Hallmark Financial: A Strong Sell

Zacks

On Sep 17, 2013, Zacks Investment Research downgraded Hallmark Financial Services Inc. (HALL) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Earnings estimates for Hallmark Financial have been trending down, owing to dismal second-quarter 2013 results and a reduced investment portfolio. The company reported second-quarter results with a negative earnings surprise of 166.7%.

Additionally, this property-casualty and specialty insurer underperformed the year-to-date Nasdaq index, which posed growth of 26.5% against Hallmark Financial’s negative return of 5.1%.

On Aug 8, Hallmark Financial reported second-quarter operating loss per share of 16 cents, which was wider than the Zacks Consensus Estimate and year-ago loss of 6 cents and 10 cents, respectively.

The downside was due to a 16.6% year-over-year decline in net investment income along with a 17.9% upsurge in total expenses, which together more than offset the top-line growth of 17.4%. While growth was witnessed in premiums earned, loss adjusted expenses, catastrophe losses and underwriting expenses were still high, as reflected by the deteriorated combined ratio. Nevertheless, book value per share and operating cash flow improved.

Although Hallmark Financial sits on a modest cash position, lack of current growth catalysts and non-renewals in its primary Florida markets restrict desired growth. Moreover, its Personal Lines business is facing operating challenges after the company discontinued some of its products and reduced premiums from many of its operational areas.

Fluctuations in currencies and equity markets and low interest rates have taken a toll on the investment portfolio and finance charges. These factors are also making investors jittery.

The Zacks Consensus Estimate for 2013 plunged 71.4% to earnings of 10 cents per share in the last 60 days, 44.4% lower than the 2012 figure. Moreover, the estimate for 2014 is pegged at 25 cents a share, down 50% in the last 60 days. Meanwhile, no upward revisions in estimates were witnessed for either year.

Other Stocks to Consider

While we prefer to avoid Hallmark Financial at present, other stocks that are outperforming in the insurance sector include Everest Re (RE), Global Indemnity Plc (GBLI) and CNA Financial Corp. (CNA). All these stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on HALLRead the Full Research Report on RERead the Full Research Report on CNARead the Full Research Report on GBLIZacks Investment Research

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