HALL Hallmark Financial Services Inc

Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today announced financial results for the first quarter ended March 31, 2022.

	First Quarter
		2022			2021
$ in millions:
Net (Loss) Income	$	(3.2	)	$	9.0
Operating (Loss) Income (1)	$	(3.3	)	$	4.4
$ per diluted share:
Net (Loss) Income	$	(0.18	)	$	0.49
Operating (Loss) Income (1)	$	(0.18	)	$	0.24

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

Highlights:

• Net loss of $3.2 million, or $0.18 per share, in the first quarter of 2022 as compared to net income of $9.0 million, or $0.49 per share, for the same period of 2021.
• Net combined ratio of 106.0% for the first quarter of 2022 declined from 95.4% for the same period the prior year.
• Although moderating in 2022, achieved rate increases, particularly in the Specialty Commercial Segment with increases for this business averaging 8.2% for the first quarter.
• Gross premiums written for the quarter ended March 31, 2022 decreased 7% compared to the quarter ended March 31, 2021 and decreased 1% compared to the previous quarter ended December 31, 2021.
• Net catastrophe losses were $1.1 million in the first quarter of 2022, or 1.3 points of the net combined ratio.
• Net investment gains of $0.1 million during the first quarter of 2022, which included $0.1 million of unrealized losses on equity securities, as compared to net investment gains of $5.8 million, which included $4.4 million of unrealized gains on equity securities, during the same period the prior year.

First Quarter 2022 Financial Review

	First Quarter
		2022			2021		% Change
($ in thousands)
Gross premiums written	$	150,959		$	163,018		-7	%
Net premiums written	$	78,321		$	91,497		-14	%
Net premiums earned	$	82,476		$	101,852		-19	%
Investment income, net of expenses	$	1,859		$	3,010		-38	%
Investment gains (losses), net	$	51		$	5,779		-99	%
Net (loss) income	$	(3,219	)	$	8,971		-136	%
Operating (loss) income (1)	$	(3,259	)	$	4,406		-174	%
Net (loss) income per share - basic	$	(0.18	)	$	0.49		-137	%
Net (loss) income per share - diluted	$	(0.18	)	$	0.49		-137	%
Operating (loss) income per share - diluted (1)	$	(0.18	)	$	0.24		-175	%
Book value per share	$	9.34		$	9.69		-4	%

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

Gross Premiums WrittenGross premiums written were $151.0 million during the three months ended March 31, 2022, representing a decrease of 7% from the $163.0 million in gross premiums written for the same period in 2021.

Net Premiums WrittenNet premiums written were $78.3 million during the three months ended March 31, 2022, representing a decrease of 14% from the $91.5 million in net premiums written for the same period of 2021.  

Net Premiums EarnedNet premiums earned were $82.5 million for the three months ended March 31, 2022, representing a 19% decrease from the $101.9 million in net premiums earned for the same period in 2021.  

InvestmentsTotal return on investment securities was -0.2% during the three months ended March 31, 2022, significantly outperforming market averages, including the 5% decline in the S&P 500 Stock Index and a 5.9% decline in the Bloomberg Aggregate Bond Index. Notably, common stock performance was positive during the quarter. Fixed maturity securities also performed favorably compared to fixed-income benchmarks.

Beginning in second quarter of 2020, following the steep decline in interest rates resulting from COVID-19 related stimulus measures, significant restraint was exercised in consideration of new bond investments. Instead, the amount of cash held steadily increased, growing to more than $350 million by 2021 yearend. As interest rates rose significantly in the latter part of the quarter just ended, $154 million of cash was deployed into fixed income securities at yields comparable to, or higher than, the average yield of the existing portfolio.

These actions had two primary effects. First, the cash reserves and short duration of debt securities held provided significant protection to the balance sheet during what has been described as among the worst quarters of performance in bond markets in U.S. history – avoiding unrealized losses in longer dated maturities that will likely persist for years. Second, opportunistic reinvestment of large sums of cash into securities with comparatively attractive yields is expected to contribute to an increase in investment income in future periods. Subsequent to quarter end, an additional $60 million has been deployed in debt securities of similar or better yields.

Net investment income was $1.9 million during the three months ended March 31, 2022, as compared to $3.0 million during the same period in 2021. The decline in net investment income was primarily due to a lower average amount of debt securities owned during the current quarter compared to the prior year and a $500 thousand special common stock dividend received on an arbitrage trading position in the prior year.

Net investment gains were $51 thousand for the three months ended March 31, 2022, as compared to net investment gains of $5.8 million for the same period in 2021. Net realized and unrealized gains on common stocks were offset by a reduction in the amount of unrealized gains on preferred stocks existing at 2021 yearend.

Fixed-income securities were $388.3 million at March 31, 2022, with a tax equivalent book yield of 2.5% compared to 2.6% as of March 31, 2021. As of March 31, 2022, the fixed-income portfolio had an average modified duration of 1.0 years and 82% of the securities had remaining time to maturity of five years or less. As of March 31, 2022, 12% of the investment portfolio was invested in equity securities.

Total investments were $440.9 million at March 31, 2022. Cash and cash equivalents, including restricted cash were $187.6 million. Total investments, cash and cash equivalents, and restricted cash were $628.5 million or $34.55 per share.

Pre-Tax IncomePre-tax loss was $4.1 million for the three months ended March 31, 2022, as compared to a pre-tax income of $11.2 million reported during the same period in 2021. The decline in pre-tax results for the three months ended March 31, 2021, was predominately driven by decreased revenue and lower net investment gains, partially offset by lower losses and loss adjustment expenses (“LAE”) and lower operating expenses.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined RatiosThe net combined ratio was 106.0% for the quarter ended March 31, 2022, as compared to 95.4% for the same period during 2021.

The decrease in losses and LAE was primarily due to decreased net premiums earned and lower net catastrophe losses, partially offset by unfavorable net prior year loss reserve development during the first quarter of 2022 compared to favorable net prior year loss development during the same period of 2021. Losses and LAE for the first quarter of 2022 included $1.1 million of net catastrophe losses as compared to $5.9 million during the same period of the prior year. During the first quarter of 2022, we experienced $7.7 million of unfavorable net prior year loss reserve development, driven primarily by our exited contract binding line of business, compared to $2.1 million of favorable net prior year loss development during the same period of 2021.

The net loss ratio was 77.6% for the three months ended March 31, 2022 as compared to 68.2% reported during the same period in 2021. Net unfavorable prior year loss reserve development increased the net loss ratio by 9.3 points for the three months ended March 31, 2022, as compared to 2.0 points reduction in the net loss ratio from net favorable prior year loss reserve development for the same period during 2021. Catastrophe losses contributed 1.3 points to the net loss ratio for the three months ended March 31, 2022, as compared to 5.8 points for the same period during 2021.

The expense ratio was 28.4% for the three months ended March 31, 2022 as compared to 27.2% during the same period in 2021.

Net (Loss) Income Net loss was $3.2 million for the three months ended March 31, 2022 as compared to net income of $9.0 million for the same period during 2021. On a diluted basis per share, net loss was $0.18 per share for the three months ended March 31, 2022 as compared to a net income of $0.49 per share for the three months ended March 31, 2021.

Book Value Per ShareBook value per share decreased 4% to $9.34 per share as of March 31, 2022 as compared to $9.66 per share as of December 31, 2021.

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 impairment of long lived assets from GAAP net income. Impairments 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 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 income and operating income 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
First Quarter 2022
Reported GAAP measures	$	(4,119	)	$	(900	)	$	(3,219	)		18,172		$	(0.18	)
Excluded investment (gains)/losses	$	(51	)	$	(11	)	$	(40	)		18,172		$	(0.00	)
Operating loss	$	(4,170	)	$	(911	)	$	(3,259	)		18,172		$	(0.18	)
First Quarter 2021
Reported GAAP measures	$	11,227		$	2,256		$	8,971			18,142		$	0.49
Excluded investment (gains)/losses	$	(5,779	)	$	(1,214	)	$	(4,565	)		18,142		$	(0.25	)
Operating income	$	5,448		$	1,042		$	4,406			18,142		$	0.24

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 KenneyPresidentChief Financial Officer 817.348.1600www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value)		Mar. 31				Dec. 31
ASSETS		2022				2021
Investments:		(unaudited)
Debt securities, available-for-sale, at fair value (amortized cost: $389,582 in 2022 and $288,175 in 2021)	$	388,254			$	290,073
Equity securities (cost: $46,124 in 2022 and $42,120 in 2021)		52,604				48,695
Total investments		440,858				338,768
Cash and cash equivalents		183,377				352,867
Restricted cash		4,239				3,810
Ceded unearned premiums		142,645				146,433
Premiums receivable		88,420				90,621
Accounts receivable		20,094				6,914
Receivable for securities		1,209				1,326
Reinsurance recoverable		545,266				549,964
Deferred policy acquisition costs		6,847				6,811
Intangible assets, net		693				819
Federal income tax recoverable		14,748				18,217
Deferred federal income taxes, net		9,412				8,906
Prepaid expenses		5,389				2,389
Other assets		26,666				25,753
Total Assets	$	1,489,863			$	1,553,598
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance costs of $721 in 2022 and $746 in 2021)	$	49,279			$	49,254
Subordinated debt securities (less unamortized debt issuance costs of $730 in 2022 and $744 in 2021)		55,972				55,959
Reserves for unpaid losses and loss adjustment expenses		798,338				816,681
Unearned premiums		276,485				284,427
Reinsurance payable		85,980				117,908
Pension liability		59				174
Payable for securities		2,374				3,280
Accounts payable and other liabilites		51,540				50,394
Total Liabilities		1,320,027				1,378,077
Commitments and contingencies
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2022 and 2021		3,757				3,757
Additional paid-in capital		122,741				122,844
Retained earnings		71,484				74,703
Accumulated other comprehensive loss		(3,563	)			(1,035	)
Treasury stock (2,682,413 shares in 2022 and 2,700,364 shares in 2021), at cost		(24,583	)			(24,748	)
Total Stockholders Equity		169,836				175,521
Total Liabilities & Stockholders Equity	$	1,489,863			$	1,553,598

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations	Three Months Ended
($ in thousands, except per share amounts, unaudited)	March 31,
	2022					2021
Gross premiums written	$	150,959			$	163,018
Ceded premiums written		(72,638	)			(71,521	)
Net premiums written		78,321				91,497
Change in unearned premiums		4,155				10,355
Net premiums earned		82,476				101,852
Investment income, net of expenses		1,859				3,010
Investment gains, net		51				5,779
Finance charges		983				1,133
Commission and fees		287				260
Other income		16				19
Total revenues		85,672				112,053
Losses and loss adjustment expenses		64,024				69,479
Operating expenses		24,377				29,972
Interest expense		1,264				1,249
Amortization of intangible assets		126				126
Total expenses		89,791				100,826
(Loss) income before tax		(4,119	)			11,227
Income tax (benefit) expense		(900	)			2,256
Net (loss) income	$	(3,219	)		$	8,971
Net (loss) income per share:
Basic	$	(0.18	)		$	0.49
Diluted	$	(0.18	)		$	0.49

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Mar. 31
	Specialty Commercial Segment						Standard Commercial Segment						Personal Segment						Corporate					Consolidated
($ in thousands, unaudited)		2022			2021			2022			2021			2022			2021			2022			2021		2022			2021
Gross premiums written	$	103,850		$	113,990		$	30,277		$	29,735		$	16,832		$	19,293		$	-		$	-	$	150,959		$	163,018
Ceded premiums written		(61,069	)		(61,204	)		(11,493	)		(10,250	)		(76	)		(67	)		-			-		(72,638	)		(71,521	)
Net premiums written		42,781			52,786			18,784			19,485			16,756			19,226			-			-		78,321			91,497
Change in unearned premiums		7,429			14,425			(2,077	)		(2,419	)		(1,197	)		(1,651	)		-			-		4,155			10,355
Net premiums earned		50,210			67,211			16,707			17,066			15,559			17,575			-			-		82,476			101,852
Total revenues		51,911			69,599			17,128			17,688			16,819			18,959			(186	)		5,807		85,672			112,053
Losses and loss adjustment expenses		39,312			42,983			12,133			12,091			12,579			14,405			-			-		64,024			69,479
Pre-tax income (loss)		2,565			11,348			(692	)		366			(1,026	)		(1,623	)		(4,966	)		1,136		(4,119	)		11,227
Net loss ratio (1)		78.3	%		64.0	%		72.6	%		70.8	%		80.8	%		82.0	%							77.6	%		68.2	%
Net expense ratio (1)		22.1	%		24.1	%		34.7	%		31.6	%		29.0	%		30.4	%							28.4	%		27.2	%
Net combined ratio (1)		100.4	%		88.1	%		107.3	%		102.4	%		109.8	%		112.4	%							106.0	%		95.4	%
Net (Unfavorable) Favorable Prior Year Development		(6,380	)		1,899			262			1,361			(1,573	)		(1,174	)							(7,691	)		2,086

(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 release is available at: https://www.globenewswire.com/NewsRoom/AttachmentNg/a204b59d-618d-45a4-823f-f2fc7a049fbd