U.S. Markets closed

Edited Transcript of HALL earnings conference call or presentation 8-Nov-19 1:30pm GMT

Q3 2019 Hallmark Financial Services Inc Earnings Call

FORT WORTH Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Hallmark Financial Services Inc earnings conference call or presentation Friday, November 8, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Webb

Hallmark Financial Services, Inc. - Senior VP of Corporate Development & Strategy

* Jeffrey Ray Passmore

Hallmark Financial Services, Inc. - Senior VP, CFO & Secretary

* Naveen Anand

Hallmark Financial Services, Inc. - President & CEO

================================================================================

Conference Call Participants

================================================================================

* Andrew F. Boord

Fenimore Asset Management, Inc. - Investment Research Analyst

* Marcos Costa Holanda

Raymond James & Associates, Inc., Research Division - Research Associate

* Robert Edward Farnam

Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance

* Samuel Hoffman

Lincoln Square Capital Management - Founder & President

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings and welcome to the Hallmark Financial Services 2019 Third Quarter Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Webb, Senior Vice President, Corporate Development and Strategy at Hallmark. Thank you, sir. You may begin.

--------------------------------------------------------------------------------

David Webb, Hallmark Financial Services, Inc. - Senior VP of Corporate Development & Strategy [2]

--------------------------------------------------------------------------------

Thank you, and welcome to the Hallmark Financial's Third Quarter 2019 Earnings Call. This is our second earnings call, and we anticipate continuing these on a quarterly basis going forward. Joining me on the call today are Naveen Anand, President and CEO; and Jeff Passmore, Chief Financial Officer. During the call, we will be making forward-looking statements. These statements may reflect certain assumptions, expectations, beliefs and intentions, which are subject to various risks and uncertainties. Investors are cautioned that actual results may differ materially from such forward-looking statements. Please refer to our most recent Form 10-K and other filings made with the SEC for additional details on some of the risk factors that may materially affect our results. We may also reference certain non-GAAP financial measures in the call today. A copy of the press release containing a reconciliation of GAAP to these measures and an updated quarterly investor presentation are available on the company's website at www.hallmarkgrp.com.

We will begin the call today with a brief overview of the quarter. Jeff will follow with some comments on the quarter's financial results, and then Naveen will discuss market conditions and our results.

With that, I'll turn the call over to Naveen.

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [3]

--------------------------------------------------------------------------------

Thank you, David, and good morning, everyone. I'm pleased to report that through the third quarter, Hallmark Financial continues to produce returns in excess of 10%. Operating earnings were $0.35 per share for the quarter, a 52% increase over the same period of the previous year and $1.07 per share on a year-to-date basis, producing an annualized operating return on beginning equity of 10.2%. Net income was $0.29 per share for the quarter and $1.82 on a year-to-date basis, which translates to an annualized return on beginning equity of 17.4%.

These results highlight the positive impact -- the transformative actions taken by the company over the last few years, which has touched every facet of this organization and has laid the foundation for the company to take advantage of the current favorable market opportunities, particularly for Specialty insurers.

The company is focused on building the talent base, market presence to firmly establish ourselves as a specialty company with a diversified portfolio of specialty products. Our timing is good. We are well positioned to take advantage of the opportunity created by the market dislocation in the specialty space. We have been focused on expanding our Specialty business, which now comprises 77% of our total premiums, and generated a combined ratio of 87.7% in the third quarter and a combined ratio of 91% year-to-date.

Most of our Specialty products are seeing significant rate increases, while at the same time, deploying smaller limits and improving terms and conditions. The combination of these 3 components, rate, limits and terms and conditions is critical to building and sustaining a profitable portfolio of business in an environment where claim severity is increasing.

I'll now turn the call over to Jeff Passmore for a review of our financial results and then come back in with some views on our segments.

--------------------------------------------------------------------------------

Jeffrey Ray Passmore, Hallmark Financial Services, Inc. - Senior VP, CFO & Secretary [4]

--------------------------------------------------------------------------------

Thank you, Naveen, and good morning. For the third quarter of 2019, we reported net income of $5.3 million. This compares to $9.7 million the same quarter last year. Removing the impact of unrealized changes in the market value of equity securities, our operating earnings for the third quarter of 2019 were $6.3 million compared to $4.2 million in the same quarter last year.

Gross premium written increased 33% to $224 million during the quarter compared to $169 million in the same quarter last year. This improvement relative to last year is attributable primarily to growth in our Specialty businesses, driven, in large part, by the favorable rate increases we are achieving in this portfolio.

Year-to-date, our Specialty Commercial segment represented 77% of our portfolio, with our Standard Commercial segment at 11% and our Personal segment at 12%. Net premium written increased 45% to $128 million for the quarter compared to $88 million in the same quarter last year. While much of this is related to the growth in gross premiums, the rate -- the higher rate of increase is being driven by the changes we made to our reinsurance program, starting in October 2018, led by the consolidation of our casualty business into a single treaty structure.

For certain of our Specialty lines of business, session rates in previous treaties were higher, which has resulted in a larger portion of the business being retained by the company, translating to a larger growth rate in net premiums. These changes to the reinsurance structure allow us to retain a larger amount of the Specialty business that we write. At the same time, the structure also provides protection against claim severity as we have more reinsurance coverage on claims in excess of $1 million.

Going forward, we currently expect that the net premiums will continue to increase at a slightly higher rate than gross premiums, but those rates should be much closer than they have been over the past 4 quarters.

Cash flow from operations was a positive $16.2 million inflow for the quarter and a $22.9 million inflow year-to-date, a $41.9 million increase over the first 3 quarters of 2018. The net cash outflows that the company experienced in 2018 were a direct and deliberate result of the improvements made in the claim organization, seeking to close claims more quickly than the company has historically. That dynamic has now normalized, and we anticipate the current trend will continue. The expense ratio was 26% for the quarter and 25.8% on a year-to-date basis. We continue to emphasize our expense ratio as a competitive advantage relative to our peers, which we believe is achieved by our careful management of expenses, intelligent usage of technology and external resources and our mix of business. We generally target an expense ratio that is 28% or lower.

Net investment income increased 4% to $5.1 million during the quarter as compared to $4.9 million in the same period the prior year. Net investment losses were $1.3 million for the quarter, resulting from a $1.5 million reduction in net unrealized gains.

In August, we issued $50 million of a 10-year senior unsecured note in the public market with a 6.25% coupon. We used $30 million of these proceeds to repay an existing bank revolving credit facility and the remainder was contributed to our insurance subsidiaries to support additional premium growth as we see opportunity in the current market to achieve returns in excess of our target. Total cash and investments increased 9% since year-end to $730 million or $40.26 per share. Improved operating cash flows driven by both increased premium production and stabilization in claim payments, proceeds from our senior unsecured note offering during the quarter and a year-to-date increase in the valuation of our investment portfolio are the main drivers of this increase.

Stockholders' equity for the group ended the quarter at $296 million, up $41 million since year-end 2018. Our book value per share has increased 15.5% since year-end to $16.36 per share as compared to $14.17. This is not an annualized number and reflects the actual change in book value per share over the 9-month time frame.

And with that, I'd like to turn it back over to Naveen.

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [5]

--------------------------------------------------------------------------------

Thanks, Jeff. I'd like to spend a few minutes on the company's core results, and then we'll discuss our performance at a segment level. Our combined ratio for the quarter for -- of 2019 was 95.8% compared to 98.1% in the same period prior year. Year-to-date, the combined ratio was 95.6% as compared to 97.5%, an improvement of almost 2 points. We continue to make progress toward our target of sub-95% combined ratios. While there has been much discussion in the market recently over the cat events, which have been primarily driven by Hurricane Dorian and Typhoon Faxai, Hallmark Financial has had a relatively quiet cat year, owing to minimal impact from any major weather events.

Cat losses were 0.5 point (sic) [0.5%] in the quarter and 1.5 point (sic) [1.5%] for the year, which is below our historical average of between 2 and 4 points. Also as noted in our earnings release, the recent storms in the Dallas area, while impactful to our community and colleagues, is not expected to be a meaningful cat event for Hallmark. We've been mentioning increase in claims severity impacting our casualty lines, in particularly Commercial Auto, for the last 2 years, and we've been aggressive in addressing this trend. In response to this, we've taken steps to improve pricing, risk selection and claims management. The company experienced an increase in prior year development in the quarter driven by increased claim severity in our Commercial Auto line above what was previously anticipated with unfavorable development in the quarter of 5.7 or 2.4 points year-to-date. Claim management has been an important part of our strategy. We sought to close claims quicker and reduce our exposure to increasing claim costs associated with longer time frames and litigation. This is clearly evident in our Commercial Auto book, where the company has been diligent in working to close claims from earlier accident years and has closed, at this point, 99.1% of all primary Commercial Auto claims reported for accident years 2012 through 2017, as illustrated on Slide 12 of our investor presentation, if you'd like to review.

We've also been very focused on addressing the issue on the pricing side of our auto book. Over the past year, the impact of the underwriting decisions and rate increases in our primary trucking portfolio has been notable. Since 2015, we have reduced in-force customer count by 53%, while premiums are only down 4%. On a more recent comparisons, since just year-end 2018, policy counts are down 9%, while premiums are up -- policy count is down 16%, while premiums are up 9%.

Our underwriting actions, supported by improved risk selection, predictive models, restructured claim efforts that seek to fast-track new claims to closure, will position the company for long-term success in this line. Overall, our Specialty Commercial segment is performing very well. In the third quarter, the segment produced a combined ratio of 87.7%, and for the year, the segment generated a combined ratio of 91% or 85.5% on an accident year basis. In addition, we continue to see great rate momentum in this segment, with rates increasing over the course of the year. In the third quarter, average rate increase across this portfolio was in excess of 15%, which is helping to drive improved underwriting margin into the business. This is particularly evident in our E&S Property book, in our professional liability segments as well as in our Commercial Auto product line.

We're in very good -- we're in a very good position to capitalize on the current market conditions, which, in our view, have shifted from broad headwinds to tailwinds and particularly in our core Specialty lines. As I mentioned earlier, compressing limits is a critical part of our strategy in reducing the impact of claim severity in the market. At this point, nearly 90% of our liability policies are $1 million or less in limit in both our Specialty Commercial and in our Standard Commercial segment, which greatly minimizes our exposure to claims severity. In terms of our other segments, while the company's overall cat experience for the quarter was good, Personal Lines segment saw an uptick in both PCS and non-PCS weather-related claims, resulting in a loss ratio of 80.8%, a 5-point (sic) [5%] increase over the same quarter last year.

Year-to-date, this book is generating a combined ratio of 96.9%, which is an improvement over the 101.7% combined ratio over the same period last year. Our Standard Commercial business also experienced an increase in attritional loss activity in the quarter. This includes some non -- small non-cat property losses as well as some cat loss activity from severe conductive storms. Result is a combined ratio of 107.5% for the quarter and 99.4% year-to-date. Overall, I'm pleased with how we're positioned in 2020, and we're benefiting from all the work that we've done over the past few years. And we're able to take advantage of the favorable market conditions in the Specialty lines of business that Hallmark writes. We have the right people in place to balance growth, while still maintaining and driving pricing discipline.

With that, operator, let's open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Greg Peters with Raymond James.

--------------------------------------------------------------------------------

Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [2]

--------------------------------------------------------------------------------

This is Marcos calling for Greg. You guys been talking about market dislocations for a couple of quarters now. And I was hoping you could spend a minute and give us an update, where this dynamic is more pronounced in the marketplace right now?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [3]

--------------------------------------------------------------------------------

Sure. So overall, we're seeing a couple of things that are taking place in the market. We are seeing some of those standard line carriers move out of the E&S lanes. And so certainly, more business is coming into the E&S lanes. And overall, through 6 months from a segment perspective, E&S has grown -- is growing at about 15% to 16%. E&S didn't see that type of dislocation of growth. I think the last time the E&S lines saw that type of dislocation was back in 2001, 2002. We're seeing it in our E&S Property line where we're seeing much more syndication of limits. So many more carriers are required to fill a tower and a program. And as a result, we're, in some cases, seeing sort of inverted towers in some cases where pricing is higher as you get up the ladder, which is kind of opposite of what you would expect. We're seeing it in our professional liability segments, both in our health care as well as our financial line segment, and we're much more of a small business, small customer writer in those segments. We're seeing it also in our Commercial Auto as well as our casualty segments, both on the primary and the excess, but more so on the excess.

Now this is a combination of changes that are being driven by, as I mentioned earlier, those standard lines markets kind of moving out of the lanes and more business coming back into the E&S segment. That's probably the biggest impact. Second is the changes at Lloyds. Particularly, as Lloyds has walked away from small binding authorities. And those individual risks are now coming into the market as individual risk versus -- they were in sort of program situations with Lloyds. And then to a certain extent, some of the changes at AIG and others that are making in terms of their limits and limit profiles. That's a little less impactful for us only because we don't necessarily focus on that sort of large national global account market from an overall standpoint.

--------------------------------------------------------------------------------

Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [4]

--------------------------------------------------------------------------------

Got it. My next question is on Slide 11. And you have your combined ratio broken down here, and you could see a remarkable improvement in the expense ratio and you're near your 95% target year-to-date, but that seems like, if we were to have an average cat year, you would be running a little higher. So I guess, maybe you can give us some perspective of where you'd see your expense and core loss ratio headed towards so -- in order for you to hit that target?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [5]

--------------------------------------------------------------------------------

Yes. So we see -- as we continue to add rate into our portfolio the terms, conditions and the changes that are going in the marketplace, we expect that -- and our mix of business, as that evolves, we see our accident ratio -- accident loss ratio continue to improve. I think from an expense standpoint, we're in the range of 25, 26 -- 25.5 to 26 at this point. And we'll see some more further improvement from a growth as we continue to grow and benefit from the growth tax expense ratio. We don't have any sort of major projects and things like that from a CapEx perspective that are on the horizon that's going to necessarily impact. A lot that work has been done over the course of the last 4 years. So it's going to come from a combination of continued improvement in margin from an accident year loss ratio perspective and a little bit from the expense ratio, with -- even with a normalized cat scenario, which has been around -- been in the 3 points over the last few years.

--------------------------------------------------------------------------------

Marcos Costa Holanda, Raymond James & Associates, Inc., Research Division - Research Associate [6]

--------------------------------------------------------------------------------

Got it. And I guess, just my last question would be on capital. And I guess it's a good opportunity for you guys to comment on your perspective on the balance of capital and growth. You see some pretty soaring growth numbers there. And then maybe you can talk about your excess capital position, if there is any intention to come back to the market and repurchase shares.

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [7]

--------------------------------------------------------------------------------

Yes. So we generally target a leverage ratio between 1.4x to 1.5x. We're a little bit above that right now at 1.6%, but not really far out of that range. And we feel fairly comfortable with the capital that we have. The company in the past has been quite a bit higher in terms of leverage ratios. But my comfort level is kind of stay within this range. At this point, we're adequately capitalized. As Jeff noted, we did add $20 million recently from the public debt offering into our insurance companies. And based on our projections of profitability resulting from kind of what we will generate from the stat capital perspective meets our expectations to keep the net premium leverage within that range of the 1.4, 1.6 range. At this point, we did file a universal shelf, as you may recall, back in May at a -- for $150 million. We pulled down $100 million of it -- about $50 million of it, I'm sorry. So we have $100 million available at this point. So we do have some optionality if we choose to do something down the road. But at this point, we feel like we're generating enough from a stat profitability perspective and stat capital perspective to support our growth ambitions based on what we see as the outlook of the market.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Bob Farnam with Boenning and Scattergood.

--------------------------------------------------------------------------------

Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [9]

--------------------------------------------------------------------------------

I'd like to see if I can tease out maybe a little bit more detail on Commercial Auto reserves. So you say that 99.1% of the claims have been closed from accident years 27 and prior. About how many claims are we talking now that are still open? I don't need an exact number, just kind of ballpark, how many claims are still open from that era? How much does that 0.9% represent?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [10]

--------------------------------------------------------------------------------

So kind of an -- I'd address that question in 2 parts, Bob. So 2015 and prior, which was kind of the area where we saw the most of dislocation and drove primarily the reserve charges in the past, we're less than 50 claims open in terms of all those accident years at this point and adequate with the case reserve from our perspective. We have a little bit more over a couple of hundred claims open between '17 and '16 from an overall claim perspective. But the key point is, we feel case reserves, from a case reserve perspective, are probably at the highest level we've seen in our company in our history, and we feel they're adequately reserved. But as you get kind of closer to closing out the claims, you do get some volatility. And we thought it was prudent to add to our reserves on that basis based on some of the volatility we're seeing as we to continue the pace of closing out the claims that we have.

--------------------------------------------------------------------------------

Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [11]

--------------------------------------------------------------------------------

And these claims are predominantly you have -- are they on policies that have $1 million limit on them? Is that the key...

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [12]

--------------------------------------------------------------------------------

Yes. This is all primary. That's correct. $1 million limit, yes.

--------------------------------------------------------------------------------

Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [13]

--------------------------------------------------------------------------------

Okay. And so -- again, I'm sorry, you may not have the details there, but -- so in terms of the 150-or-so -- sounds like 150-or-so remaining claims around that era. Do you know what percentage that they are reserved at in terms of -- are they -- a percentage of the limit as how much is -- how much potential is there for going up to the limit on those claims?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [14]

--------------------------------------------------------------------------------

Yes. So again, and it's case-by-case basis, but those -- there's quite a few that are at limits losses already, so they're not going to develop anymore. But on an average case reserve basis, we feel pretty adequate in terms of what the case reserves are in terms of -- I don't have the specific information in terms of what that average case reserves is, but I'm happy to provide that as a follow-on.

--------------------------------------------------------------------------------

Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [15]

--------------------------------------------------------------------------------

Yes. Sorry, I didn't mean to hammer you with like a little miniature detailed stuff there, but I was just curious about the Commercial Auto stuff just because of the adverse development again this quarter. But it looks like 2018 has developed favorably thus far. Is that basically lower-than-expected severity or frequency? Or like, what's been driving the improvement in 2018 accident year?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [16]

--------------------------------------------------------------------------------

Now a couple of things. Obviously, all of the changes we've made are coming through -- started making a lot of those changes in '16 and '17 in terms of our portfolio, both from pricing, risk selection improvement standpoint, we put in our second-generation of our predictive model and capability, but also there's been a large reduction in just exposure base in the company. So when you look at 2018 and on Page 12 of our investor deck, would give you some reference points on policies in-force, the reduction is just sheer policies in-force, and rate that has been put on the policies is driving the continued improvement in the portfolio from a portfolio standpoint, and that improvement continues into '19 as well.

--------------------------------------------------------------------------------

Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [17]

--------------------------------------------------------------------------------

Is there a specific type of claim you've been trying to -- policy, I mean, not claim, but policy. You've called quite a bit of your in-force policies. What has been the more problematic type of policy that you've been getting rid of?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [18]

--------------------------------------------------------------------------------

A couple of things. So we're looking at a lot of variables in terms of risk quality in our models to give us better and deeper insight on risk profile and risk quality. And through that process, in general terms, we've noted that some of the newer venture-type truckers are problematic. And so that's been a big part of the exit. Some classes of flatbed trucking are problematic. It's down to kind of specific type of goods hauled and areas hauled. Some of the regional truckers have been problematic in some of the regions that they travel in where we've seen high preponderance of activity, and that's all coming through some of our modeling activity that we've done to really understand the portfolio. So -- and then, broadly speaking, we've also exited 2 states that we think were really challenging and were unprofitable for us, which were Louisiana and Mississippi, and we exited those, stopped writing new business in those states in 2016 and in 2017. We completed the exit out of those states from a renewal standpoint.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from Sam Hoffman with Lincoln Square.

--------------------------------------------------------------------------------

Samuel Hoffman, Lincoln Square Capital Management - Founder & President [20]

--------------------------------------------------------------------------------

My questions surround just the ongoing nature or the onetime nature of some of the items that happened in the quarter. So my first question is on Personal Lines. Was the entire excess of the loss ratio in the quarter due to cat and non-cat weather? And do you expect the combined ratio to be sort of in the 95% or below [range] as it had been in the prior 4 quarters going forward?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [21]

--------------------------------------------------------------------------------

So we had a higher preponderance of losses related to weather in the quarter, that was the biggest part of the impact. There was also a little bit of movement, higher increase on the expense ratio by a couple of points. I think that sort of goes up, ebbs and flows in terms of its quarterly -- kind of a quarterly impact. But I do expect the portfolio to come more in line and be on target as to our 95% target for that portfolio on a run rate basis.

--------------------------------------------------------------------------------

Samuel Hoffman, Lincoln Square Capital Management - Founder & President [22]

--------------------------------------------------------------------------------

Terrific. And then on the Commercial Auto, which accident year was the prior year development coming from? Because we have seen some companies like Travelers take strengthenings on their more recent years. And it sounds like this is coming from older years, and it would be implied since you've closed more of your claims, we could view this as being more onetime. But I just wanted to get your commentary on where exactly it came from.

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [23]

--------------------------------------------------------------------------------

So it was actually -- we added to reserves in the more recent years of '16 and '17, which is where we're -- which is what's left over of the claims that we're closing out. And '15 and prior, as I said earlier, based on the number of claims that are open, have pretty much settled out at this point. But we did -- again, those are the years that we have the left over of the claims, if you will. And those are the ones that we're focused on at this point closing out, and that's where we saw some volatility, which we thought was prudent to put some more reserve additions onto those years on that basis.

--------------------------------------------------------------------------------

Samuel Hoffman, Lincoln Square Capital Management - Founder & President [24]

--------------------------------------------------------------------------------

Okay. But you didn't add to 2018 or 2019 in the quarter?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [25]

--------------------------------------------------------------------------------

No. That's correct. No.

--------------------------------------------------------------------------------

Samuel Hoffman, Lincoln Square Capital Management - Founder & President [26]

--------------------------------------------------------------------------------

0

Okay. Terrific. And then last question is, do you still believe that a 10% return on equity and the 95% combined ratio is achievable for 2019 and beyond?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [27]

--------------------------------------------------------------------------------

So we don't generally give kind of broad guidance on that basis. But our view is based on kind of -- if you look at our metrics of the organization from a balance sheet standpoint, we're targeting generally at 95% or better combined ratio based on our kind of leverage ratios, both in terms of our net premium leverage, our asset leverage, cofinancing rate as well as our debt leverage and walk through all of that, the ability for us to sustain a 10% or better is relatively good. And we feel good about being in a position to do that on a current year as well as go-forward basis.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Andrew Boord with Fenimore.

--------------------------------------------------------------------------------

Andrew F. Boord, Fenimore Asset Management, Inc. - Investment Research Analyst [29]

--------------------------------------------------------------------------------

Obviously, it was a good quarter. So congratulations and thanks for all the good data you guys are putting out these days. It really helps. My question. Would you -- you may have already hit -- I apologize if I missed something here, but on the Standard Commercial segment, I'm a little surprised it's down in the $15 million range for net premiums earned. Just anything you're pulling out of there? Or anything changing there that would explain that? And I'm not sure it's a risk or anything. I'm just trying to get my arms around it?

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [30]

--------------------------------------------------------------------------------

Andrew, it's primarily driven by the changes we made in the reinsurance treaty. So as we restructured our broad casualty treaty last year, we ceded some of the liability end of this portfolio that we had not been ceding before. And that's -- and so it's -- we were -- and we were retaining more -- some of the more of the specialty risk, and so it's really been about capital allocation and optimizing our capital allocation perspective to optimize our returns from that standpoint. So it's really on that basis, that's driving that change.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to Mr. Anand for any additional concluding comments.

--------------------------------------------------------------------------------

Naveen Anand, Hallmark Financial Services, Inc. - President & CEO [32]

--------------------------------------------------------------------------------

Great. Well, just thank you again, everyone, for your participation this morning. We appreciate your time and interest in Hallmark, and we look forward to speaking with you again next quarter. Thank you.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.