Contact:
Mark J. Morrison
president and Chief Executive Officer
(817) 348-1600
FORT WORTH, Texas, August 11, 2008 – Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported net income of $7.2 million for the second quarter of 2008, an 18% decrease from the $8.8 million reported for the second quarter of 2007. Year to date, Hallmark reported net income of $14.3 million, representing a 3% increase over the $13.8 million reported for the first six months of 2007. On a fully diluted basis, net income was $0.34 per share and $0.68 per share for the second quarter and six months ended June 30, 2008, as compared to $0.42 per share and $0.66 per share for the similar periods of 2007. Total revenues were $71.7 million and $142.9 million for the second quarter and first six months of 2008, representing 4% and 8% increases from the $68.7 million and $132.7 million reported for the similar periods of 2007.
Mark J. Morrison, President and Chief Executive Officer, said, "Overall, the results for the quarter were solid and the operating margins in our core books of business have proven to be resilient in this soft market cycle. However, the general economic and insurance market conditions have provided ongoing challenges. Nonetheless, we continue to maintain discipline in our underwriting and pricing practices. We see little or no long term benefit to chasing underpriced business for the sake of near term top line growth. Our strategy of increasing our retention of the business produced within the commercial specialty area has helped to bolster revenue and partially offset the soft market conditions. We also believe that our continued selective expansion into new states will yield long term benefits by positioning us to attract new business within the broader footprint when market pricing returns to more rational levels."
Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Our net combined ratio of 90%, annualized return on average equity of 15% and cash flow from operations of over $17 million for the second quarter demonstrate the results of our underwriting discipline and focus on the bottom-line. Solid investment performance has also contributed to a 16% increase in book value per share since the end of the second quarter of 2007. Our long term focus is to continue to improve the financial value and operational capacity of the Company as measured through intrinsic value per share. While this will not necessarily occur evenly over discrete quarterly intervals, we are nonetheless pleased with the continued progress made during the second quarter of 2008."
Three Months Ended
June 30,
%
2008 2007 Change
($ in thousands)
Gross premiums written $ 63,115 $ 66,577 -5%
Net premiums written 60,788 62,296 -2%
Net premiums earned 59,443 55,310 7%
Commission and fee income 6,669 8,159 -18%
Investment income, net of expenses 3,957 3,047 30%
Realized gain 232 828 -72%
Total revenues 71,663 68,736 4%
Net income 7,201 8,815 -18%
Common EPS - basic $ 0.35 $ 0.42 -17%
Common EPS - diluted $ 0.34 $ 0.42 -19%
Annualized return on average equity 15.3% 22.0% -30%
Book value per share $ 9.20 $ 7.91 16%
Cash flow from operations $ 17,361 $ 25,632 -32%
Six Months Ended
June 30,
%
2008 2007 Change
($ in thousands)
Gross premiums written $127,352 $131,235 -3%
Net premiums written 122,693 123,067 0%
Net premiums earned 118,359 106,958 11%
Commission and fee income 13,153 16,064 -18%
Investment income, net of expenses 7,582 6,037 26%
Realized gain 1,091 881 24%
Total revenues 142,856 132,694 8%
Net income 14,253 13,785 3%
Common EPS - basic $ 0.69 $ 0.66 5%
Common EPS - diluted $ 0.68 $ 0.66 3%
Annualized return on average equity 15.4% 17.5% -12%
Book value per share $ 9.20 $ 7.91 16%
Cash flow from operations $ 29,749 $ 44,594 -33%
During the three and six months ended June 30, 2008, Hallmark's total revenues were $71.7 and $142.9 million, representing a 4% and 8% increase over the $68.7 million and $132.7 in total revenues for the same periods of 2007. Increased earned premium due to increased retention of business produced by the Specialty Commercial Segment and increased production by the Personal Segment were the primary causes of the increases in revenue. Standard Commercial Segment revenues increased $2.2 million, or 11% and 5%, during the three and six months ended June 30, 2008 as compared to the same periods during 2007, due primarily to increased contingent commissions related to favorable loss development on prior accident years. Specialty Commercial Segment revenues decreased $1.0 million and increased $3.0 million, during the three months and six months ended June 30, 2008 as compared to the same periods of 2007, due to lower commission income primarily as a result of the continued shift from a third-party agency model to an underwriting model, partially offset by increased net premiums earned as a result of the increased retention of business. Revenues from our Personal Segment increased $1.8 million and $3.8 million, or 12% and 13%, during the three and six months ended June 30, 2008 as compared to the same periods during 2007, due largely to geographic expansion into new states. Corporate revenue of $1.0 million remained relatively unchanged for the second quarter of 2008 as compared to the same period in 2007. Corporate revenue increased $1.2 million for the six months ended June 30, 2008 due primarily to increased recognized gains on our investment portfolio of $0.2 million and increased investment income of $1.0 million due to changes in capital allocation.
We reported net income of $7.2 million and $14.3 million for the three and six months ended June 30, 2008, which was $1.6 million lower and $0.5 million higher than the $8.8 million and $13.8 million reported for the same periods in 2007. The decrease in net income for the three months was primarily attributable to favorable loss development on prior accident years during the second quarter of 2008 of $0.3 million as compared to $1.9 million for the same period during 2007. The year to date increase in net income was primarily attributable to a lower effective tax rate from a higher amount of tax exempt bonds in our investment portfolio in 2008 than we held in 2007. Year to date 2008 pre-tax income increased $0.1 million to $20.7 million from the prior year. Increased revenue was partially offset by increased incurred loss and loss adjustment expense of $8.6 million, increased interest expense of $0.8 million from our issuance of trust preferred securities in the third quarter of 2007 and increased operating expense of $0.6 million.
Hallmark's net loss ratio was 60.6% for the second quarter of 2008 as compared to 55.5% for the second quarter of 2007. For the year to date, Hallmark's net loss ratio was 60.4% as compared to 58.8% for the same period the prior year. Hallmark's net expense ratio was 29.2% for the second quarter of 2008 as compared to 27.9% for the second quarter of 2007. For the year to date, Hallmark's net expense ratio was 29.1% as compared to 28.1% for the same period the prior year. Hallmark maintained a profitable net combined ratio of 89.8% for the second quarter of 2008 and 89.5% for the year to date as compared to 83.4% and 86.9% 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. Our business involves marketing, distributing, underwriting and servicing commercial insurance, personal 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.
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
June 30 December 31
ASSETS 2008 2007
(unaudited)
Investments:
Debt securities, available-for-sale,
at fair value $ 164,137 $ 248,069
Equity securities, available-for-
sale, at fair value 51,694 15,166
Short-Term investments, available-
for-sale, at fair value 121,440 2,625
Total investments 337,271 265,860
Cash and cash equivalents 33,599 145,884
Restricted cash and cash equivalents 11,588 16,043
Premiums receivable 47,090 46,026
Accounts receivable 5,257 5,219
Receivable for securities 200 27,395
Prepaid reinsurance premiums 682 274
Reinsurance recoverable 3,791 4,952
Deferred policy acquisition costs 20,652 19,757
Excess of cost over fair value of
net assets acquired 30,025 30,025
Intangible assets 22,634 23,781
Current federal income tax recoverable 724
Deferred federal income taxes 2,413 275
Prepaid expenses 1,212 1,240
Other assets 21,402 19,583
Total assets $ 538,540 $ 606,314
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 60,592 $ 60,814
Structured settlements 10,000
Reserves for unpaid losses and
loss adjustment expenses 144,374 125,338
Unearned premiums 107,369 102,998
Unearned revenue 2,253 2,949
Accrued agent profit sharing 1,335 2,844
Accrued ceding commission payable 12,189 12,099
Pension liability 1,432 1,669
Current federal income tax 630
Payable for securities 3,401 91,401
Accounts payable and other
accrued expenses 14,150 16,385
Total liabilities 347,095 427,127
Commitments and Contingencies
Stockholders' equity:
Common stock, $.18 par value
(authorized 33,333,333 shares
in 2008 and 2007; issued
20,816,782 in 2008 and
20,776,080 shares in 2007) 3,747 3,740
Capital in excess of par value 119,369 118,459
Retained earnings 73,162 58,909
Accumulated other comprehensive loss (4,756) (1,844)
Treasury stock, at cost (7,828 shares
in 2008 and 2007) (77) (77)
Total stockholders' equity 191,445 179,187
$ 538,540 $ 606,314
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
2008 2007 2008 2007
Gross premiums written $ 63,115 $ 66,577 $ 127,352 $ 131,235
Ceded premiums written (2,327) (4,281) (4,659) (8,168)
Net premiums written 60,788 62,296 122,693 123,067
Change in unearned
premiums (1,345) (6,986) (4,334) (16,109)
Net premiums earned 59,443 55,310 118,359 106,958
Investment income, net
of expenses 3,957 3,047 7,582 6,037
Realized gain 232 828 1,091 881
Finance charges 1,323 1,185 2,587 2,271
Commission and fees 6,669 8,159 13,153 16,064
Processing and service
fees 36 203 78 475
Other income 3 4 6 8
Total revenues 71,663 68,736 142,856 132,694
Losses and loss
adjustment expenses 36,029 30,712 71,533 62,897
Other operating expenses 23,608 23,723 47,073 46,424
Interest expense 1,186 796 2,371 1,582
Amortization of
intangible asset 573 573 1,146 1,146
Total expenses 61,396 55,804 122,123 112,049
Income before tax 10,267 12,932 20,733 20,645
Income tax expense 3,066 4,117 6,480 6,860
Net income $ 7,201 $ 8,815 $ 14,253 $ 13,785
Common stockholders
net income per share:
Basic $ 0.35 $ 0.42 $ 0.69 $ 0.66
Diluted $ 0.34 $ 0.42 $ 0.68 $ 0.66
Hallmark Financial Services, Inc.
Consolidated Segment Data
Three Months Ended June 30, 2008
Standard Specialty
Commercial Commercial Personal Consol
Segment Segment Segment Corporate idated
Produced premium
(1) $ 21,624 $ 35,986 $ 14,153 $ $ 71,763
Gross premiums
written 21,624 27,338 14,153 63,115
Ceded premiums
written (1,382) (945) (2,327)
Net premiums written 20,242 26,393 14,153 60,788
Change in unearned
premiums 36 (2,395) 1,014 (1,345)
Net premiums earned 20,278 23,998 15,167 59,443
Total revenues 22,157 31,988 16,498 1,020 71,663
Losses and loss
adjustment expenses 11,669 13,976 10,384 36,029
Pre-tax income
(loss) 3,984 6,265 1,913 (1,895) 10,267
Net loss ratio (2) 57.5% 58.2% 68.5% 60.6%
Net expense ratio
(2) 27.3% 30.7% 21.6% 29.2%
Net combined ratio
(2) 84.8% 88.9% 90.1% 89.8%
Three Months Ended June 30, 2007
Standard Specialty
Commercial Commercial Personal Consol
Segment Segment Segment Corporate idated
Produced premium
(1) $ 24,751 $ 40,956 $ 13,298 $ $ 79,005
Gross premiums
written 24,740 28,540 13,297 66,577
Ceded premiums
written (2,804) (1,477) (4,281)
Net premiums written 21,936 27,063 13,297 62,296
Change in unearned
premiums (1,731) (5,474) 219 (6,986)
Net premiums earned 20,205 21,589 13,516 55,310
Total revenues 20,003 32,978 14,696 1,059 68,736
Losses and loss
adjustment expenses 11,267 10,635 8,813 (3) 30,712
Pre-tax income
(loss) 2,664 9,441 2,176 (1,349) 12,932
Net loss ratio (2) 55.8% 49.3% 65.2% 55.5%
Net expense ratio
(2) 27.0% 32.0% 22.8% 27.9%
Net combined ratio
(2) 82.8% 81.3% 88.0% 83.4%
1 Produced premium is a non-GAAP measurement that management uses
to track total controlled premium produced by our operations. 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 retained by third party
insurance carriers where we receive commission revenue.
2 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.
Hallmark Financial Services, Inc.
Consolidated Segment Data
Six Months Ended June 30, 2008
Standard Specialty
Commercial Commercial Personal Consoli
Segment Segment Segment Corporate dated
Produced
premium (1) 43,373 68,006 31,880 143,259
Gross premiums
written 43,373 52,099 31,880 127,352
Ceded premiums
written (2,746) (1,913) (4,659)
Net premiums
written 40,627 50,186 31,880 122,693
Change in
unearned
premiums 440 (2,550) (2,224) (4,334)
Net premiums
earned 41,067 47,636 29,656 118,359
Total revenues 43,986 64,075 32,224 2,571 142,856
Losses and loss
adjustment
expenses 22,979 28,979 19,575 71,533
Pre-tax income
(loss) 7,865 11,558 4,503 (3,193) 20,733
Net loss ratio
(2) 56.0% 60.8% 66.0% 60.4%
Net expense
ratio (2) 27.3% 30.7% 22.0% 29.1%
Net combined
ratio (2) 83.3% 91.5% 88.0% 89.5%
Six Months Ended June 30, 2007
Standard Specialty
Commercial Commercial Personal Consoli
Segment Segment Segment Corporate dated
Produced
premium (1) 48,301 80,313 28,374 156,988
Gross premiums
written 48,221 54,641 28,373 131,235
Ceded premiums
written (5,439) (2,729) (8,168)
Net premiums
written 42,782 51,912 28,373 123,067
Change in
unearned
premiums (2,655) (11,230) (2,224) (16,109)
Net premiums
earned 40,127 40,682 26,149 106,958
Total revenues 41,770 61,076 28,469 1,379 132,694
Losses and loss
adjustment
expenses 24,108 21,716 17,080 (7) 62,897
Pre-tax income
(loss) 5,423 14,127 4,294 (3,199) 20,645
Net loss
ratio (2) 60.1% 53.4% 65.3% 58.8%
Net expense
ratio (2) 27.5% 31.8% 23.2% 28.1%
Net combined
ratio (2) 87.6% 85.2% 88.5% 86.9%
1 Produced premium is a non-GAAP measurement that management uses
to track total controlled premium produced by our operations. 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 retained by third party
insurance carriers where we receive commission revenue.
2 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.
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