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

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| Source: Hallmark Financial Services, Inc.

FORT WORTH, Texas, Aug. 7, 2014 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported second quarter 2014 net income of $1.7 million, or $0.09 per diluted share, compared to a net loss of $3.2 million, or $0.16 per diluted share, reported for second quarter 2013. Year to date, Hallmark reported net income of $6.2 million, or $0.32 per diluted share, compared to a net loss of $1.5 million, or $0.08 per diluted share for the same period the prior year. Total revenues were $80.8 million for the second quarter of 2014 as compared to $99.3 million for the second quarter of 2013. Year to date total revenues for 2014 were $167.9 million as compared to $192.4 million reported for the same period the prior year.

"I am pleased to report our fourth consecutive quarter of profitable underwriting results as evidenced by our reported quarterly combined ratio of 97.4%," said Mark J. Morrison, President and Chief Executive Officer. "We achieved these results despite the worst quarter for catastrophe losses in our history. A high frequency of severe convective storms resulted in over $13 million in net incurred losses that added 17% to our combined ratio for the quarter. On a pre-catastrophe loss basis, the quarter marked the best operating results in Hallmark's history."

Mr. Morrison continued, "Apart from the unprecedented level of catastrophe losses, underlying trends during the quarter continued to reflect the positive momentum in our businesses. Our Specialty Commercial Segment, which now accounts for approximately two-thirds of our total premium volume, continues to generate profitable premium growth and outstanding results. The Specialty Commercial Segment reported a combined ratio of 88.9% and pre-tax income of $9.5 million for the current quarter, and has generated a combined ratio of 90.5% and pre-tax income of $34.7 million over a trailing four quarter period. Additionally, the corrective actions taken in our Personal Segment over that past couple of years have clearly made a positive impact and this business once again contributed to our profitable underwriting results for the quarter on both a gross and net basis. Our Standard Commercial Segment also continues to produce acceptable results before catastrophe losses. Despite reducing large property risks and implementing aggressive rate increases in catastrophe prone areas, this business once again incurred heavy catastrophe losses during the quarter of $12.5 million, net of reinsurance. We will continue to take steps to reduce our exposure to catastrophic events by further refining our property pricing, underwriting criteria and utilization of catastrophe reinsurance coverage."

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Book value per share was $12.78 at the end of the quarter, an increase of 9% since a year ago. Total cash and investments have increased 6% during the first half of 2014 to $651.5 million, or $33.95 per share, due in part to cash flow from operations of $19.6 million. Hallmark's cash balances totaled $171.8 million as of June 30, 2014."

Second Quarter  
  2014 2013 % Change
  ($ in thousands, unaudited)
Gross premiums written  124,440  119,467 4%
Net premiums written  73,703  99,545 -26%
Net premiums earned  78,046  92,844 -16%
Investment income, net of expenses  2,986  3,278 -9%
Net realized (losses) gains  (284)  1,597 NM
Total revenues  80,836  99,299 -19%
Net income (loss)  1,651  (3,151) NM
Net income (loss) per share - basic  $ 0.09  $ (0.16) NM
Net income (loss) per share - diluted  $ 0.09  $ (0.16) NM
Book value per share  $ 12.78  $ 11.68 9%
Cash flow from operations 14,474 18,208 -21%
   
Year-to-Date  
  2014 2013 % Change
  ($ in thousands, unaudited)
Gross premiums written  240,522  227,614 6%
Net premiums written  156,624  193,441 -19%
Net premiums earned  160,623  179,332 -10%
Investment income, net of expenses  6,227  6,906 -10%
Net realized (losses) gains  (99)  2,773 NM
Total revenues  167,945  192,440 -13%
Net income (loss)  6,199  (1,457) NM
Net income (loss) per share - basic  $ 0.32  $ (0.08) NM
Net income (loss) per share - diluted  $ 0.32  $ (0.08) NM
Book value per share  $ 12.78  $ 11.68 9%
Cash flow from operations 19,581 24,033 -19%

Second Quarter 2014 Commentary

During the three and six months ended June 30, 2014, Hallmark's total revenues were $80.8 million and $167.9 million, representing a decrease of 19% and 13%, respectively, from the $99.3 million and $192.4 million in total revenues for the same periods of 2013. This decrease in revenue was primarily attributable to lower net earned premiums in the Personal Segment due to a quota share reinsurance contract entered into during the fourth quarter of 2013 on non-standard automobile risks produced in certain states. Further contributing to the decrease in revenue were net realized losses recognized during the three and six months ended June 30, 2014 as compared to net realized gains recognized during the same periods of 2013, lower net investment income and an increase in adverse profit share commission revenue adjustments in the Standard Commercial Segment for the three and six months ended June 30, 2014 as compared to the same periods of 2013.

The decrease in revenue for the three and six months ended June 30, 2014 was offset by decreased loss and loss adjustment expenses ("LAE") of $22.6 million and $31.5 million, respectively, as compared to the same periods in 2013. During the three months ended June 30, 2014, the Company recorded $5.6 million of favorable prior year loss development. During the three months ended June 30, 2013, the Company recorded $5.4 million unfavorable prior year loss development. During the six months ended June 30, 2014, the Company recorded $6.8 million of favorable prior year loss development. During the six months ended June 30, 2013, the Company recorded $7.4 million of unfavorable prior year loss development. The decrease in loss and LAE occurred despite a $7.8 million increase in net catastrophe losses to $13.3 million during the three months ended June 30, 2014 from $5.5 million reported for the same period of 2013. Other operating expenses also decreased due mostly to decreased production related expenses in the Personal Segment, partially offset by higher salary and related expenses due primarily to changes in incentive compensation accruals.

Hallmark reported net income of $1.7 million and $6.2 million for the three and six months ended June 30, 2014 as compared to a net loss of $3.2 million and $1.5 million for the three and six months ended June 30, 2013. On a diluted basis per share, the Company reported net income of $0.09 per share for the three months ended June 30, 2014, as compared to net loss of $0.16 per share for the same period in 2013. On a diluted basis per share, net income per share was $0.32 for the six months ended June 30, 2014 as compared to net loss per share of $0.08 for the same period during 2013.

Hallmark's consolidated net loss ratio was 67.3% and 65.5% for the three and six months ended June 30, 2014, as compared to 80.8% and 76.3% for the same periods in 2013. Hallmark's net expense ratio was 30.1% and 30.2% for the three and six months ended June 30, 2014 as compared to 28.6% and 29.4% for the same periods in 2013. Hallmark's net combined ratio was 97.4% and 95.7% for the three and six months ended June 30, 2014 as compared to 109.4% and 105.7% for the same periods 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) Jun. 30 Dec. 31
ASSETS 2014 2013
Investments: (unaudited)  
Debt securities, available-for-sale, at fair value (cost: $424,760 in 2014 and $408,627 in 2013) $ 427,147 $ 410,095
Equity securities, available-for-sale, at fair value (cost: $24,830 in 2014 and $24,902 in 2013) 52,553 51,230
Total investments 479,700 461,325
Cash and cash equivalents 156,365 141,666
Restricted cash 15,421 12,190
Ceded unearned premiums 60,652 44,988
Premiums receivable 79,789 71,157
Accounts receivable 3,205 2,382
Receivable for securities  1,165  1,320
Reinsurance recoverable 99,756 76,818
Deferred policy acquisition costs 19,757 22,586
Goodwill 44,695 44,695
Intangible assets, net 18,675 19,953
Prepaid expenses 2,051 1,531
Other assets 6,307 8,412
Total Assets $ 987,538 $ 909,023
LIABILITIES AND STOCKHOLDERS' EQUITY    
Liabilities:    
Revolving credit facility payable $ -- $ 1,473
Subordinated debt securities 56,702 56,702
Reserves for unpaid losses and loss adjustment expenses 415,297 382,640
Unearned premiums 196,968 185,303
Reinsurance balances payable 34,182 20,598
Pension liability 1,116 1,433
Payable for securities  17,908  206
Deferred federal income taxes, net  2,545  2,825
Federal income tax payable 844 719
Accounts payable and other accrued expenses 16,662 19,006
Total Liabilities 742,224 670,905
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 123,048 122,827
Retained earnings 112,408 106,209
Accumulated other comprehensive income 18,379 16,883
Treasury stock (1,684,149 shares in 2014 and 1,609,374 shares in 2013), at cost (12,278) (11,558)
Total Stockholders' Equity 245,314 238,118
  $ 987,538 $ 909,023
     
     
     
Hallmark Financial Services, Inc. and Subsidiaries    
Consolidated Statements of Operations Three Months Ended Six Months Ended
($ in thousands, except share amounts; unaudited) June 30 June 30
  2014 2013 2014 2013 
Gross premiums written $ 124,440 $ 119,467 $ 240,522 $ 227,614
Ceded premiums written (50,737) (19,922) (83,898) (34,173)
Net premiums written 73,703 99,545 156,624 193,441
Change in unearned premiums 4,343 (6,701) 3,999 (14,109)
Net premiums earned 78,046 92,844 160,623 179,332
         
Investment income, net of expenses 2,986 3,278 6,227 6,906
Net realized (losses) gains (284) 1,597 (99) 2,773
Finance charges 1,383 1,487 2,767 2,912
Commission and fees (1,309) 79 (1,599) 420
Other income 14 14 26 97
Total revenues 80,836 99,299 167,945 192,440
         
Losses and loss adjustment expenses 52,502 75,059 105,272 136,797
Other operating expenses 24,510 27,578 50,646 54,772
Interest expense 1,143 1,150 2,295 2,299
Amortization of intangible assets 639 829 1,278 1,726
Total expenses 78,794 104,616 159,491 195,594
         
Income (loss) before tax 2,042 (5,317) 8,454 (3,154)
Income tax expense (benefit) 391 (2,166) 2,255 (1,697)
Net income (loss) $ 1,651 $ (3,151) $ 6,199 $ (1,457)
         
Net income (loss) per share:        
Basic $ 0.09 $ (0.16) $ 0.32 $ (0.08)
Diluted $ 0.09 $ (0.16) $ 0.32 $ (0.08)
         
                   
                   
                   
Hallmark Financial Services, Inc. and Subsidiaries                  
Consolidated Segment Data                  
Three Months Ended Jun. 30 (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  $ 22,646  $ 23,687  $ 85,807  $ 76,361  $ 15,987  $ 19,419  $ --   $ --   $ 124,440  $ 119,467
Ceded premiums written (2,262) (2,102) (35,497) (16,368) (12,978) (1,452)  --   --  (50,737) (19,922)
Net premiums written 20,384 21,585 50,310 59,993 3,009 17,967  --   --  73,703 99,545
Change in unearned premiums (946) (1,978) 5,090 (7,269) 199 2,546  --   --  4,343 (6,701)
Net premiums earned 19,438 19,607 55,400 52,724 3,208 20,513  --   --  78,046 92,844
                     
Total revenues 19,341 20,709 58,702 55,660 4,882 22,387 (2,089) 543 80,836 99,299
                     
Losses and loss adjustment expenses 16,129 16,447 35,242 40,953 1,131 17,659  --   --  52,502 75,059
                     
Pre-tax income (loss) (3,147) (1,999) 9,465 566 1,285 (1,654) (5,561) (2,230) 2,042 (5,317)
                     
Net loss ratio (1) 83.0% 83.9% 63.6% 77.7% 35.3% 86.1%     67.3% 80.8%
Net expense ratio (1) 33.0% 31.8% 25.3% 26.8% 43.0% 24.6%     30.1% 28.6%
Net combined ratio (1) 116.0% 115.7% 88.9% 104.5% 78.3% 110.7%     97.4% 109.4%
Favorable (Unfavorable) Prior Year Development  3,942  1,496  417  (5,667)  1,249  (1,250)  --   --   5,608  (5,421)
                     
                     
 
                     
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)                
  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  $ 43,627  $ 45,329  $ 160,729  $ 141,667  $ 36,166  $ 40,618  $ --   $ --   $ 240,522  $ 227,614
Ceded premiums written (4,231) (4,097) (49,726) (27,300) (29,941) (2,776)  --   --  (83,898) (34,173)
Net premiums written 39,396 41,232 111,003 114,367 6,225 37,842  --   --  156,624 193,441
Change in unearned premiums (558) (3,095) 3,670 (12,790) 887 1,776  --   --  3,999 (14,109)
Net premiums earned 38,838 38,137 114,673 101,577 7,112 39,618  --   --  160,623 179,332
                     
Total revenues 39,682 40,997 121,184 107,340 10,474 43,365 (3,395) 738 167,945 192,440
                     
Losses and loss adjustment expenses 28,952 29,030 72,183 75,389 4,137 32,378  --   --  105,272 136,797
                     
Pre-tax income (loss) (1,926) (522) 19,389 4,264 1,254 (1,718) (10,263) (5,178) 8,454 (3,154)
                     
Net loss ratio (1) 74.5% 76.1% 62.9% 74.2% 58.2% 81.7%     65.5% 76.3%
Net expense ratio (1) 32.8% 32.7% 25.9% 27.2% 40.0% 25.8%     30.2% 29.4%
Net combined ratio (1) 107.3% 108.8% 88.8% 101.4% 98.2% 107.5%     95.7% 105.7%
Favorable (Unfavorable) Prior Year Development  5,135  2,222  (231)  (8,657)  1,907  (997)  --   --   6,811  (7,432)
                     
                     
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.                    
Mark J. Morrison, President and Chief Executive Officer
817.348.1600
www.hallmarkgrp.com