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 8-Aug-2013All 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


8-Aug-2013

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 Hallmark Select business which is written on a national basis. We pursue our business activities through subsidiaries whose operations are organized into five 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 insurance products and services handled by our Standard Commercial P&C 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 insurance products and services handled by our E&S Commercial business unit and the general aviation, commercial umbrella and excess liability and medical professional liability insurance products and services handled by our Hallmark Select business unit, as well as certain Specialty Programs which are managed at the parent level.

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

The retained premium produced by these reportable segments 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 and a portion of the commercial property/casualty policies marketed within the Standard 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") presently 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")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 27% 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 13% 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 six months ended June 30, 2013, our total revenues were $99.3 million and $192.4 million, representing a 17% and 15% increase, respectively, from the $84.6 million and $167.6 million in total revenues for the same periods of 2012. This increase in revenue was primarily attributable to increased production in our Specialty Commercial Segment and our Standard Commercial Segment. Further contributing to this increase in revenue were higher net realized gains. These increases in revenue were partially offset by lower net investment income and lower finance charges and earned premium in our Personal Lines business unit due mostly to the impact of a reduction of premium written in underperforming states and products exited.

The increase in revenue for the three and six months ended June 30, 2013 was accompanied by increased loss and loss adjustment expenses ("LAE") of $13.8 million and $20.8 million, respectively, as compared to the same periods in 2012. During the three months ended June 30, 2013 and 2012 we recorded $5.4 million and $1.6 million unfavorable prior year loss development. During the six months ended June 30, 2013 we recorded $7.4 million of unfavorable prior year loss development. During the six months ended June 30, 2012 we recorded $1.4 million of favorable prior year loss development. The increase in loss and LAE occurred despite a $4.2 million decrease in catastrophe losses to $6.2 million during the six months ended June 30, 2013 from $10.4 million reported for the same period of 2012. Other operating expenses also increased due mostly to increased production related expenses in our E&S Commercial business unit.

We reported a $3.2 million and $1.5 million net loss for the three and six months ended June 30, 2013 as compared to a $1.8 million and $1.7 million net loss for the same periods during 2012. On a diluted basis per share, we reported a net loss of $0.16 per share for the three months ended June 30, 2013, as compared to net loss of $0.10 per share for the same period in 2012. On a diluted basis per share, net loss per share was $0.08 for the six months ended June 30, 2013 as compared to net loss per share of $0.09 for the same period during 2012.

Second Quarter 2013 as Compared to Second Quarter 2012



The following is additional business segment information for the three months
ended June 30, 2013 and 2012 (in thousands):



                                                                                      Three Months Ended June 30
                                         Standard                   Specialty
                                        Commercial                 Commercial                  Personal
                                          Segment                    Segment                    Segment                  Corporate                Consolidated
                                     2013         2012         2013          2012          2013         2012         2013         2012         2013          2012
Gross premiums written             $ 23,687       20,739     $  76,361        61,456     $ 19,419       18,620     $      -            -     $ 119,467       100,815
Ceded premiums written               (2,102 )     (1,730 )     (16,368 )     (13,749 )     (1,452 )       (199 )          -            -       (19,922 )     (15,678 )
Net premiums written                 21,585       19,009        59,993        47,707       17,967       18,421            -            -        99,545        85,137
Change in unearned premiums          (1,978 )     (2,369 )      (7,269 )      (7,017 )      2,546        2,498            -            -        (6,701 )      (6,888 )
Net premiums earned                  19,607       16,640        52,724        40,690       20,513       20,919            -            -        92,844        78,249

Total revenues                       20,709       17,924        55,660        43,046       22,387       22,905          543          696        99,299        84,571

Losses and loss adjustment
expenses                             16,447       13,013        40,953        28,286       17,659       19,930            -            -        75,059        61,229

Pre-tax income (loss), net of
non-controlling interest             (1,999 )       (710 )         566         2,929       (1,654 )     (4,211 )     (2,230 )     (2,202 )      (5,317 )      (4,194 )

Net loss ratio (1)                     83.9 %       78.2 %        77.7 %        69.5 %       86.1 %       95.3 %                                  80.8 %        78.2 %
Net expense ratio (1)                  31.8 %       34.2 %        26.8 %        28.4 %       24.6 %       28.8 %                                  28.6 %        30.5 %
Net combined ratio (1)                115.7 %      112.4 %       104.5 %        97.9 %      110.7 %      124.1 %                                 109.4 %       108.7 %

Favorable (Unfavorable) Prior
Year Development                      1,496         (187 )      (5,667 )          48       (1,250 )     (1,496 )          -            -        (5,421 )      (1,635 )

(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 $23.7 million for the three months ended June 30, 2013, which was $3.0 million, or 14%, more than the $20.7 million reported for the same period in 2012. Net premiums written were $21.6 million for the three months ended June 30, 2013 as compared to $19.0 million reported for the same period in 2012. The increase in premium volume was primarily due to increased premium production in both our Standard Commercial P&C and Workers Compensation business units.

Total revenue for the Standard Commercial Segment of $20.7 million for the three months ended June 30, 2013 was $2.8 million more than the $17.9 million reported during the same period in 2012. This 16% increase in total revenue was mostly due to increased net premiums earned of $3.0 million partially offset by a $0.1 million increased adverse profit share commission revenue adjustment and lower finance charges of $0.1 million during three months ended June 30, 2013 as compared to the same period in 2012.

Our Standard Commercial Segment reported a pre-tax loss of $2.0 million for the three months ended June 30, 2013 as compared to a pre-tax loss of $0.7 million for the same period of 2012. This increase in pre-tax loss was primarily the result of higher loss and LAE of $3.4 million and higher operating expenses of $0.7 million consisting primarily of production related expenses, partially offset by the increased revenue discussed above.

The Standard Commercial Segment reported a net loss ratio of 83.9% for the three months ended June 30, 2013 as compared to 78.2% for the same period of 2012. The gross loss ratio before reinsurance for the three months ended June 30, 2013 was 78.3% as compared to the 86.4% reported for the same period of 2012. The increase in the net loss ratio was impacted by reinsurance recoverable on large property losses during the second quarter of 2012. The decrease in the gross loss ratio was impacted by favorable loss reserve development of $1.5 million as compared to unfavorable loss reserve development of $0.2 million during the same period of 2012, partially offset by higher current accident year loss trends excluding catastrophe losses during the second quarter of 2013 as compared to the same period in 2012. The gross and net loss results for the three months ended June 30, 2013 and 2012 include $3.2 million and $4.8 million, respectively, of catastrophe losses.

Specialty Commercial Segment

The $55.7 million of total revenue for the three months ended June 30, 2013 was $12.7 million higher than the $43.0 million reported by the Specialty Commercial Segment for the same period in 2012. This increase in revenue was primarily due to higher net premiums earned of $12.0 million largely from increased production in both our E&S Commercial and Hallmark Select business units. Further contributing to this increased revenue was higher net investment income of $0.3 million and higher commission revenue of $0.4 million due primarily to favorable profit share commission adjustments for the three months ended June 30, 2013 as compared to the second quarter of 2012.

Pre-tax income for the Specialty Commercial Segment of $0.6 million for the second quarter of 2013 was $2.3 million lower than the $2.9 million reported for the same period in 2012. The decrease in pre-tax income was primarily due to higher loss and LAE expenses of $12.7 million and higher operating expenses of $2.4 million, partially offset by the increased revenue discussed above. Our E&S Commercial business unit reported a $9.7 million increase in loss and LAE due primarily to increased premium production as well as unfavorable prior year loss development, partially offset by lower current accident year loss trends. In addition, our Hallmark Select business unit reported a $3.3 million increase in loss and LAE which consisted of (a) a $0.4 million increase in loss and LAE due to increased premium production in our commercial umbrella and excess liability line of business, (b) a $2.8 million increase in loss and LAE primarily due to large loss volatility in our aircraft hull coverage during the second quarter of 2013 and lower favorable prior year loss reserve development during the second quarter of 2013 as compared to the same period of 2012 and (c) a $0.1 million increase in loss and LAE attributable to our medical professional liability insurance products. These increases in Specialty Commercial Segment loss and LAE were partially offset by a $0.3 million decrease in loss and LAE in our Specialty Programs due primarily to decreased current accident year loss trends. The increase in operating expenses for the three months ended June 30, 2013 were primarily the result of increased production related expenses of $2.3 million and increased professional service fees of $0.1 million.

The Specialty Commercial Segment reported a net loss ratio of 77.7% for the three months ended June 30, 2013 as compared to 69.5% for the same period during 2012. The gross loss ratio before reinsurance was 74.5% for the three months ended June 30, 2013 as compared to 66.1% for the same period in 2012. The higher gross and net loss ratios include large hull loss volatility and $5.7 million unfavorable prior years' loss development for the three months ended June 30, 2013 as compared to $48 thousand favorable prior years' loss development for the same period of 2012.

Personal Segment

Gross premiums written for the Personal Segment were $19.4 million for the three months ended June 30, 2013, which was $0.8 million, or 4%, more than the $18.6 million reported for the same period in 2012. Net premiums written for our Personal Segment were $18.0 million in the second quarter of 2013, which was a decrease of $0.4 million, or 2%, from the $18.4 million reported for the second quarter of 2012. The decrease in net premium written was due mostly to a quota share reinsurance contract entered into during the first quarter of 2013 on our low value dwelling/homeowners, renters, and manufactured homes lines of business.

Total revenue for the Personal Segment decreased 2% to $22.4 million for the second quarter of 2013 from $22.9 million for the second quarter of 2012. Lower earned premium of $0.4 million due to lower net premium production discussed above and decreased net investment income of $0.1 million were the primary reasons for the decrease in revenue for the period.

Pre-tax loss for the Personal Segment was $1.7 million for the three months ended June 30, 2013 as compared to pre-tax loss of $4.2 million for the same period of 2012. The lower pre-tax loss was the result of decreased losses and LAE of $2.2 million and lower operating expenses of $0.8 million, the combined result of lower production related expenses of $0.6 million and lower salary and related expenses of $0.2 million. The decrease in loss and LAE and operating expenses were partially offset by lower revenue discussed above.

The Personal Segment reported a net loss ratio of 86.1% for the three months ended June 30, 2013 as compared to 95.3% for the second quarter of 2012. The gross loss ratio before reinsurance was 86.7% for the three months ended June 30, 2013 as compared to 96.8% for the same period in 2012. The lower gross and net loss ratio are primarily the result of lower current accident year loss trends for the three months ended June 30, 2013 as compared to the same period of 2012. The loss and LAE during the three months ended June 30, 2013 and 2012 included $1.3 million and $1.5 million, respectively, of unfavorable prior years' loss reserve development. The Personal Segment reported a net expense ratio of 24.6% for the second quarter of 2013 as compared to 28.8% for the same period of 2012. The decrease in the expense ratio was due predominately to lower operating expenses.

Corporate

Total revenue for Corporate decreased by $0.2 million for the three months ended June 30, 2013 as compared to the same period the prior year. This decrease in total revenue was due to lower net investment income of $0.8 million, partially offset by higher net realized gains of $0.6 million for the three months ended June 30, 2013 as compared to the same period of the prior year.

Corporate pre-tax loss was $2.2 million for the three months ended June 30, 2013 and 2012. The decreased revenue discussed above was offset by lower operating expenses of $0.2 million due largely to an adjustment during the second quarter of 2013 to the expected earn-out payable in conjunction with the acquisition of HNIC.

Six Months Ended June 30, 2013 as Compared to Six Months Ended June 30, 2012



The following is additional business segment information for the six months
ended June 30, 2013 and 2012 (in thousands):



                                                                                       Six Months Ended June 30
                                         Standard                   Specialty
                                        Commercial                 Commercial                  Personal
                                          Segment                    Segment                    Segment                  Corporate                Consolidated
                                     2013         2012         2013          2012          2013         2012         2013         2012         2013          2012
Gross premiums written             $ 45,329       39,586     $ 141,667       116,341     $ 40,618       42,283     $      -            -     $ 227,614       198,210
Ceded premiums written               (4,097 )     (3,187 )     (27,300 )     (24,563 )     (2,776 )       (361 )          -            -       (34,173 )     (28,111 )
Net premiums written                 41,232       36,399       114,367        91,778       37,842       41,922            -            -       193,441       170,099
Change in unearned premiums          (3,095 )     (2,930 )     (12,790 )     (13,053 )      1,776        1,341            -            -       (14,109 )     (14,642 )
Net premiums earned                  38,137       33,469       101,577        78,725       39,618       43,263            -            -       179,332       155,457

Total revenues                       40,997       36,030       107,340        83,439       43,365       47,336          738          752       192,440       167,557

Losses and loss adjustment
expenses                             29,030       26,777        75,389        51,295       32,378       37,948            -            -       136,797       116,020

Pre-tax income (loss), net of
non-controlling interest               (522 )     (2,072 )       4,264         8,906       (1,718 )     (5,402 )     (5,178 )     (5,432 )      (3,154 )      (4,000 )

Net loss ratio (1)                     76.1 %       80.0 %        74.2 %        65.2 %       81.7 %       87.7 %                                  76.3 %        74.6 %
Net expense ratio (1)                  32.7 %       34.0 %        27.2 %        28.7 %       25.8 %       28.1 %                                  29.4 %        30.5 %
Net combined ratio (1)                108.8 %      114.0 %       101.4 %        93.9 %      107.5 %      115.8 %                                 105.7 %       105.1 %

Favorable (Unfavorable) Prior
Year Development                      2,222        2,756        (8,657 )         922         (997 )     (2,286 )          -            -        (7,432 )       1,392

(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 $45.3 million for the six months ended June 30, 2013, which was $5.7 million, or 15%, more than the $39.6 million reported for the same period in 2012. Net premiums written were $41.2 million for the six months ended June 30, 2013 as compared to $36.4 million reported for the same period in 2012. The increase in premium volume was primarily due to increased premium production in both our Standard Commercial P&C and Workers Compensation business units.

Total revenue for the Standard Commercial Segment of $41.0 million for the six months ended June 30, 2013 was $5.0 million more than the $36.0 million reported during the same period in 2012. This 14% increase in total revenue was mostly due to increased net premiums earned of $4.7 million, higher net investment income of $0.1 million and a favorable profit share commission revenue adjustment of $0.1 million during the second quarter of 2013 as compared to a $0.1 million unfavorable profit share commission adjustment during the same period the prior year.

Our Standard Commercial Segment reported a pre-tax loss of $0.5 million for the six months ended June 30, 2013 as compared to pre-tax loss of $2.1 million for the same period of 2012. Partially offsetting the increased revenue discussed above were higher loss and LAE expenses of $2.3 million and higher operating expenses of $1.1 million, primarily consisting of production related expenses.

The Standard Commercial Segment reported a net loss ratio of 76.1% for the six months ended June 30, 2013 as compared to 80.0% for the same period in 2012. The gross loss ratio before reinsurance for the six months ended June 30, 2013 was 71.8% as compared to the 79.3% reported for the same period of 2012. The lower gross and net loss ratios for the six months ended June 30, 2013 were primarily the result of lower catastrophe losses. The gross and net loss results for the six months ended June 30, 2013 and 2012 include $3.5 million and $8.8 million, respectively, of catastrophe losses. During the six months ended June 30, 2013 and 2012 the Standard Commercial Segment reported favorable loss reserve development of $2.2 million and $2.8 million, respectively.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were $141.7 million for the six months ended June 30, 2013, which was $25.4 million, or 22%, more than the $116.3 million reported for the same period in 2012. Net premiums written were $114.4 million for the six months ended June 30, 2013 as compared to $91.8 million reported for the same period in 2012. The increase in premium volume was primarily due to increased premium production in our E&S Commercial business unit and our Hallmark Select business unit.

The $107.3 million of total revenue for the Specialty Commercial Segment for the six months ended June 30, 2013 was $23.9 million higher than the $83.4 million reported for 2012. This 29% increase in revenue was due to higher net premiums earned of $22.9 million due predominately to increased production discussed above. Further contributing to this increased revenue was higher net investment income of $0.8 million and higher favorable profit share commission revenue adjustment of $0.2 million for the six months ended June 30, 2013 as compared to the same period of 2012.

Pre-tax income for the Specialty Commercial Segment of $4.3 million for the six months ended June 30, 2013 was $4.6 million lower than the $8.9 million reported for the same period in 2012. The decrease in pre-tax income was primarily due to higher loss and LAE expenses of $24.1 million and higher operating expenses of $4.6 million, partially offset by lower amortization of intangible assets of $0.1 million, lower non-controlling interest of $0.1 million and the increased revenue discussed above. Our E&S Commercial business unit reported a $19.6 million increase in loss and LAE due primarily to increased premium volume and $9.3 million of unfavorable prior year loss reserve development as compared to $1.8 million of unfavorable development during the same period of 2012. In addition, our Hallmark Select business unit reported a $4.3 million increase in loss and LAE which consisted of (a) a $0.7 million increase in loss and LAE due to increased premium production in our commercial umbrella and excess liability line of business, (b) a $3.4 million increase in loss and LAE primarily due to large loss volatility in our aircraft hull coverage during the first six months of 2013 and lower favorable prior year loss reserve development during the first six months of 2013 as compared to the same period of 2012 and (c) a $0.2 million increase in loss and LAE attributable to our medical professional liability insurance products. Also contributing to the increase in Specialty Commercial Segment loss and LAE was a $0.2 million increase in loss and LAE in our Specialty Programs due primarily to increased current accident year loss trends. The increase in operating expense was the combined result of increased production related expenses of $4.4 million and higher professional service fees of $0.2 million.

The Specialty Commercial Segment reported a net loss ratio of 74.2% for the six months ended June 30, 2013 as compared to 65.2% for the same period during 2012. The gross loss ratio before reinsurance was 71.8% for the six months ended June 30, 2013 as compared to 62.9% for the same period in 2012. The higher gross and net loss ratio include large hull loss volatility and $8.6 million of . . .

  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.