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	v320580_8k.htm

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES SECOND QUARTER 2012 RESULTS

FORT WORTH, Texas, (August 6, 2012) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported second quarter 2012 net loss of $1.8 million, or $0.10 per share, compared to a net loss of $0.1 million, or $0.00 per share reported for second quarter 2011. Year to date, Hallmark reported a net loss of $1.7 million, or $0.09 per share, compared to a net loss of $11.3 million, or $0.56 per share reported for the same period the prior year. Total revenues were $84.6 million for the second quarter 2012 as compared to $78.5 million for the second quarter of 2011. Year to date total revenues for 2012 were $167.6 million, up 7% from the $155.9 million reported for the same period the prior year.

Mark J. Morrison, President and Chief Executive Officer, said, “Our pre-tax results for the second quarter are greatly improved from the prior year due to various actions taken over the past several months to improve the profitability of our books of business including meaningful rate increases, and exiting unprofitable states and product lines. However, the results are not what we planned to be reporting this quarter due to significant net catastrophe losses of $5.6 million incurred during the quarter and adverse prior year loss reserve development of $1.6 million. These events impacted the quarterly results by $0.25 per diluted share.”

Mr. Morrison continued, “Although we are disappointed that catastrophe losses have again over-shadowed improvements made in the profitability of our operating units during the quarter, we are in the business of insuring risks that expose us to catastrophic events. Near term volatility from such events is to be expected. We try to mitigate such volatility with appropriate reinsurance protection, but we have no control over the frequency and timing of these events. Absent any further events over the coming quarters, we expect to see underwriting margins begin to reflect the impact of the mid to upper-single digit rate increases that continue across nearly all of our operating units and product lines.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share was $11.08 at the end of the second quarter, a decrease of 1% year over year and a decrease of 1% year to date. Cash flow from operations was $12.4 million in the second quarter and $17.2 million year to date. Total cash and investments increased 4% year to date to $527 million, or $27.35 per share. Hallmark continues to have significant cash of $87.0 million as of June 30, 2012.”

	Three Months Ended
	June 30,
	2012			2011			% Change
	($ in thousands, unaudited)
Gross premiums written		100,815			91,371			10	%
Net premiums written		85,137			78,956			8	%
Net premiums earned		78,249			71,578			9	%
Investment income, net of expenses		3,932			3,778			4	%
Net realized gains		991			1,664			-40	%
Total revenues		84,571			78,513			8	%
Net loss (1)		(1,843	)		(87	)		NM
Net loss per share - basic	$	(0.10	)	$	-			NM
Net loss per share - diluted	$	(0.10	)	$	-			NM
Book value per share	$	11.08		$	11.20			-1	%
Cash flow from operations	$	12,409		$	16,972			-27	%

	Six Months Ended
	June 30,
	2012			2011			% Change
	($ in thousands)
Gross premiums written		198,210			181,083			9	%
Net premiums written		170,099			155,190			10	%
Net premiums earned		155,457			141,691			10	%
Investment income, net of expenses		7,778			7,785			0	%
Net realized gains		872			2,783			-69	%
Total revenues		167,557			155,921			7	%
Net loss (1)		(1,672	)		(11,300	)		NM
Net loss per share - basic	$	(0.09	)	$	(0.56	)		NM
Net loss per share - diluted	$	(0.09	)	$	(0.56	)		NM
Book value per share	$	11.08		$	11.20			-1	%
Cash flow from operations	$	17,222		$	10,992			57	%

(1)

Net loss is net 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 six months ended June 30, 2012, total revenues were $84.6 million and $167.6 million, representing an 8% and 7% increase, respectively, from the $78.5 million and $155.9 million in total revenues for the same period of 2011. This increase in revenue was primarily attributable to increased earned premium largely from increased production by the E&S Commercial business unit and the acquisition of the Workers Compensation business unit during the third quarter of 2011. These increases in revenue were partially offset by lower net realized gains and lower finance charges and earned premium in the Personal Lines business unit due mostly to the impact of rate increases, the reduction of premium written in Florida, and exiting certain other underperforming states and programs.

The increase in revenue for the three months and six months ended June 30, 2012 was complemented by slightly decreased loss and loss adjustment expenses due primarily to lower current accident year loss trends. During the three months ended June 30, 2012, Hallmark recorded $1.6 million unfavorable prior year loss development. During the six months ended June 30, 2012 Hallmark recorded $1.4 million of favorable prior year loss development. During the three and six months ended June 30, 2011 Hallmark recorded $0.7 million and $15.8 million, respectively, of unfavorable prior year loss development. Of the $15.8 million unfavorable development recognized for the six months ended June 30, 2011, $9.5 million was a result of adverse prior year loss reserve development in the Personal Lines Segment in Florida. In addition, the results for the six months ended June 30, 2012 and 2011 include $10.4 million and $9.4 million in net losses from weather related claims.

Hallmark reported a $1.8 million net loss for the three months ended June 30, 2012 as compared to $87 thousand net loss for the same period during 2011. Hallmark reported a net loss of $1.7 million for the six months ended June 30, 2012, which was $9.6 million lower than the $11.3 million net loss reported for the six months ended June 30, 2011. On a diluted basis per share, Hallmark reported a net loss of $0.10 per share for the three months ended June 30, 2012, as compared to net loss of $0.00 per share for the same period in 2011. On a diluted basis, net loss per share was $0.09 for the six months ended June 30, 2012 as compared to net loss per share of $0.56 for the same period during 2011.

Hallmark's consolidated net loss ratio was 78.2% and 74.6% for the three and six months ended June 30, 2012 as compared to 86.5% and 88.7% for the same periods in 2011. Hallmark's net expense ratio was 30.5% for the three and six months ended June 30, 2012 as compared to 31.9% and 31.2% for the same periods in 2011. Hallmark’s net combined ratio was 108.7% and 105.1% for the three and six months ended June 30, 2012 as compared to 118.4% and 119.9% 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)

	June 30			December 31
	2012			2011
	(unaudited)			(as adjusted)
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (cost: $397,052 in 2012 and $380,578 in 2011)	$	399,069		$	380,469
Equity securities, available-for-sale, at fair value (cost: $30,119 in 2012 and $30,465 in 2011)		40,715			44,159

Total investments		439,784			424,628

Cash and cash equivalents		76,230			74,471
Restricted cash		10,793			9,372
Ceded unearned premiums		21,692			19,470
Premiums receivable		68,882			53,513
Accounts receivable		3,495			3,946
Receivable for securities		2,334			2,617
Reinsurance recoverable		47,808			42,734
Deferred policy acquisition costs		25,481			22,554
Goodwill		44,695			44,695
Intangible assets, net		24,861			26,654
Deferred federal income taxes, net		1,940			-
Federal income tax recoverable		1,119			6,738
Prepaid expenses		1,651			1,458
Other assets		12,579			13,209

Total assets	$	783,344		$	746,059

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Revolving credit facility payable	$	1,550		$	4,050
Subordinated debt securities		56,702			56,702
Reserves for unpaid losses and loss adjustment expenses		314,109			296,945
Unearned premiums		163,371			146,104
Unearned revenue		63			55
Reinsurance balances payable		6,189			3,139
Accrued agent profit sharing		929			959
Accrued ceding commission payable		1,200			1,071
Pension liability		3,660			3,971
Payable for securities		6,419			203
Deferred federal income taxes, net		-			135
Accounts payable and other accrued expenses		14,354			15,869

Total liabilities		568,546			529,203

Commitments and Contingencies

Redeemable non-controlling interest		1,274			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		122,669			122,487
Retained earnings		92,768			94,440
Accumulated other comprehensive income		5,888			6,446
Treasury stock (1,609,374 shares in 2012 and 2011), at cost		(11,558	)		(11,558	)

Total stockholders' equity		213,524			215,572

	$	783,344		$	746,059

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
				(as adjusted)						(as adjusted)

Gross premiums written	$	100,815		$	91,371		$	198,210		$	181,083
Ceded premiums written		(15,678	)		(12,415	)		(28,111	)		(25,893	)
Net premiums written		85,137			78,956			170,099			155,190
Change in unearned premiums		(6,888	)		(7,378	)		(14,642	)		(13,499	)
Net premiums earned		78,249			71,578			155,457			141,691

Investment income, net of expenses		3,932			3,778			7,778			7,785
Net realized gains		991			1,664			872			2,783
Finance charges		1,524			1,725			3,164			3,465
Commission and fees		(184	)		(243	)		(4	)		172
Other income		59			11			290			25

Total revenues		84,571			78,513			167,557			155,921

Losses and loss adjustment expenses		61,229			61,920			116,020			125,705
Other operating expenses		25,419			23,887			51,351			47,040
Interest expense		1,178			1,153			2,327			2,311
Amortization of intangible assets		896			896			1,793			1,793

Total expenses		88,722			87,856			171,491			176,849

Loss before tax		(4,151	)		(9,343	)		(3,934	)		(20,928	)
Income tax benefit		(2,351	)		(9,264	)		(2,328	)		(9,650	)
Net loss		(1,800	)		(79	)		(1,606	)		(11,278	)
Less: Net income attributable to non-controlling interest		43			8			66			22

Net loss attributable to Hallmark Financial Services, Inc.	$	(1,843	)	$	(87	)	$	(1,672	)	$	(11,300	)

Net loss per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic	$	(0.10	)	$	-		$	(0.09	)	$	(0.56	)
Diluted	$	(0.10	)	$	-		$	(0.09	)	$	(0.56	)

Hallmark Financial Services, Inc

Consolidated Segment Data

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

Gross premiums written	$	20,739		$	61,456		$	18,620			-		$	100,815
Ceded premiums written		(1,730	)		(13,749	)		(199	)		-			(15,678	)
Net premiums written		19,009			47,707			18,421			-			85,137
Change in unearned premiums		(2,369	)		(7,017	)		2,498			-			(6,888	)
Net premiums earned		16,640			40,690			20,919			-			78,249

Total revenues		17,924			43,046			22,905			696			84,571

Losses and loss adjustment expenses		13,013			28,286			19,930			-			61,229

Pre-tax income (loss), net of non-controlling interest		(710	)		2,929			(4,211	)		(2,202	)		(4,194	)

Net loss ratio (1)		78.2	%		69.5	%		95.3	%					78.2	%
Net expense ratio (1)		34.2	%		28.4	%		28.8	%					30.5	%
Net combined ratio (1)		112.4	%		97.9	%		124.1	%					108.7	%

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

Gross premiums written	$	18,549		$	48,533		$	24,289			-		$	91,371
Ceded premiums written		(1,392	)		(10,877	)		(146	)		-			(12,415	)
Net premiums written		17,157			37,656			24,143			-			78,956
Change in unearned premiums		(1,796	)		(5,171	)		(411	)		-			(7,378	)
Net premiums earned		15,361			32,485			23,732			-			71,578

Total revenues		16,241			34,476			25,869			1,927			78,513

Losses and loss adjustment expenses		15,789			23,549			22,582			-			61,920

Pre-tax income (loss), net of non-controlling interest		(4,767	)		812			(4,620	)		(776	)		(9,351	)

Net loss ratio (1)		102.8	%		72.5	%		95.2	%					86.5	%
Net expense ratio (1)		34.0	%		30.6	%		27.7	%					31.9	%
Net combined ratio (1)		136.8	%		103.1	%		122.9	%					118.4	%

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

	Six Months Ended June 30, 2012
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Gross premiums written	$	39,586		$	116,341		$	42,283			-		$	198,210
Ceded premiums written		(3,187	)		(24,563	)		(361	)		-			(28,111	)
Net premiums written		36,399			91,778			41,922			-			170,099
Change in unearned premiums		(2,930	)		(13,053	)		1,341			-			(14,642	)
Net premiums earned		33,469			78,725			43,263			-			155,457

Total revenues		36,030			83,439			47,336			752			167,557

Losses and loss adjustment expenses		26,777			51,295			37,948			-			116,020

Pre-tax income (loss), net of non-controlling interest		(2,072	)		8,906			(5,402	)		(5,432	)		(4,000	)

Net loss ratio (1)		80.0	%		65.2	%		87.7	%					74.6	%
Net expense ratio (1)		34.0	%		28.7	%		28.1	%					30.5	%
Net combined ratio (1)		114.0	%		93.9	%		115.8	%					105.1	%

	Six Months Ended June 30, 2011
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Gross premiums written	$	36,004		$	88,615		$	56,464			-		$	181,083
Ceded premiums written		(2,564	)		(18,597	)		(4,732	)		-			(25,893	)
Net premiums written		33,440			70,018			51,732			-			155,190
Change in unearned premiums		(2,187	)		(6,318	)		(4,994	)		-			(13,499	)
Net premiums earned		31,253			63,700			46,738			-			141,691

Total revenues		33,668			67,619			50,919			3,715			155,921

Losses and loss adjustment expenses		28,414			43,350			53,941			-			125,705

Pre-tax income (loss), net of non-controlling interest		(5,150	)		4,263			(17,804	)		(2,259	)		(20,950	)

Net loss ratio (1)		90.9	%		68.1	%		115.4	%					88.7	%
Net expense ratio (1)		32.7	%		30.4	%		25.8	%					31.2	%
Net combined ratio (1)		123.6	%		98.5	%		141.2	%					119.9	%

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