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Hallmark Financial Services, Inc. Announces Fourth Quarter and Fiscal Year 2012 Results

Hallmark Logo (EPR)

FORT WORTH, Texas, March 14, 2013 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported fourth quarter 2012 net income of $1.8 million, or $0.09 per share, compared to net income of $0.3 million, or $0.02 per share reported for fourth quarter 2011. Hallmark reported net income of $3.5 million, or $0.18 per share, for fiscal 2012 as compared to a net loss of $10.9 million, or $0.55 per share, reported for fiscal 2011. Total revenues were $88.6 million for the fourth quarter 2012 as compared to $83.1 million for the fourth quarter of 2011. Fiscal 2012 total revenues were $341.8 million, up 6% from the $322.8 million reported for fiscal 2011.



Mark J. Morrison, President and Chief Executive Officer, said, "The positive results for the quarter continue to reflect improvement in underwriting profitability due to the decisive actions taken over the past year, including a continuation of meaningful rate increases across most all business units and exiting unprofitable states and product lines in our Personal Segment. Our fourth quarter combined ratio of 99.1% and earnings of $0.09 per share evidence this improvement and reflect the favorable underlying trends within our business."

Mr. Morrison continued, "The year-over-year increase in revenue continues to be largely driven by organic growth from the operating units that comprise our Specialty Commercial Segment. We have seen an increase in premium production generated from favorable rate trends, as well as from added insured exposure units that suggests improving economic conditions in the markets in which we operate. We continue to see middle single-digit to low double-digit rate increases across all operations with the exception of General Aviation, which continues to be impacted by increased competition in a contracting market. We expect these trends to continue throughout 2013 as we continue to closely monitor pricing and pursue rate increases in most all of our lines of business."

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Book value per share was $11.45 at the end of the year, an increase of 2% over prior year. Cash flow from operations was $5.5 million in the fourth quarter and $33.7 million for fiscal 2012, up from $24.6 million in the prior year. Total cash and investments increased 6% during fiscal 2012 to $539.2 million, or $27.99 per share."

Mr. Schwarz continued, "Despite holding a greater amount of fixed income securities during 2012, net investment income was nearly $0.6 million less than prior year due to a 70 basis point decline in tax equivalent book yield to 4.4%. Hallmark continues to carry significant cash of $93.9 million as of December 31, 2012, which we seek to opportunistically deploy in ways that will generate a higher return for shareholders in the future."

4th Quarter
2012 2011 % Change
($ in thousands, unaudited)
Gross premiums written 92,184 84,047 10%
Net premiums written 77,385 70,804 9%
Net premiums earned 83,498 76,282 9%
Investment income, net of expenses 3,720 4,115 -10%
Net realized gains 89 456 -80%
Total revenues 88,623 83,102 7%
Net income (1) 1,783 311 473%
Net income per share - basic $ 0.09 $ 0.02 350%
Net income per share - diluted $ 0.09 $ 0.02 350%
Book value per share $ 11.45 $ 11.19 2%
Cash flow from operations 5,495 9,602 -43%
Fiscal Year
2012 2011 % Change
($ in thousands)
Gross premiums written 389,842 354,881 10%
Net premiums written 332,489 303,876 9%
Net premiums earned 319,436 293,041 9%
Investment income, net of expenses 15,293 15,880 -4%
Net realized gains 1,943 3,633 -47%
Total revenues 341,800 322,771 6%
Net income (loss) (1) 3,524 (10,891) NM
Net income (loss) per share - basic $ 0.18 $ (0.55) NM
Net income (loss) per share - diluted $ 0.18 $ (0.55) NM
Book value per share $ 11.45 $ 11.19 2%
Cash flow from operations 33,682 24,610 37%
(1) Net income (loss) is net income (loss) 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).

Fiscal Year 2012 Commentary

During fiscal 2012, total revenues were $341.8 million, representing an approximately 6% increase over the $322.8 million in total revenues for fiscal 2011. The growth in revenue was primarily attributable to increased premium production and resulting earned premium driven largely from the E&S Commercial business unit and from the acquisition of the Workers Compensation business unit during the third quarter of 2011. The increase in revenue was partially offset by an adverse profit share commission revenue adjustment in the Standard Commercial P&C business unit, combined with lower finance charges and earned premium in the Personal Segment due mostly to the impact of a reduction of premium written in underperforming states and products exited over the past twelve months. Further offsetting the increase in revenue was lower net realized gains for the period ended December 31, 2012.

Net income attributable to Hallmark was $3.5 million for the year ended December 31, 2012, as compared to a net loss of $10.9 million for the year ended December 31, 2011. On a diluted per share basis, net income attributable to Hallmark was $0.18 per share for fiscal 2012 as compared to a net loss of $0.55 per share for fiscal 2011.

The increase in revenue for the year ended December 31, 2012 was complemented by decreased loss and loss adjustment expenses due primarily to improved current accident year loss trends in the Standard Commercial P&C business unit and Personal Lines business unit as well as $3.7 million of favorable prior year loss development for the year ended December 31, 2012 as compared to $16.4 million of adverse reserve development recognized during the prior year. Of the $16.4 million unfavorable development recognized for the year ended December 31, 2011, $10.3 million was a result of adverse prior year loss reserve development in the Personal Segment in Florida. In addition, the results for the years ended December 31, 2012 and 2011 included $11.7 million and $10.3 million, respectively, in current accident year net losses from weather related claims.

Hallmark's consolidated net loss ratio was 68.9% and 70.9% for the three and twelve months ended December 31, 2012 as compared to 75.2% and 81.6% for the same periods in 2011. Hallmark's net expense ratio was 30.2% and 30.8% for the three and twelve months ended December 31, 2012 as compared to 29.3% and 30.8% for the same periods in 2011. Hallmark's net combined ratio was 99.1% and 101.7% for the three and twelve months ended December 31, 2012 as compared to 104.5% and 112.4% for the same periods in 2011.

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) As of December 31
ASSETS 2012 2011
Investments: (as adjusted)
Debt securities, available-for-sale, at fair value (cost: $397,800 in 2012 and $380,578 in 2011) $ 401,435 $ 380,469
Equity securities, available-for-sale, at fair value (cost: $31,502 in 2012 and $30,465 in 2011) 43,925 44,159
Total investments 445,360 424,628
Cash and cash equivalents 85,145 74,471
Restricted cash 8,707 9,372
Ceded unearned premiums 22,411 19,470
Premiums receivable 66,683 53,513
Accounts receivable 3,110 3,946
Receivable for securities 3 2,617
Reinsurance recoverable 51,970 42,734
Deferred policy acquisition costs 24,911 22,554
Goodwill 44,695 44,695
Intangible assets, net 23,068 26,654
Deferred federal income taxes, net 1,940 --
Federal income tax recoverable -- 6,738
Prepaid expenses 1,480 1,458
Other assets 10,985 13,209
Total Assets $ 790,468 $ 746,059
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Revolving credit facility payable $ 1,473 $ 4,050
Subordinated debt securities 56,702 56,702
Reserves for unpaid losses and loss adjustment expenses 313,416 296,945
Unearned premiums 162,502 146,104
Reinsurance balances payable 7,330 3,139
Pension liability 3,685 3,971
Payable for securities -- 203
Federal income tax payable 1,518 --
Deferred federal income taxes, net -- 135
Accounts payable and other accrued expenses 23,305 17,954
Total Liabilities 569,931 529,203
Commitments and contingencies
Redeemable non-controlling interest -- 1,284
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2012 and 2011 3,757 3,757
Additional paid-in capital 122,475 122,487
Retained earnings 97,964 94,440
Accumulated other comprehensive income 7,899 6,446
Treasury stock (1,609,374 shares in 2012 and 2011), at cost (11,558) (11,558)
Total Stockholders' Equity 220,537 215,572
$ 790,468 $ 746,059
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations Three Months Ended Fiscal Year Ended
($ in thousands, except share amounts) December 31 December 31
2012 2011 2012 2011
(as adjusted) (as adjusted)
Gross premiums written $ 92,184 $ 84,047 $ 389,842 $ 354,881
Ceded premiums written (14,799) (13,243) (57,353) (51,005)
Net premiums written 77,385 70,804 332,489 303,876
Change in unearned premiums 6,113 5,478 (13,053) (10,835)
Net premiums earned 83,498 76,282 319,436 293,041
Investment income, net of expenses 3,720 4,115 15,293 15,880
Net realized gains 89 456 1,943 3,633
Finance charges 1,419 1,678 5,957 6,826
Commission and fees (112) 558 (1,145) 3,175
Other income 9 13 316 216
Total revenues 88,623 83,102 341,800 322,771
Losses and loss adjustment expenses 57,555 57,394 226,414 239,235
Other operating expenses 26,715 23,216 103,792 95,106
Interest expense 1,170 1,161 4,634 4,631
Amortization of intangible assets 896 896 3,586 3,586
Total expenses 86,336 82,667 338,426 342,558
Income (loss) before tax 2,287 435 3,374 (19,787)
Income tax expense (benefit) 504 94 (474) (8,954)
Net income (loss) 1,783 341 3,848 (10,833)
Less: net income attributable to non-controlling interest -- 30 324 58
Net income (loss) attributable to Hallmark Financial Services, Inc. $ 1,783 $ 311 $ 3,524 $ (10,891)
Net income (loss) per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic $ 0.09 $ 0.02 $ 0.18 $ (0.55)
Diluted $ 0.09 $ 0.02 $ 0.18 $ (0.55)
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
($ in thousands) Three Months Ended December 31
Standard
Commercial
Segment
Specialty
Commercial
Segment

Personal
Segment


Corporate


Consolidated
2012 2011 2012 2011 2012 2011 2012 2011 2012 2011
Gross premiums written $ 18,799 16,718 $ 57,005 47,988 $ 16,380 19,341 $ -- -- $ 92,184 84,047
Ceded premiums written (1,937) (1,423) (12,694) (11,702) (168) (118) -- -- (14,799) (13,243)
Net premiums written 16,862 15,295 44,311 36,286 16,212 19,223 -- -- 77,385 70,804
Change in unearned premiums 1,258 1,509 2,226 528 2,629 3,441 -- -- 6,113 5,478
Net premiums earned 18,120 16,804 46,537 36,814 18,841 22,664 -- -- 83,498 76,282
Total revenues 19,328 18,904 49,105 38,405 20,641 24,795 (451) 998 88,623 83,102
Losses and loss adjustment expenses 13,575 11,823 27,153 20,559 16,827 25,012 -- -- 57,555 57,394
Pre-tax income (loss), net of non-controlling interest (2) 115 2,225 8,739 7,393 (2,788) (7,306) (3,779) (1,907) 2,287 405
Net loss ratio (1) 74.9% 70.4% 58.3% 55.8% 89.3% 110.4% -- -- 68.9% 75.2%
Net expense ratio (1) 31.2% 27.6% 28.0% 29.0% 28.4% 24.3% -- -- 30.2% 29.3%
Net combined ratio (1) 106.1% 98.0% 86.3% 84.8% 117.7% 134.7% -- -- 99.1% 104.5%
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.
2 Amounts for 2011 have been adjusted for the adoption of a change in accounting principle related to deferred policy acquisition costs. (See, "Adoption of New Accounting Pronouncements" in Note 1 to the audited consolidated financial statements, included in Hallmark's Form 10-K for the year ended December 31, 2012.)
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
($ in thousands) Year Ended December 31
Standard
Commercial
Segment
Specialty
Commercial
Segment

Personal
Segment


Corporate


Consolidated
2012 2011 2012 2011 2012 2011 2012 2011 2012 2011
Gross premiums written $ 77,091 69,420 $ 235,695 185,020 $ 77,056 100,441 $ -- -- $ 389,842 354,881
Ceded premiums written (7,000) (5,476) (49,642) (40,743) (711) (4,786) -- -- (57,353) (51,005)
Net premiums written 70,091 63,944 186,053 144,277 76,345 95,655 -- -- 332,489 303,876
Change in unearned premiums (936) 642 (17,223) (8,784) 5,106 (2,693) -- -- (13,053) (10,835)
Net premiums earned 69,155 64,586 168,830 135,493 81,451 92,962 -- -- 319,436 293,041
Total revenues 73,119 72,830 178,917 142,838 89,149 101,351 615 5,752 341,800 322,771
Losses and loss adjustment expenses 52,828 50,940 103,980 87,265 69,606 101,030 -- -- 226,414 239,235
Pre-tax income (loss), net of non-controlling interest (2) (2,486) 1,335 25,932 14,348 (8,535) (29,647) (11,861) (5,881) 3,050 (19,845)
Net loss ratio (1) 76.4% 78.9% 61.6% 64.4% 85.5% 108.7% -- -- 70.9% 81.6%
Net expense ratio (1) 33.2% 32.3% 28.3% 29.6% 28.5% 25.8% -- -- 30.8% 30.8%
Net combined ratio (1) 109.6% 111.2% 89.9% 94.0% 114.0% 134.5% -- -- 101.7% 112.4%
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.
2 Amounts for 2011 have been adjusted for the adoption of a change in accounting principle related to deferred policy acquisition costs. (See, "Adoption of New Accounting Pronouncements" in Note 1 to the audited consolidated financial statements, included in Hallmark's Form 10-K for the year ended December 31, 2012.)

CONTACT: Mark J. Morrison President and Chief Executive Officer 817.348.1600 www.hallmarkgrp.com

Source:Hallmark Financial Services, Inc.