Hallmark Financial Announces Second Quarter 2020 Results

Monday, 10. August 2020 22:05

DALLAS, Aug. 10, 2020 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the second quarter and six months ended June 30, 2020.


 Second Quarter Year-to-Date
  2020  2019   2020  2019 
$ in millions (unaudited):     
Net Income (Loss)$6.7 $13.0  $(57.6)$28.1 
Operating Earnings (1)$5.1 $7.6  $9.7 $13.2 
      
$ per diluted share:     
Net Income (Loss)$0.37 $0.71  $(3.18)$1.54 
Operating Earnings (1)$0.28 $0.42  $0.53 $0.73 
(1)  See “Non-GAAP Financial Measures” below
 

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

  • Hallmark Financial reported a net combined ratio of 98.4% as compared to 94.5% for the second quarter of 2019.  During the first quarter of 2020, the Company announced its decision to exit the Binding Primary Auto business.  The second quarter net combined ratio was negatively impacted by 2.6 points from this discontinued line of business. 
     
  • Hallmark Financial saw continued momentum on rate increases, as rates were up an average of 18% for all lines and 23% for the Specialty Commercial Segment.
     
  • Gross premiums written decreased 16% to $183.6 million
     
  • Net premiums written decreased 12% to $109.0 million
     
  • Net premiums earned increased 18% to $125.6 million
     
  • Net income of $6.7 million, or $0.37 per diluted share, compared to net income of $13.0 million, or $0.71 per diluted share
     
  • Operating earnings of $5.1 million, or $0.28 per diluted share, compared to $7.6 million, or $0.42 per diluted share (see “Non-GAAP Financial Measures” below)
     
  • Net investment gains of $2.1 million compared to net investment gains of $6.8 million 
     
  • Net catastrophe losses of $6.6 million, inclusive of $3.7 million net losses for COVID-19 claims, contributed 5.2 points to the net combined ratio compared to $2.0 million contributing 1.9 points

Year-to-Date 2020 Highlights (all comparisons to same prior year period):

  • Hallmark Financial reported a net combined ratio of 98.0% as compared to 95.4% for the first six months of 2019.  During the first quarter of 2020, the Company announced its decision to exit the Binding Primary Auto business.  The year-to-date combined ratio was negatively impacted by 5.0 points from this discontinued line of business. 
     
  • Hallmark Financial saw continued momentum on rate increases, as rates were up an average of 15% for all lines and 19% for the Specialty Commercial Segment.
     
  • Gross premiums written decreased 5% to $385.2 million
     
  • Net premiums written decreased 2% to $235.5 million
     
  • Net premiums earned increased 21% to $249.5 million
     
  • Net loss of $57.6 million, or $3.18 per diluted share, compared to net income of $28.1 million, or $1.54 per diluted share
     
  • Operating earnings of $9.7 million, or $0.53 per diluted share, compared to $13.2 million, or $0.73 per diluted share (see “Non-GAAP Financial Measures” below)
     
  • Net investment losses of ($27.3) million compared to net investment gains of $18.8 million
     
  • Net catastrophe losses of $12.6 million, inclusive of $5.0 million net losses for COVID-19 claims, contributed 5.0 points to the net combined ratio compared to $4.0 million contributing 2.0 points
     
  • 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.

Naveen Anand, President and Chief Executive Officer, commented, “While the Company has had numerous challenges to overcome this year, through the efforts of our employees, board of directors, and business partners, we have worked to onboard a new auditor, regain Nasdaq compliance, and timely file our second quarter financial results.  It is no small feat that this was all accomplished in the midst of the COVID-19 challenges, where the Company transitioned quickly and effectively to become an almost entirely remote workforce.  It is quite remarkable what our employees have been able to accomplish.”

“Our exit from the Binding Primary Auto business, following growing severity in claims from prior years, combined with our efforts to secure reinsurance on the prior year reserves associated with this business, will serve to limit the Company’s future exposure and reduce the volatility associated with a book of business that has been responsible for the vast majority of the Company’s net unfavorable prior year reserve development over the past 5 years,” continued Mr. Anand.

“Additionally, while we have reduced premium targets in certain lines of business, we continue to capitalize on favorable market opportunities that have continued to accelerate throughout the current year.  While seeking to reduce exposure through limits deployment and limiting terms and conditions, we also experienced continued momentum on rate increases, with rates up an average of 18% for all lines and 23% for the Specialty Commercial Segment in the second quarter of 2020 compared to last year. Excluding the Binding Primary Auto business presently in runoff, gross premiums declined by 3.4% in the quarter and increased by 5.7% on a year-to-date basis compared to 2019,” said Mr. Anand.

        
 Second Quarter Year-to-Date
  2020  2019 % Change  2020  2019 % Change
($ in thousands, unaudited)       
Gross premiums written 183,644  218,236 -16%  385,233  405,552 -5%
Net premiums written 108,987  123,843 -12%  235,492  241,246 -2%
Net premiums earned 125,596  106,499 18%  249,529  205,529 21%
Investment income, net of expenses 3,196  5,412 -41%  7,654  10,523 -27%
Investment gains (losses), net 2,058  6,817 -70%  (27,272) 18,754 -245%
Net income (loss) 6,701  13,029 -49%  (57,609) 28,054 -305%
Operating earnings (loss)(1) 5,075  7,644 -34%  9,659  13,238 -27%
Net income (loss) per share - basic$0.37 $0.72 -49% $(3.18)$1.55 -305%
Net income (loss) per share - diluted$0.37 $0.71 -48% $(3.18)$1.54 -306%
Operating earnings (loss) per share - diluted (1)$0.28 $0.42 -33% $0.53 $0.73 -27%
Book value per share$11.14 $15.98 -30%    
(1)  See “Non-GAAP Financial Measures” below         
 

Second Quarter and Year-to-Date 2020 Financial Review

Gross Premiums Written
During the three and six months ended June 30, 2020, Hallmark Financial’s gross premiums written were $183.6 million and $385.2 million, respectively, representing a decrease of 16% and 5%, respectively, from the $218.2 million and $405.6 million in gross premiums written for the same periods in 2019.

Net Premiums Written
During the three and six months ended June 30, 2020, Hallmark Financial’s net premiums written were $109.0 million and $235.5 million, respectively, representing a decrease of 12% and 2%, respectively, from the $123.8 million and $241.2 million in net premiums written for the same periods of 2019. 

Net Premiums Earned
Hallmark Financial’s net premiums earned were $125.6 million and $249.5 million for the three and six months ended June 30, 2020, respectively, representing a 18% and 21% increase, respectively, from the $106.5 million and $205.5 million in net premiums earned for the same periods in 2019. 

Investments
During the three and six months ended June 30, 2020, net investment income was $3.2 million and $7.7 million, respectively, as compared to $5.4 million and $10.5 million during the same periods in 2019.  Net investment gains were $2.1 million for the three months ended June 30, 2020 as compared to net investment gains of $6.8 million for the same period the prior year.  Net investment losses were $27.3 million for the six months ended June 30, 2020 as compared to net investment gains of $18.8 million for the same period the prior year. 

The declines in net investment income were primarily due to lower interest rates in the first half of 2020 compared to the prior year and an increase in the proportion of short-term investments held relative to longer maturity investments. The net investment losses in the first half of 2020 were primarily due to an overall reduction of investment in equity securities in the first quarter of 2020 during the historic market declines associated with the novel coronavirus (COVID-19) pandemic.

At June 30, 2020 fixed-income securities were $553.3 million, with a tax equivalent book yield of 2.2% compared to 3.6% as of June 30, 2019.  As of June 30, 2020, the fixed-income portfolio had an average modified duration of 0.9 years and 90% of the securities had remaining time to maturity of five years or less.  As of June 30, 2020, 3% of the investment portfolio was invested in equity securities.

At June 30, 2020, total investments were $571.6 million.  Cash and cash equivalents, including restricted cash were $128.5 million.  Total investments, cash and cash equivalents, and restricted cash were $700.0 million or $38.59 per share.

Pre-Tax Income
Hallmark Financial had pre-tax income of $5.6 million for the three months ended June 30, 2020, as compared to pre-tax income of $16.5 million reported during the same period in 2019.  Hallmark Financial had a pre-tax loss of $64.0 million for the six months ended June 30, 2020, as compared to pre-tax income of $35.4 million reported during the same period in 2019. 

The decline in pre-tax results for the three months ended June 30, 2020 was predominately driven by adverse prior year net loss reserve development of $10.8 million as compared to $1.5 million for the same period the prior year, as well as the $4.8 million decline in net investment gains during the quarter as compared to the second quarter of 2019.

The decline in pre-tax results for the six months ended June 30, 2020 was predominately driven by the impairment of goodwill and other intangible assets of $46.0 million, net investment losses of $27.3 million as compared to net investment gains of $18.8 million reported during the same period in 2019 and unfavorable prior year net loss reserve development of $19.3 million as compared to $1.4 million reported for the same period the prior year.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratios
Losses and LAE for the three and six months ended June 30, 2020 increased $21.6 million and $45.0 million, respectively, as compared to the prior year periods due primarily to increased net premiums earned, as well as unfavorable net prior year reserve development.  Hallmark Financial reported $10.8 million and $19.3 million, respectively, of net unfavorable prior year loss reserve development during the three and six months ended June 30, 2020 as compared to net unfavorable prior year loss reserve development of $1.5 million and $1.4 million, respectively, during the same periods the prior year.

Hallmark Financial had a net loss ratio of 75.5% for both the three and six months ended June 30, 2020 as compared to 68.8% and 69.7%, respectively, reported during the same periods in 2019.  Catastrophe losses contributed 5.2 points and 5.0 points, respectively, to the net loss ratio for the three and six months ended June 30, 2020, as compared to 1.9 points and 2.0 points, respectively, for the same periods of the prior year.  Included in the 2020 net catastrophe losses are reserves for COVID-19 claims that contributed 3.0 points and 2.0 points, respectively, to the total net loss ratio for the three and six months ended June 30, 2020.  

The expense ratio was 22.9% and 22.5%, respectively, for the three and six months ended June 30, 2020 as compared to 25.7% and 25.7%, respectively, reported during the same periods in 2019.  The Company reported a net combined ratio of 98.4% and 98.0%, respectively, for the three and six months ended June 30, 2020 as compared to 94.5% and 95.4%, respectively, during the same periods in 2019. 

Net Income
Hallmark Financial reported net income of $6.7 million and a net loss of $57.6 million, respectively, for the three and six months ended June 30, 2020 as compared to net income of $13.0 million and $28.1 million for the three and six months ended June 30, 2019, respectively. 

On a diluted basis per share, the Company reported net income of $0.37 per share and a net loss of $3.18 per share, respectively, for the three and six months ended June 30, 2020 as compared to net income of $0.71 per share and $1.54 per share, respectively, for the three and six months ended June 30, 2019, respectively.

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.

              
($ in thousands)Income
Before Tax
Less Tax
Effect
Net
After Tax
Weighted
Average
Shares Diluted
Diluted
Per Share
Second Quarter 2020     
Reported GAAP measures$5,583 $(1,118)$ 6,701 18,141$ 0.37 
Excluded investment (gains)/losses$(2,058)$(432)$(1,626)18,141$(0.09)
Operating earnings$3,525 $(1,550)$ 5,075 18,141$ 0.28 
      
Second Quarter 2019     
Reported GAAP measures$16,484 $3,455 $ 13,029 18,251$ 0.71 
Excluded investment (gains)/losses$(6,817)$(1,432)$(5,385)18,251$(0.30)
Operating earnings$9,667 $2,023 $ 7,644 18,251$ 0.42 
      
Year-to-Date 2020     
Reported GAAP measures$(64,003)$(6,394)$ (57,609)18,132$ (3.18)
Excluded impairment of goodwill     
and other intangible assets$45,996 $273 $45,723 18,132$2.52 
Excluded investment (gains)/losses$27,272 $5,727 $21,545 18,132$1.19 
Operating earnings$9,265 $(394)$ 9,659 18,132$ 0.53 
      
Year-to-Date 2019     
Reported GAAP measures$35,402 $7,348 $ 28,054 18,250$ 1.54 
Excluded investment (gains)/losses$(18,754)$(3,938)$(14,816)18,250$(0.81)
Operating earnings$16,648 $3,410 $ 13,238 18,250$ 0.73 
              

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 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:
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)Jun. 30Dec. 31
ASSETS20202019
Investments: (unaudited) 
Debt securities, available-for-sale, at fair value (amortized cost: $552,266 in 2020 and $569,498 in 2019)$553,322 $574,279 
Equity securities (cost: $21,249 in 2020 and $71,895 in 2019) 17,949  99,215 
Other investment (cost: $3,763 in 2020 and $3,763 in 2019) 295  2,169 
Total investments 571,566  675,663 
Cash and cash equivalents 126,619  53,336 
Restricted cash 1,858  1,612 
Ceded unearned premiums 144,169  164,221 
Premiums receivable 128,924  148,288 
Accounts receivable 5,046  4,286 
Receivable for securities 1,304  12,581 
Reinsurance recoverable 377,988  315,466 
Deferred policy acquisition costs 23,110  22,994 
Goodwill -  44,695 
Intangible assets, net 2,556  5,087 
Federal income tax recoverable 9,258  8,995 
Deferred federal income taxes, net 9,031  2,185 
Prepaid expenses 3,654  2,603 
Other assets 29,313  33,262 
Total Assets$1,434,396 $1,495,274 
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Liabilities:    
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $893 in 2020 and $942 in 2019)$49,107 $49,058 
Subordinated debt securities (less unamortized debt issuance cost of $820 in 2020 and $846 in 2019) 55,882  55,856 
Reserves for unpaid losses and loss adjustment expenses 670,936  620,355 
Unearned premiums 354,837  388,926 
Reinsurance balances payable 55,818  59,274 
Pension liability 1,223  1,388 
Payable for securities 3  1,648 
Accounts payable and other accrued expenses 44,418  55,487 
Total Liabilities 1,232,224  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 122,729  123,468 
Retained earnings 102,961  160,570 
Accumulated other comprehensive (loss) income (2,243) 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 202,172  263,282 
Total Liabilities & Stockholders' Equity$1,434,396 $1,495,274 
 

 

              
Hallmark Financial Services, Inc. and Subsidiaries    
Consolidated Statements of OperationsThree Months Ended Six Months Ended
($ in thousands, except per share amounts, unaudited)June 30, June 30,
 20202019 20202019
Gross premiums written$183,644 $218,236  $385,233 $405,552 
Ceded premiums written (74,657) (94,393)  (149,741) (164,306)
Net premiums written 108,987  123,843   235,492  241,246 
Change in unearned premiums 16,609  (17,344)  14,037  (35,717)
Net premiums earned 125,596  106,499   249,529  205,529 
          
Investment income, net of expenses 3,196  5,412   7,654  10,523 
Investment (losses) gains, net 2,058  6,817   (27,272) 18,754 
Finance charges 1,528  1,797   3,172  3,531 
Commission and fees 260  364   584  657 
Other income 14  14   33  30 
Total revenues 132,652  120,903   233,700  239,024 
          
Losses and loss adjustment expenses 94,873  73,226   188,278  143,313 
Operating expenses 30,259  29,336   59,407  56,582 
Interest expense 1,320  1,240   2,788  2,493 
Impairment of goodwill and other intangible assets -  -   45,996  - 
Amortization of intangible assets 617  617   1,234  1,234 
Total expenses 127,069  104,419   297,703  203,622 
          
(Loss) income before tax 5,583  16,484   (64,003) 35,402 
Income tax (benefit) expense (1,118) 3,455   (6,394) 7,348 
Net (loss) income$6,701 $13,029  $(57,609)$28,054 
          
Net (loss) income per share:         
Basic$0.37 $0.72  $(3.18)$1.55 
Diluted$0.37 $0.71  $(3.18)$1.54 
      

   

           
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data    
Three Months Ended Jun. 30 
 Specialty Commercial SegmentStandard Commercial SegmentPersonal SegmentCorporateConsolidated
($ in thousands, unaudited) 2020  2019  2020  2019  2020  2019  2020  2019 2020  2019 
Gross premiums written$138,627 $172,940 $23,842 $21,835 $21,175 $23,461 $- $-$183,644 $218,236 
Ceded premiums written (64,640) (83,370) (7,037) (7,170) (2,980) (3,853) -  - (74,657) (94,393)
Net premiums written 73,987  89,570  16,805  14,665  18,195  19,608  -  - 108,987  123,843 
Change in unearned premiums 14,350  (20,216) (404) 1,611  2,663  1,261  -  - 16,609  (17,344)
Net premiums earned 88,337  69,354  16,401  16,276  20,858  20,869  -  - 125,596  106,499 
           
Total revenues 91,124  73,592  17,096  17,310  22,464  23,116  1,968  6,885 132,652  120,903 
           
Losses and loss adjustment expenses 69,262  48,374  10,775  10,613  14,836  14,239  -  - 94,873  73,226 
           
Pre-tax income (loss) 5,882  10,427  802  2,057  1,884  2,441  (2,985) 1,559 5,583  16,484 
           
Net loss ratio (1) 78.4% 69.7% 65.7% 65.2% 71.1% 68.2%   75.5% 68.8%
Net expense ratio (1) 18.5% 22.1% 34.4% 29.0% 21.0% 23.3%   22.9% 25.7%
Net combined ratio (1) 96.9% 91.8% 100.1% 94.2% 92.1% 91.5%   98.4% 94.5%
           
Favorable (Unfavorable) Prior Year Development (9,315) (3,277) (794) 1,778  (680) 29  -  - (10,789) (1,470)
           
(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
 Specialty Commercial SegmentStandard Commercial SegmentPersonal SegmentCorporateConsolidated
($ in thousands, unaudited) 2020  2019  2020  2019  2020  2019  2020  2019 2020  2019 
Gross premiums written$288,097 $307,339 $50,218 $47,363 $46,918 $50,850 $- $-$385,233 $405,552 
Ceded premiums written (128,604) (140,731) (14,500) (15,273) (6,637) (8,302) -  - (149,741) (164,306)
Net premiums written 159,493  166,608  35,718  32,090  40,281  42,548  -  - 235,492  241,246 
Change in unearned premiums 15,816  (33,066) (2,899) 1,560  1,120  (4,211) -  - 14,037  (35,717)
Net premiums earned 175,309  133,542  32,819  33,650  41,401  38,337  -  - 249,529  205,529 
           
Total revenues 183,244  141,559  34,732  35,683  44,787  42,599  (29,063) 19,183 233,700  239,024 
           
Losses and loss adjustment expenses 130,145  94,323  22,630  22,264  35,503  26,726  -  - 188,278  143,313 
           
Pre-tax income (loss) 22,174  18,395  1,518  3,564  (3,771) 4,014  (83,924) 9,429 (64,003) 35,402 
           
Net loss ratio (1) 74.2% 70.6% 69.0% 66.2% 85.8% 69.7%   75.5% 69.7%
Net expense ratio (1) 18.1% 22.2% 32.9% 29.7% 24.7% 22.8%   22.5% 25.7%
Net combined ratio (1) 92.3% 92.8% 101.9% 95.9% 110.5% 92.5%   98.0% 95.4%
           
Net Favorable (Unfavorable) Prior Year Development (12,468) (5,203) (919) 3,583  (5,961) 216    (19,348) (1,404)
 
(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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