Hallmark Announces Second Quarter Results

Hallmark Financial Services, Inc.

Hallmark Financial Services, Inc.

Hallmark Financial Services, Inc.

DALLAS, Aug. 14, 2023 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today filed its Form 10-Q and announced financial results for the second quarter and six months ended June 30, 2023.

	Second Quarter							Year-to-Date
		2023			2022				2023			2022
$ in millions:
Net loss from continuing operations	$	(17.8	)	$	(67.0	)		$	(57.0	)	$	(78.7	)
Net income (loss) from discontinued operations	$	5.9		$	(2.4	)		$	6.0		$	6.1
Net loss	$	(11.9	)	$	(69.4	)		$	(51.0	)	$	(72.6	)
Operating loss (1)	$	(12.4	)	$	(63.9	)		$	(17.4	)	$	(75.6	)
$ per diluted share (2):
Net loss from continuing operations	$	(9.78	)	$	(36.85	)		$	(31.37	)	$	(43.30	)
Net income (loss) from discontinued operations	$	3.23		$	(1.31	)		$	3.29		$	3.35
Net loss	$	(6.55	)	$	(38.16	)		$	(28.08	)	$	(39.95	)
Operating loss (1)	$	(6.83	)	$	(35.12	)		$	(9.56	)	$	(41.58	)

⁽¹⁾   See “Non-GAAP Financial Measures” below
⁽²⁾   Per share amounts have been restated to reflect one-for-ten reverse stock split

Highlights of results from the quarter:

• Net loss from continuing operations in the second quarter of 2023 of $17.8 million, or $9.78 per share, as compared to a net loss of $67.0 million, or $36.85 per share for the comparable period in 2022. Year-to-date net loss from continuing operations of $57.0 million, or $31.37 per share, for 2023 as compared to a net loss of $78.7 million, or $43.30 per share, for the comparable period in 2022.
  
  

• Net income from discontinued operations of $5.9 million, or $3.23 per share, in the second quarter of 2023 as compared to a net loss from discontinued operations of $2.4 million, or $1.31 per share, for the comparable period in 2022. Year-to-date net income from discontinued operations of $6.0 million, or $3.29 per share, for 2023 as compared to net income of $6.1 million, or $3.35 per share, for the comparable period in 2022.
  
  

• Net loss of $11.9 million, or $6.55 per share, in the second quarter of 2023 includes $3.1 million or $1.72 per share related to the DARAG^(a) write-off to bad debt expense based on the final definitive award declared on June 2, 2023, compared to a net loss of $69.4 million, or $38.16 per share, for the comparable period in 2022. Year-to-date net loss of $51.0 million, or $28.08 per share, for 2023 includes $29.1 million, or $16.00 per share, related to the DARAG^(a) write-off to bad debt expense on the final definitive award declared on June 2, 2023, as compared to a net loss of $72.6 million, or $39.95 per share, for the comparable period in 2022. See Non-GAAP Financial Measures below.
  
  

• Net combined ratio of 157.3% for the three months ended June 30, 2023, compared to 240.9% for the same periods the prior year. Year-to-date net combined ratio for 2023 of 185.9% as compared to 187.3% for the comparable period in 2022.
  
  

• Underlying combined ratio (excluding net prior year development, catastrophe losses and write-off of DARAG^(a) receivable) of 119.4% for the three months ended June 30, 2023, compared to 117.7% for the same period the prior year. Year-to-date underlying combined ratio for 2023 of 114.9% as compared to 113.6% for the comparable period in 2022. See Non-GAAP Financial Measures below.
  
  

• Net investment income was $4.0 million during the three months ended June 30, 2023, as compared to $3.1 million during the same period in 2022. Year-to-date net investment income for 2023 of $8.4 million as compared to $5.0 million for the comparable period in 2022.
  
  

• As of June 30, 2023, the Company has $150.5 million in cash and cash equivalents. Our debt securities were $295.8 million as of June 30, 2023 as compared to $426.6 million as of December 31, 2022. Furthermore, 92% of debt securities have maturities of five years or less and overall our debt securities portfolio has an average modified duration of 0.7 years.
  
  

• The Company continues to maintain a full valuation allowance for income tax in fiscal 2023.
  
  

• Due to the Maui, Hawaii wildfires on August 9, 2023, we preliminarily estimate our net loss exposure to be $7.5 million plus additional cost in the form of reinstatement premiums to restore any necessary reinsurance layers. The net loss and any additional cost incurred will be recognized in our third quarter 2023 financial statements.
  
  

• On May 5, 2023, the Company entered into an agreement with an A.M. Best rated “A” insurance company to continue to write new business in circumstances that require an A.M. Best financial strength rating.
  
  

a)

As previously disclosed in Hallmark’s public filings, certain of Hallmark’s subsidiaries were parties to an arbitration proceeding relating to a Loss Portfolio Transfer Reinsurance Contract with DARAG Bermuda Ltd. and DARAG Insurance Limited. On May 4, 2023, the arbitration panel rendered an interim final award, which resulted in a write-off of $32.9 million recognized during the first quarter of 2023, subject to final determination of certain amounts under settlement which may increase or decrease our total write-off. As of March 31, 2023, our consolidated balance sheet included $3.9 million of account receivable from DARAG related to cost incurred in which we contended we have right of reimbursement. On June 2, 2023, the final definitive binding award was declared by the arbitration panel which resulted in an additional write-off to Hallmark of $3.9 million, or $3.1 million if tax effected, during the second quarter of 2023. This additional write-off results in a total write-off of $36.8 million, or $29.1 million if tax effected, included in our year-to-date net loss.

Second Quarter and Year-to-Date 2023 Financial Review

	Second Quarter							Year-to-Date
		2023			2022				2023			2022
($ in thousands)
Gross premiums written	$	54,511		$	56,004			$	111,683		$	115,337
Net premiums written	$	43,875		$	37,438			$	86,256		$	78,707
Net premiums earned	$	36,847		$	37,037			$	72,127		$	76,352
Investment income, net of expenses	$	4,019		$	3,120			$	8,361		$	4,979
Investment gains (losses), net	$	248		$	(3,994	)		$	(392	)	$	(3,943	)
Net (loss) from continuing operations	$	(17,785	)	$	(67,035	)		$	(57,031	)	$	(78,712	)
Net income from discontinued operations	$	5,876		$	(2,382	)		$	5,980		$	6,076
Net (loss) income	$	(11,909	)	$	(69,417	)		$	(51,051	)	$	(72,636	)
Operating (loss) income (2)	$	(12,416	)	$	(63,880	)		$	(17,389	)	$	(75,597	)
Net (loss) income per share from continuing operations basic & diluted (1)	$	(9.78	)	$	(36.85	)		$	(31.37	)	$	(43.30	)
Net income per share from discontinued operations - basic & diluted	$	3.23		$	(1.31	)		$	3.29		$	3.35
Net loss per share - basic & diluted	$	(6.55	)	$	(38.16	)		$	(28.08	)	$	(39.95	)
Operating (loss) per share - basic & diluted (2)	$	(6.83	)	$	(35.12	)		$	(9.56	)	$	(41.58	)
Book value per share	$	6.81		$	53.01			$	6.81		$	53.01

⁽¹⁾   Per share amounts have been restated for a reverse stock split
⁽²⁾   See “Non-GAAP Financial Measures” below

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 asset impairments or valuation allowances from GAAP net income from continuing operations. Asset impairments and valuation allowances 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 from continuing operations and net income per share from continuing operations 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.

Hallmark Financial Services, Inc. and Subsidiaries
Non-GAAP Financial Measures Reconciliation
($ in thousands)	Income (Loss) from Continuing Operations Before Tax			Less Tax Effect			Net After Tax			Weighted Average Shares Diluted	Diluted Per Share
Second Quarter 2023
Reported GAAP measures	$	(17,918	)	$	(133	)	$	(17,785	)	1,818	$	(9.78	)
Excluded deferred tax valuation allowance	$	-		$	(2,441	)	$	2,441		1,818	$	1.34
Excluded write-off receivable from reinsurer	$	3,954		$	830		$	3,124		1,818	$	1.72
Excluded investment (gains)/losses	$	(248	)	$	(52	)	$	(196	)	1,818	$	(0.11	)
Operating loss	$	(14,212	)	$	(1,796	)	$	(12,416	)	1,818	$	(6.83	)
Second Quarter 2022
Reported GAAP measures	$	(54,585	)	$	12,450		$	(67,035	)	1,819	$	(36.85	)
Excluded investment (gains)/losses	$	3,994		$	839		$	3,155		1,819	$	1.73
Operating loss	$	(50,591	)	$	13,289		$	(63,880	)	1,819	$	(35.12	)
Year-to-Date 2023
Reported GAAP measures	$	(57,698	)	$	(667	)	$	(57,031	)	1,818	$	(31.37	)
Excluded deferred tax valuation allowance	$	-		$	(10,239	)	$	10,239		1,818	$	5.63
Excluded write-off receivable from reinsurer	$	36,826		$	7,733		$	29,093		1,818	$	16.00
Excluded investment (gains)/losses	$	392		$	82		$	310		1,818	$	0.17
Operating loss	$	(20,480	)	$	(3,091	)	$	(17,389	)	1,818	$	(9.56	)
Year-to-Date 2022
Reported GAAP measures	$	(69,442	)	$	9,270		$	(78,712	)	1,818	$	(43.30	)
Excluded investment (gains)/losses	$	3,943		$	828		$	3,115		1,818	$	1.71
Operating income	$	(65,499	)	$	10,098		$	(75,597	)	1,818	$	(41.58	)

Underlying combined ratio is calculated by excluding the impact of net favorable or unfavorable prior year loss development and catastrophe losses from the calculation of the net combined ratio. Management believes that the underlying combined ratio provides useful information to investors about the current performance of the Company's insurance operations absent historical developments and uncontrollable events. Combined ratio is the GAAP measure most comparable to underlying combined ratio. A reconciliation of the underlying combined ratio to the combined ratio is presented below.

	2ndQ 2023		2ndQ 2022		YTD 2023		YTD 2022
Net combined ratio	157.3	%	240.9	%	185.9	%	187.3	%
Impact on net combined ratio
Net Unfavorable (Favorable) Prior Year Development	24.5	%	120.9	%	16.1	%	72.3	%
Catastrophes, net of reinsurance	2.8	%	2.3	%	3.8	%	1.4	%
Write-off receivable from reinsurer	10.7	%	0.0	%	51.1	%	0.0	%
Underlying combined ratio	119.4	%	117.7	%	114.9	%	113.6	%

A copy of our Form 10-Q is available on our website at www.hallmarkgrp.com or on the SEC website at www.sec.gov. Readers are urged to review the Form 10-Q for a more complete discussion of our financial performance.

About Hallmark

Hallmark is a 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
Chief Executive Officer
817.348.1600
www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value)		Jun. 30			Dec. 31
ASSETS		2023			2022
Investments:
Debt securities, available-for-sale, at fair value (amortized cost: $299,544 in 2023 and $434,119 in 2022; allowance for expected credit losses of $0 in 2023)	$	295,761		$	426,597
Equity securities (cost: $24,284 in 2023 and $30,058 in 2022)		22,763			28,199
Total investments		318,524			454,796
Cash and cash equivalents		150,528			59,133
Restricted cash		14,781			29,486
Ceded unearned premiums		86,661			237,086
Premiums receivable		49,506			78,355
Accounts receivable		1,076			10,859
Receivable from reinsurer		-			58,882
Receivable for securities		476			945
Reinsurance recoverable (net of allowance for expected credit losses of $200 in 2023)		593,635			578,424
Deferred policy acquisition costs		9,858			8
Federal income tax recoverable		-			2,668
Prepaid pension assets		239			163
Prepaid expenses		1,878			1,508
Other assets		22,186			24,389
Total Assets	$	1,249,348		$	1,536,702
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance costs of $599 in 2023 and $648 in 2022)	$	49,401		$	49,352
Subordinated debt securities (less unamortized debt issuance costs of $666 in 2023 and $691 in 2022)		56,036			56,011
Reserves for unpaid losses and loss adjustment expenses		784,846			880,869
Unearned premiums		156,394			292,691
Reinsurance payable		111,176			128,950
Federal income tax payable		464			-
Accounts payable and other liabilities		78,646			68,535
Total Liabilities		1,236,963			1,476,408
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value, authorized 3,333,333 shares; issued 2,087,283 shares in 2023 and 2022		2,087			2,087
Additional paid-in capital		124,879			124,740
(Accumulated deficit) retained earnings		(84,458	)		(33,407	)
Accumulated other comprehensive loss		(5,489	)		(8,492	)
Treasury stock (268,801 shares in 2023 and 2022), at cost		(24,634	)		(24,634	)
Total Stockholders Equity		12,385			60,294
Total Liabilities & Stockholders Equity	$	1,249,348		$	1,536,702

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations	Three Months Ended							Year-to-Date
($ in thousands, except per share amounts)	June 30,							June 30,
	2023			2022				2023			2022
Gross premiums written	$	54,511		$	56,004			$	111,683		$	115,337
Ceded premiums written		(10,636	)		(18,566	)			(25,427	)		(36,630	)
Net premiums written		43,875			37,438				86,256			78,707
Change in unearned premiums		(7,028	)		(401	)			(14,129	)		(2,355	)
Net premiums earned		36,847			37,037				72,127			76,352
Investment income, net of expenses		4,019			3,120				8,361			4,979
Investment gains (losses), net		248			(3,994	)			(392	)		(3,943	)
Finance charges		732			980				1,511			1,963
Other income		64			14				134			29
Total revenues		41,910			37,157				81,741			79,380
Losses and loss adjustment expenses		36,752			72,646				66,516			112,028
Operating expenses		21,138			17,723				69,087			34,150
Interest expense		1,938			1,366				3,836			2,630
Amortization of intangible assets		0			7				0			14
Total expenses		59,828			91,742				139,439			148,822
(Loss) income from continuing operations before tax		(17,918	)		(54,585	)			(57,698	)		(69,442	)
Income tax (benefit) expense from continuing operations		(133	)		12,450				(667	)		9,270
Net (loss) income from continuing operations	$	(17,785	)	$	(67,035	)		$	(57,031	)	$	(78,712	)
Discontinued operations:
Total pretax income from discontinued operations	$	5,876		$	(2,965	)		$	5,980		$	7,773
Income tax (benefit) expense on discontinued operations		-			(583	)			-			1,697
Income (loss) from discontinued operations, net of tax	$	5,876		$	(2,382	)		$	5,980		$	6,076
Net (loss) income	$	(11,909	)	$	(69,417	)		$	(51,051	)	$	(72,636	)
Net (loss) basic income per share:
Net loss from continuing operations	$	(9.78	)	$	(36.85	)		$	(31.37	)	$	(43.30	)
Net income (loss) from discontinued operations		3.23			(1.31	)			3.29			3.35
Basic net (loss) income per share	$	(6.55	)	$	(38.16	)		$	(28.08	)	$	(39.95	)
Net (loss) diluted income per share:
Net loss from continuing operations	$	(9.78	)	$	(36.85	)		$	(31.37	)	$	(43.30	)
Net income (loss) from discontinued operations		3.23			(1.31	)			3.29			3.35
Diluted net (loss) income per share	$	(6.55	)	$	(38.16	)		$	(28.08	)	$	(39.95	)

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Three Months Ended Jun. 30
	Commercial Lines Segment						Personal Lines Segment						Runoff Specialty Segment						Corporate						Consolidated
($ in thousands, unaudited)		2023			2022			2023			2022			2023			2022			2023			2022			2023			2022
Gross premiums written	$	39,292		$	37,385		$	15,073		$	15,118		$	146		$	3,501		$	-		$	-		$	54,511		$	56,004
Ceded premiums written		(10,510	)		(17,890	)		(78	)		(74	)		(48	)		(602	)		-			-			(10,636	)		(18,566	)
Net premiums written		28,782			19,495			14,995			15,044			98			2,899			-			-			43,875			37,438
Change in unearned premiums		(5,610	)		(1,305	)		(1,420	)		809			2			95			-			-			(7,028	)		(401	)
Net premiums earned		23,172			18,190			13,575			15,853			100			2,994			-			-			36,847			37,037
Total revenues		23,185			18,210			14,308			16,827			99			2,994			4,318			(874	)		41,910			37,157
Losses and loss adjustment expenses		17,796			13,002			13,474			14,094			5,482			45,550			-			-			36,752			72,646
Pre-tax (loss) income	$	(2,323	)	$	(863	)	$	(4,717	)	$	(3,040	)	$	(10,030	)	$	(44,279	)	$	(848	)	$	(6,403	)	$	(17,918	)	$	(54,585	)
Net loss ratio (1)		76.8	%		71.5	%		99.3	%		88.9	%	N/A (2)				1521.4	%								99.7	%		196.1	%
Net expense ratio (1)		31.8	%		34.4	%		33.7	%		31.6	%	N/A (2)				51.2	%								57.6	%		44.8	%
Net combined ratio (1)		108.6	%		105.9	%		133.0	%		120.5	%	N/A (2)				1572.6	%								157.3	%		240.9	%
Impact on net combined ratio
Net Unfavorable (Favorable) Prior Year Development		3.1	%		2.1	%		18.4	%		11.6	%	N/A (2)				1421.5	%								24.5	%		120.9	%
Catastrophes, net of reinsurance		3.4	%		4.3	%		1.7	%		0.4	%	N/A (2)				0.0	%								2.8	%		2.3	%
Write-off receivable from reinsurer		0.0	%		0.0	%		0.0	%		0.0	%	N/A (2)				0.0	%								10.7	%		0.0	%
Underlying combined ratio (1)		102.1	%		99.5	%		112.9	%		108.5	%	N/A (2)				151.1	%								119.4	%		117.7	%
Net Unfavorable (Favorable) Prior Year Development		715			378			2,493			1,835			5,804			42,560			-			-			9,012			44,773

(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. The underlying combined ratio is the net combined ratio excluding the impact of net prior year reserve development and catastrophes and excluding the write-off of a receivable from reinsurer.
(2)	The Company’s Runoff Segment has reached a point of maturity that earned premium is minimal and renders any ratios no longer meaningful.

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
Year-to-Date Ended Jun. 30
	Commercial Lines Segment						Personal Lines Segment						Runoff Segment						Corporate						Consolidated
($ in thousands, unaudited)		2023			2022			2023			2022			2023			2022			2023			2022			2023			2022
Gross premiums written	$	82,637		$	75,456		$	28,725		$	31,950		$	321		$	7,931		$	-		$	-		$	111,683		$	115,337
Ceded premiums written		(24,999	)		(35,633	)		(211	)		(150	)		(217	)		(847	)		-			-			(25,427	)		(36,630	)
Net premiums written		57,638			39,823			28,514			31,800			104			7,084			-			-			86,256			78,707
Change in unearned premiums		(12,856	)		(3,378	)		(1,282	)		(388	)		9			1,411			-			-			(14,129	)		(2,355	)
Net premiums earned		44,782			36,445			27,232			31,412			113			8,495			-			-			72,127			76,352
Total revenues		44,811			36,490			28,744			33,359			113			8,495			8,073			1,036			81,741			79,380
Losses and loss adjustment expenses		33,413			25,914			24,643			26,673			8,460			59,441			-			-			66,516			112,028
Pre-tax (loss) income	$	(1,497	)	$	(1,499	)	$	(6,492	)	$	(4,353	)	$	(47,225	)	$	(54,317	)	$	(2,484	)	$	(9,273	)	$	(57,698	)	$	(69,442	)
Net loss ratio (1)		74.6	%		71.1	%		90.5	%		84.9	%	N/A (2)				699.7	%								92.2	%		146.7	%
Net expense ratio (1)		28.7	%		34.1	%		33.5	%		30.3	%	N/A (2)				38.5	%								93.7	%		40.6	%
Net combined ratio (1)		103.3	%		105.2	%		124.0	%		115.2	%	N/A (2)				738.2	%								185.9	%		187.3	%
Impact on net combined ratio
Net Unfavorable (Favorable) Prior Year Development		1.7	%		-0.1	%		11.0	%		10.8	%	N/A (2)				610.2	%								16.1	%		72.3	%
Catastrophes, net of reinsurance		5.3	%		2.7	%		1.5	%		0.3	%	N/A (2)				0.0	%								3.8	%		1.4	%
Write-off receivable from reinsurer		0.0	%		0.0	%		0.0	%		0.0	%	N/A (2)				0.0	%								51.1	%		0.0	%
Underlying combined ratio (1)		96.3	%		102.7	%		111.5	%		104.1	%	N/A (2)				128.0	%								114.9	%		113.6	%
Net Unfavorable (Favorable) Prior Year Development		769			(51	)		2,992			3,408			7,839			51,836									11,600			55,193

(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. The underlying combined ratio is the net combined ratio excluding the impact of net prior year reserve development and catastrophes and excluding the write-off of a receivable from reinsurer.
(2)	The Company’s Runoff Segment has reached a point of maturity that earned premium is minimal and renders any ratios no longer meaningful.

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