HALLMARK FINANCIAL SERVICES INC - FORM 8-K - EX-99.1

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8-K - HALLMARK FINANCIAL SERVICES INC	v214717_8k.htm

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES FOURTH QUARTER AND FISCAL YEAR 2010 EARNINGS RESULTS

FORT WORTH, Texas, (March 14, 2011) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported fourth quarter 2010 net earnings of $0.4 million compared to $9.3 million reported for the fourth quarter of 2009. Hallmark reported net earnings of $7.3 million for fiscal year 2010, compared to $24.6 million reported for fiscal year 2009. On a fully diluted basis, net earnings were $0.02 per share and $0.36 per share, respectively, for the fourth quarter and fiscal year 2010, as compared to net earnings of $0.46 per share and $1.19 per share, respectively, for the fourth quarter and fiscal year 2009. Total revenues were $79.3 million and $307.1 million for the fourth quarter and fiscal year 2010, up 8% and 7%, respectively, from the $73.5 million and $287.0 million reported for the fourth quarter and fiscal year 2009.

Mark J. Morrison, President and Chief Executive Officer, said, “Fiscal 2010 proved to be a year of challenges and opportunities for Hallmark. We missed our combined ratio target for the year due to a combination of factors affecting incurred losses in each of our three largest business units. Increased volatility of large losses and weather related claims negatively affected the results of our Standard Commercial and E&S Commercial business units. We also experienced uncharacteristically poor results in our Personal Lines business unit, as higher than expected growth from geographic and product expansion drove a greater proportion of less seasoned business into the total mix of policies in force. Compounding this situation was an extraordinary level of fraudulent claims from business written in the recent expansion state of Florida. In order to bring Personal Lines results back to acceptable levels, we are actively managing our exposure in less seasoned states through rate increases and aggressive agency plant management. We expect these efforts to bring our Personal Lines results back in line with our expectations by the end of 2011.”

Mr. Morrison continued, “During the first week of February this year, most of the country was impacted by severe winter storms. We presently estimate our losses from these storms to be approximately $3 million, net of approximately $1 million in reinsurance. These events will be reflected in our first quarter 2011 results. Despite these challenges, Hallmark is continuing to build opportunities for the future. With the close of our acquisition of Hallmark National Insurance Company at the end of 2010 and the renewal rights to its non-standard personal automobile business, we have a pipeline of seasoned business to fuel growth in our Personal Lines business unit for 2011 and beyond. Additionally in 2010, our E&S Commercial business unit launched a nationwide non-standard medical malpractice insurance program with the hiring of an experienced Chicago-based underwriting team. This program produced $1.6 million of written premium during 2010.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share grew 4% during fiscal 2010 to $11.72. Total cash, cash equivalents and investments grew $53 million, or 12%, during fiscal 2010 to $498 million, or approximately $25 per share. Total investment securities increased 32% during the year to $432 million, contributing to growth in investment income and helping to offset the effect of lower market yields. Fourth quarter 2010 investment income increased 16% to $4 million compared to the prior year quarter. Cash flow from operations was $36 million for the year. As of year-end, Hallmark continued to have significant cash and cash equivalents of $66 million.”

	Three Months Ended
	December 31,
	2010			2009			% Change
	($ in thousands, unaudited)
Produced premium (1)	$	72,152		$	66,003			9	%
Gross premiums written		73,735			67,013			10	%
Net premiums written		63,666			57,909			10	%
Net premiums earned		70,902			65,085			9	%
Investment income, net of expenses		4,336			3,744			16	%
Net realized gain on investments		2,645			1,916			38	%
Total revenues		79,333			73,482			8	%
Net earnings (2)		420			9,296			-95	%
Net earnings per share - basic	$	0.02		$	0.46			-96	%
Net earnings per share - diluted	$	0.02		$	0.46			-96	%
Annualized return on average equity		0.7	%		16.8	%		-96	%
Book value per share	$	11.72		$	11.26			4	%
Cash flow from operations	$	7,426		$	16,003			-54	%

	Fiscal Year Ended
	December 31,
	2010			2009			% Change
	($ in thousands, unaudited)
Produced premium (1)	$	314,857		$	288,450			9	%
Gross premiums written		320,973			287,558			12	%
Net premiums written		281,641			261,740			8	%
Net premiums earned		278,271			251,072			11	%
Investment income, net of expenses		14,849			14,947			-1	%
Net realized gain on investments		8,402			3,032			177	%
Total revenues		307,060			287,039			7	%
Net earnings (2)		7,334			24,575			-70	%
Net earnings per share - basic	$	0.36		$	1.19			-70	%
Net earnings per share - diluted	$	0.36		$	1.19			-70	%
Return on average equity		3.2	%		12.1	%		-74	%
Book value per share	$	11.72		$	11.26			4	%
Cash flow from operations	$	36,360		$	61,698			-41	%

(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 months and year ended December 31, 2010, Hallmark’s total revenues were $79.3 million and $307.1 million, representing an 8% and 7% increase, respectively, from the $73.5 million and $287.0 million in total revenues for the same periods of 2009. The increase in revenue for the three months ended December 31, 2010 was primarily attributable to increased production in its Personal Segment due to geographic expansion. The increase in revenue for the year ended December 31, 2010 was also attributable to increased production in the Personal Segment due to geographic expansion, as well as increased retention of business in the Specialty Commercial Segment 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. Also partially offsetting the increase in revenue were lower commission and fees in our Specialty Commercial Segment due primarily to the shift from a third party agency structure to an insurance underwriting structure.

Hallmark reported net earnings of $0.4 million and $7.3 million for the three months and year ended December 31, 2010, respectively, which were $8.9 million and $17.3 million lower than the $9.3 million and $24.6 million net earnings reported for the same periods of 2009. On a fully diluted basis, net earnings were $0.02 and $0.36 per share for the three months and year ended December 31, 2010, respectively, as compared to net earnings of $0.46 and $1.19 per share for the same periods in 2009. The decrease in net income for the three months and year ending December 31, 2010 was primarily due to increased current accident year loss and loss adjustment expenses primarily caused by increased volatility of large losses, greater than anticipated Personal Segment expansion into Florida and weather related losses. Unfavorable prior year loss development of $2.1 million and $9.2 million recognized during the three months and year ended December 31, 2010, respectively, as compared to favorable development of $1.8 million and unfavorable development of $1.6 million recognized for the three months and year ended December 31, 2009 also contributed to the decrease in net income. Partially offsetting the increased loss and loss adjustment expenses was the increase in revenue for the three months and year ending December 31, 2010, as well as lower operating expenses due to lower production related expenses in the Standard Commercial Segment and Specialty Commercial Segment 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 79.1% and 72.8% for the three months and year ended December 31, 2010, respectively, as compared to 58.5% and 61.2% for the same periods in 2009. Hallmark's net expense ratio was 29.9% and 29.6% for the three months and year ended December 31, 2010, respectively, as compared to 29.7% and 30.5% for the same periods in 2009. Hallmark’s net combined ratio was 109.0% and 102.4% for the three months and year ended December 31, 2010, respectively, as compared to 88.2% and 91.7% 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, medical malpractice 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

December 31, 2010 and 2009

($ in thousands)

	2010			2009
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (cost; $383,530 in 2010 and $287,108 in 2009)	$	388,399		$	291,876
Equity securities, available-for-sale, at fair value (cost; $32,469 in 2010 and $27,251 in 2009)		44,042			35,801

Total investments		432,441			327,677

Cash and cash equivalents		60,519			112,270
Restricted cash		5,277			5,458
Ceded unearned premiums		25,504			12,997
Premiums receivable		47,337			46,635
Accounts receivable		7,051			3,377
Receivable for securities		2,215			-
Reinsurance recoverable		39,505			10,008
Deferred policy acquisition costs		21,679			20,792
Goodwill		43,564			41,080
Intangible assets, net		30,241			28,873
Federal income tax recoverable		4,093			-
Prepaid expenses		1,987			923
Other assets		15,207			18,779

	$	736,620		$	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		251,677			184,662
Unearned premiums		140,965			125,089
Unearned revenue		116			191
Reinsurance balances payable		3,122			3,281
Accrued agent profit sharing		1,301			1,790
Accrued ceding commission payable		4,231			8,600
Pension liability		2,833			2,628
Payable for securities		2,493			19
Payable for acquisition		14,000			-
Deferred federal income taxes, net		3,471			942
Federal income tax payable		-			1,266
Accounts payable and other accrued expenses		15,786			13,258

		499,497			401,228
Commitments and contingencies

Redeemable non-controlling interest		1,360			1,124

Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares in 2010 and 2009; issued 20,872,831 shares in 2010 and 2009		3,757			3,757
Additional paid-in capital		121,815			121,016
Retained earnings		105,816			98,482
Accumulated other comprehensive income		9,637			8,589
Treasury stock, (748,662 shares in 2010 and 757,828 in 2009), at cost		(5,262	)		(5,327	)

Total stockholders’ equity		235,763			226,517

	$	736,620		$	628,869

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

	Three Months Ended						Fiscal Year Ended
	December 31						December 31
	2010			2009			2010			2009

Gross premiums written	$	73,735		$	67,013		$	320,973		$	287,558
Ceded premiums written		(10,069	)		(9,104	)		(39,332	)		(25,818	)
Net premiums written		63,666			57,909			281,641			261,740
Change in unearned premiums		7,236			7,176			(3,370	)		(10,668	)
Net premiums earned		70,902			65,085			278,271			251,072

Investment income, net of expenses		4,336			3,744			14,849			14,947
Net realized gains		2,645			1,916			8,402			3,032
Finance charges		1,807			1,550			7,054			5,874
Commission and fees		(371	)		1,177			(1,575	)		12,011
Other income		14			10			59			103

Total revenues		79,333			73,482			307,060			287,039

Losses and loss adjustment expenses		56,095			38,067			202,544			153,619
Operating expenses		22,033			21,177			87,989			92,233
Interest expense		1,151			1,146			4,598			4,602
Amortization of intangible assets		916			916			3,665			3,328

Total expenses		80,195			61,306			298,796			253,782

Income before tax		(862	)		12,176			8,264			33,257
Income tax expense		(1,317	)		2,864			825			8,630
Net income		455			9,312			7,439			24,627
Less: Net income attributable to non-controlling interest		35			16			105			52

Net income attributable to Hallmark Financial Services, Inc.	$	420		$	9,296		$	7,334		$	24,575

Net income per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic	$	0.02		$	0.46		$	0.36		$	1.19
Diluted	$	0.02		$	0.46		$	0.36		$	1.19

Hallmark Financial Services, Inc.

Consolidated Segment Data

($ in thousands)

	Three Months Ended December 31, 2010
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate		Consolidated

Produced premium (1)	$	15,357		$	36,435		$	20,360		$	-	$	72,152

Gross premiums written		15,357			38,018			20,360			-		73,735
Ceded premiums written		(1,168	)		(8,814	)		(87	)		-		(10,069	)
Net premiums written		14,189			29,204			20,273			-		63,666
Change in unearned premiums		1,799			2,413			3,024			-		7,236
Net premiums earned		15,988			31,617			23,297			-		70,902

Total revenues		17,160			33,573			25,355			3,245		79,333

Losses and loss adjustment expenses		12,017			20,496			23,582			-		56,095

Pre-tax income (loss), net of non-controlling interest		727			3,486			(5,230	)		120		(897	)

Net loss ratio (2)		75.2	%		64.8	%		101.2	%				79.1	%
Net expense ratio (2)		27.0	%		30.9	%		24.3	%				29.9	%
Net combined ratio (2)		102.2	%		95.7	%		125.5	%				109.0	%

	Three Months Ended December 31, 2009
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	15,631		$	33,632		$	16,740		$	-		$	66,003

Gross premiums written		15,631			34,642			16,740			-			67,013
Ceded premiums written		(1,099	)		(8,005	)		-			-			(9,104	)
Net premiums written		14,532			26,637			16,740			-			57,909
Change in unearned premiums		2,789			4,012			375			-			7,176
Net premiums earned		17,321			30,649			17,115			-			65,085

Total revenues		18,713			33,903			18,814			2,052			73,482

Losses and loss adjustment expenses		10,482			17,031			10,554			-			38,067

Pre-tax income (loss), net of non-controlling interest		3,279			6,603			3,262			(984	)		12,160

Net loss ratio (2)		60.5	%		55.6	%		61.7	%					58.5	%
Net expense ratio (2)		27.8	%		30.4	%		22.1	%					29.7	%
Net combined ratio (2)		88.3	%		86.0	%		83.8	%					88.2	%

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)

	Fiscal Year Ended December 31, 2010
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	67,844		$	151,721		$	95,292		$	-		$	314,857

Gross premiums written		67,832			157,849			95,292			-			320,973
Ceded premiums written		(4,260	)		(34,876	)		(196	)		-			(39,332	)
Net premiums written		63,572			122,973			95,096			-			281,641
Change in unearned premiums		1,999			1,125			(6,494	)		-			(3,370	)
Net premiums earned		65,571			124,098			88,602			-			278,271

Total revenues		69,670			131,076			96,741			9,573			307,060

Losses and loss adjustment expenses		51,468			78,911			72,165			-			202,544

Pre-tax income (loss), net of non-controlling interest		(2,316	)		13,315			(705	)		(2,135	)		8,159

Net loss ratio (2)		78.5	%		63.6	%		81.4	%					72.8	%
Net expense ratio (2)		30.7	%		29.7	%		22.4	%					29.6	%
Net combined ratio (2)		109.2	%		93.3	%		103.8	%					102.4	%

	Fiscal Year Ended December 31, 2009
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	72,512		$	144,230		$	71,708		$	-		$	288,450

Gross premiums written		72,512			143,338			71,708			-			287,558
Ceded premiums written		(4,430	)		(21,388	)		-			-			(25,818	)
Net premiums written		68,082			121,950			71,708			-			261,740
Change in unearned premiums		3,208			(9,680	)		(4,196	)		-			(10,668	)
Net premiums earned		71,290			112,270			67,512			-			251,072

Total revenues		76,496			131,504			73,785			5,254			287,039

Losses and loss adjustment expenses		44,372			65,453			43,794			-			153,619

Pre-tax income (loss), net of non-controlling interest		9,266			20,883			11,000			(7,944	)		33,205

Net loss ratio (2)		62.2	%		58.3	%		64.9	%					61.2	%
Net expense ratio (2)		31.3	%		30.1	%		21.6	%					30.5	%
Net combined ratio (2)		93.5	%		88.4	%		86.5	%					91.7	%

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