARAG receivable) of 107.5% for the three months ended March 31, 2023, compared to 109.8% for the same period the prior year. See Non-GAAP Financial Measures below.
Net investment income was $4.3 million during the three months ended March 31, 2023, as compared to $1.9 million during the same period in 2022.
As of March 31, 2023, the Company has $105.5 million in cash and cash equivalents. Our debt securities were $340.0 million as of March 31, 2023 as compared to $426.6 million as of December 31, 2022. Also, 91% of debt securities have maturities of five years or less and the average modified duration of 0.7 years.
The Company continues to maintain a full valuation allowance for income tax in fiscal 2023.
On May 14, 2023, the Company submitted notice to AM Best to withdraw from AM Best’s interactive rating process. We will be assigned a Non-Rating Designation of NR by AM Best, which are assigned to insurance companies that are not rated.

First Quarter 2023 Financial Review





First Quarter


2023


2022

($ in thousands)


Gross premiums written
$
57,172

$
59,333

Net premiums written
$
42,381

$
41,269

Net premiums earned
$
35,280

$
39,315

Investment income, net of expenses
$
4,342

$
1,859

Investment (losses) gains, net
$
(640
)
$
51

Net (loss) from continuing operations
$
(39,246
)
$
(11,677
)
Net income from discontinued operations
$
104

$
8,458

Net (loss) income
$
(39,142
)
$
(3,219
)
Operating (loss) income (2)
$
(4,973
)
$
(11,717
)
Net (loss) income per share - from continuing operations basic & diluted (1)
$
(21.59
)
$
(6.43
)
Net income per share from discontinued operations - basic & diluted
$
0.06

$
4.66

Net loss per share - basic & diluted
$
(21.53
)
$
(1.77
)
Operating (loss) per share - basic & diluted (2)
$
(2.74
)
$
(6.45
)
Book value per share
$
12.95

$
93.47

⁽¹⁾ Per share amounts have been restated for a reverse stock split
⁽²⁾ See “Non-GAAP Financial Measures” below

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 income and operating income per share are calculated by excluding net investment gains and losses and asset impairments or valuation allowances from GAAP net income from continuing operations. Asset impairments and valuation allowances are unusual and infrequent charges for the Company. Management believes that operating income and operating income per share provide useful information to investors about the performance of and underlying trends in the Company’s core insurance operations. Net income from continuing operations and net income per share from continuing operations are the GAAP measures that are most directly comparable to operating earnings and operating earnings per share. A reconciliation of operating income and operating income per share to the most comparable GAAP financial measures is presented below.

($ in thousands)
Income (Loss) from Continuing Operations Before Tax
Less Tax Effect
Net After Tax
Weighted Average Shares Diluted
Diluted Per Share
First Quarter 2023





Reported GAAP measures
$
(39,780
)
$
(534
)
$
(39,246
)

1,818

$
(21.59
)
Excluded deferred tax valuation allowance
$
-

$
(7,798
)
$
7,798


1,818

$
4.29

Excluded write-off receivable from reinsurer
$
32,872

$
6,903

$
25,969


1,818

$
14.28

Excluded investment (gains)/losses
$
640

$
134

$
506


1,818

$
0.28

Operating loss
$
(6,268
)
$
(1,295
)
$
(4,973
)

1,818

$
(2.74
)






First Quarter 2022





Reported GAAP measures
$
(14,857
)
$
(3,180
)
$
(11,677
)

1,817

$
(6.43
)
Excluded investment (gains)/losses
$
(51
)
$
(11
)
$
(40
)

1,817

$
(0.02
)
Operating loss
$
(14,908
)
$
(3,191
)
$
(11,717
)

1,817

$
(6.45
)

Underlying combined ratio is calculated by excluding the impact of net favorable or unfavorable prior year loss development and catastrophe losses from the calculation of the net combined ratio. Management believes that the underlying combined ratio provides useful information to investors about the current performance of the Company's insurance operations absent historical developments and uncontrollable events. Combined ratio is the GAAP measure most comparable to underlying combined ratio. A reconciliation of the underlying combined ratio to the combined ratio is presented below.


1stQ 2023
1stQ 2022
Net combined ratio

215.7
%

136.9
%
Impact on net combined ratio


Net Unfavorable (Favorable) Prior Year Development

10.1
%

26.5
%
Catastrophes, net of reinsurance

4.9
%

0.6
%
Write-off receivable from reinsurer

93.2
%

0.0
%
Underlying combined ratio

107.5
%

109.8
%

A copy of our Form 10-Q is available on our website at www.hallmarkgrp.com or on the SEC website at www.sec.gov. Readers are urged to review the Form 10-Q for a more complete discussion of our financial performance.

About Hallmark

Hallmark is a property and casualty insurance holding company with a diversified portfolio of insurance products written on a national platform. With six insurance subsidiaries, Hallmark markets, underwrites and services commercial and personal insurance in select markets. Hallmark 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:

Chris Kenney
Chief Executive Officer
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

2023

2022
Investments:



Debt securities, available-for-sale, at fair value (amortized cost: $344,714 in 2023 and $434,119 in 2022; allowance for expected credit losses of $0 in 2023)
$
340,054

$
426,597

Equity securities (cost: $24,281 in 2023 and $30,058 in 2022)

22,392


28,199

Total investments

362,446


454,796

Cash and cash equivalents

105,458


59,133

Restricted cash

9,108


29,486

Ceded unearned premiums

231,314


237,086

Premiums receivable

82,375


78,355

Accounts receivable

1,378


10,859

Receivable from reinsurer

3,953


58,882

Restricted funds withheld

11,129


0

Receivable for securities

11,563


945

Reinsurance recoverable (net of allowance for expected credit losses of $200 in 2023)

621,229


578,424

Deferred policy acquisition costs

2,896


8

Federal income tax recoverable

2,598


2,668

Prepaid pension assets

201


163

Prepaid expenses

2,227


1,508

Other assets

22,390


24,389

Total Assets
$
1,470,265

$
1,536,702

LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Senior unsecured notes due 2029 (less unamortized debt issuance costs of $623 in 2023 and $648 in 2022)
$
49,377

$
49,352

Subordinated debt securities (less unamortized debt issuance costs of $679 in 2023 and $691 in 2022)

56,023


56,011

Reserves for unpaid losses and loss adjustment expenses

835,903


880,869

Unearned premiums

294,019


292,691

Reinsurance payable

143,529


128,950

Payable for securities

979


-

Accounts payable and other liabilities

66,900


68,535

Total Liabilities

1,446,730


1,476,408

Commitments and contingencies




Stockholders' equity:




Common stock, $1.00 par value, authorized 3,333,333 shares; issued 2,087,283 shares in 2023 and 2022
2,087


2,087

Additional paid-in capital

124,837


124,740

(Accumulated deficit) retained earnings

(72,549
)

(33,407
)
Accumulated other comprehensive loss

(6,206
)

(8,492
)
Treasury stock (268,801 shares in 2023 and 2022), at cost

(24,634
)

(24,634
)
Total Stockholders Equity

23,535


60,294

Total Liabilities & Stockholders Equity
$
1,470,265

$
1,536,702

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended
($ in thousands, except per share amounts)
March 31,

2023
2022
Gross premiums written
$
57,172

$
59,333

Ceded premiums written

(14,791
)

(18,064
)
Net premiums written

42,381


41,269

Change in unearned premiums

(7,101
)

(1,954
)
Net premiums earned

35,280


39,315






Investment income, net of expenses

4,342


1,859

Investment (losses) gains, net

(640
)

51

Finance charges

779


983

Other income

70


15

Total revenues

39,831


42,223






Losses and loss adjustment expenses

29,764


39,382

Operating expenses

47,949


16,427

Interest expense

1,898


1,264

Amortization of intangible assets

0


7

Total expenses

79,611


57,080






(Loss) income from continuing operations before tax

(39,780
)

(14,857
)
Income tax expense (benefit) from continuing operations

(534
)

(3,180
)
Net (loss) income from continuing operations
$
(39,246
)
$
(11,677
)





Discontinued operations:




Total pretax income from discontinued operations
$
104

$
10,738

Income tax (benefit) expense on discontinued operations

-


2,280

Income from discontinued operations, net of tax
$
104

$
8,458






Net (loss) income
$
(39,142
)
$
(3,219
)





Net (loss) basic income per share:




Net loss from continuing operations
$
(21.59
)
$
(6.43
)
Net income from discontinued operations

0.06


4.66

Basic net (loss) income per share
$
(21.53
)
$
(1.77
)





Net (loss) diluted income per share:




Net loss from continuing operations
$
(21.59
)
$
(6.43
)
Net income from discontinued operations

0.06


4.66

Diluted net (loss) income per share
$
(21.53
)
$
(1.77
)

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data




Three Months Ended Mar. 31











Commercial Lines Segment
Personal Lines Segment
Runoff Specialty Segment
Corporate
Consolidated
($ in thousands, unaudited)

2023


2022


2023


2022


2023


2022


2023


2022


2023


2022

Gross premiums written
$
43,345

$
38,071

$
13,652

$
16,832

$
175

$
4,430

$
-

$
-

$
57,172

$
59,333

Ceded premiums written

(14,489
)

(17,743
)

(133
)

(76
)

(169
)

(245
)

0


0


(14,791
)

(18,064
)
Net premiums written

28,856


20,328


13,519


16,756


6


4,185


0


0


42,381


41,269

Change in unearned premiums

(7,246
)

(2,073
)

138


(1,197
)

7


1,316


0


0


(7,101
)

(1,954
)
Net premiums earned

21,610


18,255


13,657


15,559


13


5,501


0


0


35,280


39,315












Total revenues

21,626


18,280


14,436


16,532


14


5,501


3,755


1,910


39,831


42,223












Losses and loss adjustment expenses

15,617


12,912


11,169


12,579


2,978


13,891


0


0


29,764


39,382












Pre-tax income (loss)

826


(636
)

(1,775
)

(1,313
)

(37,195
)

(10,038
)

(1,636
)

(2,870
)

(39,780
)

(14,857
)











Net loss ratio (1)

72.3
%

70.7
%

81.8
%

80.8
%
N/A (2)

252.5
%



84.4
%

100.2
%
Net expense ratio (1)

25.4
%

33.9
%

33.2
%

29.0
%
N/A (2)

31.5
%



131.3
%

36.7
%
Net combined ratio (1)

97.7
%

104.6
%

115.0
%

109.8
%
N/A (2)

284.0
%



215.7
%

136.9
%











Impact on net combined ratio










Net Unfavorable (Favorable) Prior Year Development

4.6
%

-2.4
%

3.8
%

10.1
%
N/A (2)

168.6
%



10.1
%

26.5
%
Catastrophes, net of reinsurance

7.3
%

1.1
%

1.2
%

0.1
%
N/A (2)

0.0
%



4.9
%

0.6
%
Write-off receivable from reinsurer

0.0
%

0.0
%

0.0
%

0.0
%
N/A (2)

0.0
%



93.2
%

0.0
%
Underlying combined ratio (1)

85.7
%

105.9
%

110.0
%

99.6
%
N/A (2)

115.4
%



107.5
%

109.8
%

⁽¹⁾ 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. The underlying combined ratio is the net combined ratio excluding the impact of net prior year reserve development and catastrophes and excluding the write-off of a receivable from reinsurer.

⁽²⁾ The Company’s Runoff Segment has reached a point of maturity that earned premium is minimal and renders any ratios no longer meaningful.

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/4fb87372-b7a9-47e0-969b-94291b3c6287

Company Name:	SouthState Corporation
Stock Symbol:	SSB
Market:	NASDAQ
Website:	southstatebank.com

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