Hallmark looks to capitalise on E&S tailwinds after Q3 growth

Hallmark Financial Services reported its gross written premiums increased 33 percent in the third quarter, as the US specialty insurer benefited from the big rate increases being seen on E&S business.

Hallmark reported operating earnings of $6.3mn in the third quarter, up from $4.2mn in the prior year period. Operating earnings per share were $0.35, up from $0.23 in the prior year period.

“We’re in a very good position to capitalise on the current market conditions which in our view have shifted from broad headwinds to tailwinds, particularly in our core specialty lines,” Naveen Anand, president and CEO of Hallmark Financial Services, said on an earnings call.

The combined ratio improved to 95.8 percent in the quarter, from 98.1 percent in Q3 2018.

Gross written premium increased 33 percent in the quarter to $224mn from $169mn in the third quarter of 2018. Hallmark said this was attributable primarily to growth in specialty businesses driven in large part by favourable rate increases.

Hallmark reported double digit rate increases in most of its specialty commercial product lines, with certain lines experiencing rate increases above 20 percent. Anand said the average rate increase across the specialty commercial portfolio was in excess of 15 percent.

Bob Farnam, analyst at Boenning & Scattergood, said in a note that the gross premium growth was much stronger than his 13 percent estimate.

The specialty commercial portfolio, which represents 77 percent of Hallmark’s book, grew 39 percent in the quarter.

On the earnings call, Anand said the company was benefiting from some standard lines carriers moving out of the E&S lines, Lloyds walking away from smaller binding authorities and, to a lesser extent, changes at AIG.

“I think the last time the E&S lines saw that type of dislocation was back in 2001, 2002,” Anand said. “We’re seeing much more syndication of limits, with many more carriers required to fill a tower and a program. As a result we’re seeing inverted towers in some cases where pricing is higher as you get up the ladder, which is kind of the opposite of what you would expect.”

“I think the last time the E&S lines saw that type of dislocation was back in 2001, 2002”

Hallmark Financial Services CEO Naveen Anand

He said this syndication of limits was particularly evident in Hallmark’s E&S property, professional liability and commercial auto product lines.

Anand commented that a result of Lloyd’s pulling away from smaller binding authorities is that “those individual risks are now coming into the market as individual risk versus being in sort of program situations with Lloyd’s”.

Boenning & Scattergood’s Farnam noted the quarter included more adverse development for Hallmark than he expected, with 5.7 percentage points against an expected 1.3 points.

Hallmark reported that the commercial auto environment remains difficult, and the reserve increases reflected the ongoing severity challenges in this line. “We continue to aggressively manage our primary trucking portfolio,” Hallmark said in its earnings release.

The number of commercial auto policies in force has declined 53 percent since 2015, while premiums have only declined 4 percent in that time. Since year-end 2018 the commercial auto policy count is down 9 percent while premiums are up 9 percent.

“We’ve been very focused on addressing the issue on the pricing side of our auto book,” Anand noted on the earnings call. .

The executive added that Hallmark has taken steps to reduce the impact of severity on the whole book.

“Compressing limits is a critical part of our strategy and reducing the impact of claim severity in the market,” he said. “At this point, nearly 90 percent of our liability policies are $1mn or less in limits in both our specialty commercial and in our standard commercial segments, which greatly minimises our exposure to claim severity.”

Compared to the 33 percent growth in gross premiums, net premium written increased 45 percent to $128mn for the quarter, up from $88mn in the same quarter last year.

“While much of this is related to the growth in gross premiums, the higher rate of increase is being driven by the changes we made to our reinsurance programme starting in October 2018 led by the consolidation of our casualty business into a single treaty structure,” Anand explained.

He said the changes to the reinsurance structure allowed the insurer to retain a larger amount of specialty business.