Hallmark Financial Services (HALL) 8-K Announces Second Quarter 2009 Earnings Results

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES SECOND QUARTER 2009 EARNINGS RESULTS

FORT WORTH, Texas, (August 13, 2009) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported second quarter 2009 net earnings of $4.3 million compared to $7.4 million reported for second quarter 2008.  Year to date, Hallmark reported net earnings of $11.1 million, compared to $14.7 million for the same period the prior year.  On a fully diluted basis, net earnings were $0.20 per share and $0.53 per share for the second quarter and the first six months of 2009, as compared to $0.35 per share and $0.70 per share for the similar periods of 2008.  Total revenues were $70.7 million and $141.7 million for the second quarter and first six months of 2009, as compared to $72.0 million and $143.5 million for the similar periods of 2008.

Mark J. Morrison, President and Chief Executive Officer, said, “Our premium production increased 8% this quarter compared to a year ago due to our ongoing geographic and product expansion in our Personal Segment and the expansion of our Specialty Commercial Segment with the acquisition of Heath XS late last year. However, our adherence to underwriting discipline during the prolonged soft market conditions has contributed to a decrease in premium production in our Standard Commercial Segment and the other lines of business in our Specialty Commercial Segment. Although we continue to see aggressive pricing on larger commercial accounts from national standard lines carriers and an increased appetite for risks that have historically been written in the E&S market, the greatest factor affecting our premium production is the impact of the economic slowdown on our insureds.”

Mr. Morrison continued, “Our primary focus continues to be on underwriting profitability, as opposed to premium growth or market share.  We are achieving this goal by remaining disciplined in soft market conditions, as evidenced by our 91.7% combined ratio for the quarter.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Year-to-date book value per share increased 17% to $10.08 as of June 30, 2009.  This follows our flat 2008 growth in book value per share – a result that occurred despite producing a 91.6% combined ratio, due in large part to recognized impairment losses on certain securities that have since recovered in value.  Strong investment performance and solid underwriting profits during the first six months of 2009 generated an annualized return on average equity of 11%, and cash flow from operations of $29 million.”

	Three Months Ended
	June 30,
	2009			2008			% Change
	($ in thousands)
Gross premiums written	$	75,053		$	63,115			19	%
Net premiums written		71,793			61,109			17	%
Net premiums earned		62,319			59,764			4	%
Commission and fee income		2,627			6,669			-61	%
Investment income, net of expenses		3,467			3,957			-12	%
Gain on investments		867			232			274	%
Total revenues		70,744			71,984			-2	%
Net earnings (1)		4,275			7,410			-42	%
Net earnings per share - basic	$	0.20		$	0.36			-44	%
Net earnings per share - diluted	$	0.20		$	0.35			-43	%
Annualized return on average equity		8.5	%		15.7	%		-46	%
Book value per share	$	10.08		$	9.24			9	%
Cash flow from operations	$	19,931		$	17,361			15	%

	Six Months Ended
	June 30,
	2009			2008			% Change
	($ in thousands)
Gross premiums written	$	146,532		$	127,352			15	%
Net premiums written		141,040			123,342			14	%
Net premiums earned		121,749			119,008			2	%
Commission and fee income		8,816			13,153			-33	%
Investment income, net of expenses		7,736			7,582			2	%
Gain on investments		519			1,091			-52	%
Total revenues		141,654			143,505			-1	%
Net earnings (1)		11,065			14,675			-25	%
Net earnings per share - basic	$	0.53		$	0.71			-25	%
Net earnings per share - diluted	$	0.53		$	0.70			-24	%
Annualized return on average equity		11.4	%		15.8	%		-28	%
Book value per share	$	10.08		$	9.24			9	%
Cash flow from operations	$	28,782		$	29,749			-3	%

(1) Net earnings is net income attributable to Hallmark Financial Services, Inc. as reported in our consolidated statements of operations.

During the three and six months ended June 30, 2009, our total revenues were $70.7 million and $141.7 million, representing a 2% and 1% decrease from the $72.0 million and $143.5 million in total revenues for the same periods of 2008.  This decrease in revenue was primarily attributable to lower commission and fee income in our Standard Commercial and Specialty Commercial Segments due to  profit sharing commission adjustments related to adverse loss development on prior accident years as well as a shift in our Specialty Commercial Segment from a third party agency structure to an insurance underwriting structure. This decrease in revenue was partially offset by increased earned premium due to increased retention of business in our Specialty Commercial Segment, the acquisition of our Heath XS Operating Unit in the third quarter of 2008 and increased production by our Personal Lines Segment, partially offset by reduced earned premium in our Standard Commercial Segment due to the deterioration of the general economic environment in our major markets.

We reported net earnings of $4.3 million and $11.1 million for the three and six months ended June 30, 2009, which were $3.1 million and $3.6 million lower than the $7.4 million and $14.7 million reported for the same periods in 2008.  On a diluted basis per share, net earnings were $0.20 and $0.53 per share for the three months and six months ended June 30, 2009, as compared to $0.35 and $0.70 per share for the same periods in 2008.   The decrease in net earnings for the three and six months ended June 30, 2009 was primarily attributable to decreased revenue as discussed above and higher loss and loss adjustment expense due mostly to unfavorable prior year loss development of $1.8 million recognized in both the three months and six months ending June 30, 2009 as compared to favorable development of $0.3 million and $1.8 million recognized during the three months and six months ending June 30, 2008.

Hallmark's net loss ratio was 61.2% and 61.6% for the three and six months ended June 30, 2009 as compared to 60.3% and 60.1% for the same periods of 2008.  Hallmark's net expense ratio was 30.5% and 30.6% for the three and six months ended June 30, 2009 as compared to 31.0% and 30.7% for the same periods of 2008.  Hallmark maintained profitable net combined ratios of 91.7% and 92.2% for the three and six months ended June 30, 2009 as compared to 91.3% and 90.8% for the same periods in the prior year.

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. Hallmark’s business involves marketing, distributing, underwriting and servicing commercial insurance, personal insurance and general aviation insurance, as well as providing other insurance related services.  The Company is headquartered in Fort Worth, Texas and its common stock is 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 Reform 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, general economic conditions, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s 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
ASSETS	2009			2008
	(unaudited)
Investments:
Debt securities, available-for-sale, at fair value	$	274,677		$	268,513
Equity securities, available-for-sale, at fair value		38,718			25,003
Total investments		313,395			293,516
Cash and cash equivalents		83,150			59,134
Restricted cash and cash equivalents		9,848			8,033
Premiums receivable		52,598			44,032
Accounts receivable		3,752			4,531
Receivable for securities		71			1,031
Prepaid reinsurance premiums		6,467			1,349
Reinsurance recoverable		14,072			8,218
Deferred policy acquisition costs		23,432			19,524
Excess of cost over fair value of net assets acquired		41,080			41,080
Intangible assets, net		30,705			28,969
Current federal income tax recoverable		2,169			696
Deferred federal income taxes		3,254			6,696
Prepaid expenses		993			1,007
Other assets		18,498			20,582
Total assets	$	603,484		$	538,398
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable	$	59,502		$	60,919
Reserves for unpaid losses and loss adjustment expenses		180,366			156,363
Unearned premiums		126,595			102,192
Unearned revenue		605			2,037
Accrued agent profit sharing		1,318			2,151
Accrued ceding commission payable		8,600			8,605
Pension liability		4,388			4,309
Payable for securities		4,246			3,606
Accounts payable and other accrued expenses		6,749			18,067
Total liabilities		392,369			358,249
Commitments and Contingencies
Redeemable non-controlling interest		891			737
Stockholders' equity:
Common stock, $.18 par value (authorized 33,333,333 shares in 2009 and 2008;
issued 20,871,498 shares in 2009 and 20,841,782 shares in 2008)		3,757			3,751
Capital in excess of par value		120,736			119,928
Retained earnings		84,972			72,242
Accumulated other comprehensive income (loss)		836			(16,432	)
Treasury stock, at cost (7,828 shares in 2009 and 2008)		(77	)		(77	)
Total stockholders' equity		210,224			179,412
	$	603,484		$	538,398

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
	2009			2008			2009			2008
Gross premiums written	$	75,053		$	63,115		$	146,532		$	127,352
Ceded premiums written		(3,260	)		(2,006	)		(5,492	)		(4,010	)
Net premiums written		71,793			61,109			141,040			123,342
Change in unearned premiums		(9,474	)		(1,345	)		(19,291	)		(4,334	)
Net premiums earned		62,319			59,764			121,749			119,008
Investment income, net of expenses		3,467			3,957			7,736			7,582
Net realized gains		867			232			519			1,091
Finance charges		1,449			1,323			2,799			2,587
Commission and fees		2,627			6,669			8,816			13,153
Processing and service fees		11			36			26			78
Other income		4			3			9			6
Total revenues		70,744			71,984			141,654			143,505
Losses and loss adjustment expenses		38,131			36,029			74,973			71,533
Other operating expenses		23,878			23,608			47,628			47,073
Interest expense		1,150			1,186			2,309			2,371
Amortization of intangible assets		782			573			1,496			1,146
Total expenses		63,941			61,396			126,406			122,123
Income before tax		6,803			10,588			15,248			21,382
Income tax expense		2,519			3,178			4,181			6,707
Net income		4,284			7,410			11,067			14,675
Less: Net income attributable to
non-controlling  interest		9			-			2			-
Net income attributable to Hallmark Financial Services, Inc.	$	4,275		$	7,410		$	11,065		$	14,675
Net income per share attributable to Hallmark Financial
Services, Inc. common stockholders:
Basic	$	0.20		$	0.36		$	0.53		$	0.71
Diluted	$	0.20		$	0.35		$	0.53		$	0.70

Hallmark Financial Services, Inc.

Consolidated Segment Data

	Three Months Ended June 30, 2009
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium (1)	$	20,425		$	40,252		$	16,918		$	-		$	77,595
Gross premiums written		20,425			37,710			16,918			-			75,053
Ceded premiums written		(1,084	)		(2,176	)		-			-			(3,260	)
Net premiums written		19,341			35,534			16,918			-			71,793
Change in unearned premiums		(1,614	)		(8,158	)		298			-			(9,474	)
Net premiums earned		17,727			27,376			17,216			-			62,319
Total revenues		18,194			32,430			18,701			1,419			70,744
Losses and loss adjustment expenses		11,119			15,848			11,164			-			38,131
Pre-tax  income (loss), net of
non-controlling interest		1,247			5,010			2,894			(2,357	)		6,794
Net loss ratio (2)		62.7	%		57.9	%		64.8	%					61.2	%
Net expense ratio (2)		32.1	%		30.2	%		20.7	%					30.5	%
Net combined ratio (2)		94.8	%		88.1	%		85.5	%					91.7	%

	Three Months Ended June 30, 2008
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium (1)	$	21,624		$	35,986		$	14,153		$	-		$	71,763
Gross premiums written		21,624			27,338			14,153			-			63,115
Ceded premiums written		(1,207	)		(799	)		-			-			(2,006	)
Net premiums written		20,417			26,539			14,153			-			61,109
Change in unearned premiums		36			(2,395	)		1,014			-			(1,345	)
Net premiums earned		20,453			24,144			15,167			-			59,764
Total revenues		22,332			32,134			16,498			1,020			71,984
Losses and loss adjustment expenses		11,669			13,976			10,384			-			36,029
Pre-tax  income (loss)		4,159			6,411			1,913			(1,895	)		10,588
Net loss ratio (2)		57.1	%		57.9	%		68.5	%					60.3	%
Net expense ratio (2)		31.2	%		30.3	%		21.8	%					31.0	%
Net combined ratio (2)		88.3	%		88.2	%		90.3	%					91.3	%

1 Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by our operations.  We believe this is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or assumed by third party insurance carriers who pay us commission revenue.

2 The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. During the second quarter of 2009 we changed the method in which the net expense ratio is calculated.  The net expense ratio is now calculated for our operating units that retain 100% of produced premium, as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP.  For the operating units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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.  All prior period ratios have been restated to conform to the new method, resulting in an increase to the consolidated net expense ratio of 1.9% for the three months ended June 30, 2008.

Hallmark Financial Services, Inc.

Consolidated Segment Data

	Six Months Ended June 30, 2009
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium (1)	$	39,572		$	74,534		$	37,544		$	-		$	151,650
Gross premiums written		39,572			69,416			37,544			-			146,532
Ceded premiums written		(2,187	)		(3,305	)		-			-			(5,492	)
Net premiums written		37,385			66,111			37,544			-			141,040
Change in unearned premiums		(1,208	)		(13,784	)		(4,299	)					(19,291	)
Net premiums earned		36,177			52,327			33,245			-			121,749
Total revenues		38,214			65,255			36,236			1,949			141,654
Losses and loss adjustment expenses		22,465			30,781			21,727			-			74,973
Pre-tax  income (loss), net of
non-controlling interest		3,823			10,692			5,513			(4,782	)		15,246
Net loss ratio (2)		62.1	%		58.8	%		65.4	%					61.6	%
Net expense ratio (2)		32.2	%		30.1	%		20.9	%					30.6	%
Net combined ratio (2)		94.3	%		88.9	%		86.3	%					92.2	%

	Six Months Ended June 30, 2008
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium (1)	$	43,373		$	68,006		$	31,880		$	-		$	143,259
Gross premiums written		43,373			52,099			31,880			-			127,352
Ceded premiums written		(2,394	)		(1,616	)		-			-			(4,010	)
Net premiums written		40,979			50,483			31,880			-			123,342
Change in unearned premiums		440			(2,550	)		(2,224	)		-			(4,334	)
Net premiums earned		41,419			47,933			29,656			-			119,008
Total revenues		44,338			64,372			32,224			2,571			143,505
Losses and loss adjustment expenses		22,979			28,979			19,575			-			71,533
Pre-tax income (loss)		8,217			11,855			4,503			(3,193	)		21,382
Net loss ratio (2)		55.5	%		60.5	%		66.0	%					60.1	%
Net expense ratio (2)		31.1	%		30.5	%		21.6	%					30.7	%
Net combined ratio (2)		86.6	%		91.0	%		87.6	%					90.8	%

1 Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by our operations.  We believe this is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or assumed by third party insurance carriers who pay us commission revenue.

2 The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. During the second quarter of 2009 we changed the method in which the net expense ratio is calculated.  The net expense ratio is now calculated for our operating units that retain 100% of produced premium, as total operating expenses for the unit offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP.  For the operating units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit 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.  All prior period ratios have been restated to conform to the new method, resulting in an increase to the consolidated net expense ratio of 1.7% for the six months ended June 30, 2008