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Hallmark Financial Services, Inc. Announces Third Quarter 2013 Earnings Results

Hallmark Logo (EPR)
Hallmark Financial Services, Inc. Logo

FORT WORTH, Texas, Nov. 7, 2013 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported third quarter 2013 net income of $6.3 million, or $0.32 per diluted share, compared to net income of $3.4 million, or $0.18 per diluted share, reported for third quarter 2012. Year to date, Hallmark reported net income of $4.8 million, or $0.25 per diluted share, compared to net income of $1.7 million, or $0.09 per diluted share, for the same period the prior year. Total revenues were $108.6 million for the third quarter of 2013 as compared to $85.6 million for the third quarter of 2012. Year to date total revenues for 2013 were $301.1 million, up 19% from the $253.2 million reported for the same period the prior year.



"Operating results for the third quarter reflect our ongoing strategy of growing existing lines of business where we can do so profitably and contracting in those where we have experienced unacceptable underwriting performance. Our year-to-date gross written premium growth of 18% is driven largely by near double-digit rate increases in our Specialty and Standard commercial segments coupled with increased insured exposures on renewal policies as a result of improving economic conditions," said Mark J. Morrison, President and Chief Executive Officer. "Our quarterly combined ratio of 98.8% reflects an improvement in current accident year underwriting profitability. While we are not yet satisfied with our overall underwriting profitability, we are confident the underwriting and pricing actions we have taken will continue to improve operating margins going forward and help us to achieve our targeted financial goals."

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Book value per share was $11.94 at the end of the quarter, an increase of 5% over prior year and an increase of 4% over prior year end. Cash flow from operations was $29.5 million in the third quarter, up from $11.0 million in the third quarter of 2012. Total cash and investments have increased 12% during the year to $603.0 million, or $31.30 per share. Hallmark's cash balances totaled $160.4 million as of September 30, 2013."

Third Quarter
2013 2012 % Change
($ in thousands, unaudited)
Gross premiums written 123,664 99,448 24%
Net premiums written 102,889 85,005 21%
Net premiums earned 97,452 80,481 21%
Investment income, net of expenses 2,965 3,795 -22%
Net realized gains 6,950 982 608%
Total revenues 108,613 85,620 27%
Net income (1) 6,274 3,413 84%
Net income per share - basic $ 0.33 $ 0.18 83%
Net income per share - diluted $ 0.32 $ 0.18 78%
Book value per share $ 11.94 $ 11.37 5%
Cash flow from operations 29,487 10,965 169%
Year to Date
2013 2012 % Change
($ in thousands, unaudited)
Gross premiums written 351,278 297,658 18%
Net premiums written 296,330 255,104 16%
Net premiums earned 276,784 235,938 17%
Investment income, net of expenses 9,871 11,573 -15%
Net realized gains 9,723 1,854 424%
Total revenues 301,053 253,177 19%
Net income (1) 4,817 1,741 177%
Net income per share - basic $ 0.25 $ 0.09 178%
Net income per share - diluted $ 0.25 $ 0.09 178%
Book value per share $ 11.94 $ 11.37 5%
Cash flow from operations 53,520 28,187 90%
(1) Net income for each period is net income attributable to Hallmark Financial Services, Inc. as reported in the consolidated statements of operations as determined in accordance with U.S. generally accepted accounting principles (GAAP).

Third Quarter 2013 Commentary

During the three and nine months ended September 30, 2013, total revenues were $108.6 million and $301.1 million, representing a 27% and 19% increase, respectively, from the $85.6 million and $253.2 million in total revenues for the same period of 2012. The growth in revenue was primarily attributable to increased premium production and resulting earned premium driven largely from the Specialty Commercial Segment and the Standard Commercial Segment. Further contributing to the increase in revenue were higher net realized gains on the investment portfolio and a lower adverse profit share commission revenue adjustment in the Standard Commercial Segment. These increases in revenue were partially offset by lower net investment income and lower year to date earned premium in the Personal Segment due mostly to the impact of discontinued products and a reduction of premium written in underperforming states.

As a result, Hallmark reported net income of $6.3 million and $4.8 million for the three and nine months ended September 30, 2013 as compared to net income of $3.4 million and $1.7 million for the same periods during 2012. On a diluted basis per share, Hallmark reported net income of $0.32 per share for the three months ended September 30, 2013, as compared to $0.18 per share for the same period in 2012. On a diluted basis per share, net income per share was $0.25 for the nine months ended September 30, 2013 as compared to $0.09 for the same period during 2012.

Hallmark's consolidated net loss ratio was 69.9% and 74.0% for the three and nine months ended September 30, 2013 as compared to 65.7% and 71.6% for the same periods in 2012. The net loss ratios were impacted by $0.5 million and $8.0 million of unfavorable prior year loss reserve development for the three and nine months ended September 30, 2013 as compared to $2.2 million and $3.6 million of favorable prior year loss reserve development for the same periods of 2012. Also impacting the current quarter's gross and net loss ratios was $2.3 million of additional loss development, or 2.4% net loss ratio points, on catastrophe weather events that occurred in the first half of 2013. Hallmark's net expense ratio was 28.9% and 29.2% for the three and nine months ended September 30, 2013 as compared to 30.1% and 30.4% for the same periods in 2012. Hallmark's net combined ratio was 98.8% and 103.2% for the three and nine months ended September 30, 2013 as compared to 95.8% and 102.0% for the same periods in 2012.

About Hallmark Financial Services, Inc.

Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Hallmark's business involves marketing, distributing, underwriting and servicing commercial and personal lines of property/casualty insurance products, as well as providing other insurance related services. Hallmark is headquartered in Fort Worth, Texas and its common stock is listed on NASDAQ under the symbol "HALL."

The Hallmark Financial Services, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=4395

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 share amounts) Sept. 30 Dec. 31
ASSETS 2013 2012
Investments: (unaudited)
Debt securities, available-for-sale, at fair value (cost: $395,860 in 2013 and $397,800 in 2012) $ 396,647 $401,435
Equity securities, available-for-sale, at fair value (cost: $24,033 in 2013 and $31,502 in 2012) 45,940 43,925
Total investments 442,587 445,360
Cash and cash equivalents 151,698 85,145
Restricted cash 8,700 8,707
Ceded unearned premiums 31,731 22,411
Premiums receivable 77,749 66,683
Accounts receivable 3,209 3,110
Receivable for securities 19 3
Reinsurance recoverable 61,193 51,970
Deferred policy acquisition costs 26,943 24,911
Goodwill 44,695 44,695
Intangible assets, net 20,647 23,068
Deferred federal income taxes, net -- 1,940
Prepaid expenses 1,611 1,480
Other assets 8,935 10,985
Total Assets $ 879,717 $790,468
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Revolving credit facility payable $ 1,473 $ 1,473
Subordinated debt securities 56,702 56,702
Reserves for unpaid losses and loss adjustment expenses 360,248 313,416
Unearned premiums 191,367 162,502
Reinsurance balances payable 11,862 7,330
Pension liability 3,334 3,685
Payable for securities 6,380 --
Deferred federal income taxes, net 319 --
Federal income tax payable 1,075 1,518
Accounts payable and other accrued expenses 16,879 23,305
Total Liabilities 649,639 569,931
Commitments and contingencies
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2013 and 2012 3,757 3,757
Additional paid-in capital 122,720 122,475
Retained earnings 102,781 97,964
Accumulated other comprehensive income 12,378 7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost (11,558) (11,558)
Total Stockholders' Equity 230,078 220,537
$ 879,717 $790,468
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations Three Months Ended Nine Months Ended
($ in thousands, except share amounts; unaudited) September 30 September 30
2013 2012 2013 2012
Gross premiums written $ 123,664 $99,448 $ 351,278 $ 297,658
Ceded premiums written (20,775) (14,443) (54,948) (42,554)
Net premiums written 102,889 85,005 296,330 255,104
Change in unearned premiums (5,437) (4,524) (19,546) (19,166)
Net premiums earned 97,452 80,481 276,784 235,938
Investment income, net of expenses 2,965 3,795 9,871 11,573
Net realized gains 6,950 982 9,723 1,854
Finance charges 1,484 1,374 4,396 4,538
Commission and fees (251) (1,029) 169 (1,033)
Other income 13 17 110 307
Total revenues 108,613 85,620 301,053 253,177
Losses and loss adjustment expenses 68,158 52,839 204,955 168,859
Other operating expenses 29,139 25,726 83,911 77,077
Interest expense 1,150 1,137 3,449 3,464
Amortization of intangible assets 694 897 2,420 2,690
Total expenses 99,141 80,599 294,735 252,090
Income before tax 9,472 5,021 6,318 1,087
Income tax expense (benefit) 3,198 1,350 1,501 (978)
Net income 6,274 3,671 4,817 2,065
Less: net income attributable to non-controlling interest -- 258 -- 324
Net income attributable to Hallmark Financial Services, Inc. $ 6,274 $ 3,413 $ 4,817 $ 1,741
Net income per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic $ 0.33 $ 0.18 $ 0.25 $ 0.09
Diluted $ 0.32 $ 0.18 $ 0.25 $ 0.09
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Sept. 30 (unaudited)
Standard Commercial Segment Specialty Commercial Segment Personal Segment Corporate Consolidated
($ in thousands) 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012
Gross premiums written $ 21,444 $ 18,706 $ 83,453 $ 62,349 $ 18,767 $ 18,393 $ -- $ -- $ 123,664 $ 99,448
Ceded premiums written (1,837) (1,876) (17,932) (12,385) (1,006) (182) -- -- (20,775) (14,443)
Net premiums written 19,607 16,830 65,521 49,964 17,761 18,211 -- -- 102,889 85,005
Change in unearned premiums 332 736 (7,512) (6,396) 1,743 1,136 -- -- (5,437) (4,524)
Net premiums earned 19,939 17,566 58,009 43,568 19,504 19,347 -- -- 97,452 80,481
Total revenues 21,163 17,761 60,787 46,373 21,256 21,172 5,407 314 108,613 85,620
Losses and loss adjustment expenses 13,537 12,476 37,914 25,532 16,707 14,831 -- -- 68,158 52,839
Pre-tax income (loss), net of non-controlling interest 1,163 (529) 7,564 8,287 (1,613) (345) 2,358 (2,650) 9,472 4,763
Net loss ratio (1) 67.9% 71.0% 65.4% 58.6% 85.7% 76.7% 69.9% 65.7%
Net expense ratio (1) 32.5% 33.4% 26.8% 27.3% 25.4% 29.3% 28.9% 30.1%
Net combined ratio (1) 100.4% 104.4% 92.2% 85.9% 111.1% 106.0% 98.8% 95.8%
Favorable (Unfavorable) Prior Year Development 1,408 71 (1,405) 2,757 (534) (651) -- -- (531) 2,177
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 for the business units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. For the business units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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)
Standard Commercial Segment Specialty Commercial Segment Personal Segment Corporate Consolidated
($ in thousands) 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012
Gross premiums written $66,773 $58,292 $225,120 $178,690 $59,385 $60,676 $ -- $ -- $351,278 $297,658
Ceded premiums written (5,934) (5,063) (45,232) (36,948) (3,782) (543) -- -- (54,948) (42,554)
Net premiums written 60,839 53,229 179,888 141,742 55,603 60,133 -- -- 296,330 255,104
Change in unearned premiums (2,763) (2,194) (20,302) (19,449) 3,519 2,477 -- -- (19,546) (19,166)
Net premiums earned 58,076 51,035 159,586 122,293 59,122 62,610 -- -- 276,784 235,938
Total revenues 62,160 53,791 168,127 129,812 64,621 68,508 6,145 1,066 301,053 253,177
Losses and loss adjustment expenses 42,567 39,253 113,303 76,827 49,085 52,779 -- -- 204,955 168,859
Pre-tax income (loss), net of non-controlling interest 641 (2,601) 11,828 17,193 (3,331) (5,747) (2,820) (8,082) 6,318 763
Net loss ratio (1) 73.3% 76.9% 71.0% 62.8% 83.0% 84.3% 74.0% 71.6%
Net expense ratio (1) 32.6% 33.8% 27.0% 28.2% 25.7% 28.5% 29.2% 30.4%
Net combined ratio (1) 105.9% 110.7% 98.0% 91.0% 108.7% 112.8% 103.2% 102.0%
Favorable (Unfavorable) Prior Year Development 3,630 2,827 (10,062) 3,679 (1,531) (2,937) -- -- (7,963) 3,569
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 for the business units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. For the business units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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.

CONTACT: For further information, please contact: Mark J. Morrison, President and Chief Executive Officer at 817.348.1600 www.hallmarkgrp.com

Source:Hallmark Financial Services, Inc.