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Hallmark Financial Announces Second Quarter 2020 Results

·21 min read

Hallmark Yahoo Photo

Hallmark Yahoo Photo
Hallmark Yahoo Photo
Hallmark Yahoo Photo

DALLAS, Aug. 10, 2020 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the second quarter and six months ended June 30, 2020.


Second Quarter

Year-to-Date

2020

2019

2020

2019

$ in millions (unaudited):

Net Income (Loss)

$

6.7

$

13.0

$

(57.6

)

$

28.1

Operating Earnings (1)

$

5.1

$

7.6

$

9.7

$

13.2

$ per diluted share:

Net Income (Loss)

$

0.37

$

0.71

$

(3.18

)

$

1.54

Operating Earnings (1)

$

0.28

$

0.42

$

0.53

$

0.73

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

Second Quarter 2020 Highlights (all comparisons to same prior year period):

  • Hallmark Financial reported a net combined ratio of 98.4% as compared to 94.5% for the second quarter of 2019. During the first quarter of 2020, the Company announced its decision to exit the Binding Primary Auto business. The second quarter net combined ratio was negatively impacted by 2.6 points from this discontinued line of business.

  • Hallmark Financial saw continued momentum on rate increases, as rates were up an average of 18% for all lines and 23% for the Specialty Commercial Segment.

  • Gross premiums written decreased 16% to $183.6 million

  • Net premiums written decreased 12% to $109.0 million

  • Net premiums earned increased 18% to $125.6 million

  • Net income of $6.7 million, or $0.37 per diluted share, compared to net income of $13.0 million, or $0.71 per diluted share

  • Operating earnings of $5.1 million, or $0.28 per diluted share, compared to $7.6 million, or $0.42 per diluted share (see “Non-GAAP Financial Measures” below)

  • Net investment gains of $2.1 million compared to net investment gains of $6.8 million

  • Net catastrophe losses of $6.6 million, inclusive of $3.7 million net losses for COVID-19 claims, contributed 5.2 points to the net combined ratio compared to $2.0 million contributing 1.9 points

Year-to-Date 2020 Highlights (all comparisons to same prior year period):

  • Hallmark Financial reported a net combined ratio of 98.0% as compared to 95.4% for the first six months of 2019. During the first quarter of 2020, the Company announced its decision to exit the Binding Primary Auto business. The year-to-date combined ratio was negatively impacted by 5.0 points from this discontinued line of business.

  • Hallmark Financial saw continued momentum on rate increases, as rates were up an average of 15% for all lines and 19% for the Specialty Commercial Segment.

  • Gross premiums written decreased 5% to $385.2 million

  • Net premiums written decreased 2% to $235.5 million

  • Net premiums earned increased 21% to $249.5 million

  • Net loss of $57.6 million, or $3.18 per diluted share, compared to net income of $28.1 million, or $1.54 per diluted share

  • Operating earnings of $9.7 million, or $0.53 per diluted share, compared to $13.2 million, or $0.73 per diluted share (see “Non-GAAP Financial Measures” below)

  • Net investment losses of ($27.3) million compared to net investment gains of $18.8 million

  • Net catastrophe losses of $12.6 million, inclusive of $5.0 million net losses for COVID-19 claims, contributed 5.0 points to the net combined ratio compared to $4.0 million contributing 2.0 points

  • In connection with its normal process for evaluating impairment triggering events during the first quarter of 2020, the Company determined that a significant decline in its market capitalization below its stockholders’ equity indicated the impairment of the goodwill and indefinite-lived intangible assets included in its balance sheet. As a result, the Company took a $44.7 million charge to goodwill and a $1.3 million charge to indefinite-lived assets as of March 31, 2020.

Naveen Anand, President and Chief Executive Officer, commented, “While the Company has had numerous challenges to overcome this year, through the efforts of our employees, board of directors, and business partners, we have worked to onboard a new auditor, regain Nasdaq compliance, and timely file our second quarter financial results. It is no small feat that this was all accomplished in the midst of the COVID-19 challenges, where the Company transitioned quickly and effectively to become an almost entirely remote workforce. It is quite remarkable what our employees have been able to accomplish.”

“Our exit from the Binding Primary Auto business, following growing severity in claims from prior years, combined with our efforts to secure reinsurance on the prior year reserves associated with this business, will serve to limit the Company’s future exposure and reduce the volatility associated with a book of business that has been responsible for the vast majority of the Company’s net unfavorable prior year reserve development over the past 5 years,” continued Mr. Anand.

“Additionally, while we have reduced premium targets in certain lines of business, we continue to capitalize on favorable market opportunities that have continued to accelerate throughout the current year. While seeking to reduce exposure through limits deployment and limiting terms and conditions, we also experienced continued momentum on rate increases, with rates up an average of 18% for all lines and 23% for the Specialty Commercial Segment in the second quarter of 2020 compared to last year. Excluding the Binding Primary Auto business presently in runoff, gross premiums declined by 3.4% in the quarter and increased by 5.7% on a year-to-date basis compared to 2019,” said Mr. Anand.

Second Quarter

Year-to-Date

2020

2019

% Change

2020

2019

% Change

($ in thousands, unaudited)

Gross premiums written

183,644

218,236

-16

%

385,233

405,552

-5

%

Net premiums written

108,987

123,843

-12

%

235,492

241,246

-2

%

Net premiums earned

125,596

106,499

18

%

249,529

205,529

21

%

Investment income, net of expenses

3,196

5,412

-41

%

7,654

10,523

-27

%

Investment gains (losses), net

2,058

6,817

-70

%

(27,272

)

18,754

-245

%

Net income (loss)

6,701

13,029

-49

%

(57,609

)

28,054

-305

%

Operating earnings (loss)(1)

5,075

7,644

-34

%

9,659

13,238

-27

%

Net income (loss) per share - basic

$

0.37

$

0.72

-49

%

$

(3.18

)

$

1.55

-305

%

Net income (loss) per share - diluted

$

0.37

$

0.71

-48

%

$

(3.18

)

$

1.54

-306

%

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

$

0.28

$

0.42

-33

%

$

0.53

$

0.73

-27

%

Book value per share

$

11.14

$

15.98

-30

%

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

Second Quarter and Year-to-Date 2020 Financial Review

Gross Premiums Written
During the three and six months ended June 30, 2020, Hallmark Financial’s gross premiums written were $183.6 million and $385.2 million, respectively, representing a decrease of 16% and 5%, respectively, from the $218.2 million and $405.6 million in gross premiums written for the same periods in 2019.

Net Premiums Written
During the three and six months ended June 30, 2020, Hallmark Financial’s net premiums written were $109.0 million and $235.5 million, respectively, representing a decrease of 12% and 2%, respectively, from the $123.8 million and $241.2 million in net premiums written for the same periods of 2019.

Net Premiums Earned
Hallmark Financial’s net premiums earned were $125.6 million and $249.5 million for the three and six months ended June 30, 2020, respectively, representing a 18% and 21% increase, respectively, from the $106.5 million and $205.5 million in net premiums earned for the same periods in 2019.

Investments
During the three and six months ended June 30, 2020, net investment income was $3.2 million and $7.7 million, respectively, as compared to $5.4 million and $10.5 million during the same periods in 2019. Net investment gains were $2.1 million for the three months ended June 30, 2020 as compared to net investment gains of $6.8 million for the same period the prior year. Net investment losses were $27.3 million for the six months ended June 30, 2020 as compared to net investment gains of $18.8 million for the same period the prior year.

The declines in net investment income were primarily due to lower interest rates in the first half of 2020 compared to the prior year and an increase in the proportion of short-term investments held relative to longer maturity investments. The net investment losses in the first half of 2020 were primarily due to an overall reduction of investment in equity securities in the first quarter of 2020 during the historic market declines associated with the novel coronavirus (COVID-19) pandemic.

At June 30, 2020 fixed-income securities were $553.3 million, with a tax equivalent book yield of 2.2% compared to 3.6% as of June 30, 2019. As of June 30, 2020, the fixed-income portfolio had an average modified duration of 0.9 years and 90% of the securities had remaining time to maturity of five years or less. As of June 30, 2020, 3% of the investment portfolio was invested in equity securities.

At June 30, 2020, total investments were $571.6 million. Cash and cash equivalents, including restricted cash were $128.5 million. Total investments, cash and cash equivalents, and restricted cash were $700.0 million or $38.59 per share.

Pre-Tax Income
Hallmark Financial had pre-tax income of $5.6 million for the three months ended June 30, 2020, as compared to pre-tax income of $16.5 million reported during the same period in 2019. Hallmark Financial had a pre-tax loss of $64.0 million for the six months ended June 30, 2020, as compared to pre-tax income of $35.4 million reported during the same period in 2019.

The decline in pre-tax results for the three months ended June 30, 2020 was predominately driven by adverse prior year net loss reserve development of $10.8 million as compared to $1.5 million for the same period the prior year, as well as the $4.8 million decline in net investment gains during the quarter as compared to the second quarter of 2019.

The decline in pre-tax results for the six months ended June 30, 2020 was predominately driven by the impairment of goodwill and other intangible assets of $46.0 million, net investment losses of $27.3 million as compared to net investment gains of $18.8 million reported during the same period in 2019 and unfavorable prior year net loss reserve development of $19.3 million as compared to $1.4 million reported for the same period the prior year.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratios
Losses and LAE for the three and six months ended June 30, 2020 increased $21.6 million and $45.0 million, respectively, as compared to the prior year periods due primarily to increased net premiums earned, as well as unfavorable net prior year reserve development. Hallmark Financial reported $10.8 million and $19.3 million, respectively, of net unfavorable prior year loss reserve development during the three and six months ended June 30, 2020 as compared to net unfavorable prior year loss reserve development of $1.5 million and $1.4 million, respectively, during the same periods the prior year.

Hallmark Financial had a net loss ratio of 75.5% for both the three and six months ended June 30, 2020 as compared to 68.8% and 69.7%, respectively, reported during the same periods in 2019. Catastrophe losses contributed 5.2 points and 5.0 points, respectively, to the net loss ratio for the three and six months ended June 30, 2020, as compared to 1.9 points and 2.0 points, respectively, for the same periods of the prior year. Included in the 2020 net catastrophe losses are reserves for COVID-19 claims that contributed 3.0 points and 2.0 points, respectively, to the total net loss ratio for the three and six months ended June 30, 2020.

The expense ratio was 22.9% and 22.5%, respectively, for the three and six months ended June 30, 2020 as compared to 25.7% and 25.7%, respectively, reported during the same periods in 2019. The Company reported a net combined ratio of 98.4% and 98.0%, respectively, for the three and six months ended June 30, 2020 as compared to 94.5% and 95.4%, respectively, during the same periods in 2019.

Net Income
Hallmark Financial reported net income of $6.7 million and a net loss of $57.6 million, respectively, for the three and six months ended June 30, 2020 as compared to net income of $13.0 million and $28.1 million for the three and six months ended June 30, 2019, respectively.

On a diluted basis per share, the Company reported net income of $0.37 per share and a net loss of $3.18 per share, respectively, for the three and six months ended June 30, 2020 as compared to net income of $0.71 per share and $1.54 per share, respectively, for the three and six months ended June 30, 2019, respectively.

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 earnings and operating earnings per share are calculated by excluding net investment gains and losses and impairment of goodwill and other intangible assets from GAAP net income. 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.

($ in thousands)

Income
Before Tax

Less Tax
Effect

Net
After Tax

Weighted
Average
Shares Diluted

Diluted
Per Share

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 earnings

$

3,525

$

(1,550

)

$

5,075

18,141

$

0.28

Second Quarter 2019

Reported GAAP measures

$

16,484

$

3,455

$

13,029

18,251

$

0.71

Excluded investment (gains)/losses

$

(6,817

)

$

(1,432

)

$

(5,385

)

18,251

$

(0.30

)

Operating earnings

$

9,667

$

2,023

$

7,644

18,251

$

0.42

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 earnings

$

9,265

$

(394

)

$

9,659

18,132

$

0.53

Year-to-Date 2019

Reported GAAP measures

$

35,402

$

7,348

$

28,054

18,250

$

1.54

Excluded investment (gains)/losses

$

(18,754

)

$

(3,938

)

$

(14,816

)

18,250

$

(0.81

)

Operating earnings

$

16,648

$

3,410

$

13,238

18,250

$

0.73

About Hallmark Financial

Hallmark Financial 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 and offices in Dallas/Fort Worth, San Antonio, Chicago, Jersey City and Atlanta, Hallmark Financial markets, underwrites and services commercial and personal insurance in select markets. Hallmark Financial 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:
Mr. David Webb, Senior Vice President of Corporate Development at 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

2020

2019

Investments:

(unaudited)

Debt securities, available-for-sale, at fair value (amortized cost: $552,266 in 2020 and $569,498 in 2019)

$

553,322

$

574,279

Equity securities (cost: $21,249 in 2020 and $71,895 in 2019)

17,949

99,215

Other investment (cost: $3,763 in 2020 and $3,763 in 2019)

295

2,169

Total investments

571,566

675,663

Cash and cash equivalents

126,619

53,336

Restricted cash

1,858

1,612

Ceded unearned premiums

144,169

164,221

Premiums receivable

128,924

148,288

Accounts receivable

5,046

4,286

Receivable for securities

1,304

12,581

Reinsurance recoverable

377,988

315,466

Deferred policy acquisition costs

23,110

22,994

Goodwill

-

44,695

Intangible assets, net

2,556

5,087

Federal income tax recoverable

9,258

8,995

Deferred federal income taxes, net

9,031

2,185

Prepaid expenses

3,654

2,603

Other assets

29,313

33,262

Total Assets

$

1,434,396

$

1,495,274

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Senior unsecured notes due 2029 (less unamortized debt issuance cost of $893 in 2020 and $942 in 2019)

$

49,107

$

49,058

Subordinated debt securities (less unamortized debt issuance cost of $820 in 2020 and $846 in 2019)

55,882

55,856

Reserves for unpaid losses and loss adjustment expenses

670,936

620,355

Unearned premiums

354,837

388,926

Reinsurance balances payable

55,818

59,274

Pension liability

1,223

1,388

Payable for securities

3

1,648

Accounts payable and other accrued expenses

44,418

55,487

Total Liabilities

1,232,224

1,231,992

Commitments and contingencies

Stockholders’ equity:

Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2019 and 2018

3,757

3,757

Additional paid-in capital

122,729

123,468

Retained earnings

102,961

160,570

Accumulated other comprehensive (loss) income

(2,243

)

688

Treasury stock (2,731,335 shares in 2020 and 2,749,738 shares in 2019), at cost

(25,032

)

(25,201

)

Total Stockholders’ Equity

202,172

263,282

Total Liabilities & Stockholders' Equity

$

1,434,396

$

1,495,274

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,

2020

2019

2020

2019

Gross premiums written

$

183,644

$

218,236

$

385,233

$

405,552

Ceded premiums written

(74,657

)

(94,393

)

(149,741

)

(164,306

)

Net premiums written

108,987

123,843

235,492

241,246

Change in unearned premiums

16,609

(17,344

)

14,037

(35,717

)

Net premiums earned

125,596

106,499

249,529

205,529

Investment income, net of expenses

3,196

5,412

7,654

10,523

Investment (losses) gains, net

2,058

6,817

(27,272

)

18,754

Finance charges

1,528

1,797

3,172

3,531

Commission and fees

260

364

584

657

Other income

14

14

33

30

Total revenues

132,652

120,903

233,700

239,024

Losses and loss adjustment expenses

94,873

73,226

188,278

143,313

Operating expenses

30,259

29,336

59,407

56,582

Interest expense

1,320

1,240

2,788

2,493

Impairment of goodwill and other intangible assets

-

-

45,996

-

Amortization of intangible assets

617

617

1,234

1,234

Total expenses

127,069

104,419

297,703

203,622

(Loss) income before tax

5,583

16,484

(64,003

)

35,402

Income tax (benefit) expense

(1,118

)

3,455

(6,394

)

7,348

Net (loss) income

$

6,701

$

13,029

$

(57,609

)

$

28,054

Net (loss) income per share:

Basic

$

0.37

$

0.72

$

(3.18

)

$

1.55

Diluted

$

0.37

$

0.71

$

(3.18

)

$

1.54

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)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Gross premiums written

$

138,627

$

172,940

$

23,842

$

21,835

$

21,175

$

23,461

$

-

$

-

$

183,644

$

218,236

Ceded premiums written

(64,640

)

(83,370

)

(7,037

)

(7,170

)

(2,980

)

(3,853

)

-

-

(74,657

)

(94,393

)

Net premiums written

73,987

89,570

16,805

14,665

18,195

19,608

-

-

108,987

123,843

Change in unearned premiums

14,350

(20,216

)

(404

)

1,611

2,663

1,261

-

-

16,609

(17,344

)

Net premiums earned

88,337

69,354

16,401

16,276

20,858

20,869

-

-

125,596

106,499

Total revenues

91,124

73,592

17,096

17,310

22,464

23,116

1,968

6,885

132,652

120,903

Losses and loss adjustment expenses

69,262

48,374

10,775

10,613

14,836

14,239

-

-

94,873

73,226

Pre-tax income (loss)

5,882

10,427

802

2,057

1,884

2,441

(2,985

)

1,559

5,583

16,484

Net loss ratio (1)

78.4

%

69.7

%

65.7

%

65.2

%

71.1

%

68.2

%

75.5

%

68.8

%

Net expense ratio (1)

18.5

%

22.1

%

34.4

%

29.0

%

21.0

%

23.3

%

22.9

%

25.7

%

Net combined ratio (1)

96.9

%

91.8

%

100.1

%

94.2

%

92.1

%

91.5

%

98.4

%

94.5

%

Favorable (Unfavorable) Prior Year Development

(9,315

)

(3,277

)

(794

)

1,778

(680

)

29

-

-

(10,789

)

(1,470

)

(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)

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

Gross premiums written

$

288,097

$

307,339

$

50,218

$

47,363

$

46,918

$

50,850

$

-

$

-

$

385,233

$

405,552

Ceded premiums written

(128,604

)

(140,731

)

(14,500

)

(15,273

)

(6,637

)

(8,302

)

-

-

(149,741

)

(164,306

)

Net premiums written

159,493

166,608

35,718

32,090

40,281

42,548

-

-

235,492

241,246

Change in unearned premiums

15,816

(33,066

)

(2,899

)

1,560

1,120

(4,211

)

-

-

14,037

(35,717

)

Net premiums earned

175,309

133,542

32,819

33,650

41,401

38,337

-

-

249,529

205,529

Total revenues

183,244

141,559

34,732

35,683

44,787

42,599

(29,063

)

19,183

233,700

239,024

Losses and loss adjustment expenses

130,145

94,323

22,630

22,264

35,503

26,726

-

-

188,278

143,313

Pre-tax income (loss)

22,174

18,395

1,518

3,564

(3,771

)

4,014

(83,924

)

9,429

(64,003

)

35,402

Net loss ratio (1)

74.2

%

70.6

%

69.0

%

66.2

%

85.8

%

69.7

%

75.5

%

69.7

%

Net expense ratio (1)

18.1

%

22.2

%

32.9

%

29.7

%

24.7

%

22.8

%

22.5

%

25.7

%

Net combined ratio (1)

92.3

%

92.8

%

101.9

%

95.9

%

110.5

%

92.5

%

98.0

%

95.4

%

Net Favorable (Unfavorable) Prior Year Development

(12,468

)

(5,203

)

(919

)

3,583

(5,961

)

216

(19,348

)

(1,404

)

(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.