EX-99.1 2 v075005_ex99-1.htm Unassociated Document
 


FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.
ANNOUNCES FIRST QUARTER 2007 EARNINGS RESULTS

FORT WORTH, Texas, (May 10, 2007) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported quarterly net income of $5.0 million for the first quarter ended March 31, 2007, representing a 105% increase over net income of $2.4 million for the first quarter of 2006. On a diluted basis, net income to the common stockholders was $0.24 per share for the three months ended March 31, 2007 as compared to $0.14 per share for the same period in 2006. During the quarter ended March 31, 2007, Hallmark reported total revenues of $64.0 million, representing a 44% increase over the $44.5 million in total revenues for the first quarter of 2006. 

Mark J. Morrison, President and Chief Executive Officer, said, "We are very pleased to report the positive results the Company achieved during the first quarter. The increase in revenue for the quarter was primarily the result of executing our plan to increase the retention of the business we produce which, in turn, had the intended result of increasing our bottom line.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Profitable underwriting remains our focus and is reflected in a combined ratio of 90.5% for the first quarter of 2007. Annualized return on average equity was 13% and is expected to improve in the future as a result of continued planned increases in retained premium volume. Year over year growth in book value per share was 17% at quarter end.” 

 
    
Three Months Ended
March 31,    
  
     
2007
    
2006
  
 
    
($ in thousands)    
  
Gross premiums written
 
$
64,658
  
$
47,735
  
Net premiums written
   
60,771
   
45,779
 
Net premiums earned
   
51,648
   
28,434
 
Commission and fees
    
7,905
   
12,264
 
Investment income, net of expenses
    
2,990
   
2,357
 
Realized gain (loss) on investments
    
53
   
(83
)
Total revenues
   
63,958
   
44,520
 
Net income
   
4,970
   
2,426
 
Common EPS - basic
 
$
0.24
  
$
0.14
  
Common EPS - diluted
 
$
0.24
  
$
0.14
  
Annualized return on average equity
   
13.0
%
  
10.9
%
Book value per share
  
$
7.52
  
$
6.42
  
Cash flow from operations
  
$
18,975
  
$
9,582
  
 
 

The increase in net income was largely due to the improved results of our Specialty Commercial Segment and additional investment income from a larger investment portfolio, in both cases primarily as the result of increased retention of premiums. In addition, the first quarter of 2006 was adversely impacted by $1.1 million of interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January, 2006 and subsequently converted to common stock during the second quarter of 2006. These increases in net income were partially offset by lower results from our Standard Commercial Segment during the first quarter of 2007.

Increased retention of business produced by our Specialty Commercial Segment was the primary cause of the increase in revenue. Specialty Commercial Segment revenues increased $12.1 million, or 76%, during the three months ended March 31, 2007 as compared to the same period of 2006. Increased retention of business was also the primary reason for the $4.2 million increase in revenue from the Standard Commercial Segment during the first quarter of 2007. Earned premiums from our Personal Segment also contributed $2.9 million to the increase in revenue for the three months ended March 31, 2007.

Net investment income for the three months ended March 31, 2007 was $3.0 million as compared to $2.4 million for the same period in 2006. The increase of 27% reflected higher interest rates and greater average cash and invested assets attributable to increased retention of premiums, positive cash flow from operations and reinvestment of strong earnings for the past four quarters.
 
Hallmark's net losses and loss adjustment expenses and its net loss ratio for the three months ended March 31, 2007 were $32.2 million and 62.3%, respectively, compared to $16.7 million and 58.7%, respectively, for the same period in 2006. Hallmark did not recognize any development of prior years’ loss reserve estimates during either the first quarter 2007 or 2006. The increase in the net loss ratio is primarily due to a decrease in incurred losses inuring to our reinsurance coverage for the first quarter of 2007 as compared to the first quarter of 2006. Hallmark's other operating costs and expenses and its expense ratio for the three months ended March 31, 2007 were $22.7 million and 28.2%, respectively, compared to $21.0 million and 28.8%, respectively, for the same period in 2006.
 
Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property and casualty insurance products to businesses and individuals. The Company's business involves marketing, distributing, underwriting and servicing commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana, Louisiana, Oklahoma, Arkansas and Washington; marketing, distributing, underwriting and servicing non- standard personal automobile insurance in Texas, New Mexico, Arizona, Oklahoma, Arkansas, Idaho, Oregon and Washington; marketing, distributing, underwriting and servicing general aviation insurance in 47 states; and providing other insurance related services. The Company is headquartered in Fort Worth, Texas and its common stock is presently 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 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, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s periodic report filings with the Securities and Exchange Commission.

For further information, please contact:
Mark J. Morrison, President and Chief Executive Officer at 817.348.1600
www.hallmarkgrp.com
 
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
 
     
March 31,
2007 
    
December 31,
2006 
  
     
(unaudited)
    
(audited) 
  
ASSETS
              
Investments:
              
Debt securities, available-for-sale, at market value
  
$
133,122
  
$
125,784
  
Equity securities, available-for-sale, at market value
    
37,448
    
4,580
  
Short-term investments, available-for-sale, at market value
    
10,325
    
25,275
  
               
Total investments
    
180,895
    
155,639
  
               
Cash and cash equivalents
    
75,823
    
81,474
  
Restricted cash and investments
    
17,013
    
31,815
  
Premiums receivable
    
49,497
    
44,644
  
Accounts receivable
    
11,425
    
13,223
  
Prepaid reinsurance premium
    
1,637
    
1,629
  
Reinsurance balances receivable
    
5,083
    
-
  
Reinsurance recoverable
    
5,283
    
5,930
  
Deferred policy acquisition costs
    
18,929
    
17,145
  
Excess of cost over fair value of net assets acquired
   
31,427
    
31,427
  
Intangible assets
    
25,501
    
26,074
  
Prepaid expenses
    
1,418
    
1,769
  
Other assets
   
8,240
    
5,184
  
               
Total assets
  
$
432,171
  
$
415,953
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Liabilities:
              
Notes payable
  
$
36,016
  
$
35,763
  
Structured settlements
    
9,691
    
24,587
  
Unpaid losses and loss adjustment expenses
    
90,840
    
77,564
  
Unearned premiums
    
100,581
    
91,606
  
Unearned revenue
    
4,508
    
5,734
  
Reinsurance balances payable
    
-
    
1,060
  
Accrued agent profit sharing
    
594
    
1,784
  
Accrued ceding commission payable
    
7,206
    
3,956
  
Pension liability
    
3,121
    
3,126
  
Deferred federal income taxes
    
3,708
    
2,310
  
Current federal income tax payable
    
1,684
    
2,132
  
Accounts payable and other accrued expenses
    
18,108
    
15,600
  
               
Total liabilities
    
276,057
    
265,222
  
               
Commitments and Contingencies
          
               
Stockholders' equity:
              
Common stock, $.18 par value (authorized 33,333,333 shares in 2007 and 2006;
              
issued 20,776,066 shares in 2007 and 2006)
    
3,740
    
3,740
  
Additional paid in capital
    
117,983
    
117,932
  
Retained earnings
   
36,450
    
31,480
  
Accumulated other comprehensive loss
    
(1,982
)
  
(2,344
)
Treasury stock, at cost (7,828 shares in 2007 and 2006)
    
(77
)
  
(77
)
               
Total stockholders' equity
    
156,114
    
150,731
  
               
   
$
432,171
  
$
415,953
  
 
 
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)
 
   
Three Months Ended
March 31 
  
   
2007 
    
2006 
  
             
Gross premiums written
$ 
64,658
  
$
47,735
  
Ceded premiums written
  
(3,887
)
  
(1,956
)
Net premiums written
  
60,771
    
45,779
  
Change in unearned premiums
  
(9,123
)
  
(17,345
)
Net premiums earned
  
51,648
    
28,434
  
             
Investment income, net of expenses
  
2,990
    
2,357
  
Realized gain (loss)
  
53
    
(83
)
Finance charges
  
1,086
    
687
  
Commission and fees
  
7,905
    
12,264
  
Processing and service fees
  
272
    
857
  
Other income
 
4
    
4
  
             
Total revenues
 
63,958
    
44,520
  
             
Losses and loss adjustment expenses
  
32,185
    
16,690
  
Other operating costs and expenses
  
22,701
    
21,026
  
Interest expense
 
786
    
1,585
  
Interest expense from amortization of discount on convertible notes
  
-
    
1,117
  
Amortization of intangible asset
  
573
    
573
  
             
Total expenses
  
56,245
    
40,991
  
             
Income before tax
  
7,713
    
3,529
  
             
Income tax expense 
  
2,743
    
1,103
  
             
Net income 
$ 
4,970
  
$ 
2,426
  
             
Common stockholders net income per share:            
Basic 
 $  0.24   $   0.14  
Diluted 
 $   0.24   $   0.14  
             
Convertible noteholders net income per share: 
            
Basic 
 $    n/a   $    0.14  
Diluted 
 $     n/a   $    0.14  
 

Hallmark Financial Services, Inc.
Consolidated Segment Data
 
 
    
Three Months Ended March 31, 2007 
  
 
    
Standard 
    
Specialty
                    
   
 Commercial 
    
Commercial
    
Personal
              
 
    
Segment    
   
Segment
    
Segment
    
Corporate
    
Consolidated
  
                                 
Produced premium
    
23,550
   
39,357
   
15,076
   
-
   
77,983
 
                                 
Gross premiums written
    
23,481
   
26,101
   
15,076
   
-
   
64,658
 
Ceded premiums written
    
(2,635
)
  
(1,252
)
  
-
   
-
   
(3,887
)
Net premiums written
    
20,846
   
24,849
   
15,076
   
-
   
60,771
 
Change in unearned premiums
    
(924
)
  
(5,756
)
  
(2,443
)
        
(9,123
)
Net premiums earned
    
19,922
   
19,093
   
12,633
   
-
   
51,648
 
                                 
Total revenues
    
21,767
   
28,098
   
13,773
   
320
   
63,958
 
                                 
Losses and loss adjustment expenses
    
12,841
   
11,081
   
8,267
   
(4
)
  
32,185
 
 
                                
Pre-tax income
    
2,759
   
4,686
   
2,118
   
(1,850
)
  
7,713
 
 
                                
Net loss ratio (1)
    
64.5
%
  
58.0
%
  
65.4
%
        
62.3
%
Net expense ratio (1)
    
28.0
%
  
31.5
%
  
23.6
%
        
28.2
%
Net combined ratio(1)
    
92.5
%
  
89.5
%
  
89.0
%
        
90.5
%
 
 
    
Three Months Ended March 31, 2006 
  
 
    
Standard 
    
Specialty
                    
 
    
Commercial 
    
Commercial
    
Personal
              
 
    
Segment 
    
Segment
    
Segment
    
Corporate
    
Consolidated
  
                                 
Produced premium
    
23,664
   
39,005
   
11,099
   
-
   
73,768
 
                                 
Gross premiums written
    
23,464
   
13,172
   
11,099
   
-
   
47,735
 
Ceded premiums written
    
(1,785
)
  
(171
)
  
-
   
-
   
(1,956
)
Net premiums written
    
21,679
   
13,001
   
11,099
   
-
   
45,779
 
Change in unearned premiums
    
(7,367
)
  
(8,622
)
  
(1,356
)
  
-
   
(17,345
)
Net premiums earned
    
14,312
   
4,379
   
9,743
   
-
   
28,434
 
                                 
Total revenues
    
17,540
   
15,968
   
10,797
   
215
   
44,520
 
                                 
Losses and loss adjustment expenses
    
7,800
   
2,812
   
6,086
   
(8
)
  
16,690
 
                                 
Pre-tax income
    
3,360
   
1,619
   
2,051
   
(3,501
)
  
3,529
 
                                 
Net loss ratio (1)
    
54.5
%
  
64.2
%
  
62.5
%
        
58.7
%
Net expense ratio (1)
    
30.8
%
  
27.3
%
  
26.7
%
        
28.8
%
Net combined ratio(1)
    
85.3
%
  
91.5
%
  
89.2
%
        
87.5
%
 
1
Net loss ratio is calculated as total net losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP. Net expense ratio is calculated as total underwriting expenses of our insurance company subsidiaries, including allocated overhead expenses and offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.