HALLMARK FINANCIAL SERVICES HALL
April 24, 2018 - 5:58pm EST by
surf1680
2018 2019
Price: 10.00 EPS 0 0
Shares Out. (in M): 18 P/E 0 0
Market Cap (in $M): 182 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Property and Casualty

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.

 

2004

$8,602

2005

$13,468

2006

$23,950

2007

$41,769

2008

$21,124

2009

$33,257

2010

$8,371

2011

-$19,787

2012

$3,374

2013

$11,080

2014

$18,782

2015

$31,886

2016

$8,478

2017

-$16,572

 

 

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.

 

company

pbvps

 

combined ratios

   

2017

2016

2015

1347 Property Insurance Holdin

0.87

104

105

95

Atlas Financial Holdings Inc

1.52

220

122

102

Blue Capital Reinsurance Holdi

0.82

102

201

65

Conifer Holdings Inc

0.94

99

126

112

Federated National Holding Co

1.04

114

116

77

First Acceptance Corporation

0.57

97

116

99

Hallmark Financial Services, I

0.73

107

99

93

ICC Holdings Inc

0.77

104

94

95

Kingstone Companies Inc

1.92

80

79

80

Kingsway Financial Services In

2.19

116

106

101

Unico American Corporation

0.66

114

95

87

Greenlight (not under $300m)

0.7

108

103

111

 

 

 

 

 

 

 

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.

 

 

 

  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

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.

 

 

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