HALL Hallmark Financial Services Inc

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

Highlights:

• Pre-tax income was $4.4 million for the three months ended September 30, 2021, as compared to pre-tax loss of $37.8 million reported during the same period in 2020. Pre-tax income was $14.6 million for the nine months ended September 30, 2021, as compared to a pre-tax loss of $102.5 million for the same period the prior year.
• Net income was $3.4 million, or $0.19 per diluted share, in the third quarter of 2021 as compared to net loss of $28.4 million, or $1.56 per diluted share, for the same period of 2020. Year-to-date net income was $11.6 million, or $0.64 per diluted share, as compared to a net loss of $86.5 million, or $4.77 per diluted share, for the same period of 2020.
• Net combined ratio was 95.9% and 99.6% for the three and nine months ended September 30, 2021, compared to 132.7% and 109.4% for the same periods the prior year.
• Gross premiums written for the nine months ended September 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 nine months ended September 30, 2021 would have decreased 10% compared to the same period of the prior year. (See “Non-GAAP” Financial Measures below).
• Net premiums written for the nine months ended September 30, 2021 decreased 21% compared to the same period of the prior year. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for the nine months ended September 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 $2.8 million in the third quarter of 2021, or 3.0 points of the net combined ratio as compared to $9.6 million, or 8.2 points of the net combined ratio for the same period the prior year. Net catastrophe losses were $12.4 million for the first nine months of 2021, or 4.2 points of the net combined ratio as compared to $22.2 million, or 6.1 points of the net combined ratio for the same period the prior year.
• Net investment gain was $9.1 million for year to date 2021, which included $3.8 million of unrealized gains on equity securities, as compared to net investment loss of $27.9 million, which included $31.8 million of unrealized losses on equity and other investment securities, during the same period the prior year.

Third Quarter and Year-to-Date 2021 Financial Review

	Third Quarter									Year-to-Date
				*As Revised									*As Revised
		2021			2020		% Change				2021			2020		% Change
($ in thousands)
Gross premiums written	$	169,104		$	196,464		-14	%		$	501,838		$	581,697		-14	%
Net premiums written	$	90,964		$	113,056		-20	%		$	269,947		$	342,430		-21	%
Net premiums earned	$	94,347		$	116,720		-19	%		$	292,783		$	362,017		-19	%
Investment income, net of expenses	$	2,213		$	2,660		-17	%		$	7,576		$	10,314		-27	%
Other-than-temporary impairment (1)	$	-		$	(1,692	)	nm			$	-		$	(1,692	)	nm
Net income (loss)	$	3,445		$	(28,388	)	112	%		$	11,571		$	(86,541	)	113	%
Operating income (loss) (2)	$	3,866		$	(10,750	)	136	%		$	4,365		$	(1,635	)	367	%
Net income (loss) per share - basic	$	0.19		$	(1.56	)	112	%		$	0.64		$	(4.77	)	113	%
Net income (loss) per share - diluted	$	0.19		$	(1.56	)	112	%		$	0.64		$	(4.77	)	113	%
Operating income (loss) per share - diluted (2)	$	0.21		$	(0.59	)	136	%		$	0.24		$	(0.09	)	367	%
Book value per share	$	9.78		$	9.66		1.3	%
* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

(1) Other-than-temporary impairment is included in investment gains (losses), net

(2) See “Non-GAAP Financial Measures” below

Gross Premiums WrittenGross premiums written were $169.1 million and $501.8 million during the three and nine months ended September 30, 2021, representing a decrease of 14% and 14%, from the $196.5 million and $581.7 million in gross premiums written for the same periods in 2020.

Net Premiums WrittenNet premiums written were $91.0 million and $269.9 million during the three and nine months ended September 30, 2021, representing a decrease of 20% and 21%, from the $113.1 million and $342.4 million in net premiums written for the same periods in 2020.

Net Premiums EarnedNet premiums earned were $94.3 million and $292.8 million for the three and nine months ended September 30, 2021, representing a decrease of 19% and 19%, from the $116.7 million and $362.0 million in net premiums earned for the same periods in 2020.

InvestmentsNet investment income was $2.2 million and $7.6 million during the three and nine months ended September 30, 2021, as compared to $2.7 million and $10.3 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 loss was $0.5 million for the three months and net gain of $9.1 million for the nine months ended September 30, 2021, as compared to net investment losses of $0.6 million and $27.9 million, for the same periods in 2020.

Fixed-income securities were $317.9 million as of September 30, 2021, with a tax equivalent book yield of 2.4% compared to 2.7% as of September 30, 2020. As of September 30, 2021, the fixed-income portfolio had an average modified duration of 0.7 years and 76% of the securities had remaining time to maturity of five years or less. As of September 30, 2021, 12% of the total investment portfolio was invested in equity securities.

Total investments were $363.3 million as of September 30, 2021. Cash and cash equivalents, including restricted cash were $329.6 million. Total investments, cash and cash equivalents, and restricted cash were $692.9 million or $38.13 per share.

Pre-Tax Income (Loss)Pre-tax income was $4.4 million for the three months ended September 30, 2021, as compared to pre-tax loss of $37.8 million reported during the same period in 2020. Pre-tax income was $14.6 million for the nine months ended September 30, 2021, as compared to a pre-tax loss of $102.5 million for the same period the prior year. The improvement in pre-tax results for the nine months ended September 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, a $98.6 million decrease in losses and LAE and a $6.9 million decrease in operating expenses and a $1.4 million decrease in amortization of intangible assets, 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.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined RatiosLosses and LAE for the three and nine months ended September 30, 2021 decreased $58.8 million and $98.6 million, as compared to the same periods during 2020, primarily 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 $1.5 million and $2.6 million of net unfavorable prior year loss reserve development during the three and nine months ended September 30, 2021 as compared to net unfavorable prior year loss reserve development of $13.9 million and $33.3 million during the same periods in 2020. Net catastrophe losses were $2.8 million and $12.4 million during the three and nine months ended September 30, 2021 as compared to $9.6 million and $22.2 million, during the same periods of 2020.  

The net loss ratio was 67.5% and 71.6% for the three and nine months ended September 30, 2021, as compared to 105.0% and 85.2% reported during the same periods in 2020. Catastrophe losses contributed 3.0 points and 4.2 points to the net loss ratio for the three and nine months ended September 30, 2021, as compared to 8.2 points and 6.1 points for the same periods during 2020. Net unfavorable prior year loss reserve development contributed 1.6 points and 0.9 points to the net loss ratio for the three and nine months ended September 30, 2021, as compared to 12.0 points and 9.2 points for the same periods during 2020.  

The expense ratio was 28.4% and 28.0% for the three and nine months ended September 30, 2021, as compared to 27.7% and 24.2% during the same periods in 2020. The Company reported net combined ratios of 95.9% and 99.6% for the three and nine months ended September 30, 2021, as compared to 132.7% and 109.4% for the same periods during 2020.  

Net Income (Loss)Net income was $3.4 million and $11.6 million for the three and nine months ended September 30, 2021, as compared to net losses of $28.4 million and $86.5 million for the same periods during 2020.  

On a diluted basis per share, net income was $0.19 per share and $0.64 per share for the three and nine months ended September 30, 2021, as compared to net loss of $1.56 per share and $4.77 per share for the same periods in 2020.

Book Value Per ShareBook value per share increased 6% to $9.78 per share as of September 30, 2021 as compared to $9.24 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.

										Weighted
	Income (Loss)			Less Tax			Net			Average		Diluted
($ in thousands)	Before Tax			Effect			After Tax			Shares Diluted		Per Share
Third Quarter 2021
Reported GAAP measures	$	4,391		$	946		$	3,445		18,172		$	0.19
Excluded investment (gains)/losses	$	533		$	112		$	421		18,172		$	0.02
Operating income	$	4,924		$	1,058		$	3,866		18,172		$	0.21
Third Quarter 2020 (*As Revised)
Reported GAAP measures	$	(37,792	)	$	(9,404	)	$	(28,388	)	18,142		$	(1.56	)
Excluded loss portfolio transfer cost included in Losses and LAE	$	21,700		$	4,557		$	17,143		18,142		$	0.94
Excluded investment (gains)/losses	$	627		$	132		$	495		18,142		$	0.03
Operating loss	$	(15,465	)	$	(4,715	)	$	(10,750	)	18,142		$	(0.59	)
Year-to-Date 2021
Reported GAAP measures	$	14,608		$	3,037		$	11,571		18,162		$	0.64
Excluded investment (gains)/losses	$	(9,122	)	$	(1,916	)	$	(7,206	)	18,162		$	(0.40	)
Operating income	$	5,486		$	1,121		$	4,365		18,162		$	0.24
Year-to-Date 2020 (*As Revised)
Reported GAAP measures	$	(102,484	)	$	(15,943	)	$	(86,541	)	18,136		$	(4.77	)
Excluded impairment of goodwill and other intangibles	$	45,996		$	273		$	45,723		18,136		$	2.52
Excluded loss portfolio transfer cost included in Losses and LAE	$	21,700		$	4,557		$	17,143		18,136		$	0.95
Excluded investment (gains)/losses	$	27,899		$	5,859		$	22,040		18,136		$	1.22
Operating loss	$	(6,889	)	$	(5,254	)	$	(1,635	)	18,136		$	(0.09	)
* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

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		$	501,838		$	581,697		-14	%			$	269,947		$	342,430		-21	%
Less primary binding commercial auto		$	218		$	24,798		-99	%			$	48		$	23,250		-100	%
Written premium excluding primary binding commercial auto		$	501,620		$	556,899		-10	%			$	269,899		$	319,180		-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)		Sep. 30			Dec. 31
ASSETS		2021			2020
Investments:		(unaudited)		* As Revised
Debt securities, available-for-sale, at fair value (amortized cost: $315,029 in 2021 and $502,167 in 2020)	$	317,916		$	507,279
Equity securities (cost: $39,129 in 2021 and $26,988 in 2020)		45,362			29,388
Total investments		363,278			536,667
Cash and cash equivalents		325,833			102,580
Restricted cash		3,793			5,728
Ceded unearned premiums		145,858			143,446
Premiums receivable		85,177			120,332
Accounts receivable		6,595			5,967
Receivable for securities		5,613			913
Reinsurance recoverable		515,088			497,846
Deferred policy acquisition costs		10,494			17,840
Intangible assets, net		944			1,322
Federal income tax recoverable		17,347			24,691
Deferred federal income taxes, net		9,326			8,724
Prepaid expenses		4,683			2,648
Other assets		26,179			28,013
Total Assets	$	1,520,208		$	1,496,717
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance costs of $770 in 2021 and $844 in 2020)	$	49,230		$	49,156
Subordinated debt securities (less unamortized debt issuance costs of $757 in 2021 and $795 in 2020)		55,946			55,907
Reserves for unpaid losses and loss adjustment expenses		815,381			789,768
Unearned premiums		300,383			320,806
Reinsurance payable		71,183			61,100
Pension liability		1,530			1,859
Payable for securities		1,047			-
Accounts payable and other accrued expenses		47,728			50,415
Total Liabilities		1,342,428			1,329,011
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		122,773			122,893
Retained earnings		77,270			65,699
Accumulated other comprehensive income		(1,272	)		383
Treasury stock (2,700,364 shares in 2021 and 2,730,673 shares in 2020), at cost		(24,748	)		(25,026	)
Total Stockholders Equity		177,780			167,706
Total Liabilities & Stockholders Equity	$	1,520,208		$	1,496,717
*All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations	Three Months Ended							Nine Months Ended
($ in thousands, except per share amounts, unaudited)	September 30,							September 30,
					*As Revised							*As Revised
	2021			2020				2021			2020
Gross premiums written	$	169,104		$	196,464			$	501,838		$	581,697
Ceded premiums written		(78,140	)		(83,408	)			(231,891	)		(239,267	)
Net premiums written		90,964			113,056				269,947			342,430
Change in unearned premiums		3,383			3,664				22,836			19,587
Net premiums earned		94,347			116,720				292,783			362,017
Investment income, net of expenses		2,213			2,660				7,576			10,314
Investment (losses) gains, net		(533	)		(627	)			9,122			(27,899	)
Finance charges		1,076			1,316				3,318			4,488
Commission and fees		232			209				742			793
Other income		15			15				50			48
Total revenues		97,350			120,293				313,591			349,761
Losses and loss adjustment expenses		63,706			122,555				209,674			308,278
Operating expenses		27,882			33,640				85,188			92,059
Interest expense		1,245			1,273				3,743			4,061
Impairment of goodwill and other intangible assets		0			0				0			45,996
Amortization of intangible assets		126			617				378			1,851
Total expenses		92,959			158,085				298,983			452,245
Income (loss) before tax		4,391			(37,792	)			14,608			(102,484	)
Income tax expense (benefit)		946			(9,404	)			3,037			(15,943	)
Net (loss) income	$	3,445		$	(28,388	)		$	11,571		$	(86,541	)
Net (loss) income per share:
Basic	$	0.19		$	(1.56	)		$	0.64		$	(4.77	)
Diluted	$	0.19		$	(1.56	)		$	0.64		$	(4.77	)
* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Sep. 30
	Specialty CommercialSegment						Standard CommercialSegment						Personal Segment						Corporate						Consolidated
				* AsRevised																								* AsRevised
($ in thousands, unaudited)		2021			2020			2021			2020			2021			2020			2021			2020			2021			2020
Gross premiums written	$	126,716		$	150,016		$	24,935		$	24,726		$	17,453		$	21,722		$	-		$	-		$	169,104		$	196,464
Ceded premiums written		(69,424	)		(72,977	)		(8,644	)		(7,270	)		(72	)		(3,161	)		-			-			(78,140	)		(83,408	)
Net premiums written		57,292			77,039			16,291			17,456			17,381			18,561			-			-			90,964			113,056
Change in unearned premiums		2,623			3,979			1,177			(744	)		(417	)		429			-			-			3,383			3,664
Net premiums earned		59,915			81,018			17,468			16,712			16,964			18,990			-			-			94,347			116,720
Total revenues		62,493			83,749			18,156			17,398			18,316			20,513			(1,616	)		(1,367	)		97,349			120,293
Losses and loss adjustment expenses		36,560			92,625			10,411			14,683			16,735			15,247			-			-			63,706			122,555
Pre-tax income (loss)		12,620			(27,237	)		1,957			(1,672	)		(3,887	)		(2,065	)		(6,299	)		(6,818	)		4,391			(37,792	)
Net loss ratio (1)		61.0	%		114.3	%		59.6	%		87.9	%		98.7	%		80.3	%								67.5	%		105.0	%
Net expense ratio (1)		22.0	%		22.2	%		32.9	%		26.1	%		26.1	%		32.0	%								28.4	%		27.7	%
Net combined ratio (1)		83.0	%		136.5	%		92.5	%		114.0	%		124.8	%		112.3	%								95.9	%		132.7	%
Net (Unfavorable) Favorable Prior Year Development		(1,305	)		(11,493	)		993			(1,431	)		(1,197	)		(987	)								(1,509	)		(13,911	)

(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.

* All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Nine Months Ended Sep. 30
	Specialty CommercialSegment						Standard CommercialSegment						Personal Segment						Corporate						Consolidated
				* AsRevised																								* AsRevised
($ in thousands, unaudited)		2021			2020			2021			2020			2021			2020			2021			2020			2021			2020
Gross premiums written	$	366,896		$	438,113		$	82,382		$	74,944		$	52,560		$	68,640		$	-		$	-		$	501,838		$	581,697
Ceded premiums written		(202,433	)		(207,699	)		(29,224	)		(21,770	)		(234	)		(9,798	)		-			-			(231,891	)		(239,267	)
Net premiums written		164,463			230,414			53,158			53,174			52,326			58,842			-			-			269,947			342,430
Change in unearned premiums		24,985			21,681			(2,077	)		(3,643	)		(72	)		1,549			-			-			22,836			19,587
Net premiums earned		189,448			252,095			51,081			49,531			52,254			60,391			-			-			292,783			362,017
Total revenues		196,982			262,761			53,084			52,130			56,390			65,300			7,134			(30,430	)		313,590			349,761
Losses and loss adjustment expenses		125,655			220,215			36,640			37,313			47,379			50,750			-			-			209,674			308,278
Pre-tax income (loss)		28,816			(5,752	)		347			(154	)		(8,275	)		(5,836	)		(6,280	)		(90,742	)		14,608			(102,484	)
Net loss ratio (1)		66.3	%		87.4	%		71.7	%		75.3	%		90.7	%		84.0	%								71.6	%		85.2	%
Net expense ratio (1)		23.4	%		19.3	%		32.1	%		30.6	%		27.9	%		27.0	%								28.0	%		24.2	%
Net combined ratio (1)		89.7	%		106.7	%		103.8	%		105.9	%		118.6	%		111.0	%								99.6	%		109.4	%
Net (Unfavorable) Favorable Prior Year Development		(533	)		(23,961	)		2,336			(2,350	)		(4,356	)		(6,948	)								(2,553	)		(33,259	)

(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.

*   All prior period amounts have been adjusted to reflect the correction of an immaterial error relating to certain reinsurance treaties and other items related to prior periods.

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