Hallmark Financial Services, Inc. (“Hallmark”) (NASDAQ: HALL) today filed its Form 10-Q and announced financial results for the first quarter ended March 31, 2023.
| First Quarter | ||||||
| 2023 | 2022 | |||||
| $ in millions: | ||||||
| Net loss from continuing operations | $ | (39.2 | ) | $ | (11.7 | ) |
| Net income from discontinued operations | $ | 0.1 | $ | 8.5 | ||
| Net loss | $ | (39.1 | ) | $ | (3.2 | ) |
| Operating loss (1) | $ | (5.0 | ) | $ | (11.7 | ) |
| $ per diluted share (2): | ||||||
| Net loss from continuing operations | $ | (21.59 | ) | $ | (6.43 | ) |
| Net income from discontinued operations | $ | 0.06 | $ | 4.66 | ||
| Net loss | $ | (21.53 | ) | $ | (1.77 | ) |
| Operating loss (1) | $ | (2.74 | ) | $ | (6.45 | ) |
(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:
- American Hallmark Insurance Company of Texas, Hallmark Insurance Company, Hallmark Specialty Insurance Company, Hallmark County Mutual Insurance Company and Hallmark National Insurance Company (collectively, the “Hallmark Insurers”) are parties to a Loss Portfolio Transfer Reinsurance Contract (the “LPT Contract”) and related agreements with DARAG Bermuda Ltd. (“DARAG Bermuda”) and DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, the “Reinsurers”). The Reinsurers and the Hallmark Insurers agreed to submit to binding arbitration a dispute regarding the rights and obligations of the parties under the LPT Contract. The Company established a receivable of $58.9 million pending a resolution of the matter. An interim binding arbitration award was declared by the arbitration panel on May 4, 2023. In accordance with GAAP, the Company recognized in the current reporting period a write-off to bad debt expense of $32.9 million of the receivable established by the Company. As of March 31, 2023, our consolidated balance sheet included $4.0 million of account receivable from DARAG related to cost incurred in which we contend we have right of reimbursement. A definitive binding award is expected to be forthcoming in the near future which may increase or decrease our total write-off.
- Net loss from continuing operations of $39.2 million, or $21.59 per share, in the first quarter of 2023 includes $26.0 million or $14.28 per share related to the DARAG write-off to bad debt expense, as compared to a net loss of $11.7 million, or $6.43 per share, for the same period of 2022. See Non-GAAP Financial Measures below.
- Net income from discontinued operations of $0.1 million, or $0.06 per share, in the first quarter of 2023 as compared to net income from discontinued operations of $8.5 million, or $4.66 per share, for the same period of 2022.
- Net loss of $39.1 million, or $21.53 per share, in the first quarter of 2023 includes $26.0 million or $14.28 per share related to the DARAG write-off to bad debt expense as compared to net loss of $3.2 million, or $1.77 per share, for the same period of 2022. See Non-GAAP Financial Measures below.
- Net combined ratio of 215.7% for the three months ended March 31, 2023, compared to 136.9% for the same periods the prior year.
- Underlying combined ratio (excluding net prior year development, catastrophe losses and write-off of DARAG receivable) of 107.5% for the three months ended March 31, 2023, compared to 109.8% for the same period the prior year. See Non-GAAP Financial Measures below.
- Net investment income was $4.3 million during the three months ended March 31, 2023, as compared to $1.9 million during the same period in 2022.
- As of March 31, 2023, the Company has $105.5 million in cash and cash equivalents. Our debt securities were $340.0 million as of March 31, 2023 as compared to $426.6 million as of December 31, 2022. Also, 91% of debt securities have maturities of five years or less and the average modified duration of 0.7 years.
- The Company continues to maintain a full valuation allowance for income tax in fiscal 2023.
- On May 14, 2023, the Company submitted notice to AM Best to withdraw from AM Best’s interactive rating process. We will be assigned a Non-Rating Designation of NR by AM Best, which are assigned to insurance companies that are not rated.
First Quarter 2023 Financial Review
| First Quarter | ||||||
| 2023 | 2022 | |||||
| ($ in thousands) | ||||||
| Gross premiums written | $ | 57,172 | $ | 59,333 | ||
| Net premiums written | $ | 42,381 | $ | 41,269 | ||
| Net premiums earned | $ | 35,280 | $ | 39,315 | ||
| Investment income, net of expenses | $ | 4,342 | $ | 1,859 | ||
| Investment (losses) gains, net | $ | (640 | ) | $ | 51 | |
| Net (loss) from continuing operations | $ | (39,246 | ) | $ | (11,677 | ) |
| Net income from discontinued operations | $ | 104 | $ | 8,458 | ||
| Net (loss) income | $ | (39,142 | ) | $ | (3,219 | ) |
| Operating (loss) income (2) | $ | (4,973 | ) | $ | (11,717 | ) |
| Net (loss) income per share – from continuing operations basic & diluted (1) | $ | (21.59 | ) | $ | (6.43 | ) |
| Net income per share from discontinued operations – basic & diluted | $ | 0.06 | $ | 4.66 | ||
| Net loss per share – basic & diluted | $ | (21.53 | ) | $ | (1.77 | ) |
| Operating (loss) per share – basic & diluted (2) | $ | (2.74 | ) | $ | (6.45 | ) |
| Book value per share | $ | 12.95 | $ | 93.47 | ||
(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.
| ($ in thousands) | Income (Loss) from Continuing Operations Before Tax |
Less Tax Effect |
Net After Tax |
Weighted Average Shares Diluted |
Diluted Per Share |
||||||||||
| First Quarter 2023 | |||||||||||||||
| Reported GAAP measures | $ | (39,780 | ) | $ | (534 | ) | $ | (39,246 | ) | 1,818 | $ | (21.59 | ) | ||
| Excluded deferred tax valuation allowance | $ | – | $ | (7,798 | ) | $ | 7,798 | 1,818 | $ | 4.29 | |||||
| Excluded write-off receivable from reinsurer | $ | 32,872 | $ | 6,903 | $ | 25,969 | 1,818 | $ | 14.28 | ||||||
| Excluded investment (gains)/losses | $ | 640 | $ | 134 | $ | 506 | 1,818 | $ | 0.28 | ||||||
| Operating loss | $ | (6,268 | ) | $ | (1,295 | ) | $ | (4,973 | ) | 1,818 | $ | (2.74 | ) | ||
| First Quarter 2022 | |||||||||||||||
| Reported GAAP measures | $ | (14,857 | ) | $ | (3,180 | ) | $ | (11,677 | ) | 1,817 | $ | (6.43 | ) | ||
| Excluded investment (gains)/losses | $ | (51 | ) | $ | (11 | ) | $ | (40 | ) | 1,817 | $ | (0.02 | ) | ||
| Operating loss | $ | (14,908 | ) | $ | (3,191 | ) | $ | (11,717 | ) | 1,817 | $ | (6.45 | ) | ||
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.
| 1stQ 2023 | 1stQ 2022 | |||||
| Net combined ratio | 215.7 | % | 136.9 | % | ||
| Impact on net combined ratio | ||||||
| Net Unfavorable (Favorable) Prior Year Development | 10.1 | % | 26.5 | % | ||
| Catastrophes, net of reinsurance | 4.9 | % | 0.6 | % | ||
| Write-off receivable from reinsurer | 93.2 | % | 0.0 | % | ||
| Underlying combined ratio | 107.5 | % | 109.8 | % | ||
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.”
Balance Sheets, etc.
| Hallmark Financial Services, Inc. and Subsidiaries | ||||||
| Consolidated Balance Sheets | ||||||
| ($ in thousands, except par value) | Mar. 31 | Dec. 31 | ||||
| ASSETS | 2023 | 2022 | ||||
| Investments: | ||||||
| Debt securities, available-for-sale, at fair value (amortized cost: $344,714 in 2023 and $434,119 in 2022; allowance for expected credit losses of $0 in 2023) | $ | 340,054 | $ | 426,597 | ||
| Equity securities (cost: $24,281 in 2023 and $30,058 in 2022) | 22,392 | 28,199 | ||||
| Total investments | 362,446 | 454,796 | ||||
| Cash and cash equivalents | 105,458 | 59,133 | ||||
| Restricted cash | 9,108 | 29,486 | ||||
| Ceded unearned premiums | 231,314 | 237,086 | ||||
| Premiums receivable | 82,375 | 78,355 | ||||
| Accounts receivable | 1,378 | 10,859 | ||||
| Receivable from reinsurer | 3,953 | 58,882 | ||||
| Restricted funds withheld | 11,129 | 0 | ||||
| Receivable for securities | 11,563 | 945 | ||||
| Reinsurance recoverable (net of allowance for expected credit losses of $200 in 2023) | 621,229 | 578,424 | ||||
| Deferred policy acquisition costs | 2,896 | 8 | ||||
| Federal income tax recoverable | 2,598 | 2,668 | ||||
| Prepaid pension assets | 201 | 163 | ||||
| Prepaid expenses | 2,227 | 1,508 | ||||
| Other assets | 22,390 | 24,389 | ||||
| Total Assets | $ | 1,470,265 | $ | 1,536,702 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Liabilities: | ||||||
| Senior unsecured notes due 2029 (less unamortized debt issuance costs of $623 in 2023 and $648 in 2022) | $ | 49,377 | $ | 49,352 | ||
| Subordinated debt securities (less unamortized debt issuance costs of $679 in 2023 and $691 in 2022) | 56,023 | 56,011 | ||||
| Reserves for unpaid losses and loss adjustment expenses | 835,903 | 880,869 | ||||
| Unearned premiums | 294,019 | 292,691 | ||||
| Reinsurance payable | 143,529 | 128,950 | ||||
| Payable for securities | 979 | – | ||||
| Accounts payable and other liabilities | 66,900 | 68,535 | ||||
| Total Liabilities | 1,446,730 | 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 | 124,837 | 124,740 | ||||
| (Accumulated deficit) retained earnings | (72,549 | ) | (33,407 | ) | ||
| Accumulated other comprehensive loss | (6,206 | ) | (8,492 | ) | ||
| Treasury stock (268,801 shares in 2023 and 2022), at cost | (24,634 | ) | (24,634 | ) | ||
| Total Stockholders Equity | 23,535 | 60,294 | ||||
| Total Liabilities & Stockholders Equity | $ | 1,470,265 | $ | 1,536,702 | ||
| Hallmark Financial Services, Inc. and Subsidiaries | ||||||
| Consolidated Statements of Operations | Three Months Ended | |||||
| ($ in thousands, except per share amounts) | March 31, | |||||
| 2023 | 2022 | |||||
| Gross premiums written | $ | 57,172 | $ | 59,333 | ||
| Ceded premiums written | (14,791 | ) | (18,064 | ) | ||
| Net premiums written | 42,381 | 41,269 | ||||
| Change in unearned premiums | (7,101 | ) | (1,954 | ) | ||
| Net premiums earned | 35,280 | 39,315 | ||||
| Investment income, net of expenses | 4,342 | 1,859 | ||||
| Investment (losses) gains, net | (640 | ) | 51 | |||
| Finance charges | 779 | 983 | ||||
| Other income | 70 | 15 | ||||
| Total revenues | 39,831 | 42,223 | ||||
| Losses and loss adjustment expenses | 29,764 | 39,382 | ||||
| Operating expenses | 47,949 | 16,427 | ||||
| Interest expense | 1,898 | 1,264 | ||||
| Amortization of intangible assets | 0 | 7 | ||||
| Total expenses | 79,611 | 57,080 | ||||
| (Loss) income from continuing operations before tax | (39,780 | ) | (14,857 | ) | ||
| Income tax expense (benefit) from continuing operations | (534 | ) | (3,180 | ) | ||
| Net (loss) income from continuing operations | $ | (39,246 | ) | $ | (11,677 | ) |
| Discontinued operations: | ||||||
| Total pretax income from discontinued operations | $ | 104 | $ | 10,738 | ||
| Income tax (benefit) expense on discontinued operations | – | 2,280 | ||||
| Income from discontinued operations, net of tax | $ | 104 | $ | 8,458 | ||
| Net (loss) income | $ | (39,142 | ) | $ | (3,219 | ) |
| Net (loss) basic income per share: | ||||||
| Net loss from continuing operations | $ | (21.59 | ) | $ | (6.43 | ) |
| Net income from discontinued operations | 0.06 | 4.66 | ||||
| Basic net (loss) income per share | $ | (21.53 | ) | $ | (1.77 | ) |
| Net (loss) diluted income per share: | ||||||
| Net loss from continuing operations | $ | (21.59 | ) | $ | (6.43 | ) |
| Net income from discontinued operations | 0.06 | 4.66 | ||||
| Diluted net (loss) income per share | $ | (21.53 | ) | $ | (1.77 | ) |
| Hallmark Financial Services, Inc. and Subsidiaries | ||||||||||||||||||||||||||||||
| Consolidated Segment Data | ||||||||||||||||||||||||||||||
| Three Months Ended Mar. 31 | ||||||||||||||||||||||||||||||
| 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 | $ | 43,345 | $ | 38,071 | $ | 13,652 | $ | 16,832 | $ | 175 | $ | 4,430 | $ | – | $ | – | $ | 57,172 | $ | 59,333 | ||||||||||
| Ceded premiums written | (14,489 | ) | (17,743 | ) | (133 | ) | (76 | ) | (169 | ) | (245 | ) | 0 | 0 | (14,791 | ) | (18,064 | ) | ||||||||||||
| Net premiums written | 28,856 | 20,328 | 13,519 | 16,756 | 6 | 4,185 | 0 | 0 | 42,381 | 41,269 | ||||||||||||||||||||
| Change in unearned premiums | (7,246 | ) | (2,073 | ) | 138 | (1,197 | ) | 7 | 1,316 | 0 | 0 | (7,101 | ) | (1,954 | ) | |||||||||||||||
| Net premiums earned | 21,610 | 18,255 | 13,657 | 15,559 | 13 | 5,501 | 0 | 0 | 35,280 | 39,315 | ||||||||||||||||||||
| Total revenues | 21,626 | 18,280 | 14,436 | 16,532 | 14 | 5,501 | 3,755 | 1,910 | 39,831 | 42,223 | ||||||||||||||||||||
| Losses and loss adjustment expenses | 15,617 | 12,912 | 11,169 | 12,579 | 2,978 | 13,891 | 0 | 0 | 29,764 | 39,382 | ||||||||||||||||||||
| Pre-tax income (loss) | 826 | (636 | ) | (1,775 | ) | (1,313 | ) | (37,195 | ) | (10,038 | ) | (1,636 | ) | (2,870 | ) | (39,780 | ) | (14,857 | ) | |||||||||||
| Net loss ratio (1) | 72.3 | % | 70.7 | % | 81.8 | % | 80.8 | % | N/A (2) | 252.5 | % | 84.4 | % | 100.2 | % | |||||||||||||||
| Net expense ratio (1) | 25.4 | % | 33.9 | % | 33.2 | % | 29.0 | % | N/A (2) | 31.5 | % | 131.3 | % | 36.7 | % | |||||||||||||||
| Net combined ratio (1) | 97.7 | % | 104.6 | % | 115.0 | % | 109.8 | % | N/A (2) | 284.0 | % | 215.7 | % | 136.9 | % | |||||||||||||||
| Impact on net combined ratio | ||||||||||||||||||||||||||||||
| Net Unfavorable (Favorable) Prior Year Development | 4.6 | % | -2.4 | % | 3.8 | % | 10.1 | % | N/A (2) | 168.6 | % | 10.1 | % | 26.5 | % | |||||||||||||||
| Catastrophes, net of reinsurance | 7.3 | % | 1.1 | % | 1.2 | % | 0.1 | % | N/A (2) | 0.0 | % | 4.9 | % | 0.6 | % | |||||||||||||||
| Write-off receivable from reinsurer | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | N/A (2) | 0.0 | % | 93.2 | % | 0.0 | % | |||||||||||||||
| Underlying combined ratio (1) | 85.7 | % | 105.9 | % | 110.0 | % | 99.6 | % | N/A (2) | 115.4 | % | 107.5 | % | 109.8 | % | |||||||||||||||
(1) 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.
Share Price
Hallmarks share price has hit a 5 year low and there are no signs that this trend will stop in the short term. One year ago the share price was $28.20.
The previous low of $4.37 on December 20th 2022 has now been passed with the share price today, 16th May 2023, standing at $3.83. On the 11th of May the share price had hit it’s all time low of $3.54.
About Hallmark
Hallmark is a globally recognized brand, known for its greeting cards, gift wrap, and ornaments. But beyond the festive trappings of its products lies a complex financial history.
Founded in 1910 by Joyce Clyde Hall and his brother Rollie Hall, the company started as a humble postcard business in Kansas City, Missouri.
Today it has grown into a large company with operations across the world.
In 1928, Hallmark introduced its first Christmas card and sales took off from there. The company quickly expanded into other product lines such as stationery and gift items.
By 1944, Hallmark had become the largest producer of greeting cards in the United States. Over time, they continued to innovate their offerings by introducing new formats such as musical cards and pop-up cards.
