EX-99.1 2 tm1922246d1_ex99-1.htm EXHIBIT 99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL ANNOUNCES THIRD QUARTER 2019 EARNINGS RESULTS

DALLAS, Texas, (November 7, 2019) - Hallmark Financial Services, Inc. (“Hallmark Financial”) (NASDAQ: HALL) today announced financial results for the third quarter and nine months ended September 30, 2019.

(Unaudited)	Third Quarter				Year-to-Date
	2019		2018		2019		2018
$ in millions:
Net Income	$	5.3	$	9.7	$	33.3	$	15.4
Operating Earnings (1)	$	6.3	$	4.2	$	19.6	$	13.3

$ per diluted share:
Net Income	$	0.29	$	0.53	$	1.82	$	0.85
Operating Earnings (1)	$	0.35	$	0.23	$	1.07	$	0.73

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

Third Quarter 2019 Highlights (all comparisons to same prior year period):

Gross premiums written increased 33% to $224.2 million

Net premiums written increased 45% to $127.8 million

Net combined ratio improved to 95.8% compared to 98.1%

Net income of $5.3 million, or $0.29 per diluted share, compared to $9.7 million, or $0.53 per diluted share

Operating earnings of $6.3 million, or $0.35 per diluted share, compared to $4.2 million, or $0.23 per diluted share (see “Non-GAAP Financial Measures” below)

Net investment losses of $1.3 million, including $0.2 million in net realized gains and a $1.5 million decrease in net unrealized gains, compared to net investment gains of $7.0 million

Hallmark Financial Services, Inc.

Two Lincoln Centre

5420 Lyndon B Johnson Freeway, Suite 1100

Dallas, Texas 75240-2345

www.hallmarkgrp.com

Year-to-Date September 30, 2019 Highlights (all comparisons to same prior year period):

Gross premiums written increased 27% to $629.7 million

Net premiums written increased 37% to $369.0 million

Net combined ratio improved to 95.6% compared to 97.5%

Net income of $33.3 million, or $1.82 per diluted share, compared to $15.4 million, or $0.85 per diluted share

Operating earnings of $19.6 million, or $1.07 per diluted share, compared to $13.3 million, or $0.73 per diluted share (see “Non-GAAP Financial Measures” below)

Net investment gains of $17.4 million, including $4.4 million in net realized gains and a $13.0 million increase in net unrealized gains, compared to net investment gains of $2.7 million

Annualized return on beginning stockholders’ equity of 17.4%

Annualized operating return on beginning stockholder’s equity of 10.2%, driven by strong underwriting results (see “non-GAAP Financial Measures” below)

Book value per share grew 11% over prior year and 15% year-to-date to $16.36

	Third Quarter								Year-to-Date
	2019			2018			% Change		2019		2018			% Change
($ in thousands, unaudited)
Gross premiums written		224,178			169,112			33%		629,730		495,836			27%
Net premiums written		127,773			88,012			45%		369,019		269,291			37%
Net premiums earned		112,499			88,862			27%		318,028		271,787			17%
Investment income, net of expenses		5,050			4,860			4%		15,573		13,706			14%
Investment gains (losses), net		(1,342	)		6,980			-119%		17,412		2,678			550%
Net income		5,287			9,685			-45%		33,341		15,422			116%
Operating earnings (1)		6,347			4,170			52%		19,586		13,306			47%
Net income per share - basic	$	0.29		$	0.54			-46%	$	1.84	$	0.85			116%
Net income per share - diluted	$	0.29		$	0.53			-45%	$	1.82	$	0.85			114%
Operating earnings per share - diluted (1)	$	0.35		$	0.23			52%	$	1.07	$	0.73			47%
Operating cash flow		16,215			(9,088	)		278%		22,900		(18,983	)		221%
Book value per share	$	16.36		$	14.79			11%

⁽¹⁾

See “Non-GAAP Financial Measures” below

Management Commentary

Overview

Naveen Anand, President and Chief Executive Officer, stated, “Through the first nine months of 2019, Hallmark Financial produced a stellar 17.4% annualized return on beginning equity and is well-positioned to take advantage of the current market dislocation we are seeing in many of our specialty commercial products.

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“For the third quarter of 2019, we achieved a combined ratio of 95.8% as compared to 98.1% in the same period last year, an improvement of 2.3 points. Operating earnings increased 52% for the quarter and 47% year-to-date as compared to the same periods last year. CAT losses overall were 0.5% in the quarter, mostly seen in our Standard Commercial and Personal Lines portfolios. While our thoughts and prayers go out to our colleagues, friends and neighbors who were impacted by the recent tornadoes in and around Dallas, this fourth quarter event is unlikely to have a material impact on our CAT losses.

Premiums / Segment Overview

Mr. Anand continued, “Gross and net premiums were up sharply in the quarter, driven by double digit rate increases in most of our specialty commercial product lines, with certain lines experiencing rate increases above 20%. Net premium growth was also impacted by increased retention from the reinsurance changes we made last year on October 1^st. Going forward, net premium growth should begin to trend more in line with gross premiums.

“Specialty Commercial Segment gross premiums for the third quarter of 2019 increased 39% over the same period of the prior year, driven by rate increases. These product lines are seeing increasing rate momentum each quarter, improving terms and conditions and more syndication of limits. This is particularly evident in our E&S property, professional liability, and commercial auto product lines.

“As I noted last quarter, the environment in commercial auto remains difficult. In this quarter, we added to reserves for prior years to reflect the ongoing severity challenges in this line. We continue to aggressively manage our primary trucking portfolio. In-force customer count has come down 53% since 2015, while premiums have only reduced 4% in that time frame. Since 2018, our customer count is down 16% while premiums are up 9%. We continue to aggressively close both newly arising and pending claims from older accident years.

Even with the inclusion of the prior year reserve additions, the Specialty Commercial Segment produced an excellent 87.7% combined ratio for the most recent quarter.

“Both our Standard Commercial and Personal segments saw an increase in attritional loss activity in the third quarter of 2019. In Standard Commercial, small property losses, along with 2.7 points of impact from CAT losses, drove our result in the quarter. In Personal lines, weather related losses, both CAT and non-CAT, adversely impacted our quarterly results. However, the Personal lines portfolio has achieved a 96.9% net combined ratio in 2019 through nine months, compared to 101.7% for the same period last year,” concluded Mr. Anand.

Book Value and Investment Overview

Mark E. Schwarz, Executive Chairman of Hallmark Financial, stated, “Book value per share increased 15% during the first nine months of 2019 to $16.36 at September 30, 2019, another high-water mark for the Company, driven largely by strong operating earnings and increased total returns from our investment portfolio. Net investment income increased 14% to $15.6 million for the first nine months of 2019 as compared to the same prior year period, and our total investments and cash increased 9% during the first nine months of 2019 to $729.7 million or $40.26 per share.”

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Third Quarter and Year-to-Date 2019 Financial Review

Gross Premiums Written

During the three and nine months ended September 30, 2019, Hallmark Financial’s gross premiums written were $224.2 million and $629.7 million, respectively, representing an increase of 33% and 27%, respectively, from the $169.1 million and $495.8 million in gross premiums written for the same periods in 2018.

Net Premiums Written

During the three and nine months ended September 30, 2019, Hallmark Financial’s net premiums written were $127.8 million and $369.0 million, respectively, representing an increase of 45% and 37%, respectively, from the $88.0 million and $269.3 million in net premiums written for the same periods of 2018. The increase in net premiums written for the three and nine months ended September 30, 2019 was primarily due to premium growth in both the Specialty Commercial and Personal Segments, as well as increased net retention of business in the Personal Segment.

Net Premiums Earned

Hallmark Financial’s net premiums earned were $112.5 million and $318.0 million for the three and nine months ended September 30, 2019, respectively, as compared to $88.9 million and $271.8 million for the same periods in 2018.

Pre-Tax Income

Hallmark Financial had pre-tax income of $6.7 million and $42.1 million for the three and nine months ended September 30, 2019, respectively, as compared to $12.1 million and $19.3 million reported during the same periods in 2018.

The decrease in income before tax for the three months ended September 30, 2019 was largely due to decreased net unrealized gains on Hallmark Financial’s equity and other investments of $1.5 million as compared to an increase in net unrealized gains of $7.1 million for the same period in 2018, partially offset by increased net premiums earned, net investment income and finance charges.

The increase in income before tax for the nine months ended September 30, 2019 was largely due to increased net unrealized gains on Hallmark Financial’s equity and other investments of $13.0 million as compared to increased net unrealized gains of $2.5 million for the same period in 2018.

Also contributing to the year-to-date improvement in income before tax was increased net premiums earned, higher finance charges and higher net investment income. Year-to-date net realized gains of $4.4 million as compared to $0.2 million for the comparable prior year period also contributed to the improvement in year-to-date income before tax.

Loss and Loss Adjustment Expenses (“LAE”) and Net Combined Ratios

Increases in revenue were partially offset by increased losses and LAE for the three and nine months ended September 30, 2019 of $14.3 million and $30.3 million, respectively, as compared to the prior year periods due primarily to increased net premiums earned. In addition, Hallmark Financial reported $6.4 million and $7.8 million, respectively, of unfavorable net prior year loss reserve development during the three and nine months ended September 30, 2019 as compared to $1.6 million and $6.1 million, respectively, of unfavorable net prior year loss reserve development during the same periods of 2018.

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Hallmark Financial had a net loss ratio of 69.8% for each of the three and nine months ended September 30, 2019, as compared to 72.3% and 70.5% reported during the same periods in 2018. Catastrophe losses contributed 0.5% and 1.5% to the net loss ratios for the three and nine months ended September 30, 2019, as compared to 1.9% and 1.7% for the same periods of the prior year.

The expense ratio was 26.0% and 25.8% for the three and nine months ended September 30, 2019, respectively, as compared to 25.8% and 27.0% reported during the same periods in 2018. The Company reported a net combined ratio of 95.8% and 95.6% for the three and nine months ended September 30, 2019, compared to 98.1% and 97.5% during the same periods in 2018.

Net Income

Hallmark Financial reported net income of $5.3 million and $33.3 million for the three and nine months ended September 30, 2019 as compared to $9.7 million and $15.4 million for the three and nine months ended September 30, 2018.

On a diluted basis per share, the Company reported net income of $0.29 per share and $1.82 per share for the three and nine months ended September 30, 2019 as compared to $0.53 per share and $0.85 per share for the three and nine months ended September 30, 2018.

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 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.

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										Weighted
	Income			Less Tax			Net			Average		Diluted
($ in thousands)	Before Tax			Effect			After Tax			Shares Diluted		Per Share
Third Quarter 2019
Reported GAAP measures	$	6,660		$	1,373		$	5,287			18,295	$	0.29
Excluded investment (gains)/losses	$	1,342		$	282		$	1,060			18,295	$	0.06
Operating earnings	$	8,002		$	1,655		$	6,347			18,295	$	0.35

Third Quarter 2018
Reported GAAP measures	$	12,075		$	2,390		$	9,685			18,167	$	0.53
Excluded investment (gains)/losses	$	(6,980	)	$	(1,465	)	$	(5,515	)		18,167	$	(0.30	)
Operating earnings	$	5,095		$	925		$	4,170			18,167	$	0.23

Year-to-Date 2019
Reported GAAP measures	$	42,062		$	8,721		$	33,341			18,283	$	1.82
Excluded investment (gains)/losses	$	(17,412	)	$	(3,657	)	$	(13,755	)		18,283	$	(0.75	)
Operating earnings	$	24,650		$	5,064		$	19,586			18,283	$	1.07

Year-to-Date 2018
Reported GAAP measures	$	19,256		$	3,834		$	15,422			18,203	$	0.85
Excluded investment (gains)/losses	$	(2,678	)	$	(562	)	$	(2,116	)		18,203	$	(0.12	)
Operating earnings	$	16,578		$	3,272		$	13,306			18,203	$	0.73

Operating return on beginning GAAP equity is calculated as operating earnings divided by GAAP equity at the beginning of the period. Management believes that operating return on beginning GAAP equity provides useful information to investors about the performance of the Company’s core insurance operations relative to its shareholder equity. Return on beginning equity is the GAAP measure that is most directly comparable to operating return on beginning GAAP equity. A reconciliation of operating return on beginning GAAP equity to return on beginning equity is presented below.

Year-to-date 2019 net income	33,341	a
Excluded investment gains, net of tax	(13,755)
Year-to-date 2019 operating earnings	19,586	b
Annualized year-to-date 2019 net income	44,455	(a / 3 * 4)
Annualized year-to-date 2019 operating earnings	26,115	(b / 3 * 4)

Beginning GAAP equity	255,532	c

Annualized return on beginning GAAP equity	17.4%	(a / 3 * 4) / c
Annualized operating return on beginning GAAP equity	10.2%	(b / 3 * 4) / c

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About Hallmark Financial

Hallmark Financial 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 and offices in Dallas/Fort Worth, San Antonio, Chicago, Jersey City and Atlanta, Hallmark Financial markets, underwrites and services approximately $800 million annually in commercial and personal insurance premiums in select markets. Hallmark Financial 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:

Mr. David Webb, Senior Vice President of Corporate Development at 817.348.1600

www.hallmarkgrp.com

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Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value)		Sept. 30			Dec. 31
ASSETS		2019			2018
Investments:		(unaudited)
Debt securities, available-for-sale, at fair value (amortized cost: $564,602 in 2019 and $550,268 in 2018)	$	568,831		$	545,870
Equity securities (cost: $68,737 in 2019 and $68,709 in 2018)		92,099			80,896
Other investment (cost: $3,763 in 2019 and $3,763 in 2018)		3,009			1,148
Total investments		663,939			627,914
Cash and cash equivalents		64,045			35,594
Restricted cash		1,697			4,877
Ceded unearned premiums		164,046			133,031
Premiums receivable		140,580			119,778
Accounts receivable		1,646			1,619
Receivable for securities		6,351			3,369
Reinsurance recoverable		313,552			252,029
Deferred policy acquisition costs		21,904			14,291
Goodwill		44,695			44,695
Intangible assets, net		5,706			7,555
Deferred federal income taxes, net		556			4,983
Prepaid expenses		1,551			2,588
Other assets		33,266			12,571
Total Assets	$	1,463,534		$	1,264,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $966 in 2019)	$	49,034		$	-
Revolving credit facility payable		-			30,000
Subordinated debt securities (less unamortized debt issuance cost of $859 in 2019 and $898 in 2018)		55,843			55,804
Reserves for unpaid losses and loss adjustment expenses		565,296			527,247
Unearned premiums		380,066			298,061
Reinsurance balances payable		61,799			67,328
Current federal income tax payable		680			4
Pension liability		1,410			2,018
Payable for securities		1,952			698
Accounts payable and other accrued expenses		51,021			28,202
Total Liabilities		1,167,101			1,009,362
Commitments and contingencies
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2019 and 2018		3,757			3,757
Additional paid-in capital		123,095			123,168
Retained earnings		194,536			161,195
Accumulated other comprehensive income (loss)		246			(6,660	)
Treasury stock (2,749,738 shares in 2019 and 2,846,131 shares in 2018), at cost		(25,201	)		(25,928	)
Total Stockholders’ Equity		296,433			255,532
Total Liabilities & Stockholders' Equity	$	1,463,534		$	1,264,894

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Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations	Three Months Ended						Nine Months Ended
($ in thousands, except per share amounts)	September 30,						September 30,
	2019			2018			2019			2018
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Gross premiums written	$	224,178		$	169,112		$	629,730		$	495,836
Ceded premiums written		(96,405	)		(81,100	)		(260,711	)		(226,545	)
Net premiums written		127,773			88,012			369,019			269,291
Change in unearned premiums		(15,274	)		850			(50,991	)		2,496
Net premiums earned		112,499			88,862			318,028			271,787

Investment income, net of expenses		5,050			4,860			15,573			13,706
Investment gains (losses), net		(1,342	)		6,980			17,412			2,678
Finance charges		1,778			1,347			5,309			3,548
Commission and fees		287			869			944			2,604
Other income		13			28			43			89
Total revenues		118,285			102,946			357,309			294,412

Losses and loss adjustment expenses		78,548			64,245			221,861			191,568
Operating expenses		31,074			24,829			87,656			78,402
Interest expense		1,386			1,180			3,879			3,335
Amortization of intangible assets		617			617			1,851			1,851
Total expenses		111,625			90,871			315,247			275,156

Income before tax		6,660			12,075			42,062			19,256
Income tax expense		1,373			2,390			8,721			3,834
Net income	$	5,287		$	9,685		$	33,341		$	15,422

Net income per share:
Basic	$	0.29		$	0.54		$	1.84		$	0.85
Diluted	$	0.29		$	0.53		$	1.82		$	0.85

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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, unaudited)	2019			2018			2019			2018			2019			2018			2019			2018		2019			2018
Gross premiums written	$	174,695		$	125,599		$	23,563		$	21,560		$	25,920		$	21,953		$	-		$	-	$	224,178		$	169,112
Ceded premiums written		(84,369	)		(66,404	)		(7,814	)		(2,398	)		(4,222	)		(12,298	)		-			-		(96,405	)		(81,100	)
Net premiums written		90,326			59,195			15,749			19,162			21,698			9,655			-			-		127,773			88,012
Change in unearned premiums		(14,043	)		3,203			(590	)		(449	)		(641	)		(1,904	)		-			-		(15,274	)		850
Net premiums earned		76,283			62,398			15,159			18,713			21,057			7,751			-			-		112,499			88,862

Total revenues		81,341			68,302			16,344			19,857			22,943			9,355			(2,343	)		5,432		118,285			102,946

Losses and loss adjustment expenses		50,107			52,106			11,433			6,261			17,008			5,878			-			-		78,548			64,245

Pre-tax income (loss)		14,766			2,452			62			7,264			(740	)		684			(7,428	)		1,675		6,660			12,075

Net loss ratio (1)		65.7	%		83.5	%		75.4	%		33.5	%		80.8	%		75.8	%							69.8	%		72.3	%
Net expense ratio (1)		22.0	%		22.4	%		32.1	%		34.1	%		24.1	%		20.2	%							26.0	%		25.8	%
Net combined ratio (1)		87.7	%		105.9	%		107.5	%		67.6	%		104.9	%		96.0	%							95.8	%		98.1	%

Favorable (Unfavorable) Prior Year Development		(6,029	)		(8,869	)		(75	)		7,269			(273	)		(9	)		-			-		(6,377	)		(1,609	)

⁽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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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, unaudited)	2019			2018			2019			2018			2019			2018			2019		2018			2019			2018
Gross premiums written	$	482,034		$	376,491		$	70,926		$	65,931		$	76,770		$	53,414		$	-	$	-		$	629,730		$	495,836
Ceded premiums written		(225,100	)		(189,145	)		(23,087	)		(7,598	)		(12,524	)		(29,802	)		-		-			(260,711	)		(226,545	)
Net premiums written		256,934			187,346			47,839			58,333			64,246			23,612			-		-			369,019			269,291
Change in unearned premiums		(47,109	)		9,071			970			(3,648	)		(4,852	)		(2,927	)		-		-			(50,991	)		2,496
Net premiums earned		209,825			196,417			48,809			54,685			59,394			20,685			-		-			318,028			271,787

Total revenues		222,900			213,507			52,027			57,979			65,542			24,891			16,840		(1,965	)		357,309			294,412

Losses and loss adjustment expenses		144,430			148,001			33,697			28,562			43,734			15,005			-		-			221,861			191,568

Pre-tax income (loss)		33,161			20,980			3,626			11,239			3,274			661			2,001		(13,624	)		42,062			19,256

Net loss ratio (1)		68.8	%		75.4	%		69.0	%		52.2	%		73.6	%		72.5	%							69.8	%		70.5	%
Net expense ratio (1)		22.1	%		22.8	%		30.4	%		33.5	%		23.3	%		29.2	%							25.8	%		27.0	%
Net combined ratio (1)		90.9	%		98.2	%		99.4	%		85.7	%		96.9	%		101.7	%							95.6	%		97.5	%

Net Favorable (Unfavorable) Prior Year Development		(11,232	)		(15,730	)		3,508			8,829			(57	)		839			-		-			(7,781	)		(6,062	)

⁽¹⁾

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