On Apr 3, Zacks Investment Research downgraded Hallmark Financial Services Inc. (HALL) by a notch to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Earnings estimates forHallmark Financial have been trending down owing to dismal premiums growth and a reduced investment portfolio during fourth-quarter 2013. Additionally, this property-casualty and specialty insurer underperformed the one-year Nasdaq index, which posed a growth of 30.8% against Hallmark Financial’s negative return of 6.4%.
On Mar 12, Hallmark Financial reported fourth-quarter operating earnings per share of 18 cents, which were wider than the Zacks Consensus Estimate and the year-ago earnings of 13 cents and 9 cents, respectively.
The upside was primarily based on lower loss and loss adjusted expenses as well as reduced catastrophe losses, resulting in improved net loss and combined ratios. However, a 17% year-over-year reduction was witnessed in net premiums written, whereas investment income declined 19%. These being the primary revenue drivers, led to dampened fundamental growth and deteriorated margins. Additionally, unfavorable reserves from prior years add to operating risks.
Hallmark Financial’s Personal Lines business continues to face operating challenges from discontinuance of some of its products and reduced premiums from many of its operational areas. Although Hallmark Financial sits on modest cash position, lack of any current growth catalyst and non-renewals in primary markets restrict desired underwriting results and operating margins.
Moreover, incapacities to address the fluctuations in currencies, equity markets and interest rates have taken a toll on the investment portfolio and finance charges. These factors consistently make investors jittery.
The Zacks Consensus Estimate for 2014 plunged 66.7% to earnings of 15 cents per share in the last 30 days, 65.1% lower than its 2013 equivalent. On the other hand, the estimate for 2015 is pegged at 45 cents a share, unchanged over the same period. Meanwhile, no upward revision in estimates was witnessed for both the years.
Other Stocks that Warrant a Look
While we prefer to avoid Hallmark Financial at present, other stocks that are outperforming in the insurance sector include AmTrust Financial Services Inc. (AFSI), EMC Insurance Inc. (EMCI) and Global Indemnity Plc (GBLI). All these stocks sport a Zacks Rank #1 (Strong Buy).
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