FORT WORTH, Texas, March 20 /PRNewswire-FirstCall/ -- Hallmark
Financial Services, Inc. (NASDAQ:HALL) today reported quarterly net
income of $4.7 million for the fourth quarter ended December 31,
2006, representing a 63% increase from the $2.9 million in net
income for the fourth quarter of 2005. Diluted earnings per share
for the three months ended December 31, 2006, were $0.23,
representing a 15% increase over the $0.20 in diluted earnings per
share for the same period of the prior year. Affecting the diluted
per share earnings was the issuance of 3 million common shares from
the successful completion of the Company's underwritten public
offering during the fourth quarter of 2006. Hallmark also reported
net income of $9.2 million and diluted earnings per share of $0.53
for the year ended December 31, 2006, compared to net income of
$9.2 million and diluted earnings per share of $0.76 in the prior
year. During the year ended December 31, 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 year ended December 31, 2006, would
have been $15.3 million, representing a 66% increase over fiscal
2005, and its diluted earnings per share would have been $0.89 for
the year ended December 31, 2006. Diluted earnings per share for
the year ended December 31, 2006 were also impacted by the public
offering in the fourth quarter. During the three months and year
ended December 31, 2006, Hallmark reported total revenues of $54.7
million and $202.7 million, representing 105% and 133% increases,
respectively, over the $26.6 million and $87.0 million in total
revenues for the comparable periods of 2005. Mark J. Morrison,
President and Chief Executive Officer, said, "We are very pleased
with the results the Company achieved for 2006. Each of our
reporting segments performed well during the year and contributed
significantly to the overall results. Our record revenues and
operating profits for the year are primarily due to recent
acquisitions and increased premium retention, as well as
year-over-year improvements in underwriting results and operational
efficiency. Looking forward, we expect growth in gross written
premium to continue into 2007 and beyond as a result of both
increased retention of existing business and organic growth." Mark
E. Schwarz, Executive Chairman of Hallmark, stated, "I believe that
2006 was a landmark year for our company in which we made excellent
progress in implementing our long-term strategic goals. We began
the year with the acquisitions of the enterprises now comprising
our Aerospace Operating Unit and TGA Operating Unit, which added
significant breadth to the organization. These operating units,
which constitute our Specialty Commercial Segment, have performed
to our expectations and have been successfully integrated into our
operational structure. Our continuing goal is to selectively
acquire businesses like these as a means to expand our existing
segments into new specialty and niche markets. In addition, the
successful completion of our public offering in the fourth quarter
of 2006 has broadened our shareholder base and provided the capital
structure needed to support the increased premium retention we
anticipate." Three Months Ended Year Ended December 31, December
31, 2006 2005 2006 2005 ($ in thousands) Gross premiums written
$60,227 $26,482 $213,945 $89,467 Net premiums written 56,752 25,819
202,928 88,252 Net premiums earned 47,174 20,457 152,061 59,184
Commission and fee income 3,120 3,169 35,343 16,703 Net investment
income 2,956 1,562 10,461 3,836 Net realized gain (loss) on
investments 35 6 (1,466) 58 Total revenues 54,669 26,638 202,741
87,035 Net Income 4,730 2,894 9,191 9,186 EPS - Basic $0.23 $0.20
$0.53 $0.76 EPS - Diluted $0.23 $0.20 $0.53 $0.76 Return on Average
Equity 13.9% 13.8% 7.8% 15.6% Adjusted Net Income (1) 4,730 2,894
15,257 9,186 Adjusted EPS - Basic (1) $0.23 $0.20 $0.89 $0.76
Adjusted EPS - Diluted (1) $0.23 $0.20 $0.89 $0.76 Adjusted Return
on Average Equity (1) 13.9% 13.8% 17.2% 15.6% Book Value Per Share
$7.26 $5.89 $7.26 $5.89 (1) Adjusted to exclude the effect of the
non-cash interest expense charge of $6.1 million (net of tax)
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 computed without the 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 from amortization amortization of discount, of Tax Net
net of tax discount effect Income Year ended December 31, 2006
$15,257 $9,625 $(3,559) $9,191 Weighted average shares - basic
17,181 17,181 Weighted average shares - diluted 17,194 17,194
Average shareholders' equity 117,960 117,960 Net income per share -
basic $0.89 $0.53 Net income per share - diluted $0.89 $0.53 Return
on average equity 17.2% 7.8% Excluding the effect of the non-cash
interest expense charge, the increase in net income for the three
months and year ended December 31, 2006 versus the same periods in
2005 was primarily attributable to the results of Hallmark's
Specialty Commercial Segment, the subsidiaries of which were
acquired January 1, 2006, the retention of business produced by its
Standard Commercial Segment beginning in the third quarter of 2005
and additional investment income. The acquisitions of the
subsidiaries comprising the Specialty Commercial Segment in the
first quarter of 2006 contributed $24.7 million and $80.7 million
to the increase in total revenues for the three months and year
ended December 31, 2006, respectively, as compared to the same
periods in 2005. The retention of business produced by the Standard
Commercial Segment that was previously retained by third parties
also contributed $8.0 million and $48.3 million to the increase in
revenue for the three months and year ended December 31, 2006,
respectively, but was partially offset by lower ceding commissions
and fee revenues of $6.3 million and $18.3 million for the three
months and year ended December 31, 2006, respectively, primarily
attributable to the shift from a third-party agency structure to an
insurance underwriting structure. Net investment income for the
three months and year ended December 31, 2006 were $3.0 million and
$10.5 million, respectively, compared to $1.6 million and $3.8
million for the similar periods in 2005. The quarter and fiscal
year increases of 89% and 173%, 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. The fiscal year increase was partially
offset by net realized losses on our investment portfolio of $1.5
million for fiscal 2006 as compared to nominal net realized gains
during fiscal 2005. Hallmark's net losses and loss adjustment
expenses and its net loss ratio for the three months ended December
31, 2006 were $26.6 million and 56.5%, respectively, compared to
$11.2 million and 54.7%, respectively, for the same period in 2005.
The net losses and loss adjustment expenses and net loss ratio for
the year ended December 31, 2006 were $87.1 million and 57.3%,
respectively, compared to $33.8 million and 57.1%, respectively,
for the same period of 2005. For the three months ended December
31, 2006, the Company had a reduction in its projected favorable
development of prior years' loss reserve estimates of $0.3 million,
as compared to $1.2 million of favorable development recognized for
the same period in 2005. For the year ended December 31, 2006, the
Company recognized $1.2 million in favorable development of prior
years' loss reserve estimates as compared to $2.4 million of
favorable development during 2005. Hallmark's other operating costs
and expenses and its expense ratio for the three months ended
December 31, 2006 were $19.5 million and 28.1%, respectively,
compared to $10.7 million and 32.4%, respectively, for the same
period in 2005. Other operating costs and expenses and the expense
ratio for the year ended December 31, 2006 were $83.6 million and
28.4%, respectively, compared to $38.5 million and 30.8% 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, Arkansas and Washington; marketing, distributing,
underwriting and servicing non-standard personal automobile
insurance in Texas, New Mexico, Arizona, Oklahoma, Arkansas, Idaho,
Oregon and Washington; marketing, distributing, underwriting and
servicing general aviation insurance in 47 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
December 31, 2006 and 2005 (In thousands) ASSETS 2006 2005
Investments: Debt securities, available-for-sale, at fair value
$125,784 $79,360 Equity securities, available-for-sale, at fair
value 4,580 3,403 Short-term investments, available-for-sale, at
fair value 25,275 12,281 Total investments 155,639 95,044 Cash and
cash equivalents 81,474 44,528 Restricted cash and investments
31,815 13,802 Prepaid reinsurance premiums 1,629 767 Premiums
receivable 44,644 26,530 Accounts receivable 13,223 2,083
Reinsurance recoverable 5,930 444 Deferred policy acquisition costs
17,145 9,164 Excess of cost over fair value of net assets acquired
31,427 4,836 Intangible assets 26,074 459 Deferred federal income
taxes --- 3,992 Prepaid expenses 1,769 802 Other assets 5,184 6,455
$415,953 $208,906 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities:
Notes payable $35,763 $30,928 Structured settlements 24,587 ---
Reserves for unpaid losses and loss adjustment expenses 77,564
26,321 Unearned premiums 91,606 36,027 Unearned revenue 5,734 4,055
Reinsurance balances payable 1,060 116 Accrued agent profit sharing
1,784 2,173 Accrued ceding commission payable 3,956 11,430 Pension
liability 3,126 2,932 Deferred federal income taxes 2,310 ---
Current federal income tax payable 2,132 300 Accounts payable and
other accrued expenses 15,600 9,436 265,222 123,718 Commitments and
contingencies Stockholders' equity: Common stock, $.18 par value,
authorized 33,333,333 shares in 2006 and 16,666,667 shares in 2005;
issued 20,776,066 shares in 2006 and 14,476,102 shares in 2005
3,740 2,606 Capital in excess of par value 117,932 62,907 Retained
earnings 31,480 22,289 Accumulated other comprehensive loss (2,344)
(2,597) Treasury stock, 7,828 shares in 2006 and 2,470 shares in
2005, at cost (77) (17) Total stockholders' equity 150,731 85,188
$415,953 $208,906 Hallmark Financial Services, Inc. and
Subsidiaries Consolidated Statements of Operations ($ in thousands,
except per share amounts) Three Months Ended Year Ended December 31
December 31 2006 2005 2006 2005 Gross premiums written $60,227
$26,482 $213,945 $89,467 Ceded premiums written (3,475) (663)
(11,017) (1,215) Net premiums written 56,752 25,819 202,928 88,252
Change in unearned premiums (9,578) (5,362) (50,867) (29,068) Net
premiums earned 47,174 20,457 152,061 59,184 Investment income, net
of expenses 2,956 1,562 10,461 3,836 Realized gain (loss) 35 6
(1,466) 58 Finance charges 1,043 508 3,983 2,044 Commission and
fees 3,120 3,169 35,343 16,703 Processing and service fees 336 931
2,330 5,183 Other income 5 5 29 27 Total revenues 54,669 26,638
202,741 87,035 Losses and loss adjustment expenses 26,639 11,200
87,117 33,784 Other operating costs and expenses 19,486 10,740
83,583 38,492 Interest expense 1,024 600 5,798 1,264 Interest
expense from amortization of discount on convertible notes --- ---
9,625 --- Amortization of intangible asset 574 (4) 2,293 27 Total
expenses 47,723 22,536 188,416 73,567 Income before tax 6,946 4,102
14,325 13,468 Income tax expense 2,216 1,208 5,134 4,282 Net income
$4,730 $2,894 $9,191 $9,186 Common stockholders net income per
share: Basic $0.23 $0.20 $0.53 $0.76 Diluted $0.23 $0.20 $0.53
$0.76 Hallmark Financial Services, Inc. Consolidated Segment Data
Three Months Ended December 31, 2006 Standard Specialty Commercial
Commercial Personal Consol- Segment Segment Segment Corporate
idated Produced premium 22,322 40,872 11,019 --- 74,213 Gross
premiums written 22,186 27,022 11,019 --- 60,227 Ceded premiums
written (2,728) (747) --- --- (3,475) Net premiums written 19,458
26,275 11,019 --- 56,752 Change in unearned premiums 250 (9,767)
(61) --- (9,578) Net premiums earned 19,708 16,508 10,958 ---
47,174 Total revenues 17,557 24,686 12,054 372 54,669 Loss and loss
adjustment expenses 11,634 7,939 7,074 (8) 26,639 Pre-tax income
512 6,384 2,000 (1,950) 6,946 Loss ratio (1) 59.0% 48.1% 64.6%
56.5% Expense ratio (2) 29.3% 30.5% 22.6% 28.1% Combined ratio (3)
88.3% 78.6% 87.2% 84.6% Three Months Ended December 31, 2005
Standard Specialty Commercial Commercial Personal Consol- Segment
Segment Segment Corporate idated Produced premium 19,512 --- 8,337
--- 27,849 Gross premiums written 18,083 --- 8,399 --- 26,482 Ceded
premiums written (1,151) --- 488 --- (663) Net premiums written
16,932 --- 8,887 --- 25,819 Change in unearned premiums (5,248) ---
(114) --- (5,362) Net premiums earned 11,684 --- 8,773 --- 20,457
Total revenues 15,873 --- 10,738 27 26,638 Loss and loss adjustment
expenses 6,979 --- 4,237 (16) 11,200 Pre-tax income 1,890 --- 3,981
(1,769) 4,102 Loss ratio (1) 59.7% 48.3% 54.7% Expense ratio (2)
34.2% 30.0% 32.4% Combined ratio (3) 93.9% 78.3% 87.1% Hallmark
Financial Services, Inc. Consolidated Segment Data Year Ended
December 31, 2006 Standard Specialty Commercial Commercial Personal
Consol- Segment Segment Segment Corporate idated Produced premium
91,679 156,482 45,135 --- 293,296 Gross premiums written 91,070
77,740 45,135 --- 213,945 Ceded premiums written (8,850) (2,167)
--- --- (11,017) Net premiums written 82,220 75,573 45,135 ---
202,928 Change in unearned premiums (12,146) (35,903) (2,818) ---
(50,867) Net premiums earned 70,074 39,670 42,317 --- 152,061 Total
revenues 75,325 80,689 46,998 (271) 202,741 Loss and loss
adjustment expenses 38,799 21,908 26,443 (33) 87,117 Pre-tax income
11,757 14,309 8,760 (20,501) 14,325 Loss ratio (1) 55.4% 55.2%
62.5% 57.3% Expense ratio (2) 29.4% 30.5% 24.9% 28.4% Combined
ratio (3) 84.8% 85.7% 87.4% 85.7% Year Ended December 31, 2005
Standard Specialty Commercial Commercial Personal Consol- Segment
Segment Segment Corporate idated Produced premium 81,721 --- 36,345
--- 118,066 Gross premiums written 52,952 --- 36,515 --- 89,467
Ceded premiums written (1,703) --- 488 --- (1,215) Net premiums
written 51,249 --- 37,003 --- 88,252 Change in unearned premiums
(29,498) --- 430 --- (29,068) Net premiums earned 21,751 --- 37,433
--- 59,184 Total revenues 43,067 --- 43,907 61 87,035 Loss and loss
adjustment expenses 12,610 --- 21,239 (65) 33,784 Pre-tax income
6,651 --- 11,647 (4,830) 13,468 Loss ratio (1) 58.0% 56.7% 57.1%
Expense ratio (2) 34.4% 28.8% 30.8% Combined ratio (3) 92.4% 85.5%
87.9% (1) Net loss ratio is calculated as total net losses and loss
adjustment expenses divided by net premiums earned, each determined
in accordance with GAAP. (2) Net expense ratio is calculated as
total underwriting expenses of our insurance company subsidiaries,
including allocated overhead expenses and offset by agency fee
income, divided by net premiums earned, each determined in
accordance with GAAP. During the fourth quarter of fiscal 2006, we
adopted the widely used industry calculation that offsets expenses
with agency fee income. All prior period comparative expense ratios
have been restated. (3) Net combined ratio is calculated as the sum
of the net loss ratio and the net expense ratio. 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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