Mark J. Morrison
President and Chief Executive Officer
Hallmark Financial Services, Inc.,
(817) 348-1600
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 $64.1 million and 27.8%, respectively, for the same period in 2006.
Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance, non-standard personal automobile insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our general aviation business which is written on a national basis. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol "HALL."
The Hallmark Financial Services, Inc. logo is available at http://www.primenewswire.com/newsroom/prs/?pkgid=4395
Forward-looking statements in this Release are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company's products and services in the marketplace, competitive factors, interest rate trends, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company's periodic report filings with the Securities and Exchange Commission.
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
Sept. 30 Dec. 31
ASSETS 2007 2006
(unaudited) (audited)
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)
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 Consol-
Segment Segment Segment Corporate idated
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 Consol-
Segment Segment Segment Corporate idated
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 Consol-
Segment Segment Segment Corporate idated
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 Consol-
Segment Segment Segment Corporate idated
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.
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