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Form 8-K HALLMARK FINANCIAL SERVI For: Mar 16

March 16, 2022 4:41 PM EDT

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Exhibit 99.1

Graphic

FOR IMMEDIATE RELEASE

HALLMARK ANNOUNCES FOURTH QUARTER AND FISCAL 2021 RESULTS

DALLAS, Texas, (March 16, 2022) - Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today announced financial results for the fourth quarter and fiscal year ended December 31, 2021.

Highlights:

Pre-tax loss was ($3.1) million for the three months ended December 31, 2021, as compared to pre-tax loss of ($13.3) million reported during the same period in 2020. Pre-tax income was $11.5 million for the fiscal year ended December 31, 2021, as compared to a pre-tax loss of ($115.8) million for fiscal 2020.
Net loss was ($2.5) million, or ($0.14) per diluted share, in the fourth quarter of 2021 as compared to net loss of ($7.8) million, or ($0.43) per diluted share, for the same period of 2020. Fiscal 2021 net income was $9.0 million, or $0.50 per diluted share, as compared to a net loss of ($94.4) million, or ($5.20) per diluted share, for fiscal 2020.
Net combined ratio was 106.1% and 101.1% for the three months and fiscal year ended December 31, 2021, compared to 117.7% and 111.3% for the same periods the prior year.
Gross premiums written for fiscal 2021 decreased 12% compared to fiscal 2020. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for fiscal 2021 would have decreased 9% compared to the same period of the prior year. (See “Non-GAAP” Financial Measures below).
Net premiums written for fiscal 2021 decreased 21% compared to fiscal 2020. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for fiscal 2021 would have decreased 16% compared to fiscal 2020. (See “Non-GAAP” Financial Measures below).
Net catastrophe losses were $5.9 million in the fourth quarter of 2021, or 6.8 points of the net combined ratio as compared to $0.8 million, or 0.8 points of the net combined ratio for the same period the prior year. Net catastrophe losses were $18.3 million for fiscal 2021, or 4.8 points of the net combined ratio as compared to $23.1 million, or 4.9 points of the net combined ratio for fiscal 2020.
Net investment gain was $10.2 million for fiscal 2021, which included $4.2 million of unrealized gains on equity securities, as compared to net investment loss of $22.9 million, which included $23.3 million of unrealized losses on equity and other investment securities, during fiscal 2020.


Fourth Quarter and Fiscal 2021 Financial Review

Fourth Quarter

    

Fiscal Year

2021

2020

% Change

2021

2020

% Change

($ in thousands)

Gross premiums written

$ 151,915

$ 161,671

(6)%

$ 653,754

$ 743,368

(12)%

Net premiums written

$ 69,975

$ 85,903

(19)%

$ 339,924

$ 428,332

(21)%

Net premiums earned

$ 86,509

$ 109,884

(21)%

$ 379,290

$ 471,901

(20)%

Investment income, net of expenses

$ 2,139

$ 2,606

(18)%

$ 9,715

$ 12,920

(25)%

Investment (losses) gains, net

$ 1,100

$ 5,005

(78)%

$ 10,222

($ 22,894)

145%

Other-than-temporary impairment (1)

$ -

$ -

nm

$ -

$ -

nm

Net income (loss)

($ 2,545)

($ 7,810)

67%

$ 9,004

($ 94,351)

110%

Operating income (loss) (2)

($ 3,436)

($ 11,764)

71%

$ 929

($ 13,399)

107%

Net income (loss) per share - basic

($ 0.14)

($ 0.43)

67%

$ 0.50

($ 5.20)

110%

Net income (loss) per share - diluted

($ 0.14)

($ 0.43)

67%

$ 0.50

($ 5.20)

110%

Operating income (loss) per share - diluted (2)

($ 0.19)

($ 0.65)

71%

$ 0.05

($ 0.74)

107%

Book value per share

$ 9.66

$ 9.24

4.5%

(1)Other-than-temporary impairment is included in investment gains (losses), net
(2)See “Non-GAAP Financial Measures” below

Gross Premiums Written

Gross premiums written were $151.9 million and $653.8 million during the three months ended and fiscal year ended December 31, 2021, respectively, representing a decrease of 6% and 12%, from the $161.7 million and $743.4 million in gross premiums written for the same periods in 2020.

Net Premiums Written

Net premiums written were $70.0 million and $339.9 million during the three months ended and fiscal year ended December 31, 2021, representing a decrease of 19% and 21%, from the $85.9 million and $428.3 million in net premiums written for the same periods in 2020.

Net Premiums Earned

Net premiums earned were $86.5 million and $379.3 million for the three months ended and fiscal year ended December 31, 2021, representing a decrease of 21% and 20%, from the $109.9 million and $471.9 million in net premiums earned for the same periods in 2020.

Investments

Net investment income was $2.1 million and $9.7 million during the three months ended and fiscal year ended December 31, 2021, as compared to $2.6 million and $12.9 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 gain was $1.1 million for the three months and $10.2 million for the fiscal year ended December 31, 2021, as compared to net investment gain of $5.0 million and net investment losses of $22.9 million, for the same periods in 2020. Net investment losses for the fiscal year ended December 31,


2020 included $1.7 million of other-than-temporary impairments reported during the third quarter comprised solely of secured obligations of American Airlines, Inc. maturing in 2022 and 2023 that have since recovered to market prices in excess of 90% of par value. The remaining net investment losses in fiscal 2020 were primarily due to sales of long-held equity securities in the first quarter of 2020 during the market decline associated with the COVID-19 pandemic. These sales were a management decision to reallocate capital supporting the investment portfolio to insurance underwriting operations and were not reflective of investment views regarding the future prospects for the securities.

Fixed-income securities were $290.0 million as of December 31, 2021 as compared to $507.3 million as of December 31, 2020, with a tax equivalent book yield of 2.4% compared to 2.7% as of December 31, 2020. As of December 31, 2021, the fixed-income portfolio had an average modified duration of 0.6 years and 74% of the securities had remaining time to maturity of five years or less. As of December 31, 2020, the fixed-income portfolio had an average modified duration of 0.8 years and 91% of the securities had remaining time to maturity of five years or less. As of December 31, 2021, 14% of the total investment portfolio was invested in equity securities as compared to 5% as of December 31, 2020.

Total investments were $338.8 million as of December 31, 2021. Cash and cash equivalents, including restricted cash were $356.7 million. Total investments, cash and cash equivalents, and restricted cash were $695.5 million or $38.27 per share.

Pre-Tax Income (Loss)

Pre-tax loss was ($3.1) million for the three months ended December 31, 2021, as compared to pre-tax loss of ($13.3) million reported during the same period in 2020. Pre-tax income was $11.5 million for fiscal 2021, as compared to a pre-tax loss of ($115.8) million for fiscal 2020. The improvement in pre-tax results for fiscal 2021 as compared to 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 $131.7 million decrease in losses and LAE and a $11.5 million decrease in operating expenses and a $2.0 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 Ratios

Losses and LAE for the three months and fiscal year ended December 31, 2021 decreased $33.1 million and $131.7 million, as compared to the same periods during 2020, primarily due to improved prior year net loss reserve development, lower fiscal year net catastrophe losses and lower net premiums earned. There was $4.2 million and $6.0 million of net unfavorable prior year loss reserve development during the three months and fiscal year ended December 31, 2021 as compared to net unfavorable prior year loss reserve development of $25.0 million and $58.3 million during the same periods in 2020. Net catastrophe losses were $5.9 million and $18.3 million during the three months and fiscal year ended December 31, 2021 as compared to $0.8 million and $23.1 million, during the same periods of 2020.

The net loss ratio was 75.8% and 72.6% for the three months and fiscal year ended December 31, 2021, as compared to 89.8% and 86.2% reported during the same periods in 2020. Catastrophe losses contributed 6.8 points and 4.8 points to the net loss ratio for the three months and fiscal year ended December 31, 2021, as compared to 0.8 points and 4.9 points for the same periods during 2020. Net unfavorable prior year loss reserve development contributed 4.9 points and 1.6 points to the net loss ratio


for the three months and fiscal year ended December 31, 2021, as compared to 22.8 points and 12.4 points for the same periods during 2020.

The net expense ratio was 30.3% and 28.5% for the three months and fiscal year ended December 31, 2021, as compared to 27.9% and 25.1% during the same periods in 2020. The Company reported net combined ratios of 106.1% and 101.1% for the three months and fiscal year ended December 31, 2021, as compared to 117.7% and 111.3% for the same periods during 2020. The increase in the expense ratio during the quarter includes $1.6 million of previously capitalized expenses related to the decision to discontinue pursuit of an initial public offering of a non-controlling ownership stake in the core business of its Specialty Commercial business segment. This expense added 1.8 points and 0.4 points to the expense ratio during the three months and fiscal year ended December 31, 2021, respectively.

Net Income (Loss)

Net loss was ($2.5) million for the three months ended December 31, 2021 and net income was $9.0 million for the fiscal year ended December 31, 2021, as compared to net losses of ($7.8) million and ($94.4) million for the same periods during 2020.

On a diluted basis per share, net loss was ($0.14) per share for the three months ended December 31, 2021 and net income was $0.50 per share for the fiscal year ended December 31, 2021, as compared to net loss of ($0.43) per share and ($5.20) per share for the same periods in 2020.

Book Value Per Share

Book value per share increased 5% to $9.66 per share as of December 31, 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 (collectively, “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

Fourth Quarter 2021

Reported GAAP measures

($ 3,113)

($ 546)

($ 2,567)

18,172

($ 0.14)

Excluded investment (gains)/losses

($ 1,100)

($ 231)

($ 869)

18,172

($ 0.05)

Operating income

($ 4,213)

($ 777)

($ 3,436)

18,172

($ 0.19)

Fourth Quarter 2020 (*As Revised)

Reported GAAP measures

($ 13,284)

($ 5,474)

($ 7,810)

18,142

($ 0.43)

Excluded investment (gains)/losses

($ 5,005)

($ 1,051)

($ 3,954)

18,142

($ 0.22)

Operating loss

($ 18,289)

($ 6,525)

($ 11,764)

18,142

($ 0.65)

Year-to-Date 2021

Reported GAAP measures

$ 11,495

$ 2,491

$ 9,004

18,165

$ 0.50

Excluded investment (gains)/losses

($ 10,222)

($ 2,147)

($ 8,075)

18,165

($ 0.44)

Operating income

$ 1,273

$ 344

$ 929

18,165

$ 0.05

Year-to-Date 2020 (*As Revised)

Reported GAAP measures

($ 115,768)

($ 21,417)

($ 94,351)

18,137

($ 5.20)

Excluded impairment of goodwill and other intangibles

$ 45,996

$ 273

$ 45,723

18,137

$ 2.52

Excluded loss portfolio transfer cost included in Losses and LAE

$ 21,700

$ 4,557

$ 17,143

18,137

$ 0.95

Excluded investment (gains)/losses

$ 22,894

$ 4,808

$ 18,086

18,137

$ 1.00

Operating loss

($ 25,178)

($ 11,779)

($ 13,399)

18,137

($ 0.74)

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

$ 653,754

$ 743,368

(12)%

$ 339,924

$ 428,332

(21)%

Less primary binding commercial auto

$ 218

$ 25,420

(99)%

$ 48

$ 23,694

(100)%

Written premium excluding

primary binding commercial auto

$ 653,536

$ 717,948

(9)%

$ 339,876

$ 404,638

(16)%


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 Kenney
President
Chief Financial Officer
817.348.1600
www.hallmarkgrp.com


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except par value)

Dec. 31

Dec. 31

ASSETS

2021

2020

Investments:

Debt securities, available-for-sale, at fair value (amortized cost: $288,175 in 2021 and $502,167 in 2020)

$

290,073

$

507,279

Equity securities (cost: $42,120 in 2021 and $26,988 in 2020)

48,695

29,388

Total investments

338,768

536,667

Cash and cash equivalents

352,867

102,580

Restricted cash

3,810

5,728

Ceded unearned premiums

146,433

143,446

Premiums receivable

90,621

120,332

Accounts receivable

6,914

5,967

Receivable for securities

1,326

913

Reinsurance recoverable

549,964

497,846

Deferred policy acquisition costs

6,811

17,840

Intangible assets, net

819

1,322

Federal income tax recoverable

18,217

24,691

Deferred federal income taxes, net

8,906

8,724

Prepaid expenses

2,389

2,648

Other assets

25,753

28,013

Total Assets

$

1,553,598

$

1,496,717

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Senior unsecured notes due 2029 (less unamortized debt issuance costs of $746 in 2021 and $844 in 2020)

$

49,254

$

49,156

Subordinated debt securities (less unamortized debt issuance costs of $744. in 2021 and $795 in 2020)

55,959

55,907

Reserves for unpaid losses and loss adjustment expenses

816,681

789,768

Unearned premiums

284,427

320,806

Reinsurance payable

117,908

61,100

Pension liability

174

1,859

Payable for securities

3,280

-

Accounts payable and other accrued expenses

50,394

50,415

Total Liabilities

1,378,077

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

122,844

122,893

Retained earnings

74,703

65,699

Accumulated other comprehensive income

(1,035)

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

175,521

167,706

Total Liabilities & Stockholders Equity

$

1,553,598

$

1,496,717


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

Three Months Ended

Fiscal Year Ended

($ in thousands, except per share amounts)

December 31,

December 31,

2021

2020

2021

2020

Gross premiums written

$

151,916

$

161,671

$

653,754

$

743,368

Ceded premiums written

(81,939)

(75,768)

(313,830)

(315,036)

Net premiums written

69,977

85,903

339,924

428,332

Change in unearned premiums

16,530

23,981

39,366

43,569

Net premiums earned

86,507

109,884

379,290

471,901

Investment income, net of expenses

2,139

2,606

9,715

12,920

Investment (losses) gains, net

1,100

5,005

10,222

(22,894)

Finance charges

1,026

1,217

4,344

5,705

Commission and fees

327

363

1,069

1,156

Other income

13

12

63

60

Total revenues

91,112

119,087

404,703

468,848

Losses and loss adjustment expenses

65,570

98,629

275,244

406,907

Operating expenses

27,279

31,860

112,467

123,919

Interest expense

1,250

1,265

4,993

5,326

Impairment of goodwill and other intangible assets

0

0

0

45,996

Amortization of intangible assets

126

617

504

2,468

Total expenses

94,225

132,371

393,208

584,616

(Loss) income before tax

(3,113)

(13,284)

11,495

(115,768)

Income tax (benefit) expense

(546)

(5,474)

2,491

(21,417)

Net (loss) income

$

(2,567)

$

(7,810)

$

9,004

$

(94,351)

Net (loss) income per share:

Basic

$

(0.14)

$

(0.43)

$

0.50

$

(5.20)

Diluted

$

(0.14)

$

(0.43)

$

0.50

$

(5.20)


Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Segment Data

Three Months Ended Dec. 31

Specialty Commercial Segment

Standard Commercial Segment

Personal Segment

Corporate

Consolidated

* As Revised

* As Revised

($ in thousands, unaudited)

2021

2020

2021

2020

2021

2020

2021

2020

2021

2020

Gross premiums written

$ 114,086

$ 122,188

$ 23,178

$ 23,104

$ 14,652

$ 16,379

$ -

$ -

$ 151,916

$ 161,671

Ceded premiums written

(73,242)

(68,069)

(8,627)

(7,882)

(70)

183

-

-

(81,939)

(75,768)

Net premiums written

40,844

54,119

14,551

15,222

14,582

16,562

-

-

69,977

85,903

Change in unearned premiums

11,883

20,809

2,951

1,801

1,696

1,371

-

-

16,530

23,981

Net premiums earned

52,727

74,928

17,502

17,023

16,278

17,933

-

-

86,507

109,884

Total revenues

55,386

77,754

18,211

17,689

17,578

19,430

(63)

4,214

91,112

119,087

Losses and loss adjustment expenses

39,074

65,779

12,512

15,165

13,984

17,685

-

-

65,570

98,629

Pre-tax income (loss)

4,098

(2,000)

(377)

(2,885)

(1,679)

(4,502)

(5,155)

(3,897)

(3,113)

(13,284)

Net loss ratio (1)

74.1%

87.8%

71.5%

69.3%

85.9%

98.6%

75.8%

89.8%

Net expense ratio (1)

24.9%

19.2%

35.6%

33.0%

27.9%

29.2%

30.3%

27.9%

Net combined ratio (1)

99.0%

107.0%

107.1%

102.3%

113.8%

127.8%

106.1%

117.7%

Net (Unfavorable) Favorable Prior Year Development

(2,881)

(21,847)

(815)

(1,007)

(535)

(2,175)

(4,231)

(25,029)

(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

Fiscal Year Ended Dec. 31

Specialty Commercial Segment

Standard Commercial Segment

Personal Segment

Corporate

Consolidated

* As Revised

* As Revised

($ in thousands, unaudited)

2021

2020

2021

2020

2021

2020

2021

2020

2021

2020

Gross premiums written

$ 480,981

$ 560,301

$ 105,560

$ 98,048

$ 67,213

$ 85,019

$ -

$ -

$ 653,754

$ 743,368

Ceded premiums written

(275,677)

(275,769)

(37,850)

(29,652)

(303)

(9,615)

-

-

(313,830)

(315,036)

Net premiums written

205,304

284,532

67,710

68,396

66,910

75,404

-

-

339,924

428,332

Change in unearned premiums

36,868

42,491

874

(1,842)

1,624

2,920

-

-

39,366

43,569

Net premiums earned

242,172

327,023

68,584

66,554

68,534

78,324

-

-

379,290

471,901

Total revenues

252,368

340,515

71,295

69,819

73,969

84,730

7,071

(26,216)

404,703

468,848

Losses and loss adjustment expenses

164,729

285,994

49,152

52,478

61,363

68,435

-

-

275,244

406,907

Pre-tax income (loss)

32,915

(7,752)

(30)

(3,039)

(9,955)

(10,338)

(11,435)

(94,639)

11,495

(115,768)

Net loss ratio (1)

68.0%

87.5%

71.7%

78.9%

89.5%

87.4%

72.6%

86.2%

Net expense ratio (1)

23.7%

19.3%

33.0%

31.1%

27.9%

27.5%

28.5%

25.1%

Net combined ratio (1)

91.7%

106.8%

104.7%

110.0%

117.4%

114.9%

101.1%

111.3%

Net (Unfavorable) Favorable Prior Year Development

(2,670)

(45,808)

1,521

(3,357)

(4,891)

(9,123)

(6,040)

(58,288)

(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.



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