Hallmark Financial Services (HALL) 8-K Announces Second Quarter 2007 Earnings Results

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES SECOND QUARTER 2007 EARNINGS RESULTS

FORT WORTH, Texas, (August 9, 2007) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported quarterly net income of $8.8 million for the second quarter ended June 30, 2007 as compared to a net loss of $2.8 million reported for the second quarter of 2006. On a diluted basis, net income per share was $0.42 for the three months ended June 30, 2007 as compared to a net loss of $0.18 per share for the same period in 2006. During the quarter ended June 30, 2007, Hallmark reported total revenues of $68.7 million, representing a 46% increase over the $47.2 million in total revenues for the second quarter of 2006.

Mark J. Morrison, President and Chief Executive Officer, said, "We are very pleased to report that the second quarter of 2007 represented the highest quarterly revenues and profit in the Company’s history. The increase in revenue for the quarter was primarily the result of the continued execution of our plan to increase the retention of the business we produce which, in turn, had the intended result of increasing our bottom line. Even with the general softening market conditions across the property & casualty industry, our overall production growth and policy rates in the quarter and year-to-date have been in line with our expectations. For the six months ended June 30, 2007, gross premiums produced by our operating units have collectively grown by 9.6% over the same period last year. This growth is largely a result of our strategy of controlled geographic expansion into states where business is less price sensitive and where we feel we can achieve adequate pricing for our policies. Our underwriting margins continue to be strong in each of our operating units as we have maintained favorable policy retention levels without the need to give significant rate concessions.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Profitable underwriting continues to be our focus and is reflected in a combined ratio of 86.9% year-to-date and an annualized return on average equity of 18%. Year-over-year growth in book value per share was 22% at quarter end.” 

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	($ in thousands)						($ in thousands)
Gross premiums written	$	66,577		$	47,876		$	131,235		$	95,611
Net premiums written		62,296			45,392			123,067			91,171
Net premiums earned		55,310			34,259			106,958			62,693
Commission and fee income		8,159			10,016			16,064			22,280
Investment income, net of expenses		3,047			2,236			6,037			4,593
Realized gain (loss)		828			(1,283	)		881			(1,366	)
Total revenues		68,736			47,187			132,694			91,707
Net income (loss)		8,815			(2,842	)		13,785			(416	)
Common EPS - basic	$	0.42		$	(0.18	)	$	0.66		$	(0.03	)
Common EPS - diluted	$	0.42		$	(0.18	)	$	0.66		$	(0.03	)
Annualized return on average equity		22.0	%		-10.9	%		17.5	%		-0.8	%
Book value per share	$	7.91		$	6.47		$	7.91		$	6.47
Cash flow from operations	$	25,619		$	20,091		$	44,594		$	29,673

The increase in net income for both the quarter and year-to-date was largely due to the improved results of the Specialty Commercial Segment and additional investment income from a larger investment portfolio, in both cases primarily as the result of increased retention of premiums. In addition, the first half of 2006 was adversely impacted by $9.6 million of interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January, 2006 and subsequently converted to common stock during the second quarter of 2006. These increases in net income were partially offset by lower results from the Standard Commercial and Personal Segments during the second quarter and year-to-date 2007.

Increased retention of business produced by the Specialty Commercial Segment and increased production by the Personal Segment were the primary causes of the increase in revenue. Specialty Commercial Segment revenues increased $15.8 million and $28.0 million, or 92% and 84%, during the three months and six months ended June 30, 2007, respectively, as compared to the same periods of 2006. Revenues from the Personal Segment increased $2.8 million and $5.8 million, or 24% and 25%, during the three and six months ended June 30, 2007, respectively, due largely to geographic expansion into new states. The retention of business produced by the Standard Commercial Segment that was previously retained by third parties was the primary reason for that segment’s $0.7 million and $5.0 million increase in revenue for the three months and six months ended June 30, 2007, respectively. Realized gains of $0.8 million and $0.9 million for the three months and six months ended June 30, 2007, respectively, as compared to realized losses of $1.4 million recognized for both the same periods the prior year, were the primary reason for the increase in revenue for Corporate.

Net investment income for the three months ended June 30, 2007 was $3.0 million as compared to $2.2 million for the same period in 2006. Net investment income for the six months ended June 30, 2007 was $6.0 million as compared to $4.6 million for the same period in 2006. The increase reflected higher interest rates and greater average cash and invested assets attributable to increased retention of premiums, positive cash flow from operations and reinvestment of strong earnings for the past four quarters. Hallmark has no exposure in its investment portfolio to sub-prime mortgages and less than $5 thousand total exposure in mortgage backed securities.

Hallmark's net losses and loss adjustment expenses and its net loss ratio for the three months ended June 30, 2007 were $30.7 million and 55.5%, respectively, compared to $20.2 million and 59.0%, respectively, for the same period in 2006. Hallmark's net losses and loss adjustment expenses and its net loss ratio for the six months ended June 30, 2007 were $62.9 million and 58.8%, respectively, compared to $36.9 million and 58.8%, respectively, for the same period in 2006. Hallmark recognized $1.9 million of favorable development on prior years’ loss reserve estimates during the second quarter of 2007 as compared to $0.9 million of favorable development recognized during the same period in 2006. Hallmark recognized $2.1 million of favorable development on prior years’ loss reserve estimates during the first six months of 2007 as compared to $0.8 million of favorable development recognized during the same period in 2006. Hallmark's other operating costs and expenses and its expense ratio for the three months ended June 30, 2007 were $23.7 million and 27.9%, respectively, compared to $20.0 million and 26.8%, respectively, for the same period in 2006. Hallmark's other operating costs and expenses and its expense ratio for the six months ended June 30, 2007 were $46.4 million and 28.1%, respectively, compared to $41.1 million and 27.7%, respectively, for the same period in 2006.

Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana, Louisiana, Oklahoma, Arkansas and Washington; marketing, distributing, underwriting and servicing non-standard personal automobile insurance in Texas, New Mexico, Arizona, Oklahoma, Arkansas, Louisiana, Idaho, Oregon, Montana, Missouri and Washington; marketing, distributing, underwriting and servicing general aviation insurance in 47 states; and providing other insurance related services. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol "HALL."

Forward-looking statements in this Release are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company’s products and services in the marketplace, competitive factors, interest rate trends, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s periodic report filings with the Securities and Exchange Commission.

For further information, please contact:

Mark J. Morrison, President and Chief Executive Officer at 817.348.1600

www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands)

		June 30			December 31
		2007			2006
ASSETS		(unaudited)			(audited)
Investments:
Debt securities, available-for-sale, at market value	$	160,547		$	133,030
Equity securities, available-for-sale, at market value		30,192			4,580
Short-term investments, available-for-sale, at market value		64,086			25,275
Total investments		254,825			162,885
Cash and cash equivalents		41,792			81,474
Restricted cash and cash equivalents		10,042			24,569
Premiums receivable		54,569			44,644
Accounts receivable		12,441			13,223
Prepaid reinsurance premium		1,773			1,629
Reinsurance recoverable		6,505			5,930
Deferred policy acquisition costs		20,214			17,145
Excess of cost over fair value of net assets acquired		31,427			31,427
Intangible assets		24,927			26,074
Prepaid expenses		1,187			1,769
Other assets		10,639			5,184
Total assets	$	470,341		$	415,953
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable	$	35,130		$	35,763
Structured settlements		9,794			24,587
Unpaid losses and loss adjustment expenses		104,388			77,564
Unearned premiums		107,859			91,606
Unearned revenue		3,777			5,734
Reinsurance balances payable		1,271			1,060
Accrued agent profit sharing		1,256			1,784
Accrued ceding commission payable		7,059			3,956
Pension liability		2,895			3,126
Deferred federal income taxes		1,225			2,310
Current federal income tax payable		4,652			2,132
Accounts payable and other accrued expenses		26,768			15,600
Total liabilities		306,074			265,222
Commitments and Contingencies
Stockholders' equity:
Common stock, $.18 par value (authorized 33,333,333 shares in 2007 and 2006;
issued 20,776,080 shares in 2007 and 2006)		3,740			3,740
Additional paid in capital		118,085			117,932
Retained earnings		45,265			31,480
Accumulated other comprehensive loss		(2,746	)		(2,344	)
Treasury stock, at cost (7,828 shares in 2007 and 2006)		(77	)		(77	)
Total stockholders' equity		164,267			150,731
	$	470,341		$	415,953

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts) 

		Three Months Ended						Six Months Ended
		June 30						June 30
		2007			2006			2007			2006
Gross premiums written	$	66,577		$	47,876		$	131,235		$	95,611
Ceded premiums written		(4,281	)		(2,484	)		(8,168	)		(4,440	)
Net premiums written		62,296			45,392			123,067			91,171
Change in unearned premiums		(6,986	)		(11,133	)		(16,109	)		(28,478	)
Net premiums earned		55,310			34,259			106,958			62,693
Investment income, net of expenses		3,047			2,236			6,037			4,593
Realized gain (loss)		828			(1,283	)		881			(1,366	)
Finance charges		1,185			1,216			2,271			1,903
Commission and fees		8,159			10,016			16,064			22,280
Processing and service fees		203			727			475			1,584
Other income		4			16			8			20
Total revenues		68,736			47,187			132,694			91,707
Losses and loss adjustment expenses		30,712			20,199			62,897			36,889
Other operating expenses		23,723			20,027			46,424			41,053
Interest expense		796			1,662			1,582			3,247
Interest expense from amortization of discount on convertible notes		-			8,508			-			9,625
Amortization of intangible asset		573			573			1,146			1,146
Total expenses		55,804			50,969			112,049			91,960
Income (loss) before tax		12,932			(3,782	)		20,645			(253	)
Income tax expense (benefit)		4,117			(940	)		6,860			163
Net income (loss)	$	8,815		$	(2,842	)	$	13,785		$	(416	)
Common stockholders net income (loss) per share:
Basic	$	0.42		$	(0.18	)	$	0.66		$	(0.03	)
Diluted	$	0.42		$	(0.18	)	$	0.66		$	(0.03	)

	Three Months Ended June 30, 2007
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium		24,751			40,956			13,298			-			79,005
Gross premiums written		24,740			28,540			13,297			-			66,577
Ceded premiums written		(2,804	)		(1,477	)		-			-			(4,281	)
Net premiums written		21,936			27,063			13,297			-			62,296
Change in unearned premiums		(1,731	)		(5,474	)		219			-			(6,986	)
Net premiums earned		20,205			21,589			13,516			-			55,310
Total revenues		20,003			32,978			14,696			1,059			68,736
Losses and loss adjustment expenses		11,267			10,635			8,813			(3	)		30,712
Pre-tax income (loss)		2,664			9,441			2,176			(1,349	)		12,932
Net loss ratio (1)		55.8	%		49.3	%		65.2	%					55.5	%
Net expense ratio (1)		27.0	%		32.0	%		22.8	%					27.9	%
Net combined ratio (1)		82.8	%		81.3	%		88.0	%					83.4	%

	Three Months Ended June 30, 2006
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium		23,488			35,285			10,739			-			69,512
Gross premiums written		23,453			13,684			10,739			-			47,876
Ceded premiums written		(2,067	)		(417	)		-			-			(2,484	)
Net premiums written		21,386			13,267			10,739			-			45,392
Change in unearned premiums		(4,532	)		(6,258	)		(343	)		-			(11,133	)
Net premiums earned		16,854			7,009			10,396			-			34,259
Total revenues		19,264			17,146			11,890			(1,113	)		47,187
Losses and loss adjustment expenses		10,018			3,707			6,482			(8	)		20,199
Pre-tax income (loss)		2,773			3,439			2,393			(12,387	)		(3,782	)
Net loss ratio (1)		59.4	%		52.9	%		62.4	%					59.0	%
Net expense ratio (1)		28.9	%		22.4	%		26.2	%					26.8	%
Net combined ratio (1)		88.3	%		75.3	%		88.6	%					85.8	%

¹Net loss ratio is calculated as total net losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP. Net expense ratio is calculated as total underwriting expenses of our insurance company subsidiaries, including allocated overhead expenses and offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

	Six Months Ended June 30, 2007
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium		48,301			80,313			28,374			-			156,988
Gross premiums written		48,221			54,641			28,373			-			131,235
Ceded premiums written		(5,439	)		(2,729	)		-			-			(8,168	)
Net premiums written		42,782			51,912			28,373			-			123,067
Change in unearned premiums		(2,655	)		(11,230	)		(2,224	)					(16,109	)
Net premiums earned		40,127			40,682			26,149			-			106,958
Total revenues		41,770			61,076			28,469			1,379			132,694
Losses and loss adjustment expenses		24,108			21,716			17,080			(7	)		62,897
Pre-tax income (loss)		5,423			14,127			4,294			(3,199	)		20,645
Net loss ratio (1)		60.1	%		53.4	%		65.3	%					58.8	%
Net expense ratio (1)		27.5	%		31.8	%		23.2	%					28.1	%
Net combined ratio (1)		87.6	%		85.2	%		88.5	%					86.9	%

	Six Months Ended June 30, 2006
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium		47,152			74,290			21,838			-			143,280
Gross premiums written		46,917			26,856			21,838			-			95,611
Ceded premiums written		(3,852	)		(588	)		-			-			(4,440	)
Net premiums written		43,065			26,268			21,838			-			91,171
Change in unearned premiums		(11,899	)		(14,880	)		(1,699	)		-			(28,478	)
Net premiums earned		31,166			11,388			20,139			-			62,693
Total revenues		36,804			33,114			22,687			(898	)		91,707
Losses and loss adjustment expenses		17,818			6,519			12,568			(16	)		36,889
Pre-tax income (loss)		6,133			5,058			4,444			(15,888	)		(253	)
Net loss ratio (1)		57.2	%		57.3	%		62.4	%					58.8	%
Net expense ratio (1)		29.8	%		24.3	%		26.4	%					27.7	%
Net combined ratio (1)		87.0	%		81.6	%		88.8	%					86.5	%

¹Net loss ratio is calculated as total net losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP. Net expense ratio is calculated as total underwriting expenses of our insurance company subsidiaries, including allocated overhead expenses and offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.