Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HALL > SEC Filings for HALL > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for HALLMARK FINANCIAL SERVICES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HALLMARK FINANCIAL SERVICES INC


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read together with our consolidated financial statements and the notes thereto. This discussion contains forward-looking statements. Please see "Risks Associated with Forward-Looking Statements in this Form 10-Q" for a discussion of some of the uncertainties, risks and assumptions associated with these statements.

Introduction

Hallmark Financial Services, Inc. ("Hallmark" and, together with subsidiaries, "we," "us" or "our") is an insurance holding company that, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance, personal insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our General Aviation and Excess & Umbrella business which is written on a national basis. We pursue our business activities through subsidiaries whose operations are organized into six business units, which are supported by our insurance company subsidiaries.

Our non-carrier insurance activities are segregated by business units into the following reportable segments:

Standard Commercial Segment.Our Standard Commercial Segment includes the standard lines commercial property/casualty products and services handled by our Standard Commercial P&C business unit (formerly known as our Standard Commercial business unit) and the workers compensation insurance products handled by our Workers Compensation business unit.

Specialty Commercial Segment.Our Specialty Commercial Segment includes the excess and surplus lines commercial property/casualty and medical professional liability insurance products and services handled by our E&S Commercial business unit, the general aviation insurance products and services handled by our General Aviation business unit, the commercial excess liability and umbrella insurance products handled by our Excess & Umbrella business unit and satellite launch insurance products included in Specialty Programs.

Personal Segment. Our Personal Segment includes the non-standard personal automobile insurance, low value dwelling/homeowners, renters, motorcycle and business auto insurance products and services handled by our Personal Lines business unit.

The retained premium produced by our business units is supported by the following insurance company subsidiaries:

American Hallmark Insurance Company of Texas ("AHIC") presently retains a portion of the risks on the commercial property/casualty and workers compensation policies marketed within the Standard Commercial Segment, retains a portion of the risks on personal policies marketed within the Personal Segment and retains a portion of the risks on the commercial, medical professional liability, aviation and satellite launch property/casualty policies marketed within the Specialty Commercial Segment.

Hallmark Specialty Insurance Company ("HSIC") presently retains a portion of the risks on the commercial property/casualty and medical professional liability policies marketed within the Specialty Commercial Segment.

Hallmark Insurance Company ("HIC") presently retains a portion of the risks on both the personal policies marketed within the Personal Segment and the commercial and aviation property/casualty products marketed within the Specialty Commercial Segment.

Hallmark National Insurance Company ("HNIC") was acquired on December 31, 2010. Simultaneous with the closing of the acquisition, HNIC entered into reinsurance contracts with an affiliate of the seller, pursuant to which such affiliate of the seller will handle all claims and assume all liabilities arising under policies issued by HNIC prior to the closing or during a transition period of up to nine months following the closing. Commencing January 1, 2011, HNIC retains a portion of the risks on the personal policies marketed within the Personal Segment.

Hallmark County Mutual Insurance Company ("HCM") control and management is maintained through our wholly owned subsidiary CYR Insurance Management Company ("CYR"). CYR has as its primary asset a management agreement with HCM, which provides for CYR to have management and control of HCM. HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas. HCM does not retain any business.

Texas Builders Insurance Company ("TBIC") was acquired on July 1, 2011 and retains a portion of the risks on the workers compensation policies marketed within our Standard Commercial Segment.

AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement pursuant to which AHIC retains 30% of the total net premiums written by any of them, HIC retains 28% of our total net premiums written by any of them, HSIC retains 30% of our total net premiums written by any of them and HNIC retains 12% of our total premiums written by any of them. Neither HCM nor TBIC is a party to the intercompany pooling arrangement. This pooling arrangement has no impact on our consolidated financial statements reported in accordance with U.S. generally accepted accounting principles ("GAAP").

Results of Operations

Management Overview During the three and nine months ended September 30, 2012, our total revenues were $85.6 million and $253.2 million, representing a 2% and 6% increase, respectively, from the $83.7 million and $239.7 million in total revenues for the same period of 2011. The growth in revenue was primarily attributable to increased premium production and resulting earned premium driven largely from our E&S Commercial business unit and from the acquisition of our Workers Compensation business unit during the third quarter of 2011. The increase in revenue was partially offset by an adverse profit share commission revenue adjustment in our Standard Commercial P&C business unit, combined with lower finance charges and earned premium in our Personal Segment due mostly to the impact of a reduction of premium written in underperforming states and products exited over the past twelve months. Further offsetting the increase in revenue was lower net realized gains for the nine months ended September 30, 2012.

The increase in revenue for the three months and nine months ended September 30, 2012 was complemented by decreased loss and loss adjustment expenses ("LAE") due primarily to improved current accident year loss trends in our Standard Commercial P&C business unit for the year-to-date and Personal Lines business unit for both the quarter and year-to-date as well as significant adverse reserve development recognized during the prior year. During the three months and nine months ended September 30, 2012, we recorded $2.2 million and $3.6 million, respectively, of favorable prior year loss reserve development. During the three and nine months ended September 30, 2011, we recorded $2.3 million and $18.1 million, respectively, of unfavorable prior year loss reserve development. Of the $18.1 million unfavorable development recognized for the nine months ended September 30, 2011, $10.1 million was a result of adverse prior year loss reserve development in our Personal Segment in Florida. In addition, the results for the nine months ended September 30, 2012 and 2011 included $11.6 million and $10.0 million, respectively, in net losses from weather related claims.

We reported $3.4 million net income attributable to Hallmark for the three months ended September 30, 2012, as compared to $98 thousand net income attributable to Hallmark for the same period during 2011. We reported a net income attributable to Hallmark of $1.7 million for the nine months ended September 30, 2012, which was $12.9 million higher than the $11.2 million net loss attributable to Hallmark reported for the nine months ended September 30, 2011. On a diluted basis per share, we reported net income of $0.18 per share for the three months ended September 30, 2012, as compared to net income of $0.01 per share for the same period in 2011. On a diluted basis per share, net income per share was $0.09 for the nine months ended September 30, 2012, as compared to net loss per share of $0.57 for the same period during 2011. We reported an income tax benefit of $1.0 million, or an effective income tax rate of -90.0%, for the nine months ended September 30, 2012, as compared to income tax benefit of $9.0 million, or an effective rate of 44.7%, for the same period during 2011.

Third Quarter 2012 as Compared to Third Quarter 2011

The following is additional business segment information for the three months ended September 30, 2012 and 2011 (in thousands):

                        Hallmark Financial Services, Inc

                           Consolidated Segment Data



                                                               Three Months Ended September 30, 2012
                                             Standard        Specialty
                                            Commercial      Commercial      Personal
                                             Segment          Segment        Segment       Corporate       Consolidated

Gross premiums written                     $     18,706     $    62,349     $  18,393               -     $       99,448
Ceded premiums written                           (1,876 )       (12,385 )        (182 )             -            (14,443 )
Net premiums written                             16,830          49,964        18,211               -             85,005
Change in unearned premiums                         736          (6,396 )       1,136               -             (4,524 )
Net premiums earned                              17,566          43,568        19,347               -             80,481

Total revenues                                   17,761          46,373        21,172             314             85,620

Losses and loss adjustment expenses              12,476          25,532        14,831               -             52,839

Pre-tax  income (loss), net of
 non-controlling interest                          (529 )         8,287          (345 )        (2,650 )            4,763

Net loss ratio (1)                                 71.0 %          58.6 %        76.7 %                             65.7 %
Net expense ratio (1)                              33.4 %          27.3 %        29.3 %                             30.1 %
Net combined ratio (1)                            104.4 %          85.9 %       106.0 %                             95.8 %




                                                               Three Months Ended September 30, 2011
                                             Standard        Specialty
                                            Commercial      Commercial      Personal
                                             Segment          Segment        Segment       Corporate       Consolidated

Gross premiums written                     $     16,698     $    48,417     $  24,636               -     $       89,751
Ceded premiums written                           (1,489 )       (10,444 )          64               -            (11,869 )
Net premiums written                             15,209          37,973        24,700               -             77,882
Change in unearned premiums                       1,320          (2,993 )      (1,141 )             -             (2,814 )
Net premiums earned                              16,529          34,980        23,559               -             75,068

Total revenues                                   20,258          36,814        25,637           1,039             83,748

Losses and loss adjustment expenses              10,703          23,356        22,077               -             56,136

Pre-tax  income (loss), net of
 non-controlling interest                         4,260           2,691        (4,536 )        (1,715 )              700

Net loss ratio (1)                                 64.8 %          66.8 %        93.7 %                             74.8 %
Net expense ratio (1)                              32.0 %          29.8 %        28.9 %                             31.6 %
Net combined ratio (1)                             96.8 %          96.6 %       122.6 %                            106.4 %

(1) The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated for our business units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. For the business units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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.

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $18.7 million for the three months ended September 30, 2012, which was $2.0 million, or 12%, more than the $16.7 million reported for the same period in 2011. Net premiums written were $16.8 million for the three months ended September 30, 2012 as compared to $15.2 million reported for the same period in 2011. The increase in premium volume was primarily due to increased premium production in both our Standard Commercial P&C business unit and our Workers Compensation business unit.

Total revenue for the Standard Commercial Segment of $17.8 million for the three months ended September 30, 2012 was $2.5 million less than the $20.3 million reported during the same period in 2011. This decrease in total revenue was mostly due to an adverse profit share commission revenue adjustment of $1.2 million during the third quarter of 2012 as compared to a favorable profit share commission revenue adjustment of $2.5 million during the same period of 2011. This decrease in revenue was partially offset by increased net premiums earned of $1.0 million due primarily to increased premium production in both our Standard Commercial P&C business unit and our Workers Compensation business unit and higher net investment income of $0.2 million.

Our Standard Commercial Segment reported a pre-tax loss of $0.5 million for the three months ended September 30, 2012 as compared to pre-tax income of $4.3 million for the same period of 2011. The reduced revenue discussed above, higher loss and LAE of $1.8 million and higher operating expenses of $0.5 million were the primary drivers of the pre-tax loss for the three months ended September 30, 2012.

The Standard Commercial Segment reported a net loss ratio of 71.0% for the three months ended September 30, 2012 as compared to 64.8% for the same period of 2011. The gross loss ratio before reinsurance for the three months ended September 30, 2012 was 68.1% as compared to the 59.9% reported for the same period of 2011. The increase in the net loss ratio was impacted by higher current accident year loss trends during the third quarter of 2012 as compared to the same period in 2011. During the three months ended September 30, 2012, the Standard Commercial Segment reported favorable loss reserve development of $0.1 million as compared to $0.7 million favorable loss reserve development during the same period of 2011. The Standard Commercial Segment reported a net expense ratio of 33.4% for the three months ended September 30, 2012 as compared to 32.0% for the same period of 2011. The increase in the expense ratio is primarily due to increased production related expenses.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were $62.3 million for the three months ended September 30, 2012, which was $13.9 million, or 29%, more than the $48.4 million reported for the same period in 2011. Net premiums written were $50.0 million for the three months ended September 30, 2012 as compared to $38.0 million reported for the same period in 2011. The increase in premium volume was primarily due to increased premium production in our E&S Commercial business unit, Excess & Umbrella business unit and our space risk program, partially offset by reduced premium volume in our General Aviation business unit.

The $46.4 million of total revenue for the three months ended September 30, 2012 was $9.6 million higher than the $36.8 million reported by the Specialty Commercial Segment for the same period in 2011. This increase in revenue was primarily due to higher net premiums earned of $8.6 million largely from increased premium production discussed above. Further contributing to this increased revenue was higher net investment income of $0.7 million and a favorable profit share commission revenue adjustment of $0.1 million for the three months ended September 30, 2012 as compared to an adverse profit share commission revenue adjustment of $0.2 million for the same period of 2011.

Pre-tax income for the Specialty Commercial Segment of $8.3 million for the third quarter of 2012 was $5.6 million higher than the $2.7 million reported for the same period in 2011. The increase in pre-tax income was primarily due to the increased revenue discussed above partially offset by higher loss and LAE expenses of $2.2 million, higher operating expenses of $1.6 million and $0.3 million in expense related to the acquisition of the non-controlling interest in our Excess & Umbrella business unit during the third quarter of 2012. Our General Aviation business unit reported a $1.6 million increase in loss and LAE due primarily to higher current accident year loss trends, our Excess & Umbrella business unit reported a $0.2 million increase in loss and LAE due to increased premium production and our space risk program reported a $1.0 million increase in loss and LAE attributable to a large claim during the third quarter of 2012. These increases in loss and LAE were partially offset by a $0.6 million decrease in loss and LAE in our E&S Commercial business unit due primarily to favorable prior year loss reserve development for the three months ended September 30, 2012 as compared to the same period during 2011 partially offset by increased premium production. The increase in operating expenses for the three months ended September 30, 2012 were primarily the result of increased production related expenses of $1.4 million and increased salary and related expenses of $0.4 million, partially offset by lower professional service fees of $0.2 million.

The Specialty Commercial Segment reported a net loss ratio of 58.6% for the three months ended September 30, 2012 as compared to 66.8% for the same period during 2011. The gross loss ratio before reinsurance was 60.3% for the three months ended September 30, 2012 as compared to 65.6% for the same period in 2011. The Specialty Commercial Segment reported $2.7 million of favorable prior year loss reserve development for the three months ended September 30, 2012 as compared to $0.1 million adverse prior year loss reserve development for the same period in 2011. The Specialty Commercial Segment reported a decline in the net expense ratio to 27.3% for the three months ended September 30, 2012 as compared to 29.8% for the same period in 2011 primarily due to increased premium production.

Personal Segment

Gross premiums written for the Personal Segment were $18.4 million for the three months ended September 30, 2012, which was $6.2 million, or 25%, less than the $24.6 million reported for the same period in 2011. The decrease in premium was due mostly to the impact of rate increases and exiting certain underperforming states and programs.

Total revenue for the Personal Segment decreased 17% to $21.2 million for the third quarter of 2012 from $25.6 million for the third quarter of 2011. Lower earned premium of $4.2 million and lower finance charges of $0.3 million were the primary reason for the decrease in revenue for the period.

Pre-tax loss for the Personal Segment was $0.3 million for the three months ended September 30, 2012 as compared to $4.5 million for the same period of 2011. The decrease in pre-tax loss for the three months ended September 30, 2012 as compared to the same period in 2011 was driven by decreased losses and LAE of $7.2 million and lower operating expenses of $1.4 million due to decreased production related expense, professional service fees and salary and related expenses, partially offset by the lower revenue discussed above.

The Personal Segment reported a net loss ratio of 76.7% for the three months ended September 30, 2012 as compared to 93.7% for the third quarter of 2011. The loss ratio for the three months ended September 30, 2012 includes improved current accident year loss trends. The loss and LAE during the three months ended September 30, 2012 included $0.6 million of adverse prior year loss reserve development as compared to $2.9 million of adverse prior year loss reserve development for the same period in 2011.

Corporate

Total revenue for Corporate decreased by $0.7 million for the three months ended September 30, 2012 as compared to the same period the prior year. This decrease in total revenue was primarily due to lower net investment income of $1.1 million and the bargain purchase gain recorded on the acquisition of TBIC Holding of $0.1 million reported in other income during the third quarter of 2011. This decrease in total revenue was partially offset by higher net realized gains of $0.5 million for the three months ended September 30, 2012 as compared to the same period of the prior year.

Corporate pre-tax loss was $2.7 million for the three months ended September 30, 2012 as compared to $1.7 million pre-tax loss for the same period the prior year. The increase in pre-tax loss was the result of the decreased revenue discussed above and higher operating expenses of $0.3 million due primarily to an adjustment recorded during the three months ended September 30, 2011 to reduce the expected earn-out payable in conjunction with the acquisition of HNIC.

Nine Months Ended September 30, 2012 as Compared to Nine Months Ended September 30, 2011

The following is additional business segment information for the nine months ended September 30, 2012 and 2011 (in thousands):

                       Hallmark Financial Services, Inc.

                           Consolidated Segment Data



                                                               Nine Months Ended September 30, 2012
                                             Standard        Specialty
                                            Commercial      Commercial      Personal
                                             Segment          Segment        Segment       Corporate       Consolidated

Gross premiums written                     $     58,292     $   178,690     $  60,676               -     $      297,658
Ceded premiums written                           (5,063 )       (36,948 )        (543 )             -            (42,554 )
Net premiums written                             53,229         141,742        60,133               -            255,104
Change in unearned premiums                      (2,194 )       (19,449 )       2,477               -            (19,166 )
Net premiums earned                              51,035         122,293        62,610               -            235,938

Total revenues                                   53,791         129,812        68,508           1,066            253,177

Losses and loss adjustment expenses              39,253          76,827        52,779               -            168,859

Pre-tax  income (loss), net of
 non-controlling interest                        (2,601 )        17,193        (5,747 )        (8,082 )              763

Net loss ratio (1)                                 76.9 %          62.8 %        84.3 %                             71.6 %
Net expense ratio (1)                              33.8 %          28.2 %        28.5 %                             30.4 %
Net combined ratio (1)                            110.7 %          91.0 %       112.8 %                            102.0 %




                                                               Nine Months Ended September 30, 2011
                                             Standard        Specialty
                                            Commercial      Commercial      Personal
                                             Segment          Segment        Segment       Corporate       Consolidated

Gross premiums written                     $     52,702     $   137,032     $  81,100               -     $      270,834
Ceded premiums written                           (4,053 )       (29,041 )      (4,668 )             -            (37,762 )
Net premiums written                             48,649         107,991        76,432               -            233,072
Change in unearned premiums                        (867 )        (9,312 )      (6,134 )             -            (16,313 )
Net premiums earned                              47,782          98,679        70,298               -            216,759

Total revenues                                   53,926         104,433        76,556           4,754            239,669

Losses and loss adjustment expenses              39,117          66,706        76,018               -            181,841

Pre-tax  income (loss), net of
 non-controlling interest                          (890 )         6,955       (22,341 )        (3,974 )          (20,250 )

Net loss ratio (1)                                 81.9 %          67.6 %       108.1 %                             83.9 %
Net expense ratio (1)                              32.5 %          30.2 %        26.8 %                             31.3 %
Net combined ratio (1)                            114.4 %          97.8 %       134.9 %                            115.2 %

(1) The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated for our business units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. For the business units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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.

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $58.3 million for the nine months ended September 30, 2012, which was $5.6 million, or 11%, more than the $52.7 million reported for the same period in 2011. Net premiums written were $53.2 million for the nine months ended September 30, 2012 as compared to $48.6 million reported for the same period in 2011. The increase in premium volume was primarily due to the acquisition of our Workers Compensation business unit during the third quarter of 2011.

Total revenue for the Standard Commercial Segment of $53.8 million for the nine months ended September 30, 2012 was $0.1 million less than the $53.9 million reported during the same period in 2011. This decrease in total revenue was mostly due to an adverse profit share commission revenue adjustment of $1.4 million during the nine months ended September 30, 2012 as compared to a favorable profit share commission revenue adjustment of $2.7 million during the same period of 2011. This decrease in total revenue was offset by increased net premiums earned of $3.3 million due primarily to the acquisition of our Workers Compensation business unit during the third quarter of 2011 and higher net investment income of $0.7 million.

Our Standard Commercial Segment reported a pre-tax loss of $2.6 million for the nine months ended September 30, 2012 as compared to pre-tax loss of $0.9 million for the same period of 2011. The decreased revenue discussed above and higher operating expenses of $1.5 million primarily due to the acquisition of our . . .

  Add HALL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HALL - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.