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	v327836_8k.htm

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES THIRD QUARTER 2012 RESULTS

FORT WORTH, Texas, (November 7, 2012) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported third quarter 2012 net income of $3.4 million, or $0.18 per share, compared to net income of $0.1 million, or $0.01 per share reported for third quarter 2011. Year to date, Hallmark reported net income of $1.7 million, or $0.09 per share, compared to a net loss of $11.2 million, or $0.57 per share reported for the same period the prior year. Total revenues were $85.6 million for the third quarter 2012 as compared to $83.7 million for the third quarter of 2011. Year to date total revenues for 2012 were $253.2 million, up 6% from the $239.7 million reported for the same period the prior year.

Mark J. Morrison, President and Chief Executive Officer, said, “I am pleased to report that the decisive actions taken over the past year to improve underwriting profitability, including a continuation of meaningful rate increases across most all business units and exiting unprofitable states and product lines in our Personal Segment, have produced earnings for the quarter commensurate with Hallmark’s long term track record. Our third quarter combined ratio of 95.8% and earnings of $0.18 per share evidence this improvement and reflect the favorable underlying trends within our business. We recognize there is still work to do in order to produce the results we expect over the long term. However, we are encouraged by the progress we have made and remain optimistic about how our business is positioned for the future.”

Mr. Morrison continued, “The year-over-year increase in revenue has been largely driven by organic growth from the operating units that comprise our Specialty Commercial Segment. We have seen an increase in premium production generated from favorable rate trends, as well as from added insured exposure units on accounts that suggests improving economic conditions in the markets in which we operate. We continue to see middle single-digit to low double-digit rate increases across all operations with the exception of General Aviation, which continues to be impacted by overly aggressive competitors in a contracting market.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share was $11.37 at the end of the third quarter, an increase of 4% year over year and an increase of 2% year to date. Cash flow from operations was $11.0 million in the third quarter and $28.2 million year to date. Total cash and investments increased 7% year to date to $542 million, or $28.13 per share. Hallmark continues to have significant cash of $116 million as of September 30, 2012.”

	Three Months Ended
	September 30,
	2012		2011		% Change
	($ in thousands, unaudited)
Gross premiums written		99,448		89,751		11	%
Net premiums written		85,005		77,882		9	%
Net premiums earned		80,481		75,068		7	%
Investment income, net of expenses		3,795		3,980		-5	%
Net realized gains		982		394		149	%
Total revenues		85,620		83,748		2	%
Net income (1)		3,413		98		3383	%
Net income per share - basic	$	0.18	$	0.01		1700	%
Net income per share - diluted	$	0.18	$	0.01		1700	%
Book value per share	$	11.37	$	10.96		4	%
Cash flow from operations	$	10,965	$	4,010		173	%

	Nine Months Ended
	September 30,
	2012		2011			% Change
	($ in thousands)
Gross premiums written		297,658		270,834			10	%
Net premiums written		255,104		233,072			9	%
Net premiums earned		235,938		216,759			9	%
Investment income, net of expenses		11,573		11,765			-2	%
Net realized gains		1,854		3,177			-42	%
Total revenues		253,177		239,669			6	%
Net income (loss) (1)		1,741		(11,202	)		NM
Net income (loss) per share - basic	$	0.09	$	(0.57	)		NM
Net income (loss) per share - diluted	$	0.09	$	(0.57	)		NM
Book value per share	$	11.37	$	10.96			4	%
Cash flow from operations	$	28,187	$	15,008			88	%

(1)

Net income (loss) is net income (loss) 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, 2012, total revenues were $85.6 million and $253.2 million, representing a 2% and 6% increase, respectively, from the $83.7 million and $239.7 million in total revenues for the same period of 2011. The growth in revenue was primarily attributable to increased premium production and resulting earned premium driven largely from the E&S Commercial business unit and from the acquisition of the Workers Compensation business unit during the third quarter of 2011. The increase in revenue was partially offset by an adverse profit share commission revenue adjustment in the Standard Commercial P&C business unit, combined with lower finance charges and earned premium in the Personal Segment due mostly to the impact of a reduction of premium written in underperforming states and products exited over the past twelve months. Further offsetting the increase in revenue was lower net realized gains for the nine months ended September 30, 2012.

The increase in revenue for the three months and nine months ended September 30, 2012 was complemented by decreased loss and loss adjustment expenses (“LAE”) due primarily to improved current accident year loss trends in the Standard Commercial P&C business unit for the year-to-date and the Personal Lines business unit for both the quarter and year-to-date as well as significant adverse reserve development recognized during the prior year. During the three months and nine months ended September 30, 2012 Hallmark recorded $2.2 million and $3.6 million of favorable prior year loss reserve development. During the three and nine months ended September 30, 2011 Hallmark recorded $2.3 million and $18.1 million, respectively, of unfavorable prior year loss reserve development. Of the $18.1 million unfavorable development recognized for the nine months ended September 30, 2011, $10.1 million was a result of adverse prior year loss reserve development in the Personal Segment in Florida. In addition, the results for the nine months ended September 30, 2012 and 2011 included $11.6 million and $10.0 million, respectively, in net losses from weather related claims.

The Company reported $3.4 million net income attributable to Hallmark for the three months ended September 30, 2012 as compared to $98 thousand net income attributable to Hallmark for the same period during 2011. The Company reported a net income attributable to Hallmark of $1.7 million for the nine months ended September 30, 2012, which was $12.9 million higher than the $11.2 million net loss attributable to Hallmark reported for the nine months ended September 30, 2011. On a diluted basis per share, Hallmark reported net income of $0.18 per share for the three months ended September 30, 2012, as compared to net income of $0.01 per share for the same period in 2011. On a diluted basis per share, net income per share was $0.09 for the nine months ended September 30, 2012 as compared to net loss per share of $0.57 for the same period during 2011.

Hallmark's consolidated net loss ratio was 65.7% and 71.6% for the three and nine months ended September 30, 2012 as compared to 74.8% and 83.9% for the same periods in 2011. Hallmark's net expense ratio was 30.1% and 30.4% for the three and nine months ended September 30, 2012 as compared to 31.6% and 31.3% for the same periods in 2011. Hallmark’s net combined ratio was 95.8% and 102.0% for the three and nine months ended September 30, 2012 as compared to 106.4% and 115.2% for the same periods in 2011.

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		2012			2011
		(unaudited)			(as adjusted)
Investments:
Debt securities, available-for-sale, at fair value (cost: $380,495 in 2012 and $380,578 in 2011)	$	384,288		$	380,469
Equity securities, available-for-sale, at fair value (cost: $29,118 in 2012 and $30,465 in 2011)		41,694			44,159

Total investments		425,982			424,628

Cash and cash equivalents		107,682			74,471
Restricted cash		8,246			9,372
Ceded unearned premiums		21,994			19,470
Premiums receivable		69,182			53,513
Accounts receivable		3,360			3,946
Receivable for securities		1,051			2,617
Reinsurance recoverable		50,109			42,734
Deferred policy acquisition costs		26,408			22,554
Goodwill		44,695			44,695
Intangible assets, net		23,965			26,654
Deferred federal income taxes, net		532			-
Federal income tax recoverable		-			6,738
Prepaid expenses		1,620			1,458
Other assets		11,008			13,209

Total assets	$	795,834		$	746,059

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Revolving credit facility payable	$	1,473		$	4,050
Subordinated debt securities		56,702			56,702
Reserves for unpaid losses and loss adjustment expenses		315,607			296,945
Unearned premiums		168,197			146,104
Reinsurance balances payable		5,976			3,139
Pension liability		3,245			3,971
Payable for securities		6,749			203
Deferred federal income taxes, net		-			135
Federal income tax payable		177			-
Accounts payable and other accrued expenses		18,600			17,954

Total liabilities		576,726			529,203

Commitments and Contingencies

Redeemable non-controlling interest		-			1,284


Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333 shares in 2012 and 2011;
issued 20,872,831 in 2012 and 2011		3,757			3,757
Additional paid-in capital		122,412			122,487
Retained earnings		96,181			94,440
Accumulated other comprehensive income		8,316			6,446
Treasury stock (1,609,374 shares in 2012 and 2011), at cost		(11,558	)		(11,558	)

Total stockholders' equity		219,108			215,572

	$	795,834		$	746,059

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended

		2012			2011			2012			2011
					(as adjusted)						(as adjusted)

Gross premiums written	$	99,448		$	89,751		$	297,658		$	270,834
Ceded premiums written		(14,443	)		(11,869	)		(42,554	)		(37,762	)
Net premiums written		85,005			77,882			255,104			233,072
Change in unearned premiums		(4,524	)		(2,814	)		(19,166	)		(16,313	)
Net premiums earned		80,481			75,068			235,938			216,759

Investment income, net of expenses		3,795			3,980			11,573			11,765
Net realized gains		982			394			1,854			3,177
Finance charges		1,374			1,683			4,538			5,148
Commission and fees		(1,029	)		2,445			(1,033	)		2,617
Other income		17			178			307			203

Total revenues		85,620			83,748			253,177			239,669

Losses and loss adjustment expenses		52,839			56,136			168,859			181,841
Other operating expenses		25,726			24,850			77,077			71,890
Interest expense		1,137			1,159			3,464			3,470
Amortization of intangible assets		897			897			2,690			2,690

Total expenses		80,599			83,042			252,090			259,891

Income (loss) before tax		5,021			706			1,087			(20,222	)
Income tax expense (benefit)		1,350			602			(978	)		(9,048	)
Net income (loss)		3,671			104			2,065			(11,174	)
Less: Net income attributable to
non-controlling interest		258			6			324			28

Net income (loss) attributable to Hallmark Financial Services, Inc.	$	3,413		$	98		$	1,741		$	(11,202	)

Net income (loss) per share attributable to Hallmark Financial
Services, Inc. common stockholders:
Basic	$	0.18		$	0.01		$	0.09		$	(0.57	)
Diluted	$	0.18		$	0.01		$	0.09		$	(0.57	)

Hallmark Financial Services, Inc

Consolidated Segment Data

	Three Months Ended September 30, 2012
		Standard			Specialty
		Commercial			Commercial			Personal
		Segment			Segment			Segment		Corporate			Consolidated

Gross premiums written	$	18,706		$	62,349		$	18,393		-		$	99,448
Ceded premiums written		(1,876	)		(12,385	)		(182	)	-			(14,443	)
Net premiums written		16,830			49,964			18,211		-			85,005
Change in unearned premiums		736			(6,396	)		1,136		-			(4,524	)
Net premiums earned		17,566			43,568			19,347		-			80,481

Total revenues		17,761			46,373			21,172		314			85,620

Losses and loss adjustment expenses		12,476			25,532			14,831		-			52,839

Pre-tax income (loss), net of
non-controlling interest		(529	)		8,287			(345	)	(2,650	)		4,763

Net loss ratio (1)		71.0	%		58.6	%		76.7	%				65.7	%
Net expense ratio (1)		33.4	%		27.3	%		29.3	%				30.1	%
Net combined ratio (1)		104.4	%		85.9	%		106.0	%				95.8	%

	Three Months Ended September 30, 2011
		Standard			Specialty
		Commercial			Commercial			Personal
		Segment			Segment			Segment		Corporate			Consolidated

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		4,260			2,691			(4,536	)	(1,715	)		700

Net loss ratio (1)		64.8	%		66.8	%		93.7	%				74.8	%
Net expense ratio (1)		32.0	%		29.8	%		28.9	%				31.6	%
Net combined ratio (1)		96.8	%		96.6	%		122.6	%				106.4	%

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, 2012
		Standard			Specialty
		Commercial			Commercial			Personal
		Segment			Segment			Segment		Corporate			Consolidated

Gross premiums written	$	58,292		$	178,690		$	60,676		-		$	297,658
Ceded premiums written		(5,063	)		(36,948	)		(543	)	-			(42,554	)
Net premiums written		53,229			141,742			60,133		-			255,104
Change in unearned premiums		(2,194	)		(19,449	)		2,477		-			(19,166	)
Net premiums earned		51,035			122,293			62,610		-			235,938

Total revenues		53,791			129,812			68,508		1,066			253,177

Losses and loss adjustment expenses		39,253			76,827			52,779		-			168,859

Pre-tax income (loss), net of
non-controlling interest		(2,601	)		17,193			(5,747	)	(8,082	)		763

Net loss ratio (1)		76.9	%		62.8	%		84.3	%				71.6	%
Net expense ratio (1)		33.8	%		28.2	%		28.5	%				30.4	%
Net combined ratio (1)		110.7	%		91.0	%		112.8	%				102.0	%

	Nine Months Ended September 30, 2011
		Standard			Specialty
		Commercial			Commercial			Personal
		Segment			Segment			Segment		Corporate			Consolidated

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		(890	)		6,955			(22,341	)	(3,974	)		(20,250	)

Net loss ratio (1)		81.9	%		67.6	%		108.1	%				83.9	%
Net expense ratio (1)		32.5	%		30.2	%		26.8	%				31.3	%
Net combined ratio (1)		114.4	%		97.8	%		134.9	%				115.2	%

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