HALL Hallmark Financial Services Inc

Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today announced financial results for the second quarter and six months ended June 30, 2021.

	Second Quarter						Year-to-Date
		2021			2020			2021		2020
$ in millions:
Net Income (Loss)	$	(0.5	)	$	6.7		$	8.9	$	(57.6	)
Operating Income (1)	$	(3.5	)	$	5.1		$	1.3	$	9.7
$ per diluted share:
Net Income (Loss)	$	(0.03	)	$	0.37		$	0.49	$	(3.18	)
Operating Income (1)	$	(0.19	)	$	0.28		$	0.07	$	0.53
(1) See “Non-GAAP Financial Measures” below

Highlights:

• Net loss of $0.5 million, or $0.03 per share, in the second quarter of 2021 as compared to net income of $6.7 million, or $0.37 per share, for the same period of 2020. Year-to-date net income of $8.9 million, or $0.49 per share, as compared to a net loss of $57.6 million, or $3.18 per share, for the same period of 2020.
• Net combined ratio of 105.7% and 100.8% for the three and six months ended June 30, 2021, compared to 98.4% and 98.0% for the same periods the prior year.  
• Specialty Commercial Segment net combined ratio of 97.2% and 92.3% for the three and six months ended June 30, 2021, compared to 96.9% and 92.3% for the same periods the prior year.
• Substantial rate increases achieved, particularly in the Specialty Commercial Segment, with increases for this business averaging 12% for the quarter and 13% year-to-date.
• Gross premiums written for the six months ended June 30, 2021 decreased 14% compared to the same period of the prior year. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for the six months ended June 30, 2021 would have decreased 8% compared to the same period of the prior year. (See “Non-GAAP” Financial Measures below).
• Net premiums written for the six months ended June 30, 2021 decreased 23% compared to the same period of the prior year. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for the six months ended June 30, 2021 would have decreased 15% compared to the same period of the prior year. (See “Non-GAAP” Financial Measures below).

• Net catastrophe losses were $3.7 million in the second quarter of 2021, or 3.8 points of the net combined ratio as compared to $6.6 million, or 5.2 points of the net combined ratio for the same period the prior year.   Net catastrophe losses were $9.6 million for the first six months of 2021, or 4.8 points of the net combined ratio as compared to $12.6 million, or 5.0 points of the net combined ratio for the same period the prior year.
• Net investment gains of $3.9 million during the second quarter of 2021, which included $1.1 million of unrealized gains on equity securities, as compared to net investment gains of $2.1 million, which included $2.5 million of unrealized gains on equity and other investment securities, during the same period the prior year.

Second Quarter and Year-to-Date 2021 Financial Review

	Second Quarter								Year-to-Date
		2021			2020	% Change				2021		2020		% Change
($ in thousands)
Gross premiums written		169,716			183,644	-8	%			332,734		385,233		-14	%
Net premiums written		89,134			108,987	-18	%			182,281		235,492		-23	%
Net premiums earned		98,611			125,596	-21	%			202,829		249,529		-19	%
Investment income, net of expenses		2,353			3,196	-26	%			5,363		7,654		-30	%
Investment gains (losses), net		3,876			2,058	88	%			9,655		(27,272	)	135	%
Net (loss) income		(467	)		6,701	-107	%			8,878		(57,609	)	115	%
Operating (loss) income (1)		(3,529	)		5,075	-170	%			1,251		9,659		-87	%
Net (loss) income per share - basic	$	(0.03	)	$	0.37	-108	%		$	0.49	$	(3.18	)	115	%
Net (loss) income per share - diluted	$	(0.03	)	$	0.37	-108	%		$	0.49	$	(3.18	)	115	%
Operating (loss) income per share - diluted (1)	$	(0.19	)	$	0.28	-168	%		$	0.07	$	0.53		-87	%
Book value per share	$	9.84		$	11.14	-12	%
(1) See “Non-GAAP Financial Measures” below

Gross Premiums WrittenGross premiums written were $169.7 million and $332.7 million during the three and six months ended June 30, 2021, representing a decrease of 8% and 14%, from the $183.6 million and $385.2 million in gross premiums written for the same periods in 2020.

Net Premiums WrittenNet premiums written were $89.1 million and $182.3 million during the three and six months ended June 30, 2021, representing a decrease of 18% and 23%, from the $109.0 million and $235.5 million in net premiums written for the same periods in 2020.

Net Premiums EarnedNet premiums earned were $98.6 million and $202.8 million for the three and six months ended June 30, 2021, representing a decrease of 21% and 19%, from the $125.6 million and $249.5 million in net premiums earned for the same periods in 2020.

InvestmentsNet investment income was $2.4 million and $5.4 million during the three and six months ended June 30, 2021, as compared to $3.2 million and $7.7 million during the same periods in 2020. The decline in net investment income was primarily due to lower interest rates compared to the same periods during 2020 and an increase in the proportion of cash and short-term investments held relative to longer maturity investments.

Net investment gains were $3.9 million and $9.7 million for the three and six months ended June 30, 2021, as compared to net investment gains of $2.1 million and net investment losses of $27.3 million, for the same periods in 2020.

Fixed-income securities were $300.7 million as of June 30, 2021, with a tax equivalent book yield of 2.8% compared to 2.2% as of June 30, 2020. As of June 30, 2021, the fixed-income portfolio had an average modified duration of 0.7 years and 79% of the securities had remaining time to maturity of five years or less. As of June 30, 2021, 14% of the investment portfolio was invested in equity securities.

Total investments were $347.7 million as of June 30, 2021. Cash and cash equivalents, including restricted cash were $332.0 million. Total investments, cash and cash equivalents, and restricted cash were $679.7 million or $37.41 per share.

Pre-Tax (Loss) IncomePre-tax loss was $0.5 million for the three months ended June 30, 2021, as compared to pre-tax income of $5.6 million reported during the same period in 2020.   Pre-tax income was $11.2 million for the six months ended June 30, 2021, as compared to a pre-tax loss of $64.0 million for the same period the prior year. The improvement in pre-tax results for the six months ended June 30, 2021 as compared to the same period the prior year was primarily due to the absence of $46.0 million of impairment charges to goodwill and indefinite-lived intangible assets taken during the first quarter of 2020 and a $39.7 million decrease in losses and LAE, partially offset by decreased revenue. The impairment charges during the first quarter of 2020 resulted from our determination that a significant decline in market capitalization below stockholders’ equity indicated the impairment of the goodwill and indefinite-lived intangible assets included in our balance sheet. The decrease in losses and LAE was primarily the result of exiting the contract binding line of the primary automobile business marketed by our Commercial Auto business unit commencing in February 2020, as well as an $18.3 million improvement in unfavorable net prior year loss reserve development. Decreased revenue for the first half of 2021 compared to the same period of the prior year was due primarily to decreased net premiums earned of $46.7 million, lower net investment income of $2.3 million and lower finance charges of $1.0 million, partially offset by $36.9 million higher net investment gains.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratios

Losses and LAE for the three and six months ended June 30, 2021 decreased $17.2 million and $39.7 million, as compared to the same periods during 2020 due to improved prior year net loss reserve development, lower net catastrophe losses and lower net premiums earned, partially offset by increases in current accident year non-catastrophe net loss trends. There was $3.1 million and $1.0 million of net unfavorable prior year loss reserve development during the three and six months ended June 30, 2021 as compared to net unfavorable prior year loss reserve development of $10.8 million and $19.3 million during the same periods in 2020.   Net catastrophe losses were $3.7 million and $9.6 million during the three and six months ended June 30, 2021 as compared to $6.6 million and $12.6 million, during the same periods of 2020.

The net loss ratio was 78.8% and 73.3% for the three and six months ended June 30, 2021, as compared to 75.5% and 75.5% reported during the same periods in 2020. Catastrophe losses contributed 3.8 points and 4.8 points to the net loss ratio for the three and six months ended June 30, 2021, as compared to 5.2 points and 5.0 points for the same periods during 2020.   Net unfavorable prior year loss reserve development contributed 3.2 points and 0.5 points to the net loss ratio for the three and six months ended June 30, 2021, as compared to 8.6 points and 7.8 points contributed to the net loss ratio from net unfavorable prior year loss reserve development for the same periods during 2020.  

The expense ratio was 26.9% and 27.5% for the three and six months ended June 30, 2021, as compared to 22.9% and 22.5% during the same periods in 2020. The Company reported net combined ratios of 105.7% and 100.8% for the three and six months ended June 30, 2021, as compared to 98.4% and 98.0% for the same periods during 2020.  

Net Income (Loss)

Net loss was $0.5 million and net income was $8.9 million for the three and six months ended June 30, 2021, as compared to net income of $6.7 million and a net loss of $57.6 million for the same periods during 2020.

On a diluted basis per share, net loss was $0.03 per share and net income was $0.49 per share for the three and six months ended June 30, 2021, as compared to net income of $0.37 per share and net loss of $3.18 per share for the same periods in 2020.

Book Value Per Share

Book value per share increased 4% to $9.84 per share as of June 30, 2021 as compared to $9.42 per share as of December 31, 2020.

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 loss and operating loss per share are calculated by excluding net investment gains and losses and impairment of goodwill and other intangible assets (“Impairments”) from GAAP net income. The Impairments are unusual and infrequent charges for the Company. Management believes that operating earnings and operating earnings per share provide useful information to investors about the performance of and underlying trends in the Company’s core insurance operations. Net income and net income per share are the GAAP measures that are most directly comparable to operating earnings and operating earnings per share. A reconciliation of operating earnings and operating earnings per share to the most comparable GAAP financial measures is presented below.

Hallmark Financial Services, Inc. and Subsidiaries
Non-GAAP Financial Measures Reconciliation
										Weighted
										Average
	Income (Loss)			Less Tax			Net			Shares	Diluted
($ in thousands)	Before Tax			Effect			After Tax			Diluted	Per Share
Second Quarter 2021
Reported GAAP measures	$	(532	)	$	(65	)	$	(467	)	18,171	$	(0.03	)
Excluded investment (gains)/losses	$	(3,876	)	$	(814	)	$	(3,062	)	18,171	$	(0.17	)
Operating income	$	(4,408	)	$	(879	)	$	(3,529	)	18,171	$	(0.19	)
Second Quarter 2020
Reported GAAP measures	$	5,583		$	(1,118	)	$	6,701		18,141	$	0.37
Excluded investment (gains)/losses	$	(2,058	)	$	(432	)	$	(1,626	)	18,141	$	(0.09	)
Operating income	$	3,525		$	(1,550	)	$	5,075		18,141	$	0.28
Year-to-Date 2021
Reported GAAP measures	$	11,168		$	2,290		$	8,878		18,157	$	0.49
Excluded investment (gains)/losses	$	(9,655	)	$	(2,028	)	$	(7,627	)	18,157	$	(0.42	)
Operating income	$	1,513		$	262		$	1,251		18,157	$	0.07
Year-to-Date 2020
Reported GAAP measures	$	(64,003	)	$	(6,394	)	$	(57,609	)	18,132	$	(3.18	)
Excluded impairment of goodwill and other intangible assets	$	45,996		$	273		$	45,723		18,132	$	2.52
Excluded investment (gains)/losses	$	27,272		$	5,727		$	21,545		18,132	$	1.19
Operating income	$	9,265		$	(394	)	$	9,659		18,132	$	0.53

In February 2020, Hallmark made the strategic decision to exit the contract binding line of the primary automobile business as a result of increasing claim severity and limited opportunity for meaningful rate increases. At that time, the Company began the process of non-renewing policies and placing in-force policies in runoff in accordance with state regulatory guidelines. Management believes that presenting gross and net premiums written excluding the contract binding line of the primary automobile business provides useful information to investors about the impact of this decision. A reconciliation of year-to-date GAAP gross and net premiums written to gross and net premiums written excluding the contract binding line of the primary automobile business is presented below.

	YTD Gross Written Premium					YTD Net Written Premium
	2021	2020	% Change			2021	2020	% Change
($ in thousands)
Reported written premium	332,734	385,233	-14	%		182,281	235,492	-23	%
Less primary binding commercial auto	226	22,013	-99	%		97	21,077	-100	%
Written premium excluding primary binding commercial auto	332,508	363,220	-8	%		182,184	214,415	-15	%

About Hallmark

Hallmark is a specialty 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 KenneyChief Financial Officer 817.348.1600www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value)		Jun. 30				Dec. 31
ASSETS		2021				2020
Investments:		(unaudited)
Debt securities, available-for-sale, at fair value (amortized cost: $297,066 in 2021 and $502,167 in 2020)	$	300,737			$	507,279
Equity securities (cost: $39,124 in 2021 and $26,988 in 2020)		46,948				29,388
Total investments		347,685				536,667
Cash and cash equivalents		326,558				102,580
Restricted cash		5,474				5,728
Ceded unearned premiums		139,609				138,926
Premiums receivable		105,792				120,332
Accounts receivable		4,524				5,967
Receivable for securities		7,037				913
Reinsurance recoverable		494,473				490,231
Deferred policy acquisition costs		13,291				17,840
Intangible assets, net		1,070				1,322
Federal income tax recoverable		20,025				25,642
Deferred federal income taxes, net		8,190				8,724
Prepaid expenses		5,598				2,648
Other assets		27,368				28,013
Total Assets	$	1,506,694			$	1,485,533
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance costs of $795 in 2021 and $844 in 2020)	$	49,205			$	49,156
Subordinated debt securities (less unamortized debt issuance costs of $769 in 2021 and $795 in 2020)		55,933				55,907
Reserves for unpaid losses and loss adjustment expenses		810,749				789,768
Unearned premiums		300,941				320,806
Reinsurance payable		51,921				46,700
Pension liability		1,640				1,859
Payable for securities		5,774				-
Accounts payable and other accrued expenses		51,647				50,415
Total Liabilities		1,327,810				1,314,611
Commitments and contingencies
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2021 and 2020		3,757				3,757
Additional paid-in capital		122,782				122,893
Retained earnings		77,793				68,915
Accumulated other comprehensive income		(687	)			383
Treasury stock (2,701,799 shares in 2021 and 2,730,673 shares in 2020), at cost		(24,761	)			(25,026	)
Total Stockholders Equity		178,884				170,922
Total Liabilities & Stockholders Equity	$	1,506,694			$	1,485,533

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations	Three Months Ended							Six Months Ended
($ in thousands, except per share amounts, unaudited)	June 30,							June 30,
	2021			2020				2021			2020
Gross premiums written	$	169,716		$	183,644			$	332,734		$	385,233
Ceded premiums written		(80,582	)		(74,657	)			(150,453	)		(149,741	)
Net premiums written		89,134			108,987				182,281			235,492
Change in unearned premiums		9,477			16,609				20,548			14,037
Net premiums earned		98,611			125,596				202,829			249,529
Investment income, net of expenses		2,353			3,196				5,363			7,654
Investment gains (losses), net		3,876			2,058				9,655			(27,272	)
Finance charges		1,109			1,528				2,242			3,172
Commission and fees		250			260				510			584
Other income		16			14				35			33
Total revenues		106,215			132,652				220,634			233,700
Losses and loss adjustment expenses		77,719			94,873				148,622			188,278
Operating expenses		27,653			30,259				58,094			59,407
Interest expense		1,249			1,320				2,498			2,788
Impairment of goodwill and other intangible assets		0			0				0			45,996
Amortization of intangible assets		126			617				252			1,234
Total expenses		106,747			127,069				209,466			297,703
(Loss) income before tax		(532	)		5,583				11,168			(64,003	)
Income tax (benefit) expense		(65	)		(1,118	)			2,290			(6,394	)
Net (loss) income	$	(467	)	$	6,701			$	8,878		$	(57,609	)
Net (loss) income per share:
Basic	$	(0.03	)	$	0.37			$	0.49		$	(3.18	)
Diluted	$	(0.03	)	$	0.37			$	0.49		$	(3.18	)

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Jun. 30
	Specialty Commercial Segment						Standard Commercial Segment						Personal Segment						Corporate						Consolidated
($ in thousands, unaudited)		2021			2020			2021			2020			2021			2020			2021			2020			2021			2020
Gross premiums written	$	126,190		$	138,627		$	27,712		$	23,842		$	15,814		$	21,175		$	-		$	-		$	169,716		$	183,644
Ceded premiums written		(70,157	)		(64,640	)		(10,330	)		(7,037	)		(95	)		(2,980	)		-			-			(80,582	)		(74,657	)
Net premiums written		56,033			73,987			17,382			16,805			15,719			18,195			-			-			89,134			108,987
Change in unearned premiums		8,316			14,350			(835	)		(404	)		1,996			2,663			-			-			9,477			16,609
Net premiums earned		64,349			88,337			16,547			16,401			17,715			20,858			-			-			98,611			125,596
Total revenues		66,918			91,124			17,240			17,096			19,115			22,464			2,943			1,968			106,216			132,652
Losses and loss adjustment expenses		47,342			69,262			14,138			10,775			16,239			14,836			-			-			77,719			94,873
Pre-tax income (loss)		5,327			5,882			(1,976	)		802			(2,766	)		1,884			(1,117	)		(2,985	)		(532	)		5,583
Net loss ratio (1)		73.6	%		78.4	%		85.4	%		65.7	%		91.7	%		71.1	%								78.8	%		75.5	%
Net expense ratio (1)		23.6	%		18.5	%		31.7	%		34.4	%		27.2	%		21.0	%								26.9	%		22.9	%
Net combined ratio (1)		97.2	%		96.9	%		117.1	%		100.1	%		118.9	%		92.1	%								105.7	%		98.4	%
Favorable (Unfavorable) Prior Year Development		(1,127	)		(9,315	)		(18	)		(794	)		(1,985	)		(680	)		-			-			(3,130	)		(10,789	)

(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.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Six Months Ended Jun. 30
	Specialty Commercial Segment						Standard Commercial Segment						Personal Segment						Corporate					Consolidated
($ in thousands, unaudited)		2021			2020			2021			2020			2021			2020			2021		2020			2021			2020
Gross premiums written	$	240,180		$	288,097		$	57,447		$	50,218		$	35,107		$	46,918		$	-	$	-		$	332,734		$	385,233
Ceded premiums written		(129,711	)		(128,604	)		(20,580	)		(14,500	)		(162	)		(6,637	)		-		-			(150,453	)		(149,741	)
Net premiums written		110,469			159,493			36,867			35,718			34,945			40,281			-		-			182,281			235,492
Change in unearned premiums		23,457			15,816			(3,254	)		(2,899	)		345			1,120			-		-			20,548			14,037
Net premiums earned		133,926			175,309			33,613			32,819			35,290			41,401			-		-			202,829			249,529
Total revenues		138,883			183,244			34,928			34,732			38,074			44,787			8,750		(29,063	)		220,635			233,700
Losses and loss adjustment expenses		91,749			130,145			26,229			22,630			30,644			35,503			-		-			148,622			188,278
Pre-tax income (loss)		17,148			22,174			(1,610	)		1,518			(4,389	)		(3,771	)		19		(83,924	)		11,168			(64,003	)
Net loss ratio (1)		68.5	%		74.2	%		78.0	%		69.0	%		86.8	%		85.8	%							73.3	%		75.5	%
Net expense ratio (1)		23.8	%		18.1	%		31.7	%		32.9	%		28.8	%		24.7	%							27.5	%		22.5	%
Net combined ratio (1)		92.3	%		92.3	%		109.7	%		101.9	%		115.6	%		110.5	%							100.8	%		98.0	%
Net Favorable (Unfavorable) Prior Year Development		772			(12,468	)		1,343			(919	)		(3,159	)		(5,961	)							(1,044	)		(19,348	)

(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.

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/a204b59d-618d-45a4-823f-f2fc7a049fbd