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CST: 07/12/2019 10:54:27   

Hallmark Financial Reports Second Quarter 2019 Results Highlighted by Significantly Higher Earnings and Book Value Per Share Growth

121 Days ago

DALLAS, Aug. 07, 2019 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the second quarter and six months ended June 30, 2019.

(Unaudited) Second Quarter   Year-to-Date
  2019 2018   2019 2018
$ in millions:      
  Net Income $   13.0 $   5.1   $   28.1 $   5.7
  Operating Earnings (1) $   7.6 $   4.7   $   13.2 $   9.1
           
$ per diluted share:          
  Net Income $   0.71 $   0.28   $   1.54 $   0.31
  Operating Earnings (1) $   0.42 $   0.26   $   0.73 $   0.50
(1)  See “Non-GAAP Financial Measures” below                  

Second Quarter 2019 Highlights (all comparisons to same prior year period):

  • Gross premiums written increased 26% to $218.2 million
     
  • Net premiums written increased 38% to $123.8 million
     
  • Net combined ratio improved to 94.5% compared to 97.0%
     
  • Net income of $13.0 million, or $0.71 per diluted share, compared to $5.1 million, or $0.28 per diluted share
     
  • Operating earnings of $7.6 million, or $0.42 per diluted share, compared to $4.7 million, or $0.26 per diluted share (see “Non-GAAP Financial Measures” below)
     
  • Net investment gains of $6.8 million, including $0.1 million in net realized gains and a $6.7 million increase in net unrealized gains, compared to net investment gains of $0.5 million 

Year-to-Date June 2019 Highlights (all comparisons to same prior year period):

  • Gross premiums written increased 24% to $405.6 million
     
  • Net premiums written increased 33% to $241.2 million
     
  • Net combined ratio improved to 95.4% compared to 97.1%
     
  • Net income of $28.1 million, or $1.54 per diluted share, compared to $5.7 million, or $0.31 per diluted share
     
  • Operating earnings of $13.2 million, or $0.73 per diluted share, compared to $9.1 million, or $0.50 per diluted share (see “Non-GAAP Financial Measures” below)
     
  • Net investment gains of $18.8 million, including $4.2 million in net realized gains and a $14.6 million increase in net unrealized gains, compared to net investment losses of $4.3 million 
     
  • Annualized return on beginning stockholders’ equity of 22%
     
  • Annualized operating return on beginning tangible equity of 12.6%, driven by strong underwriting results (see “Non-GAAP Financial Measures” below)
     
  • Book value per share grew 12% over prior year and 13% year-to-date to $15.98
  Second Quarter   Year-to-Date
  2019 2018 % Change   2019 2018 % Change
($ in thousands, unaudited)      
Gross premiums written      218,236     173,219 26 %       405,552     326,724   24 %
Net premiums written      123,843     89,846 38 %       241,246     181,279   33 %
Net premiums earned      106,499     90,978 17 %       205,529     182,925   12 %
Investment income, net of expenses     5,412     4,406 23 %       10,523     8,846   19 %
Investment gains (losses), net     6,817     533 1,179 %       18,754     (4,302 ) 536 %
Net income     13,029     5,090 156 %       28,054     5,737   389 %
Operating earnings (1)     7,644     4,669 64 %       13,238     9,136   45 %
Net income per share - basic $   0.72 $   0.28 157 %   $   1.55 $   0.32   384 %
Net income per share - diluted $   0.71 $   0.28 154 %   $   1.54 $   0.31   397 %
Operating earnings per share - diluted (1) $   0.42 $   0.26 62 %   $   0.73 $   0.50   46 %
Book value per share $   15.98 $   14.23 12 %        
(1)  See “Non-GAAP Financial Measures” below
                   

Management Commentary
Overview
Naveen Anand, President and Chief Executive Officer, stated, “The second quarter 2019 results reflect our continued positive momentum as we effectively execute our strategy of building a national specialty business.  Operating earnings increased by 64% over the comparable prior year period driven by continued improvement in underwriting results and increased premiums in our specialty markets.  For the second quarter, our net combined ratio improved to 94.5% from 97.0% last year. Annualized operating return on tangible equity improved to 12.6%.  Rate increases across most of our portfolio were strong and a key contributor to our growth in gross premiums written, along with new business, driven by sharp increase in submissions.

Premiums / Segment Overview
Mr. Anand continued, “These rate increases materialized in our Specialty Commercial Segment, which grew second quarter gross premiums written by 27% over last year and achieved a second quarter net combined ratio of 91.8% versus 95.2% last year.  For the quarter, we achieved written rate increases in the double digits, driven by commercial auto as well as most of our E&S lines. Submissions increased over 25% as compared to the first six months of 2018 in the Specialty Commercial Segment.  E&S property, commercial auto, E&S casualty and professional liability product lines saw the largest increases in submissions reflecting the market dislocation in these lines.  The environment in primary commercial auto remains challenging from a severity perspective and we continue to make strides in improving risk selection, culling our portfolio and increasing rates to exceed rising loss trends.

“Our Personal Segment produced a second quarter 91.5% net combined ratio compared to 105.1% last year.  Our Standard Commercial Segment grew second quarter gross written premiums by $0.3 million compared to the prior year. This segment produced a second quarter net combined ratio of 94.2% which included 4.0% attributable to catastrophe losses,” concluded Mr. Anand.

Executive Chairman’s Remarks
Mark E. Schwarz, Executive Chairman of Hallmark Financial, stated, “Book value per share increased 13% to $15.98 during the first six months of 2019, a high-water mark for the Company, driven largely by an increase in the market valuation of our investment portfolio, particularly equities, as well as strong operating earnings.  Our net investment income was $10.5 million for the first six months of 2019, representing a 19% increase compared to the prior year period.  Our total investments and cash increased 5% during the first six months of 2019 to $700.9 million or $38.67 per share.”

Second Quarter and Year-to-Date 2019 Financial Review

Gross Premiums Written
During the three and six months ended June 30, 2019, Hallmark Financial’s gross premiums written were $218.2 million and $405.6 million, respectively, representing an increase of 26% and 24%, respectively, from the $173.2 million and $326.7 million in gross premiums written for the same periods in 2018.

Net Premiums Written
During the three and six months ended June 30, 2019, Hallmark Financial’s net premiums written were $123.8 million and $241.2 million, respectively, representing an increase of 38% and 33%, respectively, from the $89.8 million and $181.3 million in net premiums written for the same periods of 2018.  The increase in net premiums written for the three and six months ended June 30, 2019 was primarily due to premium growth in both the Specialty Commercial and Personal Segments, as well as increased net retention of business in the Personal Segment. 

Net Premiums Earned
Hallmark Financial’s net premiums earned were $106.5 million and $205.5 million for the three and six months ended June 30, 2019, respectively, as compared to $91.0 million and $182.9 million for the same periods in 2018. 

Pre-Tax Income
Hallmark Financial had pre-tax income of $16.5 million and $35.4 million for the three and six months ended June 30, 2019, respectively, as compared to $6.4 million and $7.2 million reported during the same periods in 2018. 

The improvement in income before tax for the three and six months ended June 30, 2019 was largely due to increased net unrealized gains on our equity and other investments of $6.7 million and $14.6 million, respectively, as compared to an increase in net unrealized gains of $0.2 million and a decrease in net unrealized gains of $4.7 million reported for the same periods in 2018.  Also contributing to the improvement in income before tax for the quarter and year-to-date was increased net premiums earned, higher finance charges and higher net investment income.  Year-to-date net realized gains of $4.2 million as compared to $0.4 million for the comparable prior year period also contributed to the improvement in year-to-date income before tax.  

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratio
These increases in revenue were partially offset by increased losses and LAE for the three and six months ended June 30, 2019 of $9.6 million and $16.0 million, respectively, as compared to the prior year periods due primarily to increased net premiums earned. 

Hallmark Financial reported $1.5 million and $1.4 million, respectively, of unfavorable net prior year loss reserve development during the three and six months ended June 30, 2019 as compared to $5.0 million and $4.5 million, respectively, of unfavorable net prior year loss reserve development during the same periods of 2018.

Hallmark Financial had a net loss ratio of 68.8% and 69.7% for the three and six months ended June 30, 2019, respectively, as compared to 70.0% and 69.6% reported during the same periods in 2018.  Catastrophe losses contributed 1.9% and 2.0% to the net loss ratios for the three and six months ended June 30, 2019, as compared to 2.2% and 1.6% for the same periods of the prior year. 

The expense ratio was 25.7% for both the three and six months ended June 30, 2019, respectively, as compared to 27.0% and 27.5% reported during the same periods in 2018.  The Company reported a net combined ratio of 94.5% and 95.4% for the three and six months ended June 30, 2019, compared to 97.0% and 97.1% during the same periods in 2018. 

Net Income
Hallmark Financial reported net income of $13.0 million and $28.1 million for the three and six months ended June 30, 2019 as compared to $5.1 million and $5.7 million for the three and six months ended June 30, 2018.  

On a diluted basis per share, the Company reported net income of $0.71 per share and $1.54 per share for the three and six months ended June 30, 2019 as compared to $0.28 per share and $0.31 per share for the three and six months ended June 30, 2018.

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 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 2019        
Reported GA AP measures $   16,484   $   3,455   $     13,029     18,251 $     0.71  
Excluded investment (gains)/losses $   (6,817 ) $   (1,432 ) $   (5,385 )   18,251 $   (0.30 )
Operating e arnings $   9,667   $   2,023   $     7,644     18,251 $     0.42  
           
Second Quarter 2018        
Reported GA AP measures $   6,372   $   1,282   $     5,090     18,174 $     0.28  
Excluded investment (gains)/losses $   (533 ) $   (112 ) $   (421 )   18,174 $   (0.02 )
Operating e arnings $   5,839   $   1,170   $     4,669     18,174 $     0.26  
           
Year-to-Date 2019        
Reported GA AP measures $   35,402   $   7,348   $     28,054     18,250 $     1.54  
Excluded investment (gains)/losses $   (18,754 ) $   (3,938 ) $   (14,816 )   18,250 $   (0.81 )
Operating e arnings $   16,648   $   3,410   $     13,238     18,250 $     0.73  
           
Year-to-Date 2018        
Reported GA AP measures $   7,181   $   1,444   $     5,737     18,230 $     0.31  
Excluded investment (gains)/losses $   4,302   $   903   $   3,399     18,230 $   0.19  
Operating e arnings $   11,483   $   2,347   $     9,136     18,230 $     0.50  
           

Operating return on beginning tangible equity is calculated as operating earnings divided by GAAP equity at the beginning of the period excluding goodwill.  Management believes that operating return on beginning tangible equity provides useful information to investors about the performance of the Company’s core insurance operations relative to its core shareholder equity exclusive of non-depreciable goodwill from prior acquisitions.  Return on beginning equity is the GAAP measure that is most directly comparable to operating return on beginning tangible equity.  A reconciliation of operating return on beginning tangible equity to return on beginning equity is presented below.

Year-to-date 2019 net income   28,054   a
Excluded investment gains, net of tax   (14,816 )  
Year-to-date 2019 operating earnings   13,238   b
Annualized year-to-date 2019 net income   56,108   (a x 2)
Annualized year-to-date 2019 operating earnings   26,476   (b x 2)
     
Beginning GAAP equity   255,532   c
Reverse goodwill   (44,695 )  
Beginning tangible equity   210,837   d
     
Annualized return on beginning GAAP equity 22.0 % (a x 2) / c
Annualized operating return on beginning tangible equity 12.6 % (b x 2) / d

 

About Hallmark Financial

Hallmark Financial is a specialty property and casualty insurance holding company with a diversified portfolio of insurance products written on a national platform.  With six insurance subsidiaries and offices in Dallas/Fort Worth, San Antonio, Chicago, Jersey City and Atlanta, Hallmark Financial markets, underwrites and services over $650 million annually in commercial and personal insurance premiums in select markets.  Hallmark Financial 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:
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   2019   2018
Investments:   (unaudited)  
Debt securities, available-for-sale, at fair value (amortized cost: $530,516 in 2019 and $550,268 in 2018) $ 533,148   $ 545,870  
Equity securities (cost: $68,709 in 2019 and $68,709 in 2018)   94,012     80,896  
Other investment (cost: $3,763 in 2019 and $3,763 in 2018)   2,585     1,148  
Total investments   629,745     627,914  
Cash and cash equivalents   67,670     35,594  
Restricted cash    3,486     4,877  
Ceded unearned premiums   150,883     133,031  
Premiums receivable   144,674     119,778  
Accounts receivable   1,332     1,619  
Receivable for securities     2,581       3,369  
Reinsurance recoverable   300,155     252,029  
Deferred policy acquisition costs   20,308     14,291  
Goodwill    44,695     44,695  
Intangible assets, net   6,323     7,555  
Deferred federal income taxes, net   -     4,983  
Prepaid expenses   3,282     2,588  
Other assets    30,634     12,571  
Total Assets $ 1,405,768   $ 1,264,894  
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Liabilities:        
Revolving credit facility payable $   30,000    $    30,000  
Subordinated debt securities (less unamortized debt issuance cost of $872 in 2019 and $898 in 2018)     55,830       55,804  
Reserves for unpaid losses and loss adjustment expenses   551,543     527,247  
Unearned premiums   351,630     298,061  
Reinsurance balances payable   73,977     67,328  
Current federal income tax payable   870       4  
Deferred federal income taxes, net   143       -   
Pension liability   1,946     2,018  
Payable for securities     3,167       698  
Accounts payable and other accrued expenses   47,126     28,202  
Total Liabilities   1,116,232     1,009,362  
Commitments and contingencies        
Stockholders’ equity:        
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2019 and 2018 3,757     3,757  
Additional paid-in capital    122,778     123,168  
Retained earnings    189,249     161,195  
Accumulated other comprehensive loss     (1,047 )     (6,660 )
Treasury stock (2,749,738 shares in 2019 and 2,846,131 shares in 2018), at cost   (25,201 )   (25,928 )
Total Stockholders’ Equity   289,536     255,532  
Total Liabilities & Stockholders' Equity $ 1,405,768   $ 1,264,894  
 


Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations Three Months Ended   Six Months Ended
($ in thousands, except per share amounts) June 30,   June 30,
  2019 2018   2019 2018
    (unaudited)   (unaudited)     (unaudited)   (unaudited)
Gross premiums written $ 218,236   $ 173,219     $   405,552   $ 326,724  
Ceded premiums written   (94,393 )   (83,373 )       (164,306 )   (145,445 )
Net premiums written   123,843     89,846         241,246     181,279  
Change in unearned premiums   (17,344 )   1,132         (35,717 )   1,646  
Net premiums earned   106,499     90,978         205,529     182,925  
                   
Investment income, net of expenses   5,412     4,406         10,523     8,846  
Investment gains (losses), net   6,817     533         18,754     (4,302 )
Finance charges   1,797     1,161         3,531     2,201  
Commission and fees   364     1,032         657     1,735  
Other income   14     15         30     61  
Total revenues   120,903     98,125         239,024     191,466  
                   
Losses and loss adjustment expenses   73,226     63,648         143,313     127,323  
Operating expenses   29,336     26,360         56,582     53,573  
Interest expense   1,240     1,128         2,493     2,155  
Amortization of intangible assets   617     617         1,234     1,234  
Total expenses   104,419     91,753         203,622     184,285  
                   
Income before tax   16,484     6,372         35,402     7,181  
Income tax expense   3,455     1,282         7,348     1,444  
Net income $ 13,029   $ 5,090     $   28,054   $ 5,737  
                   
Net income per share:                  
Basic $ 0.72   $ 0.28     $ 1.55   $ 0.32  
Diluted $ 0.71   $ 0.28     $ 1.54   $ 0.31  
           


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, unaudited) 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
Gross premiums written $   172,940   $   136,079   $   21,835   $   21,574   $   23,461   $   15,566   $   -  $   -    $   218,236   $   173,219  
Ceded premiums written   (83,370 )   (72,083 )   (7,170 )   (2,645 )   (3,853 )   (8,645 )     -      -      (94,393 )   (83,373 )
Net premiums written   89,570     63,996     14,665     18,929     19,608     6,921       -      -      123,843     89,846  
Change in unearned premiums   (20,216 )   2,333     1,611     (824 )   1,261     (377 )     -      -      (17,344 )   1,132  
Net premiums earned   69,354     66,329     16,276     18,105     20,869     6,544       -      -      106,499     90,978  
                     
Total revenues   73,592     72,081     17,310     19,247     23,116     7,916     6,885   (1,119 )   120,903     98,125  
                     
Losses and loss adjustment expenses   48,374     48,352     10,613     10,621     14,239     4,675       -      -      73,226     63,648  
                     
Pre-tax income (loss)   10,427     8,770     2,057     2,656     2,441     (1 )   1,559   (5,053 )   16,484     6,372  
                     
Net loss ratio (1)   69.7 %   72.9 %   65.2 %   58.7 %   68.2 %   71.4 %       68.8 %   70.0 %
Net expense ratio (1)   22.1 %   22.3 %   29.0 %   33.2 %   23.3 %   33.7 %       25.7 %   27.0 %
Net combined ratio (1)   91.8 %   95.2 %   94.2 %   91.9 %   91.5 %   105.1 %       94.5 %   97.0 %
                     
Favorable (Unfavorable) Prior Year Development     (3,277 )     (5,849 )     1,778       507       29       359       -      -        (1,470 )     (4,983 )
                     


(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, unaudited) 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
Gross premiums written $   307,339   $   250,892   $   47,363   $   44,371   $   50,850   $   31,461   $   -  $   -    $   405,552   $   326,724  
Ceded premiums written   (140,731 )   (122,741 )   (15,273 )   (5,200 )   (8,302 )   (17,504 )     -      -      (164,306 )   (145,445 )
Net premiums written   166,608     128,151     32,090     39,171     42,548     13,957       -      -      241,246     181,279  
Change in unearned premiums   (33,066 )   5,868     1,560     (3,199 )   (4,211 )   (1,023 )     -      -      (35,717 )   1,646  
Net premiums earned   133,542     134,019     33,650     35,972     38,337     12,934       -      -      205,529     182,925  
                     
Total revenues   141,559     145,205     35,683     38,122     42,599     15,536     19,183   (7,397 )   239,024     191,466  
                     
Losses and loss adjustment expenses   94,323     95,895     22,264     22,301     26,726     9,127       -      -      143,313     127,323  
                     
Pre-tax income (loss)   18,395     18,528     3,564     3,975     4,014     (23 )   9,429   (15,299 )   35,402     7,181  
                     
Net loss ratio (1)   70.6 %   71.6 %   66.2 %   62.0 %   69.7 %   70.6 %       69.7 %   69.6 %
Net expense ratio (1)   22.2 %   23.0 %   29.7 %   33.2 %   22.8 %   34.6 %       25.7 %   27.5 %
Net combined ratio (1)   92.8 %   94.6 %   95.9 %   95.2 %   92.5 %   105.2 %       95.4 %   97.1 %
                     
Net Favorable (Unfavorable) Prior Year Development     (5,203 )     (6,861 )     3,583       1,560       216       848       -      -        (1,404 )     (4,453 )
                     


(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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