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FOR IMMEDIATE RELEASE
HALLMARK FINANCIAL SERVICES, INC.
ANNOUNCES FIRST QUARTER 2007 EARNINGS RESULTS
FORT WORTH, Texas, (May 10, 2007) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported quarterly net income of $5.0 million for the first quarter ended March 31, 2007, representing a 105% increase over net income of $2.4 million for the first quarter of 2006. On a diluted basis, net income to the common stockholders was $0.24 per share for the three months ended March 31, 2007 as compared to $0.14 per share for the same period in 2006. During the quarter ended March 31, 2007, Hallmark reported total revenues of $64.0 million, representing a 44% increase over the $44.5 million in total revenues for the first quarter of 2006.
Mark J. Morrison, President and Chief Executive Officer, said, "We are very pleased to report the positive results the Company achieved during the first quarter. The increase in revenue for the quarter was primarily the result of executing our plan to increase the retention of the business we produce which, in turn, had the intended result of increasing our bottom line.”
Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Profitable underwriting remains our focus and is reflected in a combined ratio of 90.5% for the first quarter of 2007. Annualized return on average equity was 13% and is expected to improve in the future as a result of continued planned increases in retained premium volume. Year over year growth in book value per share was 17% at quarter end.”
Three Months Ended March 31, | |||||||
2007 | 2006 | ||||||
($ in thousands) | |||||||
Gross premiums written | $ | 64,658 | $ | 47,735 | |||
Net premiums written | 60,771 | 45,779 | |||||
Net premiums earned | 51,648 | 28,434 | |||||
Commission and fees | 7,905 | 12,264 | |||||
Investment income, net of expenses | 2,990 | 2,357 | |||||
Realized gain (loss) on investments | 53 | (83 | ) | ||||
Total revenues | 63,958 | 44,520 | |||||
Net income | 4,970 | 2,426 | |||||
Common EPS - basic | $ | 0.24 | $ | 0.14 | |||
Common EPS - diluted | $ | 0.24 | $ | 0.14 | |||
Annualized return on average equity | 13.0 | % | 10.9 | % | |||
Book value per share | $ | 7.52 | $ | 6.42 | |||
Cash flow from operations | $ | 18,975 | $ | 9,582 |
The increase in net income was largely due to the improved results of our Specialty Commercial Segment and additional investment income from a larger investment portfolio, in both cases primarily as the result of increased retention of premiums. In addition, the first quarter of 2006 was adversely impacted by $1.1 million of interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January, 2006 and subsequently converted to common stock during the second quarter of 2006. These increases in net income were partially offset by lower results from our Standard Commercial Segment during the first quarter of 2007.
Increased retention of business produced by our Specialty Commercial Segment was the primary cause of the increase in revenue. Specialty Commercial Segment revenues increased $12.1 million, or 76%, during the three months ended March 31, 2007 as compared to the same period of 2006. Increased retention of business was also the primary reason for the $4.2 million increase in revenue from the Standard Commercial Segment during the first quarter of 2007. Earned premiums from our Personal Segment also contributed $2.9 million to the increase in revenue for the three months ended March 31, 2007.
Net investment income for the three months ended March 31, 2007 was $3.0 million as compared to $2.4 million for the same period in 2006. The increase of 27% reflected higher interest rates and greater average cash and invested assets attributable to increased retention of premiums, positive cash flow from operations and reinvestment of strong earnings for the past four quarters.
Hallmark's net losses and loss adjustment expenses and its net loss ratio for the three months ended March 31, 2007 were $32.2 million and 62.3%, respectively, compared to $16.7 million and 58.7%, respectively, for the same period in 2006. Hallmark did not recognize any development of prior years’ loss reserve estimates during either the first quarter 2007 or 2006. The increase in the net loss ratio is primarily due to a decrease in incurred losses inuring to our reinsurance coverage for the first quarter of 2007 as compared to the first quarter of 2006. Hallmark's other operating costs and expenses and its expense ratio for the three months ended March 31, 2007 were $22.7 million and 28.2%, respectively, compared to $21.0 million and 28.8%, respectively, for the same period in 2006.
Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property and casualty insurance products to businesses and individuals. The Company's business involves marketing, distributing, underwriting and servicing commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana, Louisiana, Oklahoma, Arkansas and Washington; marketing, distributing, underwriting and servicing non- standard personal automobile insurance in Texas, New Mexico, Arizona, Oklahoma, Arkansas, Idaho, Oregon and Washington; marketing, distributing, underwriting and servicing general aviation insurance in 47 states; and providing other insurance related services. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol "HALL."
Forward-looking statements in this Release are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company’s products and services in the marketplace, competitive factors, interest rate trends, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s periodic report filings with the Securities and Exchange Commission.
For further information, please contact:
Mark J. Morrison, President and Chief Executive Officer at 817.348.1600
www.hallmarkgrp.com
Hallmark Financial Services, Inc. and Subsidiaries | |||||||||
Consolidated Balance Sheets | |||||||||
($ in thousands) |
March 31, 2007 | December 31, 2006 | ||||||
(unaudited) | (audited) | ||||||
ASSETS | |||||||
Investments: | |||||||
Debt securities, available-for-sale, at market value | $ | 133,122 | $ | 125,784 | |||
Equity securities, available-for-sale, at market value | 37,448 | 4,580 | |||||
Short-term investments, available-for-sale, at market value | 10,325 | 25,275 | |||||
Total investments | 180,895 | 155,639 | |||||
Cash and cash equivalents | 75,823 | 81,474 | |||||
Restricted cash and investments | 17,013 | 31,815 | |||||
Premiums receivable | 49,497 | 44,644 | |||||
Accounts receivable | 11,425 | 13,223 | |||||
Prepaid reinsurance premium | 1,637 | 1,629 | |||||
Reinsurance balances receivable | 5,083 | - | |||||
Reinsurance recoverable | 5,283 | 5,930 | |||||
Deferred policy acquisition costs | 18,929 | 17,145 | |||||
Excess of cost over fair value of net assets acquired | 31,427 | 31,427 | |||||
Intangible assets | 25,501 | 26,074 | |||||
Prepaid expenses | 1,418 | 1,769 | |||||
Other assets | 8,240 | 5,184 | |||||
Total assets | $ | 432,171 | $ | 415,953 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Liabilities: | |||||||
Notes payable | $ | 36,016 | $ | 35,763 | |||
Structured settlements | 9,691 | 24,587 | |||||
Unpaid losses and loss adjustment expenses | 90,840 | 77,564 | |||||
Unearned premiums | 100,581 | 91,606 | |||||
Unearned revenue | 4,508 | 5,734 | |||||
Reinsurance balances payable | - | 1,060 | |||||
Accrued agent profit sharing | 594 | 1,784 | |||||
Accrued ceding commission payable | 7,206 | 3,956 | |||||
Pension liability | 3,121 | 3,126 | |||||
Deferred federal income taxes | 3,708 | 2,310 | |||||
Current federal income tax payable | 1,684 | 2,132 | |||||
Accounts payable and other accrued expenses | 18,108 | 15,600 | |||||
Total liabilities | 276,057 | 265,222 | |||||
Commitments and Contingencies | |||||||
Stockholders' equity: | |||||||
Common stock, $.18 par value (authorized 33,333,333 shares in 2007 and 2006; | |||||||
issued 20,776,066 shares in 2007 and 2006) | 3,740 | 3,740 | |||||
Additional paid in capital | 117,983 | 117,932 | |||||
Retained earnings | 36,450 | 31,480 | |||||
Accumulated other comprehensive loss | (1,982 | ) | (2,344 | ) | |||
Treasury stock, at cost (7,828 shares in 2007 and 2006) | (77 | ) | (77 | ) | |||
Total stockholders' equity | 156,114 | 150,731 | |||||
$ | 432,171 | $ | 415,953 |
Hallmark Financial Services, Inc. and Subsidiaries Consolidated Statements of Operations |
(Unaudited) |
($ in thousands, except per share amounts) |
Three Months Ended March 31 | ||||||
2007 | 2006 | |||||
Gross premiums written | $ | 64,658 | $ | 47,735 | ||
Ceded premiums written | (3,887 | ) | (1,956 | ) | ||
Net premiums written | 60,771 | 45,779 | ||||
Change in unearned premiums | (9,123 | ) | (17,345 | ) | ||
Net premiums earned | 51,648 | 28,434 | ||||
Investment income, net of expenses | 2,990 | 2,357 | ||||
Realized gain (loss) | 53 | (83 | ) | |||
Finance charges | 1,086 | 687 | ||||
Commission and fees | 7,905 | 12,264 | ||||
Processing and service fees | 272 | 857 | ||||
Other income | 4 | 4 | ||||
Total revenues | 63,958 | 44,520 | ||||
Losses and loss adjustment expenses | 32,185 | 16,690 | ||||
Other operating costs and expenses | 22,701 | 21,026 | ||||
Interest expense | 786 | 1,585 | ||||
Interest expense from amortization of discount on convertible notes | - | 1,117 | ||||
Amortization of intangible asset | 573 | 573 | ||||
Total expenses | 56,245 | 40,991 | ||||
Income before tax | 7,713 | 3,529 | ||||
Income tax expense | 2,743 | 1,103 | ||||
Net income | $ | 4,970 | $ | 2,426 | ||
Common stockholders net income per share: | ||||||
Basic | $ | 0.24 | $ | 0.14 | ||
Diluted | $ | 0.24 | $ | 0.14 | ||
Convertible noteholders net income per share: | ||||||
Basic | $ | n/a | $ | 0.14 | ||
Diluted | $ | n/a | $ | 0.14 |
Hallmark Financial Services, Inc. | |||||||||
Consolidated Segment Data |
Three Months Ended March 31, 2007 | ||||||||||||||||
Standard | Specialty | |||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||
Produced premium | 23,550 | 39,357 | 15,076 | - | 77,983 | |||||||||||
Gross premiums written | 23,481 | 26,101 | 15,076 | - | 64,658 | |||||||||||
Ceded premiums written | (2,635 | ) | (1,252 | ) | - | - | (3,887 | ) | ||||||||
Net premiums written | 20,846 | 24,849 | 15,076 | - | 60,771 | |||||||||||
Change in unearned premiums | (924 | ) | (5,756 | ) | (2,443 | ) | (9,123 | ) | ||||||||
Net premiums earned | 19,922 | 19,093 | 12,633 | - | 51,648 | |||||||||||
Total revenues | 21,767 | 28,098 | 13,773 | 320 | 63,958 | |||||||||||
Losses and loss adjustment expenses | 12,841 | 11,081 | 8,267 | (4 | ) | 32,185 | ||||||||||
Pre-tax income | 2,759 | 4,686 | 2,118 | (1,850 | ) | 7,713 | ||||||||||
Net loss ratio (1) | 64.5 | % | 58.0 | % | 65.4 | % | 62.3 | % | ||||||||
Net expense ratio (1) | 28.0 | % | 31.5 | % | 23.6 | % | 28.2 | % | ||||||||
Net combined ratio(1) | 92.5 | % | 89.5 | % | 89.0 | % | 90.5 | % |
Three Months Ended March 31, 2006 | ||||||||||||||||
Standard | Specialty | |||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||
Produced premium | 23,664 | 39,005 | 11,099 | - | 73,768 | |||||||||||
Gross premiums written | 23,464 | 13,172 | 11,099 | - | 47,735 | |||||||||||
Ceded premiums written | (1,785 | ) | (171 | ) | - | - | (1,956 | ) | ||||||||
Net premiums written | 21,679 | 13,001 | 11,099 | - | 45,779 | |||||||||||
Change in unearned premiums | (7,367 | ) | (8,622 | ) | (1,356 | ) | - | (17,345 | ) | |||||||
Net premiums earned | 14,312 | 4,379 | 9,743 | - | 28,434 | |||||||||||
Total revenues | 17,540 | 15,968 | 10,797 | 215 | 44,520 | |||||||||||
Losses and loss adjustment expenses | 7,800 | 2,812 | 6,086 | (8 | ) | 16,690 | ||||||||||
Pre-tax income | 3,360 | 1,619 | 2,051 | (3,501 | ) | 3,529 | ||||||||||
Net loss ratio (1) | 54.5 | % | 64.2 | % | 62.5 | % | 58.7 | % | ||||||||
Net expense ratio (1) | 30.8 | % | 27.3 | % | 26.7 | % | 28.8 | % | ||||||||
Net combined ratio(1) | 85.3 | % | 91.5 | % | 89.2 | % | 87.5 | % |
1 | Net loss ratio is calculated as total net losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP. Net expense ratio is calculated as total underwriting expenses of our insurance company subsidiaries, including allocated overhead expenses and offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio. |