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Hallmark Financial Services, Inc. Announces First Quarter 2017 Earnings Results

FORT WORTH, Texas, May 09, 2017 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ:HALL) today announced earnings results for its first quarter 2017, including the following highlights:

  • 1st quarter 2017 net income of $4.0 million, or $0.21 per diluted share
  • 1st quarter 2017 total revenues of $96.9 million, increased 8% over prior year
  • 1st quarter 2017 favorable prior year reserve development of $0.5 million
  • 1st quarter 2017 net combined ratio of 98.6%

“The first quarter of fiscal 2017 continued to see elevated losses from our automobile lines of business. However, we are seeing improvement in our personal auto loss experience for the current accident year compared to prior year as our actions to address increased severity and frequency trends in this portfolio are beginning to have the expected impact. In the quarter, our Personal Segment did see some adverse loss reserve development from prior accident years which included a large settlement of a homeowners claim, a line that we exited beginning in late 2014,” said Naveen Anand, President and Chief Executive Officer.

“Our Specialty Commercial Segment grew premium production by 9% and reported a profitable 92.9% combined ratio for the quarter despite elevated commercial auto losses compared to the first quarter of the prior year. During a quarter which the industry saw significant severe convective storm losses, our Standard Commercial Segment experienced insignificant catastrophe losses as a result of our exposure reductions over the last two years and good fortune. However, during the first quarter of 2017, this segment experienced a $0.9 million hit to pre-tax income from the runoff of our occupational accident and workers’ compensation lines of business as compared to a $0.3 million adverse impact during the same period the prior year. These runoff lines adversely impacted our Standard Commercial Segment’s combined ratio by 6.2% and our consolidated combined ratio by 1.1% for the first quarter,” concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “We reported book value per share of $14.60 as of March 31, 2017, which is an increase of 2% during the first quarter. Our total cash and investments increased by $7.7 million during the first three months of 2017 to $748.8 million, or $40.33 per share. Our balance sheet remains liquid with a very short duration in our investment portfolio and cash balances (including restricted cash) of $85.8 million as of March 31, 2017 are ready to be deployed as we see opportunity.”

First Quarter
2017 2016 % Change
($ in thousands, unaudited)
Gross premiums written 135,112 128,447 5%
Net premiums written 88,519 87,626 1%
Net premiums earned 89,223 84,327 6%
Investment income, net of expenses 4,479 3,879 15%
Gain (loss) on investments (1) 2,060 74 2684%
Other-than-temporary impairments - (301) -100%
Total revenues 96,948 90,028 8%
Net income 3,986 4,074 -2%
Net income per share - basic$ 0.21 $ 0.21 0%
Net income per share - diluted$ 0.21 $ 0.21 0%
Book value per share$14.60 $14.00 4%
Cash flow from operations 8,839 (1,311) nm
(1) includes change in unrealized gain (loss) on other investment recognized in earnings

First Quarter 2017 Commentary

Hallmark reported net income of $4.0 million for the three months ended March 31, 2017 as compared to net income of $4.1 million for the same period the prior year. On a diluted basis per share, the Company reported net income of $0.21 per share for the three months ended both March 31, 2017 and 2016.

Hallmark's consolidated net loss ratio was 69.3% for the three months ended March 31, 2017, as compared to 65.7% for the same period the prior year. Hallmark's net expense ratio was 29.3% for the three months ended March 31, 2017 as compared to 29.6% for the same period the prior year. Hallmark’s net combined ratio was 98.6% for the three months ended March 31, 2017 as compared to 95.3% for the same period the prior year. Hallmark’s reported net combined ratio includes a 1.1% adverse impact for the three months ended March 31, 2017, as compared to a 0.5% adverse impact for the same period the prior year, from the workers’ compensation and occupational accident lines of business no longer written by the Standard Commercial Segment. Similarly, these discontinued lines of business accounted for 6.2% of the 101.6% net combined ratio of the Standard Commercial Segment for the first quarter of 2017 and 2.4% of the 100.7% net combined ratio of the Standard Commercial Segment for the first quarter of 2016.

During the three months ended March 31, 2017, Hallmark’s total revenues were $96.9 million, representing an increase of 8% from the $90.0 million in total revenues for the same period of 2016. During the three months ended March 31, 2017, Hallmark’s income before tax was $5.8 million, representing a decrease of $0.2 million from the $6.0 million reported during the same period the prior year.

The increase in revenue for the three months ended March 31, 2017 was primarily attributable to net realized gains on the Company’s investment portfolio during the current quarter as compared to net realized losses during the same period the prior year. Also contributing to the increase in revenue were higher net premiums earned and higher net investment income, partially offset by lower finance charge revenue and lower commission and fee revenue. The higher net premiums earned were due mostly to increased premium production in the Specialty Commercial Segment.

The decrease in income before tax for the three months ended March 31, 2017 was due primarily to increased losses and loss adjustment expenses (“LAE”) of $6.4 million and higher operating expenses of $0.6 million, partially offset by the increase in revenue discussed above. The increase in loss and LAE was primarily the result of higher current accident year loss trends in the Specialty Commercial Segment driven by commercial auto lines of business, as well as the increased earned premium discussed above.

During the three months ended March 31, 2017, Hallmark’s cash flow provided by operations was $8.8 million compared to cash flow used by operations of $1.3 million during the same period the prior year. The increase in operating cash flow was primarily due to decreased paid losses (including timing of reinsurance claim settlements), increased net collected premiums, higher collected net investment income and lower income taxes paid partially offset by higher paid operating expenses and lower collected finance charges.

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 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.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value)
Mar. 31
Dec. 31
ASSETS 2017 2016
Investments: (unaudited)
Debt securities, available-for-sale, at fair value (cost: $605,438 in 2017 and $597,784 in 2016)$605,333 $597,457
Equity securities, available-for-sale, at fair value (cost: $30,369 in 2017 and $31,449 in 2016) 53,156 51,711
Other investment (cost; $3,763 in 2017 and 2016) 4,510 4,951
Total investments 662,999 654,119
Cash and cash equivalents 82,953 79,632
Restricted cash 2,852 7,327
Ceded unearned premiums 82,358 81,482
Premiums receivable 94,496 89,715
Accounts receivable 1,708 2,269
Receivable for securities 1,254 3,047
Reinsurance recoverable 148,588 147,821
Deferred policy acquisition costs 19,094 19,193
Goodwill 44,695 44,695
Intangible assets, net 11,875 12,491
Deferred federal income taxes, net 575 1,365
Federal income tax recoverable 1,955 3,951
Prepaid expenses 3,406 1,552
Other assets 14,416 13,801
Total Assets$1,173,224 $1,162,460
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Revolving credit facility payable$ 30,000 $ 30,000
Subordinated debt securities (less unamortized debt issuance cost of $988 in 2017 and $1,001 in 2016) 55,714 55,701
Reserves for unpaid losses and loss adjustment expenses 486,971 481,567
Unearned premiums 241,427 241,254
Reinsurance balances payable 51,738 46,488
Pension liability 2,152 2,203
Payable for securities 9,036 14,215
Accounts payable and other accrued expenses 25,160 25,296
Total Liabilities 902,198 896,724
Commitments and contingencies
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2017 and 2016 3,757 3,757
Additional paid-in capital 123,183 123,166
Retained earnings 152,013 148,027
Accumulated other comprehensive income 12,178 10,371
Treasury stock (2,306,735 shares in 2017 and 2,260,849 shares in 2016), at cost (20,105) (19,585)
Total Stockholders’ Equity 271,026 265,736
Total Liabilities & Stockholders' Equity$1,173,224 $1,162,460

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
($ in thousands, except share amounts)
Three Months Ended
March 31
2017 2016
Gross premiums written$135,112 $128,447
Ceded premiums written (46,593) (40,821)
Net premiums written 88,519 87,626
Change in unearned premiums 704 (3,299)
Net premiums earned 89,223 84,327
Investment income, net of expenses 4,479 3,879
Net realized gains (losses) 2,060 (227)
Finance charges 1,053 1,441
Commission and fees 72 577
Other income 61 31
Total revenues 96,948 90,028
Losses and loss adjustment expenses 61,842 55,395
Operating expenses 27,495 26,896
Interest expense 1,156 1,131
Amortization of intangible assets 617 617
Total expenses 91,110 84,039
Income before tax 5,838 5,989
Income tax expense 1,852 1,915
Net income$3,986 $4,074
Net income per share:
Basic$0.21 $0.21
Diluted$0.21 $0.21

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Mar. 31 (unaudited)
Specialty Commercial
Segment
Standard Commercial
Segment
Personal
Segment
Corporate Consolidated
($ in thousands) 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
Gross premiums written$ 95,507 $ 87,400 $ 20,693 $ 20,098 $ 18,912 $ 20,949 $ - $ - $135,112 $128,447
Ceded premiums written (35,924) (28,663) (1,841) (2,352) (8,828) (9,806) - - (46,593) (40,821)
Net premiums written 59,583 58,737 18,852 17,746 10,084 11,143 - - 88,519 87,626
Change in unearned premiums 2,346 (1,484) (2,138) (1,096) 496 (719) - - 704 (3,299)
Net premiums earned 61,929 57,253 16,714 16,650 10,580 10,424 - - 89,223 84,327
Total revenues 65,835 60,583 17,726 17,992 11,863 12,090 1,524 (637) 96,948 90,028
Losses and loss adjustment expenses 41,590 34,413 11,046 11,069 9,206 9,913 - - 61,842 55,395
Pre-tax income (loss), net of non-controlling interest 8,098 10,312 851 1,416 (758) (1,083) (2,353) (4,656) 5,838 5,989
Net loss ratio (1) 67.2% 60.1% 66.1% 66.5% 87.0% 95.1% 69.3% 65.7%
Net expense ratio (1) 25.7% 27.7% 35.5% 34.2% 26.0% 19.1% 29.3% 29.6%
Net combined ratio (1) 92.9% 87.8% 101.6% 100.7% 113.0% 114.2% 98.6% 95.3%
Favorable (Unfavorable) Prior Year Development (300) 2,347 1,458 358 (669) (988) - - 489 1,717
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.