![Hallmark financial services](https://capedge.com/proxy/8-K/0001144204-07-059357/logo.jpg)
FOR IMMEDIATE RELEASE
HALLMARK FINANCIAL SERVICES, INC.
ANNOUNCES THIRD QUARTER 2007 EARNINGS RESULTS
FORT WORTH, Texas, (November 7, 2007) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported quarterly net income of $6.6 million for the third quarter ended September 30, 2007 as compared to $4.9 million reported for the third quarter of 2006. On a diluted basis, net income per share was $0.32 for the three months ended September 30, 2007 as compared to $0.27 per share for the same period in 2006. During the quarter ended September 30, 2007, Hallmark reported total revenues of $72.2 million, representing a 28% increase over the $56.4 million in total revenues for the third quarter of 2006.
Mark J. Morrison, President and Chief Executive Officer, said, “Our strong quarterly earnings are the expected result of the continued execution of our plan to increase the retention of the business we produce. Even with softening market conditions across the property/casualty insurance industry, our overall production growth and policy rates for the year have been in line with our expectations. For the nine months ended September 30, 2007, gross premiums produced by our operating units have collectively grown by 6% over the same period last year. This growth is largely a result of our strategy of controlled geographic expansion into states where business is less price sensitive and we can achieve adequate pricing for our policies. Our underwriting margins continue to be strong in each of our operating units as we have maintained favorable policy retention levels without the need to give significant rate concessions.”
Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Profitable underwriting continues to be our focus and is reflected in a combined ratio of 87.8% and an annualized return on average equity of 17% for the year to date. Year-over-year growth in book value per share was 21% at quarter end.”
Three Months Ended | ||||||||||
September 30, | ||||||||||
2007 | 2006 | % Change | ||||||||
($ in thousands) | ||||||||||
Gross premiums written | $ | 62,304 | $ | 58,107 | 7 | % | ||||
Net premiums written | 61,525 | 55,005 | 12 | % | ||||||
Net premiums earned | 59,425 | 42,194 | 41 | % | ||||||
Commission and fee income | 7,280 | 9,943 | -27 | % | ||||||
Investment income, net of expenses | 3,774 | 2,912 | 30 | % | ||||||
Gain (loss) on investments | 418 | (135 | ) | NM | ||||||
Total revenues | 72,218 | 56,365 | 28 | % | ||||||
Net income | 6,582 | 4,877 | 35 | % | ||||||
Common EPS - basic | $ | 0.32 | $ | 0.27 | 19 | % | ||||
Common EPS - diluted | $ | 0.32 | $ | 0.27 | 19 | % | ||||
Annualized return on average equity | 15.7 | % | 16.5 | % | -5 | % | ||||
Book value per share | $ | 8.29 | $ | 6.83 | 21 | % | ||||
Cash flow from operations | $ | 17,173 | $ | 15,823 | 9 | % |
Nine Months Ended | ||||||||||
September 30, | ||||||||||
2007 | 2006 | % Change | ||||||||
($ in thousands) | ||||||||||
Gross premiums written | $ | 193,539 | $ | 153,718 | 26 | % | ||||
Net premiums written | 184,592 | 146,176 | 26 | % | ||||||
Net premiums earned | 166,383 | 104,887 | 59 | % | ||||||
Commission and fee income | 23,344 | 32,223 | -28 | % | ||||||
Investment income, net of expenses | 9,811 | 7,505 | 31 | % | ||||||
Gain (loss) on investments | 1,299 | (1,501 | ) | NM | ||||||
Total revenues | 204,912 | 148,072 | 38 | % | ||||||
Net income | 20,367 | 4,461 | 357 | % | ||||||
Common EPS - basic | $ | 0.98 | $ | 0.28 | 250 | % | ||||
Common EPS - diluted | $ | 0.98 | $ | 0.28 | 250 | % | ||||
Annualized return on average equity | 16.8 | % | 5.8 | % | 190 | % | ||||
Book value per share | $ | 8.29 | $ | 6.83 | 21 | % | ||||
Cash flow from operations | $ | 61,767 | $ | 45,496 | 36 | % |
The increase in net income for both the quarter and year-to-date was largely due to the improved results of the 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 nine months of 2006 was adversely impacted by $9.6 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 the Standard Commercial and Personal Segments during the third quarter and year-to-date 2007.
Increased retention of business produced by the Specialty Commercial Segment and increased production by the Personal Segment were the primary causes of the increase in revenue. Specialty Commercial Segment revenues increased $9.9 million and $37.8 million, or 43% and 68%, during the three months and nine months ended September 30, 2007, respectively, as compared to the same periods of 2006. Revenues from the Personal Segment increased $2.9 million and $8.7 million, or 24% and 25%, during the three and nine months ended September 30, 2007, respectively, due largely to geographic expansion into new states. Increased retention of business was also the primary reason for the Standard Commercial Segment’s $2.6 million and $7.5 million increases in revenue for the three months and nine months ended September 30, 2007, respectively. Gains on investments of $0.4 million and $1.3 million for the three months and nine months ended September 30, 2007, respectively, as compared to losses on investments of $0.1 million and $1.5 million recognized for the same periods the prior year, were the primary reason for the increase in revenue for Corporate.
Net investment income for the three months ended September 30, 2007 was $3.8 million as compared to $2.9 million for the same period in 2006. Net investment income for the nine months ended September 30, 2007 was $9.8 million as compared to $7.5 million for the same period in 2006. The increase reflected higher yields 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 has no exposure in its investment portfolio to sub-prime mortgages and $4 thousand total exposure in mortgage backed securities.
Hallmark's net losses and loss adjustment expenses and its net loss ratio for the three months ended September 30, 2007 were $36.7 million and 61.8%, respectively, compared to $23.6 million and 55.9%, respectively, for the same period in 2006. Hallmark's net losses and loss adjustment expenses and its net loss ratio for the nine months ended September 30, 2007 were $99.6 million and 59.9%, respectively, compared to $60.5 million and 57.7%, respectively, for the same period in 2006. Hallmark recognized $0.8 million of favorable development on prior years’ loss reserve estimates during the third quarter of 2007 as compared to $1.2 million of favorable development recognized during the same period in 2006. Hallmark recognized $2.9 million of favorable development on prior years’ loss reserve estimates during the first nine months of 2007 as compared to $2.0 million of favorable development recognized during the same period in 2006. Hallmark's other operating expenses and its expense ratio for the three months ended September 30, 2007 were $24.1 million and 27.7%, respectively, compared to $23.0 million and 27.8%, respectively, for the same period in 2006. Hallmark's other operating expenses and its expense ratio for the nine months ended September 30, 2007 were $70.5 million and 27.9%, respectively, compared to $64.1 million and 27.8%, respectively, for the same period in 2006.
Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance, non-standard personal automobile insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our general aviation business which is written on a national basis. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol "HALL."
Forward-looking statements in this Release are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company’s products and services in the marketplace, competitive factors, interest rate trends, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s periodic report filings with the Securities and Exchange Commission.
For further information, please contact:
Mark J. Morrison, President and Chief Executive Officer at 817.348.1600
www.hallmarkgrp.com
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
September 30 2007 | December 31 2006 | ||||||
(unaudited) | (audited) | ||||||
ASSETS | |||||||
Investments: | |||||||
Debt securities, available-for-sale, at market value | $ | 163,054 | $ | 133,030 | |||
Equity securities, available-for-sale, at market value | 41,988 | 4,580 | |||||
Short-term investments, available-for-sale, at market value | 56,311 | 25,275 | |||||
Total investments | 261,353 | 162,885 | |||||
Cash and cash equivalents | 61,681 | 81,474 | |||||
Restricted cash and cash equivalents | 15,646 | 24,569 | |||||
Premiums receivable | 53,136 | 44,644 | |||||
Accounts receivable | 18,503 | 13,223 | |||||
Prepaid reinsurance premium | 1,154 | 1,629 | |||||
Reinsurance recoverable | 5,781 | 5,930 | |||||
Deferred policy acquisition costs | 20,776 | 17,145 | |||||
Excess of cost over fair value of net assets acquired | 30,025 | 31,427 | |||||
Intangible assets | 24,354 | 26,074 | |||||
Prepaid expenses | 1,094 | 1,769 | |||||
Other assets | 12,131 | 5,184 | |||||
Total assets | $ | 505,634 | $ | 415,953 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Liabilities: | |||||||
Notes payable | $ | 60,681 | $ | 35,763 | |||
Structured settlements | 9,897 | 24,587 | |||||
Unpaid losses and loss adjustment expenses | 116,136 | 77,564 | |||||
Unearned premiums | 108,365 | 91,606 | |||||
Unearned revenue | 3,356 | 5,734 | |||||
Reinsurance balances payable | - | 1,060 | |||||
Accrued agent profit sharing | 1,990 | 1,784 | |||||
Accrued ceding commission payable | 7,052 | 3,956 | |||||
Pension liability | 2,884 | 3,126 | |||||
Deferred federal income taxes | 115 | 2,310 | |||||
Current federal income tax payable | 336 | 2,132 | |||||
Accounts payable and other accrued expenses | 22,736 | 15,600 | |||||
Total liabilities | 333,548 | 265,222 | |||||
Commitments and Contingencies | |||||||
Stockholders' equity: | |||||||
Common stock, $.18 par value (authorized 33,333,333 shares in 2007 and 2006; issued 20,776,080 shares in 2007 and 2006) | 3,740 | 3,740 | |||||
Additional paid in capital | 118,283 | 117,932 | |||||
Retained earnings | 51,847 | 31,480 | |||||
Accumulated other comprehensive loss | (1,707 | ) | (2,344 | ) | |||
Treasury stock, at cost (7,828 shares in 2007 and 2006) | (77 | ) | (77 | ) | |||
Total stockholders' equity | 172,086 | 150,731 | |||||
$ | 505,634 | $ | 415,953 |
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30 | September 30 | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
Gross premiums written | $ | 62,304 | $ | 58,107 | $ | 193,539 | $ | 153,718 | |||||
Ceded premiums written | (779 | ) | (3,102 | ) | (8,947 | ) | (7,542 | ) | |||||
Net premiums written | 61,525 | 55,005 | 184,592 | 146,176 | |||||||||
Change in unearned premiums | (2,100 | ) | (12,811 | ) | (18,209 | ) | (41,289 | ) | |||||
Net premiums earned | 59,425 | 42,194 | 166,383 | 104,887 | |||||||||
Investment income, net of expenses | 3,774 | 2,912 | 9,811 | 7,505 | |||||||||
Gain (loss) on investments | 418 | (135 | ) | 1,299 | (1,501 | ) | |||||||
Finance charges | 1,206 | 1,037 | 3,477 | 2,940 | |||||||||
Commission and fees | 7,280 | 9,943 | 23,344 | 32,223 | |||||||||
Processing and service fees | 111 | 410 | 586 | 1,994 | |||||||||
Other income | 4 | 4 | 12 | 24 | |||||||||
Total revenues | 72,218 | 56,365 | 204,912 | 148,072 | |||||||||
Losses and loss adjustment expenses | 36,723 | 23,589 | 99,620 | 60,478 | |||||||||
Other operating expenses | 24,087 | 23,044 | 70,511 | 64,097 | |||||||||
Interest expense | 1,026 | 1,527 | 2,608 | 4,774 | |||||||||
Interest expense from amortization of discount on convertible notes | - | - | - | 9,625 | |||||||||
Amortization of intangible asset | 573 | 573 | 1,719 | 1,719 | |||||||||
Total expenses | 62,409 | 48,733 | 174,458 | 140,693 | |||||||||
Income before tax | 9,809 | 7,632 | 30,454 | 7,379 | |||||||||
Income tax expense | 3,227 | 2,755 | 10,087 | 2,918 | |||||||||
Net income | $ | 6,582 | $ | 4,877 | $ | 20,367 | $ | 4,461 | |||||
Common stockholders net income per share: | |||||||||||||
Basic | $ | 0.32 | $ | 0.27 | $ | 0.98 | $ | 0.28 | |||||
Diluted | $ | 0.32 | $ | 0.27 | $ | 0.98 | $ | 0.28 |
Three Months Ended September 30, 2007 | ||||||||||||||||
Standard | Specialty | |||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||
Produced premium | 21,945 | 37,919 | 14,854 | - | 74,718 | |||||||||||
Gross premiums written | 21,918 | 25,531 | 14,855 | - | 62,304 | |||||||||||
Ceded premiums written | 198 | (977 | ) | - | - | (779 | ) | |||||||||
Net premiums written | 22,116 | 24,554 | 14,855 | - | 61,525 | |||||||||||
Change in unearned premiums | (311 | ) | (870 | ) | (919 | ) | - | (2,100 | ) | |||||||
Net premiums earned | 21,805 | 23,684 | 13,936 | - | 59,425 | |||||||||||
Total revenues | 23,530 | 32,760 | 15,185 | 743 | 72,218 | |||||||||||
Losses and loss adjustment expenses | 13,513 | 13,682 | 9,532 | (4 | ) | 36,723 | ||||||||||
Pre-tax income (loss) | 3,514 | 6,350 | 1,854 | (1,909 | ) | 9,809 | ||||||||||
Net loss ratio (1) | 62.0 | % | 57.8 | % | 68.4 | % | 61.8 | % | ||||||||
Net expense ratio (1) | 27.3 | % | 30.8 | % | 22.9 | % | 27.7 | % | ||||||||
Net combined ratio (1) | 89.3 | % | 88.6 | % | 91.3 | % | 89.5 | % |
Three Months Ended September 30, 2006 | ||||||||||||||||
Standard | Specialty | |||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||
Produced premium | 22,206 | 41,320 | 12,278 | - | 75,804 | |||||||||||
Gross premiums written | 21,967 | 23,862 | 12,278 | - | 58,107 | |||||||||||
Ceded premiums written | (2,270 | ) | (832 | ) | - | - | (3,102 | ) | ||||||||
Net premiums written | 19,697 | 23,030 | 12,278 | - | 55,005 | |||||||||||
Change in unearned premiums | (497 | ) | (11,256 | ) | (1,058 | ) | - | (12,811 | ) | |||||||
Net premiums earned | 19,200 | 11,774 | 11,220 | - | 42,194 | |||||||||||
Total revenues | 20,964 | 22,889 | 12,257 | 255 | 56,365 | |||||||||||
Losses and loss adjustment expenses | 9,347 | 7,450 | 6,800 | (8 | ) | 23,589 | ||||||||||
Pre-tax income (loss) | 5,112 | 2,867 | 2,316 | (2,663 | ) | 7,632 | ||||||||||
Net loss ratio (1) | 48.7 | % | 63.3 | % | 60.6 | % | 55.9 | % | ||||||||
Net expense ratio (1) | 28.1 | % | 30.7 | % | 24.3 | % | 27.8 | % | ||||||||
Net combined ratio (1) | 76.8 | % | 94.0 | % | 84.9 | % | 83.7 | % |
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. |
Nine Months Ended September 30, 2007 | ||||||||||||||||
Standard | Specialty | |||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||
Produced premium | 70,246 | 118,232 | 43,228 | - | 231,706 | |||||||||||
Gross premiums written | 70,139 | 80,172 | 43,228 | - | 193,539 | |||||||||||
Ceded premiums written | (5,241 | ) | (3,706 | ) | - | - | (8,947 | ) | ||||||||
Net premiums written | 64,898 | 76,466 | 43,228 | - | 184,592 | |||||||||||
Change in unearned premiums | (2,966 | ) | (12,100 | ) | (3,143 | ) | - | (18,209 | ) | |||||||
Net premiums earned | 61,932 | 64,366 | 40,085 | - | 166,383 | |||||||||||
Total revenues | 65,300 | 93,836 | 43,654 | 2,122 | 204,912 | |||||||||||
Losses and loss adjustment expenses | 37,621 | 35,398 | 26,612 | (11 | ) | 99,620 | ||||||||||
Pre-tax income (loss) | 8,937 | 20,477 | 6,148 | (5,108 | ) | 30,454 | ||||||||||
Net loss ratio (1) | 60.7 | % | 55.0 | % | 66.4 | % | 59.9 | % | ||||||||
Net expense ratio (1) | 27.4 | % | 31.4 | % | 23.1 | % | 27.9 | % | ||||||||
Net combined ratio (1) | 88.1 | % | 86.4 | % | 89.5 | % | 87.8 | % |
Nine Months Ended September 30, 2006 | ||||||||||||||||
Standard | Specialty | |||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||
Produced premium | 69,357 | 115,610 | 34,116 | - | 219,083 | |||||||||||
Gross premiums written | 68,884 | 50,718 | 34,116 | - | 153,718 | |||||||||||
Ceded premiums written | (6,122 | ) | (1,420 | ) | - | - | (7,542 | ) | ||||||||
Net premiums written | 62,762 | 49,298 | 34,116 | - | 146,176 | |||||||||||
Change in unearned premiums | (12,396 | ) | (26,136 | ) | (2,757 | ) | - | (41,289 | ) | |||||||
Net premiums earned | 50,366 | 23,162 | 31,359 | - | 104,887 | |||||||||||
Total revenues | 57,768 | 56,003 | 34,944 | (643 | ) | 148,072 | ||||||||||
Losses and loss adjustment expenses | 27,165 | 13,969 | 19,369 | (25 | ) | 60,478 | ||||||||||
Pre-tax income (loss) | 11,245 | 7,925 | 6,760 | (18,551 | ) | 7,379 | ||||||||||
Net loss ratio (1) | 53.9 | % | 60.3 | % | 61.8 | % | 57.7 | % | ||||||||
Net expense ratio (1) | 29.1 | % | 27.6 | % | 25.7 | % | 27.8 | % | ||||||||
Net combined ratio (1) | 83.0 | % | 87.9 | % | 87.5 | % | 85.5 | % |
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. |