Hallmark Financial Services, Inc. Announces Third Quarter 2010 Results

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.

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."

 (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.

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. 

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.