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Hallmark Announces Second Quarter 2021 Results

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Hallmark Financial Services, Inc.

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

DALLAS, Texas, Aug. 12, 2021 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today announced financial results for the second quarter and six months ended June 30, 2021.

Second Quarter

Year-to-Date

2021

2020

2021

2020

$ in millions:

Net Income (Loss)

$

(0.5

)

$

6.7

$

8.9

$

(57.6

)

Operating Income (1)

$

(3.5

)

$

5.1

$

1.3

$

9.7

$ per diluted share:

Net Income (Loss)

$

(0.03

)

$

0.37

$

0.49

$

(3.18

)

Operating Income (1)

$

(0.19

)

$

0.28

$

0.07

$

0.53

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



Highlights:

  • Net loss of $0.5 million, or $0.03 per share, in the second quarter of 2021 as compared to net income of $6.7 million, or $0.37 per share, for the same period of 2020. Year-to-date net income of $8.9 million, or $0.49 per share, as compared to a net loss of $57.6 million, or $3.18 per share, for the same period of 2020.

  • Net combined ratio of 105.7% and 100.8% for the three and six months ended June 30, 2021, compared to 98.4% and 98.0% for the same periods the prior year.

  • Specialty Commercial Segment net combined ratio of 97.2% and 92.3% for the three and six months ended June 30, 2021, compared to 96.9% and 92.3% for the same periods the prior year.

  • Substantial rate increases achieved, particularly in the Specialty Commercial Segment, with increases for this business averaging 12% for the quarter and 13% year-to-date.

  • Gross premiums written for the six months ended June 30, 2021 decreased 14% compared to the same period of the prior year. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for the six months ended June 30, 2021 would have decreased 8% compared to the same period of the prior year. (See “Non-GAAP” Financial Measures below).

  • Net premiums written for the six months ended June 30, 2021 decreased 23% compared to the same period of the prior year. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for the six months ended June 30, 2021 would have decreased 15% compared to the same period of the prior year. (See “Non-GAAP” Financial Measures below).

  • Net catastrophe losses were $3.7 million in the second quarter of 2021, or 3.8 points of the net combined ratio as compared to $6.6 million, or 5.2 points of the net combined ratio for the same period the prior year. Net catastrophe losses were $9.6 million for the first six months of 2021, or 4.8 points of the net combined ratio as compared to $12.6 million, or 5.0 points of the net combined ratio for the same period the prior year.

  • Net investment gains of $3.9 million during the second quarter of 2021, which included $1.1 million of unrealized gains on equity securities, as compared to net investment gains of $2.1 million, which included $2.5 million of unrealized gains on equity and other investment securities, during the same period the prior year.

Second Quarter and Year-to-Date 2021 Financial Review

Second Quarter

Year-to-Date

2021

2020

% Change

2021

2020

% Change

($ in thousands)

Gross premiums written

169,716

183,644

-8

%

332,734

385,233

-14

%

Net premiums written

89,134

108,987

-18

%

182,281

235,492

-23

%

Net premiums earned

98,611

125,596

-21

%

202,829

249,529

-19

%

Investment income, net of expenses

2,353

3,196

-26

%

5,363

7,654

-30

%

Investment gains (losses), net

3,876

2,058

88

%

9,655

(27,272

)

135

%

Net (loss) income

(467

)

6,701

-107

%

8,878

(57,609

)

115

%

Operating (loss) income (1)

(3,529

)

5,075

-170

%

1,251

9,659

-87

%

Net (loss) income per share - basic

$

(0.03

)

$

0.37

-108

%

$

0.49

$

(3.18

)

115

%

Net (loss) income per share - diluted

$

(0.03

)

$

0.37

-108

%

$

0.49

$

(3.18

)

115

%

Operating (loss) income per share - diluted (1)

$

(0.19

)

$

0.28

-168

%

$

0.07

$

0.53

-87

%

Book value per share

$

9.84

$

11.14

-12

%

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


Gross Premiums Written
Gross premiums written were $169.7 million and $332.7 million during the three and six months ended June 30, 2021, representing a decrease of 8% and 14%, from the $183.6 million and $385.2 million in gross premiums written for the same periods in 2020.

Net Premiums Written
Net premiums written were $89.1 million and $182.3 million during the three and six months ended June 30, 2021, representing a decrease of 18% and 23%, from the $109.0 million and $235.5 million in net premiums written for the same periods in 2020.

Net Premiums Earned
Net premiums earned were $98.6 million and $202.8 million for the three and six months ended June 30, 2021, representing a decrease of 21% and 19%, from the $125.6 million and $249.5 million in net premiums earned for the same periods in 2020.

Investments
Net investment income was $2.4 million and $5.4 million during the three and six months ended June 30, 2021, as compared to $3.2 million and $7.7 million during the same periods in 2020. The decline in net investment income was primarily due to lower interest rates compared to the same periods during 2020 and an increase in the proportion of cash and short-term investments held relative to longer maturity investments.

Net investment gains were $3.9 million and $9.7 million for the three and six months ended June 30, 2021, as compared to net investment gains of $2.1 million and net investment losses of $27.3 million, for the same periods in 2020.

Fixed-income securities were $300.7 million as of June 30, 2021, with a tax equivalent book yield of 2.8% compared to 2.2% as of June 30, 2020. As of June 30, 2021, the fixed-income portfolio had an average modified duration of 0.7 years and 79% of the securities had remaining time to maturity of five years or less. As of June 30, 2021, 14% of the investment portfolio was invested in equity securities.

Total investments were $347.7 million as of June 30, 2021. Cash and cash equivalents, including restricted cash were $332.0 million. Total investments, cash and cash equivalents, and restricted cash were $679.7 million or $37.41 per share.

Pre-Tax (Loss) Income
Pre-tax loss was $0.5 million for the three months ended June 30, 2021, as compared to pre-tax income of $5.6 million reported during the same period in 2020. Pre-tax income was $11.2 million for the six months ended June 30, 2021, as compared to a pre-tax loss of $64.0 million for the same period the prior year. The improvement in pre-tax results for the six months ended June 30, 2021 as compared to the same period the prior year was primarily due to the absence of $46.0 million of impairment charges to goodwill and indefinite-lived intangible assets taken during the first quarter of 2020 and a $39.7 million decrease in losses and LAE, partially offset by decreased revenue. The impairment charges during the first quarter of 2020 resulted from our determination that a significant decline in market capitalization below stockholders’ equity indicated the impairment of the goodwill and indefinite-lived intangible assets included in our balance sheet. The decrease in losses and LAE was primarily the result of exiting the contract binding line of the primary automobile business marketed by our Commercial Auto business unit commencing in February 2020, as well as an $18.3 million improvement in unfavorable net prior year loss reserve development. Decreased revenue for the first half of 2021 compared to the same period of the prior year was due primarily to decreased net premiums earned of $46.7 million, lower net investment income of $2.3 million and lower finance charges of $1.0 million, partially offset by $36.9 million higher net investment gains.

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

Losses and LAE for the three and six months ended June 30, 2021 decreased $17.2 million and $39.7 million, as compared to the same periods during 2020 due to improved prior year net loss reserve development, lower net catastrophe losses and lower net premiums earned, partially offset by increases in current accident year non-catastrophe net loss trends. There was $3.1 million and $1.0 million of net unfavorable prior year loss reserve development during the three and six months ended June 30, 2021 as compared to net unfavorable prior year loss reserve development of $10.8 million and $19.3 million during the same periods in 2020. Net catastrophe losses were $3.7 million and $9.6 million during the three and six months ended June 30, 2021 as compared to $6.6 million and $12.6 million, during the same periods of 2020.

The net loss ratio was 78.8% and 73.3% for the three and six months ended June 30, 2021, as compared to 75.5% and 75.5% reported during the same periods in 2020. Catastrophe losses contributed 3.8 points and 4.8 points to the net loss ratio for the three and six months ended June 30, 2021, as compared to 5.2 points and 5.0 points for the same periods during 2020. Net unfavorable prior year loss reserve development contributed 3.2 points and 0.5 points to the net loss ratio for the three and six months ended June 30, 2021, as compared to 8.6 points and 7.8 points contributed to the net loss ratio from net unfavorable prior year loss reserve development for the same periods during 2020.

The expense ratio was 26.9% and 27.5% for the three and six months ended June 30, 2021, as compared to 22.9% and 22.5% during the same periods in 2020. The Company reported net combined ratios of 105.7% and 100.8% for the three and six months ended June 30, 2021, as compared to 98.4% and 98.0% for the same periods during 2020.

Net Income (Loss)

Net loss was $0.5 million and net income was $8.9 million for the three and six months ended June 30, 2021, as compared to net income of $6.7 million and a net loss of $57.6 million for the same periods during 2020.

On a diluted basis per share, net loss was $0.03 per share and net income was $0.49 per share for the three and six months ended June 30, 2021, as compared to net income of $0.37 per share and net loss of $3.18 per share for the same periods in 2020.

Book Value Per Share

Book value per share increased 4% to $9.84 per share as of June 30, 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 loss and operating loss 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 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.

Hallmark Financial Services, Inc. and Subsidiaries

Non-GAAP Financial Measures Reconciliation

Weighted

Average

Income (Loss)

Less Tax

Net

Shares

Diluted

($ in thousands)

Before Tax

Effect

After Tax

Diluted

Per Share

Second Quarter 2021

Reported GAAP measures

$

(532

)

$

(65

)

$

(467

)

18,171

$

(0.03

)

Excluded investment (gains)/losses

$

(3,876

)

$

(814

)

$

(3,062

)

18,171

$

(0.17

)

Operating income

$

(4,408

)

$

(879

)

$

(3,529

)

18,171

$

(0.19

)

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 income

$

3,525

$

(1,550

)

$

5,075

18,141

$

0.28

Year-to-Date 2021

Reported GAAP measures

$

11,168

$

2,290

$

8,878

18,157

$

0.49

Excluded investment (gains)/losses

$

(9,655

)

$

(2,028

)

$

(7,627

)

18,157

$

(0.42

)

Operating income

$

1,513

$

262

$

1,251

18,157

$

0.07

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 income

$

9,265

$

(394

)

$

9,659

18,132

$

0.53

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 and net 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 year-to-date GAAP gross and net premiums written to gross and net premiums written excluding the contract binding line of the primary automobile business is presented below.

YTD Gross Written Premium

YTD Net Written Premium

2021

2020

% Change

2021

2020

% Change

($ in thousands)

Reported written premium

332,734

385,233

-14

%

182,281

235,492

-23

%

Less primary binding commercial auto

226

22,013

-99

%

97

21,077

-100

%

Written premium excluding primary binding commercial auto

332,508

363,220

-8

%

182,184

214,415

-15

%

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 Financial Officer
817.348.1600
www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except par value)

Jun. 30

Dec. 31

ASSETS

2021

2020

Investments:

(unaudited)

Debt securities, available-for-sale, at fair value (amortized cost: $297,066 in 2021 and $502,167 in 2020)

$

300,737

$

507,279

Equity securities (cost: $39,124 in 2021 and $26,988 in 2020)

46,948

29,388

Total investments

347,685

536,667

Cash and cash equivalents

326,558

102,580

Restricted cash

5,474

5,728

Ceded unearned premiums

139,609

138,926

Premiums receivable

105,792

120,332

Accounts receivable

4,524

5,967

Receivable for securities

7,037

913

Reinsurance recoverable

494,473

490,231

Deferred policy acquisition costs

13,291

17,840

Intangible assets, net

1,070

1,322

Federal income tax recoverable

20,025

25,642

Deferred federal income taxes, net

8,190

8,724

Prepaid expenses

5,598

2,648

Other assets

27,368

28,013

Total Assets

$

1,506,694

$

1,485,533

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Senior unsecured notes due 2029 (less unamortized debt issuance costs of $795 in 2021 and $844 in 2020)

$

49,205

$

49,156

Subordinated debt securities (less unamortized debt issuance costs of $769 in 2021 and $795 in 2020)

55,933

55,907

Reserves for unpaid losses and loss adjustment expenses

810,749

789,768

Unearned premiums

300,941

320,806

Reinsurance payable

51,921

46,700

Pension liability

1,640

1,859

Payable for securities

5,774

-

Accounts payable and other accrued expenses

51,647

50,415

Total Liabilities

1,327,810

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

122,782

122,893

Retained earnings

77,793

68,915

Accumulated other comprehensive income

(687

)

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

178,884

170,922

Total Liabilities & Stockholders Equity

$

1,506,694

$

1,485,533


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

Three Months Ended

Six Months Ended

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

June 30,

June 30,

2021

2020

2021

2020

Gross premiums written

$

169,716

$

183,644

$

332,734

$

385,233

Ceded premiums written

(80,582

)

(74,657

)

(150,453

)

(149,741

)

Net premiums written

89,134

108,987

182,281

235,492

Change in unearned premiums

9,477

16,609

20,548

14,037

Net premiums earned

98,611

125,596

202,829

249,529

Investment income, net of expenses

2,353

3,196

5,363

7,654

Investment gains (losses), net

3,876

2,058

9,655

(27,272

)

Finance charges

1,109

1,528

2,242

3,172

Commission and fees

250

260

510

584

Other income

16

14

35

33

Total revenues

106,215

132,652

220,634

233,700

Losses and loss adjustment expenses

77,719

94,873

148,622

188,278

Operating expenses

27,653

30,259

58,094

59,407

Interest expense

1,249

1,320

2,498

2,788

Impairment of goodwill and other intangible assets

0

0

0

45,996

Amortization of intangible assets

126

617

252

1,234

Total expenses

106,747

127,069

209,466

297,703

(Loss) income before tax

(532

)

5,583

11,168

(64,003

)

Income tax (benefit) expense

(65

)

(1,118

)

2,290

(6,394

)

Net (loss) income

$

(467

)

$

6,701

$

8,878

$

(57,609

)

Net (loss) income per share:

Basic

$

(0.03

)

$

0.37

$

0.49

$

(3.18

)

Diluted

$

(0.03

)

$

0.37

$

0.49

$

(3.18

)


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Segment Data

Three Months Ended Jun. 30

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

$

126,190

$

138,627

$

27,712

$

23,842

$

15,814

$

21,175

$

-

$

-

$

169,716

$

183,644

Ceded premiums written

(70,157

)

(64,640

)

(10,330

)

(7,037

)

(95

)

(2,980

)

-

-

(80,582

)

(74,657

)

Net premiums written

56,033

73,987

17,382

16,805

15,719

18,195

-

-

89,134

108,987

Change in unearned premiums

8,316

14,350

(835

)

(404

)

1,996

2,663

-

-

9,477

16,609

Net premiums earned

64,349

88,337

16,547

16,401

17,715

20,858

-

-

98,611

125,596

Total revenues

66,918

91,124

17,240

17,096

19,115

22,464

2,943

1,968

106,216

132,652

Losses and loss adjustment expenses

47,342

69,262

14,138

10,775

16,239

14,836

-

-

77,719

94,873

Pre-tax income (loss)

5,327

5,882

(1,976

)

802

(2,766

)

1,884

(1,117

)

(2,985

)

(532

)

5,583

Net loss ratio (1)

73.6

%

78.4

%

85.4

%

65.7

%

91.7

%

71.1

%

78.8

%

75.5

%

Net expense ratio (1)

23.6

%

18.5

%

31.7

%

34.4

%

27.2

%

21.0

%

26.9

%

22.9

%

Net combined ratio (1)

97.2

%

96.9

%

117.1

%

100.1

%

118.9

%

92.1

%

105.7

%

98.4

%

Favorable (Unfavorable) Prior Year Development

(1,127

)

(9,315

)

(18

)

(794

)

(1,985

)

(680

)

-

-

(3,130

)

(10,789

)


(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 Segment

Standard Commercial Segment

Personal Segment

Corporate

Consolidated

($ in thousands, unaudited)

2021

2020

2021

2020

2021

2020

2021

2020

2021

2020

Gross premiums written

$

240,180

$

288,097

$

57,447

$

50,218

$

35,107

$

46,918

$

-

$

-

$

332,734

$

385,233

Ceded premiums written

(129,711

)

(128,604

)

(20,580

)

(14,500

)

(162

)

(6,637

)

-

-

(150,453

)

(149,741

)

Net premiums written

110,469

159,493

36,867

35,718

34,945

40,281

-

-

182,281

235,492

Change in unearned premiums

23,457

15,816

(3,254

)

(2,899

)

345

1,120

-

-

20,548

14,037

Net premiums earned

133,926

175,309

33,613

32,819

35,290

41,401

-

-

202,829

249,529

Total revenues

138,883

183,244

34,928

34,732

38,074

44,787

8,750

(29,063

)

220,635

233,700

Losses and loss adjustment expenses

91,749

130,145

26,229

22,630

30,644

35,503

-

-

148,622

188,278

Pre-tax income (loss)

17,148

22,174

(1,610

)

1,518

(4,389

)

(3,771

)

19

(83,924

)

11,168

(64,003

)

Net loss ratio (1)

68.5

%

74.2

%

78.0

%

69.0

%

86.8

%

85.8

%

73.3

%

75.5

%

Net expense ratio (1)

23.8

%

18.1

%

31.7

%

32.9

%

28.8

%

24.7

%

27.5

%

22.5

%

Net combined ratio (1)

92.3

%

92.3

%

109.7

%

101.9

%

115.6

%

110.5

%

100.8

%

98.0

%

Net Favorable (Unfavorable) Prior Year Development

772

(12,468

)

1,343

(919

)

(3,159

)

(5,961

)

(1,044

)

(19,348

)


(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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