Hallmark Financial Services, Inc. Announces Second Quarter

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News Desk 2018

Aug 8, 2016 at 4:15 PM

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

FORT WORTH, Texas, Aug. 08, 2016 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ: HALL ) today announced the following earnings highlights for its second fiscal quarter ended June 30, 2016:

2^nd quarter net income of $1.1 million, or $0.06 per diluted share
2^nd quarter catastrophe losses of $7.8 million, or $0.27 per diluted share net of tax
2^nd quarter other-than-temporary impairments of $2.6 million, or $0.09 per diluted share net of tax
2^nd quarter net combined ratio of 95.9%, including 8.9% attributable to catastrophe losses
2^nd quarter gross premiums written up 8% compared to prior year
2^nd quarter ending book value per share of $14.25, up 5% compared to June 30, 2015

“The second quarter of 2016 was adversely impacted by a combination of higher catastrophe losses from severe convective storms in Texas and the Midwest and other-than-temporary impairments in our investment portfolio. CAT losses were $7.8 million for the second quarter of 2016 compared to $3.7 million for the same period the prior year. Nonetheless we achieved a 95.9% combined ratio despite the 8.9% attributable to CAT losses,” said Naveen Anand, President and Chief Executive Officer.

“The Specialty Commercial Segment, which has been the focus of our investments in new products and additional underwriters, contributed both revenue growth and profitability to the Company’s second quarter results. Our Standard Commercial Segment produced strong results on a year over year basis, despite $6.7 million of CAT losses in the second quarter of 2016 compared to only $2.8 million for the same period the prior year. The Personal Lines Segment still underperformed primarily driven by unfavorable prior year loss development, although current accident year results have improved. Also adversely impacting the second quarter results was a $1.8 million accrual for an arbitration award related to the contingent consideration from a 2011 acquisition,” concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Hallmark reported book value per share of $14.25 as of June 30, 2016, an increase of 5% over June 30, 2015. Total cash and investments increased $18.1 million during the first six months of 2016 to $719.9 million, an increase of 5% per share to $38.56 per share. Our cash balances (including restricted cash) totaled $101.2 million as of June 30, 2016.”

Second Quarter
		2016			2015		% Change
	($ in thousands, unaudited)
Gross premiums written		144,037			133,508			8	%
Net premiums written		95,243			94,305			1	%
Net premiums earned		87,698			88,476			-1	%
Investment income, net of expenses		3,994			3,711			8	%
Gain on investments		410			4,992			-92	%
Other-than-temporary impairments		(2,587	)		(1,553	)		67	%
Total revenues		91,052			97,197			-6	%
Net income		1,066			6,376			-83	%
Net income per share - basic	$	0.06		$	0.33			-82	%
Net income per share - diluted	$	0.06		$	0.33			-82	%
Book value per share	$	14.25		$	13.63			5	%
Cash flow from operations		3,645			29,169			-88	%

Year to Date
		2016			2015		% Change
	($ in thousands, unaudited)
Gross premiums written		272,484			258,567			5	%
Net premiums written		182,869			184,679			-1	%
Net premiums earned		172,025			175,172			-2	%
Investment income, net of expenses		7,873			6,556			20	%
Gain on investments		484			5,853			-92	%
Other-than-temporary impairments		(2,888	)		(1,830	)		58	%
Total revenues		181,080			188,647			-4	%
Net income		5,140			11,719			-56	%
Net income per share - basic	$	0.27		$	0.61			-56	%
Net income per share - diluted	$	0.27		$	0.60			-55	%
Book value per share	$	14.25		$	13.63			5	%
Cash flow from operations		2,334			32,878			-93	%

Second Quarter 2016 Commentary

Hallmark reported net income of $1.1 million and $5.1 million for the three and six months ended June 30, 2016 as compared to net income of $6.4 million and $11.7 million for the same periods the prior year. On a diluted basis per share, the Company reported net income of $0.06 per share and $0.27 per share for the three and six months ended June 30, 2016, as compared to net income of $0.33 per share and $0.60 per share for the same periods the prior year.

Hallmark's consolidated net loss ratio was 66.7% and 66.2% for the three and six months ended June 30, 2016, as compared to 67.5% and 66.1% for the same periods the prior year. Hallmark's net expense ratio was 29.2% and 29.4% for the three and six months ended June 30, 2016 as compared to 28.6% and 28.4% for the same periods the prior year. Hallmark’s net combined ratio was 95.9% and 95.6% for the three and six months ended June 30, 2016 as compared to 96.1% and 94.5% for the same periods the prior year.

During the three and six months ended June 30, 2016, total revenues were $91.1 million and $181.1 million, representing a decrease of 6% and 4%, respectively, from the $97.2 million and $188.6 million in total revenues for the same periods of 2015. This decrease in revenue was primarily attributable to realized losses recognized on the investment portfolio during the three and six months ended June 30, 2016 as compared to realized gains recognized during the prior year periods and lower net premiums earned, partially offset by higher net investment income and higher commission and fee revenue. The decreased net earned premiums were due primarily to lower premiums written in the Workers Compensation operating unit due to a renewal rights agreement entered into during the second quarter of 2015 and subsequently amended during the third quarter of 2015 to cede 100% of the unearned premium effective July 1, 2015, as well as the impact on net premiums earned of lower net premiums written in the Specialty Commercial Segment during the fourth quarter of 2015 impacting year-to-date net earned premium, partially offset by increased retained premium under a renewed quota share reinsurance agreement effective October 1, 2014 in the Personal Segment.

The decrease in revenue for the three and six months ended June 30, 2016 was partially offset by lower loss and loss adjustment expenses (“LAE”) of $1.2 million and $1.9 million, respectively, as compared to the same period in 2015. The decrease in loss and LAE was primarily the result of lower current accident year non-catastrophe loss trends and favorable net prior year loss development in the Standard Commercial Segment, partially offset by higher current accident year catastrophe losses in the Standard Commercial Segment. The Company recorded an aggregate of $8.3 million of net catastrophe losses during the six months ended June 30, 2016 as compared to net catastrophe losses of $3.7 million for the same period of 2015. The Company recorded favorable prior year loss reserve development of $2.8 million for the six months ended June 30, 2016 as compared to $1.5 million of favorable prior year development for the same period of 2015. Other operating expenses increased mostly as a result of a $1.8 million accrual to the earn-out related to the previous acquisition of TBIC and increased salary and related expenses, partially offset by lower production related expenses in the Specialty Commercial Segment.

During the six months ended June 30, 2016, Hallmark’s cash flow provided by operations was $2.3 million compared to cash flow provided by operations of $32.9 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 lower net paid operating expenses and increased net collected premiums.

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)		Jun. 30				Dec. 31
ASSETS			2016				2015
Investments:		(unaudited)
Debt securities, available-for-sale, at fair value (cost: $567,989 in 2016 and $538,629 in 2015)	$		569,271		$		531,325
Equity securities, available-for-sale, at fair value (cost: $30,249 in 2016 and $24,951 in 2015)			49,460				47,504
Total investments			618,731				578,829
Cash and cash equivalents			91,940				114,446
Restricted cash			9,242				8,522
Ceded unearned premiums			74,610				65,094
Premiums receivable			97,059				83,376
Accounts receivable			2,016				2,005
Receivable for securities			1,394				10,424
Reinsurance recoverable			124,865				114,287
Deferred policy acquisition costs			20,624				20,366
Goodwill			44,695				44,695
Intangible assets, net			13,726				14,959
Deferred federal income taxes, net			2,174				3,360
Federal income tax recoverable			260				1,779
Prepaid expenses			4,637				3,213
Other assets			10,748				10,192
Total Assets	$		1,116,721		$		1,075,547
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Revolving credit facility payable	$		30,000		$		30,000
Subordinated debt securities			55,675				55,649
Reserves for unpaid losses and loss adjustment expenses			443,612				450,878
Unearned premiums			236,767				216,407
Reinsurance balances payable			45,055				33,741
Pension liability			2,429				2,496
Payable for securities			12,626				1,097
Accounts payable and other accrued expenses			24,462				23,253
Total Liabilities			850,626				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			123,650				123,480
Retained earnings			146,641				141,501
Accumulated other comprehensive income			10,864				7,418
Treasury stock (2,204,267 shares in 2016 and 1,775,512 shares in 2015), at cost			(18,817	)			(14,130	)
Total Stockholders’ Equity			266,095				262,026
Total Liabilities & Stockholders' Equity	$		1,116,721		$		1,075,547

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
	2016			2015			2016			2015
Gross premiums written	$	144,037		$	133,508		$	272,484		$	258,567
Ceded premiums written		(48,794	)		(39,203	)		(89,615	)		(73,888	)
Net premiums written		95,243			94,305			182,869			184,679
Change in unearned premiums		(7,545	)		(5,829	)		(10,844	)		(9,507	)
Net premiums earned		87,698			88,476			172,025			175,172

Investment income, net of expenses		3,994			3,711			7,873			6,556
Net realized gains (losses)		(2,177	)		3,439			(2,404	)		4,023
Finance charges		1,348			1,482			2,789			2,781
Commission and fees		155			(110	)		732			(101	)
Other income		34			199			65			216
Total revenues		91,052			97,197			181,080			188,647

Losses and loss adjustment expenses		58,502			59,725			113,897			115,815
Operating expenses		29,323			26,446			56,219			52,360
Interest expense		1,123			1,134			2,254			2,274
Amortization of intangible assets		617			617			1,234			1,234
Total expenses		89,565			87,922			173,604			171,683

Income before tax		1,487			9,275			7,476			16,964
Income tax expense		421			2,899			2,336			5,245
Net income	$	1,066		$	6,376		$	5,140		$	11,719

Net income per share:
Basic	$	0.06		$	0.33		$	0.27		$	0.61
Diluted	$	0.06		$	0.33		$	0.27		$	0.60

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Jun. 30	(unaudited)
	Specialty Commercial Segment						Standard Commercial Segment						Personal Segment						Corporate						Consolidated
($ in thousands)		2016			2015			2016			2015			2016			2015			2016			2015			2016			2015
Gross premiums written	$	103,717		$	89,891		$	21,024		$	22,176		$	19,296		$	21,441		$	-		$	-		$	144,037		$	133,508
Ceded premiums written		(37,538	)		(27,509	)		(2,210	)		(2,073	)		(9,046	)		(9,621	)		-			-			(48,794	)		(39,203	)
Net premiums written		66,179			62,382			18,814			20,103			10,250			11,820			-			-			95,243			94,305
Change in unearned premiums		(6,410	)		(3,019	)		(1,473	)		(1,029	)		338			(1,781	)		-			-			(7,545	)		(5,829	)
Net premiums earned		59,769			59,363			17,341			19,074			10,588			10,039			-			-			87,698			88,476

Total revenues		63,040			62,418			18,219			20,083			12,147			11,727			(2,354	)		2,969			91,052			97,197

Losses and loss adjustment expenses		39,518			39,649			9,369			11,380			9,615			8,696			-			-			58,502			59,725

Pre-tax income (loss)		7,287			7,727			3,011			2,468			(1,014	)		(76	)		(7,797	)		(844	)		1,487			9,275

Net loss ratio (1)		66.1	%		66.8	%		54.0	%		59.7	%		90.8	%		86.6	%								66.7	%		67.5	%
Net expense ratio (1)		26.2	%		25.5	%		34.0	%		33.6	%		23.7	%		21.8	%								29.2	%		28.6	%
Net combined ratio (1)		92.3	%		92.3	%		88.0	%		93.3	%		114.5	%		108.4	%								95.9	%		96.1	%

Favorable (Unfavorable) Prior Year Development		(753	)		(407	)		3,316			1,536			(1,523	)		(714	)		-			-			1,040			415

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	(unaudited)
	Specialty Commercial Segment						Standard Commercial Segment						Personal Segment						Corporate						Consolidated
($ in thousands)		2016			2015			2016			2015			2016			2015			2016			2015			2016			2015
Gross premiums written	$	191,117		$	171,657		$	41,122		$	44,485		$	40,245		$	42,425		$	-		$	-		$	272,484		$	258,567
Ceded premiums written		(66,201	)		(50,599	)		(4,562	)		(4,033	)		(18,852	)		(19,256	)		-			-			(89,615	)		(73,888	)
Net premiums written		124,916			121,058			36,560			40,452			21,393			23,169			-			-			182,869			184,679
Change in unearned premiums		(7,894	)		(1,808	)		(2,569	)		(1,814	)		(381	)		(5,885	)		-			-			(10,844	)		(9,507	)
Net premiums earned		117,022			119,250			33,991			38,638			21,012			17,284			-			-			172,025			175,172

Total revenues		123,623			124,675			36,211			40,464			24,237			20,380			(2,991	)		3,128			181,080			188,647

Losses and loss adjustment expenses		73,931			76,982			20,438			23,850			19,528			14,983			-			-			113,897			115,815

Pre-tax income (loss)		17,599			17,448			4,427			4,354			(2,097	)		(372	)		(12,453	)		(4,466	)		7,476			16,964

Net loss ratio (1)		63.2	%		64.6	%		60.1	%		61.7	%		92.9	%		86.7	%								66.2	%		66.1	%
Net expense ratio (1)		27.0	%		25.5	%		34.1	%		32.7	%		21.4	%		21.5	%								29.4	%		28.4	%
Net combined ratio (1)		90.2	%		90.1	%		94.2	%		94.4	%		114.3	%		108.2	%								95.6	%		94.5	%

Favorable (Unfavorable) Prior Year Development		1,594			(196	)		3,674			2,898			(2,511	)		(1,226	)		-			-			2,757			1,476

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.