Hallmark Financial Announces First Quarter 2020 Results

Fort Worth, Texas, UNITED STATES


DALLAS, July 23, 2020 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the first quarter ended March 31, 2020.

 First Quarter
 2020 2019
$ in millions:(unaudited) (unaudited)
Net (Loss) Income$  (64.3)$  15.0
Operating Earnings (1)$  4.6 $  5.6
    
$ per diluted share:   
Net (Loss) Income$  (3.55)$  0.83
Operating Earnings (1)$  0.25 $  0.31

(1) See “Non-GAAP Financial Measures” below

First Quarter 2020 Highlights (all comparisons to same prior year period):

  • Hallmark Financial reported a net combined ratio of 97.6% as compared to 96.5% for the first quarter of 2019.  During the quarter, as previously announced on March 2nd, the Company decided to exit the Binding Primary Auto business.  The combined ratio was negatively impacted by 7.5 points from this discontinued line of business during the quarter. 

  • Hallmark Financial saw continued momentum on rate increases, as rates were up 13% for all lines and 16% for the Specialty Commercial Segment.

  • Gross premiums written increased 8% to $201.6 million

  • Net premiums written increased 8% to $126.5 million

  • Net premiums earned increased 25% to $123.9 million

  • Net combined ratio of 97.6% compared to 96.5%

  • Net loss of $64.3 million, or $3.55 per diluted share, compared to net income of $15.0 million, or $0.83 per diluted share

  • Operating earnings of $4.6 million, or $0.25 per diluted share, compared to $5.6 million, or $0.31 per diluted share (see “Non-GAAP Financial Measures” below) 

  • Net investment losses of $29.3 million compared to net investment gains of $11.9 million 

  • In connection with its normal process for evaluating impairment triggering events, the Company determined that a significant decline in its market capitalization below its stockholders’ equity during the quarter indicated the impairment of the goodwill and indefinite-lived intangible assets included in its balance sheet.  As a result, the Company took a $44.7 million charge to goodwill and a $1.3 million charge to indefinite-lived assets as of March 31, 2020.
 First Quarter
 20202019% Change
($ in thousands, unaudited)     
Gross premiums written201,589 187,3168%
Net premiums written126,505 117,4038%
Net premiums earned123,933 99,03025%
Investment income, net of expenses4,458 5,111-13
Investment (losses) gains, net(29,330)11,937-346
Net (loss) income(64,310)15,025-528
Operating earnings (1)4,584 5,595-18
Net (loss) income per share - basic$(3.55)$0.83-528
Net (loss) income per share - diluted$(3.55)$0.83-528
Operating earnings per share - diluted (1)$0.25 $0.31-19
Book value per share$10.39 $15.10-31

(1) See “Non-GAAP Financial Measures” below

First Quarter 2020 Financial Review

Gross Premiums Written
During the three months ended March 31, 2020, Hallmark Financial’s gross premiums written were $201.6 million, representing an increase of 8% from the $187.3 million in gross premiums written for the same period in 2019.

Net Premiums Written
During the three months ended March 31, 2020, Hallmark Financial’s net premiums written were $126.5 million, representing an increase of 8% from the $117.4 million in net premiums written for the same period of 2019. 

Net Premiums Earned
Hallmark Financial’s net premiums earned were $123.9 million for the three months ended March 31, 2020, representing a 25% increase from the $99.0 million in net premiums earned for the same period in 2019. 

Investments
During the three months ended March 31, 2020, net investment income was $4.5 million as compared to $5.1 million during the same period in 2019. Net investment losses were $29.3 million for the three months ended March 31, 2020 as compared to net investment gains of $11.9 million for the same period the prior year. The total portfolio return was negative 5.4% for the three months ended March 31, 2020, primarily due to the historic first quarter market declines associated with the novel coronavirus (“COVID-19”) pandemic.

At March 31, 2020 fixed-income securities were $589.4 million, with a tax equivalent book yield of 2.4% compared to 3.7% as of March 31, 2019. As of March 31, 2020, the fixed-income portfolio had an average modified duration of 1.2 years and 89% of the securities had remaining time to maturity of five years or less. As of March 31, 2020, 2% of the investment portfolio was invested in equity securities.

At March 31, 2020, total investments were $603.7 million. Cash and cash equivalents, including restricted cash were $68.9 million. Total investments, cash and cash equivalents, and restricted cash were $672.6 million or $37.08 per share.

Pre-Tax Income
Hallmark Financial had pre-tax loss of $69.6 million for the three months ended March 31, 2020, as compared to pre-tax income of $18.9 million reported during the same period in 2019. 

The decline in pre-tax results for the three months ended March 31, 2020 was predominately driven by the impairment of goodwill and other intangible assets of $46.0 million as well as net investment losses of $29.3 million as compared to net investment gains of $11.9 million reported during the same period in 2019.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratios
Losses and LAE for the three months ended March 31, 2020 increased $23.3 million as compared to the prior year period due primarily to increased net premiums earned, as well as unfavorable net prior year reserve development.  Hallmark Financial reported $8.6 million of net unfavorable prior year loss reserve development during the three months ended March 31, 2020 as compared to net favorable prior year loss reserve development of $0.1 million during the same period the prior year.

Hallmark Financial had a net loss ratio of 75.4% for the three months ended March 31, 2020 as compared to 70.8% reported during the same period in 2019.  Catastrophe losses contributed 4.9% to the net loss ratio for the three months ended March 31, 2020, as compared to 2.1% for the same period of the prior year. 

The expense ratio was 22.2% for the three months ended March 31, 2020 as compared to 25.7% reported during the same period in 2019.  The Company reported a net combined ratio of 97.6% for the three months ended March 31, 2020 as compared to 96.5% during the same period in 2019. 

Net Income
Hallmark Financial reported a net loss of $64.3 million for the three months ended March 31, 2020 as compared to net income of $15.0 million for the three months ended March 31, 2019. 

On a diluted basis per share, the Company reported a net loss of $3.55 per share for the three months ended March 31, 2020 as compared to net income of $0.83 per share for the three months ended March 31, 2019.

Non-GAAP Financial Measures

The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”).  However, the Company also presents and discusses certain non-GAAP financial measures that it believes are useful to investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the effectiveness of business strategies and for planning and budgeting purposes.  However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements.  In addition, the Company’s definitions of these items may not be comparable to the definitions used by other companies. 

Operating earnings and operating earnings per share are calculated by excluding net investment gains and losses and impairment of goodwill and other intangible assets from GAAP net income.  Management believes that operating earnings and operating earnings per share provide useful information to investors about the performance of and underlying trends in the Company’s core insurance operations.  Net income and net income per share are the GAAP measures that are most directly comparable to operating earnings and operating earnings per share.  A reconciliation of operating earnings and operating earnings per share to the most comparable GAAP financial measures is presented below.

    Weighted 
 IncomeLess TaxNetAverageDiluted
($ in thousands)Before TaxEffectAfter TaxShares DilutedPer Share
First Quarter 2020         
Reported GAAP measures$  (69,586)$  (5,276)$  (64,310)18,123$  (3.55)
Excluded impairment of goodwill         
and other intangible assets$  45,996 $  273 $  45,723 18,123$  2.52 
Excluded investment (gains)/losses$  29,330 $  6,159 $  23,171 18,123$  1.28 
Operating earnings$  5,740 $  1,156 $  4,584 18,123$  0.25 
          
First Quarter 2019         
Reported GAAP measures$  18,918 $  3,893 $  15,025 18,193$  0.83 
Excluded investment (gains)/losses$  (11,937)$  (2,507)$  (9,430)18,193$  (0.52)
Operating earnings$  6,981 $  1,386 $  5,595 18,193$  0.31 

About Hallmark Financial

Hallmark Financial is a specialty property and casualty insurance holding company with a diversified portfolio of insurance products written on a national platform.  With six insurance subsidiaries and offices in Dallas/Fort Worth, San Antonio, Chicago, Jersey City and Atlanta, Hallmark Financial markets, underwrites and services approximately $800 million annually in commercial and personal insurance premiums in select markets.  Hallmark Financial is headquartered in Dallas, 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 materially 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.

     For further information, please contact:
Mr. David Webb, Senior Vice President of Corporate Development at 817.348.1600
www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets    
($ in thousands, except par value)  Mar. 31  Dec. 31 
ASSETS  2020  2019 
Investments: (unaudited)   
Debt securities, available-for-sale, at fair value (amortized cost: $597,170 in 2020 and $569,498 in 2019)$589,383 $574,279 
Equity securities (cost: $19,783 in 2020 and $71,895 in 2019) 14,139  99,215 
Other investment (cost: $3,763 in 2020 and $3,763 in 2019) 168  2,169 
Total investments 603,690  675,663 
Cash and cash equivalents 67,165  53,336 
Restricted cash 1,732  1,612 
Ceded unearned premiums 151,296  164,221 
Premiums receivable 140,220  148,288 
Accounts receivable 3,812  4,286 
Receivable for securities 16,282  12,581 
Reinsurance recoverable 364,470  315,466 
Deferred policy acquisition costs 25,587  22,994 
Goodwill -  44,695 
Intangible assets, net 3,173  5,087 
Federal income tax recoverable 9,467  8,995 
Deferred federal income taxes, net 9,577  2,185 
Prepaid expenses 5,373  2,603 
Other assets 31,326  33,262 
Total Assets$1,433,170 $1,495,274 
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Liabilities:      
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $917 in 2020 and $942 in 2019)$49,083 $49,058 
Subordinated debt securities (less unamortized debt issuance cost of $834 in 2020 and $846 in 2019) 55,868  55,856 
Reserves for unpaid losses and loss adjustment expenses 653,490  620,355 
Unearned premiums 378,573  388,926 
Reinsurance balances payable 57,953  59,274 
Pension liability 1,305  1,388 
Payable for securities 104  1,648 
Accounts payable and other accrued expenses 48,348  55,487 
Total Liabilities 1,244,724  1,231,992 
Commitments and contingencies      
Stockholders’ equity:      
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2019 and 20183,757  3,757 
Additional paid-in capital 122,718  123,468 
Retained earnings 96,260  160,570 
Accumulated other comprehensive (loss) income (9,257) 688 
Treasury stock (2,731,335 shares in 2020 and 2,749,738 shares in 2019), at cost (25,032) (25,201)
Total Stockholders’ Equity 188,446  263,282 
Total Liabilities & Stockholders' Equity$1,433,170 $1,495,274 


Hallmark Financial Services, Inc. and Subsidiaries  
Consolidated Statements of OperationsThree Months Ended
($ in thousands, except per share amounts)March 31,
 20202019
  (unaudited) (unaudited)
Gross premiums written$201,589 $187,316 
Ceded premiums written (75,084) (69,913)
Net premiums written 126,505  117,403 
Change in unearned premiums (2,572) (18,373)
Net premiums earned 123,933  99,030 
       
Investment income, net of expenses 4,458  5,111 
Investment (losses) gains, net (29,330) 11,937 
Finance charges 1,644  1,734 
Commission and fees 324  293 
Other income 19  16 
Total revenues 101,048  118,121 
       
Losses and loss adjustment expenses 93,405  70,087 
Operating expenses 29,148  27,246 
Interest expense 1,468  1,253 
Impairment of goodwill and other intangible assets 45,996  - 
Amortization of intangible assets 617  617 
Total expenses 170,634  99,203 
       
(Loss) income before tax (69,586) 18,918 
Income tax (benefit) expense (5,276) 3,893 
Net (loss) income$(64,310)$15,025 
       
Net (loss) income per share:      
Basic$(3.55)$0.83 
Diluted$(3.55)$0.83 


Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Mar. 31
 Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
CorporateConsolidated
($ in thousands, unaudited)202020192020 201920202019202020192020 2019 
Gross premiums written$  149,470 $  134,399 $  26,376 $  25,528 $25,743 $27,389 $  -$  -$201,589 $187,316 
Ceded premiums written(63,964)(57,361)(7,463)(8,103)(3,657)(4,449)--(75,084)(69,913)
Net premiums written85,506 77,038 18,913 17,425 22,086 22,940 --126,505 117,403 
Change in unearned premiums1,466 (12,850)(2,495)(51)(1,543)(5,472)--(2,572)(18,373)
Net premiums earned86,972 64,188 16,418 17,374 20,543 17,468 --123,933 99,030 
                   
Total revenues92,120 67,967 17,636 18,373 22,323 19,483  (31,031)12,298101,048 118,121 
                   
Losses and loss adjustment expenses60,883 45,949 11,855 11,651 20,667 12,487 --93,405 70,087 
                   
Pre-tax income (loss)16,292 7,968 716 1,507 (5,655)1,573  (80,939)7,870(69,586)18,918 
                   
Net loss ratio (1)70.0%71.6%72.2%67.1%100.6%71.5%  75.4%70.8%
Net expense ratio (1)17.7%22.3%32.5%30.4%28.4%22.2%  22.2%25.7%
Net combined ratio (1)87.7%93.9%104.7%97.5%129.0%93.7%  97.6%96.5%
                   
Net Favorable (Unfavorable) Prior Year Development(3,153)(1,926)(125)1,805 (5,281)187   (8,559)66 

(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.