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

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8-K - FORM 8-K - HALLMARK FINANCIAL SERVICES INC	v239829_8k.htm

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES THIRD QUARTER 2011 RESULTS

FORT WORTH, Texas, (November 8, 2011) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported third quarter 2011 net income of $125,000 compared to $1.0 million reported for third quarter 2010. Year to date, Hallmark reported net loss of $11.1 million, compared to net income of $6.9 million reported for the same period the prior year. On a fully diluted basis, third quarter 2011 net income was $0.01 per share as compared to net income of $0.05 per share for the third quarter of 2010. Year to date, Hallmark reported net loss of $0.56 per diluted share, compared to net income of $0.34 per diluted share for the same period the prior year. Total revenues were $83.7 million for the third quarter 2011 as compared to $76.2 million for the third quarter of 2010. Year to date total revenues for 2011 were $239.7 million, up 5% from the $227.7 million reported for the same period the prior year.

Mark J. Morrison, President and Chief Executive Officer, said, “Our overall results for the quarter are much improved over the first two quarters of fiscal 2011, driven by our two commercial segments. Our Standard Commercial segment combined ratio improved to 96.9% due in large part to the absence of large losses that we have experienced in recent quarters. In order to reduce our ongoing exposure to large losses, we have started to exit certain classes of business that contributed to the historical large loss volatility. Our Specialty Commercial segment also reported improved results as evidenced by its third quarter combined ratio of 96.5% compared to 102.9% last quarter. This improvement was primarily driven by improved loss experience in our general aviation business unit.”

Mr. Morrison continued, “We continue to take aggressive steps to address the unfavorable financial performance of our Personal lines segment, including ceasing to write new private passenger automobile business in Florida and other underperforming states. We have also initiated rate reviews across all products and markets and have filed for rate increases in multiple states. As these and other actions taken in our Personal Lines business unit take effect, we expect this unit to return to an acceptable level of profitability.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Third quarter book value per share decreased 2% from the second quarter and is down 6% year to date. Investment income increased 12% year to date compared to the prior year. Cash flow from operations was $4.0 million in the third quarter and $15.0 million year to date.”

“Our total investments, cash and cash equivalents and restricted cash are essentially flat year to date at just over $498 million. However, on a per share basis, total investments, cash and cash equivalents and restricted cash have increased to an all-time high of $25.86 per share, due predominately to the repurchase of shares during the year. Hallmark continues to have a significant amount of cash and cash equivalents including restricted cash of $53.6 million as of the end of the quarter,” said Mr. Schwarz.

Mr. Schwarz continued, “Hallmark has repurchased 875,712 shares or 4% of its outstanding common stock for a total cost of $6.4 million during the year. Since inception of the company’s buyback program, total shares repurchased are 1,625,712 or 8% of the then outstanding common stock. The total cost of shares repurchased to date is $11.7 million or $7.17 per share, equivalent to 65% of our third quarter book value per share of $10.98. There are approximately 2.4 million shares remaining authorized under the Company’s stock buyback program.”

	Three Months Ended September 30,
	2011		2010		% Change
	($ in thousands, unaudited)
Produced premium (1)	$	88,264	$	80,427		10	%
Gross premiums written		89,751		82,199		9	%
Net premiums written		77,882		72,047		8	%
Net premiums earned		75,068		70,406		7	%
Investment income, net of expenses		3,980		4,036		-1	%
Net realized gain on investments		394		311		27	%
Total revenues		83,748		76,217		10	%
Net earnings (2)		125		1,016		-88	%
Net earnings per share - basic	$	0.01	$	0.05		-80	%
Net earnings per share - diluted	$	0.01	$	0.05		-80	%
Book value per share	$	10.98	$	11.71		-6	%
Cash flow from operations	$	4,016	$	11,485		-65	%

	Nine Months Ended September 30,
	2011			2010		% Change
	($ in thousands, unaudited)
Produced premium (1)	$	262,132		$	242,705		8	%
Gross premiums written		270,834			247,238		10	%
Net premiums written		233,072			217,975		7	%
Net premiums earned		216,759			207,369		5	%
Investment income, net of expenses		11,765			10,513		12	%
Net realized gain on investments		3,177			5,757		-45	%
Total revenues		239,669			227,727		5	%
Net (loss) earnings (2)		(11,124	)		6,914	NM
Net (loss) earnings per share - basic	$	(0.56	)	$	0.34	NM
Net (loss) earnings per share - diluted	$	(0.56	)	$	0.34	NM
Book value per share	$	10.98		$	11.71		-6	%
Cash flow from operations	$	15,008		$	28,934		-48	%

(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 and Hallmark National Insurance Company subsidiaries.

(2) Net (loss) earnings is net (loss) 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 ended September 30, 2011 Hallmark’s total revenues were $83.7 million representing a 10% increase from the $76.2 million in total revenues for the same period of 2010. This increase in revenue was primarily attributable to increased earned premium due to increased production by the E&S Commercial business unit, a new space risk program entered into during the first quarter of 2011 and the acquisition of the Workers Comp business unit during the third quarter of 2011. Further contributing to the increased revenues were favorable profit sharing commission revenue adjustments and higher gains recognized on the investment portfolio. These increases in revenue were partially offset by lower earned premium and net investment income in the Standard Commercial business unit due to continued reduction in premium production as a result of increased competition and soft market conditions.

During the nine months ended September 30, 2011 Hallmark’s total revenues were $239.7 million representing a 5% increase from the $227.7 million in total revenues for the same period of 2011. This increase in revenue was primarily attributable to increased earned premium due to increased production by the Personal Lines and E&S Commercial business units, a new space risk program entered into during the first quarter of 2011 and the acquisition of the Workers Comp business unit during the third quarter of 2011. Further contributing to the increased revenues were favorable profit sharing commission revenue adjustments and higher net investment income. These increases in revenue were partially offset by lower earned premium and net investment income in the Standard Commercial business unit due to continued reduction in premium production as a result of increased competition and soft market conditions, as well as lower recognized gains on the investment portfolio.

Hallmark reported $125,000 of net earnings for the three months ended September 30, 2011 as compared to net income of $1.0 million for the same period during 2010. Hallmark reported a net loss of $11.1 million for the nine months ended September 30, 2011, which was $18.0 million lower than the $6.9 million net income reported for the nine months ended September 30, 2010. On a diluted basis per share, Hallmark reported net income of $0.01 per share for the three months ended September 30, 2011, as compared to $0.05 per share for the same period in 2010. On a diluted basis per share, net loss per share was $0.56 for the nine months ended September 30, 2011 as compared to net income per share of $0.34 for the same period during 2010.

The increase in revenue for the three months and nine months ended September 30, 2011 was offset by increased loss and loss adjustment expenses due primarily to higher current accident year loss estimates, as well as unfavorable prior year loss development of $2.3 million and $18.1 million recognized during the three and nine months ended September 30, 2011, respectively, as compared to unfavorable prior year development of $0.5 million and $7.0 million recognized during the three and nine months ended September 30, 2010. Of the $18.1 million unfavorable development recognized for the nine months ended September 30, 2011, $17.2 million was a result of adverse prior year loss reserve development in the Personal Lines Segment, of which $10.1 was directly attributable to loss development in Florida. In addition, the results for the nine months ended September 30, 2011 include $10.0 million in current accident year net losses from weather related claims, nearly all of which was incurred in the first half of 2011. As a result of the pre-tax loss and an increase in the proportion of tax-exempt income relative to total pre-tax loss, Hallmark reported an income tax benefit of $9.0 million, or an effective income tax rate of 44.8%, for the nine months ended September 30, 2011, as compared to income tax expense of $2.1 million, or an effective rate of 23.5%, for the same period during 2010.

Hallmark's consolidated net loss ratio was 74.8% and 83.9% for the three and nine months ended September 30, 2011 as compared to 72.9% and 70.6% for the same periods in 2010. The adverse prior year development and the losses from the weather related claims contributed 13.0% to the 83.9% consolidated net loss ratio for the nine months ended September 30, 2011. Hallmark's net expense ratio was 31.5% and 31.3% for the three and nine months ended September 30, 2011 as compared to 29.4% and 29.5% for the same periods in 2010. Hallmark’s net combined ratio was 106.3% and 115.2% for the three and nine months ended September 30, 2011 as compared to 102.3% and 100.1% for the same periods in 2010.

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
ASSETS	2011			2010
	(unaudited)
Investments:
Debt securities, available-for-sale, at fair value (cost: $405,612 in 2011 and $383,530 in 2010)	$	403,244		$	388,399
Equity securities, available-for-sale, at fair value (cost: $33,424 in 2011 and $32,469 in 2010)		41,241			44,042

Total investments		444,485			432,441

Cash and cash equivalents		49,416			60,519
Restricted cash		4,180			5,277
Ceded unearned premiums		18,685			25,504
Premiums receivable		58,159			47,337
Accounts receivable		4,582			7,051
Receivable for securities		11			2,215
Reinsurance recoverable		44,078			39,505
Deferred policy acquisition costs		24,441			21,679
Goodwill		44,695			44,695
Intangible assets, net		27,551			30,241
Federal income tax recoverable		7,156			4,093
Deferred federal income taxes, net		1,801			-
Prepaid expenses		1,835			1,987
Other assets		13,290			15,207

Total assets	$	744,365		$	737,751

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Note payable	$	4,050		$	2,800
Subordinated debt securities		56,702			56,702
Reserves for unpaid losses and loss adjustment expenses		293,201			251,677
Unearned premiums		150,796			140,965
Unearned revenue		73			116
Reinsurance balances payable		2,445			3,122
Accrued agent profit sharing		1,438			1,301
Accrued ceding commission payable		1,139			4,231
Pension liability		2,338			2,833
Payable for securities		5,778			2,493
Payable for acquisition		-			14,000
Deferred federal income taxes, net		-			4,602
Accounts payable and other accrued expenses		13,551			15,786

Total liabilities		531,511			500,628

Commitments and Contingencies (Note 18)

Redeemable non-controlling interest		1,261			1,360

Stockholders' equity:

Common stock, $.18 par value, authorized 33,333,333 shares in 2011 and 2010; issued 20,872,831 in 2011 and 2010		3,757			3,757
Additional paid-in capital		122,355			121,815
Retained earnings		94,692			105,816
Accumulated other comprehensive income		2,347			9,637
Treasury stock (1,609,374 shares in 2011 and 748,662 shares in 2010), at cost		(11,558	)		(5,262	)

Total stockholders' equity		211,593			235,763

Liabilities and Equity, Total	$	744,365		$	737,751

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Gross premiums written	$	89,751		$	82,199		$	270,834		$	247,238
Ceded premiums written		(11,869	)		(10,152	)		(37,762	)		(29,263	)
Net premiums written		77,882			72,047			233,072			217,975
Change in unearned premiums		(2,814	)		(1,641	)		(16,313	)		(10,606	)
Net premiums earned		75,068			70,406			216,759			207,369

Investment income, net of expenses		3,980			4,036			11,765			10,513
Net realized gains		394			311			3,177			5,757
Finance charges		1,683			1,833			5,148			5,247
Commission and fees		2,445			(392	)		2,617			(1,204	)
Other income		178			23			203			45

Total revenues		83,748			76,217			239,669			227,727

Losses and loss adjustment expenses		56,136			51,293			181,841			146,449
Other operating expenses		24,809			21,602			71,770			65,956
Interest expense		1,159			1,151			3,470			3,447
Amortization of intangible assets		897			917			2,690			2,749

Total expenses		83,001			74,963			259,771			218,601

Income (loss) before tax		747			1,254			(20,102	)		9,126
Income tax (benefit) expense		616			205			(9,006	)		2,142
Net income (loss)		131			1,049			(11,096	)		6,984
Less: Net income attributable to non-controlling interest		6			33			28			70
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	125		$	1,016		$	(11,124	)	$	6,914

Net income (loss) attributable to Hallmark Financial
Services, Inc. common stockholders:
Basic	$	0.01		$	0.05		$	(0.56	)	$	0.34
Diluted	$	0.01		$	0.05		$	(0.56	)	$	0.34

Hallmark Financial Services, Inc

Consolidated Segment Data

	Three Months Ended September 30, 2011
	Standard Commercial Segment			Specialty Commercial Segment			Personal Segment			Corporate			Consolidated
Produced premium (1)	$	16,698		$	46,711		$	24,855		$	-		$	88,264

Gross premiums written		16,698			48,417			24,636			-			89,751
Ceded premiums written		(1,489	)		(10,444	)		64			-			(11,869	)
Net premiums written		15,209			37,973			24,700			-			77,882
Change in unearned premiums		1,320			(2,993	)		(1,141	)		-			(2,814	)
Net premiums earned		16,529			34,980			23,559			-			75,068

Total revenues		20,258			36,814			25,637			1,039			83,748

Losses and loss adjustment expenses		10,703			23,356			22,077			-			56,136

Pre-tax income (loss), net of non-controlling interest		4,249			2,729			(4,522	)		(1,715	)		741

Net loss ratio (2)		64.8	%		66.8	%		93.7	%					74.8	%
Net expense ratio (2)		32.1	%		29.7	%		28.8	%					31.5	%
Net combined ratio (2)		96.9	%		96.5	%		122.5	%					106.3	%

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

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 and Hallmark National Insurance Company subsidiaries.

The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is 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. The 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

	Nine Months Ended September 30, 2011
	Standard Commercial Segment			Specialty Commercial Segment			Personal Segment			Corporate			Consolidated
Produced premium (1)	$	52,702		$	132,588		$	76,842		$	-		$	262,132

Gross premiums written		52,702			137,032			81,100			-			270,834
Ceded premiums written		(4,053	)		(29,041	)		(4,668	)		-			(37,762	)
Net premiums written		48,649			107,991			76,432			-			233,072
Change in unearned premiums		(867	)		(9,312	)		(6,134	)		-			(16,313	)
Net premiums earned		47,782			98,679			70,298			-			216,759

Total revenues		53,926			104,433			76,556			4,754			239,669

Losses and loss adjustment expenses		39,117			66,706			76,018			-			181,841

Pre-tax income (loss), net of non-controlling interest		(884	)		7,060			(22,332	)		(3,974	)		(20,130	)

Net loss ratio (2)		81.9	%		67.6	%		108.1	%					83.9	%
Net expense ratio (2)		32.4	%		30.1	%		26.8	%					31.3	%
Net combined ratio (2)		114.3	%		97.7	%		134.9	%					115.2	%

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

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