Hallmark Financial Services (HALL) 8-K Announces Fourth Quarter and Year 2007 Earnings Results

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES FOURTH QUARTER AND YEAR 2007 EARNINGS RESULTS

FORT WORTH, Texas, (March 17, 2008) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported a record annual net income of $27.4 million for fiscal 2007 as compared to $9.2 million during fiscal 2006. On a fully diluted basis, net income was $1.32 per share for fiscal 2007 as compared to $0.53 per share for fiscal 2006. Total revenues for fiscal 2007 were $274.5 million, representing an approximately 35% increase from the $202.7 million reported for fiscal 2006.

Hallmark also reported quarterly net income of $7.1 million for the three months ended December 31, 2007, as compared to $4.7 million during the fourth quarter of 2006. On a fully diluted basis, net income was $0.34 per share for the three months ended December 31, 2007, as compared to $0.23 per share for the same period in 2006. During the quarter ended December 31, 2007, Hallmark reported total revenues of $69.6 million, representing an approximately 27% increase over the $54.7 million in total revenues for the fourth quarter of 2006.

Mark J. Morrison, President and Chief Executive Officer, said, “I am pleased to report another landmark year of record earnings for Hallmark. The increase in our revenue for 2007 was the result of the continued execution of our plan to increase the retention of the business we produce despite softening market conditions across the property/casualty insurance industry. Aggregate gross premiums produced by our operating units grew by approximately 2% during 2007. This growth was largely a result of controlled geographic expansion into states where business is less price sensitive. Our underwriting margins continue to be strong in each of our operating units as we have maintained favorable policy retention levels without significant rate concessions.”

“Although we continue to see significant rate competition on larger commercial accounts coming primarily from large regional and national standard lines companies, these accounts do not make up the core of our commercial lines of business. However, premiums from renewals of our smaller commercial construction accounts have declined during the last half of 2007, as the general economic slow-down has caused a contraction in revenues and payrolls for this sector. Our Personal Segment continues to experience strong growth associated with geographic expansion and the focus on entering less competitive pricing markets. We believe that our underwriting discipline and bottom-line focus in this softening rate environment will enable us to achieve results superior to the average of our peers in our specialty and niche markets of the property/casualty insurance segment.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Our continued underwriting discipline and bottom-line focus is reflected in our net combined ratio of 87.4% for 2007, a return on average equity of 17% and strong cash flow from operations of over $80 million generated for the year. Our solid investment performance contributed to book value per share growth of approximately 19% for the year. Our total return approach has served us well this year to preserve and grow book value while avoiding the issues in sub-prime securities and the related turmoil in the credit markets. We continue to hold a significant position in cash and short-term securities in our portfolio which may be deployed in long term investments should the opportunity arise in the current markets.” 

	Three Months Ended
	December 31,
	2007			2006			% Change
	($ in thousands)
Gross premiums written	$	55,933		$	60,227			-7	%
Net premiums written		53,551			56,752			-6	%
Net premiums earned		58,920			47,174			25	%
Commission and fee income		4,710			3,120			51	%
Investment income, net of expenses		3,369			2,956			14	%
Gain on investments		1,287			35			NM
Total revenues		69,586			54,669			27	%
Net income		7,062			4,730			49	%
Common EPS - basic	$	0.34		$	0.23			48	%
Common EPS - diluted	$	0.34		$	0.23			48	%
Annualized return on average equity		16.1	%		13.9	%		16	%
Book value per share	$	8.63		$	7.26			19	%
Cash flow from operations	$	18,570		$	30,466			-39	%

	Twelve Months Ended
	December 31,
	2007			2006			% Change
	($ in thousands)
Gross premiums written	$	249,472		$	213,945			17	%
Net premiums written		238,143			202,928			17	%
Net premiums earned		225,303			152,061			48	%
Commission and fee income		28,054			35,343			-21	%
Investment income, net of expenses		13,180			10,461			26	%
Gain (loss) on investments		2,586			(1,466	)		NM
Total revenues		274,498			202,741			35	%
Net income		27,429			9,191			198	%
Common EPS - basic	$	1.32		$	0.53			149	%
Common EPS - diluted	$	1.32		$	0.53			149	%
Return on average equity		16.6	%		7.8	%		113	%
Book value per share	$	8.63		$	7.26			19	%
Cash flow from operations	$	80,337		$	75,962			6	%

The increases in net income for both the quarter and year were favorably impacted by increased revenue, including additional investment income from a larger investment portfolio, primarily resulting from an increased retention of premiums. Prior year favorable loss reserve development of $3.4 million and $6.4 million during the fourth quarter and fiscal 2007, respectively, as compared to $0.3 million of adverse loss reserve development and $1.2 million of favorable loss reserve development during the same respective periods of fiscal 2006, also contributed to the increase in annual net income. In addition, fiscal 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.

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Increased retention of business produced by the Specialty Commercial Segment and Standard Commercial Segment, as well as increased production by the Personal Segment, were the primary causes of the increases in revenue for the quarter and year. Specialty Commercial Segment revenues increased $7.7 million and $45.6 million, or 31% and 56%, during the fourth quarter and fiscal 2007, respectively, as compared to the same periods of 2006. Revenues from the Personal Segment increased $2.6 million and $11.3 million, or 21% and 24%, during the fourth quarter and fiscal 2007, respectively, due largely to geographic expansion into new states. Increased retention of business was the primary reason for the Standard Commercial Segment’s $3.3 million and $10.8 million, or 19% and 14%, increases in revenue for the fourth quarter and fiscal 2007, respectively. Investment gains of $1.3 million and $2.6 million for the fourth quarter and fiscal 2007, respectively, as compared to investment gains of $35 thousand for the fourth quarter 2006 and investment losses of $1.5 million for fiscal 2006, were the primary reason for the increase in revenue for Corporate.

Hallmark's net loss ratios were 56.5% and 59.0% for the fourth quarter and fiscal 2007, respectively, compared to 56.5% and 57.3% for the same respective periods in 2006. Hallmark's net expense ratios were 29.9% and 28.4% for the fourth quarter and fiscal 2007, respectively, compared to 28.1% and 28.4% for the same respective periods in 2006. As a result, Hallmark maintained strong net combined ratios of 86.4% and 87.4% for the fourth quarter and fiscal 2007, respectively, as compared to 84.6% and 85.7% for the same respective periods 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, personal insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our general aviation business which is written on a national basis. 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

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HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
(In thousands)
ASSETS	2007			2006
Investments:
Debt securities, available-for-sale, at fair value	$	248,069		$	133,030
Equity securities, available-for-sale, at fair value		16,868			4,580
Short-term investments, available-for-sale, at fair value		2,625			25,275
Total investments		267,562			162,885
Cash and cash equivalents		145,884			81,474
Restricted cash and cash equivalents		16,043			24,569
Prepaid reinsurance premiums		274			1,629
Premiums receivable		46,026			44,644
Accounts receivable		5,219			7,852
Receivable for securities		27,395			5,371
Reinsurance recoverable		4,952			5,930
Deferred policy acquisition costs		19,757			17,145
Excess of cost over fair value of net assets acquired		30,025			31,427
Intangible assets		23,781			26,074
Deferred federal income taxes		275			-
Prepaid expenses		1,240			1,769
Other assets		17,881			5,184
	$	606,314		$	415,953
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable	$	60,814		$	35,763
Structured settlements		10,000			24,587
Reserves for unpaid losses and loss adjustment expenses		125,338			77,564
Unearned premiums		102,998			91,606
Unearned revenue		2,949			5,734
Reinsurance balances payable		-			1,060
Accrued agent profit sharing		2,844			1,784
Accrued ceding commission payable		12,099			3,956
Pension liability		1,669			3,126
Deferred federal income taxes		-			2,310
Payable for securities		91,401			-
Current federal income tax payable		630			2,132
Accounts payable and other accrued expenses		16,385			15,600
		427,127			265,222
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
Capital in excess of par value		118,459			117,932
Retained earnings		58,909			31,480
Accumulated other comprehensive loss		(1,844	)		(2,344	)
Treasury stock, 7,828 shares in 2007 and 2006, at cost		(77	)		(77	)
Total stockholders’ equity		179,187			150,731
	$	606,314		$	415,953

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

($ in thousands, except per share amounts)

	Three Months Ended						Twelve Months Ended
	December 31						December 31
	2007			2006			2007			2006
Gross premiums written	$	55,933		$	60,227		$	249,472		$	213,945
Ceded premiums written		(2,382	)		(3,475	)		(11,329	)		(11,017	)
Net premiums written		53,551			56,752			238,143			202,928
Change in unearned premiums		5,369			(9,578	)		(12,840	)		(50,867	)
Net premiums earned		58,920			47,174			225,303			152,061
Investment income, net of expenses		3,369			2,956			13,180			10,461
Gain (loss) on investments		1,287			35			2,586			(1,466	)
Finance charges		1,225			1,043			4,702			3,983
Commission and fees		4,710			3,120			28,054			35,343
Processing and service fees		71			336			657			2,330
Other income		4			5			16			29
Total revenues		69,586			54,669			274,498			202,741
Losses and loss adjustment expenses		33,298			26,639			132,918			87,117
Other operating expenses		23,761			19,486			94,272			83,583
Interest expense		1,306			1,024			3,914			5,798
Interest expense from amortization of discount on convertible notes		-			-			-			9,625
Amortization of intangible asset		574			574			2,293			2,293
Total expenses		58,939			47,723			233,397			188,416
Income before tax		10,647			6,946			41,101			14,325
Income tax expense		3,585			2,216			13,672			5,134
Net income	$	7,062		$	4,730		$	27,429		$	9,191
Common stockholders net income per share:
Basic	$	0.34		$	0.23		$	1.32		$	0.53
Diluted	$	0.34		$	0.23		$	1.32		$	0.53

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	Three Months Ended December 31, 2007
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium		20,739			32,771			12,688			-			66,198
Gross premiums written		20,729			22,516			12,688			-			55,933
Ceded premiums written		(1,405	)		(977	)		-			-			(2,382	)
Net premiums written		19,324			21,539			12,688			-			53,551
Change in unearned premiums		2,126			2,511			732			-			5,369
Net premiums earned		21,450			24,050			13,420			-			58,920
Total revenues		20,839			32,419			14,614			1,714			69,586
Losses and loss adjustment expenses		10,859			13,086			9,357			(4	)		33,298
Pre-tax income		3,105			7,566			1,375			(1,399	)		10,647
Net loss ratio (1)		50.6	%		54.4	%		69.7	%					56.5	%
Net expense ratio (1)		33.1	%		30.7	%		23.6	%					29.9	%
Net combined ratio (1)		83.7	%		85.1	%		93.3	%					86.4	%

	Three Months Ended December 31, 2006
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium		22,322			40,880			11,019			-			74,221
Gross premiums written		22,186			27,022			11,019			-			60,227
Ceded premiums written		(2,728	)		(747	)		-			-			(3,475	)
Net premiums written		19,458			26,275			11,019			-			56,752
Change in unearned premiums		250			(9,767	)		(61	)		-			(9,578	)
Net premiums earned		19,708			16,508			10,958			-			47,174
Total revenues		17,557			24,686			12,054			372			54,669
Losses and loss adjustment expenses		11,634			7,939			7,074			(8	)		26,639
Pre-tax income		512			6,384			2,000			(1,950	)		6,946
Net loss ratio (1)		59.0	%		48.1	%		64.5	%					56.5	%
Net expense ratio (1)		29.3	%		30.5	%		22.6	%					28.1	%
Net combined ratio (1)		88.3	%		78.6	%		87.1	%					84.6	%

¹ Net 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.

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	Twelve Months Ended December 31, 2007
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium		90,985			151,003			55,916			-			297,904
Gross premiums written		90,868			102,688			55,916			-			249,472
Ceded premiums written		(6,646	)		(4,683	)		-			-			(11,329	)
Net premiums written		84,222			98,005			55,916			-			238,143
Change in unearned premiums		(840	)		(9,589	)		(2,411	)					(12,840	)
Net premiums earned		83,382			88,416			53,505			-			225,303
Total revenues		86,139			126,255			58,268			3,836			274,498
Losses and loss adjustment expenses		48,480			48,484			35,969			(15	)		132,918
Pre-tax income		12,042			28,043			7,523			(6,507	)		41,101
Net loss ratio (1)		58.1	%		54.8	%		67.2	%					59.0	%
Net expense ratio (1)		28.9	%		31.2	%		23.2	%					28.4	%
Net combined ratio (1)		87.0	%		86.0	%		90.4	%					87.4	%

	Twelve Months Ended December 31, 2006
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium		91,679			156,490			45,135			-			293,304
Gross premiums written		91,070			77,740			45,135			-			213,945
Ceded premiums written		(8,850	)		(2,167	)		-			-			(11,017	)
Net premiums written		82,220			75,573			45,135			-			202,928
Change in unearned premiums		(12,146	)		(35,903	)		(2,818	)		-			(50,867	)
Net premiums earned		70,074			39,670			42,317			-			152,061
Total revenues		75,325			80,689			46,998			(271	)		202,741
Losses and loss adjustment expenses		38,799			21,908			26,443			(33	)		87,117
Pre-tax income		11,757			14,309			8,760			(20,501	)		14,325
Net loss ratio (1)		55.4	%		55.2	%		62.5	%					57.3	%
Net expense ratio (1)		29.4	%		30.5	%		24.9	%					28.4	%
Net combined ratio (1)		84.8	%		85.7	%		87.4	%					85.7	%

¹ Net 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.

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