Exhibit 99.1

 

 

FOR IMMEDIATE RELEASE

 

HALLMARK FINANCIAL ANNOUNCES SECOND QUARTER 2020 RESULTS

 

DALLAS, Texas, (August 10, 2020) - 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
$ in millions (unaudited):		2020				2019				2020				2019
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
($ in thousands, unaudited)		2020				2019				% Change				2020				2019				% Change
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 (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 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.

 

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.

 

 

														Weighted
		Income				Less Tax				Net				Average				Diluted
($ in thousands)		Before Tax				Effect				After Tax				Shares 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 817.348.1600

www.hallmarkgrp.com

 

 

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

		Jun. 30				Dec. 31
($ in thousands, except par value)		2020				2019
			(unaudited)
ASSETS
Investments:
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
		June 30,								June 30,
($ in thousands, except per share amounts, unaudited)		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.