Description

Still $10/share?

Hallmark Financial Services, Inc. (Hall) is a diversified specialty property/casualty insurer.  Hall has been written up twice in the past 10 years on VIC. My thesis is simple:  Given high valuation levels across the board - here is something that is trading at near it’s cheapest historical levels. 

Compare and contrast investing in HALL in 2009 vs. 2018

What’s the same as before:

Hall is currently trading at the same discount to tangible book value that it did in 2009 when trev62 wrote it up for VIC.    At the time of that writeup, Hall stock had just endured 3 years of negative share price returns - like right now. 

Hall is trading at the same price (and even more of a discount) than when Zeke wrote it up in early 2016 meanwhile they’ve grown their business by 20%.

Their investment portfolio is still heavily weighted towards quality bonds.  Mark Schwarz of New Castle hedge fund is still involved.   Hall’s geographical concentration is still in Texas and their insurance biz is ranked “A-“ by A.M. Best

Insiders were buying in 2009, and at a smaller level the CEO was buying in 2016 and recently in 2018.

What is different:

Gross premiums have doubled since 2009

Their business is more diversified, interest rates are moving higher and there are less shares outstanding (20 million in 2009, 19 million in 2016 vs. 18 million now).

Technical/behavioral:  The climate has changed- At that time, insurers were scary investments (AIG!). Recently, the stock market has enjoyed a few years of positive returns and Hall share-price has been negative on an absolute basis.   In 2009 it was easier to hold a losing stock that was fundamentally performing.    

In 2009, Hall was on the heels of dramatic increase in book value per share due to both operational and investment performance, whereas Hall is currently performing terribly – due to catastrophic losses.  I think this qualifies as “investor exhaustion” more so now than in 2009.

In 2009, the softness/discount in Hall could be attributed to the selling by New Castle partners as they took their position from 14 million shares down to where it is now (and has been for a long time) 4.5 million shares, or 27% of company. 

Going forward, this is a pretty forward easy investment.   Operationally, Hall had a nasty year in 2017.  It doesn’t have them that often and it tends to build equity.

The nasty  year they had in 2011 was on half as much premiums as they generated in 2017.  Berkshire Hathaway’s insurance group lost money in 2 out of the last 10 years (vs.Hall 2 out of 14 according to slide deck).  Other P&C insurance companies with under $300 million market cap have much worse track records, losing money ~3 out of 8 years and trade at similar or even better levels.

Hallmark is the only P&C insurance company under $300 million market cap that has continually decreased the amount of shares outstanding over the last 7 years.

Hall is in year 3 of a 5 year plan.  It is an opportune time to add right now and hopefully profit from the fulfillment of the plan.

Catalyst

A few quarters of more typical, profitable performance.

Share buyback.  The board currently has authorized a 3 million share buyback.   Since 2009 they’ve bought back ~3 million shares.  There are ~600k fewer shares outstanding now than there were last year.

A  year with less natural catastrophic events than Texas experienced in 2017.