Hallmark Financial Services, Inc.?s (HALL) core 2Q08 results were a penny ahead of our expectations, benefiting from good earned premium growth, additional income from a larger investment portfolio resulting from increased retention of premiums, and a favorable prior-year loss reserve development.
Excellent risk-adjusted capitalization, favorable operating performance, and financial flexibility helped the company in maintaining its A- rating. The acquisition of various agency production sources has resulted in geographic as well product risk for the group. We believe these factors will bring stability to HALL?s earnings. As such, we keep the shares on Hold.
Following a review of the 2Q08 results, we are fine-tuning our 2008 and 2009 earnings expectations to $1.35 per share and $1.35 per share, respectively, from $1.37 per share and $1.40 per share. At the current level, the shares of Hallmark trade at 0.99x the 2Q08 book value of $9.20 per share. On October 29, 2007, the shares achieved an intraday high of $17.62 per share and reached an interim price-to-perfection of 2.1x price-to-book value per share, exceeding our previous $17.00 per share target.
Our new six-month price target of $10.40 per share (down from $12.95 per share recently), incorporates a price-to-book multiple of 1.05x (down from 1.35x previously) on our estimated book value of $9.90 per share at September 30, 2008.
