Hallmark Financial Services, Inc. Announces Third Quarter 2007 Earnings Results


FORT WORTH, Texas, Nov. 7, 2007 (PRIME NEWSWIRE) -- Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported quarterly net income of $6.6 million for the third quarter ended September 30, 2007 as compared to $4.9 million reported for the third quarter of 2006. On a diluted basis, net income per share was $0.32 for the three months ended September 30, 2007 as compared to $0.27 per share for the same period in 2006. During the quarter ended September 30, 2007, Hallmark reported total revenues of $72.2 million, representing a 28% increase over the $56.4 million in total revenues for the third quarter of 2006.

Mark J. Morrison, President and Chief Executive Officer, said, "Our strong quarterly earnings are the expected result of the continued execution of our plan to increase the retention of the business we produce. Even with softening market conditions across the property/casualty insurance industry, our overall production growth and policy rates for the year have been in line with our expectations. For the nine months ended September 30, 2007, gross premiums produced by our operating units have collectively grown by 6% over the same period last year. This growth is largely a result of our strategy of controlled geographic expansion into states where business is less price sensitive and we can achieve adequate pricing for our policies. Our underwriting margins continue to be strong in each of our operating units as we have maintained favorable policy retention levels without the need to give significant rate concessions."

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Profitable underwriting continues to be our focus and is reflected in a combined ratio of 87.8% and an annualized return on average equity of 17% for the year to date. Year-over-year growth in book value per share was 21% at quarter end."


                                          Three Months Ended
                                             September 30,
                                  --------------------------------
                                    2007        2006      % Change
                                  --------    --------    --------
                                    ($ in thousands)
 Gross premiums written           $ 62,304    $ 58,107        7%
 Net premiums written               61,525      55,005       12%
 Net premiums earned                59,425      42,194       41%
 Commission and fee income           7,280       9,943      -27%
 Investment income, net of 
  expenses                           3,774       2,912       30%
 Gain (loss) on investments            418        (135)       NM
 Total revenues                     72,218      56,365       28%
 Net income                          6,582       4,877       35%
 Common EPS - basic               $   0.32      $ 0.27       19%
 Common EPS - diluted             $   0.32      $ 0.27       19%
 Annualized return on average 
  equity                              15.7%       16.5%      -5%
 Book value per share             $   8.29    $   6.83       21%
 Cash flow from operations        $ 17,173    $ 15,823        9%

                                          Nine Months Ended
                                             September 30,
                                  --------------------------------
                                    2007        2006      % Change
                                  --------    --------    --------
                                    ($ in thousands)
 Gross premiums written           $193,539    $153,718       26%
 Net premiums written              184,592     146,176       26%
 Net premiums earned               166,383     104,887       59%
 Commission and fee income          23,344      32,223      -28%
 Investment income, net of 
  expenses                           9,811       7,505       31%
 Gain (loss) on investments          1,299      (1,501)       NM
 Total revenues                    204,912     148,072       38%
 Net income                         20,367       4,461      357%
 Common EPS - basic               $   0.98    $   0.28      250%
 Common EPS - diluted             $   0.98    $   0.28      250%
 Annualized return on average 
  equity                              16.8%        5.8%     190%
 Book value per share             $   8.29    $   6.83       21%
 Cash flow from operations        $ 61,767    $ 45,496       36%

The increase in net income for both the quarter and year-to-date was largely due to the improved results of the Specialty Commercial Segment and additional investment income from a larger investment portfolio, in both cases primarily as the result of increased retention of premiums. In addition, the first nine months of 2006 was adversely impacted by $9.6 million of interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January, 2006 and subsequently converted to common stock during the second quarter of 2006. These increases in net income were partially offset by lower results from the Standard Commercial and Personal Segments during the third quarter and year-to-date 2007.

Increased retention of business produced by the Specialty Commercial Segment and increased production by the Personal Segment were the primary causes of the increase in revenue. Specialty Commercial Segment revenues increased $9.9 million and $37.8 million, or 43% and 68%, during the three months and nine months ended September 30, 2007, respectively, as compared to the same periods of 2006. Revenues from the Personal Segment increased $2.9 million and $8.7 million, or 24% and 25%, during the three and nine months ended September 30, 2007, respectively, due largely to geographic expansion into new states. Increased retention of business was also the primary reason for the Standard Commercial Segment's $2.6 million and $7.5 million increases in revenue for the three months and nine months ended September 30, 2007, respectively. Gains on investments of $0.4 million and $1.3 million for the three months and nine months ended September 30, 2007, respectively, as compared to losses on investments of $0.1 million and $1.5 million recognized for the same periods the prior year, were the primary reason for the increase in revenue for Corporate.

Net investment income for the three months ended September 30, 2007 was $3.8 million as compared to $2.9 million for the same period in 2006. Net investment income for the nine months ended September 30, 2007 was $9.8 million as compared to $7.5 million for the same period in 2006. The increase reflected higher yields and greater average cash and invested assets attributable to increased retention of premiums, positive cash flow from operations and reinvestment of strong earnings for the past four quarters. Hallmark has no exposure in its investment portfolio to sub-prime mortgages and $4 thousand total exposure in mortgage backed securities.

Hallmark's net losses and loss adjustment expenses and its net loss ratio for the three months ended September 30, 2007 were $36.7 million and 61.8%, respectively, compared to $23.6 million and 55.9%, respectively, for the same period in 2006. Hallmark's net losses and loss adjustment expenses and its net loss ratio for the nine months ended September 30, 2007 were $99.6 million and 59.9%, respectively, compared to $60.5 million and 57.7%, respectively, for the same period in 2006. Hallmark recognized $0.8 million of favorable development on prior years' loss reserve estimates during the third quarter of 2007 as compared to $1.2 million of favorable development recognized during the same period in 2006. Hallmark recognized $2.9 million of favorable development on prior years' loss reserve estimates during the first nine months of 2007 as compared to $2.0 million of favorable development recognized during the same period in 2006. Hallmark's other operating expenses and its expense ratio for the three months ended September 30, 2007 were $24.1 million and 27.7%, respectively, compared to $23.0 million and 27.8%, respectively, for the same period in 2006. Hallmark's other operating expenses and its expense ratio for the nine months ended September 30, 2007 were $70.5 million and 27.9%, respectively, compared to $64.1 million and 27.8%, respectively, for the same period in 2006.

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. Our business involves marketing, distributing, underwriting and servicing commercial insurance, non-standard personal automobile insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our general aviation business which is written on a national basis. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol "HALL."

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

Forward-looking statements in this Release are made pursuant to the "safe harbor" provisions of the Private Securities Litigation 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, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company's periodic report filings with the Securities and Exchange Commission.



          Hallmark Financial Services, Inc. and Subsidiaries
                      Consolidated Balance Sheets
                           ($ in thousands)

                                                  Sept. 30    Dec. 31
                     ASSETS                         2007        2006
                     ------                       --------    --------
                                                (unaudited)  (audited)
 Investments:
   Debt securities, available-for-sale, at
    market value                                  $163,054    $133,030
   Equity securities, available-for-sale, at
    market value                                    41,988       4,580
   Short-term investments, available-for-sale,
    at market value                                 56,311      25,275
                                                  --------    --------

     Total investments                             261,353     162,885

 Cash and cash equivalents                          61,681      81,474
 Restricted cash and cash equivalents               15,646      24,569
 Premiums receivable                                53,136      44,644
 Accounts receivable                                18,503      13,223
 Prepaid reinsurance premium                         1,154       1,629
 Reinsurance recoverable                             5,781       5,930
 Deferred policy acquisition costs                  20,776      17,145
 Excess of cost over fair value of net assets
  acquired                                          30,025      31,427
 Intangible assets                                  24,354      26,074
 Prepaid expenses                                    1,094       1,769
 Other assets                                       12,131       5,184
                                                  --------    --------

     Total assets                                 $505,634    $415,953
                                                  ========    ========

        LIABILITIES AND STOCKHOLDERS' EQUITY
        ------------------------------------
 Liabilities:
   Notes payable                                  $ 60,681    $ 35,763
   Structured settlements                            9,897      24,587
   Unpaid losses and loss adjustment expenses      116,136      77,564
   Unearned premiums                               108,365      91,606
   Unearned revenue                                  3,356       5,734
   Reinsurance balances payable                         --       1,060
   Accrued agent profit sharing                      1,990       1,784
   Accrued ceding commission payable                 7,052       3,956
   Pension liability                                 2,884       3,126
   Deferred federal income taxes                       115       2,310
   Current federal income tax payable                  336       2,132
   Accounts payable and other accrued expenses      22,736      15,600
                                                  --------    --------

     Total liabilities                             333,548     265,222

 Commitments and Contingencies

 Stockholders' equity:
   Common stock, $.18 par value (authorized
    33,333,333 shares in 2007 and 2006; issued
    20,776,080 shares in 2007 and 2006)              3,740       3,740
   Additional paid in capital                      118,283     117,932
   Retained earnings                                51,847      31,480
   Accumulated other comprehensive loss             (1,707)     (2,344)
   Treasury stock, at cost (7,828 shares in 2007
    and 2006)                                          (77)        (77)
                                                  --------    --------

     Total stockholders' equity                    172,086     150,731
                                                  --------    --------

                                                  $505,634    $415,953
                                                  ========    ========


          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
                          --------------------    --------------------
                            2007        2006        2007        2006
                          --------    --------    --------    --------

 Gross premiums written   $ 62,304    $ 58,107    $193,539    $153,718
 Ceded premiums written       (779)     (3,102)     (8,947)     (7,542)
                          --------    --------    --------    --------
   Net premiums written     61,525      55,005     184,592     146,176
   Change in unearned
    premiums                (2,100)    (12,811)    (18,209)    (41,289)
                          --------    --------    --------    --------
   Net premiums earned      59,425      42,194     166,383     104,887

 Investment income, net
  of expenses                3,774       2,912       9,811       7,505
 Gain (loss) on
  investments                  418        (135)      1,299      (1,501)
 Finance charges             1,206       1,037       3,477       2,940
 Commission and fees         7,280       9,943      23,344      32,223
 Processing and service
  fees                         111         410         586       1,994
 Other income                    4           4          12          24
                          --------    --------    --------    --------

     Total revenues         72,218      56,365     204,912     148,072

 Losses and loss
  adjustment expenses       36,723      23,589      99,620      60,478
 Other operating
  expenses                  24,087      23,044      70,511      64,097
 Interest expense            1,026       1,527       2,608       4,774
 Interest expense from
  amortization of
  discount on
  convertible notes             --          --          --       9,625
 Amortization of
  intangible asset             573         573       1,719       1,719
                          --------    --------    --------    --------

     Total expenses         62,409      48,733     174,458     140,693

 Income before tax           9,809       7,632      30,454       7,379

 Income tax expense          3,227       2,755      10,087       2,918
                          --------    --------    --------    --------

 Net income               $  6,582    $  4,877    $ 20,367    $  4,461
                          ========    ========    ========    ========

 Common stockholders
  net income per share:
   Basic                  $   0.32    $   0.27    $   0.98    $   0.28
                          ========    ========    ========    ========
   Diluted                $   0.32    $   0.27    $   0.98    $   0.28
                          ========    ========    ========    ========


                  

                            Three Months Ended September 30, 2007
                      ------------------------------------------------
                      Standard  Specialty
                     Commercial Commercial Personal             Consol-
                      Segment    Segment   Segment   Corporate  idated
                      --------  ---------- --------  ---------  ------

 Produced premium       21,945    37,919    14,854        --    74,718
                       -------   -------   -------   -------   -------

 Gross premiums
  written               21,918    25,531    14,855        --    62,304
 Ceded premiums 
  written                  198      (977)       --        --      (779)
                       -------   -------   -------   -------   -------
 Net premiums written   22,116    24,554    14,855        --    61,525
 Change in unearned
  premiums                (311)     (870)     (919)       --    (2,100)
                       -------   -------   -------   -------   -------
 Net premiums earned    21,805    23,684    13,936        --    59,425

 Total revenues         23,530    32,760    15,185       743    72,218

 Losses and loss
  adjustment expenses   13,513    13,682     9,532        (4)   36,723

 Pre-tax income (loss)   3,514     6,350     1,854    (1,909)    9,809

 Net loss ratio (1)       62.0%     57.8%     68.4%               61.8%
 Net expense
  ratio (1)               27.3%     30.8%     22.9%               27.7%
                       -------   -------   -------             -------
 Net combined
  ratio (1)               89.3%     88.6%     91.3%               89.5%
                       =======   =======   =======             =======

                            Three Months Ended September 30, 2006
                      ------------------------------------------------
                      Standard  Specialty
                     Commercial Commercial Personal             Consol-
                      Segment    Segment   Segment   Corporate  idated
                      --------  ---------- --------  ---------  ------

 Produced premium       22,206    41,320    12,278        --    75,804
                       -------   -------   -------   -------   -------

 Gross premiums
  written               21,967    23,862    12,278        --    58,107
 Ceded premiums
  written               (2,270)     (832)       --        --    (3,102)
                       -------   -------   -------   -------   -------
 Net premiums written   19,697    23,030    12,278        --    55,005
 Change in unearned
  premiums                (497)  (11,256)   (1,058)       --   (12,811)
                       -------   -------   -------   -------   -------
 Net premiums earned    19,200    11,774    11,220        --    42,194

 Total revenues         20,964    22,889    12,257       255    56,365

 Losses and loss
  adjustment expenses    9,347     7,450     6,800        (8)   23,589

 Pre-tax  income (loss)  5,112     2,867     2,316    (2,663)    7,632

 Net loss ratio (1)       48.7%     63.3%     60.6%               55.9%
 Net expense
  ratio (1)               28.1%     30.7%     24.3%               27.8%
                       -------   -------   -------             -------
 Net combined
  ratio (1)              76.8%     94.0%     84.9%               83.7%
                       =======   =======   =======             =======

 (1) Net loss ratio is calculated as total net losses and loss
     adjustment expenses divided by net premiums earned, each
     determined in accordance with GAAP.  Net expense ratio is
     calculated as total underwriting expenses of our insurance
     company subsidiaries, including allocated overhead expenses and
     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.

                  

                            Nine Months Ended September 30, 2007
                      ------------------------------------------------
                      Standard  Specialty
                     Commercial Commercial Personal             Consol-
                      Segment    Segment   Segment   Corporate  idated
                      --------  ---------- --------  ---------  ------

 Produced premium       70,246   118,232    43,228        --   231,706
                       -------   -------   -------   -------   -------

 Gross premiums
  written               70,139    80,172    43,228        --   193,539
 Ceded premiums
  written               (5,241)   (3,706)       --        --    (8,947)
                       -------   -------   -------   -------   -------
 Net premiums written   64,898    76,466    43,228        --   184,592
 Change in unearned
  premiums              (2,966)  (12,100)   (3,143)       --   (18,209)
                       -------   -------   -------   -------   -------
 Net premiums earned    61,932    64,366    40,085        --   166,383

 Total revenues         65,300    93,836    43,654     2,122   204,912

 Losses and loss
  adjustment expenses   37,621    35,398    26,612       (11)   99,620

 Pre-tax income (loss)   8,937    20,477     6,148    (5,108)   30,454

 Net loss ratio (1)       60.7%     55.0%     66.4%               59.9%
 Net expense
  ratio (1)               27.4%     31.4%     23.1%               27.9%
                       -------   -------   -------             -------
 Net combined
  ratio (1)               88.1%     86.4%     89.5%               87.8%
                       =======   =======   =======             =======

                            Nine Months Ended September 30, 2006
                      ------------------------------------------------
                      Standard  Specialty
                     Commercial Commercial Personal             Consol-
                      Segment    Segment   Segment   Corporate  idated
                      --------  ---------- --------  ---------  ------

 Produced premium       69,357   115,610    34,116        --   219,083
                       -------   -------   -------   -------   -------

 Gross premiums
  written               68,884    50,718    34,116        --   153,718
 Ceded premiums
  written               (6,122)   (1,420)       --        --    (7,542)
                       -------   -------   -------   -------   -------
 Net premiums written   62,762    49,298    34,116        --   146,176
 Change in unearned
  premiums             (12,396)  (26,136)   (2,757)       --   (41,289)
                       -------   -------   -------   -------   -------
 Net premiums earned    50,366    23,162    31,359        --   104,887

 Total revenues         57,768    56,003    34,944      (643)  148,072

 Losses and loss
  adjustment expenses   27,165    13,969    19,369       (25)   60,478

 Pre-tax income (loss)  11,245     7,925     6,760   (18,551)    7,379

 Net loss ratio (1)       53.9%     60.3%     61.8%               57.7%
 Net expense
  ratio (1)               29.1%     27.6%     25.7%               27.8%
                       -------   -------   -------             -------
 Net combined
  ratio (1)               83.0%     87.9%     87.5%               85.5%
                       =======   =======   =======             =======

 (1) Net loss ratio is calculated as total net losses and loss
     adjustment expenses divided by net premiums earned, each
     determined in accordance with GAAP.  Net expense ratio is
     calculated as total underwriting expenses of our insurance
     company subsidiaries, including allocated overhead expenses and
     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.


            

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