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Hallmark Announces Second Quarter Results

DALLAS, Aug. 14, 2023 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today filed its Form 10-Q and announced financial results for the second quarter and six months ended June 30, 2023.

 Second Quarter Year-to-Date
  2023  2022   2023  2022 
$ in millions:    
Net loss from continuing operations$(17.8)$(67.0) $(57.0)$(78.7)
Net income (loss) from discontinued operations$5.9 $(2.4) $6.0 $6.1 
Net loss$(11.9)$(69.4) $(51.0)$(72.6)
Operating loss (1)$(12.4)$(63.9) $(17.4)$(75.6)
      
$ per diluted share (2):    
Net loss from continuing operations$(9.78)$(36.85) $(31.37)$(43.30)
Net income (loss) from discontinued operations$3.23 $(1.31) $3.29 $3.35 
Net loss$(6.55)$(38.16) $(28.08)$(39.95)
Operating loss (1)$(6.83)$(35.12) $(9.56)$(41.58)

(1)   See “Non-GAAP Financial Measures” below
(2)   Per share amounts have been restated to reflect one-for-ten reverse stock split

Highlights of results from the quarter:

  • Net loss from continuing operations in the second quarter of 2023 of $17.8 million, or $9.78 per share, as compared to a net loss of $67.0 million, or $36.85 per share for the comparable period in 2022. Year-to-date net loss from continuing operations of $57.0 million, or $31.37 per share, for 2023 as compared to a net loss of $78.7 million, or $43.30 per share, for the comparable period in 2022.

  • Net income from discontinued operations of $5.9 million, or $3.23 per share, in the second quarter of 2023 as compared to a net loss from discontinued operations of $2.4 million, or $1.31 per share, for the comparable period in 2022. Year-to-date net income from discontinued operations of $6.0 million, or $3.29 per share, for 2023 as compared to net income of $6.1 million, or $3.35 per share, for the comparable period in 2022.

  • Net loss of $11.9 million, or $6.55 per share, in the second quarter of 2023 includes $3.1 million or $1.72 per share related to the DARAG(a) write-off to bad debt expense based on the final definitive award declared on June 2, 2023, compared to a net loss of $69.4 million, or $38.16 per share, for the comparable period in 2022. Year-to-date net loss of $51.0 million, or $28.08 per share, for 2023 includes $29.1 million, or $16.00 per share, related to the DARAG(a) write-off to bad debt expense on the final definitive award declared on June 2, 2023, as compared to a net loss of $72.6 million, or $39.95 per share, for the comparable period in 2022. See Non-GAAP Financial Measures below.

  • Net combined ratio of 157.3% for the three months ended June 30, 2023, compared to 240.9% for the same periods the prior year. Year-to-date net combined ratio for 2023 of 185.9% as compared to 187.3% for the comparable period in 2022.

  • Underlying combined ratio (excluding net prior year development, catastrophe losses and write-off of DARAG(a) receivable) of 119.4% for the three months ended June 30, 2023, compared to 117.7% for the same period the prior year. Year-to-date underlying combined ratio for 2023 of 114.9% as compared to 113.6% for the comparable period in 2022. See Non-GAAP Financial Measures below.

  • Net investment income was $4.0 million during the three months ended June 30, 2023, as compared to $3.1 million during the same period in 2022. Year-to-date net investment income for 2023 of $8.4 million as compared to $5.0 million for the comparable period in 2022.

  • As of June 30, 2023, the Company has $150.5 million in cash and cash equivalents. Our debt securities were $295.8 million as of June 30, 2023 as compared to $426.6 million as of December 31, 2022. Furthermore, 92% of debt securities have maturities of five years or less and overall our debt securities portfolio has an average modified duration of 0.7 years.

  • The Company continues to maintain a full valuation allowance for income tax in fiscal 2023.

  • Due to the Maui, Hawaii wildfires on August 9, 2023, we preliminarily estimate our net loss exposure to be $7.5 million plus additional cost in the form of reinstatement premiums to restore any necessary reinsurance layers. The net loss and any additional cost incurred will be recognized in our third quarter 2023 financial statements.

  • On May 5, 2023, the Company entered into an agreement with an A.M. Best rated “A” insurance company to continue to write new business in circumstances that require an A.M. Best financial strength rating.

 a)As previously disclosed in Hallmark’s public filings, certain of Hallmark’s subsidiaries were parties to an arbitration proceeding relating to a Loss Portfolio Transfer Reinsurance Contract with DARAG Bermuda Ltd. and DARAG Insurance Limited. On May 4, 2023, the arbitration panel rendered an interim final award, which resulted in a write-off of $32.9 million recognized during the first quarter of 2023, subject to final determination of certain amounts under settlement which may increase or decrease our total write-off. As of March 31, 2023, our consolidated balance sheet included $3.9 million of account receivable from DARAG related to cost incurred in which we contended we have right of reimbursement. On June 2, 2023, the final definitive binding award was declared by the arbitration panel which resulted in an additional write-off to Hallmark of $3.9 million, or $3.1 million if tax effected, during the second quarter of 2023. This additional write-off results in a total write-off of $36.8 million, or $29.1 million if tax effected, included in our year-to-date net loss.


Second Quarter and Year-to-Date 2023 Financial Review

 Second Quarter Year-to-Date
  2023  2022   2023  2022 
($ in thousands)    
Gross premiums written$54,511 $56,004  $111,683 $115,337 
Net premiums written$43,875 $37,438  $86,256 $78,707 
Net premiums earned$36,847 $37,037  $72,127 $76,352 
Investment income, net of expenses$4,019 $3,120  $8,361 $4,979 
Investment gains (losses), net$248 $(3,994) $(392)$(3,943)
Net (loss) from continuing operations$(17,785)$(67,035) $(57,031)$(78,712)
Net income from discontinued operations$5,876 $(2,382) $5,980 $6,076 
Net (loss) income$(11,909)$(69,417) $(51,051)$(72,636)
Operating (loss) income (2)$(12,416)$(63,880) $(17,389)$(75,597)
Net (loss) income per share from continuing operations basic & diluted (1)$(9.78)$(36.85) $(31.37)$(43.30)
Net income per share from discontinued operations - basic & diluted$3.23 $(1.31) $3.29 $3.35 
Net loss per share - basic & diluted$(6.55)$(38.16) $(28.08)$(39.95)
Operating (loss) per share - basic & diluted (2)$(6.83)$(35.12) $(9.56)$(41.58)
Book value per share$6.81 $53.01  $6.81 $53.01 

 

(1)   Per share amounts have been restated for a reverse stock split
(2)   See “Non-GAAP Financial Measures” below


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 income and operating income per share are calculated by excluding net investment gains and losses and asset impairments or valuation allowances from GAAP net income from continuing operations. Asset impairments and valuation allowances are unusual and infrequent charges for the Company. Management believes that operating income and operating income per share provide useful information to investors about the performance of and underlying trends in the Company’s core insurance operations. Net income from continuing operations and net income per share from continuing operations are the GAAP measures that are most directly comparable to operating earnings and operating earnings per share. A reconciliation of operating income and operating income per share to the most comparable GAAP financial measures is presented below.

 
Hallmark Financial Services, Inc. and Subsidiaries
Non-GAAP Financial Measures Reconciliation
      
($ in thousands)Income (Loss)
from Continuing Operations
Before Tax
Less Tax
Effect
Net
After Tax
Weighted
Average
Shares Diluted
Diluted
Per Share
Second Quarter 2023    
Reported GAAP measures$(17,918)$(133)$ (17,785)1,818$ (9.78)
Excluded deferred tax valuation allowance$- $(2,441)$2,441 1,818$1.34 
Excluded write-off receivable from reinsurer$3,954 $830 $3,124 1,818$1.72 
Excluded investment (gains)/losses$(248)$(52)$(196)1,818$(0.11)
Operating loss$(14,212)$(1,796)$ (12,416)1,818$ (6.83)
      
Second Quarter 2022    
Reported GAAP measures$(54,585)$12,450 $ (67,035)1,819$ (36.85)
Excluded investment (gains)/losses$3,994 $839 $3,155 1,819$1.73 
Operating loss$(50,591)$13,289 $ (63,880)1,819$ (35.12)
      
Year-to-Date 2023    
Reported GAAP measures$(57,698)$(667)$ (57,031)1,818$(31.37)
Excluded deferred tax valuation allowance$- $(10,239)$10,239 1,818$5.63 
Excluded write-off receivable from reinsurer$36,826 $7,733 $29,093 1,818$16.00 
Excluded investment (gains)/losses$392 $82 $310 1,818$0.17 
Operating loss$(20,480)$(3,091)$ (17,389)1,818$ (9.56)
      
Year-to-Date 2022    
Reported GAAP measures$(69,442)$9,270 $ (78,712)1,818$ (43.30)
Excluded investment (gains)/losses$3,943 $828 $3,115 1,818$1.71 
Operating income$(65,499)$10,098 $ (75,597)1,818$ (41.58)

 


Underlying combined ratio is calculated by excluding the impact of net favorable or unfavorable prior year loss development and catastrophe losses from the calculation of the net combined ratio. Management believes that the underlying combined ratio provides useful information to investors about the current performance of the Company's insurance operations absent historical developments and uncontrollable events. Combined ratio is the GAAP measure most comparable to underlying combined ratio. A reconciliation of the underlying combined ratio to the combined ratio is presented below.

     
 2ndQ 2023  2ndQ 2022YTD 2023YTD 2022
Net combined ratio157.3%240.9%185.9%187.3%
Impact on net combined ratio   
Net Unfavorable (Favorable) Prior Year Development24.5%120.9%16.1%72.3%
Catastrophes, net of reinsurance2.8%2.3%3.8%1.4%
Write-off receivable from reinsurer10.7%0.0%51.1%0.0%
Underlying combined ratio119.4%117.7%114.9%113.6%

 


A copy of our Form 10-Q is available on our website at www.hallmarkgrp.com or on the SEC website at www.sec.gov. Readers are urged to review the Form 10-Q for a more complete discussion of our financial performance.

About Hallmark

Hallmark is a property and casualty insurance holding company with a diversified portfolio of insurance products written on a national platform. With six insurance subsidiaries, Hallmark markets, underwrites and services commercial and personal insurance in select markets. Hallmark 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:

Chris Kenney
Chief Executive Officer
817.348.1600
www.hallmarkgrp.com

 
 
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets    
($ in thousands, except par value) Jun. 30 Dec. 31
ASSETS 2023  2022 
Investments:   
Debt securities, available-for-sale, at fair value (amortized cost: $299,544 in 2023 and $434,119 in 2022; allowance for expected credit losses of $0 in 2023)$295,761 $426,597 
Equity securities (cost: $24,284 in 2023 and $30,058 in 2022) 22,763  28,199 
Total investments 318,524  454,796 
Cash and cash equivalents 150,528  59,133 
Restricted cash 14,781  29,486 
Ceded unearned premiums 86,661  237,086 
Premiums receivable 49,506  78,355 
Accounts receivable 1,076  10,859 
Receivable from reinsurer -  58,882 
Receivable for securities 476  945 
Reinsurance recoverable (net of allowance for expected credit losses of $200 in 2023) 593,635  578,424 
Deferred policy acquisition costs 9,858  8 
Federal income tax recoverable -  2,668 
Prepaid pension assets 239  163 
Prepaid expenses 1,878  1,508 
Other assets 22,186  24,389 
Total Assets$1,249,348 $1,536,702 
LIABILITIES AND STOCKHOLDERS' EQUITY    
Liabilities:    
Senior unsecured notes due 2029 (less unamortized debt issuance costs of $599 in 2023 and $648 in 2022)$49,401 $49,352 
Subordinated debt securities (less unamortized debt issuance costs of $666 in 2023 and $691 in 2022) 56,036  56,011 
Reserves for unpaid losses and loss adjustment expenses 784,846  880,869 
Unearned premiums 156,394  292,691 
Reinsurance payable 111,176  128,950 
Federal income tax payable 464  - 
Accounts payable and other liabilities 78,646  68,535 
Total Liabilities 1,236,963  1,476,408 
Commitments and contingencies    
Stockholders' equity:    
Common stock, $1.00 par value, authorized 3,333,333 shares; issued 2,087,283 shares in 2023 and 20222,087  2,087 
Additional paid-in capital 124,879  124,740 
(Accumulated deficit) retained earnings (84,458) (33,407)
Accumulated other comprehensive loss (5,489) (8,492)
Treasury stock (268,801 shares in 2023 and 2022), at cost (24,634) (24,634)
Total Stockholders Equity 12,385  60,294 
Total Liabilities & Stockholders Equity$1,249,348 $1,536,702 
 


Hallmark Financial Services, Inc. and Subsidiaries    
Consolidated Statements of OperationsThree Months Ended Year-to-Date
($ in thousands, except per share amounts)June 30, June 30,
 2023 2022  2023 2022 
Gross premiums written$54,511 $56,004  $111,683 $115,337 
Ceded premiums written (10,636) (18,566)  (25,427) (36,630)
Net premiums written 43,875  37,438   86,256  78,707 
Change in unearned premiums (7,028) (401)  (14,129) (2,355)
Net premiums earned 36,847  37,037   72,127  76,352 
          
Investment income, net of expenses 4,019  3,120   8,361  4,979 
Investment gains (losses), net 248  (3,994)  (392) (3,943)
Finance charges 732  980   1,511  1,963 
Other income 64  14   134  29 
Total revenues 41,910  37,157   81,741  79,380 
          
Losses and loss adjustment expenses 36,752  72,646   66,516  112,028 
Operating expenses 21,138  17,723   69,087  34,150 
Interest expense 1,938  1,366   3,836  2,630 
Amortization of intangible assets 0  7   0  14 
Total expenses 59,828  91,742   139,439  148,822 
          
(Loss) income from continuing operations before tax (17,918) (54,585)  (57,698) (69,442)
Income tax (benefit) expense from continuing operations (133) 12,450   (667) 9,270 
Net (loss) income from continuing operations$(17,785)$(67,035) $(57,031)$(78,712)
          
Discontinued operations:         
Total pretax income from discontinued operations$5,876 $(2,965) $5,980 $7,773 
Income tax (benefit) expense on discontinued operations -  (583)  -  1,697 
Income (loss) from discontinued operations, net of tax$5,876 $(2,382) $5,980 $6,076 
          
Net (loss) income$(11,909)$(69,417) $(51,051)$(72,636)
          
Net (loss) basic income per share:         
Net loss from continuing operations$(9.78)$(36.85) $(31.37)$(43.30)
Net income (loss) from discontinued operations 3.23  (1.31)  3.29  3.35 
Basic net (loss) income per share$(6.55)$(38.16) $(28.08)$(39.95)
          
Net (loss) diluted income per share:         
Net loss from continuing operations$(9.78)$(36.85) $(31.37)$(43.30)
Net income (loss) from discontinued operations 3.23  (1.31)  3.29  3.35 
Diluted net (loss) income per share$(6.55)$(38.16) $(28.08)$(39.95)
          



Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data    
Three Months Ended Jun. 30       
 Commercial Lines SegmentPersonal Lines SegmentRunoff Specialty SegmentCorporateConsolidated
($ in thousands, unaudited) 2023  2022  2023  2022  2023  2022  2023  2022  2023  2022 
Gross premiums written$39,292 $37,385 $15,073 $15,118 $146 $3,501 $- $- $54,511 $56,004 
Ceded premiums written (10,510) (17,890) (78) (74) (48) (602) -  -  (10,636) (18,566)
Net premiums written 28,782  19,495  14,995  15,044  98  2,899  -  -  43,875  37,438 
Change in unearned premiums (5,610) (1,305) (1,420) 809  2  95  -  -  (7,028) (401)
Net premiums earned 23,172  18,190  13,575  15,853  100  2,994  -  -  36,847  37,037 
           
Total revenues 23,185  18,210  14,308  16,827  99  2,994  4,318  (874) 41,910  37,157 
           
Losses and loss adjustment expenses 17,796  13,002  13,474  14,094  5,482  45,550  -  -  36,752  72,646 
           
Pre-tax (loss) income$(2,323)$(863)$(4,717)$(3,040)$(10,030)$(44,279)$(848)$(6,403)$(17,918)$(54,585)
           
Net loss ratio (1) 76.8% 71.5% 99.3% 88.9%N/A (2) 1521.4%   99.7% 196.1%
Net expense ratio (1) 31.8% 34.4% 33.7% 31.6%N/A (2) 51.2%   57.6% 44.8%
Net combined ratio (1) 108.6% 105.9% 133.0% 120.5%N/A (2) 1572.6%   157.3% 240.9%
           
Impact on net combined ratio          
Net Unfavorable (Favorable) Prior Year Development 3.1% 2.1% 18.4% 11.6%N/A (2) 1421.5%   24.5% 120.9%
Catastrophes, net of reinsurance 3.4% 4.3% 1.7% 0.4%N/A (2) 0.0%   2.8% 2.3%
Write-off receivable from reinsurer 0.0% 0.0% 0.0% 0.0%N/A (2) 0.0%   10.7% 0.0%
Underlying combined ratio (1) 102.1% 99.5% 112.9% 108.5%N/A (2) 151.1%   119.4% 117.7%
           
Net Unfavorable (Favorable) Prior Year Development 715  378  2,493  1,835  5,804  42,560  -  -  9,012  44,773 
           

 

(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. The underlying combined ratio is the net combined ratio excluding the impact of net prior year reserve development and catastrophes and excluding the write-off of a receivable from reinsurer.
  
(2)The Company’s Runoff Segment has reached a point of maturity that earned premium is minimal and renders any ratios no longer meaningful.



Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data    
Year-to-Date Ended Jun. 30       
 Commercial Lines SegmentPersonal Lines SegmentRunoff SegmentCorporateConsolidated
($ in thousands, unaudited) 2023  2022  2023  2022  2023  2022  2023  2022  2023  2022 
Gross premiums written$82,637 $75,456 $28,725 $31,950 $321 $7,931 $- $- $111,683 $115,337 
Ceded premiums written (24,999) (35,633) (211) (150) (217) (847) -  -  (25,427) (36,630)
Net premiums written 57,638  39,823  28,514  31,800  104  7,084  -  -  86,256  78,707 
Change in unearned premiums (12,856) (3,378) (1,282) (388) 9  1,411  -  -  (14,129) (2,355)
Net premiums earned 44,782  36,445  27,232  31,412  113  8,495  -  -  72,127  76,352 
           
Total revenues 44,811  36,490  28,744  33,359  113  8,495  8,073  1,036  81,741  79,380 
           
Losses and loss adjustment expenses 33,413  25,914  24,643  26,673  8,460  59,441  -  -  66,516  112,028 
           
Pre-tax (loss) income$(1,497)$(1,499)$(6,492)$(4,353)$(47,225)$(54,317)$(2,484)$(9,273)$(57,698)$(69,442)
           
Net loss ratio (1) 74.6% 71.1% 90.5% 84.9%N/A (2) 699.7%   92.2% 146.7%
Net expense ratio (1) 28.7% 34.1% 33.5% 30.3%N/A (2) 38.5%   93.7% 40.6%
Net combined ratio (1) 103.3% 105.2% 124.0% 115.2%N/A (2) 738.2%   185.9% 187.3%
           
Impact on net combined ratio          
Net Unfavorable (Favorable) Prior Year Development 1.7% -0.1% 11.0% 10.8%N/A (2) 610.2%   16.1% 72.3%
Catastrophes, net of reinsurance 5.3% 2.7% 1.5% 0.3%N/A (2) 0.0%   3.8% 1.4%
Write-off receivable from reinsurer 0.0% 0.0% 0.0% 0.0%N/A (2) 0.0%   51.1% 0.0%
Underlying combined ratio (1) 96.3% 102.7% 111.5% 104.1%N/A (2) 128.0%   114.9% 113.6%
           
Net Unfavorable (Favorable) Prior Year Development 769  (51) 2,992  3,408  7,839  51,836    11,600  55,193 
           


(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. The underlying combined ratio is the net combined ratio excluding the impact of net prior year reserve development and catastrophes and excluding the write-off of a receivable from reinsurer.  
  
(2)The Company’s Runoff Segment has reached a point of maturity that earned premium is minimal and renders any ratios no longer meaningful.

 

A photo accompanying this release is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/4fb87372-b7a9-47e0-969b-94291b3c6287


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