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Hallmark Announces Third Quarter 2021 Results

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Hallmark Financial Services, Inc.

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

DALLAS, Nov. 15, 2021 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today announced financial results for the third quarter and nine months ended September 30, 2021.

Highlights:

  • Pre-tax income was $4.4 million for the three months ended September 30, 2021, as compared to pre-tax loss of $37.8 million reported during the same period in 2020. Pre-tax income was $14.6 million for the nine months ended September 30, 2021, as compared to a pre-tax loss of $102.5 million for the same period the prior year.

  • Net income was $3.4 million, or $0.19 per diluted share, in the third quarter of 2021 as compared to net loss of $28.4 million, or $1.56 per diluted share, for the same period of 2020. Year-to-date net income was $11.6 million, or $0.64 per diluted share, as compared to a net loss of $86.5 million, or $4.77 per diluted share, for the same period of 2020.

  • Net combined ratio was 95.9% and 99.6% for the three and nine months ended September 30, 2021, compared to 132.7% and 109.4% for the same periods the prior year.

  • Gross premiums written for the nine months ended September 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 nine months ended September 30, 2021 would have decreased 10% compared to the same period of the prior year. (See “Non-GAAP” Financial Measures below).

  • Net premiums written for the nine months ended September 30, 2021 decreased 21% compared to the same period of the prior year. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for the nine months ended September 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 $2.8 million in the third quarter of 2021, or 3.0 points of the net combined ratio as compared to $9.6 million, or 8.2 points of the net combined ratio for the same period the prior year. Net catastrophe losses were $12.4 million for the first nine months of 2021, or 4.2 points of the net combined ratio as compared to $22.2 million, or 6.1 points of the net combined ratio for the same period the prior year.

  • Net investment gain was $9.1 million for year to date 2021, which included $3.8 million of unrealized gains on equity securities, as compared to net investment loss of $27.9 million, which included $31.8 million of unrealized losses on equity and other investment securities, during the same period the prior year.

Third Quarter and Year-to-Date 2021 Financial Review

Third Quarter

Year-to-Date

*As Revised

*As Revised

2021

2020

% Change

2021

2020

% Change

($ in thousands)

Gross premiums written

$

169,104

$

196,464

-14

%

$

501,838

$

581,697

-14

%

Net premiums written

$

90,964

$

113,056

-20

%

$

269,947

$

342,430

-21

%

Net premiums earned

$

94,347

$

116,720

-19

%

$

292,783

$

362,017

-19

%

Investment income, net of expenses

$

2,213

$

2,660

-17

%

$

7,576

$

10,314

-27

%

Other-than-temporary impairment (1)

$

-

$

(1,692

)

nm

$

-

$

(1,692

)

nm

Net income (loss)

$

3,445

$

(28,388

)

112

%

$

11,571

$

(86,541

)

113

%

Operating income (loss) (2)

$

3,866

$

(10,750

)

136

%

$

4,365

$

(1,635

)

367

%

Net income (loss) per share - basic

$

0.19

$

(1.56

)

112

%

$

0.64

$

(4.77

)

113

%

Net income (loss) per share - diluted

$

0.19

$

(1.56

)

112

%

$

0.64

$

(4.77

)

113

%

Operating income (loss) per share - diluted (2)

$

0.21

$

(0.59

)

136

%

$

0.24

$

(0.09

)

367

%

Book value per share

$

9.78

$

9.66

1.3

%

* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

(1) Other-than-temporary impairment is included in investment gains (losses), net

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

Gross Premiums Written
Gross premiums written were $169.1 million and $501.8 million during the three and nine months ended September 30, 2021, representing a decrease of 14% and 14%, from the $196.5 million and $581.7 million in gross premiums written for the same periods in 2020.

Net Premiums Written
Net premiums written were $91.0 million and $269.9 million during the three and nine months ended September 30, 2021, representing a decrease of 20% and 21%, from the $113.1 million and $342.4 million in net premiums written for the same periods in 2020.

Net Premiums Earned
Net premiums earned were $94.3 million and $292.8 million for the three and nine months ended September 30, 2021, representing a decrease of 19% and 19%, from the $116.7 million and $362.0 million in net premiums earned for the same periods in 2020.

Investments
Net investment income was $2.2 million and $7.6 million during the three and nine months ended September 30, 2021, as compared to $2.7 million and $10.3 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 loss was $0.5 million for the three months and net gain of $9.1 million for the nine months ended September 30, 2021, as compared to net investment losses of $0.6 million and $27.9 million, for the same periods in 2020.

Fixed-income securities were $317.9 million as of September 30, 2021, with a tax equivalent book yield of 2.4% compared to 2.7% as of September 30, 2020. As of September 30, 2021, the fixed-income portfolio had an average modified duration of 0.7 years and 76% of the securities had remaining time to maturity of five years or less. As of September 30, 2021, 12% of the total investment portfolio was invested in equity securities.

Total investments were $363.3 million as of September 30, 2021. Cash and cash equivalents, including restricted cash were $329.6 million. Total investments, cash and cash equivalents, and restricted cash were $692.9 million or $38.13 per share.

Pre-Tax Income (Loss)
Pre-tax income was $4.4 million for the three months ended September 30, 2021, as compared to pre-tax loss of $37.8 million reported during the same period in 2020. Pre-tax income was $14.6 million for the nine months ended September 30, 2021, as compared to a pre-tax loss of $102.5 million for the same period the prior year. The improvement in pre-tax results for the nine months ended September 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, a $98.6 million decrease in losses and LAE and a $6.9 million decrease in operating expenses and a $1.4 million decrease in amortization of intangible assets, 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.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratios
Losses and LAE for the three and nine months ended September 30, 2021 decreased $58.8 million and $98.6 million, as compared to the same periods during 2020, primarily 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 $1.5 million and $2.6 million of net unfavorable prior year loss reserve development during the three and nine months ended September 30, 2021 as compared to net unfavorable prior year loss reserve development of $13.9 million and $33.3 million during the same periods in 2020. Net catastrophe losses were $2.8 million and $12.4 million during the three and nine months ended September 30, 2021 as compared to $9.6 million and $22.2 million, during the same periods of 2020.

The net loss ratio was 67.5% and 71.6% for the three and nine months ended September 30, 2021, as compared to 105.0% and 85.2% reported during the same periods in 2020. Catastrophe losses contributed 3.0 points and 4.2 points to the net loss ratio for the three and nine months ended September 30, 2021, as compared to 8.2 points and 6.1 points for the same periods during 2020. Net unfavorable prior year loss reserve development contributed 1.6 points and 0.9 points to the net loss ratio for the three and nine months ended September 30, 2021, as compared to 12.0 points and 9.2 points for the same periods during 2020.

The expense ratio was 28.4% and 28.0% for the three and nine months ended September 30, 2021, as compared to 27.7% and 24.2% during the same periods in 2020. The Company reported net combined ratios of 95.9% and 99.6% for the three and nine months ended September 30, 2021, as compared to 132.7% and 109.4% for the same periods during 2020.

Net Income (Loss)
Net income was $3.4 million and $11.6 million for the three and nine months ended September 30, 2021, as compared to net losses of $28.4 million and $86.5 million for the same periods during 2020.

On a diluted basis per share, net income was $0.19 per share and $0.64 per share for the three and nine months ended September 30, 2021, as compared to net loss of $1.56 per share and $4.77 per share for the same periods in 2020.

Book Value Per Share
Book value per share increased 6% to $9.78 per share as of September 30, 2021 as compared to $9.24 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.

Weighted

Income (Loss)

Less Tax

Net

Average

Diluted

($ in thousands)

Before Tax

Effect

After Tax

Shares Diluted

Per Share

Third Quarter 2021

Reported GAAP measures

$

4,391

$

946

$

3,445

18,172

$

0.19

Excluded investment (gains)/losses

$

533

$

112

$

421

18,172

$

0.02

Operating income

$

4,924

$

1,058

$

3,866

18,172

$

0.21

Third Quarter 2020 (*As Revised)

Reported GAAP measures

$

(37,792

)

$

(9,404

)

$

(28,388

)

18,142

$

(1.56

)

Excluded loss portfolio transfer cost included in Losses and LAE

$

21,700

$

4,557

$

17,143

18,142

$

0.94

Excluded investment (gains)/losses

$

627

$

132

$

495

18,142

$

0.03

Operating loss

$

(15,465

)

$

(4,715

)

$

(10,750

)

18,142

$

(0.59

)

Year-to-Date 2021

Reported GAAP measures

$

14,608

$

3,037

$

11,571

18,162

$

0.64

Excluded investment (gains)/losses

$

(9,122

)

$

(1,916

)

$

(7,206

)

18,162

$

(0.40

)

Operating income

$

5,486

$

1,121

$

4,365

18,162

$

0.24

Year-to-Date 2020 (*As Revised)

Reported GAAP measures

$

(102,484

)

$

(15,943

)

$

(86,541

)

18,136

$

(4.77

)

Excluded impairment of goodwill and other intangibles

$

45,996

$

273

$

45,723

18,136

$

2.52

Excluded loss portfolio transfer cost included in Losses and LAE

$

21,700

$

4,557

$

17,143

18,136

$

0.95

Excluded investment (gains)/losses

$

27,899

$

5,859

$

22,040

18,136

$

1.22

Operating loss

$

(6,889

)

$

(5,254

)

$

(1,635

)

18,136

$

(0.09

)

* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

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

$

501,838

$

581,697

-14

%

$

269,947

$

342,430

-21

%

Less primary binding commercial auto

$

218

$

24,798

-99

%

$

48

$

23,250

-100

%

Written premium excluding primary binding commercial auto

$

501,620

$

556,899

-10

%

$

269,899

$

319,180

-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)

Sep. 30

Dec. 31

ASSETS

2021

2020

Investments:

(unaudited)

* As Revised

Debt securities, available-for-sale, at fair value (amortized cost: $315,029 in 2021 and $502,167 in 2020)

$

317,916

$

507,279

Equity securities (cost: $39,129 in 2021 and $26,988 in 2020)

45,362

29,388

Total investments

363,278

536,667

Cash and cash equivalents

325,833

102,580

Restricted cash

3,793

5,728

Ceded unearned premiums

145,858

143,446

Premiums receivable

85,177

120,332

Accounts receivable

6,595

5,967

Receivable for securities

5,613

913

Reinsurance recoverable

515,088

497,846

Deferred policy acquisition costs

10,494

17,840

Intangible assets, net

944

1,322

Federal income tax recoverable

17,347

24,691

Deferred federal income taxes, net

9,326

8,724

Prepaid expenses

4,683

2,648

Other assets

26,179

28,013

Total Assets

$

1,520,208

$

1,496,717

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Senior unsecured notes due 2029 (less unamortized debt issuance costs of $770 in 2021 and $844 in 2020)

$

49,230

$

49,156

Subordinated debt securities (less unamortized debt issuance costs of $757 in 2021 and $795 in 2020)

55,946

55,907

Reserves for unpaid losses and loss adjustment expenses

815,381

789,768

Unearned premiums

300,383

320,806

Reinsurance payable

71,183

61,100

Pension liability

1,530

1,859

Payable for securities

1,047

-

Accounts payable and other accrued expenses

47,728

50,415

Total Liabilities

1,342,428

1,329,011

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

122,773

122,893

Retained earnings

77,270

65,699

Accumulated other comprehensive income

(1,272

)

383

Treasury stock (2,700,364 shares in 2021 and 2,730,673 shares in 2020), at cost

(24,748

)

(25,026

)

Total Stockholders Equity

177,780

167,706

Total Liabilities & Stockholders Equity

$

1,520,208

$

1,496,717

*All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

Three Months Ended

Nine Months Ended

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

September 30,

September 30,

*As Revised

*As Revised

2021

2020

2021

2020

Gross premiums written

$

169,104

$

196,464

$

501,838

$

581,697

Ceded premiums written

(78,140

)

(83,408

)

(231,891

)

(239,267

)

Net premiums written

90,964

113,056

269,947

342,430

Change in unearned premiums

3,383

3,664

22,836

19,587

Net premiums earned

94,347

116,720

292,783

362,017

Investment income, net of expenses

2,213

2,660

7,576

10,314

Investment (losses) gains, net

(533

)

(627

)

9,122

(27,899

)

Finance charges

1,076

1,316

3,318

4,488

Commission and fees

232

209

742

793

Other income

15

15

50

48

Total revenues

97,350

120,293

313,591

349,761

Losses and loss adjustment expenses

63,706

122,555

209,674

308,278

Operating expenses

27,882

33,640

85,188

92,059

Interest expense

1,245

1,273

3,743

4,061

Impairment of goodwill and other intangible assets

0

0

0

45,996

Amortization of intangible assets

126

617

378

1,851

Total expenses

92,959

158,085

298,983

452,245

Income (loss) before tax

4,391

(37,792

)

14,608

(102,484

)

Income tax expense (benefit)

946

(9,404

)

3,037

(15,943

)

Net (loss) income

$

3,445

$

(28,388

)

$

11,571

$

(86,541

)

Net (loss) income per share:

Basic

$

0.19

$

(1.56

)

$

0.64

$

(4.77

)

Diluted

$

0.19

$

(1.56

)

$

0.64

$

(4.77

)

* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Segment Data

Three Months Ended Sep. 30

Specialty Commercial
Segment

Standard Commercial
Segment

Personal Segment

Corporate

Consolidated

* As
Revised

* As
Revised

($ in thousands, unaudited)

2021

2020

2021

2020

2021

2020

2021

2020

2021

2020

Gross premiums written

$

126,716

$

150,016

$

24,935

$

24,726

$

17,453

$

21,722

$

-

$

-

$

169,104

$

196,464

Ceded premiums written

(69,424

)

(72,977

)

(8,644

)

(7,270

)

(72

)

(3,161

)

-

-

(78,140

)

(83,408

)

Net premiums written

57,292

77,039

16,291

17,456

17,381

18,561

-

-

90,964

113,056

Change in unearned premiums

2,623

3,979

1,177

(744

)

(417

)

429

-

-

3,383

3,664

Net premiums earned

59,915

81,018

17,468

16,712

16,964

18,990

-

-

94,347

116,720

Total revenues

62,493

83,749

18,156

17,398

18,316

20,513

(1,616

)

(1,367

)

97,349

120,293

Losses and loss adjustment expenses

36,560

92,625

10,411

14,683

16,735

15,247

-

-

63,706

122,555

Pre-tax income (loss)

12,620

(27,237

)

1,957

(1,672

)

(3,887

)

(2,065

)

(6,299

)

(6,818

)

4,391

(37,792

)

Net loss ratio (1)

61.0

%

114.3

%

59.6

%

87.9

%

98.7

%

80.3

%

67.5

%

105.0

%

Net expense ratio (1)

22.0

%

22.2

%

32.9

%

26.1

%

26.1

%

32.0

%

28.4

%

27.7

%

Net combined ratio (1)

83.0

%

136.5

%

92.5

%

114.0

%

124.8

%

112.3

%

95.9

%

132.7

%

Net (Unfavorable) Favorable Prior Year Development

(1,305

)

(11,493

)

993

(1,431

)

(1,197

)

(987

)

(1,509

)

(13,911

)

(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.

* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Segment Data

Nine Months Ended Sep. 30

Specialty Commercial
Segment

Standard Commercial
Segment

Personal Segment

Corporate

Consolidated

* As
Revised

* As
Revised

($ in thousands, unaudited)

2021

2020

2021

2020

2021

2020

2021

2020

2021

2020

Gross premiums written

$

366,896

$

438,113

$

82,382

$

74,944

$

52,560

$

68,640

$

-

$

-

$

501,838

$

581,697

Ceded premiums written

(202,433

)

(207,699

)

(29,224

)

(21,770

)

(234

)

(9,798

)

-

-

(231,891

)

(239,267

)

Net premiums written

164,463

230,414

53,158

53,174

52,326

58,842

-

-

269,947

342,430

Change in unearned premiums

24,985

21,681

(2,077

)

(3,643

)

(72

)

1,549

-

-

22,836

19,587

Net premiums earned

189,448

252,095

51,081

49,531

52,254

60,391

-

-

292,783

362,017

Total revenues

196,982

262,761

53,084

52,130

56,390

65,300

7,134

(30,430

)

313,590

349,761

Losses and loss adjustment expenses

125,655

220,215

36,640

37,313

47,379

50,750

-

-

209,674

308,278

Pre-tax income (loss)

28,816

(5,752

)

347

(154

)

(8,275

)

(5,836

)

(6,280

)

(90,742

)

14,608

(102,484

)

Net loss ratio (1)

66.3

%

87.4

%

71.7

%

75.3

%

90.7

%

84.0

%

71.6

%

85.2

%

Net expense ratio (1)

23.4

%

19.3

%

32.1

%

30.6

%

27.9

%

27.0

%

28.0

%

24.2

%

Net combined ratio (1)

89.7

%

106.7

%

103.8

%

105.9

%

118.6

%

111.0

%

99.6

%

109.4

%

Net (Unfavorable) Favorable Prior Year Development

(533

)

(23,961

)

2,336

(2,350

)

(4,356

)

(6,948

)

(2,553

)

(33,259

)

(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.

* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

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