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FOR IMMEDIATE RELEASE
HALLMARK FINANCIAL SERVICES, INC.
ANNOUNCES THIRD QUARTER 2009 EARNINGS RESULTS
FORT WORTH, Texas, (November 12, 2009) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported third quarter 2009 net earnings of $4.2 million compared to $0.6 million reported for third quarter 2008. Year to date, Hallmark reported net earnings of $15.3 million, compared to $15.3 million for the same period the prior year. On a fully diluted basis, net earnings were $0.20 per share and $0.73 per share for the third quarter and the first nine months of 2009, as compared to $0.03 per share and $0.73 per share for the similar periods of 2008. Total revenues were $71.9 million and $213.6 million for the third quarter and first nine months of 2009, as compared to $65.0 million and $208.5 million for the similar periods of 2008.
Mark J. Morrison, President and Chief Executive Officer, said, “Our premium production increased 4% year to date compared to a year ago due to our ongoing geographic and product expansion in our Personal Segment and the expansion of our Specialty Commercial Segment with the acquisition of Heath XS late last year. However, our continued adherence to underwriting discipline during prolonged soft market conditions has contributed to a decrease in premium production in our Standard Commercial Segment and the other lines of business in our Specialty Commercial Segment. We continue to see aggressive pricing on larger commercial accounts from national standard lines carriers and an increased appetite for risks that have historically been written in the E&S market. However, the greatest factor affecting our premium production is the impact of the economic slowdown on our insureds. Even with strong retention rates on our existing accounts, our commercial businesses again experienced declining premium as a result of a decrease in exposure units upon renewal.”
Mr. Morrison continued, “Our primary focus continues to be on underwriting profitability, as opposed to premium growth or market share. We are achieving this goal by remaining disciplined in soft market conditions, as evidenced by our 92.9% combined ratio for the year.”
Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share has increased 25% to $10.79 as of September 30, 2009 compared to $8.61 as of December 31, 2008. In light of the flat change in book value per share during 2008, our year to date growth in book value per share in 2009 represents true incremental growth from where we began 2008. Other operating metrics continue to be strong with cash flow from operations of $46 million and comprehensive income of $42 million for the nine months ended September 30, 2009.”
Mr. Schwarz continued, “Total investments and cash and cash equivalents were $421 million as of September 30, 2009 up 19% compared to December 31, 2008. Investment income declined 15% during the third quarter of 2009 compared to the third quarter of 2008, due to near zero yields for cash and short term securities. As of quarter end, Hallmark had $84 million of cash and cash equivalents, plus other securities with short maturities, available to be deployed in higher yielding investments should suitable opportunities arise. Additionally, during the quarter Hallmark repurchased 750,000 shares of its common stock, representing 3.6% of total shares outstanding at a price of $7 per share, or 65% of the Company’s $10.79 book value per share as of September 30, 2009.”
Three Months Ended | ||||||||||||
September 30, | ||||||||||||
2009 | 2008 | % Change | ||||||||||
($ in thousands) | ||||||||||||
Produced premium (1) | $ | 70,797 | $ | 70,015 | 1 | % | ||||||
Gross premiums written | 74,013 | 59,005 | 25 | % | ||||||||
Net premiums written | 62,791 | 56,512 | 11 | % | ||||||||
Net premiums earned | 64,238 | 58,928 | 9 | % | ||||||||
Commission and fee income | 2,018 | 3,127 | -35 | % | ||||||||
Investment income, net of expenses | 3,467 | 4,100 | -15 | % | ||||||||
Net realized gain (loss) on investments | 597 | (2,496 | ) | - | ||||||||
Total revenues | 71,903 | 64,989 | 11 | % | ||||||||
Net earnings (2) | 4,214 | 631 | 568 | % | ||||||||
Net earnings per share - basic | $ | 0.20 | $ | 0.03 | 567 | % | ||||||
Net earnings per share - diluted | $ | 0.20 | $ | 0.03 | 567 | % | ||||||
Annualized return on average equity | 7.9 | % | 1.3 | % | 508 | % | ||||||
Book value per share | $ | 10.79 | $ | 9.11 | 18 | % | ||||||
Cash flow from operations | $ | 16,913 | $ | 7,409 | 128 | % |
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2009 | 2008 | % Change | ||||||||||
($ in thousands) | ||||||||||||
Produced premium (1) | $ | 222,447 | $ | 213,275 | 4 | % | ||||||
Gross premiums written | 220,545 | 186,357 | 18 | % | ||||||||
Net premiums written | 203,831 | 179,854 | 13 | % | ||||||||
Net premiums earned | 185,987 | 177,936 | 5 | % | ||||||||
Commission and fee income | 10,834 | 16,280 | -33 | % | ||||||||
Investment income, net of expenses | 11,203 | 11,682 | -4 | % | ||||||||
Net realized gain (loss) on investments | 1,116 | (1,405 | ) | - | ||||||||
Total revenues | 213,557 | 208,494 | 2 | % | ||||||||
Net earnings (2) | 15,279 | 15,306 | 0 | % | ||||||||
Net earnings per share - basic | $ | 0.73 | $ | 0.74 | -1 | % | ||||||
Net earnings per share - diluted | $ | 0.73 | $ | 0.73 | 0 | % | ||||||
Annualized return on average equity | 10.3 | % | 11.1 | % | -7 | % | ||||||
Book value per share | $ | 10.79 | $ | 9.11 | 18 | % | ||||||
Cash flow from operations | $ | 45,695 | $ | 37,158 | 23 | % |
(1) Produced premium is a non-GAAP measurement that management uses to track total premium produced by our operations. Produced premium excludes unaffiliated third party premium fronted by our recently acquired Hallmark County Mutual Insurance Company subsidiary. We believe it is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or assumed by third party insurance carriers who pay us commission revenue.
(2) Net earnings is net income attributable to Hallmark Financial Services, Inc. as reported in our consolidated statements of operations.
During the three and nine months ended September 30, 2009, our total revenues were $71.9 million and $213.6 million, representing a 11% and 2% increase from the $65.0 million and $208.5 million in total revenues for the same periods of 2008. This increase in revenue was primarily attributable to increased earned premium due to increased retention of business in our Specialty Commercial Segment, the acquisition of our Heath XS Operating Unit in the third quarter of 2008 and increased production by our Personal Lines Segment. Increased revenue was partially offset by reduced earned premium in our Standard Commercial Segment due to the deterioration of the general economic environment in our major markets and by lower commission and fee income in our Specialty Commercial Segment due to profit sharing commission adjustments related to adverse loss development on prior accident years, as well as the shift from a third party agency structure to an insurance underwriting structure.
We reported net earnings of $4.2 million and $15.3 million for the three and nine months ended September 30, 2009, which were $3.6 million higher than the $0.6 million reported for the third quarter 2008 and the same as reported for the nine months ended September 30, 2008. On a diluted basis per share, net earnings were $0.20 and $0.73 per share for the three months and nine months ended September 30, 2009, as compared to $0.03 and $0.73 per share for the same periods in 2008. The increase in net earnings for the three months ended September 30, 2009 was primarily attributable to increased revenue partially offset by higher loss and loss adjustment expense due mostly to unfavorable prior year loss development of $1.7 million recognized in the three months ending September 30, 2009 as compared to favorable development of $0.1 million recognized during the three months ending September 30, 2008. The increase in revenue for the nine months ending September 30, 2009 was offset by increased loss and loss adjustment expense due mostly to unfavorable prior year loss development of $3.5 million recognized during the nine months ending September 30, 2009, as compared to favorable development of $1.9 million recognized during the nine months ending September 30, 2008.
Hallmark's net loss ratio was 63.2% and 62.1% for the three and nine months ended September 30, 2009 as compared to 66.2% and 62.1% for the same periods of 2008. Hallmark's net expense ratio was 31.0% and 30.8% for the three and nine months ended September 30, 2009 as compared to 30.1% and 30.5% for the same periods of 2008. Hallmark maintained profitable net combined ratios of 94.2% and 92.9% for the three and nine months ended September 30, 2009 as compared to 96.3% and 92.6% for the same periods in the prior year.
Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Hallmark’s business involves marketing, distributing, underwriting and servicing commercial insurance, personal insurance and general aviation insurance, as well as providing other insurance related services. The Company is headquartered in Fort Worth, Texas and its common stock is listed on NASDAQ under the symbol "HALL."
Forward-looking statements in this Release are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company’s products and services in the marketplace, competitive factors, interest rate trends, general economic conditions, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission.
For further information, please contact:
Mark J. Morrison, President and Chief Executive Officer at 817.348.1600
www.hallmarkgrp.com
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
September 30 | December 31 | |||||||
ASSETS | 2009 | 2008 | ||||||
(unaudited) | ||||||||
Investments: | ||||||||
�� Debt securities, available-for-sale, at fair value | $ | 295,452 | $ | 268,513 | ||||
Equity securities, available-for-sale, at fair value | 40,959 | 25,003 | ||||||
Total investments | 336,411 | 293,516 | ||||||
Cash and cash equivalents | 84,422 | 59,134 | ||||||
Restricted cash and cash equivalents | 5,918 | 8,033 | ||||||
Premiums receivable | 48,794 | 44,032 | ||||||
Accounts receivable | 3,729 | 4,531 | ||||||
Receivable for securities | 181 | 1,031 | ||||||
Prepaid reinsurance premiums | 11,198 | 1,349 | ||||||
Reinsurance recoverable | 11,695 | 8,218 | ||||||
Deferred policy acquisition costs | 22,629 | 19,524 | ||||||
Excess of cost over fair value of net assets acquired | 41,080 | 41,080 | ||||||
Intangible assets, net | 29,789 | 28,969 | ||||||
Current federal income tax recoverable | 1,080 | 696 | ||||||
Deferred federal income taxes | - | 6,696 | ||||||
Prepaid expenses | 816 | 1,007 | ||||||
Other assets | 18,264 | 20,582 | ||||||
Total assets | $ | 616,006 | $ | 538,398 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Liabilities: | ||||||||
Notes payable | $ | 59,502 | $ | 60,919 | ||||
Reserves for unpaid losses and loss adjustment expenses | 180,179 | 156,363 | ||||||
Unearned premiums | 130,467 | 102,192 | ||||||
Unearned revenue | 266 | 2,037 | ||||||
Reinsurance balances payable | 2,680 | - | ||||||
Accrued agent profit sharing | 1,908 | 2,151 | ||||||
Accrued ceding commission payable | 8,600 | 8,605 | ||||||
Pension liability | 4,427 | 4,309 | ||||||
Deferred federal income taxes | 92 | - | ||||||
Payable for securities | 688 | 3,606 | ||||||
Accounts payable and other accrued expenses | 9,148 | 18,067 | ||||||
Total liabilities | 397,957 | 358,249 | ||||||
Commitments and Contingencies | ||||||||
Redeemable non-controlling interest | 1,011 | 737 | ||||||
Stockholders' equity: | ||||||||
Common stock, $.18 par value (authorized 33,333,333 shares in 2009 and 2008; | ||||||||
issued 20,871,498 shares in 2009 and 20,841,782 shares in 2008) | 3,757 | 3,751 | ||||||
Capital in excess of par value | 121,261 | 119,928 | ||||||
Retained earnings | 89,186 | 72,242 | ||||||
Accumulated other comprehensive income (loss) | 8,161 | (16,432 | ) | |||||
Treasury stock, at cost (757,828 shares in 2009 and 7,828 in 2008) | (5,327 | ) | (77 | ) | ||||
Total stockholders' equity | 217,038 | 179,412 | ||||||
$ | 616,006 | $ | 538,398 |
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Gross premiums written | $ | 74,013 | $ | 59,005 | $ | 220,545 | $ | 186,357 | ||||||||
Ceded premiums written | (11,222 | ) | (2,493 | ) | (16,714 | ) | (6,503 | ) | ||||||||
Net premiums written | 62,791 | 56,512 | 203,831 | 179,854 | ||||||||||||
Change in unearned premiums | 1,447 | 2,416 | (17,844 | ) | (1,918 | ) | ||||||||||
Net premiums earned | 64,238 | 58,928 | 185,987 | 177,936 | ||||||||||||
Investment income, net of expenses | 3,467 | 4,100 | 11,203 | 11,682 | ||||||||||||
Net realized gains (losses) | 597 | (2,496 | ) | 1,116 | (1,405 | ) | ||||||||||
Finance charges | 1,525 | 1,307 | 4,324 | 3,894 | ||||||||||||
Commission and fees | 2,018 | 3,127 | 10,834 | 16,280 | ||||||||||||
Processing and service fees | 7 | 20 | 33 | 98 | ||||||||||||
Other income | 51 | 3 | 60 | 9 | ||||||||||||
Total revenues | 71,903 | 64,989 | 213,557 | 208,494 | ||||||||||||
Losses and loss adjustment expenses | 40,579 | 38,981 | 115,552 | 110,514 | ||||||||||||
Other operating expenses | 23,428 | 24,041 | 71,056 | 71,114 | ||||||||||||
Interest expense | 1,147 | 1,186 | 3,456 | 3,557 | ||||||||||||
Amortization of intangible assets | 916 | 620 | 2,412 | 1,766 | ||||||||||||
Total expenses | 66,070 | 64,828 | 192,476 | 186,951 | ||||||||||||
Income before tax | 5,833 | 161 | 21,081 | 21,543 | ||||||||||||
Income tax expense (benefit) | 1,585 | (485 | ) | 5,766 | 6,222 | |||||||||||
Net income | 4,248 | 646 | 15,315 | 15,321 | ||||||||||||
Less: Net income attributable to | ||||||||||||||||
non-controlling interest | 34 | 15 | 36 | 15 | ||||||||||||
Net income attributable to Hallmark Financial Services, Inc. | $ | 4,214 | $ | 631 | $ | 15,279 | $ | 15,306 | ||||||||
Net income per share attributable to Hallmark Financial | ||||||||||||||||
Services, Inc. common stockholders: | ||||||||||||||||
Basic | $ | 0.20 | $ | 0.03 | $ | 0.73 | $ | 0.74 | ||||||||
Diluted | $ | 0.20 | $ | 0.03 | $ | 0.73 | $ | 0.73 |
Consolidated Segment Data
Three Months Ended September 30, 2009 | ||||||||||||||||||||
Standard | Specialty | |||||||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||||||
Produced premium (1) | $ | 17,309 | $ | 36,064 | $ | 17,424 | $ | - | $ | 70,797 | ||||||||||
Gross premiums written | 17,309 | 39,280 | 17,424 | - | 74,013 | |||||||||||||||
Ceded premiums written | (1,144 | ) | (10,078 | ) | - | - | (11,222 | ) | ||||||||||||
Net premiums written | 16,165 | 29,202 | 17,424 | - | 62,791 | |||||||||||||||
Change in unearned premiums | 1,627 | 92 | (272 | ) | - | 1,447 | ||||||||||||||
Net premiums earned | 17,792 | 29,294 | 17,152 | - | 64,238 | |||||||||||||||
Total revenues | 19,569 | 32,346 | 18,735 | 1,253 | 71,903 | |||||||||||||||
Losses and loss adjustment expenses | 11,425 | 17,641 | 11,513 | - | 40,579 | |||||||||||||||
Pre-tax income (loss), net of | ||||||||||||||||||||
non-controlling interest | 2,164 | 3,588 | 2,225 | (2,178 | ) | 5,799 | ||||||||||||||
Net loss ratio (2) | 64.2 | % | 60.2 | % | 67.1 | % | 63.2 | % | ||||||||||||
Net expense ratio (2) | 32.8 | % | 29.8 | % | 22.4 | % | 31.0 | % | ||||||||||||
Net combined ratio (2) | 97.0 | % | 90.0 | % | 89.5 | % | 94.2 | % |
Three Months Ended September 30, 2008 | ||||||||||||||||||||
Standard | Specialty | |||||||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||||||
Produced premium (1) | $ | 18,957 | $ | 36,295 | $ | 14,763 | $ | - | $ | 70,015 | ||||||||||
Gross premiums written | 18,954 | 25,288 | 14,763 | - | 59,005 | |||||||||||||||
Ceded premiums written | (1,274 | ) | (1,219 | ) | - | - | (2,493 | ) | ||||||||||||
Net premiums written | 17,680 | 24,069 | 14,763 | - | 56,512 | |||||||||||||||
Change in unearned premiums | 1,784 | 650 | (18 | ) | - | 2,416 | ||||||||||||||
Net premiums earned | 19,464 | 24,719 | 14,745 | - | 58,928 | |||||||||||||||
Total revenues | 20,280 | 30,245 | 16,053 | (1,589 | ) | 64,989 | ||||||||||||||
Losses and loss adjustment expenses | 13,239 | 16,287 | 9,455 | - | 38,981 | |||||||||||||||
Pre-tax income (loss), net of | ||||||||||||||||||||
non-controlling interest | 887 | 745 | 2,544 | (4,030 | ) | 146 | ||||||||||||||
Net loss ratio (2) | 68.0 | % | 65.9 | % | 64.1 | % | 66.2 | % | ||||||||||||
Net expense ratio (2) | 30.9 | % | 30.8 | % | 21.5 | % | 30.1 | % | ||||||||||||
Net combined ratio (2) | 98.9 | % | 96.7 | % | 85.6 | % | 96.3 | % |
1 | Produced premium is a non-GAAP measurement that management uses to track total premium produced by our operations. Produced premium excludes unaffiliated third party premium fronted on our recently acquired Hallmark County Mutual Insurance Company subsidiary. We believe this is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or assumed by third party insurance carriers who pay us commission revenue. |
2 | The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. During the second quarter of 2009 we changed the method in which the net expense ratio is calculated. The net expense ratio is now calculated for our operating units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. For the operating units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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. All prior period ratios have been restated to conform to the new method, resulting in an increase to the consolidated net expense ratio of 1.3% for the three months ended September 30, 2008. |
Consolidated Segment Data
Nine Months Ended September 30, 2009 | ||||||||||||||||||||
Standard | Specialty | |||||||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||||||
Produced premium (1) | $ | 56,881 | $ | 110,598 | $ | 54,968 | $ | - | $ | 222,447 | ||||||||||
Gross premiums written | 56,881 | 108,696 | 54,968 | - | 220,545 | |||||||||||||||
Ceded premiums written | (3,331 | ) | (13,383 | ) | - | - | (16,714 | ) | ||||||||||||
Net premiums written | 53,550 | 95,313 | 54,968 | - | 203,831 | |||||||||||||||
Change in unearned premiums | 419 | (13,692 | ) | (4,571 | ) | - | (17,844 | ) | ||||||||||||
Net premiums earned | 53,969 | 81,621 | 50,397 | - | 185,987 | |||||||||||||||
Total revenues | 57,783 | 97,601 | 54,971 | 3,202 | 213,557 | |||||||||||||||
Losses and loss adjustment expenses | 33,890 | 48,422 | 33,240 | - | 115,552 | |||||||||||||||
Pre-tax income (loss), net of | ||||||||||||||||||||
non-controlling interest | 5,987 | 14,280 | 7,738 | (6,960 | ) | 21,045 | ||||||||||||||
Net loss ratio (2) | 62.8 | % | 59.3 | % | 66.0 | % | 62.1 | % | ||||||||||||
Net expense ratio (2) | 32.4 | % | 30.0 | % | 21.4 | % | 30.8 | % | ||||||||||||
Net combined ratio (2) | 95.2 | % | 89.3 | % | 87.4 | % | 92.9 | % |
Nine Months Ended September 30, 2008 | ||||||||||||||||||||
Standard | Specialty | |||||||||||||||||||
Commercial | Commercial | Personal | ||||||||||||||||||
Segment | Segment | Segment | Corporate | Consolidated | ||||||||||||||||
Produced premium (1) | $ | 62,330 | $ | 104,302 | $ | 46,643 | $ | - | $ | 213,275 | ||||||||||
Gross premiums written | 62,327 | 77,387 | 46,643 | - | 186,357 | |||||||||||||||
Ceded premiums written | (3,667 | ) | (2,836 | ) | - | - | (6,503 | ) | ||||||||||||
Net premiums written | 58,660 | 74,551 | 46,643 | - | 179,854 | |||||||||||||||
Change in unearned premiums | 2,224 | (1,900 | ) | (2,242 | ) | - | (1,918 | ) | ||||||||||||
Net premiums earned | 60,884 | 72,651 | 44,401 | - | 177,936 | |||||||||||||||
Total revenues | 64,617 | 94,617 | 48,277 | 983 | 208,494 | |||||||||||||||
Losses and loss adjustment expenses | 36,218 | 45,266 | 29,030 | - | 110,514 | |||||||||||||||
Pre-tax income (loss) | 9,104 | 12,601 | 7,047 | (7,224 | ) | 21,528 | ||||||||||||||
Net loss ratio (2) | 59.5 | % | 62.3 | % | 65.4 | % | 62.1 | % | ||||||||||||
Net expense ratio (2) | 31.0 | % | 30.6 | % | 21.6 | % | 30.5 | % | ||||||||||||
Net combined ratio (2) | 90.5 | % | 92.9 | % | 87.0 | % | 92.6 | % |
1 | Produced premium is a non-GAAP measurement that management uses to track total premium produced by our operations. Produced premium excludes unaffiliated third party premium fronted on our recently acquired Hallmark County Mutual Insurance Company subsidiary. We believe this is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or assumed by third party insurance carriers who pay us commission revenue. |
2 | The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. During the second quarter of 2009 we changed the method in which the net expense ratio is calculated. The net expense ratio is now calculated for our operating units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. For the operating units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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. All prior period ratios have been restated to conform to the new method, resulting in an increase to the consolidated net expense ratio of 1.6% for the nine months ended September 30, 2008. |