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

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:

  • 3rd 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 3rd 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.
  • 3rd 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 3rd 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.
  • 3rd quarter 2018 net combined ratio of 98.1% versus 108.6% for 3rd 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.

/EIN News/ -- (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 )

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        
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 )

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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