Hallmark Financial Services, Inc. Announces First Quarter 2014 Earnings Results

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| Source: Hallmark Financial Services, Inc.
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FORT WORTH, Texas, May 8, 2014 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported first quarter 2014 net income of $4.5 million, or $0.23 per diluted share, compared to net income of $1.7 million, or $0.09 per diluted share, reported for first quarter 2013. Total revenues were $87.1 million for the first quarter of 2014 as compared to $93.1 million for the first quarter of 2013.

"I am pleased to report that our strategy of growing existing profitable lines of business and contracting lines of business where we have experienced unacceptable underwriting performance continues to bear fruit in our quarterly earnings. Our combined ratio of 94.3% reflects quarterly underwriting results at a level that we have not experienced in four years, and marks the third consecutive quarter of reported underwriting profits. These results are almost entirely driven by the operating performance of our Specialty Commercial Segment which has delivered outstanding underwriting results nearly every quarter over the past three challenging years," said Mark J. Morrison, President and Chief Executive Officer. "As market conditions for our Specialty Commercial lines of business rapidly improved in recent years, we have reallocated capital to support our growth in these lines, while contracting in our Personal and Standard Commercial lines. As a result of this strategy, our Specialty Commercial Segment, which produced a combined ratio of 88.8% for the first quarter of 2014, has grown over 50% since 2011 and now accounts for nearly three-fourths of our overall net written premium in 2014."

"Our quarterly results also reflect an improvement in underwriting profitability for our Personal and Standard Commercial Segments. Subdued weather-related catastrophe events and reduced impact from Personal Segment's discontinued products and states helped to produce a quarterly underwriting profit on a gross basis in each of these segments. While we are still not satisfied with our overall underwriting profitability in these segments, we remain confident the underwriting and pricing actions we have taken will continue to improve operating margins and help us to achieve our financial goals across all lines of business."

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Book value per share was $12.54 at the end of the quarter, an increase of 6% over prior year. Total cash and investments have increased 2% during the quarter to $630.5 million, or $32.73 per share due in part to cash flow from operations of $5.1 million. Hallmark's cash balances totaled $165.0 million as of March 31, 2014."

First Quarter      
  2014 2013 % Change
  ($ in thousands, unaudited)
Gross premiums written 116,082 108,147 7%
Net premiums written 82,921 93,896 -12%
Net premiums earned 82,577 86,488 -5%
Investment income, net of expenses 3,241 3,628 -11%
Net realized gains 185 1,176 -84%
Total revenues 87,109 93,141 -6%
Net income 4,548 1,694 168%
Net income per share - basic $ 0.24 $ 0.09 167%
Net income per share - diluted $ 0.23 $ 0.09 156%
Book value per share $ 12.54 $ 11.80 6%
Cash flow from operations 5,107 5,825 -12%

First Quarter 2014 Commentary

During the three months ended March 31, 2014, total revenues were $87.1 million, representing a 6% decrease from the $93.1 million in total revenues for same period of 2013. The decrease in revenue was primarily attributable to lower net premiums earned in the Personal Segment due to quota share reinsurance contracts entered into during 2013. Further contributing to the decrease in revenue were lower net realized gains on the Company's investment portfolio, lower net investment income and an adverse profit share commission revenue adjustment in the Standard Commercial Segment compared to a favorable profit share commission revenue adjustment for the three months ended March 31, 2013. These decreases in revenue were partially offset by increased premium production and resulting earned premium driven largely from the Specialty Commercial Segment.

The decrease in revenue for the three months ended March 31, 2014 was offset by decreased loss and loss adjustment expenses ("LAE") of $9.0 million as compared to the same period in 2013. During the three months ended March 31, 2014, the Company recorded $1.2 million of favorable prior year loss reserve development as compared to $2.0 million of unfavorable prior year loss reserve development for the same period of 2013. Further contributing to the lower loss and LAE were lower current accident year loss trends in the Specialty Commercial Segment primarily driven by the Hallmark Select business unit. Other operating expenses also decreased due mostly to lower production related expenses in the Personal Segment, partially offset by increased production related expenses in the Specialty Commercial Segment.

Hallmark reported net income of $4.5 million for three months ended March 31, 2014, as compared to net income of $1.7 million for the same period in 2013. On a diluted per share basis, net income was $0.23 per share for the three months ended March 31, 2014 as compared to net income of $0.09 per share for the same period in 2013.

Hallmark's consolidated net loss ratio was 63.9% for the three months ended March 31, 2014 as compared to 71.4% for the same period in 2013. Hallmark's net expense ratio was 30.4% for the three months ended March 31, 2014 as compared to 30.2% for the same period in 2013. Hallmark's net combined ratio was 94.3% for the three months ended March 31, 2014 as compared to 101.6% for the same period in 2013. 

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) Mar. 31 Dec. 31
ASSETS 2014 2013
  (unaudited)  
Investments:    
Debt securities, available-for-sale, at fair value (cost: $414,555 in 2013 and $408,627 in 2013)  $ 415,533  $410,095
Equity securities, available-for-sale, at fair value (cost: $24,910 in 2013 and $24,902 in 2013) 49,987 51,230
Total investments 465,520 461,325
Cash and cash equivalents 153,293 141,666
Restricted cash 11,712 12,190
Ceded unearned premiums 46,335 44,988
Premiums receivable 72,782 71,157
Accounts receivable 3,308 2,382
Receivable for securities  1,609  1,320
Reinsurance recoverable 85,140 76,818
Deferred policy acquisition costs 22,852 22,586
Goodwill 44,695 44,695
Intangible assets, net 19,314 19,953
Prepaid expenses 2,863 1,531
Other assets 8,033 8,412
Total Assets  $ 937,456  $909,023
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 395,654 382,640
Unearned premiums 186,994 185,303
Reinsurance balances payable 20,622 20,598
Pension liability 1,291 1,433
Payable for securities  12,315  206
Deferred federal income taxes, net  2,530  2,825
Federal income tax payable 1,805 719
Accounts payable and other accrued expenses 16,458 19,006
Total Liabilities 695,844 670,905
Commitments and contingencies    
     
Stockholders' equity:    
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2014 and 2013 3,757 3,757
Additional paid-in capital 122,937 122,827
Retained earnings 110,757 106,209
Accumulated other comprehensive income 15,719 16,883
Treasury stock (1,609,374 shares in 2014 and 2013), at cost (11,558) (11,558)
Total Stockholders' Equity 241,612 238,118
   $ 937,456  $909,023
Hallmark Financial Services, Inc. and Subsidiaries    
Consolidated Statements of Operations Three Months Ended
($ in thousands, except share amounts; unaudited) March 31
  2014 2013
Gross premiums written  $ 116,082  $ 108,147
Ceded premiums written (33,161) (14,251)
Net premiums written 82,921 93,896
Change in unearned premiums (344) (7,408)
Net premiums earned 82,577 86,488
     
Investment income, net of expenses 3,241 3,628
Net realized gains 185 1,176
Finance charges 1,384 1,425
Commission and fees (290) 341
Other income 12 83
Total revenues 87,109 93,141
     
Losses and loss adjustment expenses 52,770 61,738
Other operating expenses 26,136 27,194
Interest expense 1,152 1,149
Amortization of intangible assets 639 897
Total expenses 80,697 90,978
     
Income before tax 6,412 2,163
Income tax expense 1,864 469
Net income 4,548 1,694
     
Net income per common share:    
Basic  $ 0.24  $ 0.09
Diluted  $ 0.23  $ 0.09
 
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data        
Three Months Ended Mar. 31 (unaudited)
  Standard
Commercial
Segment
Specialty
Commercial
Segment
Personal Segment Corporate Consolidated
($ in thousands) 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013
Gross premiums written  $ 20,981  $ 21,642  $ 74,922  $ 65,306  $ 20,179  $ 21,199  $ --  $ --  $ 116,082  $ 108,147
Ceded premiums written (1,969) (1,995) (14,229) (10,932) (16,963) (1,324)  --  -- (33,161) (14,251)
Net premiums written 19,012 19,647 60,693 54,374 3,216 19,875  --  -- 82,921 93,896
Change in unearned premiums 388 (1,117) (1,420) (5,521) 688 (770)  --  -- (344) (7,408)
Net premiums earned 19,400 18,530 59,273 48,853 3,904 19,105  --  -- 82,577 86,488
                     
Total revenues 20,341 20,288 62,482 51,680 5,592 20,978 (1,306) 195 87,109 93,141
                     
Losses and loss adjustment expenses 12,823 12,583 36,941 34,436 3,006 14,719  --  -- 52,770 61,738
                     
Pre-tax income (loss) 1,221 1,477 9,924 3,698 (31) (64) (4,702) (2,948) 6,412 2,163
                     
Net loss ratio (1) 66.1% 67.9% 62.3% 70.5% 77.0% 77.0%     63.9% 71.4%
Net expense ratio (1) 32.7% 33.7% 26.5% 27.5% 37.5% 27.1%     30.4% 30.2%
Net combined ratio (1) 98.8% 101.6% 88.8% 98.0% 114.5% 104.1%     94.3% 101.6%
                     
Favorable (Unfavorable) Prior Year Development  1,193  726  (648)  (2,990)  658  253  --  --  1,203  (2,011)
                     
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.                    
For further information, please contact:
Mark J. Morrison, President and Chief Executive Officer at 817.348.1600
www.hallmarkgrp.com