Hallmark Financial Services 8K Announces Third Quarter 2010 Results | HALL 12 Nov 10

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES THIRD QUARTER 2010 RESULTS

FORT WORTH, Texas, (November 10, 2010) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported third quarter 2010 net earnings of $1.0 million compared to $4.2 million reported for the third quarter of 2009. Year to date, Hallmark reported net earnings of $6.9 million, compared to $15.3 million reported for the same period the prior year. On a fully diluted basis, third quarter 2010 net earnings were $0.05 per share as compared to $0.20 per share for the third quarter of 2009. Year to date, Hallmark reported net earnings of $0.34 per diluted share, compared to $0.73 reported for the same period the prior year. Total revenues were $76.2 million for the third quarter 2010, up 6% from the $71.9 million reported for the third quarter of 2009. Year to date total revenues were $227.7 million, up 7% from the $213.6 million reported for the same period the prior year.

Mark J. Morrison, President and Chief Executive Officer, said, “We missed our targeted combined ratio due to a combination of factors affecting incurred losses in each of our three largest business units. First, we experienced additional development in our Standard Commercial segment on the large property losses from two hailstorms in Montana. Second, even as our Specialty Commercial segment underwriters work hard to maintain underwriting and rate discipline in an ongoing soft market, we experienced increased volatility in our general liability, commercial automobile and aircraft hull lines of business. Finally, we increased our expected loss ratio for the current accident year in our Personal Lines business unit as continued geographic growth and product expansion drive a higher percentage of less seasoned business in the total mix of policies in force. These factors resulted in a 102.3% combined ratio for the quarter.”

Mr. Morrison continued, “We continue to find relative strength in the personal lines market as commercial lines continue to experience a difficult underwriting environment. Our strategy of operating in diversified specialty markets provides us the opportunity to continue to seek profitable growth through geographic and product expansion in our Personal Segment, while maintaining underwriting discipline in our Standard and Specialty Commercial segments until soft market conditions in those markets subside. We recognize that this strategy will cause our Personal Segment loss ratio to increase in the near term given the very short-tailed nature of this business. However, we expect this ratio to trend back to the historical levels as these new markets mature. This notwithstanding, underwriting profits, as opposed to premium growth or market share, remains the key component of our strategy.

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share is up 4% year to date to $11.71 and is up 9% compared to the year ago quarter. Total cash, cash equivalents and investments have increased 11% year to date to $492 million, or approximately $24 per share. Total investment securities have increased 23% year to date to $404 million, contributing to growth in investment income and helping to offset the effect of lower market yields. Investment income increased 16% to $4 million compared to the year ago quarter. Cash flow from operations is $29 million year to date. As of the quarter end, Hallmark continues to have a significant amount of cash and cash equivalents of $88 million.”

	Three Months Ended
	September 30,
	2010			2009			% Change
	($ in thousands, unaudited)
Produced premium (1)	$	80,427		$	70,797			14	%
Gross premiums written		82,199			74,013			11	%
Net premiums written		72,047			62,791			15	%
Net premiums earned		70,406			64,238			10	%
Investment income, net of expenses		4,036			3,467			16	%
Net realized gain on investments		311			597			-48	%
Total revenues		76,217			71,903			6	%
Net earnings (2)		1,016			4,214			-76	%
Net earnings per share - basic	$	0.05		$	0.20			-75	%
Net earnings per share - diluted	$	0.05		$	0.20			-75	%
Annualized return on average equity		1.7	%		7.9	%		-78	%
Book value per share	$	11.71		$	10.79			9	%
Cash flow from operations	$	11,485		$	16,913			-32	%

	Nine Months Ended
	September 30,
	2010			2009			% Change
	($ in thousands, unaudited)
Produced premium (1)	$	242,705		$	222,447			9	%
Gross premiums written		247,238			220,545			12	%
Net premiums written		217,975			203,831			7	%
Net premiums earned		207,369			185,987			11	%
Investment income, net of expenses		10,513			11,203			-6	%
Net realized gain on investments		5,757			1,116			416	%
Total revenues		227,727			213,557			7	%
Net earnings (2)		6,914			15,279			-55	%
Net earnings per share - basic	$	0.34		$	0.73			-53	%
Net earnings per share - diluted	$	0.34		$	0.73			-53	%
Return on average equity		4.0	%		10.3	%		-61	%
Book value per share	$	11.71		$	10.79			9	%
Cash flow from operations	$	28,934		$	45,695			-37	%

(1) Produced premium is a non-GAAP measurement that management uses to track total premium produced by Hallmark’s operations. Hallmark believes it is a useful tool for users of its financial statements to measure premium production whether retained by Hallmark’s insurance company subsidiaries or assumed by third party insurance carriers who pay it commission revenue. Produced premium excludes unaffiliated third party premium fronted by its Hallmark County Mutual Insurance Company subsidiary.

(2) Net earnings is net income attributable to Hallmark Financial Services, Inc. as reported in the consolidated statements of operations as determined in accordance with GAAP.

During the three and nine months ended September 30, 2010, Hallmark’s total revenues were $76.2 million and $227.7 million, representing a 6% and 7% increase, respectively, from the $71.9 million and $213.6 million in total revenues for the same periods of 2009. The increase in revenue for the three months ended September 30, 2010 was primarily attributable to increased production in its Personal Segment due to geographic expansion. The increase in revenue for the nine months ended September 30, 2010 was also attributable to increased production in the Personal Segment due to geographic expansion, as well as increased retention of business in the E&S Commercial business unit, increased earned premium in the Excess & Umbrella business unit and gains realized on the investment portfolio. These increases in revenue were partially offset by reduced earned premium in the Standard Commercial Segment due to reduced premium production as a result of continued deterioration of the general economic environment in its major markets.

Hallmark reported net income attributable to Hallmark of $1.0 million and $6.9 million for the three and nine months ended September 30, 2010, respectively, which was $3.2 million and $8.4 million lower than the $4.2 million and $15.3 million net income attributable to Hallmark reported for the same periods of 2009. On a diluted basis per share, net income was $0.05 and $0.34 per share for the three and nine months ended September 30, 2010, respectively, as compared to net income of $0.20 and $0.73 per share for the same periods in 2009. The decrease in net income for the three and nine months ending September 30, 2010 was primarily due to increased loss and loss adjustment expenses from higher current accident year loss estimates, as well as unfavorable prior year loss development of $0.5 million and $7.0 million recognized during the three and nine months ended September 30, 2010, respectively, as compared to $1.7 million and $3.5 million unfavorable development recognized for the three and nine months ended September 30, 2009. Partially offsetting the increased loss and loss adjustment expenses was the increase in revenue for the three and nine months ending September 30, 2010, as well as lower operating expenses due to lower production related expenses in the Standard Commercial, E&S Commercial and General Aviation business units and lower general and administrative costs in the Standard Commercial Segment as a result of ongoing cost reduction initiatives.

Hallmark's net loss ratio was 72.9% and 70.6%, respectively, for the three and nine months ended September 30, 2010 as compared to 63.2% and 62.1% for the same periods in 2009. Hallmark's net expense ratio was 29.4% and 29.5%, respectively, for the three and nine months ended September 30, 2010 as compared to 31.0% and 30.8% for the same periods in 2009. Hallmark’s net combined ratio was 102.3% and 100.1%, respectively, for the three and nine months ended September 30, 2010 as compared to 94.2% and 92.9% for the same periods in 2009.

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, except share amounts)

	September 30			December 31
	2010			2009
	(unaudited)
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (cost; $353,659 in 2010 and $287,108 in 2009)	$	360,238		$	291,876
Equity securities, available-for-sale, at fair value (cost; $34,366 in 2010 and $27,251 in 2009)		44,025			35,801

Total investments		404,263			327,677

Cash and cash equivalents		81,984			112,270
Restricted cash and cash equivalents		5,991			5,458
Premiums receivable		52,288			46,635
Accounts receivable		2,958			3,377
Receivable for securities		7			-
Ceded unearned premiums		15,520			12,997
Reinsurance recoverable		19,684			10,008
Deferred policy acquisition costs		23,181			20,792
Goodwill		41,080			41,080
Intangible assets, net		26,124			28,873
Federal income tax recoverable		3,120			-
Prepaid expenses		1,733			923
Other assets		15,437			18,779

Total assets	$	693,370		$	628,869

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Note payable	$	2,800		$	2,800
Subordinated debt securities		56,702			56,702
Reserves for unpaid losses and loss adjustment expenses		223,828			184,662
Unearned premiums		138,218			125,089
Unearned revenue		140			191
Reinsurance balances payable		1,141			3,281
Accrued agent profit sharing		1,772			1,790
Accrued ceding commission payable		4,232			8,600
Pension liability		2,367			2,628
Deferred federal income taxes, net		1,366			942
Federal income tax payable		-			1,266
Payable for securities		11,609			19
Accounts payable and other accrued expenses		12,209			13,258

Total liabilities		456,384			401,228

Redeemable non-controlling interest		1,288			1,124

Stockholders' equity:
Common stock, $0.18 par value (authorized 33,333,333 shares in 2010 and 2009; issued 20,872,831 in 2010 and 2009)		3,757			3,757
Additional paid-in capital		121,589			121,016
Retained earnings		105,396			98,482
Accumulated other comprehensive income		10,218			8,589
Treasury stock, at cost (748,662 shares in 2010 and 757,828 in 2009)		(5,262	)		(5,327	)

Total stockholders' equity		235,698			226,517

	$	693,370		$	628,869

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2010			2009			2010			2009

Gross premiums written	$	82,199		$	74,013		$	247,238		$	220,545
Ceded premiums written		(10,152	)		(11,222	)		(29,263	)		(16,714	)
Net premiums written		72,047			62,791			217,975			203,831
Change in unearned premiums		(1,641	)		1,447			(10,606	)		(17,844	)
Net premiums earned		70,406			64,238			207,369			185,987

Investment income, net of expenses		4,036			3,467			10,513			11,203
Net realized gains		311			597			5,757			1,116
Finance charges		1,833			1,525			5,247			4,324
Commission and fees		(392	)		2,018			(1,204	)		10,834
Other income		23			58			45			93

Total revenues		76,217			71,903			227,727			213,557

Losses and loss adjustment expenses		51,293			40,579			146,449			115,552
Operating expenses		21,602			23,428			65,956			71,056
Interest expense		1,151			1,147			3,447			3,456
Amortization of intangible assets		917			916			2,749			2,412

Total expenses		74,963			66,070			218,601			192,476

Income before tax		1,254			5,833			9,126			21,081
Income tax expense		205			1,585			2,142			5,766
Net income		1,049			4,248			6,984			15,315
Less: Net income attributable to non-controlling interest		33			34			70			36

Net income attributable to Hallmark Financial Services, Inc.	$	1,016		$	4,214		$	6,914		$	15,279

Net income per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic	$	0.05		$	0.20		$	0.34		$	0.73
Diluted	$	0.05		$	0.20		$	0.34		$	0.73

Hallmark Financial Services, Inc.

Consolidated Segment Data

($ in thousands, unaudited)

	Three Months Ended September 30, 2010
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	15,586		$	39,653		$	25,188		$	-		$	80,427

Gross premiums written		15,586			41,425			25,188			-			82,199
Ceded premiums written		(1,147	)		(8,915	)		(90	)		-			(10,152	)
Net premiums written		14,439			32,510			25,098			-			72,047
Change in unearned premiums		1,626			(1,368	)		(1,899	)		-			(1,641	)
Net premiums earned		16,065			31,142			23,199			-			70,406

Total revenues		17,211			32,892			25,418			696			76,217

Losses and loss adjustment expenses		12,183			20,788			18,322			-			51,293

Pre-tax income (loss), net of non-controlling interest		(234	)		2,515			743			(1,803	)		1,221

Net loss ratio (2)		75.8	%		66.8	%		79.0	%					72.9	%
Net expense ratio (2)		32.2	%		30.1	%		21.0	%					29.4	%
Net combined ratio (2)		108.0	%		96.9	%		100.0	%					102.3	%

	Three Months Ended September 30, 2009
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	17,309		$	36,064		$	17,424		$	-		$	70,797

Gross premiums written		17,309			39,280			17,424			-			74,013
Ceded premiums written		(1,144	)		(10,078	)		-			-			(11,222	)
Net premiums written		16,165			29,202			17,424			-			62,791
Change in unearned premiums		1,627			92			(272	)		-			1,447
Net premiums earned		17,792			29,294			17,152			-			64,238

Total revenues		19,569			32,346			18,735			1,253			71,903

Losses and loss adjustment expenses		11,425			17,641			11,513			-			40,579

Pre-tax income (loss), net of non-controlling interest		2,164			3,588			2,225			(2,178	)		5,799

Net loss ratio (2)		64.2	%		60.2	%		67.1	%					63.2	%
Net expense ratio (2)		32.8	%		29.8	%		22.4	%					31.0	%
Net combined ratio (2)		97.0	%		90.0	%		89.5	%					94.2	%

Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by Hallmark’s operations. Hallmark believes this is a useful tool for users of its financial statements to measure premium production whether retained by Hallmark’s insurance company subsidiaries or assumed by third party insurance carriers who pay it commission revenue. Produced premium excludes unaffiliated third party premium fronted by its Hallmark County Mutual Insurance Company subsidiary.

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 Hallmark changed the method in which the net expense ratio is calculated. The net expense ratio is now calculated for the business 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 business 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.

Hallmark Financial Services, Inc.

Consolidated Segment Data

($ in thousands, unaudited)

	Nine Months Ended September 30, 2010
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	52,487		$	115,286		$	74,932		$	-		$	242,705

Gross premiums written		52,475			119,831			74,932			-			247,238
Ceded premiums written		(3,092	)		(26,062	)		(109	)		-			(29,263	)
Net premiums written		49,383			93,769			74,823			-			217,975
Change in unearned premiums		200			(1,288	)		(9,518	)		-			(10,606	)
Net premiums earned		49,583			92,481			65,305			-			207,369

Total revenues		52,510			97,503			71,386			6,328			227,727

Losses and loss adjustment expenses		39,451			58,415			48,583			-			146,449

Pre-tax income (loss), net of non-controlling interest		(3,043	)		9,829			4,525			(2,255	)		9,056

Net loss ratio (2)		79.6	%		63.2	%		74.4	%					70.6	%
Net expense ratio (2)		31.9	%		29.2	%		21.7	%					29.5	%
Net combined ratio (2)		111.5	%		92.4	%		96.1	%					100.1	%

	Nine Months Ended September 30, 2009
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	56,881		$	110,598		$	54,968		$	-		$	222,447

Gross premiums written		56,881			108,696			54,968			-			220,545
Ceded premiums written		(3,331	)		(13,383	)		-			-			(16,714	)
Net premiums written		53,550			95,313			54,968			-			203,831
Change in unearned premiums		419			(13,692	)		(4,571	)		-			(17,844	)
Net premiums earned		53,969			81,621			50,397			-			185,987

Total revenues		57,783			97,601			54,971			3,202			213,557

Losses and loss adjustment expenses		33,890			48,422			33,240			-			115,552

Pre-tax income (loss), net of non-controlling interest		5,987			14,280			7,738			(6,960	)		21,045

Net loss ratio (2)		62.8	%		59.3	%		66.0	%					62.1	%
Net expense ratio (2)		32.4	%		30.0	%		21.4	%					30.8	%
Net combined ratio (2)		95.2	%		89.3	%		87.4	%					92.9	%

Hallmark Financial Services (HALL) 8-KAnnounces Third Quarter 2010 Results