Hallmark Financial Announces Fourth Quarter and Fiscal 2020 Results

Fort Worth, Texas, UNITED STATES


DALLAS, March 15, 2021 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the fourth quarter and fiscal year ended December 31, 2020.

 Fourth Quarter Fiscal Year
  2020  2019   2020  2019 
$ in millions:     
   Net Loss$(6.0)$(34.0) $(91.7)$(0.6)
   Operating Loss (1)$(10.0)$(36.5) $(10.7)$(16.9)
      
$ per diluted share:     
   Net Loss$(0.33)$(1.87) $(5.05)$(0.03)
   Operating Loss (1)$(0.55)$(2.01) $(0.59)$(0.93)
      

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

Highlights:

  • Net loss of $6.0 million in the fourth quarter was primarily due to adverse prior year reserve development ($25.0 million pre-tax). The adverse prior year reserve development was driven by $21.8 million from our Specialty Commercial Segment which was comprised mostly of $19.0 million from our Commercial Auto business unit.

  • Hallmark Financial continued to achieve substantial rate increases, particularly in the Specialty Commercial Segment, with increases for this business averaging 20% for the quarter and 19% for the fiscal year.

  • Gross premiums written decreased 24% compared to the prior year quarter ended December 31, 2019 and 12% compared to prior year. Excluding premiums from the exited binding primary commercial auto business, gross premiums written would have decreased 15% in the quarter and decreased 2% for the year, relative to the same prior year periods. (See “Non-GAAP Financial Measures” below).

  • There were $0.8 million of net catastrophe losses in the fourth quarter, or 0.6 points of the net combined ratio, and $23.1 million for the year, or 4.8 points of the net combined ratio. The fiscal year amount includes net loss and LAE reserves of $5.0 million related to novel coronavirus (“COVID-19”) pandemic claims.

Fourth Quarter and Fiscal Year 2020 Financial Review                                                                            

 Fourth Quarter Fiscal Year
  2020  2019 % Change  2020  2019 % Change
($ in thousands)       
Gross premiums written 161,671  214,101 -24%  743,368  843,831 -12%
Net premiums written 87,370  127,533 -31%  438,973  496,552 -12%
Net premiums earned 112,709  118,849 -5%  481,798  436,877 10%
Investment income, net of expenses 2,606  5,031 -48%  12,920  20,604 -37%
Investment gains (losses), net (1) 5,005  3,206 56%  (22,894) 20,618 -211%
Net loss (6,042) (33,966)82%  (91,655) (625)-14565%
Operating loss (2) (9,996) (36,499)73%  (10,703) (16,913)37%
Net loss per share - basic$(0.33)$(1.87)82% $(5.05)$(0.03)-16,733%
Net loss per share - diluted$(0.33)$(1.87)82% $(5.05)$(0.03)-16,733%
Operating loss per share - diluted (2)$(0.55)$(2.01)73% $(0.59)$(0.93)37%
Book value per share$9.42 $14.53 -35% $9.42 $14.53 -35%

(1) For fiscal year 2020, includes $1.7 million of other-than-temporary impairment.
(2) See “Non-GAAP Financial Measures” below

Gross Premiums Written

Hallmark Financial’s gross premiums written were $161.7 million and $743.4 million during the three months and fiscal year ended December 31, 2020, respectively, representing a decrease of 24% and 12%, respectively, from the $214.1 million and $843.8 million in gross premiums written for the same periods in 2019.

Net Premiums Written

Hallmark Financial’s net premiums written were $87.4 million and $439.0 million during the three months and fiscal year ended December 31, 2020, respectively, representing a decrease of 31% and 12%, respectively, from the $127.5 million and $496.6 million in net premiums written for the same periods of 2019.

Net Premiums Earned

Hallmark Financial’s net premiums earned were $112.7 million and $481.8 million for the three months and fiscal year ended December 31, 2020, respectively, representing a 5% decrease and a 10% increase, respectively, from the $118.8 million and $436.9 million in net premiums earned for the same periods in 2019.

Investments

Net investment income was $2.6 million and $12.9 million during the three months and fiscal year ended December 31, 2020, respectively, as compared to $5.0 million and $20.6 million during the same periods in 2019. The declines in net investment income were primarily due to lower interest rates in 2020 compared to the prior year and an increase in the proportion of short-term investments held relative to longer maturity investments.

Net investment gains were $5.0 million for the three months ended December 31, 2020 as compared to net investment gains of $3.2 million for the same period the prior year. Net investment losses were $22.9 million for the fiscal year ended December 31, 2020 as compared to net investment gains of $20.6 million for the prior year.   Net investment losses for the fiscal year ended December 31, 2020 included $1.7 million of other-than-temporary impairments reported during the third quarter comprised solely of secured obligations of American Airlines, Inc. maturing in 2022 and 2023 that have since recovered to market prices in excess of 90% of par value.  The remaining net investment losses in fiscal 2020 were primarily due to sales of long-held equity securities in the first quarter of 2020 during the market decline associated with the COVID-19 pandemic. These sales were a management decision to reallocate capital supporting the investment portfolio to insurance underwriting operations and were not reflective of investment views regarding the future prospects for the securities.

Hallmark Financial held fixed-income securities of $507.3 million at December 31, 2020, with a tax equivalent book yield of 2.7% compared to 3.2% as of December 31, 2019.   Hallmark Financial currently maintains a cautious interest rate risk position represented by a short portfolio duration. As of December 31, 2020, the fixed-income portfolio had an average modified duration of 0.8 years and 91% of the securities had remaining time to maturity of five years or less.

Hallmark Financial held total investments of $536.7 million at December 31, 2020, with 5% of the investment portfolio invested in equity securities.   Total investments, cash and cash equivalents, and restricted cash were $645.0 million, or $35.55 per share, equivalent to 3.8 times book value per share of $9.42. Of this amount, total cash, cash equivalents and near-cash securities were $287.4 million, including cash and cash equivalents of $108.3 million, U.S. Treasury Bills with maturities of three months or less when purchased of $137.1 million and short-term investments in U.S. Treasury Notes with maturities less than 14 months of $42.0 million.

Pre-Tax Loss

Hallmark Financial had a pre-tax loss of $12.9 million for the three months ended December 31, 2020, as compared to a pre-tax loss of $43.1 million reported during the same period in 2019.   The improvement in pre-tax results for the three months ended December 31, 2020 was predominately driven by lower unfavorable prior year net loss reserve development of $25.0 million as compared to $53.1 million for the same period the prior year.

Hallmark Financial had a pre-tax loss of $114.2 million for the fiscal year ended December 31, 2020, as compared to a pre-tax loss of $1.0 million reported during 2019.   The decline in pre-tax results for the fiscal year ended December 31, 2020 was predominately driven by the impairment of goodwill and other intangible assets of $46.0 million, net investment losses of $22.9 million as compared to net investment gains of $20.6 million reported during 2019, a $21.7 million charge for a loss portfolio transfer reinsurance contract that closed during the third quarter of 2020, unfavorable prior year net loss reserve development of $58.3 million as compared to $60.9 million reported for the prior year and net catastrophe losses of $23.1 million as compared to $5.3 million for the prior year.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratios

Hallmark Financial reported a net combined ratio of 110.7% for the fiscal year ended December 31, 2020, as compared to 108.0% for 2019. During the first quarter of 2020, the Company announced its decision to exit the binding primary automobile business. The year-to-date combined ratio was negatively impacted by 12.4 points from this discontinued line of business, which included the $21.7 million cost of a loss portfolio transfer reinsurance agreement reported as losses and LAE.

Losses and LAE for the fiscal year ended December 31, 2020 increased $50.7 million as compared to the prior year due primarily to the $21.7 million charge for the loss portfolio transfer reinsurance contract during the third quarter of 2020, increased net premiums earned and increased net catastrophe losses, partially offset by decreased unfavorable prior year reserve development. Hallmark Financial reported $58.3 million of net unfavorable prior year loss reserve development during the fiscal year ended December 31, 2020 as compared to net unfavorable prior year loss reserve development of $60.9 million during the prior year. Hallmark Financial also reported $23.1 million of net catastrophe losses during the fiscal year ended December 31, 2020 as compared to $5.3 million during the prior year.

Hallmark Financial had a net loss ratio of 89.0% and 85.7%, respectively, for the three months and fiscal year ended December 31, 2020 as compared to 118.1% and 82.9%, respectively, reported during the same periods in 2019. The charge for the loss portfolio reinsurance contract contributed 4.5 points to the net loss ratio for the fiscal year ended December 31, 2020. Catastrophe losses contributed 0.7 points and 4.8 points, respectively, to the net loss ratio for the three months and fiscal year ended December 31, 2020, as compared to 0.6 points and 1.2 points, respectively, for the same periods of the prior year.   Included in the 2020 net catastrophe losses for the fiscal year ended December 31, 2020 are $5.0 million of net reserves for COVID-19 claims that contributed 1.0 points to the total net loss ratio. Net unfavorable prior year loss reserve development contributed 22.2 points and 12.1 points, respectively, to the net loss ratio for the three months and fiscal year ended December 31, 2020, as compared to 44.7 points and 13.9 points, respectively, for the same periods of the prior year. The following table shows the components impacting the reported 2020 losses and LAE and net loss ratio as compared to 2019 and the underlying current accident year loss ratio results excluding catastrophe losses and the charge for the loss portfolio transfer included in losses and LAE.  

 Fiscal Year
 2020  2019 
 AmountLoss Ratio AmountLoss Ratio
Net Premiums Earned481,798   436,877  
      
Reported Incurred Losses and LAE412,851 85.7% 362,165 82.9%
Prior Year Reserve Development(58,288)-12.1% (60,900)-13.9%
Loss Portfolio Transfer Cost(21,700)-4.5% - 0.0%
Accident Year Loss and LAE332,863 69.1% 301,265 69.0%
Catastrophe Losses(23,050)-4.8% (5,289)-1.2%
Accident Year Loss and LAE ex. CATS309,813 64.3% 295,976 67.8%
Net Expense Ratio 25.0%  25.1%
Accident Year CR ex. CATS 89.3%  92.9%

The expense ratio was 27.8% and 25.0%, respectively, for the three months and fiscal year ended December 31, 2020 as compared to 23.3% and 25.1%, respectively, reported during the same periods in 2019. The Company reported a net combined ratio of 116.8% and 110.7%, respectively, for the three months and fiscal year ended December 31, 2020 as compared to 141.4% and 108.0%, respectively, during the same periods in 2019.

Goodwill & Intangibles

In connection with its normal process for evaluating impairment triggering events during the first quarter of 2020, the Company determined that a significant decline in its market capitalization below its stockholders’ equity 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.

Net Income

Hallmark Financial reported a net loss of $6.0 million and $91.7 million, respectively, for the three months and fiscal year ended December 31, 2020 as compared to a net loss of $34.0 million and $0.6 million for the three months and fiscal year ended December 31, 2019, respectively.

On a diluted basis per share, the Company reported a net loss of $0.33 per share and $5.05 per share, respectively, for the three months and fiscal year ended December 31, 2020 as compared to a net loss of $1.87 per share and $0.03 per share, respectively, for the three months and fiscal year ended December 31, 2019.

Book Value Per Share

Hallmark Financial reported book value of $9.42 per share as of December 31, 2020 as compared to $14.53 per share as of December 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 loss and operating loss per share are calculated by excluding net investment gains and losses, impairment of goodwill and other intangible assets (“Impairments”) and the cost of the loss portfolio transfer transaction (“LPT”) entered into during the third quarter of 2020 from GAAP net income. The Impairments and LPT are unusual and infrequent charges for the Company. 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 
 Income (Loss)Less TaxNetAverageDiluted
($ in thousands)Before TaxEffectAfter TaxShares DilutedPer Share
Fourth Quarter 2020     
Reported GAAP measures$(12,853)$(6,811)$ (6,042)18,142$ (0.33)
Excluded investment (gains)/losses$(5,005)$(1,051)$(3,954)18,142$(0.22)
Operating loss$(17,858)$(7,862)$ (9,996)18,142$ (0.55)
      
Fourth Quarter 2019     
Reported GAAP measures$(43,094)$(9,128)$ (33,966)18,123$ (1.87)
Excluded investment (gains)/losses$(3,206)$(673)$(2,533)18,123$(0.14)
Operating loss$(46,300)$(9,801)$ (36,499)18,123$ (2.01)
      
Fiscal 2020     
Reported GAAP measures$(114,162)$(22,507)$ (91,655)18,137$ (5.05)
Excluded impairment of goodwill     
   and other intangible assets$45,996 $273 $45,723 18,137$2.52 
Excluded loss portfolio transfer cost     
   included in Losses and LAE$21,700 $4,557 $17,143 18,137$0.95 
Excluded investment (gains)/losses$22,894 $4,808 $18,086 18,137$0.99 
Operating loss$(23,572)$(12,869)$ (10,703)18,137$ (0.59)
      
Fiscal 2019     
Reported GAAP measures$(1,032)$(407)$ (625)18,107$ (0.03)
Excluded investment (gains)/losses$(20,618)$(4,330)$(16,288)18,107$(0.90)
Operating loss$(21,650)$(4,737)$ (16,913)18,107$ (0.93)


 Fourth Quarter Fiscal Year
 20202019% Change 20202019% Change
($ in thousands)       
Reported gross premiums written161,671214,101-24% 743,368843,831-12%
Less primary binding commercial auto62223,784-97% 25,420114,947-78%
Gross premiums written excluding       
  primary binding commercial auto161,049190,317-15% 717,948728,884-2%
        

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, Hallmark Financial markets, underwrites and services commercial and personal insurance 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:

David Webb
Senior Vice President, Corporate Development and Strategy
817.348.1600
www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets    
($ in thousands, except par value) Dec. 31 Dec. 31
ASSETS 2020  2019 
Investments:   
Debt securities, available-for-sale, at fair value (amortized cost: $502,167 in 2020 and $569,498 in 2019)$507,279 $574,279 
Equity securities (cost: $26,988 in 2020 and $71,895 in 2019) 29,388  99,215 
Other investment (cost: $-0- in 2020 and $3,763 in 2019) -  2,169 
Total investments 536,667  675,663 
Cash and cash equivalents 102,580  53,336 
Restricted cash 5,728  1,612 
Ceded unearned premiums 138,926  164,221 
Premiums receivable 120,332  148,288 
Accounts receivable 5,967  4,286 
Receivable for securities 913  12,581 
Reinsurance recoverable 490,231  315,466 
Deferred policy acquisition costs 17,840  22,994 
Goodwill -  44,695 
Intangible assets, net 1,322  5,087 
Federal income tax recoverable 25,642  8,995 
Deferred federal income taxes, net 8,724  2,185 
Prepaid expenses 2,648  2,603 
Other assets 28,013  33,262 
Total Assets$1,485,533 $1,495,274 
LIABILITIES AND STOCKHOLDERS' EQUITY    
Liabilities:    
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $844 in 2020 and $942 in 2019)$49,156 $49,058 
Subordinated debt securities (less unamortized debt issuance cost of $795 in 2020 and $846 in 2019) 55,907  55,856 
Reserves for unpaid losses and loss adjustment expenses 789,768  620,355 
Unearned premiums 320,806  388,926 
Reinsurance balances payable 46,700  59,274 
Pension liability 1,859  1,388 
Payable for securities -  1,648 
Accounts payable and other accrued expenses 50,415  55,487 
Total Liabilities 1,314,611  1,231,992 
Commitments and contingencies    
Stockholders' equity:    
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2020 and 20193,757  3,757 
Additional paid-in capital 122,893  123,468 
Retained earnings 68,915  160,570 
Accumulated other comprehensive income 383  688 
Treasury stock (2,730,673 shares in 2020 and 2,749,738 shares in 2019), at cost (25,026) (25,201)
Total Stockholders' Equity 170,922  263,282 
Total Liabilities & Stockholders' Equity$1,485,533 $1,495,274 
 


Hallmark Financial Services, Inc. and Subsidiaries    
Consolidated Statements of OperationsThree Months Ended Fiscal Year Ended
($ in thousands, except per share amounts)December 31, December 31,
 2020 2019  2020 2019 
Gross premiums written$161,671 $214,101  $743,368 $843,831 
Ceded premiums written (74,301) (86,568)  (304,395) (347,279)
Net premiums written 87,370  127,533   438,973  496,552 
Change in unearned premiums 25,339  (8,684)  42,825  (59,675)
Net premiums earned 112,709  118,849   481,798  436,877 
          
Investment income, net of expenses 2,606  5,031   12,920  20,604 
Investment (losses) gains, net 5,005  3,206   (22,894) 20,618 
Finance charges 1,217  1,717   5,705  7,026 
Commission and fees 363  246   1,156  1,190 
Other income 12  13   60  56 
Total revenues 121,912  129,062   478,745  486,371 
          
Losses and loss adjustment expenses 100,320  140,304   412,851  362,165 
Operating expenses 32,563  29,704   126,266  117,360 
Interest expense 1,265  1,531   5,326  5,410 
Impairment of goodwill and other intangible assets -  -   45,996  - 
Amortization of intangible assets 617  617   2,468  2,468 
Total expenses 134,765  172,156   592,907  487,403 
          
(Loss) income before tax (12,853) (43,094)  (114,162) (1,032)
Income tax expense (6,811) (9,128)  (22,507) (407)
Net (loss) income$(6,042)$(33,966) $(91,655)$(625)
          
Net (loss) income per share:         
Basic$(0.33)$(1.87) $(5.05)$(0.03)
Diluted$(0.33)$(1.87) $(5.05)$(0.03)
      


           
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data    
Three Months Ended Dec. 31          
 Specialty Commercial
Segment
Standard Commercial
Segment
Personal SegmentCorporateConsolidated
($ in thousands, unaudited) 2020  2019  2020  2019  2020  2019  2020  2019  2020  2019 
Gross premiums written$122,188 $169,879 $23,104 $21,719 $16,379 $22,503 $- $- $161,671 $214,101 
Ceded premiums written (66,602) (76,766) (7,882) (6,666) 183  (3,136) -  -  (74,301) (86,568)
Net premiums written 55,586  93,113  15,222  15,053  16,562  19,367  -  -  87,370  127,533 
Change in unearned premiums 22,167  (10,350) 1,801  108  1,371  1,558  -  -  25,339  (8,684)
Net premiums earned 77,753  82,763  17,023  15,161  17,933  20,925  -  -  112,709  118,849 
           
Total revenues 80,579  86,719  17,689  16,152  19,430  22,683  4,214  3,508  121,912  129,062 
           
Losses and loss adjustment expenses 67,470  104,351  15,165  16,339  17,685  19,614  -  -  100,320  140,304 
           
Pre-tax income (loss) (1,569) (34,532) (2,885) (4,467) (4,502) (2,847) (3,897) (1,248) (12,853) (43,094)
           
Net loss ratio (1) 86.8% 126.1% 69.3% 107.8% 98.6% 93.7%   89.0% 118.1%
Net expense ratio (1) 19.4% 21.1% 33.0% 28.5% 29.2% 21.2%   27.8% 23.3%
Net combined ratio (1) 106.2% 147.2% 102.3% 136.3% 127.8% 114.9%   116.8% 141.4%
           
Favorable (Unfavorable) Prior Year Development (21,847) (48,906) (1,007) (4,234) (2,175) 21  -  -  (25,029) (53,119)
           

(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    
Fiscal Year Ended Dec. 31          
 Specialty Commercial
Segment
Standard Commercial
Segment
Personal SegmentCorporateConsolidated
($ in thousands, unaudited) 2020  2019  2020  2019  2020  2019  2020  2019  2020  2019 
Gross premiums written$560,301 $651,913 $98,048 $92,645 $85,019 $99,273 $- $- $743,368 $843,831 
Ceded premiums written (265,128) (301,866) (29,652) (29,753) (9,615) (15,660) -  -  (304,395) (347,279)
Net premiums written 295,173  350,047  68,396  62,892  75,404  83,613  -  -  438,973  496,552 
Change in unearned premiums 41,747  (57,459) (1,842) 1,078  2,920  (3,294) -  -  42,825  (59,675)
Net premiums earned 336,920  292,588  66,554  63,970  78,324  80,319  -  -  481,798  436,877 
           
Total revenues 350,412  309,619  69,819  68,179  84,730  88,225  (26,216) 20,348  478,745  486,371 
           
Losses and loss adjustment expenses 291,938  248,781  52,478  50,036  68,435  63,348  -  -  412,851  362,165 
           
Pre-tax income (loss) (6,146) (1,371) (3,039) (841) (10,338) 427  (94,639) 753  (114,162) (1,032)
           
Net loss ratio (1) 86.6% 85.0% 78.9% 78.2% 87.4% 78.9%   85.7% 82.9%
Net expense ratio (1) 19.4% 21.8% 31.1% 30.0% 27.5% 22.7%   25.0% 25.1%
Net combined ratio (1) 106.0% 106.8% 110.0% 108.2% 114.9% 101.6%   110.7% 108.0%
           
Net Favorable (Unfavorable) Prior Year Development (45,808) (60,138) (3,357) (726) (9,123) (36)   (58,288) (60,900)
           

(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. 

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Hallmark Financial Services, Inc.