HALL - Hallmark Financial Services Inc. Announces Third Quarter 2018 Earnings Results

November, 07 2018 04:05 PM Hallmark Financial Services Inc.

FORT WORTH, Texas, Nov. 07, 2018 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ: HALL) today announced results for its third quarter and year-to-date ended September 30, 2018, including the following highlights:

3^rd quarter 2018 net income of $9.7 million, or $0.53 per diluted share, versus a net loss of $1.6 million, or $0.09 per diluted share, for 3^rd quarter 2017.
Year-to-date 2018 net income of $15.4 million, or $0.85 per diluted share, versus a net loss of $0.9 million, or $0.05 per diluted share, for prior year-to-date.
3^rd quarter 2018 operating earnings ⁽¹⁾ of $4.2 million, or $0.23 per diluted share, versus ($2.9) million, or ($0.16) per diluted share, for 3^rd quarter 2017.
Year-to-date 2018 operating earnings ⁽¹⁾ of $13.3 million, or $0.73 per diluted share, versus ($1.4) million, or ($0.07) per diluted share, for prior year-to-date.
3^rd quarter 2018 net combined ratio of 98.1% versus 108.6% for 3^rd quarter 2017.
Year-to-date 2018 net combined ratio of 97.5% versus 104.2% for prior year-to-date.
Year-to-date 2018 gross premiums written of $495.8 million increased 8% from $458.3 million for prior year-to-date.
Year-to-date 2018 net premiums written of $269.3 million declined 5% from $284.5 million for prior year-to-date.

⁽¹⁾See “Non-GAAP Financial Measures” below

Naveen Anand, President and Chief Executive Officer, stated, “Our net combined ratio reflects improvement in our underwriting results in comparison to last year on both a quarter and year-to-date basis. These results are trending favorably despite catastrophe losses and net adverse prior year reserve development, which collectively contributed 4.0% for the quarter and 4.1% on a year-to-date basis to the net combined ratio.

“Rate momentum continues to be strong through the third quarter and on a year-to-date basis. However, we have seen retention dip slightly as we have held firm on pricing. Primary commercial auto gross premium decreased by 20% over the last four quarters, following targeted rate increases and underwriting actions. Just as we did in our Personal Segment, we have developed a proprietary predictive pricing model to support the underwriting process for this portfolio and are seeing positive results from these actions.

“Our Personal Segment produced a welcome result of a 96.0% net combined ratio for the third quarter of 2018. The loss ratio results had stabilized over the last several quarters and, as projected, our expense ratio came more in line with our run rate expectations. The actions taken on the personal auto business are similar to what we are executing in commercial auto from an underwriting, pricing and claims perspective,” said Mr. Anand.

“Our Standard Commercial Segment gross premiums written grew by 10.4% for year-to-date 2018 compared to the prior year. We have been executing our strategy to add states to our footprint and expand our distribution, as well as focusing on a limited group of classes that offer us profitable growth opportunities and where we have expertise.

“Losses from catastrophes contributed 2.2% to the net combined ratio in the third quarter of 2018 and 1.8% on a year-to-date basis, with current quarter catastrophe losses being driven by Hurricane Florence. Although losses from Hurricane Michael are too early to project, we do not presently expect it to have a significant impact on our portfolio based on our exposure and modeled loss information. However, this is subject to change as claims are reported and more information becomes available. Our retention on our catastrophe reinsurance program is $5 million,” concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share at September 30, 2018 was $14.79, a year-to-date increase of 7% compared to $13.82 at December 31, 2017. Year-to-date 2018 net investment income was $13.7 million, a 5% decline compared to the prior year-to-date. Total cash and investments was $711.2 million, or $39.38 per share, as of September 30, 2018, a decrease of 2% from $40.12 per share as of December 31, 2017.”


Third Quarter

Year-to-Date

2018
2017
% Change

2018
2017
% Change
($ in thousands, unaudited)





Gross premiums written

169,112

161,151

5
%


495,836

458,319

8
%
Net premiums written

88,012

95,049

-7
%


269,291

284,462

-5
%
Net premiums earned

88,862

88,788

0
%


271,787

268,718

1
%
Investment income, net of expenses

4,860

5,295

-8
%


13,706

14,361

-5
%
Investment gains, net

6,980

2,960

136
%


2,678

4,948

-46
%
Other-than-temporary impairments

-

(850
)
100
%


-

(4,257
)
100
%
Net income (loss)

9,685

(1,560
)
721
%


15,422

(924
)
1769
%
Operating earnings (loss)

4,170

(2,931
)
242
%


13,306

(1,373
)
1069
%
Net income (loss) per share - basic
$
0.54
$
(0.09
)
700
%

$
0.85
$
(0.05
)
1800
%
Net income (loss) per share - diluted
$
0.53
$
(0.09
)
689
%

$
0.85
$
(0.05
)
1800
%
Operating earnings per share - diluted
$
0.23
$
(0.16
)
244
%

$
0.73
$
(0.07
)
1143
%
Book value per share




$
14.79
$
14.40

3
%

Third Quarter 2018 Commentary

Hallmark reported net income of $9.7 million and $15.4 million for the three months and nine months ended September 30, 2018, respectively, as compared to a net loss of $1.6 million and $0.9 million for the three months and nine months ended September 30, 2017, respectively. On a diluted basis per share, the Company reported net income of $0.53 per share and $0.85 per share for the three months and nine months ended September 30, 2018, respectively, as compared to a net loss of $0.09 per share and $0.05 per share for the three months and nine months ended September 30, 2017, respectively.

Hallmark's consolidated net loss ratio was 72.3% and 70.5% for the three months and nine months ended September 30, 2018, respectively, as compared to 81.5% and 76.3% for the three months and nine months ended September 30, 2017, respectively. Hallmark's net expense ratio was 25.8% and 27.0% for the three months and nine months ended September 30, 2018, respectively, as compared to 27.1% and 27.9% for the three months and nine months ended September 30, 2017, respectively. Hallmark’s net combined ratio was 98.1% and 97.5% for the three months and nine months ended September 30, 2018, respectively, as compared to 108.6% and 104.2% for the three months and nine months ended September 30, 2017, respectively.

During the three months and nine months ended September 30, 2018, Hallmark’s gross premiums written were $169.1 million and $495.8 million, representing an increase of 5% and 8%, respectively from the $161.2 million and $458.3 million in gross premiums written for the same periods in 2017. Hallmark’s net premiums written were $88.0 million and $269.3 million, representing a decrease of 7% and 5%, respectively from the $95.0 million and $284.5 million in net premiums written for the same periods of 2017. The decline in net premiums written was driven by an intentional shift in the mix of business away from a commercial auto concentration in the portfolio towards targeted growth in the Specialty Commercial operating unit, a larger portion of which is ceded to reinsurers. Hallmark’s net premiums earned were $88.9 million and $271.8 million for the three months and nine months ended September 30, 2018, respectively, as compared to $88.8 million and $268.7 million for the same periods in 2017. During the three months and nine months ended September 30, 2018, Hallmark’s income before tax was $12.1 million and $19.3 million, respectively, as compared to a loss before tax of $1.5 million and $0.6 million reported during the same periods in 2017.

The stable net premiums earned for the three months ended September 30, 2018 was due to net premium growth in the Standard Commercial Segment, offset by lower net premiums earned in the Specialty Commercial and Personal Segments. The modest increase in net premiums earned for the nine months ended September 30, 2018 was driven by improvements in both 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 nine months ended September 30, 2018 was largely due to increased investment gains and decreased losses and loss adjustment expenses. The investment gain during the nine months ended September 30, 2018 included $3.2 million in gain 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. The decrease in loss and LAE was primarily the result of unfavorable net prior year loss reserve development of $1.6 million and $6.1 million for the three and nine months ended September 30, 2018, respectively, as compared to unfavorable net prior year loss reserve development of $10.6 million and $20.2 million during the same periods of 2017. Higher commissions, fees and finance charges, partially offset by lower investment income, further contributed to the increase in income before tax for the three months and nine months ended September 30, 2018. The decrease in net investment income for the three and nine months ended September 30, 2018 was primarily the result of the final distribution on a fixed income security during the third quarter of the prior year.

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
Third Quarter 2018





Reported GAAP measures
$
12,075

$
2,390

$
9,685

18,167
$
0.53

Excluded investment losses/gains
$
(6,980
)
$
(1,465
)
$
(5,515
)
18,167
$
(0.30
)
Operating earnings
$
5,095

$
925

$
4,170

18,167
$
0.23







Third Quarter 2017





Reported GAAP measures
$
(1,525
)
$
35

$
(1,560
)
18,180
$
(0.09
)
Excluded investment losses/gains
$
(2,110
)
$
(739
)
$
(1,371
)
18,180
$
(0.07
)
Operating loss
$
(3,635
)
$
(704
)
$
(2,931
)
18,180
$
(0.16
)






Year-to-Date 2018





Reported GAAP measures
$
19,256

$
3,834

$
15,422

18,203
$
0.85

Excluded investment losses/gains
$
(2,678
)
$
(562
)
$
(2,116
)
18,203
$
(0.12
)
Operating earnings
$
16,578

$
3,272

$
13,306

18,203
$
0.73







Year-to-Date 2017





Reported GAAP measures
$
(605
)
$
319

$
(924
)
18,404
$
(0.05
)
Excluded investment losses/gains
$
(691
)
$
(242
)
$
(449
)
18,404
$
(0.02
)
Operating earnings
$
(1,296
)
$
77

$
(1,373
)
18,404
$
(0.07
)

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)

Sept. 30

Dec. 31
ASSETS

2018

2017
Investments:

(unaudited)


Debt securities, available-for-sale, at fair value (amortized cost: $571,657 in 2018 and $604,999 in 2017)
$
574,470

$
605,746

Equity securities (cost: $45,426 in 2018 and $30,253 in 2017)

70,152


51,763

Other investment (cost: $3,763 in 2018 and 2017)

3,085


3,824

Total investments

647,707


661,333

Cash and cash equivalents

59,925


64,982

Restricted cash

3,519


2,651

Ceded unearned premiums

135,567


112,323

Premiums receivable

111,366


104,373

Accounts receivable

1,464


1,513

Receivable for securities

3,253


5,235

Reinsurance recoverable

225,932


182,928

Deferred policy acquisition costs

13,150


16,002

Goodwill

44,695


44,695

Intangible assets, net

8,174


10,023

Deferred federal income taxes, net

1,042


1,937

Federal income tax recoverable

-


7,532

Prepaid expenses

2,526


1,743

Other assets

12,471


13,856

Total Assets
$
1,270,791

$
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 $911 in 2018 and $949 in 2017)

55,791


55,753

Reserves for unpaid losses and loss adjustment expenses

530,816


527,100

Unearned premiums

297,389


276,642

Reinsurance balances payable

55,830


52,487

Current federal income tax payable

144


-

Pension liability

1,403


1,605

Payable for securities

7,699


7,488

Accounts payable and other accrued expenses

24,667


28,933

Total Liabilities

1,003,739


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

123,053


123,180

Retained earnings

166,270


136,474

Accumulated other comprehensive income

(443
)

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

267,052


251,118

Total Liabilities & Stockholders' Equity
$
1,270,791

$
1,231,126

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended

Nine Months Ended
($ in thousands, except share amounts)
September 30,

September 30,

2018
2017

2018
2017


(unaudited)


(unaudited)
Gross premiums written
$
169,112

$
161,151


$
495,836

$
458,319

Ceded premiums written

(81,100
)

(66,102
)


(226,545
)

(173,857
)
Net premiums written

88,012


95,049



269,291


284,462

Change in unearned premiums

850


(6,261
)


2,496


(15,744
)
Net premiums earned

88,862


88,788



271,787


268,718











Investment income, net of expenses

4,860


5,295



13,706


14,361

Investment gains, net

6,980


2,110



2,678


691

Finance charges

1,347


892



3,548


2,881

Commission and fees

869


570



2,604


1,295

Other income

28


68



89


200

Total revenues

102,946


97,723



294,412


288,146











Losses and loss adjustment expenses

64,245


72,379



191,568


204,925

Operating expenses

24,829


25,071



78,402


78,445

Interest expense

1,180


1,181



3,335


3,530

Amortization of intangible assets

617


617



1,851


1,851

Total expenses

90,871


99,248



275,156


288,751











Income (loss) before tax

12,075


(1,525
)


19,256


(605
)
Income tax expense (benefit)

2,390


35



3,834


319

Net income (loss)
$
9,685

$
(1,560
)

$
15,422

$
(924
)










Net income (loss) per share:









Basic
$
0.54

$
(0.09
)

$
0.85

$
(0.05
)
Diluted
$
0.53

$
(0.09
)

$
0.85

$
(0.05
)

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)
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Gross premiums written
$
125,599

$
127,062

$
21,560

$
19,240

$
21,953

$
14,849

$
-
$
-

$
169,112

$
161,151

Ceded premiums written

(66,404
)

(56,200
)

(2,398
)

(2,889
)

(12,298
)

(7,013
)

-

-


(81,100
)

(66,102
)
Net premiums written

59,195


70,862


19,162


16,351


9,655


7,836


-

-


88,012


95,049

Change in unearned premiums

3,203


(6,274
)

(449
)

(420
)

(1,904
)

433


-

-


850


(6,261
)
Net premiums earned

62,398


64,588


18,713


15,931


7,751


8,269


-

-


88,862


88,788












Total revenues

68,302


69,721


19,857


17,401


9,355


9,404


5,432

1,197


102,946


97,723












Losses and loss adjustment expenses

52,106


53,899


6,261


11,760


5,878


6,720


-

-


64,245


72,379












Pre-tax income (loss)

2,452


1,288


7,264


229


684


(661
)

1,675

(2,381
)

12,075


(1,525
)











Net loss ratio (1)

83.5
%

83.5
%

33.5
%

73.8
%

75.8
%

81.3
%



72.3
%

81.5
%
Net expense ratio (1)

22.4
%

21.9
%

34.1
%

34.2
%

20.2
%

31.2
%



25.8
%

27.1
%
Net combined ratio (1)

105.9
%

105.4
%

67.6
%

108.0
%

96.0
%

112.5
%



98.1
%

108.6
%











Favorable (Unfavorable) Prior Year Development

(8,869
)

(9,492
)

7,269


(1,330
)

(9
)

266


-

-


(1,609
)

(10,556
)

¹The 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)
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Gross premiums written
$
376,491

$
350,374

$
65,931

$
59,702

$
53,414

$
48,243

$
-

$
-

$
495,836

$
458,319

Ceded premiums written

(189,145
)

(144,510
)

(7,598
)

(6,816
)

(29,802
)

(22,531
)

-


-


(226,545
)

(173,857
)
Net premiums written

187,346


205,864


58,333


52,886


23,612


25,712


-


-


269,291


284,462

Change in unearned premiums

9,071


(14,563
)

(3,648
)

(3,859
)

(2,927
)

2,678


-


-


2,496


(15,744
)
Net premiums earned

196,417


191,301


54,685


49,027


20,685


28,390


-


-


271,787


268,718












Total revenues

213,507


205,057


57,979


52,449


24,891


31,951


(1,965
)

(1,311
)

294,412


288,146












Losses and loss adjustment expenses

148,001


146,018


28,562


34,669


15,005


24,238


-


-


191,568


204,925












Pre-tax income (loss)

20,980


13,018


11,239


881


661


(2,311
)

(13,624
)

(12,193
)

19,256


(605
)











Net loss ratio (1)

75.4
%

76.3
%

52.2
%

70.7
%

72.5
%

85.4
%



70.5
%

76.3
%
Net expense ratio (1)

22.8
%

23.6
%

33.5
%

34.9
%

29.2
%

27.7
%



27.0
%

27.9
%
Net combined ratio (1)

98.2
%

99.9
%

85.7
%

105.6
%

101.7
%

113.1
%



97.5
%

104.2
%











Favorable (Unfavorable) Prior Year Development

(15,730
)

(17,824
)

8,829


(1,594
)

839


(822
)

-


-


(6,062
)

(20,240
)

Company Name:	Hallmark Financial Services Inc.
Stock Symbol:	HALL
Market:	NASDAQ
Website:	hallmarkgrp.com

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