GlobeNewswire Inc | May 13, 2021 04:05PM EDT

May 13, 2021

DALLAS, May 13, 2021 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (Hallmark) (NASDAQ: HALL) today announced financial results for the first quarter ended March 31, 2021.

First Quarter 2021 2020$ in millions: Net Income (Loss) $ 9.3 $ (64.3 ) Operating Income (1) $ 4.8 $ 4.6 $ per diluted share: Net Income (Loss) $ 0.52 $ (3.55 ) Operating Income (1) $ 0.27 $ 0.25

(1)See Non-GAAP Financial Measures below

Highlights:

-- Net income of $9.3 million, or $0.52 per share, in the first quarter of 2021 as compared to net loss of $64.3 million, or $3.55 per share, for the same period of 2020. -- Net combined ratio of 96.1% for the first quarter of 2021 improved from 97.6% for the same period the prior year. -- Substantial rate increases achieved, particularly in the Specialty Commercial Segment, with increases for this business averaging 13% for the quarter. -- Gross premiums written for the quarter ended March 31, 2021 decreased 19% compared to the prior year quarter ended March 31, 2020 and increased 1% compared to the previous quarter ended December 31, 2020. Excluding premiums from the exited binding primary commercial auto business, gross premiums written for the quarter ended March 31, 2021 would have decreased 11% compared to the prior year quarter ended March 31, 2020. (See Non-GAAP Financial Measures below). -- Net catastrophe losses were $5.9 million in the first quarter, or 5.7 points of the net combined ratio. Total catastrophe losses include $5.0 million from the February winter storms, which is our maximum retention of losses per event under our catastrophe reinsurance agreement. -- Net investment gains of $5.8 million during the first quarter of 2021, which included $4.4 million of unrealized gains on equity securities, as compared to net investment losses of $29.3 million, which included $35.0 million of unrealized losses on equity and other investment securities, during the same period the prior year.

First Quarter 2021 Financial Review

First Quarter 2021 2020 % Change($ in thousands) Gross premiums written $ 163,018 $ 201,589 -19%Net premiums written $ 93,147 $ 126,505 -26%Net premiums earned $ 104,218 $ 123,933 -16%Investment income, net of expenses $ 3,010 $ 4,458 -32%Investment gains (losses), net $ 5,779 $ (29,330 ) 120%Net income (loss) $ 9,345 $ (64,310 ) 115%Operating income (1) $ 4,780 $ 4,584 4%Net income (loss) per share - $ $ ) 115%basic 0.52 (3.55Net income (loss) per share - $ $ ) 115%diluted 0.52 (3.55Operating income per share - $ $ 8%diluted (1) 0.27 0.25Book value per share $ $ 10.39 -5% 9.89

(1)See Non-GAAP Financial Measures below

Gross Premiums WrittenGross premiums written were $163.0 million during the three months ended March 31, 2021, representing a decrease of 19% from the $201.6 million in gross premiums written for the same period in 2020.

Net Premiums WrittenNet premiums written were $93.1 million during the three months ended March 31, 2021, representing a decrease of 26% from the $126.5 million in net premiums written for the same period of 2020.

Net Premiums EarnedNet premiums earned were $104.2 million for the three months ended March 31, 2021, representing a 16% decrease from the $123.9 million in net premiums earned for the same period in 2020.

InvestmentsNet investment income was $3.0 million during the three months ended March 31, 2021, as compared to $4.5 million during the same period in 2020. The decline in net investment income was primarily due to lower interest rates compared to the same period during 2020 and an increase in the proportion of short-term investments held relative to longer maturity investments.

Net investment gains were $5.8 million for the three months ended March 31, 2021 as compared to net investment losses of $29.3 million for the same period in 2020.

Fixed-income securities were $348.5 million at March 31, 2021, with a tax equivalent book yield of 2.5% compared to 2.4% as of March31, 2020. As of March 31, 2021, the fixed-income portfolio had an average modified duration of 0.9years and 85% of the securities had remaining time to maturity of five years or less. As of March31, 2021, 13% of the investment portfolio was invested in equity securities.

Total investments were $402.1 million at March 31, 2021. Cash and cash equivalents, including restricted cash were $287.3 million. Total investments, cash and cash equivalents, and restricted cash were $689.4 million or $37.94 per share.

Pre-Tax IncomePre-tax income was $11.7 million for the three months ended March 31, 2021, as compared to a pre-tax loss of $69.6 million reported during the same period in 2020. The improvement in pre-tax results for the three months ended March 31, 2021 was predominately driven by the absence of $46.0 million of impairment charges to goodwill and indefinite-lived intangible assets taken during the first quarter of 2020, net investment gains of $5.8 million during the first quarter of 2021 as compared to net investment losses of $29.3 million during the same period in 2020 and favorable prior year loss reserve development of $2.1 million during the first quarter of 2021 as compared to unfavorable prior year loss reserve development of $8.6 million during the same period the prior year.

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

The net combined ratio was 96.1% for the quarter ended March 31, 2021, as compared to 97.6% for the same period during 2020.

Losses and LAE for the quarter ended March 31, 2021 decreased $22.5 million as compared to the same period during 2020 due to improved prior year loss reserve development and lower net premiums earned, partially offset by increases in current accident year loss trends due primarily to the February winter storms. There was $2.1 million of net favorable prior year loss reserve development during the quarter ended March 31, 2021 as compared to net unfavorable prior year loss reserve development of $8.6 million during the same period in 2020. Net catastrophe losses were $5.9 million during the first quarter ended March 31, 2021 as compared to $6.0 million during 2020.

The net loss ratio was 68.0% for the three months ended March 31, 2021 as compared to 75.4% reported during the same period in 2020. Catastrophe losses contributed 5.7 points to the net loss ratio for the three months ended March 31, 2021, as compared to 4.9 points for the same period during 2020. Net favorable prior year loss reserve development reduced the net loss ratio by 2.0 points for the three months ended March 31, 2021, as compared to 6.9 points contributed to the net loss ratio from net unfavorable prior year loss reserve development for the same period during 2020.

The expense ratio was 28.1% for the three months ended March 31, 2021 as compared to 22.2% during the same period in 2020. The Company reported a net combined ratio of 96.1% for the three months ended March 31, 2021 as compared to 97.6% during the same period in 2020.

Net Income (Loss)

Net income was $9.3 million for the three months ended March 31, 2021 as compared to a net loss of $64.3 million for the same period during 2020.

On a diluted basis per share, net income was $0.52 per share for the three months ended March 31, 2021 as compared to a net loss of $3.55 per share for the three months ended March 31, 2020.

Book Value Per Share

Book value per share increased 5% to $9.89 per share as of March 31, 2021 as compared to $9.42 per share as of December 31, 2020.

Non-GAAP Financial Measures

The Companys 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 Companys GAAP financial statements. In addition, the Companys 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 impairment of goodwill and other intangible assets (Impairments) from GAAP net income. The Impairments 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 Companys core insurance operations. Net income and net income per share are the GAAP measures that are most directly comparable to operatingincome and operatingincome per share. A reconciliation of operating income and operating income per share to the most comparable GAAP financial measures is presented below.

Weighted Income Less Tax Net Average Diluted (Loss)($ in Before Effect After Tax Shares Per Share thousands) Tax DilutedFirstQuarter 2021Reported GAAP $ 11,700 $ 2,355 $ 9,345 18,142 $ 0.52 measuresExcludedinvestment $ (5,779 ) $ (1,214 ) $ (4,565 ) 18,142 $ (0.25 )(gains)/lossesOperating $ 5,921 $ 1,141 $ 18,142 $ income 4,780 0.27 FirstQuarter 2020Reported GAAP $ (69,586 ) $ (5,276 ) $ (64,310 ) 18,123 $ (3.55 )measuresExcludedimpairment ofgoodwilland otherintangible $ 45,996 $ 273 $ 45,723 18,123 $ 2.52 assetsExcludedinvestment $ 29,330 $ 6,159 $ 23,171 18,123 $ 1.28 (gains)/lossesOperating $ 5,740 $ 1,156 $ 18,123 $ income 4,584 0.25

In February 2020, Hallmark made the strategic decision to exit the contract binding line of the primary automobile business as a result of increasing claim severity and limited opportunity for meaningful rate increases. At that time, the Company began the process of non-renewing policies and placing in-force policies in runoff in accordance with state regulatory guidelines. Management believes that presenting gross premiums written excluding the contract binding line of the primary automobile business provides useful information to investors about the impact of this decision. A reconciliation of GAAP gross premiums written to gross premiums written excluding the contract binding line of the primary automobile business is presented below.

First Quarter 2021 2020 % Change($ in thousands) Reported gross premiums $ 163,018 $ -19%written 201,589Less primary binding $ $ -99%commercial auto 132 18,432Gross premiums written excluding primary binding $ 162,886 $ -11%commercial auto 183,157

About Hallmark

Hallmark 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, 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 Companys 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 Companys filings with the Securities and Exchange Commission.

For further information, please contact:

Chris KenneyChief Accounting Officer 817.348.1600www.hallmarkgrp.com

Hallmark Financial Services, Inc. and SubsidiariesConsolidated Balance Sheets($ in thousands, except par value) Mar. 31 Dec. 31 ASSETS 2021 2020 Investments: (unaudited) Debt securities, available-for-sale, at fairvalue (amortized cost: $344,232 in 2021 and $ 348,525 $ 507,279 $502,167 in 2020)Equity securities (cost: $46,847 in 2021 and 53,621 29,388 $26,988 in 2020)Total investments 402,146 536,667 Cash and cash equivalents 281,849 102,580 Restricted cash 5,434 5,728 Ceded unearned premiums 134,206 138,926 Premiums receivable 109,799 120,332 Accounts receivable 4,625 5,967 Receivable for securities 1,382 913 Reinsurance recoverable 494,815 490,231 Deferred policy acquisition costs 16,386 17,840 Intangible assets, net 1,196 1,322 Federal income tax recoverable 23,855 25,642 Deferred federal income taxes, net 8,319 8,724 Prepaid expenses 6,679 2,648 Other assets 26,852 28,013 Total Assets $ 1,517,543 $ 1,485,533 LIABILITIES AND STOCKHOLDERS? EQUITY Liabilities: Senior unsecured notes due 2029 (less unamortizeddebt issuance costs of $819 in 2021 and $844 in $ 49,180 $ 49,156 2020)Subordinated debt securities (less unamortizeddebt issuance costs of $782 in 2021 and $795 in 55,920 55,907 2020)Reserves for unpaid losses and loss adjustment 812,272 789,768 expensesUnearned premiums 305,015 320,806 Reinsurance payable 51,673 46,700 Pension liability 1,749 1,859 Payable for securities 10,979 - Accounts payable and other accrued expenses 51,003 50,415 Total Liabilities 1,337,791 1,314,611 Commitments and contingencies Stockholders? equity: Common stock, $.18 par value, authorized33,333,333 shares; issued 20,872,831 shares in 3,757 3,757 2021 and 2020Additional paid-in capital 122,725 122,893 Retained earnings 78,260 68,915 Accumulated other comprehensive income (229 ) 383 Treasury stock (2,701,799 shares in 2021 and (24,761 ) (25,026 )2,730,673 shares in 2020), at costTotal Stockholders Equity 179,752 170,922 Total Liabilities & Stockholders Equity $ 1,517,543 $ 1,485,533

Hallmark Financial Services, Inc. and SubsidiariesConsolidated Statements of Operations Three Months Ended ($ in thousands, except per share amounts, March 31, unaudited) 2021 2020 Gross premiums written $ 163,018 $ 201,589 Ceded premiums written (69,871 ) (75,084 )Net premiums written 93,147 126,505 Change in unearned premiums 11,071 (2,572 )Net premiums earned 104,218 123,933 Investment income, net of expenses 3,010 4,458 Investment gains (losses), net 5,779 (29,330 )Finance charges 1,133 1,644 Commission and fees 260 324 Other income 19 19 Total revenues 114,419 101,048 Losses and loss adjustment expenses 70,903 93,405 Operating expenses 30,441 29,148 Interest expense 1,249 1,468 Impairment of goodwill and other intangible assets - 45,996 Amortization of intangible assets 126 617 Total expenses 102,719 170,634 Income (loss) before tax 11,700 (69,586 )Income tax expense (benefit) 2,355 (5,276 )Net income (loss) $ 9,345 $ (64,310 ) Net income (loss) per share: Basic $ 0.52 $ (3.55 )Diluted $ 0.52 $ (3.55 )

Hallmark Financial Services, Inc. and SubsidiariesConsolidated Segment DataThree Months Ended Mar. 31

Specialty Commercial Standard Commercial Personal Segment Corporate Consolidated Segment Segment($ inthousands, 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 unaudited)Grosspremiums $ 113,990 $ 149,470 $ 29,735 $ 26,376 $ 19,293 $ 25,743 $ - $ - $ 163,018 $ 201,589 writtenCededpremiums (59,554 ) (63,964 ) (10,250 ) (7,463 ) (67 ) (3,657 ) - - (69,871 ) (75,084 )writtenNet premiums 54,436 85,506 19,485 18,913 19,226 22,086 - - 93,147 126,505 writtenChange inunearned 15,141 1,466 (2,419 ) (2,495 ) (1,651 ) (1,543 ) - - 11,071 (2,572 )premiumsNet premiums 69,577 86,972 17,066 16,418 17,575 20,543 - - 104,218 123,933 earned Total 71,965 92,120 17,688 17,636 18,959 22,323 5,807 (31,031 ) 114,419 101,048 revenues Losses andloss 44,407 60,883 12,091 11,855 14,405 20,667 - - 70,903 93,405 adjustmentexpenses Pre-tax 11,821 16,292 366 716 (1,623 ) (5,655 ) 1,136 (80,939 ) 11,700 (69,586 )income (loss) Net loss 63.8 % 70.0 % 70.8 % 72.2 % 82.0 % 100.6 % 68.0 % 75.4 %ratio (1)Net expense 24.0 % 17.7 % 31.6 % 32.5 % 30.4 % 28.4 % 28.1 % 22.2 %ratio (1)Net combined 87.8 % 87.7 % 102.4 % 104.7 % 112.4 % 129.0 % 96.1 % 97.6 %ratio (1) Net Favorable(Unfavorable) 1,899 (3,153 ) 1,361 (125 ) (1,174 ) (5,281 ) 2,086 (8,559 )Prior YearDevelopment

(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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