FORT WORTH, Texas, Nov. 10, 2010 (GLOBE NEWSWIRE) -- 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.
Hallmark Financial Services, Inc. Logo

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."

The Hallmark Financial Services, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=4395

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.
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except share amounts)
 
  September 30, 2010 December 31, 2009
 ASSETS  (unaudited)  
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 September 30 Nine Months Ended 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 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%
           
  Three Months Ended September 30, 2009
  Standard Commercial Segment Specialty Commercial Segment Personal 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%

1 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.

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

1 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.

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, 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. 
CONTACT:  Hallmark Financial Services, Inc.          Mark J. Morrison, President and Chief Executive Officer          817.348.1600          www.hallmarkgrp.com

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