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

FORT WORTH, Texas, Nov. 07, 2016 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ:HALL) today announced earnings for its third fiscal quarter ended September 30, 2016, including the following highlights:
  • 3 rd quarter net income of $5.0 million, or $0.27 per diluted share
  • 3 rd quarter catastrophe losses of $2.2 million, or $0.08 per diluted share net of tax
  • 3 rd quarter net combined ratio of 96.6%, including 2.4% attributable to catastrophe losses
  • 3 rd quarter gross premiums written up 11% compared to prior year
  • 3 rd quarter operating cash flow up 127% compared to prior year
  • 3 rd quarter ending book value per share of $14.53, up 7% compared to September 30, 2015

"Our Specialty Commercial Segment and Standard Commercial Segment continued to perform well both in the quarter and on a year to date basis. Our investments in additional underwriting talent and new products in the Specialty Commercial Segment are beginning to deliver as expected.  We continue to find opportunities for profitable growth.  As a result, the Specialty Commercial Segment now represents over 70% of our portfolio," said Naveen Anand, President and Chief Executive Officer.

"Auto results in our Personal Segment continue to face challenging headwinds. We will continue to address these challenges by increasing rates, culling unprofitable sectors of this business and implementing changes in our claims processes to improve performance," concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Hallmark reported book value per share of $14.53 as of September 30, 2016, an increase of 7% over September 30, 2015.  Total cash and investments increased $28.9 million during the first nine months of 2016 to $730.7 million, an increase of 7% per share to $39.19 per share.  Our cash balances (including restricted cash) totaled $81.1 million as of September 30, 2016."
Third Quarter        
    2016       2015     % Change      
  ($ in thousands, unaudited)      
Gross premiums written   147,065       132,141       11 %      
Net premiums written   95,685       89,924       6 %      
Net premiums earned   90,795       88,406       3 %      
Investment income, net of expenses   4,070       3,495       16 %      
Gain on investments   1,105       28       3846 %      
Other-than-temporary impairments   -       (363 )     -100 %      
Total revenues   97,618       93,684       4 %      
Net income   5,048       6,698       -25 %      
Net income per share - basic $ 0.27     $ 0.35       -23 %      
Net income per share - diluted $ 0.27     $ 0.35       -23 %      
Book value per share $ 14.53     $ 13.62       7 %      
Cash flow from operations   23,198       10,223       127 %      
                 
                 
         
Year to Date        
    2016       2015     % Change      
  ($ in thousands, unaudited)      
Gross premiums written   419,549       390,708       7 %      
Net premiums written   278,554       274,603       1 %      
Net premiums earned   262,820       263,578       0 %      
Investment income, net of expenses   11,943       10,051       19 %      
Gain on investments   1,589       5,881       -73 %      
Other-than-temporary impairments   (2,888 )     (2,193 )     32 %      
Total revenues   278,698       282,331       -1 %      
Net income   10,188       18,417       -45 %      
Net income per share - basic $ 0.54     $ 0.96       -44 %      
Net income per share - diluted $ 0.54     $ 0.95       -43 %      
Book value per share $ 14.53     $ 13.62       7 %      
Cash flow from operations   25,532       43,101       -41 %      
                 

Third Quarter 2016 Commentary

Hallmark reported net income of $5.0 million and $10.2 million for the three and nine months ended September 30, 2016 as compared to net income of $6.7 million and $18.4 million for the same periods the prior year. On a diluted basis per share, the Company reported net income of $0.27 per share and $0.54 per share for the three and nine months ended September 30, 2016, as compared to net income of $0.35 per share and $0.95 per share for the same periods the prior year.

Hallmark's consolidated net loss ratio was 68.7% and 67.1% for the three and nine months ended September 30, 2016, as compared to 63.3% and 65.2% for the same periods the prior year.  Hallmark's net expense ratio was 27.9% and 28.9% for the three and nine months ended September 30, 2016 as compared to 27.7% and 28.2% for the same periods the prior year.  Hallmark's net combined ratio was 96.6% and 96.0% for the three and nine months ended September 30, 2016 as compared to 91.0% and 93.4% for the same periods the prior year. 

During the three and nine months ended September 30, 2016, Hallmark's total revenues were $97.6 million and $278.7 million, representing an increase of 4% and a decrease of 1%, respectively, from the $93.7 million and $282.3 million in total revenues for the same periods of 2015.  During the three and nine months ended September 30, 2016, Hallmark's income before tax was $7.2 million and $14.7 million, representing a decrease of $2.6 million and $12.1 million from the $9.8 million and $26.8 million reported during the same periods the prior year.

The increase in revenue for the three months ended September 30, 2016 was primarily attributable to realized gains recognized on the investment portfolio during the current quarter as compared to realized losses recognized during the same period the prior year.  Also contributing to the increase in revenue were higher net premiums earned, higher net investment income and higher commission and fee revenue partially offset by lower finance charge revenue and lower other income.  The higher net premiums earned were driven by higher net premiums written in the Specialty Commercial Segment and Personal Segment.

The decrease in income before tax for the three months ended September 30, 2016 was due primarily to increased loss and loss adjustment expenses ("LAE") of $6.3 million and higher interest expense of $0.4 million partially offset by the increase in revenue discussed above and lower other operating expenses of $0.1 million.  The increase in loss and LAE was primarily the result of unfavorable net prior year loss reserve development in the Specialty Commercial Segment and Personal Segment, as well as higher current accident year loss trends in the Personal Segment and Standard Commercial Segment that was partially offset by higher favorable net prior year loss reserve development in the Standard Commercial Segment.  The increase in interest expense was due to interest on a new revolving credit facility ("Facility B") entered into during the fourth quarter of 2015.

The decrease in revenue during the nine months ended September 30, 2016 was primarily attributable to realized losses recognized on the investment portfolio during the current period as compared to realized gains recognized during the same period the prior year.  Also contributing to the lower revenue was lower net premiums earned, finance charges and other income, partially offset by higher net investment income and higher commission and fee revenue.  The decrease in net premiums earned was primarily attributable to the adverse impact on the Standard Commercial Segment of ceding substantially all unearned workers' compensation premiums effective July 1, 2015, partially offset by the favorable impact of increased retention under a quota share reinsurance agreement in the Personal Segment effective October 1, 2014.

The decrease in income before tax for the nine months ended September 30, 2016 was due primarily to increased loss and LAE of $4.4 million, increased other operating expense of $3.7 million, decreased revenue discussed above and increased interest expense of $0.4 million.  The increase in loss and LAE was primarily the result of an increase in retained losses in the Personal Segment under the quota share reinsurance agreement and higher current accident year loss trends.  Hallmark incurred an aggregate of $10.4 million of net catastrophe losses during the nine months ended September 30, 2016 as compared to $5.3 million for the same period the prior year.  The Company incurred net favorable loss reserve development of $0.8 million for the nine months ended September 30, 2016 as compared to $4.6 million of favorable loss reserve development for the same period in the prior year.  Other operating expenses increased during the nine months ended September 30, 2016 primarily as the result of increased salary and related expenses in the Specialty Commercial Segment and a $1.8 million payment to settle the earn-out related to the previous acquisition of the subsidiaries comprising the Workers Compensation operating unit accrued during the second quarter of 2016, partially offset by lower production related expenses predominately in the Specialty Commercial Segment.  The increase in interest expense was due to interest on Facility B.

During the nine months ended September 30, 2016, Hallmark's cash flow provided by operations was $25.5 million compared to cash flow provided by operations of $43.1 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 increased net collected premiums, lower taxes paid, lower net paid operating expenses and higher collected net investment income.

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)   Sept. 30   Dec. 31
ASSETS     2016       2015  
Investments:   (unaudited)  
Debt securities, available-for-sale, at fair value (cost: $597,890 in 2016 and $538,629 in 2015) $   600,791   $   531,325  
Equity securities, available-for-sale, at fair value (cost: $30,309 in 2016 and $24,951 in 2015)     48,836       47,504  
Total investments     649,627       578,829  
Cash and cash equivalents     69,921       114,446  
Restricted cash     11,156       8,522  
Ceded unearned premiums     81,256       65,094  
Premiums receivable     95,497       83,376  
Accounts receivable     2,133       2,005  
Receivable for securities     685       10,424  
Reinsurance recoverable     133,479       114,287  
Deferred policy acquisition costs     20,701       20,366  
Goodwill     44,695       44,695  
Intangible assets, net     13,108       14,959  
Deferred federal income taxes, net     972       3,360  
Federal income tax recoverable     -       1,779  
Prepaid expenses     1,948       3,213  
Other assets     13,905       10,192  
Total Assets $   1,139,083   $   1,075,547  
LIABILITIES AND STOCKHOLDERS' EQUITY        
Liabilities:        
Revolving credit facility payable $   30,000   $   30,000  
Subordinated debt securities (less unamortized debt issuance cost of $1,014 in 2016 and $1,053 in 2015)     55,688       55,649  
Reserves for unpaid losses and loss adjustment expenses     455,000       450,878  
Unearned premiums     248,304       216,407  
Reinsurance balances payable     49,803       33,741  
Pension liability     1,987       2,496  
Payable for securities     3,955       1,097  
Federal income tax payable     1,001       -  
Accounts payable and other accrued expenses     22,407       23,253  
Total Liabilities     868,145       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     123,263       123,480  
Retained earnings     151,689       141,501  
Accumulated other comprehensive income     11,489       7,418  
Treasury stock (2,229,441 shares in 2016 and 1,775,512 shares in 2015), at cost     (19,260 )     (14,130 )
Total Stockholders' Equity     270,938       262,026  
Total Liabilities & Stockholders' Equity $   1,139,083   $   1,075,547  
 

 
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
  2016 2015   2016 2015
Gross premiums written $   147,065   $   132,141     $   419,549   $   390,708  
Ceded premiums written     (51,380 )     (42,217 )       (140,995 )     (116,105 )
Net premiums written     95,685       89,924         278,554       274,603  
Change in unearned premiums     (4,890 )     (1,518 )       (15,734 )     (11,025 )
Net premiums earned     90,795       88,406         262,820       263,578  
                   
Investment income, net of expenses     4,070       3,495         11,943       10,051  
Net realized gains (losses)     1,105       (335 )       (1,299 )     3,688  
Finance charges     1,036       1,619         3,825       4,400  
Commission and fees     546       60         1,278       (41 )
Other income     66       439         131       655  
Total revenues     97,618       93,684         278,698       282,331  
                   
Losses and loss adjustment expenses     62,337       56,005         176,234       171,820  
Operating expenses     26,344       26,458         82,563       78,818  
Interest expense     1,144       769         3,398       3,043  
Amortization of intangible assets     617       617         1,851       1,851  
Total expenses     90,442       83,849         264,046       255,532  
                   
Income before tax     7,176       9,835         14,652       26,799  
Income tax expense     2,128       3,137         4,464       8,382  
Net income $   5,048   $   6,698     $   10,188   $   18,417  
                   
Net income per share:                  
Basic $   0.27   $   0.35     $   0.54   $   0.96  
Diluted $   0.27   $   0.35     $   0.54   $   0.95  
           

Hallmark Financial Services, Inc. and Subsidiaries  
Consolidated Segment Data          
Three Months Ended Sept. 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 $ 104,087   $ 91,446   $ 18,579   $ 19,225   $ 24,399   $ 21,470   $ -   $ -   $ 147,065   $ 132,141    
Ceded premiums written   (38,064 )   (28,205 )   (1,925 )   (4,145 )   (11,391 )   (9,867 )   -     -     (51,380 )   (42,217 )  
Net premiums written   66,023     63,241     16,654     15,080     13,008     11,603     -     -     95,685     89,924    
Change in unearned premiums   (3,661 )   (2,909 )   258     2,087     (1,487 )   (696 )   -     -     (4,890 )   (1,518 )  
Net premiums earned   62,362     60,332     16,912     17,167     11,521     10,907     -     -     90,795     88,406    
                       
Total revenues   65,855     63,395     18,253     18,477     12,759     12,716     751     (904 )   97,618     93,684    
                       
Losses and loss adjustment expenses   41,478     36,186     9,622     10,088     11,237     9,731     -     -     62,337     56,005    
                       
Pre-tax income (loss)   8,245     11,291     3,195     2,893     (1,750 )   (224 )   (2,514 )   (4,125 )   7,176     9,835    
                       
Net loss ratio (1)   66.5 %   60.0 %   56.9 %   58.8 %   97.5 %   89.2 %       68.7 %   63.3 %  
Net expense ratio (1)   25.3 %   26.1 %   32.3 %   32.2 %   21.9 %   16.1 %       27.9 %   27.7 %  
Net combined ratio (1)   91.8 %   86.1 %   89.2 %   91.0 %   119.4 %   105.3 %       96.6 %   91.0 %  
                       
Favorable (Unfavorable) Prior Year Development   (3,532 )   2,048     2,696     1,821     (1,138 )   (783 )   -     -     (1,974 )   3,086    
                                                               
                                                               

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 (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 $ 295,204   $ 263,103   $ 59,701   $ 63,710   $ 64,644   $ 63,895   $ -   $ -   $ 419,549   $ 390,708    
Ceded premiums written   (104,265 )   (78,804 )   (6,487 )   (8,178 )   (30,243 )   (29,123 )   -     -     (140,995 )   (116,105 )  
Net premiums written   190,939     184,299     53,214     55,532     34,401     34,772     -     -     278,554     274,603    
Change in unearned premiums   (11,555 )   (4,717 )   (2,311 )   273     (1,868 )   (6,581 )   -     -     (15,734 )   (11,025 )  
Net premiums earned   179,384     179,582     50,903     55,805     32,533     28,191     -     -     262,820     263,578    
                       
Total revenues   189,478     188,070     54,464     58,941     36,996     33,096     (2,240 )   2,224     278,698     282,331    
                       
Losses and loss adjustment expenses   115,409     113,168     30,060     33,938     30,765     24,714     -     -     176,234     171,820    
                       
Pre-tax income (loss)   25,843     28,739     7,623     7,247     (3,847 )   (596 )   (14,967 )   (8,591 )   14,652     26,799    
                       
Net loss ratio (1)   64.3 %   63.0 %   59.1 %   60.8 %   94.6 %   87.7 %       67.1 %   65.2 %  
Net expense ratio (1)   26.4 %   25.7 %   33.5 %   32.6 %   21.6 %   19.4 %       28.9 %   28.2 %  
Net combined ratio (1)   90.7 %   88.7 %   92.6 %   93.4 %   116.2 %   107.1 %       96.0 %   93.4 %  
                       
Favorable (Unfavorable) Prior Year Development   (1,938 )   1,852     6,370     4,719     (3,649 )   (2,009 )   -     -     783     4,562    
                                                               
                                                               

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.
For further information, please contact:Mr. Naveen Anand, President and Chief Executive Officer at 817.348.1600www.hallmarkgrp.com

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