Hallmark Financial Services, Inc. Announces Third Quarter 2011 Results

FORT WORTH, Texas, Nov. 8, 2011 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (Nasdaq:HALL) ("Hallmark") today reported third quarter 2011 net income of $125,000 compared to $1.0 million reported for third quarter 2010. Year to date, Hallmark reported net loss of $11.1 million, compared to net income of $6.9 million reported for the same period the prior year. On a fully diluted basis, third quarter 2011 net income was $0.01 per share as compared to net income of $0.05 per share for the third quarter of 2010. Year to date, Hallmark reported net loss of $0.56 per diluted share, compared to net income of $0.34 per diluted share for the same period the prior year. Total revenues were $83.7 million for the third quarter 2011 as compared to $76.2 million for the third quarter of 2010. Year to date total revenues for 2011 were $239.7 million, up 5% from the $227.7 million reported for the same period the prior year.

Mark J. Morrison, President and Chief Executive Officer, said, "Our overall results for the quarter are much improved over the first two quarters of fiscal 2011, driven by our two commercial segments. Our Standard Commercial segment combined ratio improved to 96.9% due in large part to the absence of large losses that we have experienced in recent quarters. In order to reduce our ongoing exposure to large losses, we have started to exit certain classes of business that contributed to the historical large loss volatility. Our Specialty Commercial segment also reported improved results as evidenced by its third quarter combined ratio of 96.5% compared to 102.9% last quarter. This improvement was primarily driven by improved loss experience in our general aviation business unit."

Mr. Morrison continued, "We continue to take aggressive steps to address the unfavorable financial performance of our Personal lines segment, including ceasing to write new private passenger automobile business in Florida and other underperforming states. We have also initiated rate reviews across all products and markets and have filed for rate increases in multiple states. As these and other actions taken in our Personal Lines business unit take effect, we expect this unit to return to an acceptable level of profitability."

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Third quarter book value per share decreased 2% from the second quarter and is down 6% year to date. Investment income increased 12% year to date compared to the prior year. Cash flow from operations was $4.0 million in the third quarter and $15.0 million year to date."

"Our total investments, cash and cash equivalents and restricted cash are essentially flat year to date at just over $498 million. However, on a per share basis, total investments, cash and cash equivalents and restricted cash have increased to an all-time high of $25.86 per share, due predominately to the repurchase of shares during the year. Hallmark continues to have a significant amount of cash and cash equivalents including restricted cash of $53.6 million as of the end of the quarter," said Mr. Schwarz.

Mr. Schwarz continued, "Hallmark has repurchased 875,712 shares or 4% of its outstanding common stock for a total cost of $6.4 million during the year. Since inception of the company's buyback program, total shares repurchased are 1,625,712 or 8% of the then outstanding common stock. The total cost of shares repurchased to date is $11.7 million or $7.17 per share, equivalent to 65% of our third quarter book value per share of $10.98. There are approximately 2.4 million shares remaining authorized under the Company's stock buyback program."

During the three months ended September 30, 2011 Hallmark's total revenues were $83.7 million representing a 10% increase from the $76.2 million in total revenues for the same period of 2010. This increase in revenue was primarily attributable to increased earned premium due to increased production by the E&S Commercial business unit, a new space risk program entered into during the first quarter of 2011 and the acquisition of the Workers Comp business unit during the third quarter of 2011. Further contributing to the increased revenues were favorable profit sharing commission revenue adjustments and higher gains recognized on the investment portfolio. These increases in revenue were partially offset by lower earned premium and net investment income in the Standard Commercial business unit due to continued reduction in premium production as a result of increased competition and soft market conditions. 

During the nine months ended September 30, 2011 Hallmark's total revenues were $239.7 million representing a 5% increase from the $227.7 million in total revenues for the same period of 2011. This increase in revenue was primarily attributable to increased earned premium due to increased production by the Personal Lines and E&S Commercial business units, a new space risk program entered into during the first quarter of 2011 and the acquisition of the Workers Comp business unit during the third quarter of 2011. Further contributing to the increased revenues were favorable profit sharing commission revenue adjustments and higher net investment income. These increases in revenue were partially offset by lower earned premium and net investment income in the Standard Commercial business unit due to continued reduction in premium production as a result of increased competition and soft market conditions, as well as lower recognized gains on the investment portfolio.

Hallmark reported $125,000 of net earnings for the three months ended September 30, 2011 as compared to net income of $1.0 million for the same period during 2010. Hallmark reported a net loss of $11.1 million for the nine months ended September 30, 2011, which was $18.0 million lower than the $6.9 million net income reported for the nine months ended September 30, 2010. On a diluted basis per share, Hallmark reported net income of $0.01 per share for the three months ended September 30, 2011, as compared to $0.05 per share for the same period in 2010. On a diluted basis per share, net loss per share was $0.56 for the nine months ended September 30, 2011 as compared to net income per share of $0.34 for the same period during 2010. 

The increase in revenue for the three months and nine months ended September 30, 2011 was offset by increased loss and loss adjustment expenses due primarily to higher current accident year loss estimates, as well as unfavorable prior year loss development of $2.3 million and $18.1 million recognized during the three and nine months ended September 30, 2011, respectively, as compared to unfavorable prior year development of $0.5 million and $7.0 million recognized during the three and nine months ended September 30, 2010. Of the $18.1 million unfavorable development recognized for the nine months ended September 30, 2011, $17.2 million was a result of adverse prior year loss reserve development in the Personal Lines Segment, of which $10.1 was directly attributable to loss development in Florida. In addition, the results for the nine months ended September 30, 2011 include $10.0 million in current accident year net losses from weather related claims, nearly all of which was incurred in the first half of 2011. As a result of the pre-tax loss and an increase in the proportion of tax-exempt income relative to total pre-tax loss, Hallmark reported an income tax benefit of $9.0 million, or an effective income tax rate of 44.8%, for the nine months ended September 30, 2011, as compared to income tax expense of $2.1 million, or an effective rate of 23.5%, for the same period during 2010.

Hallmark's consolidated net loss ratio was 74.8% and 83.9% for the three and nine months ended September 30, 2011 as compared to 72.9% and 70.6% for the same periods in 2010. The adverse prior year development and the losses from the weather related claims contributed 13.0% to the 83.9% consolidated net loss ratio for the nine months ended September 30, 2011. Hallmark's net expense ratio was 31.5% and 31.3% for the three and nine months ended September 30, 2011 as compared to 29.4% and 29.5% for the same periods in 2010. Hallmark's net combined ratio was 106.3% and 115.2% for the three and nine months ended September 30, 2011 as compared to 102.3% and 100.1% for the same periods in 2010. 

Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Hallmark's business involves marketing, distributing, underwriting and servicing commercial insurance, personal insurance and general aviation insurance, as well as providing other insurance related services. The Company is headquartered in Fort Worth, Texas and its common stock is listed on NASDAQ under the symbol "HALL."

The Hallmark Financial Services, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=4395

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.

¹ Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by Hallmark's operations. Hallmark believes this is a useful tool for users of its financial statements to measure premium production whether retained by Hallmark's insurance company subsidiaries or assumed by third party insurance carriers who pay it commission revenue. Produced premium excludes unaffiliated third party premium fronted by its Hallmark County Mutual Insurance Company and Hallmark National Insurance Company subsidiaries.

² The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated for the business units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. For the business units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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.

¹ Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by Hallmark's operations. Hallmark believes this is a useful tool for users of its financial statements to measure premium production whether retained by Hallmark's insurance company subsidiaries or assumed by third party insurance carriers who pay it commission revenue. Produced premium excludes unaffiliated third party premium fronted by its Hallmark County Mutual Insurance Company and Hallmark National Insurance Company subsidiaries.

² The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated for the business units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. For the business units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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.