Mark J. Morrison
President and Chief Executive Officer
817.348.1600
www.hallmarkgrp.com
FORT WORTH, Texas (March 17, 2008) Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported a record annual net income of $27.4 million for fiscal 2007 as compared to $9.2 million during fiscal 2006. On a fully diluted basis, net income was $1.32 per share for fiscal 2007 as compared to $0.53 per share for fiscal 2006. Total revenues for fiscal 2007 were $274.5 million, representing an approximately 35% increase from the $202.7 million reported for fiscal 2006.
Hallmark also reported quarterly net income of $7.1 million for the three months ended December 31, 2007, as compared to $4.7 million during the fourth quarter of 2006. On a fully diluted basis, net income was $0.34 per share for the three months ended December 31, 2007, as compared to $0.23 per share for the same period in 2006. During the quarter ended December 31, 2007, Hallmark reported total revenues of $69.6 million, representing an approximately 27% increase over the $54.7 million in total revenues for the fourth quarter of 2006.
Mark J. Morrison, President and Chief Executive Officer, said, "I am pleased to report another landmark year of record earnings for Hallmark. The increase in our revenue for 2007 was the result of the continued execution of our plan to increase the retention of the business we produce despite softening market conditions across the property/casualty insurance industry. Aggregate gross premiums produced by our operating units grew by approximately 2% during 2007. This growth was largely a result of controlled geographic expansion into states where business is less price sensitive. Our underwriting margins continue to be strong in each of our operating units as we have maintained favorable policy retention levels without significant rate concessions."
"Although we continue to see significant rate competition on larger commercial accounts coming primarily from large regional and national standard lines companies, these accounts do not make up the core of our commercial lines of business. However, premiums from renewals of our smaller commercial construction accounts have declined during the last half of 2007, as the general economic slow-down has caused a contraction in revenues and payrolls for this sector. Our Personal Segment continues to experience strong growth associated with geographic expansion and the focus on entering less competitive pricing markets. We believe that our underwriting discipline and bottom-line focus in this softening rate environment will enable us to achieve results superior to the average of our peers in our specialty and niche markets of the property/casualty insurance segment."
Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Our continued underwriting discipline and bottom-line focus is reflected in our net combined ratio of 87.4% for 2007, a return on average equity of 17% and strong cash flow from operations of over $80 million generated for the year. Our solid investment performance contributed to book value per share growth of approximately 19% for the year. Our total return approach has served us well this year to preserve and grow book value while avoiding the issues in sub-prime securities and the related turmoil in the credit markets. We continue to hold a significant position in cash and short-term securities in our portfolio which may be deployed in long term investments should the opportunity arise in the current markets."
Three Months Ended
December 31,
2007 2006 % Change
($ in thousands)
Gross premiums written $ 55,933 $ 60,227 -7%
Net premiums written 53,551 56,752 -6%
Net premiums earned 58,920 47,174 25%
Commission and fee income 4,710 3,120 51%
Investment income,
net of expenses 3,369 2,956 14%
Gain on investments 1,287 35 NM
Total revenues 69,586 54,669 27%
Net income 7,062 4,730 49%
Common EPS - basic $ 0.34 $ 0.23 48%
Common EPS - diluted $ 0.34 $ 0.23 48%
Annualized return on
average equity 16.1% 13.9% 16%
Book value per share $ 8.63 $ 7.26 19%
Cash flow from operations $ 18,570 $ 30,466 -39%
Twelve Months Ended
December 31,
2007 2006 % Change
($ in thousands)
Gross premiums written $ 249,472 $ 213,945 17%
Net premiums written 238,143 202,928 17%
Net premiums earned 225,303 152,061 48%
Commission and fee income 28,054 35,343 -21%
Investment income,
net of expenses 13,180 10,461 26%
Gain (loss) on investments 2,586 (1,466) NM
Total revenues 274,498 202,741 35%
Net income 27,429 9,191 198%
Common EPS - basic $ 1.32 $ 0.53 149%
Common EPS - diluted $ 1.32 $ 0.53 149%
Return on average equity 16.6% 7.8% 113%
Book value per share $ 8.63 $ 7.26 19%
Cash flow from operations $ 80,337 $ 75,962 6%
The increases in net income for both the quarter and year were favorably impacted by increased revenue, including additional investment income from a larger investment portfolio, primarily resulting from an increased retention of premiums. Prior year favorable loss reserve development of $3.4 million and $6.4 million during the fourth quarter and fiscal 2007, respectively, as compared to $0.3 million of adverse loss reserve development and $1.2 million of favorable loss reserve development during the same respective periods of fiscal 2006, also contributed to the increase in annual net income. In addition, fiscal 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.
Increased retention of business produced by the Specialty Commercial Segment and Standard Commercial Segment, as well as increased production by the Personal Segment, were the primary causes of the increases in revenue for the quarter and year. Specialty Commercial Segment revenues increased $7.7 million and $45.6 million, or 31% and 56%, during the fourth quarter and fiscal 2007, respectively, as compared to the same periods of 2006. Revenues from the Personal Segment increased $2.6 million and $11.3 million, or 21% and 24%, during the fourth quarter and fiscal 2007, respectively, due largely to geographic expansion into new states. Increased retention of business was the primary reason for the Standard Commercial Segment's $3.3 million and $10.8 million, or 19% and 14%, increases in revenue for the fourth quarter and fiscal 2007, respectively. Investment gains of $1.3 million and $2.6 million for the fourth quarter and fiscal 2007, respectively, as compared to investment gains of $35 thousand for the fourth quarter 2006 and investment losses of $1.5 million for fiscal 2006, were the primary reason for the increase in revenue for Corporate.
Hallmark's net loss ratios were 56.5% and 59.0% for the fourth quarter and fiscal 2007, respectively, compared to 56.5% and 57.3% for the same respective periods in 2006. Hallmark's net expense ratios were 29.9% and 28.4% for the fourth quarter and fiscal 2007, respectively, compared to 28.1% and 28.4% for the same respective periods in 2006. As a result, Hallmark maintained strong net combined ratios of 86.4% and 87.4% for the fourth quarter and fiscal 2007, respectively, as compared to 84.6% and 85.7% for the same respective periods 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, 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
December 31, 2007 and 2006
(In thousands)
2007 2006
ASSETS
Investments:
Debt securities, available-for-sale,
at fair value $ 248,069 $ 133,030
Equity securities, available-for-sale,
at fair value 16,868 4,580
Short-term investments, available-for-sale,
at fair value 2,625 25,275
Total investments 267,562 162,885
Cash and cash equivalents 145,884 81,474
Restricted cash and cash equivalents 16,043 24,569
Prepaid reinsurance premiums 274 1,629
Premiums receivable 46,026 44,644
Accounts receivable 5,219 7,852
Receivable for securities 27,395 5,371
Reinsurance recoverable 4,952 5,930
Deferred policy acquisition costs 19,757 17,145
Excess of cost over fair value of net
assets acquired 30,025 31,427
Intangible assets 23,781 26,074
Deferred federal income taxes 275 -
Prepaid expenses 1,240 1,769
Other assets 17,881 5,184
$ 606,314 $ 415,953
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 60,814 $ 35,763
Structured settlements 10,000 24,587
Reserves for unpaid losses and
loss adjustment expenses 125,338 77,564
Unearned premiums 102,998 91,606
Unearned revenue 2,949 5,734
Reinsurance balances payable - 1,060
Accrued agent profit sharing 2,844 1,784
Accrued ceding commission payable 12,099 3,956
Pension liability 1,669 3,126
Deferred federal income taxes - 2,310
Payable for securities 91,401 -
Current federal income tax payable 630 2,132
Accounts payable and other accrued
expenses 16,385 15,600
427,127 265,222
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
Capital in excess of par value 118,459 117,932
Retained earnings 58,909 31,480
Accumulated other comprehensive loss (1,844) (2,344)
Treasury stock, 7,828 shares in 2007 and
2006, at cost (77) (77)
Total stockholders' equity 179,187 150,731
$ 606,314 $ 415,953
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
($ in thousands, except per share amounts)
Three Months Ended Twelve Months Ended
December 31 December 31
2007 2006 2007 2006
Gross premiums written $ 55,933 $ 60,227 $249,472 $213,945
Ceded premiums written (2,382) (3,475) (11,329) (11,017)
Net premiums written 53,551 56,752 238,143 202,928
Change in unearned
premiums 5,369 (9,578) (12,840) (50,867)
Net premiums earned 58,920 47,174 225,303 152,061
Investment income, net
of expenses 3,369 2,956 13,180 10,461
Gain (loss) on investments 1,287 35 2,586 (1,466)
Finance charges 1,225 1,043 4,702 3,983
Commission and fees 4,710 3,120 28,054 35,343
Processing and service fees 71 336 657 2,330
Other income 4 5 16 29
Total revenues 69,586 54,669 274,498 202,741
Losses and loss adjustment
expenses 33,298 26,639 132,918 87,117
Other operating expenses 23,761 19,486 94,272 83,583
Interest expense 1,306 1,024 3,914 5,798
Interest expense from
amortization of discount on
convertible notes - - - 9,625
Amortization of intangible
asset 574 574 2,293 2,293
Total expenses 58,939 47,723 233,397 188,416
Income before tax 10,647 6,946 41,101 14,325
Income tax expense 3,585 2,216 13,672 5,134
Net income $ 7,062 $ 4,730 $ 27,429 $ 9,191
Common stockholders net
income per share:
Basic $ 0.34 $ 0.23 $ 1.32 $ 0.53
Diluted $ 0.34 $ 0.23 $ 1.32 $ 0.53
Three Months Ended December 31, 2007
Standard Specialty
Commer- Commer-
cial cial Personal Consoli-
Segment Segment Segment Corporate dated
Produced premium 20,739 32,771 12,688 - 66,198
Gross premiums
written 20,729 22,516 12,688 - 55,933
Ceded premiums
written (1,405) (977) - - (2,382)
Net premiums written 19,324 21,539 12,688 - 53,551
Change in unearned
premiums 2,126 2,511 732 - 5,369
Net premiums earned 21,450 24,050 13,420 - 58,920
Total revenues 20,839 32,419 14,614 1,714 69,586
Losses and loss
adjustment
expenses 10,859 13,086 9,357 (4) 33,298
Pre-tax income 3,105 7,566 1,375 (1,399) 10,647
Net loss ratio (1) 50.6% 54.4% 69.7% 56.5%
Net expense ratio (1) 33.1% 30.7% 23.6% 29.9%
Net combined ratio (1) 83.7% 85.1% 93.3% 86.4%
Three Months Ended December 31, 2006
Standard Specialty
Commer- Commer-
cial cial Personal Consoli-
Segment Segment Segment Corporate dated
Produced premium 22,322 40,880 11,019 - 74,221
Gross premiums
written 22,186 27,022 11,019 - 60,227
Ceded premiums
written (2,728) (747) - - (3,475)
Net premiums written 19,458 26,275 11,019 - 56,752
Change in unearned
premiums 250 (9,767) (61) - (9,578)
Net premiums earned 19,708 16,508 10,958 - 47,174
Total revenues 17,557 24,686 12,054 372 54,669
Losses and loss
adjustment expenses 11,634 7,939 7,074 (8) 26,639
Pre-tax income 512 6,384 2,000 (1,950) 6,946
Net loss ratio (1) 59.0% 48.1% 64.5% 56.5%
Net expense ratio (1) 29.3% 30.5% 22.6% 28.1%
Net combined ratio (1) 88.3% 78.6% 87.1% 84.6%
(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.
Twelve Months Ended December 31, 2007
Standard Specialty
Commer- Commer-
cial cial Personal Consoli-
Segment Segment Segment Corporate dated
Produced premium 90,985 151,003 55,916 - 297,904
Gross premiums
written 90,868 102,688 55,916 - 249,472
Ceded premiums
written (6,646) (4,683) - - (11,329)
Net premiums written 84,222 98,005 55,916 - 238,143
Change in unearned
premiums (840) (9,589) (2,411) (12,840)
Net premiums earned 83,382 88,416 53,505 - 225,303
Total revenues 86,139 126,255 58,268 3,836 274,498
Losses and loss
adjustment expenses 48,480 48,484 35,969 (15) 132,918
Pre-tax income 12,042 28,043 7,523 (6,507) 41,101
Net loss ratio (1) 58.1% 54.8% 67.2% 59.0%
Net expense ratio (1) 28.9% 31.2% 23.2% 28.4%
Net combined
ratio (1) 87.0% 86.0% 90.4% 87.4%
Twelve Months Ended December 31, 2006
Standard Specialty
Commer- Commer-
cial cial Personal Consoli-
Segment Segment Segment Corporate dated
Produced premium 91,679 156,490 45,135 - 293,304
Gross premiums
written 91,070 77,740 45,135 - 213,945
Ceded premiums
written (8,850) (2,167) - - (11,017)
Net premiums written 82,220 75,573 45,135 - 202,928
Change in unearned
premiums (12,146) (35,903) (2,818) - (50,867)
Net premiums earned 70,074 39,670 42,317 - 152,061
Total revenues 75,325 80,689 46,998 (271) 202,741
Losses and loss
adjustment expenses 38,799 21,908 26,443 (33) 87,117
Pre-tax income 11,757 14,309 8,760 (20,501) 14,325
Net loss ratio (1) 55.4% 55.2% 62.5% 57.3%
Net expense ratio (1) 29.4% 30.5% 24.9% 28.4%
Net combined
ratio (1) 84.8% 85.7% 87.4% 85.7%
(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.
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