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Hallmark Announces First Quarter 2021 Results

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Hallmark Financial Services, Inc.

Hallmark Financial Services, Inc.
Hallmark Financial Services, Inc.
Hallmark Financial Services, Inc.

DALLAS, May 13, 2021 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today announced financial results for the first quarter ended March 31, 2021.

First Quarter

2021

2020

$ in millions:

Net Income (Loss)

$

9.3

$

(64.3

)

Operating Income (1)

$

4.8

$

4.6

$ per diluted share:

Net Income (Loss)

$

0.52

$

(3.55

)

Operating Income (1)

$

0.27

$

0.25

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

Highlights:

  • Net income of $9.3 million, or $0.52 per share, in the first quarter of 2021 as compared to net loss of $64.3 million, or $3.55 per share, for the same period of 2020.

  • Net combined ratio of 96.1% for the first quarter of 2021 improved from 97.6% for the same period the prior year.

  • Substantial rate increases achieved, particularly in the Specialty Commercial Segment, with increases for this business averaging 13% for the quarter.

  • Gross premiums written for the quarter ended March 31, 2021 decreased 19% compared to the prior year quarter ended March 31, 2020 and increased 1% compared to the previous quarter ended December 31, 2020. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for the quarter ended March 31, 2021 would have decreased 11% compared to the prior year quarter ended March 31, 2020. (See “Non-GAAP” Financial Measures below).

  • Net catastrophe losses were $5.9 million in the first quarter, or 5.7 points of the net combined ratio. Total catastrophe losses include $5.0 million from the February winter storms, which is our maximum retention of losses per event under our catastrophe reinsurance agreement.

  • Net investment gains of $5.8 million during the first quarter of 2021, which included $4.4 million of unrealized gains on equity securities, as compared to net investment losses of $29.3 million, which included $35.0 million of unrealized losses on equity and other investment securities, during the same period the prior year.

First Quarter 2021 Financial Review

First Quarter

2021

2020

% Change

($ in thousands)

Gross premiums written

$

163,018

$

201,589

-19%

Net premiums written

$

93,147

$

126,505

-26%

Net premiums earned

$

104,218

$

123,933

-16%

Investment income, net of expenses

$

3,010

$

4,458

-32%

Investment gains (losses), net

$

5,779

$

(29,330

)

120%

Net income (loss)

$

9,345

$

(64,310

)

115%

Operating income (1)

$

4,780

$

4,584

4%

Net income (loss) per share - basic

$

0.52

$

(3.55

)

115%

Net income (loss) per share - diluted

$

0.52

$

(3.55

)

115%

Operating income per share - diluted (1)

$

0.27

$

0.25

8%

Book value per share

$

9.89

$

10.39

-5%

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

Gross Premiums Written
Gross premiums written were $163.0 million during the three months ended March 31, 2021, representing a decrease of 19% from the $201.6 million in gross premiums written for the same period in 2020.

Net Premiums Written
Net premiums written were $93.1 million during the three months ended March 31, 2021, representing a decrease of 26% from the $126.5 million in net premiums written for the same period of 2020.

Net Premiums Earned
Net premiums earned were $104.2 million for the three months ended March 31, 2021, representing a 16% decrease from the $123.9 million in net premiums earned for the same period in 2020.

Investments
Net investment income was $3.0 million during the three months ended March 31, 2021, as compared to $4.5 million during the same period in 2020. The decline in net investment income was primarily due to lower interest rates compared to the same period during 2020 and an increase in the proportion of short-term investments held relative to longer maturity investments.

Net investment gains were $5.8 million for the three months ended March 31, 2021 as compared to net investment losses of $29.3 million for the same period in 2020.

Fixed-income securities were $348.5 million at March 31, 2021, with a tax equivalent book yield of 2.5% compared to 2.4% as of March 31, 2020. As of March 31, 2021, the fixed-income portfolio had an average modified duration of 0.9 years and 85% of the securities had remaining time to maturity of five years or less. As of March 31, 2021, 13% of the investment portfolio was invested in equity securities.

Total investments were $402.1 million at March 31, 2021. Cash and cash equivalents, including restricted cash were $287.3 million. Total investments, cash and cash equivalents, and restricted cash were $689.4 million or $37.94 per share.

Pre-Tax Income
Pre-tax income was $11.7 million for the three months ended March 31, 2021, as compared to a pre-tax loss of $69.6 million reported during the same period in 2020. The improvement in pre-tax results for the three months ended March 31, 2021 was predominately driven by the absence of $46.0 million of impairment charges to goodwill and indefinite-lived intangible assets taken during the first quarter of 2020, net investment gains of $5.8 million during the first quarter of 2021 as compared to net investment losses of $29.3 million during the same period in 2020 and favorable prior year loss reserve development of $2.1 million during the first quarter of 2021 as compared to unfavorable prior year loss reserve development of $8.6 million during the same period the prior year.

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

The net combined ratio was 96.1% for the quarter ended March 31, 2021, as compared to 97.6% for the same period during 2020.

Losses and LAE for the quarter ended March 31, 2021 decreased $22.5 million as compared to the same period during 2020 due to improved prior year loss reserve development and lower net premiums earned, partially offset by increases in current accident year loss trends due primarily to the February winter storms. There was $2.1 million of net favorable prior year loss reserve development during the quarter ended March 31, 2021 as compared to net unfavorable prior year loss reserve development of $8.6 million during the same period in 2020. Net catastrophe losses were $5.9 million during the first quarter ended March 31, 2021 as compared to $6.0 million during 2020.

The net loss ratio was 68.0% for the three months ended March 31, 2021 as compared to 75.4% reported during the same period in 2020. Catastrophe losses contributed 5.7 points to the net loss ratio for the three months ended March 31, 2021, as compared to 4.9 points for the same period during 2020. Net favorable prior year loss reserve development reduced the net loss ratio by 2.0 points for the three months ended March 31, 2021, as compared to 6.9 points contributed to the net loss ratio from net unfavorable prior year loss reserve development for the same period during 2020.

The expense ratio was 28.1% for the three months ended March 31, 2021 as compared to 22.2% during the same period in 2020. The Company reported a net combined ratio of 96.1% for the three months ended March 31, 2021 as compared to 97.6% during the same period in 2020.

Net Income (Loss)

Net income was $9.3 million for the three months ended March 31, 2021 as compared to a net loss of $64.3 million for the same period during 2020.

On a diluted basis per share, net income was $0.52 per share for the three months ended March 31, 2021 as compared to a net loss of $3.55 per share for the three months ended March 31, 2020.

Book Value Per Share

Book value per share increased 5% to $9.89 per share as of March 31, 2021 as compared to $9.42 per share as of December 31, 2020.

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 income and operating income per share are calculated by excluding net investment gains and losses and impairment of goodwill and other intangible assets (“Impairments”) from GAAP net income. The Impairments are unusual and infrequent charges for the Company. Management believes that operating income and operating income 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 income and operating income per share. A reconciliation of operating income and operating income per share to the most comparable GAAP financial measures is presented below.

Weighted

Income (Loss)

Less Tax

Net

Average

Diluted

($ in thousands)

Before Tax

Effect

After Tax

Shares Diluted

Per Share

First Quarter 2021

Reported GAAP measures

$

11,700

$

2,355

$

9,345

18,142

$

0.52

Excluded investment (gains)/losses

$

(5,779

)

$

(1,214

)

$

(4,565

)

18,142

$

(0.25

)

Operating income

$

5,921

$

1,141

$

4,780

18,142

$

0.27

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 income

$

5,740

$

1,156

$

4,584

18,123

$

0.25

In February 2020, Hallmark made the strategic decision to exit the contract binding line of the primary automobile business as a result of increasing claim severity and limited opportunity for meaningful rate increases. At that time, the Company began the process of non-renewing policies and placing in-force policies in runoff in accordance with state regulatory guidelines. Management believes that presenting gross premiums written excluding the contract binding line of the primary automobile business provides useful information to investors about the impact of this decision. A reconciliation of GAAP gross premiums written to gross premiums written excluding the contract binding line of the primary automobile business is presented below.

First Quarter

2021

2020

% Change

($ in thousands)

Reported gross premiums written

$

163,018

$

201,589

-19%

Less primary binding commercial auto

$

132

$

18,432

-99%

Gross premiums written excluding

primary binding commercial auto

$

162,886

$

183,157

-11%


About Hallmark

Hallmark 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 markets, underwrites and services commercial and personal insurance in select markets. Hallmark 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:

Chris Kenney
Chief Accounting Officer
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

2021

2020

Investments:

(unaudited)

Debt securities, available-for-sale, at fair value (amortized cost: $344,232 in 2021 and $502,167 in 2020)

$

348,525

$

507,279

Equity securities (cost: $46,847 in 2021 and $26,988 in 2020)

53,621

29,388

Total investments

402,146

536,667

Cash and cash equivalents

281,849

102,580

Restricted cash

5,434

5,728

Ceded unearned premiums

134,206

138,926

Premiums receivable

109,799

120,332

Accounts receivable

4,625

5,967

Receivable for securities

1,382

913

Reinsurance recoverable

494,815

490,231

Deferred policy acquisition costs

16,386

17,840

Intangible assets, net

1,196

1,322

Federal income tax recoverable

23,855

25,642

Deferred federal income taxes, net

8,319

8,724

Prepaid expenses

6,679

2,648

Other assets

26,852

28,013

Total Assets

$

1,517,543

$

1,485,533

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Senior unsecured notes due 2029 (less unamortized debt issuance costs of $819 in 2021 and $844 in 2020)

$

49,180

$

49,156

Subordinated debt securities (less unamortized debt issuance costs of $782 in 2021 and $795 in 2020)

55,920

55,907

Reserves for unpaid losses and loss adjustment expenses

812,272

789,768

Unearned premiums

305,015

320,806

Reinsurance payable

51,673

46,700

Pension liability

1,749

1,859

Payable for securities

10,979

-

Accounts payable and other accrued expenses

51,003

50,415

Total Liabilities

1,337,791

1,314,611

Commitments and contingencies

Stockholders’ equity:

Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2021 and 2020

3,757

3,757

Additional paid-in capital

122,725

122,893

Retained earnings

78,260

68,915

Accumulated other comprehensive income

(229

)

383

Treasury stock (2,701,799 shares in 2021 and 2,730,673 shares in 2020), at cost

(24,761

)

(25,026

)

Total Stockholders Equity

179,752

170,922

Total Liabilities & Stockholders Equity

$

1,517,543

$

1,485,533


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

Three Months Ended

($ in thousands, except per share amounts, unaudited)

March 31,

2021

2020

Gross premiums written

$

163,018

$

201,589

Ceded premiums written

(69,871

)

(75,084

)

Net premiums written

93,147

126,505

Change in unearned premiums

11,071

(2,572

)

Net premiums earned

104,218

123,933

Investment income, net of expenses

3,010

4,458

Investment gains (losses), net

5,779

(29,330

)

Finance charges

1,133

1,644

Commission and fees

260

324

Other income

19

19

Total revenues

114,419

101,048

Losses and loss adjustment expenses

70,903

93,405

Operating expenses

30,441

29,148

Interest expense

1,249

1,468

Impairment of goodwill and other intangible assets

-

45,996

Amortization of intangible assets

126

617

Total expenses

102,719

170,634

Income (loss) before tax

11,700

(69,586

)

Income tax expense (benefit)

2,355

(5,276

)

Net income (loss)

$

9,345

$

(64,310

)

Net income (loss) per share:

Basic

$

0.52

$

(3.55

)

Diluted

$

0.52

$

(3.55

)


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Segment Data

Three Months Ended Mar. 31

Specialty Commercial
Segment

Standard Commercial
Segment

Personal Segment

Corporate

Consolidated

($ in thousands, unaudited)

2021

2020

2021

2020

2021

2020

2021

2020

2021

2020

Gross premiums written

$

113,990

$

149,470

$

29,735

$

26,376

$

19,293

$

25,743

$

-

$

-

$

163,018

$

201,589

Ceded premiums written

(59,554

)

(63,964

)

(10,250

)

(7,463

)

(67

)

(3,657

)

-

-

(69,871

)

(75,084

)

Net premiums written

54,436

85,506

19,485

18,913

19,226

22,086

-

-

93,147

126,505

Change in unearned premiums

15,141

1,466

(2,419

)

(2,495

)

(1,651

)

(1,543

)

-

-

11,071

(2,572

)

Net premiums earned

69,577

86,972

17,066

16,418

17,575

20,543

-

-

104,218

123,933

Total revenues

71,965

92,120

17,688

17,636

18,959

22,323

5,807

(31,031

)

114,419

101,048

Losses and loss adjustment expenses

44,407

60,883

12,091

11,855

14,405

20,667

-

-

70,903

93,405

Pre-tax income (loss)

11,821

16,292

366

716

(1,623

)

(5,655

)

1,136

(80,939

)

11,700

(69,586

)

Net loss ratio (1)

63.8

%

70.0

%

70.8

%

72.2

%

82.0

%

100.6

%

68.0

%

75.4

%

Net expense ratio (1)

24.0

%

17.7

%

31.6

%

32.5

%

30.4

%

28.4

%

28.1

%

22.2

%

Net combined ratio (1)

87.8

%

87.7

%

102.4

%

104.7

%

112.4

%

129.0

%

96.1

%

97.6

%

Net Favorable (Unfavorable) Prior Year Development

1,899

(3,153

)

1,361

(125

)

(1,174

)

(5,281

)

2,086

(8,559

)

(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.

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/91031801-8d9a-498c-aa90-8e5be6b3a0c6