CONTACT:
Mark J. Morrison
President and Chief Executive Officer
Hallmark Financial Services Inc.
(817) 348 -1600
www.hallmarkgrp.com
FORT WORTH, Texas - March 20, 2007 - Hallmark Financial Services, Inc. (Nasdaq: HALL) today reported quarterly net income of $4.7 million for the fourth quarter ended December 31, 2006, representing a 63% increase from the $2.9 million in net income for the fourth quarter of 2005. Diluted earnings per share for the three months ended December 31, 2006, were $0.23, representing a 15% increase over the $0.20 in diluted earnings per share for the same period of the prior year. Affecting the diluted per share earnings was the issuance of 3 million common shares from the successful completion of the Company's underwritten public offering during the fourth quarter of 2006.
Hallmark also reported net income of $9.2 million and diluted earnings per share of $0.53 for the year ended December 31, 2006, compared to net income of $9.2 million and diluted earnings per share of $0.76 in the prior year. During the year ended December 31, 2006, Hallmark recorded $9.6 million of interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January 2006, and converted to common stock during the second quarter of 2006. In the absence of this non-cash expense, the Company's net income for the year ended December 31, 2006, would have been $15.3 million, representing a 66% increase over fiscal 2005, and its diluted earnings per share would have been $0.89 for the year ended December 31, 2006. Diluted earnings per share for the year ended December 31, 2006 were also impacted by the public offering in the fourth quarter.
During the three months and year ended December 31, 2006, Hallmark reported total revenues of $54.7 million and $202.7 million, representing 105% and 133% increases, respectively, over the $26.6 million and $87.0 million in total revenues for the comparable periods of 2005.
Mark J. Morrison, President and Chief Executive Officer, said, "We are very pleased with the results the Company achieved for 2006. Each of our reporting segments performed well during the year and contributed significantly to the overall results. Our record revenues and operating profits for the year are primarily due to recent acquisitions and increased premium retention, as well as year-over-year improvements in underwriting results and operational efficiency. Looking forward, we expect growth in gross written premium to continue into 2007 and beyond as a result of both increased retention of existing business and organic growth."
Mark E. Schwarz, Executive Chairman of Hallmark, stated, "I believe that 2006 was a landmark year for our company in which we made excellent progress in implementing our long-term strategic goals. We began the year with the acquisitions of the enterprises now comprising our Aerospace Operating Unit and TGA Operating Unit, which added significant breadth to the organization. These operating units, which constitute our Specialty Commercial Segment, have performed to our expectations and have been successfully integrated into our operational structure. Our continuing goal is to selectively acquire businesses like these as a means to expand our existing segments into new specialty and niche markets. In addition, the successful completion of our public offering in the fourth quarter of 2006 has broadened our shareholder base and provided the capital structure needed to support the increased premium retention we anticipate."
Three Months Ended Year Ended
December 31, December 31,
2006 2005 2006 2005
($ in thousands)
Gross premiums written $60,227 $26,482 $213,945 $89,467
Net premiums written 56,752 25,819 202,928 88,252
Net premiums earned 47,174 20,457 152,061 59,184
Commission and fee income 3,120 3,169 35,343 16,703
Net investment income 2,956 1,562 10,461 3,836
Net realized gain (loss) on
investments 35 6 (1,466) 58
Total revenues 54,669 26,638 202,741 87,035
Net Income 4,730 2,894 9,191 9,186
EPS - Basic $0.23 $0.20 $0.53 $0.76
EPS - Diluted $0.23 $0.20 $0.53 $0.76
Return on Average Equity 13.9% 13.8% 7.8% 15.6%
Adjusted Net Income (1) 4,730 2,894 15,257 9,186
Adjusted EPS - Basic (1) $0.23 $0.20 $0.89 $0.76
Adjusted EPS - Diluted (1) $0.23 $0.20 $0.89 $0.76
Adjusted Return on Average
Equity (1) 13.9% 13.8% 17.2% 15.6%
Book Value Per Share $7.26 $5.89 $7.26 $5.89
(1) Adjusted to exclude the effect of the non-cash interest expense
charge of $6.1 million (net of tax) resulting from the convertible
promissory notes issued and converted during the year.
The following reconciles Hallmark's year to date net income, diluted earnings per share and return on average equity computed without the interest expense from amortization attributable to the deemed discount on convertible promissory notes to its reported results (in thousands). Management believes this reconciliation provides useful supplemental information in evaluating the operating results of Hallmark's business. This disclosure should not be viewed as a substitute for net income, diluted earnings per share and return on average equity determined in accordance with U.S. generally accepted accounting principles ("GAAP"):
Income excluding Interest
interest expense expense from
from amortization amortization
of discount, of Tax Net
net of tax discount effect Income
Year ended December 31, 2006 $15,257 $9,625 $(3,559) $9,191
Weighted average shares -
basic 17,181 17,181
Weighted average shares -
diluted 17,194 17,194
Average shareholders' equity 117,960 117,960
Net income per share - basic $0.89 $0.53
Net income per share -
diluted $0.89 $0.53
Return on average equity 17.2% 7.8%
Excluding the effect of the non-cash interest expense charge, the increase in net income for the three months and year ended December 31, 2006 versus the same periods in 2005 was primarily attributable to the results of Hallmark's Specialty Commercial Segment, the subsidiaries of which were acquired January 1, 2006, the retention of business produced by its Standard Commercial Segment beginning in the third quarter of 2005 and additional investment income.
The acquisitions of the subsidiaries comprising the Specialty Commercial Segment in the first quarter of 2006 contributed $24.7 million and $80.7 million to the increase in total revenues for the three months and year ended December 31, 2006, respectively, as compared to the same periods in 2005. The retention of business produced by the Standard Commercial Segment that was previously retained by third parties also contributed $8.0 million and $48.3 million to the increase in revenue for the three months and year ended December 31, 2006, respectively, but was partially offset by lower ceding commissions and fee revenues of $6.3 million and $18.3 million for the three months and year ended December 31, 2006, respectively, primarily attributable to the shift from a third-party agency structure to an insurance underwriting structure.
Net investment income for the three months and year ended December 31, 2006 were $3.0 million and $10.5 million, respectively, compared to $1.6 million and $3.8 million for the similar periods in 2005. The quarter and fiscal year increases of 89% and 173%, respectively, reflected higher interest rates and greater average cash and invested assets in 2006 attributable to positive cash flow from operations and reinvestment of the strong earnings. The fiscal year increase was partially offset by net realized losses on our investment portfolio of $1.5 million for fiscal 2006 as compared to nominal net realized gains during fiscal 2005.
Hallmark's net losses and loss adjustment expenses and its net loss ratio for the three months ended December 31, 2006 were $26.6 million and 56.5%, respectively, compared to $11.2 million and 54.7%, respectively, for the same period in 2005. The net losses and loss adjustment expenses and net loss ratio for the year ended December 31, 2006 were $87.1 million and 57.3%, respectively, compared to $33.8 million and 57.1%, respectively, for the same period of 2005. For the three months ended December 31, 2006, the Company had a reduction in its projected favorable development of prior years' loss reserve estimates of $0.3 million, as compared to $1.2 million of favorable development recognized for the same period in 2005. For the year ended December 31, 2006, the Company recognized $1.2 million in favorable development of prior years' loss reserve estimates as compared to $2.4 million of favorable development during 2005.
Hallmark's other operating costs and expenses and its expense ratio for the three months ended December 31, 2006 were $19.5 million and 28.1%, respectively, compared to $10.7 million and 32.4%, respectively, for the same period in 2005. Other operating costs and expenses and the expense ratio for the year ended December 31, 2006 were $83.6 million and 28.4%, respectively, compared to $38.5 million and 30.8% for the same period of 2005.
Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property and casualty insurance products to businesses and individuals. The Company's business involves marketing, distributing, underwriting and servicing commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana, Louisiana, Oklahoma, Arkansas and Washington; marketing, distributing, underwriting and servicing non-standard personal automobile insurance in Texas, New Mexico, Arizona, Oklahoma, Arkansas, Idaho, Oregon and Washington; marketing, distributing, underwriting and servicing general aviation insurance in 47 states; and providing other insurance related services. 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, 2006 and 2005
(In thousands)
ASSETS 2006 2005
Investments:
Debt securities, available-for-sale,
at fair value $125,784 $79,360
Equity securities, available-for-sale,
at fair value 4,580 3,403
Short-term investments, available-for-sale,
at fair value 25,275 12,281
Total investments 155,639 95,044
Cash and cash equivalents 81,474 44,528
Restricted cash and investments 31,815 13,802
Prepaid reinsurance premiums 1,629 767
Premiums receivable 44,644 26,530
Accounts receivable 13,223 2,083
Reinsurance recoverable 5,930 444
Deferred policy acquisition costs 17,145 9,164
Excess of cost over fair value of net assets
acquired 31,427 4,836
Intangible assets 26,074 459
Deferred federal income taxes - 3,992
Prepaid expenses 1,769 802
Other assets 5,184 6,455
$415,953 $208,906
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $35,763 $30,928
Structured settlements 24,587 -
Reserves for unpaid losses and loss
adjustment expenses 77,564 26,321
Unearned premiums 91,606 36,027
Unearned revenue 5,734 4,055
Reinsurance balances payable 1,060 116
Accrued agent profit sharing 1,784 2,173
Accrued ceding commission payable 3,956 11,430
Pension liability 3,126 2,932
Deferred federal income taxes 2,310 -
Current federal income tax payable 2,132 300
Accounts payable and other accrued expenses 15,600 9,436
265,222 123,718
Commitments and contingencies
Stockholders' equity:
Common stock, $.18 par value, authorized
33,333,333 shares in 2006 and 16,666,667
shares in 2005; issued 20,776,066 shares
in 2006 and 14,476,102 shares in 2005 3,740 2,606
Capital in excess of par value 117,932 62,907
Retained earnings 31,480 22,289
Accumulated other comprehensive loss (2,344) (2,597)
Treasury stock, 7,828 shares in 2006 and
2,470 shares in 2005, at cost (77) (17)
Total stockholders' equity 150,731 85,188
$415,953 $208,906
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
($ in thousands, except per share amounts)
Three Months Ended Year Ended
December 31 December 31
2006 2005 2006 2005
Gross premiums written $60,227 $26,482 $213,945 $89,467
Ceded premiums written (3,475) (663) (11,017) (1,215)
Net premiums written 56,752 25,819 202,928 88,252
Change in unearned premiums (9,578) (5,362) (50,867) (29,068)
Net premiums earned 47,174 20,457 152,061 59,184
Investment income, net of expenses 2,956 1,562 10,461 3,836
Realized gain (loss) 35 6 (1,466) 58
Finance charges 1,043 508 3,983 2,044
Commission and fees 3,120 3,169 35,343 16,703
Processing and service fees 336 931 2,330 5,183
Other income 5 5 29 27
Total revenues 54,669 26,638 202,741 87,035
Losses and loss adjustment expenses 26,639 11,200 87,117 33,784
Other operating costs and expenses 19,486 10,740 83,583 38,492
Interest expense 1,024 600 5,798 1,264
Interest expense from amortization of
discount on convertible notes - - 9,625 -
Amortization of intangible asset 574 (4) 2,293 27
Total expenses 47,723 22,536 188,416 73,567
Income before tax 6,946 4,102 14,325 13,468
Income tax expense 2,216 1,208 5,134 4,282
Net income $4,730 $2,894 $9,191 $9,186
Common stockholders net income per
share:
Basic $0.23 $0.20 $0.53 $0.76
Diluted $0.23 $0.20 $0.53 $0.76
Hallmark Financial Services, Inc.
Consolidated Segment Data
Three Months Ended December 31, 2006
Standard Specialty
Commercial Commercial Personal Consol-
Segment Segment Segment Corporate idated
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
Loss 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
Loss ratio (1) 59.0% 48.1% 64.6% 56.5%
Expense ratio (2) 29.3% 30.5% 22.6% 28.1%
Combined ratio (3) 88.3% 78.6% 87.2% 84.6%
Three Months Ended December 31, 2005
Standard Specialty
Commercial Commercial Personal Consol-
Segment Segment Segment Corporate idated
Produced premium 19,512 - 8,337 - 27,849
Gross premiums written 18,083 - 8,399 - 26,482
Ceded premiums written (1,151) - 488 - (663)
Net premiums written 16,932 - 8,887 - 25,819
Change in unearned
premiums (5,248) - (114) - (5,362)
Net premiums earned 11,684 - 8,773 - 20,457
Total revenues 15,873 - 10,738 27 26,638
Loss and loss adjustment
expenses 6,979 - 4,237 (16) 11,200
Pre-tax income 1,890 - 3,981 (1,769) 4,102
Loss ratio (1) 59.7% 48.3% 54.7%
Expense ratio (2) 34.2% 30.0% 32.4%
Combined ratio (3) 93.9% 78.3% 87.1%
Hallmark Financial Services, Inc.
Consolidated Segment Data
Year Ended December 31, 2006
Standard Specialty
Commercial Commercial Personal Consol-
Segment Segment Segment Corporate idated
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
Loss 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
Loss ratio (1) 55.4% 55.2% 62.5% 57.3%
Expense ratio (2) 29.4% 30.5% 24.9% 28.4%
Combined ratio (3) 84.8% 85.7% 87.4% 85.7%
Year Ended December 31, 2005
Standard Specialty
Commercial Commercial Personal Consol-
Segment Segment Segment Corporate idated
Produced premium 81,721 - 36,345 - 118,066
Gross premiums written 52,952 - 36,515 - 89,467
Ceded premiums written (1,703) - 488 - (1,215)
Net premiums written 51,249 - 37,003 - 88,252
Change in unearned
premiums (29,498) - 430 - (29,068)
Net premiums earned 21,751 - 37,433 - 59,184
Total revenues 43,067 - 43,907 61 87,035
Loss and loss adjustment
expenses 12,610 - 21,239 (65) 33,784
Pre-tax income 6,651 - 11,647 (4,830) 13,468
Loss ratio (1) 58.0% 56.7% 57.1%
Expense ratio (2) 34.4% 28.8% 30.8%
Combined ratio (3) 92.4% 85.5% 87.9%
(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.
(2) 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. During the fourth quarter of
fiscal 2006, we adopted the widely used industry calculation that
offsets expenses with agency fee income. All prior period
comparative expense ratios have been restated.
(3) Net combined ratio is calculated as the sum of the net loss ratio and
the net expense ratio.
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