Hallmark Financial Services, Inc. Announces Fourth Quarter And Fiscal 2016 Results

FORT WORTH, Texas, March 09, 2017 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (NASDAQ:HALL) today announced results for its fourth quarter and fiscal year ended December 31, 2016, including the following highlights:

  • Fiscal 2016 net income of $6.5 million, or $0.34 per diluted share
  • 4th quarter 2016 net loss of $3.7 million, or $0.20 per diluted share
  • 4th quarter and fiscal 2016 net catastrophe losses of $0.6 million and $11.0 million, respectively
  • 4th quarter and fiscal 2016 adverse prior year reserve development of $8.4 million and $7.6 million, respectively
  • Fiscal 2016 net combined ratio of 99.8%, including 3.1% and 2.2% attributable to catastrophe losses and adverse prior year reserve development, respectively

“The 4th Quarter results were disappointing and the conclusion of a challenging year for Hallmark in 2016. Deteriorated results in the automobile line of business, both commercial and personal, as well as higher than expected property catastrophe losses were the primary drivers of our results in 2016. For the year, excluding the 3.1% impact of catastrophe losses and the 2.2% impact from adverse prior accident year reserve development, driven by deteriorating auto results from those prior years, the combined ratio for the group would have been 94.5%,” said Naveen Anand, President and Chief Executive Officer.

“In the quarter, we noted adverse prior year reserve development and higher current accident year loss trends resulting in an increase of our loss ratio estimates for the auto line of business in both our Specialty Commercial and Personal Segments. Actions to improve these results have been underway through the course of 2016,” continued Mr. Anand.

“In our Personal Segment we have continued to increase rates, culled under-performing risks, implemented significant improvement in claim handling and further reduced our geographic footprint to a core of ten states where we expect to gain scale and profitability as 2017 progresses.  As a result of these actions, the elevated frequency and severity trends we’ve seen are beginning to plateau.”

“In our Specialty Commercial Segment, the auto portfolio experienced a number of large losses in the quarter along with the noted unfavorable reserve development from prior accident years.  This led us to increase our current accident year loss estimates as well as to address the prior year reserve development.  In the quarter, we implemented an exit from two poorly performing states. Furthermore, we continued to increase rates and expect the impact of rate changes to flow through in 2017.”

“When I joined Hallmark in late 2014, we launched a strategy to diversify our auto driven, regionally focused portfolio to mitigate volatility and improve our earnings trend. As a result, we’ve given greater emphasis and focus on developing a broader portfolio of specialty products, geographic diversification, investing in talent, enhancing our technology and driving better data and analytics to our pricing decisions. These strategic initiatives are beginning to have the desired outcome. Our Specialty Commercial Segment now accounts for over 70% of our gross written premium and drives the largest contribution to our net income, return on equity and growth. We are equally focused on getting sustained positive contribution from our Standard Commercial and Personal Segments,” concluded Mr. Anand.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Hallmark reported book value per share of $14.28 as of December 31, 2016, an increase of 4% over prior year.  Total cash and investments increased $39.3 million during fiscal 2016 to $741.1 million, an increase of 8% per share to $39.82 per share.  Our cash balances (including restricted cash) totaled $87.0 million as of December 31, 2016.”

Fourth Quarter  
    2016       2015     % Change
  ($ in thousands, unaudited)
Gross premiums written      129,528         123,515     5 %
Net premiums written      83,275         82,341     1 %
Net premiums earned      90,550         85,503     6 %
Investment income, net of expenses     4,399         3,918     12 %
Gain (loss) on investments (1)     930         (55 )   nm    
Other-than-temporary impairments     -          (1,130 )   -100 %
Total revenues      97,254         90,071     8 %
Net income     (3,662 )       3,446     -206 %
Net income per share - basic $   (0.20 )   $   0.18     -211 %
Net income per share - diluted $   (0.20 )   $   0.18     -211 %
Book value per share $   14.28     $   13.72     4 %
Cash flow from operations   5,322       9,835     -46 %

Fiscal Year  
    2016       2015     % Change
  ($ in thousands)
Gross premiums written      549,077         514,223     7 %
Net premiums written      361,829         356,944     1 %
Net premiums earned      353,370         349,081     1 %
Investment income, net of expenses     16,342         13,969     17 %
Gain on investments (1)     2,519         5,826     -57 %
Other-than-temporary impairments     (2,888 )       (3,323 )   -13 %
Total revenues      375,952         372,402     1 %
Net income     6,526         21,863     -70 %
Net income per share - basic $   0.35     $   1.14     -69 %
Net income per share - diluted $   0.34     $   1.13     -70 %
Book value per share $   14.28     $   13.72     4 %
Cash flow from operations   30,854       52,936     -42 %
(1) includes unrealized gain on other investment recognized in earnings

Fourth Quarter 2016 Commentary

Hallmark reported net income (loss) of ($3.7) million and $6.5 million for the three months and fiscal year ended December 31, 2016 as compared to net income of $3.4 million and $21.9 million for the same periods the prior year. On a diluted basis per share, the Company reported net income (loss) of ($0.20) per share and $0.34 per share for the three months and fiscal year ended December 31, 2016, as compared to net income of $0.18 per share and $1.13 per share for the same periods the prior year.

Hallmark's consolidated net loss ratio was 85.5% and 71.8% for the three months and fiscal year ended December 31, 2016, as compared to 68.2% and 65.9% for the same periods the prior year.  Hallmark's net expense ratio was 25.5% and 28.0% for the three months and fiscal year ended December 31, 2016 as compared to 27.3% and 28.0% for the same periods the prior year.  Hallmark’s net combined ratio was 111.0% and 99.8% for the three months and fiscal year ended December 31, 2016 as compared to 95.5% and 93.9% for the same periods the prior year. 

During the three months and fiscal year ended December 31, 2016, Hallmark’s total revenues were $97.3 million and $376.0 million, representing an increase of 8% and 1%, respectively, from the $90.1 million and $372.4 million in total revenues for the same periods of 2015.  During the three months and fiscal year ended December 31, 2016, Hallmark’s income (loss) before tax was ($6.2) million and $8.5 million as compared to the $5.1 million and $31.9 million reported during the same periods the prior year.

The increase in revenue for the three months ended December 31, 2016 was primarily attributable to higher net premiums earned, net realized gains in the current quarter as compared to net realized losses on our investment portfolio in the prior year quarter, higher net investment income and higher other income partially offset by lower finance charge revenue and lower commission and fee revenue.  The higher net premiums earned were driven by higher net premiums written in the Specialty Commercial Segment and Personal Segment.

The decrease in income before tax for the three months ended December 31, 2016 was due primarily to increased losses and loss adjustment expenses (“LAE”) of $19.1 million and higher interest expense of $0.3 million partially offset by the increase in revenue discussed above and lower other operating expenses of $1.0 million.  The increase in losses and LAE was primarily the result of higher unfavorable net prior year loss reserve development in the Specialty Commercial Segment and Personal Segment, as well as higher current accident year loss trends in each of the reporting segments that was partially offset by higher favorable net prior year loss reserve development in the Standard Commercial Segment.  The increase in interest expense was due to interest on a new revolving credit facility (“Facility B”) entered into on December 17, 2015.

The increase in revenue during the fiscal year ended December 31, 2016 was primarily attributable to higher net premiums earned, higher net investment income and higher commission and fee revenue, partially offset by realized losses recognized on the investment portfolio during the current period as compared to realized gains recognized during the same period the prior year and lower finance charges.  The increased net premiums earned were primarily attributable to higher net premiums written in the Specialty Commercial Segment and the favorable impact of increased retention under a quota share reinsurance agreement in the Personal Segment effective October 1, 2014, partially offset by the adverse impact on the Standard Commercial Segment of ceding substantially all unearned workers’ compensation premiums effective July 1, 2015.

The decrease in income before tax for the year ended December 31, 2016 was due primarily to increased losses and LAE of $23.5 million, higher operating expenses of $2.8 million and higher interest expense of $0.6 million, partially offset by the increased revenue discussed above. The increase in losses and LAE was primarily the result of unfavorable net prior year loss reserve development and higher current accident year loss trends in the Specialty Commercial Segment and Personal Segment, partially offset by higher favorable net prior year loss reserve development in the Standard Commercial Segment. During the fiscal year ended December 31, 2016, Hallmark recorded unfavorable prior year net loss reserve development of $7.6 million as compared to $7.0 million of favorable prior year net loss reserve development for the same period of 2015.  Hallmark incurred an aggregate of $11.0 million of net catastrophe losses during the year ended December 31, 2016 as compared to $9.3 million for the same period the prior year.  Other operating expenses increased during the year ended December 31, 2016, primarily as the result of increased salary and related expenses in the Specialty Commercial Segment and a $1.8 million payment to settle the earn-out related to a previous acquisition accrued during the second quarter of 2016, partially offset by lower production related expenses predominately in the Specialty Commercial Segment. The increase in interest expense was due to interest on the Facility B revolving credit facility entered into during the fourth quarter of 2015.

During the fiscal year ended December 31, 2016, Hallmark’s cash flow provided by operations was $30.9 million compared to cash flow provided by operations of $52.9 million during the same period the prior year.  The decrease in operating cash flow was primarily due to increased paid losses, including timing of reinsurance claim settlements, partially offset by increased net collected premiums, lower taxes paid, lower net paid operating expenses and higher collected net investment income.

About Hallmark Financial Services, Inc.

Hallmark Financial Services, Inc. is a diversified specialty property/casualty insurer with offices in Dallas-Fort Worth, San Antonio, Chicago, Los Angeles and Atlanta.  Hallmark markets, underwrites and services over half a billion dollars annually in commercial and personal insurance premiums in select markets.  Hallmark is headquartered in Fort Worth, 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 substantially 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. Naveen Anand, President and Chief Executive Officer at 817.348.1600
www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets        
($ in thousands, except par value)   Dec. 31   Dec. 31
ASSETS   2016     2015  
Investments:      
  Debt securities, available-for-sale, at fair value (cost: $597,784 in 2016 and $538,629 in 2015) $ 597,457   $ 531,325  
  Equity securities, available-for-sale, at fair value (cost: $31,449 in 2016 and $24,524 in 2015)   51,711     47,050  
  Other investment (cost; $3,763 in 2016 and $427 in 2015)   4,951     454  
Total investments   654,119     578,829  
Cash and cash equivalents   79,632     114,446  
Restricted cash    7,327     8,522  
Ceded unearned premiums   81,482     65,094  
Premiums receivable   89,715     83,376  
Accounts receivable   2,269     2,005  
Receivable for securities     3,047       10,424  
Reinsurance recoverable   147,821     114,287  
Deferred policy acquisition costs   19,193     20,366  
Goodwill    44,695     44,695  
Intangible assets, net   12,491     14,959  
Deferred federal income taxes, net   1,365     3,360  
Federal income tax recoverable   3,951     1,779  
Prepaid expenses   1,552     3,213  
Other assets    13,801     10,192  
Total Assets $ 1,162,460   $ 1,075,547  
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Liabilities:        
  Revolving credit facility payable $   30,000    $    30,000  
  Subordinated debt securities (less unamortized debt issuance cost of $1,001 in 2016 and $1,053 in 2015)     55,701       55,649  
  Reserves for unpaid losses and loss adjustment expenses   481,567     450,878  
  Unearned premiums   241,254     216,407  
  Reinsurance balances payable   46,488     33,741  
  Pension liability   2,203     2,496  
  Payable for securities     14,215       1,097  
  Accounts payable and other accrued expenses   25,296     23,253  
Total Liabilities   896,724     813,521  
  Commitments and contingencies        
Stockholders’ equity:        
  Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2016 and 2015 3,757     3,757  
  Additional paid-in capital    123,166     123,480  
  Retained earnings    148,027     141,501  
  Accumulated other comprehensive income    10,371     7,418  
  Treasury stock (2,260,849 shares in 2016 and 1,775,512 shares in 2015), at cost   (19,585 )   (14,130 )
Total Stockholders’ Equity   265,736     262,026  
Total Liabilities & Stockholders' Equity $ 1,162,460   $ 1,075,547  

Hallmark Financial Services, Inc. and Subsidiaries          
Consolidated Statements of Operations Three Months Ended   Fiscal Year Ended
($ in thousands, except share amounts) December 31   December 31
  2016   2015     2016   2015  
Gross premiums written $ 129,528   $ 123,515     $ 549,077   $ 514,223  
Ceded premiums written   (46,253 )   (41,174 )     (187,248 )   (157,279 )
Net premiums written   83,275     82,341       361,829     356,944  
Change in unearned premiums   7,275     3,162       (8,459 )   (7,863 )
Net premiums earned   90,550     85,503       353,370     349,081  
                   
Investment income, net of expenses   4,399     3,918       16,342     13,969  
Net realized gains (losses)   930     (1,185 )     (369 )   2,503  
Finance charges   1,152     1,552       4,977     5,952  
Commission and fees   149     254       1,427     213  
Other income   74     29       205     684  
Total revenues   97,254     90,071       375,952     372,402  
                   
Losses and loss adjustment expenses   77,454     58,329       253,688     230,149  
Operating expenses   24,206     25,175       106,769     103,993  
Interest expense   1,151     863       4,549     3,906  
Amortization of intangible assets   617     617       2,468     2,468  
Total expenses   103,428     84,984       367,474     340,516  
                   
Income before tax   (6,174 )   5,087       8,478     31,886  
Income tax expense   (2,512 )   1,641       1,952     10,023  
Net income $ (3,662 ) $ 3,446     $ 6,526   $ 21,863  
                   
Net income per share:                  
Basic $ (0.20 ) $ 0.18     $ 0.35   $ 1.14  
Diluted $ (0.20 ) $ 0.18     $ 0.34   $ 1.13  

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data        
Three Months Ended Dec. 31                    
  Specialty Commercial
Segment
Standard Commercial
Segment
Personal Segment Corporate Consolidated
($ in thousands)   2016     2015     2016     2015     2016     2015     2016     2015     2016     2015  
Gross premiums written $   93,710   $   87,947   $   17,190   $   18,182   $  18,628   $  17,386   $   -    $   -    $  129,528   $  123,515  
Ceded premiums written   (35,577 )   (30,471 )   (1,914 )   (2,617 )   (8,762 )   (8,086 )     -        -      (46,253 )   (41,174 )
Net premiums written   58,133     57,476     15,276     15,565     9,866     9,300       -        -      83,275     82,341  
Change in unearned premiums   4,373     582     1,331     1,243     1,571     1,337       -        -      7,275     3,162  
Net premiums earned   62,506     58,058     16,607     16,808     11,437     10,637       -        -      90,550     85,503  
                     
Total revenues   66,419     61,840     17,502     17,923     12,830     12,442     503     (2,134 )   97,254     90,071  
                     
Losses and loss adjustment expenses   53,716     35,496     11,113     13,133     12,625     9,700       -        -      77,454     58,329  
                     
Pre-tax income (loss), net of non-controlling interest   (1,426 )   11,538     1,243     (560 )   (2,992 )   (289 )   (2,999 )   (5,602 )   (6,174 )   5,087  
                     
Net loss ratio (1)   85.9 %   61.1 %   66.9 %   78.1 %   110.4 %   91.2 %       85.5 %   68.2 %
Net expense ratio (1)   22.3 %   25.4 %   31.5 %   32.5 %   21.4 %   17.7 %       25.5 %   27.3 %
Net combined ratio (1)   108.2 %   86.5 %   98.4 %   110.6 %   131.8 %   108.9 %       111.0 %   95.5 %
                     
Favorable (Unfavorable) Prior Year Development     (10,564 )     295         3,531       2,697       (1,358 )     (601 )     -        -        (8,391 )     2,391  

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        
Fiscal Year Ended Dec. 31                    
  Specialty Commercial
Segment
Standard Commercial
Segment
Personal Segment Corporate Consolidated
($ in thousands)   2016     2015     2016     2015     2016     2015     2016     2015     2016     2015  
Gross premiums written $   388,914   $   351,050   $   76,891   $   81,892   $  83,272   $  81,281   $   -    $   -    $  549,077   $  514,223  
Ceded premiums written   (139,842 )   (109,275 )   (8,401 )   (10,795 )   (39,005 )   (37,209 )     -        -      (187,248 )   (157,279 )
Net premiums written   249,072     241,775     68,490     71,097     44,267     44,072       -        -      361,829     356,944  
Change in unearned premiums   (7,182 )   (4,135 )   (980 )   1,516     (297 )   (5,244 )     -        -      (8,459 )   (7,863 )
Net premiums earned   241,890     237,640     67,510     72,613     43,970     38,828       -        -      353,370     349,081  
                     
Total revenues   255,897     249,910     71,966     76,864     49,826     45,538     (1,737 )   90     375,952     372,402  
                     
Losses and loss adjustment expenses   169,125     148,664     41,173     47,071     43,390     34,414       -        -      253,688     230,149  
                     
Pre-tax income (loss)   24,417     40,277     8,866     6,687     (6,839 )   (885 )   (17,966 )   (14,193 )   8,478     31,886  
                     
Net loss ratio (1)   69.9 %   62.6 %   61.0 %   64.8 %   98.7 %   88.6 %       71.8 %   65.9 %
Net expense ratio (1)   25.3 %   25.6 %   33.0 %   32.6 %   21.5 %   19.0 %       28.0 %   28.0 %
Net combined ratio (1)   95.2 %   88.2 %   94.0 %   97.4 %   120.2 %   107.6 %       99.8 %   93.9 %
                     
Favorable (Unfavorable) Prior Year Development     (12,502 )     2,147       9,901       7,416       (5,007 )     (2,610 )     -        -        (7,608 )     6,953  

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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