Hallmark Financial Services, Inc. Announces Third Quarter 2008 Earnings Results


FORT WORTH, Texas, Nov. 12, 2008 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported net income of $0.6 million for the third quarter of 2008 compared to $6.8 million reported for the third quarter of 2007. Year to date, Hallmark reported net income of $15.3 million compared to $20.6 million reported for the first nine months of 2007. On a fully diluted basis, net income was $0.03 per share and $0.73 per share for the third quarter and nine months ended September 30, 2008, as compared to $0.33 per share and $0.99 per share for the similar periods of 2007. Total revenues were $65.0 million and $208.5 million for the third quarter and first nine months of 2008, representing a 10% decrease and a 2% increase from the $72.6 million and $205.3 million reported for the similar periods of 2007.

Mark J. Morrison, President and Chief Executive Officer, said, "Although the operating margins in our core books of business continue to perform well, our quarter and year-to-date results have been adversely affected by the industry-wide impact of hurricane losses and an impaired investment holding related to the ongoing credit crisis. We also experienced lower premium volume due to general economic conditions and our continued underwriting discipline in a competitive marketplace. Hurricanes Dolly and Ike struck Texas during the third quarter resulting in incurred losses and reduced profit sharing commissions of $7.2 million, or $0.23 per diluted share. We also incurred pre-tax impairment charges of $3.2 million, or $0.10 per diluted share, during the quarter predominately related to Washington Mutual senior bank notes."

Mr. Morrison continued, "Despite these challenging conditions, Hallmark continues to make progress with operating initiatives aimed at driving increased long-term value, including geographic expansion, new product development and the previously announced acquisition during the quarter of The Heath Group, which has historically produced in excess of $40 million of commercial automobile and commercial umbrella risks on an annual basis. This acquisition is expected to be immediately accretive to earnings and is complementary to existing Hallmark operations."

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Even with the hurricanes and extraordinary market turmoil experienced this quarter, Hallmark posted a net combined ratio of 95% for the quarter and 91% for the three quarters year-to-date. Book value per share of $9.11 has increased 10% compared to a year ago and is up 5.6% compared to 2007 year-end book value per share of $8.63. However, I am disappointed by the impairment we realized this quarter on our Washington Mutual senior bank notes. Fortunately, this has been the only material impairment of our debt portfolio related to the current credit crisis. Our portfolio has otherwise performed comparatively well during what has been an extremely difficult market environment. Net investment income increased 9% in the quarter and is up 19% year-to-date. Hallmark continues to maintain a diversified portfolio, with fixed income investments representing 88% of invested assets. 91% of the fixed income securities are investment grade rated, 82% are tax-exempt securities and 38% are short-term investments. As of the end of the third quarter, the portfolio had a modified duration of 3.4 years and a tax-equivalent yield over 7%. Hallmark entered 2008 with a significant amount of cash and short-term investments and has benefited from current market opportunities to invest in higher yielding securities of high quality. Hallmark has not owned CDOs, CLOs, CMOs or other securitizations and has not owned any securities issued by Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, Wachovia or AIG, other than a single AAA-rated Fannie Mae debt security that is due to mature in January 2009."

Mr. Schwarz continued, "Hallmark's relatively modest net loss experience this quarter in the face of Hurricane Ike, which may prove to be one of the most costly hurricanes on record, is a testament to our approach to managing catastrophe risk. In general, Hallmark remains financially strong and has ample liquidity, with excess capital held at the holding company and year-to-date cash flow from operations of over $37 million. We remain focused on underwriting discipline and growth in book value per share as a measure of increase in long-term shareholder value."



                                      Three Months Ended
                                          September 30,
                            ---------------------------------------
                               2008            2007        % Change
                            ----------     ----------      --------
                                      ($ in thousands)
 Gross premiums written     $  59,005      $  62,304          -5%
 Net premiums written          56,512         61,863          -9%
 Net premiums earned           58,928         59,763          -1%
 Commission and fee 
  income                        3,127          7,280         -57%
 Investment income, net 
  of expenses                   4,100          3,774           9%
 Net realized gains 
  (impairments and 
  realized losses)             (2,496)           418        -697%
 Total revenues                64,989         72,556         -10%
 Net income                       631          6,802         -91%
 Common EPS - basic         $    0.03      $    0.33         -91%
 Common EPS - diluted       $    0.03      $    0.33         -91%
 Annualized return on 
  average equity                  1.3%          16.2%        -92%
 Book value per share       $    9.11      $    8.30          10%
 Cash flow from 
  operations                $   7,409      $  17,173         -57%


                                       Nine Months Ended
                                          September 30,
                            ---------------------------------------
                               2008            2007        % Change
                            ----------     ----------      --------
                                      ($ in thousands)
 Gross premiums written     $ 186,357      $ 193,539          -4%
 Net premiums written         179,854        184,930          -3%
 Net premiums earned          177,936        166,721           7%
 Commission and fee 
  income                       16,280         23,344         -30%
 Investment income, net 
  of expenses                  11,682          9,811          19%
 Net realized gains 
  (impairments and 
  realized losses)             (1,405)         1,299        -208%
 Total revenues               208,494        205,250           2%
 Net income                    15,306         20,587         -26%
 Common EPS - basic         $    0.74      $    0.99         -25%
 Common EPS - diluted       $    0.73      $    0.99         -26%
 Annualized return on 
  average equity                 11.1%          17.0%        -35%
 Book value per share       $    9.11      $    8.30          10%
 Cash flow from 
  operations                $  37,158      $  61,767         -40%

The decrease in total revenue for the three months ended September 30, 2008 was primarily due to a reduction in earned premium, recognized net losses on our investment portfolio and lower commission income. The increase in revenue for the nine months ended September 30, 2008 was primarily due to increased earned premium and investment income, partially offset by lower commission income and recognized losses on our investment portfolio. The recognized losses on the investment portfolio included a $3.0 million impairment for a Washington Mutual senior debt security.

Standard Commercial Segment revenues decreased $3.4 million and $0.9 million, or 14% and 1%, during the three and nine months ended September 30, 2008 as compared to the same periods during 2007, due primarily to lower earned premium as a result of general economic conditions and our continued underwriting discipline in an increasingly competitive marketplace. Specialty Commercial Segment revenues decreased $2.7 million, or 8%, and increased $0.6 million, or 1%, during the three months and nine months ended September 30, 2008 as compared to the same periods of 2007, due to lower commission income primarily as a result of retaining a higher percentage of the business produced by an agency subsidiary, partially offset by increased net premiums earned as a result of the increased retention of business. Revenues from the Personal Segment increased $0.9 million and $4.6 million, or 6% and 11%, during the three and nine months ended September 30, 2008 as compared to the same periods during 2007, due largely to geographic expansion into new states. Corporate revenue decreased $2.3 million and $1.1 million for the three and nine months ended September 30, 2008 primarily due to recognized losses on our investment portfolio of $2.5 million and $1.4 million during the three and nine months ended September 30, 2008 as compared to recognized gains on our investment portfolio of $0.4 million and $1.3 million during the same period the prior year, offset by investment income of $0.6 million and $1.6 million for the same periods due to changes in capital allocation.

On a diluted basis per share, net income was $0.03 and $0.73 per share, respectively, for the three months and nine months ended September 30, 2008 as compared to $0.33 and $0.99 per share for the same periods in 2007. The decrease in net income for the three and nine months ended September 30, 2008 was primarily attributable to decreased revenue for the three month period and increased losses and loss adjustment expense for both the three and nine month periods primarily attributable to third quarter net hurricane losses.

Hallmark's net loss ratio was 66.2% for the third quarter of 2008 as compared to 61.4% for the third quarter of 2007. For the year to date, Hallmark's net loss ratio was 62.1% as compared to 59.8% for the same period the prior year. Hallmark's net expense ratio was 28.8% for the third quarter of 2008 as compared to 27.5% for the third quarter of 2007. For the year to date, Hallmark's net expense ratio was 28.9% as compared to 27.9% for the same period the prior year. Hallmark maintained a profitable net combined ratio of 95.0% for the third quarter of 2008 and 91.0% for the year to date as compared to 88.9% and 87.7% for the same periods in the prior year.

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's business is geographically concentrated in the south central and northwest regions of the United States, except for its general aviation business which is written on a national basis. 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 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 periodic report filings with the Securities and Exchange Commission.



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

                                         September 30    December 31
                 ASSETS                      2008           2007
                 ------                      ----           ----
                                          (unaudited)
 Investments:
  Debt securities, available-for-sale, 
   at fair value                         $    180,954   $    248,069
  Equity securities, available-for-
   sale, at fair value                         41,568         15,166
  Short-term investments, available-
   for-sale, at fair value                    112,965          2,625
                                         -------------  -------------

       Total investments                      335,487        265,860

 Cash and cash equivalents                     24,191        145,884
 Restricted cash and cash equivalents           8,963         16,043
 Premiums receivable                           47,052         46,026
 Accounts receivable                            5,243          5,219
 Receivable for securities                         --         27,395
 Prepaid reinsurance premiums                   2,636            942
 Reinsurance recoverable                       11,525          4,952
 Deferred policy acquisition costs             20,149         19,757
 Excess of cost over fair value of 
  net assets acquired                          37,738         30,025
 Intangible assets                             29,683         23,781
 Current federal income tax recoverable         1,586             --
 Deferred federal income taxes                  4,371            275
 Prepaid expenses                                 941          1,240
 Other assets                                  20,115         19,583
                                         -------------  -------------

       Total assets                      $    549,680   $    606,982
                                         =============  =============

    LIABILITIES AND STOCKHOLDERS' EQUITY
    ------------------------------------

 Liabilities:
  Notes payable                          $     61,760   $     60,814
  Structured settlements                           --         10,000
  Reserves for unpaid losses and loss 
   adjustment expenses                        155,288        125,338
  Unearned premiums                           105,293        102,998
  Unearned revenue                              2,126          2,949
  Accrued agent profit sharing                  1,935          2,844
  Accrued ceding commission payable            12,193         12,099
  Pension liability                             1,017          1,669
  Current federal income tax                       --            864
  Payable for securities                        5,504         91,401
  Accounts payable and other accrued 
   expenses                                    14,439         16,385
                                         -------------  -------------

       Total liabilities                      359,555        427,361
                                         -------------  -------------

 Commitments and Contingencies (Note 17)

 Redeemable minority interest                     619             --
                                         -------------  -------------

 Stockholders' equity:
  Common stock, $.18 par value 
   (authorized 33,333,333 shares in 
   2008 and 2007; issued 20,816,782 in 
   2008 and 20,776,080 shares in 2007)          3,747          3,740
  Capital in excess of par value              119,649        118,459
  Retained earnings                            74,649         59,343
  Accumulated other comprehensive loss         (8,462)        (1,844)
  Treasury stock, at cost (7,828 shares 
   in 2008 and 2007)                              (77)           (77)
                                         -------------  -------------

       Total stockholders' equity             189,506        179,621
                                         -------------  -------------

                                         -------------  -------------
                                         $    549,680   $    606,982
                                         =============  =============



         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
                           ------------------  --------------------

                             2008      2007       2008       2007
                           --------  --------  ---------  --------- 

 Gross premiums written    $ 59,005  $ 62,304  $ 186,357  $ 193,539
 Ceded premiums written      (2,493)     (441)    (6,503)    (8,609)
                           --------  --------  ---------  --------- 
  Net premiums written       56,512    61,863    179,854    184,930
  Change in unearned 
   premiums                   2,416    (2,100)    (1,918)   (18,209)
                           --------  --------  ---------  --------- 
  Net premiums earned        58,928    59,763    177,936    166,721

 Investment income, net 
  of expenses                 4,100     3,774     11,682      9,811
 Net realized gains 
  (impairments and 
  realized losses)           (2,496)      418     (1,405)     1,299
 Finance charges              1,307     1,206      3,894      3,477
 Commission and fees          3,127     7,280     16,280     23,344
 Processing and service 
  fees                           20       111         98        586
 Other income                     3         4          9         12
                           --------  --------  ---------  --------- 

     Total revenues          64,989    72,556    208,494    205,250

 Losses and loss 
  adjustment expenses        38,981    36,723    110,514     99,620
 Other operating 
  expenses                   24,041    24,087     71,114     70,511
 Interest expense             1,186     1,026      3,557      2,608
 Amortization of 
  intangible assets             620       573      1,766      1,719
                           --------  --------  ---------  --------- 

     Total expenses          64,828    62,409    186,951    174,458

 Income before tax and 
  minority interest             161    10,147     21,543     30,792
 Income tax expense 
  (benefit)                    (485)    3,345      6,222     10,205
                           --------  --------  ---------  --------- 
 Income before minority 
  interest                      646     6,802     15,321     20,587
 Minority interest               15        --         15         --
                           --------  --------  ---------  --------- 


 Net income                $    631  $  6,802  $  15,306  $  20,587
                           ========  ========  =========  ========= 

 Common stockholders net 
  income per share:
   Basic                   $   0.03  $   0.33  $    0.74  $    0.99
                           ========  ========  =========  =========
   Diluted                 $   0.03  $   0.33  $    0.73  $    0.99
                           ========  ========  =========  =========


                   Hallmark Financial Services, Inc.
                      Consolidated Segment Data

                          Three Months Ended September 30, 2008
                -----------------------------------------------------
                Standard   Specialty
                Commercial Commercial Personal
                 Segment    Segment   Segment  Corporate Consolidated
                ---------  --------- --------- ---------  ---------

 Produced
  premium (1)   $  18,957  $  36,295  $ 14,763 $      --  $  70,015
                ---------  --------- --------- ---------  ---------

 Gross premiums
  written          18,954     25,288    14,763        --     59,005
 Ceded premiums
  written          (1,274)    (1,219)       --        --     (2,493)
                ---------  --------- --------- ---------  ---------
 Net premiums
  written          17,680     24,069    14,763        --     56,512
 Change in unear-
  ned premiums      1,784        650       (18)       --      2,416
                ---------  --------- --------- ---------  ---------
 Net premiums
  earned           19,464     24,719    14,745        --     58,928

 Total revenues    20,280     30,245    16,053    (1,589)    64,989

 Losses and loss
  adjustment 
  expenses         13,239     16,287     9,455        --     38,981

 Pre-tax income
  (loss), net of
  minority 
  interest            887        745     2,544    (4,030)       146

 Net loss ratio
  (2)                68.0%      65.9%     64.1%                66.2%
 Net expense
  ratio (2)          27.4%      31.1%     22.6%                28.8%
                ---------  --------- ---------            ---------
 Net combined
  ratio (2)          95.4%      97.0%     86.7%                95.0%
                =========  ========= =========            =========


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

 Produced
  premium (1)   $  21,945  $  37,919 $  14,854 $      --  $  74,718
                ---------  --------- --------- ---------  ---------

 Gross premiums
  written          21,918     25,531    14,855        --     62,304
 Ceded premiums
  written             386       (827)       --        --       (441)
                ---------  --------- --------- ---------  ---------
 Net premiums
  written          22,304     24,704    14,855        --     61,863
 Change in unear-
  ned premiums       (311)      (870)     (919)       --     (2,100)
                ---------  --------- --------- ---------  ---------

 Net premiums
  earned           21,993     23,834    13,936        --     59,763

 Total revenues    23,718     32,910    15,185       743     72,556

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

 Pre-tax income
  (loss)            3,702      6,500     1,854    (1,909)    10,147

 Net loss ratio
  (2)                61.4%      57.4%     68.4%                61.4%
 Net expense
  ratio (2)          27.1%      30.6%     22.9%                27.5%
                ---------  --------- ---------            ---------
 Net combined
  ratio (2)          88.5%      88.0%     91.3%                88.9%
                =========  ========= =========            =========

 1 Produced premium is a non-GAAP measurement that management uses
   to track total controlled premium produced by our operations. We
   believe this is a useful tool for users of our financial statements
   to measure our premium production whether retained by our insurance
   company subsidiaries or retained by third party insurance carriers
   where we receive commission revenue.

2  The net loss ratio is calculated as incurred losses and loss
   adjustment expenses divided by net premiums earned, each determined
   in accordance with GAAP. The net expense ratio is calculated as
   underwriting expenses of our insurance company subsidiaries (which
   include provisional ceding commissions, direct agent commissions,
   premium taxes and assessments, professional fees, other general
   underwriting expenses and 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.


                   Hallmark Financial Services, Inc.
                      Consolidated Segment Data

                          Nine Months Ended September 30, 2008
                -----------------------------------------------------
                Standard   Specialty
                Commercial Commercial Personal
                 Segment    Segment   Segment  Corporate Consolidated
                ---------  --------- --------- ---------  ---------
 Produced
  premium (1)   $  62,330  $ 104,302 $  46,643 $      --  $ 213,275
                ---------  --------- --------- ---------  ---------

 Gross premiums
   written         62,327     77,387    46,643        --    186,357
 Ceded premiums
  written          (3,667)    (2,836)       --        --     (6,503)
                ---------  --------- --------- ---------  ---------
 Net premiums
  written          58,660     74,551    46,643        --    179,854
 Change in
  unearned 
  premiums          2,224     (1,900)   (2,242)       --     (1,918)
                ---------  --------- --------- ---------  ---------
 Net premiums
  earned           60,884     72,651    44,401        --    177,936

 Total revenues    64,617     94,617    48,277       983    208,494

 Losses and loss
  adjustment
  expenses         36,218     45,266    29,030        --    110,514

 Pre-tax income
  (loss), net of
  minority 
  interest          9,104     12,601     7,047    (7,224)    21,528

 Net loss ratio
  (2)                59.5%      62.3%     65.4%                62.1%
 Net expense
  ratio (2)          27.2%      30.7%     22.2%                28.9%
                ---------  --------- ---------            ---------
 Net combined
  ratio (2)          86.7%      93.0%     87.6%                91.0%
                =========  ========= =========            =========

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

 Produced
  premium (1)   $  70,246  $ 118,232 $ 43,228  $      --  $ 231,706
                ---------  --------- --------  ---------  ---------

 Gross premiums
  written          70,139     80,172   43,228         --    193,539
 Ceded premiums
  written          (5,053)    (3,556)      --         --     (8,609)
                ---------  --------- --------  ---------  ---------
 Net premiums
  written          65,086     76,616   43,228         --    184,930
 Change in unear-
  ned premiums     (2,966)   (12,100)  (3,143)        --    (18,209)
                ---------  --------- --------  ---------  ---------
 Net premiums
  earned           62,120     64,516   40,085         --    166,721

 Total revenues    65,488     93,986   43,654      2,122    205,250

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

 Pre-tax income
  (loss)            9,125     20,627    6,148     (5,108)    30,792

 Net loss ratio
  (2)                60.6%      54.9%    66.4%                 59.8%
 Net expense
  ratio (2)          27.3%      31.4%    23.1%                 27.9%
                ---------  --------- --------             ---------
 Net combined
  ratio (2)          87.9%      86.3%    89.5%                 87.7%
                =========  ========= ========             =========

 1 Produced premium is a non-GAAP measurement that management uses to
   track total controlled premium produced by our operations. We
   believe this is a useful tool for users of our financial statements
   to measure our premium production whether retained by our insurance
   company subsidiaries or retained by third party insurance carriers
   where we receive commission revenue.

 2 The net loss ratio is calculated as incurred losses and loss
   adjustment expenses divided by net premiums earned, each determined
   in accordance with GAAP. The net expense ratio is calculated as
   underwriting expenses of our insurance company subsidiaries (which
   include provisional ceding commissions, direct agent commissions,
   premium taxes and assessments, professional fees, other general
   underwriting expenses and 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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