Hallmark Financial Announces Third Quarter 2020 Results
11/05/2020 - 04:05 PM
DALLAS, Nov. 05, 2020 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the third quarter and nine months ended September 30, 2020.
Third Quarter Year-to-Date 2020 2019 2020 2019 $ in millions: (unaudited) (unaudited) Net Income $ (28.0 ) $ 5.3 $ (85.6 ) $ 33.3 Operating (Loss) Earnings (1) $ (10.4 ) $ 6.3 $ (0.7 ) $ 19.6 $ per diluted share: Net Income $ (1.54 ) $ 0.29 $ (4.72 ) $ 1.82 Operating (Loss) Earnings (1) $ (0.57 ) $ 0.35 $ (0.04 ) $ 1.07
(1) See “Non-GAAP Financial Measures” belowHighlights:
Net loss of $28.0 million in the third quarter was driven by the cost of a loss portfolio transfer ($21.7 million pre-tax) and adverse prior year reserve development ($13.9 million pre-tax). The adverse prior year reserve development was driven by $11.5 million from our Specialty Commercial Segment which was comprised mostly of $8.3 million from our Commercial Auto business unit. The loss portfolio transfer completed in the third quarter resulted in a net pre-tax charge of $21.7 million . This charge negatively impacted the net combined ratio by 18.2 points in the quarter, and 5.9 points year-to-date. Hallmark Financial continued to achieve substantial rate increases, particularly in the Specialty Commercial Segment, with increases for this business averaging 20% for the quarter and 19% year-to-date. Gross premiums written decreased 12% compared to the prior year quarter ended September 30, 2019 and 8% on a comparative year-to-date basis. Excluding premiums from the exited binding primary commercial auto business, gross premiums written would have decreased 1% in the quarter and increased 3% year-to-date, relative to the same prior year periods. There were $9.6 million of net catastrophe losses in the third quarter, or 8.1 points of the net combined ratio, and $22.2 million year-to-date, or 6.0 points of the net combined ratio. The year-to-date amount includes net loss and LAE reserves of $5.0 million related to novel coronavirus (“COVID-19”) pandemic claims. “With the completion of the loss portfolio transfer transaction in the third quarter, and the affirmation of our rating by A.M. Best, Hallmark Financial is beginning to emerge from what has been a difficult year for the Company,” explained Naveen Anand, President and Chief Executive Officer. “While the loss portfolio transfer impacted our results this quarter, it provides substantial reinsurance coverage for the binding primary commercial automobile business we exited earlier this year.”
“The quarter also witnessed an above average number of catastrophe events for the industry,” continued Mr. Anand. “There have been 28 named storms in the Atlantic this year, with 11 of those making landfall, which is a record number in recent history. Also, this year, there have been numerous wildfires in California, the Pacific Northwest, and Colorado which have had a small but still measurable impact on our results. Net catastrophe losses have added six points to our combined ratio, which is above our historical average of between two and four points per year. These losses tend to be driven by a higher than normal frequency of smaller events, rather than from larger events. The Company has property catastrophe reinsurance in place, which provides coverage in excess of $5 million per event.”
“Hallmark Financial undertook a journey many years ago to transition from a regional auto insurer to an E&S focused specialty insurance company. While change is never easy and has required us to make tough decisions along the way, I am encouraged and proud of the efforts and dedication of our employees in working tirelessly to effect this change. The current market environment has provided the opportunity for improved pricing through rates, better deployment of limits to mitigate the impact of claims severity, and removal of underpriced risks through policy terms and conditions. While we have recalibrated our top line growth this year to be more in line with our capital base, incorporating the rates we have been achieving over the past six to eight quarters, it is clear that our premium relative to exposure is increasing at a favorable rate,” concluded Mr. Anand.
Third Quarter and Year-to-Date 2020 Financial Review
Third Quarter Year-to-Date 2020 2019 % Change 2020 2019 % Change ($ in thousands, unaudited) Gross premiums written 196,464 224,178 -12 % 581,697 629,730 -8 % Net premiums written 116,111 127,773 -9 % 351,603 369,019 -5 % Net premiums earned 119,560 112,499 6 % 369,089 318,028 16 % Investment income, net of expenses 2,660 5,050 -47 % 10,314 15,573 -34 % Investment gains (losses), net (1) (627 ) (1,342 ) 53 % (27,899 ) 17,412 -260 % Other-than-temporary impairment (1) (1,692 ) - nm (1,692 ) - nm Net income (loss) (28,004 ) 5,287 -630 % (85,613 ) 33,341 -357 % Operating earnings (loss)(2) (10,366 ) 6,347 -263 % (707 ) 19,586 -104 % Net income (loss) per share - basic $ (1.54 ) $ 0.29 -631 % $ (4.72 ) $ 1.84 -357 % Net income (loss) per share - diluted $ (1.54 ) $ 0.29 -631 % $ (4.72 ) $ 1.82 -359 % Operating earnings (loss) per share - diluted (2) $ (0.57 ) $ 0.35 -263 % $ (0.04 ) $ 1.07 -104 %
(1) Other-than-temporary impairment is included in investment gains (losses), net(2) See “Non-GAAP Financial Measures” below
Gross Premiums Written During the three and nine months ended September 30, 2020, Hallmark Financial’s gross premiums written were $196.5 million and $581.7 million , respectively, representing a decrease of 12% and 8% , respectively, from the $224.2 million and $629.7 million in gross premiums written for the same periods in 2019.
Net Premiums Written During the three and nine months ended September 30, 2020, Hallmark Financial’s net premiums written were $116.1 million and $351.6 million , respectively, representing a decrease of 9% and 5% , respectively, from the $127.8 million and $369.0 million in net premiums written for the same periods of 2019.
Net Premiums Earned Hallmark Financial’s net premiums earned were $119.6 million and $369.1 million for the three and nine months ended September 30, 2020, respectively, representing a 6% and 16% increase, respectively, from the $112.5 million and $318.0 million in net premiums earned for the same periods in 2019.
Invest ments During the three and nine months ended September 30, 2020, net investment income was $2.7 million and $10.3 million , respectively, as compared to $5.1 million and $15.6 million during the same periods in 2019. The declines in net investment income were primarily due to lower interest rates in the first nine months of 2020 compared to the prior year and an increase in the proportion of short-term investments held relative to longer maturity investments.
Net investment losses were $0.6 million for the three months ended September 30, 2020 as compared to net investment losses of $1.3 million for the same period the prior year. Net investment losses were $27.9 million for the nine months ended September 30, 2020 as compared to net investment gains of $17.4 million for the same period the prior year. Net investment losses for the three and nine months ended September 30, 2020 include $1.7 million of other-than-temporary impairments reported during the quarter. The net investment losses in the first nine months 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 COVID-19 pandemic.
At September 30, 2020 fixed-income securities were $417.6 million , with a tax equivalent book yield of 2.7% compared to 3.5% as of September 30, 2019. As of September 30, 2020, the fixed-income portfolio had an average modified duration of 0.9 years and 95% of the securities had remaining time to maturity of five years or less. As of September 30, 2020, 5% of the investment portfolio was invested in equity securities.
At September 30, 2020, total investments were $441.0 million . Cash and cash equivalents, including restricted cash were $204.3 million . Total investments, cash and cash equivalents, and restricted cash were $645.3 million or $35.57 per share.
Pre-Tax Income Hallmark Financial had a pre-tax loss of $37.3 million for the three months ended September 30, 2020, as compared to pre-tax income of $6.7 million reported during the same period in 2019. Hallmark Financial had a pre-tax loss of $101.3 million for the nine months ended September 30, 2020, as compared to pre-tax income of $42.1 million reported during the same period in 2019.
The decline in pre-tax results for the three months ended September 30, 2020 was predominately driven by the $21.7 million charge for the loss portfolio transfer reinsurance contract that closed during the quarter, unfavorable prior year net loss reserve development of $13.9 million as compared to $6.4 million for the same period the prior year, as well as net catastrophe losses of $9.6 million as compared to $0.6 million for the same period the prior year.
The decline in pre-tax results for the nine months ended September 30, 2020 was predominately driven by the impairment of goodwill and other intangible assets of $46.0 million , net investment losses of $27.9 million as compared to net investment gains of $17.4 million reported during the same period in 2019, the $21.7 million charge for the loss portfolio transfer reinsurance contract that closed during the third quarter of 2020, unfavorable prior year net loss reserve development of $33.3 million as compared to $7.8 million reported for the same period the prior year and net catastrophe losses of $22.2 million as compared to $4.6 million for the same period the prior year.
Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratio s
Hallmark Financial reported a net combined ratio of 108.9% for the nine months ended September 30, 2020, as compared to 95.6% for the first nine 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 11.1 points from this discontinued line of business, which included the $21.7 million cost of the loss portfolio transfer reinsurance agreement reported as losses and LAE.
Losses and LAE for the three and nine months ended September 30, 2020 increased $45.7 million and $90.7 million , respectively, as compared to the prior year periods due primarily to the $21.7 million charge for a loss portfolio transfer reinsurance contract, increased net premiums earned, increased unfavorable net prior year reserve development and increased net catastrophe losses. Hallmark Financial reported $13.9 million and $33.3 million , respectively, of net unfavorable prior year loss reserve development during the three and nine months ended September 30, 2020 as compared to net unfavorable prior year loss reserve development of $6.4 million and $7.8 million , respectively, during the same periods the prior year. Hallmark Financial also reported $9.6 million and $22.2 million , respectively, of net catastrophe losses during the three and nine months ended September 30, 2020 as compared to $0.6 million and $4.6 million , respectively, during the same periods the prior year.
Hallmark Financial had a net loss ratio of 103.9% and 84.7% , respectively, for the three and nine months ended September 30, 2020 as compared to 69.8% reported during both the same periods in 2019. The charge for the loss portfolio reinsurance contract contributed 18.2 points and 5.9 points, respectively, to the net loss ratio for the three and nine months ended September 30, 2020. Catastrophe losses contributed 8.1 points and 6.0 points, respectively, to the net loss ratio for the three and nine months ended September 30, 2020, as compared to 0.5 points and 1.5 points, respectively, for the same periods of the prior year. Included in the 2020 net catastrophe losses for the nine months ended September 30, 2020 are $5.0 million of net reserves for COVID-19 claims that contributed 1.4 points to the total net loss ratio. Net unfavorable prior year loss reserve development contributed 11.6 points and 9.0 points, respectively, to the net loss ratio for the three and nine months ended September 30, 2020, as compared to 5.7 points and 2.4 points, respectively, for the same periods of the prior year.
The expense ratio was 27.6% and 24.2% , respectively, for the three and nine months ended September 30, 2020 as compared to 26.0% and 25.8% , respectively, reported during the same periods in 2019. The Company reported a net combined ratio of 131.5% and 108.9% , respectively, for the three and nine months ended September 30, 2020 as compared to 95.8% and 95.6% , respectively, during the same periods in 2019.
Goodwill & Intangibles
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.
Net Income Hallmark Financial reported a net loss of $28.0 million and $85.6 million , respectively, for the three and nine months ended September 30, 2020 as compared to net income of $5.3 million and $33.3 million for the three and nine months ended September 30, 2019, respectively.
On a diluted basis per share, the Company reported a net loss of $1.54 per share and $4.72 per share, respectively, for the three and nine months ended September 30, 2020 as compared to net income of $0.29 per share and $1.82 per share, respectively, for the three and nine months ended September 30, 2019.
Book Value Per Share
Hallmark Financial reported book value of $9.71 per share as of September 30, 2020 as compared to $16.36 per share as of September 30, 2019 and $14.53 per share as of December 31, 2019.
Non-GAAP Financial Measures
The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). However, the Company also presents and discusses certain non-GAAP financial measures that it believes are useful to investors as measures of operating performance. Management may also use such non-GAAP financial measures in evaluating the effectiveness of business strategies and for planning and budgeting purposes. However, these non-GAAP financial measures should not be viewed as an alternative or substitute for the results reflected in the Company’s GAAP financial statements. In addition, the Company’s definitions of these items may not be comparable to the definitions used by other companies.
Operating earnings and operating earnings per share are calculated by excluding net investment gains and losses, impairment of goodwill and other intangible assets (“Impairments”) and the cost of the loss portfolio transfer transaction (“LPT”) entered into during the third quarter of 2020 from GAAP net income. The Impairments and LPT are unusual and infrequent charges for the Company. Management believes that operating earnings and operating earnings per share provide useful information to investors about the performance of and underlying trends in the Company’s core insurance operations. Net income and net income per share are the GAAP measures that are most directly comparable to operating earnings and operating earnings per share. A reconciliation of operating earnings and operating earnings per share to the most comparable GAAP financial measures is presented below.
Weighted Income (Loss) Less Tax Net Average Diluted ($ in thousands) Before Tax Effect After Tax Shares Diluted Per Share Third Quarter 2020 Reported GAAP measures $ (37,306 ) $ (9,302 ) $ (28,004 ) 18,142 $ (1.54 ) 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 earnings $ (14,979 ) $ (4,613 ) $ (10,366 ) 18,142 $ (0.57 ) Third Quarter 2019 Reported GAAP measures $ 6,660 $ 1,373 $ 5,287 18,295 $ 0.29 Excluded investment (gains)/losses $ 1,342 $ 282 $ 1,060 18,295 $ 0.06 Operating earnings $ 8,002 $ 1,655 $ 6,347 18,295 $ 0.35 Year-to-Date 2020 Reported GAAP measures $ (101,309 ) $ (15,696 ) $ (85,613 ) 18,136 $ (4.72 ) Excluded impairment of goodwill and other intangible assets $ 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 $ 1.21 Operating earnings $ (5,714 ) $ (5,007 ) $ (707 ) 18,136 $ (0.04 ) Year-to-Date 2019 Reported GAAP measures $ 42,062 $ 8,721 $ 33,341 18,283 $ 1.82 Excluded investment (gains)/losses $ (17,412 ) $ (3,657 ) $ (13,755 ) 18,283 $ (0.75 ) Operating earnings $ 24,650 $ 5,064 $ 19,586 18,283 $ 1.07
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, 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:
David Webb Senior Vice President, Corporate Development and Strategy 817.348.1600www.hallmarkgrp.com
Hallmark Financial Services, Inc. and Subsidiaries Consolidated Balance Sheets ($ in thousands, except par value) Sept. 30 Dec. 31 ASSETS 2020 2019 Investments: (unaudited) Debt securities, available-for-sale, at fair value (amortized cost: $414,197 in 2020 and $569,498 in 2019) $ 417,569 $ 574,279 Equity securities (cost: $25,735 in 2020 and $71,895 in 2019) 23,372 99,215 Other investment (cost: $3,763 in 2020 and $3,763 in 2019) 34 2,169 Total investments 440,975 675,663 Cash and cash equivalents 186,683 53,336 Restricted cash 17,671 1,612 Ceded unearned premiums 144,075 164,221 Premiums receivable 112,367 148,288 Accounts receivable 5,194 4,286 Receivable for securities 1,568 12,581 Reinsurance recoverable 504,472 315,466 Deferred policy acquisition costs 22,365 22,994 Goodwill - 44,695 Intangible assets, net 1,938 5,087 Federal income tax recoverable 19,748 8,995 Deferred federal income taxes, net 8,012 2,185 Prepaid expenses 3,634 2,603 Other assets 28,805 33,262 Total Assets $ 1,497,507 $ 1,495,274 LIABILITIES AND STOCKHOLDERS EQUITY Liabilities: Senior unsecured notes due 2029 (less unamortized debt issuance cost of $868 in 2020 and $942 in 2019) $ 49,132 $ 49,058 Subordinated debt securities (less unamortized debt issuance cost of $808 in 2020 and $846 in 2019) 55,894 55,856 Reserves for unpaid losses and loss adjustment expenses 755,891 620,355 Unearned premiums 351,294 388,926 Reinsurance balances payable 67,346 59,274 Pension liability 1,141 1,388 Payable for securities 507 1,648 Accounts payable and other accrued expenses 40,123 55,487 Total Liabilities 1,321,328 1,231,992 Commitments and contingencies Stockholders equity: Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2020 and 2019 3,757 3,757 Additional paid-in capital 122,877 123,468 Retained earnings 74,957 160,570 Accumulated other comprehensive (loss) income (386 ) 688 Treasury stock (2,730,673 shares in 2020 and 2,749,738 shares in 2019), at cost (25,026 ) (25,201 ) Total Stockholders Equity 176,179 263,282 Total Liabilities & Stockholders' Equity $ 1,497,507 $ 1,495,274
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, 2020 2019 2020 2019 Gross premiums written $ 196,464 $ 224,178 $ 581,697 $ 629,730 Ceded premiums written (80,353 ) (96,405 ) (230,094 ) (260,711 ) Net premiums written 116,111 127,773 351,603 369,019 Change in unearned premiums 3,449 (15,274 ) 17,486 (50,991 ) Net premiums earned 119,560 112,499 369,089 318,028 Investment income, net of expenses 2,660 5,050 10,314 15,573 Investment (losses) gains, net (627 ) (1,342 ) (27,899 ) 17,412 Finance charges 1,316 1,778 4,488 5,309 Commission and fees 209 287 793 944 Other income 15 13 48 43 Total revenues 123,133 118,285 356,833 357,309 Losses and loss adjustment expenses 124,253 78,548 312,531 221,861 Operating expenses 34,296 31,074 93,703 87,656 Interest expense 1,273 1,386 4,061 3,879 Impairment of goodwill and other intangible assets - - 45,996 - Amortization of intangible assets 617 617 1,851 1,851 Total expenses 160,439 111,625 458,142 315,247 (Loss) income before tax (37,306 ) 6,660 (101,309 ) 42,062 Income tax (benefit) expense (9,302 ) 1,373 (15,696 ) 8,721 Net (loss) income $ (28,004 ) $ 5,287 $ (85,613 ) $ 33,341 Net (loss) income per share: Basic $ (1.54 ) $ 0.29 $ (4.72 ) $ 1.84 Diluted $ (1.54 ) $ 0.29 $ (4.72 ) $ 1.82
Hallmark Financial Services, Inc. and Subsidiaries Consolidated Segment Data Three Months Ended Sept. 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 $ 150,016 $ 174,695 $ 24,726 $ 23,563 $ 21,722 $ 25,920 $ - $ - $ 196,464 $ 224,178 Ceded premiums written (69,922 ) (84,369 ) (7,270 ) (7,814 ) (3,161 ) (4,222 ) - - (80,353 ) (96,405 ) Net premiums written 80,094 90,326 17,456 15,749 18,561 21,698 - - 116,111 127,773 Change in unearned premiums 3,764 (14,043 ) (744 ) (590 ) 429 (641 ) - - 3,449 (15,274 ) Net premiums earned 83,858 76,283 16,712 15,159 18,990 21,057 - - 119,560 112,499 Total revenues 86,589 81,341 17,398 16,344 20,513 22,943 (1,367 ) (2,343 ) 123,133 118,285 Losses and loss adjustment expenses 94,323 50,107 14,683 11,433 15,247 17,008 - - 124,253 78,548 Pre-tax income (loss) (26,751 ) 14,766 (1,672 ) 62 (2,065 ) (740 ) (6,818 ) (7,428 ) (37,306 ) 6,660 Net loss ratio (1) 112.5 % 65.7 % 87.9 % 75.4 % 80.3 % 80.8 % 103.9 % 69.8 % Net expense ratio (1) 22.2 % 22.0 % 26.1 % 32.1 % 32.0 % 24.1 % 27.6 % 26.0 % Net combined ratio (1) 134.7 % 87.7 % 114.0 % 107.5 % 112.3 % 104.9 % 131.5 % 95.8 % Favorable (Unfavorable) Prior Year Development (11,493 ) (6,029 ) (1,431 ) (75 ) (987 ) (273 ) - - (13,911 ) (6,377 )
(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 Nine Months Ended Sept. 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 $ 438,113 $ 482,034 $ 74,944 $ 70,926 $ 68,640 $ 76,770 $ - $ - $ 581,697 $ 629,730 Ceded premiums written (198,526 ) (225,100 ) (21,770 ) (23,087 ) (9,798 ) (12,524 ) - - (230,094 ) (260,711 ) Net premiums written 239,587 256,934 53,174 47,839 58,842 64,246 - - 351,603 369,019 Change in unearned premiums 19,580 (47,109 ) (3,643 ) 970 1,549 (4,852 ) - - 17,486 (50,991 ) Net premiums earned 259,167 209,825 49,531 48,809 60,391 59,394 - - 369,089 318,028 Total revenues 269,833 222,900 52,130 52,027 65,300 65,542 (30,430 ) 16,840 356,833 357,309 Losses and loss adjustment expenses 224,468 144,430 37,313 33,697 50,750 43,734 - - 312,531 221,861 Pre-tax income (loss) (4,577 ) 33,161 (154 ) 3,626 (5,836 ) 3,274 (90,742 ) 2,001 (101,309 ) 42,062 Net loss ratio (1) 86.6 % 68.8 % 75.3 % 69.0 % 84.0 % 73.6 % 84.7 % 69.8 % Net expense ratio (1) 19.4 % 22.1 % 30.6 % 30.4 % 27.0 % 23.3 % 24.2 % 25.8 % Net combined ratio (1) 106.0 % 90.9 % 105.9 % 99.4 % 111.0 % 96.9 % 108.9 % 95.6 % Net Favorable (Unfavorable) Prior Year Development (23,961 ) (11,232 ) (2,350 ) 3,508 (6,948 ) (57 ) (33,259 ) (7,781 )
(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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