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Section 1: 8-K (FORM 8-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 8-K

 

CURRENT REPORT Pursuant

to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

 

Date of report (Date of earliest event reported): November 7, 2018

 

HALLMARK FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)

 

Nevada
(State or Other Jurisdiction of Incorporation)

  

001-11252 87-0447375
(Commission File Number) (IRS Employer Identification No.)
   
   
777 Main Street, Suite 1000, Fort Worth, Texas 76102
(Address of Principal Executive Offices) (Zip Code)

 

817-348-1600
(Registrant’s Telephone Number, Including Area Code)
 
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

 

 

 

 

Item 2.02Results of Operations and Financial Condition

 

On November 7, 2018, the Registrant issued a press release announcing its financial results for the three months and nine months ended September 30, 2018. A copy of the Registrant’s press release is attached as Exhibit 99.1 to this Current Report.

 

 

Item 9.01Financial Statements and Exhibits

 

(c)Exhibits.

 

99.1Press release dated November 7, 2018.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.

 

  HALLMARK FINANCIAL SERVICES, INC.
     
     
     
     
Date: November 7, 2018 By: /s/ Jeffrey R. Passmore  
    Jeffrey R. Passmore, Chief Accounting Officer

 

 

 

 

 

 

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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit 99.1

 

 

 

 

Hallmark Financial Services, Inc.

777 Main Street, Suite 1000,

Fort Worth, TX 76102

817.348.1600

hallmarkgrp.com

 

 

FOR IMMEDIATE RELEASE

 

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES THIRD QUARTER 2018 EARNINGS RESULTS

 

 

FORT WORTH, Texas, (November 7, 2018) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today announced results for its third quarter and year-to-date ended September 30, 2018, including the following highlights:

 

·3rd quarter 2018 net income of $9.7 million, or $0.53 per diluted share, versus a net loss of $1.6 million, or $0.09 per diluted share, for 3rd quarter 2017.
·Year-to-date 2018 net income of $15.4 million, or $0.85 per diluted share, versus a net loss of $0.9 million, or $0.05 per diluted share, for prior year-to-date.
·3rd quarter 2018 operating earnings (1) of $4.2 million, or $0.23 per diluted share, versus ($2.9) million, or ($0.16) per diluted share, for 3rd quarter 2017.
·Year-to-date 2018 operating earnings (1) of $13.3 million, or $0.73 per diluted share, versus ($1.4) million, or ($0.07) per diluted share, for prior year-to-date.
·3rd quarter 2018 net combined ratio of 98.1% versus 108.6% for 3rd quarter 2017.
·Year-to-date 2018 net combined ratio of 97.5% versus 104.2% for prior year-to-date.
·Year-to-date 2018 gross premiums written of $495.8 million increased 8% from $458.3 million for prior year-to-date.
·Year-to-date 2018 net premiums written of $269.3 million declined 5% from $284.5 million for prior year-to-date.

 

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

 

Naveen Anand, President and Chief Executive Officer, stated, “Our net combined ratio reflects improvement in our underwriting results in comparison to last year on both a quarter and year-to-date basis. These results are trending favorably despite catastrophe losses and net adverse prior year reserve development, which collectively contributed 4.0% for the quarter and 4.1% on a year-to-date basis to the net combined ratio.

 

“Rate momentum continues to be strong through the third quarter and on a year-to-date basis. However, we have seen retention dip slightly as we have held firm on pricing. Primary commercial auto gross premium decreased by 20% over the last four quarters, following targeted rate increases and underwriting actions. Just as we did in our Personal Segment, we have developed a proprietary predictive pricing model to support the underwriting process for this portfolio and are seeing positive results from these actions.

 

“Our Personal Segment produced a welcome result of a 96.0% net combined ratio for the third quarter of 2018. The loss ratio results had stabilized over the last several quarters and, as projected, our expense ratio came more in line with our run rate expectations. The actions taken on the personal auto business are similar to what we are executing in commercial auto from an underwriting, pricing and claims perspective,” said Mr. Anand.

 

“Our Standard Commercial Segment gross premiums written grew by 10.4% for year-to-date 2018 compared to the prior year. We have been executing our strategy to add states to our footprint and expand our distribution, as well as focusing on a limited group of classes that offer us profitable growth opportunities and where we have expertise.

 

 

 

 

 

 

“Losses from catastrophes contributed 2.2% to the net combined ratio in the third quarter of 2018 and 1.8% on a year-to-date basis, with current quarter catastrophe losses being driven by Hurricane Florence. Although losses from Hurricane Michael are too early to project, we do not presently expect it to have a significant impact on our portfolio based on our exposure and modeled loss information. However, this is subject to change as claims are reported and more information becomes available. Our retention on our catastrophe reinsurance program is $5 million,” concluded Mr. Anand.

 

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share at September 30, 2018 was $14.79, a year-to-date increase of 7% compared to $13.82 at December 31, 2017. Year-to-date 2018 net investment income was $13.7 million, a 5% decline compared to the prior year-to-date. Total cash and investments was $711.2 million, or $39.38 per share, as of September 30, 2018, a decrease of 2% from $40.12 per share as of December 31, 2017.”

 

   Third Quarter   Year-to-Date 
   2018   2017   % Change   2018   2017   % Change 
($ in thousands, unaudited)                
Gross premiums written   169,112    161,151    5%    495,836    458,319    8% 
Net premiums written   88,012    95,049    -7%    269,291    284,462    -5% 
Net premiums earned   88,862    88,788    0%    271,787    268,718    1% 
Investment income, net of expenses   4,860    5,295    -8%    13,706    14,361    -5% 
Investment gains, net   6,980    2,960    136%    2,678    4,948    -46% 
Other-than-temporary impairments   -    (850)   100%    -    (4,257)   100% 
Net income (loss)   9,685    (1,560)   721%    15,422    (924)   1769% 
Operating earnings (loss)   4,170    (2,931)   242%    13,306    (1,373)   1069% 
Net income (loss) per share - basic  $0.54   $(0.09)   700%   $0.85   $(0.05)   1800% 
Net income (loss) per share - diluted  $0.53   $(0.09)   689%   $0.85   $(0.05)   1800% 
Operating earnings per share - diluted  $0.23   $(0.16)   244%   $0.73   $(0.07)   1143% 
Book value per share                 $14.79   $14.40    3% 

 

Third Quarter 2018 Commentary

 

Hallmark reported net income of $9.7 million and $15.4 million for the three months and nine months ended September 30, 2018, respectively, as compared to a net loss of $1.6 million and $0.9 million for the three months and nine months ended September 30, 2017, respectively. On a diluted basis per share, the Company reported net income of $0.53 per share and $0.85 per share for the three months and nine months ended September 30, 2018, respectively, as compared to a net loss of $0.09 per share and $0.05 per share for the three months and nine months ended September 30, 2017, respectively.

 

Hallmark's consolidated net loss ratio was 72.3% and 70.5% for the three months and nine months ended September 30, 2018, respectively, as compared to 81.5% and 76.3% for the three months and nine months ended September 30, 2017, respectively. Hallmark's net expense ratio was 25.8% and 27.0% for the three months and nine months ended September 30, 2018, respectively, as compared to 27.1% and 27.9% for the three months and nine months ended September 30, 2017, respectively. Hallmark’s net combined ratio was 98.1% and 97.5% for the three months and nine months ended September 30, 2018, respectively, as compared to 108.6% and 104.2% for the three months and nine months ended September 30, 2017, respectively.

 

 

 

 

 

 

During the three months and nine months ended September 30, 2018, Hallmark’s gross premiums written were $169.1 million and $495.8 million, representing an increase of 5% and 8%, respectively from the $161.2 million and $458.3 million in gross premiums written for the same periods in 2017. Hallmark’s net premiums written were $88.0 million and $269.3 million, representing a decrease of 7% and 5%, respectively from the $95.0 million and $284.5 million in net premiums written for the same periods of 2017. The decline in net premiums written was driven by an intentional shift in the mix of business away from a commercial auto concentration in the portfolio towards targeted growth in the Specialty Commercial operating unit, a larger portion of which is ceded to reinsurers. Hallmark’s net premiums earned were $88.9 million and $271.8 million for the three months and nine months ended September 30, 2018, respectively, as compared to $88.8 million and $268.7 million for the same periods in 2017. During the three months and nine months ended September 30, 2018, Hallmark’s income before tax was $12.1 million and $19.3 million, respectively, as compared to a loss before tax of $1.5 million and $0.6 million reported during the same periods in 2017.

 

The stable net premiums earned for the three months ended September 30, 2018 was due to net premium growth in the Standard Commercial Segment, offset by lower net premiums earned in the Specialty Commercial and Personal Segments. The modest increase in net premiums earned for the nine months ended September 30, 2018 was driven by improvements in both the Specialty Commercial and Standard Commercial Segments, partially offset by lower net premiums earned in the Personal Segment. The increase in income before tax for the three months and nine months ended September 30, 2018 was largely due to increased investment gains and decreased losses and loss adjustment expenses. The investment gain during the nine months ended September 30, 2018 included $3.2 million in gain attributable to the adoption effective January 1, 2018 of Accounting Standards Update No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” which requires equity investments that are not consolidated or accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net income. The decrease in loss and LAE was primarily the result of unfavorable net prior year loss reserve development of $1.6 million and $6.1 million for the three and nine months ended September 30, 2018, respectively, as compared to unfavorable net prior year loss reserve development of $10.6 million and $20.2 million during the same periods of 2017. Higher commissions, fees and finance charges, partially offset by lower investment income, further contributed to the increase in income before tax for the three months and nine months ended September 30, 2018. The decrease in net investment income for the three and nine months ended September 30, 2018 was primarily the result of the final distribution on a fixed income security during the third quarter of the prior year.

 

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, our definitions of these items may not be comparable to the definitions used by other companies.

 

Operating earnings and operating earnings per share are calculated by excluding net investment gains and losses from GAAP net income. 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  Less Tax  Net  Average  Diluted 
($ in thousands) Before Tax  Effect  After Tax  Shares Diluted  Per Share 
Third Quarter 2018                    
Reported GAAP measures $12,075  $2,390  $9,685   18,167  $0.53 
Excluded investment losses/gains $(6,980) $(1,465) $(5,515)  18,167  $(0.30)
Operating earnings $5,095  $925  $4,170   18,167  $0.23 
                     
Third Quarter 2017                    
Reported GAAP measures $(1,525) $35  $(1,560)  18,180  $(0.09)
Excluded investment losses/gains $(2,110) $(739) $(1,371)  18,180  $(0.07)
Operating loss $(3,635) $(704) $(2,931)  18,180  $(0.16)
                     
Year-to-Date 2018                    
Reported GAAP measures $19,256  $3,834  $15,422   18,203  $0.85 
Excluded investment losses/gains $(2,678) $(562) $(2,116)  18,203  $(0.12)
Operating earnings $16,578  $3,272  $13,306   18,203  $0.73 
                     
Year-to-Date 2017                    
Reported GAAP measures $(605) $319  $(924)  18,404  $(0.05)
Excluded investment losses/gains $(691) $(242) $(449)  18,404  $(0.02)
Operating earnings $(1,296) $77  $(1,373)  18,404  $(0.07)

 

 

About Hallmark Financial Services, Inc.

 

Hallmark Financial Services, Inc. is a diversified specialty property/casualty insurer with offices in Dallas-Fort Worth, San Antonio, Chicago, Atlanta and Jersey City. Hallmark markets, underwrites and services over half a billion dollars annually in commercial and personal insurance premiums in select markets. Hallmark is headquartered in Fort Worth, 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 substantially 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:

Mr. Naveen Anand, President and Chief Executive Officer at 817.348.1600

www.hallmarkgrp.com

 

 

 

 

 

 

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets        
($ in thousands, except par value)  Sept. 30   Dec. 31 
ASSETS   2018    2017 
Investments:   (unaudited)      
Debt securities, available-for-sale, at fair value (amortized cost: $571,657 in 2018 and $604,999 in 2017)  $574,470   $605,746 
Equity securities (cost: $45,426 in 2018 and $30,253 in 2017)   70,152    51,763 
Other investment (cost: $3,763 in 2018 and 2017)   3,085    3,824 
Total investments   647,707    661,333 
Cash and cash equivalents   59,925    64,982 
Restricted cash   3,519    2,651 
Ceded unearned premiums   135,567    112,323 
Premiums receivable   111,366    104,373 
Accounts receivable   1,464    1,513 
Receivable for securities   3,253    5,235 
Reinsurance recoverable   225,932    182,928 
Deferred policy acquisition costs   13,150    16,002 
Goodwill   44,695    44,695 
Intangible assets, net   8,174    10,023 
Deferred federal income taxes, net   1,042    1,937 
Federal income tax recoverable   -    7,532 
Prepaid expenses   2,526    1,743 
Other assets   12,471    13,856 
Total Assets  $1,270,791   $1,231,126 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Liabilities:          
Revolving credit facility payable  $30,000   $30,000 
Subordinated debt securities (less unamortized debt issuance cost of $911 in 2018 and $949 in 2017)   55,791    55,753 
Reserves for unpaid losses and loss adjustment expenses   530,816    527,100 
Unearned premiums   297,389    276,642 
 Reinsurance balances payable   55,830    52,487 
Current federal income tax payable   144    - 
Pension liability   1,403    1,605 
Payable for securities   7,699    7,488 
Accounts payable and other accrued expenses   24,667    28,933 
Total Liabilities   1,003,739    980,008 
 Commitments and contingencies          
Stockholders’ equity:          
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2018 and 2017   3,757    3,757 
Additional paid-in capital   123,053    123,180 
Retained earnings   166,270    136,474 
Accumulated other comprehensive income   (443)   12,234 
Treasury stock (2,814,155 shares in 2018 and 2,703,803 shares in 2017), at cost   (25,585)   (24,527)
Total Stockholders’ Equity   267,052    251,118 
Total Liabilities & Stockholders' Equity  $1,270,791   $1,231,126 

 

 

 

 

 

 

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations  Three Months Ended   Nine Months Ended 
($ in thousands, except share amounts)  September 30,   September 30, 
   2018   2017   2018   2017 
   (unaudited)   (unaudited) 
Gross premiums written  $169,112   $161,151   $495,836   $458,319 
Ceded premiums written   (81,100)   (66,102)   (226,545)   (173,857)
Net premiums written   88,012    95,049    269,291    284,462 
Change in unearned premiums   850    (6,261)   2,496    (15,744)
Net premiums earned   88,862    88,788    271,787    268,718 
                     
Investment income, net of expenses   4,860    5,295    13,706    14,361 
Investment gains, net   6,980    2,110    2,678    691 
Finance charges   1,347    892    3,548    2,881 
Commission and fees   869    570    2,604    1,295 
Other income   28    68    89    200 
Total revenues   102,946    97,723    294,412    288,146 
                     
Losses and loss adjustment expenses   64,245    72,379    191,568    204,925 
Operating expenses   24,829    25,071    78,402    78,445 
Interest expense   1,180    1,181    3,335    3,530 
Amortization of intangible assets   617    617    1,851    1,851 
Total expenses   90,871    99,248    275,156    288,751 
                     
Income (loss) before tax   12,075    (1,525)   19,256    (605)
Income tax expense (benefit)   2,390    35    3,834    319 
Net income (loss)  $9,685   $(1,560)  $15,422   $(924)
                     
Net income (loss) per share:                    
Basic  $0.54   $(0.09)  $0.85   $(0.05)
Diluted  $0.53   $(0.09)  $0.85   $(0.05)

 

 

 

 

 

 

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Sept. 30
 

Specialty

Commercial

Segment

 

Standard

Commercial

Segment

 

Personal

Segment

  Corporate  Consolidated 
($ in thousands) 2018  2017  2018  2017  2018  2017  2018  2017  2018  2017 
Gross premiums written $125,599  $127,062  $21,560  $19,240  $21,953  $14,849  $-  $-  $169,112  $161,151 
Ceded premiums written  (66,404)  (56,200)  (2,398)  (2,889)  (12,298)  (7,013)  -   -   (81,100)  (66,102)
Net premiums written  59,195   70,862   19,162   16,351   9,655   7,836   -   -   88,012   95,049 
Change in unearned premiums  3,203   (6,274)  (449)  (420)  (1,904)  433   -   -   850   (6,261)
Net premiums earned  62,398   64,588   18,713   15,931   7,751   8,269   -   -   88,862   88,788 
                                         
Total revenues  68,302   69,721   19,857   17,401   9,355   9,404   5,432   1,197   102,946   97,723 
                                         
Losses and loss adjustment expenses  52,106   53,899   6,261   11,760   5,878   6,720   -   -   64,245   72,379 
                                         
Pre-tax income (loss)  2,452   1,288   7,264   229   684   (661)  1,675   (2,381)  12,075   (1,525)
                                         
Net loss ratio (1)  83.5%   83.5%   33.5%   73.8%   75.8%   81.3%           72.3%   81.5% 
Net expense ratio (1)  22.4%   21.9%   34.1%   34.2%   20.2%   31.2%           25.8%   27.1% 
Net combined ratio (1)  105.9%   105.4%   67.6%   108.0%   96.0%   112.5%           98.1%   108.6% 
                                         
Favorable (Unfavorable) Prior Year Development  (8,869)  (9,492)  7,269   (1,330)  (9)  266   -   -   (1,609)  (10,556)

 

 

 

 

1The 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
Nine Months Ended Sept. 30
  Specialty
Commercial
Segment
  Standard
Commercial
Segment
  Personal
Segment
  Corporate  Consolidated 
($ in thousands) 2018  2017  2018  2017  2018  2017  2018  2017  2018  2017 
Gross premiums written $376,491  $350,374  $65,931  $59,702  $53,414  $48,243  $-  $-  $495,836  $458,319 
Ceded premiums written  (189,145)  (144,510)  (7,598)  (6,816)  (29,802)  (22,531)  -   -   (226,545)  (173,857)
Net premiums written  187,346   205,864   58,333   52,886   23,612   25,712   -   -   269,291   284,462 
Change in unearned premiums  9,071   (14,563)  (3,648)  (3,859)  (2,927)  2,678   -   -   2,496   (15,744)
Net premiums earned  196,417   191,301   54,685   49,027   20,685   28,390   -   -   271,787   268,718 
                                         
Total revenues  213,507   205,057   57,979   52,449   24,891   31,951   (1,965)  (1,311)  294,412   288,146 
                                         
Losses and loss adjustment expenses  148,001   146,018   28,562   34,669   15,005   24,238   -   -   191,568   204,925 
                                         
Pre-tax income (loss)  20,980   13,018   11,239   881   661   (2,311)  (13,624)  (12,193)  19,256   (605)
                                         
Net loss ratio (1)  75.4%   76.3%   52.2%   70.7%   72.5%   85.4%           70.5%   76.3% 
Net expense ratio (1)  22.8%   23.6%   33.5%   34.9%   29.2%   27.7%           27.0%   27.9% 
Net combined ratio (1)  98.2%   99.9%   85.7%   105.6%   101.7%   113.1%           97.5%   104.2% 
                                         
Favorable (Unfavorable) Prior Year Development  (15,730)  (17,824)  8,829   (1,594)  839   (822)  -   -   (6,062)  (20,240)

 

 

 

 

1The 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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