FORT WORTH, Texas, Nov. 9 /PRNewswire-FirstCall/ -- Hallmark Financial Services, Inc. (NASDAQ:HALL) reported record quarterly net income of $4.9 million for the third quarter ended September 30, 2006, representing a 97% increase from the $2.5 million in net income for the third quarter of 2005. Diluted earnings per share for the three months ended September 30, 2006, were $0.27, representing a 59% increase over the $0.17 in diluted earnings per share for the same period of the prior year.
Hallmark also reported net income of $4.5 million and diluted earnings per share of $0.28 for the nine months ended September 30, 2006, compared to net income of $6.3 million and diluted earnings per share of $0.58 in the same period of the prior year. During the nine months ended September 30, 2006, Hallmark recorded $9.6 million of interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January, 2006, and converted to common stock during the second quarter of 2006. In the absence of this non-cash expense, the Company's net income for the nine months ended September 30, 2006, would have been $10.5 million, representing a 67% increase over the similar period of 2005, and its diluted earnings per share would have been $0.66 for the nine months ended September 30, 2006.
During the three months and nine months ended September 30, 2006, Hallmark reported total revenues of $56.4 million and $148.1 million, representing 124% and 145% increases, respectively, over the $25.2 million and $60.4 million in total revenues for the comparable periods of 2005.
Mark J. Morrison, President and Chief Executive Officer, said, "We are very pleased with the record results the Company achieved for the third quarter. Each of our operating units performed at or above our expectations. Our record results in both revenue and profitability for the third quarter are primarily due to our recent acquisitions and increased premium retention, as well as year-over-year improvements in underwriting results and operational efficiency. Looking forward, we expect growth in gross written premium to continue for the remainder of 2006 and on into 2007 as a result of both increased retention of existing business and organic growth. We also expect this continued premium growth to fuel our ability to sustain current profitability and return on equity for the near term." The Company previously announced on October 4, 2006, the successful public offering of 3,000,000 shares of its common stock. The net proceeds of $24.6 million received from the public offering were used to reduce outstanding debt associated with recent acquisitions. The issuance of these shares increased Hallmark's book value by approximately $0.20 per share subsequent to the close of the third quarter.
Mark E. Schwarz, Executive Chairman of Hallmark, stated, "I believe that we have made excellent progress in implementing our 2006 strategic goals. We have made significant progress in integrating the recent acquisitions into our operational structure. In addition, the successful completion of our public offering has broadened our shareholder base and provided the near-term balance sheet leverage needed to support the increased premium retention anticipated through 2009." Financial Highlights Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
($ in thousands) Gross premiums written $58,107 $43,512 $153,718 $62,985
Net premiums written 55,005 42,960 146,176 62,433
Net premiums earned 42,194 19,024 104,887 38,727
Commission and fee income 9,943 3,094 32,223 13,534
Net investment income 2,912 1,412 7,505 2,274
Net realized gain (loss)
on investments (135) 93 (1,501) 52
Total revenues 56,365 25,167 148,072 60,397
Net Income 4,877 2,473 4,461 6,292
EPS - Basic $0.27 $0.17 $0.28 $0.58
EPS - Diluted $0.27 $0.17 $0.28 $0.58
Return on Average Equity 16.5% 12.0% 5.8% 14.5%
Net Income (A) 4,877 2,473 10,527 6,292
EPS - Basic (A) $0.27 $0.17 $0.66 $0.58
EPS - Diluted (A) $0.27 $0.17 $0.66 $0.58
Return on Average Equity (A) 16.5% 12.0% 13.6% 14.5%
Book Value Per Share $6.83 $5.74 $6.83 $5.74 (A) Adjusted to exclude the effect of the non-cash interest expense
charge (net of tax) of $6.1 million resulting from the convertible
promissory notes issued and converted during the year.
The following reconciles Hallmark's year to date net income, diluted earnings per share and return on average equity without interest expense from amortization attributable to the deemed discount on convertible promissory notes to its reported results (in thousands). Management believes this reconciliation provides useful supplemental information in evaluating the operating results of Hallmark's business. This disclosure should not be viewed as a substitute for net income, diluted earnings per share and return on average equity determined in accordance with U.S. generally accepted accounting principles ("GAAP"): Income excluding Interest
interest expense expense
from amortization from
of discount, amortization Net
net of tax of discount Tax effect Income Nine months ended
September 30, 2006 $10,527 $9,625 $(3,559) $4,461 Weighted average
shares - basic 16,019 16,019
Weighted average
shares - diluted 16,038 16,038
Average shareholders' equity 103,271 103,271 Net income per share - basic $0.66 $0.28
Net income per share - diluted $0.66 $0.28
Return on average equity 13.6% 5.8% Excluding the effect of the non-cash interest expense charge, the increase in net income for the three and nine months ended September 30, 2006 versus the same periods in 2005 was primarily attributable to the results of Hallmark's recently acquired TGA Operating Unit and Aerospace Operating Unit, the retention of business produced by its HGA Operating Unit beginning in the third quarter of 2005 and additional investment income.
The acquisitions of the TGA Operating Unit and the Aerospace Operating Unit in the first quarter of 2006 contributed $22.9 million and $56.0 million to the increase in total revenues for the three months and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005. The retention of business produced by the HGA Operating Unit that was previously retained by third parties also contributed $9.1 million and $40.3 million to the increase in revenue for the three months and nine months ended September 30, 2006, respectively, but was partially offset by lower ceding commissions and fee revenues of $3.0 million and $12.1 million for the three and nine months ended September 30, 2006, respectively, attributable to the shift from a third-party agency structure to an insurance underwriting structure.
Net investment income for the three months and nine months ended September 30, 2006 were $2.9 million and $7.5 million, respectively, compared to $1.4 million and $2.3 million for the similar periods in 2005. The quarter and year to date increases of 106% and 230%, respectively, reflected higher interest rates and greater average cash and invested assets in 2006 attributable to positive cash flow from operations and reinvestment of the strong earnings. These increases were partially offset by net realized losses on our investment portfolio of $0.1 million and $1.5 million for the three and nine months ended September 30, 2006, respectively, as compared to nominal net realized gains during the similar periods of 2005.
Hallmark's net losses and loss adjustment expenses and its net loss ratio for the three months ended September 30, 2006 were $23.6 million and 55.9%, respectively, compared to $11.0 million and 58.0%, respectively, for the same period in 2005. The net losses and loss adjustment expenses and net loss ratio for the nine months ended September 30, 2006 were $60.5 million and 57.7%, respectively, compared to $22.6 million and 58.3%, respectively, for the same period of 2005. For the three months and nine months ended September 30, 2006, the Company recognized $1.2 million and $2.0 million, respectively, in favorable development of prior years' loss reserve estimates.
Hallmark's other operating costs and expenses and its operating expense ratio for the three months ended September 30, 2006 were $23.0 million and 29.1%, respectively, compared to $9.9 million and 35.6%, respectively, for the same period in 2005. Other operating costs and expenses and the operating expense ratio for the nine months ended September 30, 2006 were $64.1 million and 30.4%, respectively, compared to $27.8 million and 34.0% for the same period of 2005.
Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property and casualty insurance products to businesses and individuals. The Company's business involves marketing, distributing, underwriting and servicing commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana, Louisiana, Oklahoma and Washington; marketing, distributing, underwriting and servicing non- standard personal automobile insurance in Texas, New Mexico, Arizona, Oklahoma and Idaho; marketing, distributing, underwriting and servicing general aviation insurance in 48 states; and providing other insurance related services. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol "HALL." Forward-looking statements in this Release are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company's products and services in the marketplace, competitive factors, interest rate trends, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company's periodic report filings with the Securities and Exchange Commission.
For further information, please contact:
Mark J. Morrison, President and Chief Executive Officer at 817.348.1600
http://www.hallmarkgrp.com/ Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands) September 30 December 31
ASSETS 2006 2005
(unaudited) (audited) Investments:
Debt securities, available-for-sale,
at market value $125,800 $79,360
Equity securities, available-for-sale,
at market value 3,701 3,403
Short-term investments, available-for-sale,
at market value 40,169 12,281
Total investments 169,670 95,044 Cash and cash equivalents 39,240 44,528
Restricted cash and investments 35,030 13,802
Premiums receivable 61,154 26,530
Accounts receivable 12,276 2,083
Prepaid reinsurance premium 1,575 767
Reinsurance balances receivable 777 ---
Reinsurance recoverable 4,480 444
Deferred policy acquisition costs 14,742 9,164
Excess of cost over fair value
of net assets acquired 31,781 4,836
Intangible assets 26,647 459
Deferred federal income taxes --- 3,992
Current federal income tax receivable 1,010 ---
Other assets 9,034 7,257
Total assets $407,416 $208,906
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $48,529 $30,928
Note payable to related party 12,500 ---
Structured settlements 24,326 ---
Unpaid losses and loss adjustment expenses 65,604 26,321
Unearned premiums 82,085 36,027
Unearned revenue 7,079 4,055
Reinsurance balances payable --- 116
Accrued agent profit sharing 1,854 2,173
Accrued ceding commission payable 11,534 11,430
Pension liability 2,766 2,932
Deferred federal income taxes 4,307 ---
Current federal income tax payable --- 300
Accounts payable and other accrued expenses 25,479 9,436
Total liabilities 286,063 123,718 Stockholders' equity:
Common stock, $.18 par value
(authorized 33,333,333 shares in 2006 and
16,666,667 shares in 2005;
issued 17,767,733 shares in 2006
and 14,476,102 shares in 2005) 3,198 2,606
Additional paid in capital 93,712 62,907
Retained earnings 26,750 22,289
Accumulated other comprehensive loss (2,230) (2,597)
Treasury stock, at cost (7,828 shares in 2006
and 2,470 in 2005) (77) (17) Total stockholders' equity 121,353 85,188
$407,416 $208,906 Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30 September 30 2006 2005 2006 2005 Gross premiums written $58,107 $43,512 $153,718 $62,985
Ceded premiums written (3,102) (552) (7,542) (552)
Net premiums written 55,005 42,960 146,176 62,433
Change in unearned
premiums (12,811) (23,936) (41,289) (23,706)
Net premiums earned 42,194 19,024 104,887 38,727 Investment income,
net of expenses 2,912 1,412 7,505 2,274
Realized gain (loss) (135) 93 (1,501) 52
Finance charges 1,037 487 2,940 1,536
Commission and fees 9,943 3,094 32,223 13,534
Processing and service fees 410 1,048 1,994 4,252
Other income 4 9 24 22
Total revenues 56,365 25,167 148,072 60,397
Losses and loss
adjustment expenses 23,589 11,043 60,478 22,584
Other operating costs
and expenses 23,044 9,897 64,097 27,752
Interest expense 1,527 559 4,774 664
Interest expense from
amortization of discount
on convertible notes --- --- 9,625 ---
Amortization of
intangible asset 573 17 1,719 31 Total expenses 48,733 21,516 140,693 51,031 Income before tax 7,632 3,651 7,379 9,366 Income tax expense 2,755 1,178 2,918 3,074 Net income $4,877 $2,473 $4,461 $6,292 Common stockholders
net income per share:
Basic $0.27 $0.17 $0.28 $0.58
Diluted $0.27 $0.17 $0.28 $0.58 Hallmark Financial Services, Inc. Consolidated Segment Data Three Months Ended September 30, 2006
Corp- Consol-
HGA TGA Phoenix Aerospace orate idated Produced premium 22,206 34,825 12,278 6,495 --- 75,804 Gross premiums written 21,967 17,269 12,278 6,593 --- 58,107
Ceded premiums written (2,270) (747) --- (85) --- (3,102)
Net premiums written 19,697 16,522 12,278 6,508 --- 55,005
Change in unearned
premiums (497) (5,764) (1,058) (5,492) --- (12,811)
Net premiums earned 19,200 10,758 11,220 1,016 --- 42,194 Total revenues 20,964 19,403 12,257 3,486 255 56,365 Loss and loss
adjustment expenses 9,347 6,863 6,800 587 (8) 23,589 Pre-tax income 5,112 1,998 2,316 869 (2,663) 7,632 Net loss ratio (A) 48.7% 63.8% 60.6% 57.8% --- 55.9%
Net expense ratio (A) 28.9% 29.1% 28.9% 35.1% --- 29.1%
Net combined ratio 77.6% 92.9% 89.5% 92.9% --- 85.0%
Three Months Ended September 30, 2005
Corp- Consol-
HGA TGA Phoenix Aerospace orate idated
Produced premium 19,662 --- 8,643 --- --- 28,305 Gross premiums written 34,869 --- 8,643 --- --- 43,512
Ceded premiums written (552) --- --- --- --- (552)
Net premiums written 34,317 --- 8,643 --- --- 42,960
Change in unearned
premiums (24,250) --- 314 --- --- (23,936)
Net premiums earned 10,067 --- 8,957 --- --- 19,024 Total revenues 14,339 --- 10,814 --- 14 25,167 Loss and loss
adjustment expenses 5,630 --- 5,429 --- (16) 11,043 Pre-tax income 2,196 --- 2,790 --- (1,335) 3,651 Net loss ratio (A) 55.9% --- 60.6% --- --- 58.0%
Net expense ratio (A) 37.5% --- 33.5% --- --- 35.6%
Net combined ratio 93.4% --- 94.1% --- --- 93.6% Hallmark Financial Services, Inc. Consolidated Segment Data Nine Months Ended September 30, 2006 Corp- Consol-
HGA TGA Phoenix Aerospace orate idated Produced premium 69,357 93,254 34,116 22,356 --- 219,083 Gross premiums written 68,884 43,773 34,116 6,945 --- 153,718
Ceded premiums written (6,122) (1,309) --- (111) --- (7,542)
Net premiums written 62,762 42,464 34,116 6,834 --- 146,176
Change in unearned
premiums (12,396) (20,662) (2,757) (5,474) --- (41,289)
Net premiums earned 50,366 21,802 31,359 1,360 --- 104,887 Total revenues 57,768 48,686 34,944 7,317 (643) 148,072 Loss and loss
adjustment expenses 27,165 13,186 19,369 783 (25) 60,478 Pre-tax income 11,245 7,152 6,760 773 (18,551) 7,379 Net loss ratio (A) 53.9% 60.5% 61.8% 57.6% --- 57.7%
Net expense ratio (A) 30.1% 30.6% 30.4% 38.1% --- 30.4%
Net combined ratio 84.0% 91.1% 92.2% 95.7% --- 88.1% Nine Months Ended September 30, 2005 Corp- Consol-
HGA TGA Phoenix Aerospace orate idated
Produced premium 62,209 --- 28,008 --- --- 90,217 Gross premiums written 34,869 --- 28,116 --- --- 62,985
Ceded premiums written (552) --- --- --- --- (552)
Net premiums written 34,317 --- 28,116 --- --- 62,433
Change in unearned
premiums (24,250) --- 544 --- --- (23,706)
Net premiums earned 10,067 --- 28,660 --- --- 38,727 Total revenues 27,194 --- 33,169 --- 34 60,397 Loss and loss
adjustment expenses 5,631 --- 17,002 --- (49) 22,584 Pre-tax income 4,761 --- 7,666 --- (3,061) 9,366 Net loss ratio (A) 55.9% --- 59.3% --- --- 58.3%
Net expense ratio (A) 37.5% --- 32.8% --- --- 34.0%
Net combined ratio 93.4% --- 92.1% --- --- 92.3% (A) The net loss ratio is calculated as incurred loss 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, including allocated overhead expenses, of our
insurance company subsidiaries divided by net premiums earned, each
determined in accordance with GAAP. DATASOURCE: Hallmark Financial Services, Inc.
CONTACT: Mark J. Morrison, President and Chief Executive Officer of Hallmark Financial Services, Inc., +1-817-348-1600 Web site: http://www.hallmarkgrp.com/
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