Hallmark Financial Announces Second Quarter 2020 Results
08/10/2020 - 04:05 PM
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 817.348.1600www.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.