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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:

  • 2nd quarter net income of $1.1 million, or $0.06 per diluted share
  • 2nd quarter catastrophe losses of $7.8 million, or $0.27 per diluted share net of tax
  • 2nd quarter other-than-temporary impairments of $2.6 million, or $0.09 per diluted share net of tax
  • 2nd quarter net combined ratio of 95.9%, including 8.9% attributable to catastrophe losses
  • 2nd quarter gross premiums written up 8% compared to prior year
  • 2nd 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 OperationsThree Months Ended Six Months Ended
($ in thousands, except share amounts)June 30 June 30
20162015 20162015
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
CorporateConsolidated
($ 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
CorporateConsolidated
($ 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.


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

Source:Hallmark Financial Services, Inc.