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Hallmark Financial Services, Inc. Announces Third Quarter 2012 Results

Hallmark Logo (EPR)

FORT WORTH, Texas, Nov. 7, 2012 (GLOBE NEWSWIRE) -- Hallmark Financial Services, Inc. (Nasdaq:HALL) ("Hallmark") today reported third quarter 2012 net income of $3.4 million, or $0.18 per share, compared to net income of $0.1 million, or $0.01 per share reported for third quarter 2011. Year to date, Hallmark reported net income of $1.7 million, or $0.09 per share, compared to a net loss of $11.2 million, or $0.57 per share reported for the same period the prior year. Total revenues were $85.6 million for the third quarter 2012 as compared to $83.7 million for the third quarter of 2011. Year to date total revenues for 2012 were $253.2 million, up 6% from the $239.7 million reported for the same period the prior year.



Mark J. Morrison, President and Chief Executive Officer, said, "I am pleased to report that the decisive actions taken over the past year to improve underwriting profitability, including a continuation of meaningful rate increases across most all business units and exiting unprofitable states and product lines in our Personal Segment, have produced earnings for the quarter commensurate with Hallmark's long term track record. Our third quarter combined ratio of 95.8% and earnings of $0.18 per share evidence this improvement and reflect the favorable underlying trends within our business. We recognize there is still work to do in order to produce the results we expect over the long term. However, we are encouraged by the progress we have made and remain optimistic about how our business is positioned for the future."

Mr. Morrison continued, "The year-over-year increase in revenue has been largely driven by organic growth from the operating units that comprise our Specialty Commercial Segment. We have seen an increase in premium production generated from favorable rate trends, as well as from added insured exposure units on accounts that suggests improving economic conditions in the markets in which we operate. We continue to see middle single-digit to low double-digit rate increases across all operations with the exception of General Aviation, which continues to be impacted by overly aggressive competitors in a contracting market."

Mark E. Schwarz, Executive Chairman of Hallmark, stated, "Book value per share was $11.37 at the end of the third quarter, an increase of 4% year over year and an increase of 2% year to date. Cash flow from operations was $11.0 million in the third quarter and $28.2 million year to date. Total cash and investments increased 7% year to date to $542 million, or $28.13 per share. Hallmark continues to have significant cash of $116 million as of September 30, 2012."

Three Months Ended
September 30,
2012 2011 % Change
($ in thousands, unaudited)
Gross premiums written 99,448 89,751 11%
Net premiums written 85,005 77,882 9%
Net premiums earned 80,481 75,068 7%
Investment income, net of expenses 3,795 3,980 -5%
Net realized gains 982 394 149%
Total revenues 85,620 83,748 2%
Net income (1) 3,413 98 3383%
Net income per share - basic $ 0.18 $ 0.01 1700%
Net income per share - diluted $ 0.18 $ 0.01 1700%
Book value per share $ 11.37 $ 10.96 4%
Cash flow from operations $ 10,965 $ 4,010 173%
Nine Months Ended
September 30,
2012 2011 % Change
($ in thousands)
Gross premiums written 297,658 270,834 10%
Net premiums written 255,104 233,072 9%
Net premiums earned 235,938 216,759 9%
Investment income, net of expenses 11,573 11,765 -2%
Net realized gains 1,854 3,177 -42%
Total revenues 253,177 239,669 6%
Net income (loss) (1) 1,741 (11,202) NM
Net income (loss) per share - basic $ 0.09 $ (0.57) NM
Net income (loss) per share - diluted $ 0.09 $ (0.57) NM
Book value per share $ 11.37 $ 10.96 4%
Cash flow from operations $ 28,187 $ 15,008 88%

(1) Net income (loss) is net income (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 nine months ended September 30, 2012, total revenues were $85.6 million and $253.2 million, representing a 2% and 6% increase, respectively, from the $83.7 million and $239.7 million in total revenues for the same period of 2011. The growth in revenue was primarily attributable to increased premium production and resulting earned premium driven largely from the E&S Commercial business unit and from the acquisition of the Workers Compensation business unit during the third quarter of 2011. The increase in revenue was partially offset by an adverse profit share commission revenue adjustment in the Standard Commercial P&C business unit, combined with lower finance charges and earned premium in the Personal Segment due mostly to the impact of a reduction of premium written in underperforming states and products exited over the past twelve months. Further offsetting the increase in revenue was lower net realized gains for the nine months ended September 30, 2012.

The increase in revenue for the three months and nine months ended September 30, 2012 was complemented by decreased loss and loss adjustment expenses ("LAE") due primarily to improved current accident year loss trends in the Standard Commercial P&C business unit for the year-to-date and the Personal Lines business unit for both the quarter and year-to-date as well as significant adverse reserve development recognized during the prior year. During the three months and nine months ended September 30, 2012 Hallmark recorded $2.2 million and $3.6 million of favorable prior year loss reserve development. During the three and nine months ended September 30, 2011 Hallmark recorded $2.3 million and $18.1 million, respectively, of unfavorable prior year loss reserve development. Of the $18.1 million unfavorable development recognized for the nine months ended September 30, 2011, $10.1 million was a result of adverse prior year loss reserve development in the Personal Segment in Florida. In addition, the results for the nine months ended September 30, 2012 and 2011 included $11.6 million and $10.0 million, respectively, in net losses from weather related claims.

The Company reported $3.4 million net income attributable to Hallmark for the three months ended September 30, 2012 as compared to $98 thousand net income attributable to Hallmark for the same period during 2011. The Company reported a net income attributable to Hallmark of $1.7 million for the nine months ended September 30, 2012, which was $12.9 million higher than the $11.2 million net loss attributable to Hallmark reported for the nine months ended September 30, 2011. On a diluted basis per share, Hallmark reported net income of $0.18 per share for the three months ended September 30, 2012, as compared to net income of $0.01 per share for the same period in 2011. On a diluted basis per share, net income per share was $0.09 for the nine months ended September 30, 2012 as compared to net loss per share of $0.57 for the same period during 2011.

Hallmark's consolidated net loss ratio was 65.7% and 71.6% for the three and nine months ended September 30, 2012 as compared to 74.8% and 83.9% for the same periods in 2011. Hallmark's net expense ratio was 30.1% and 30.4% for the three and nine months ended September 30, 2012 as compared to 31.6% and 31.3% for the same periods in 2011. Hallmark's net combined ratio was 95.8% and 102.0% for the three and nine months ended September 30, 2012 as compared to 106.4% and 115.2% 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."

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)
ASSETS September 30
2012
December 31
2011
(unaudited) (as adjusted)
Investments:
Debt securities, available-for-sale, at fair value (cost: $380,495 in 2012 and $380,578 in 2011) $ 384,288 $ 380,469
Equity securities, available-for-sale, at fair value (cost: $29,118 in 2012 and $30,465 in 2011) 41,694 44,159
Total investments 425,982 424,628
Cash and cash equivalents 107,682 74,471
Restricted cash 8,246 9,372
Ceded unearned premiums 21,994 19,470
Premiums receivable 69,182 53,513
Accounts receivable 3,360 3,946
Receivable for securities 1,051 2,617
Reinsurance recoverable 50,109 42,734
Deferred policy acquisition costs 26,408 22,554
Goodwill 44,695 44,695
Intangible assets, net 23,965 26,654
Deferred federal income taxes, net 532 --
Federal income tax recoverable -- 6,738
Prepaid expenses 1,620 1,458
Other assets 11,008 13,209
Total assets $ 795,834 $ 746,059
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Revolving credit facility payable $ 1,473 $ 4,050
Subordinated debt securities 56,702 56,702
Reserves for unpaid losses and loss adjustment expenses 315,607 296,945
Unearned premiums 168,197 146,104
Reinsurance balances payable 5,976 3,139
Pension liability 3,245 3,971
Payable for securities 6,749 203
Deferred federal income taxes, net -- 135
Federal income tax payable 177 --
Accounts payable and other accrued expenses 18,600 17,954
Total liabilities 576,726 529,203
Commitments and Contingencies
Redeemable non-controlling interest -- 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 122,412 122,487
Retained earnings 96,181 94,440
Accumulated other comprehensive income 8,316 6,446
Treasury stock (1,609,374 shares in 2012 and 2011), at cost (11,558) (11,558)
Total stockholders' equity 219,108 215,572
$ 795,834 $ 746,059
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
2012 2011 2012 2011
(as adjusted) (as adjusted)
Gross premiums written $ 99,448 $ 89,751 $ 297,658 $ 270,834
Ceded premiums written (14,443) (11,869) (42,554) (37,762)
Net premiums written 85,005 77,882 255,104 233,072
Change in unearned premiums (4,524) (2,814) (19,166) (16,313)
Net premiums earned 80,481 75,068 235,938 216,759
Investment income, net of expenses 3,795 3,980 11,573 11,765
Net realized gains 982 394 1,854 3,177
Finance charges 1,374 1,683 4,538 5,148
Commission and fees (1,029) 2,445 (1,033) 2,617
Other income 17 178 307 203
Total revenues 85,620 83,748 253,177 239,669
Losses and loss adjustment expenses 52,839 56,136 168,859 181,841
Other operating expenses 25,726 24,850 77,077 71,890
Interest expense 1,137 1,159 3,464 3,470
Amortization of intangible assets 897 897 2,690 2,690
Total expenses 80,599 83,042 252,090 259,891
Income (loss) before tax 5,021 706 1,087 (20,222)
Income tax expense (benefit) 1,350 602 (978) (9,048)
Net income (loss) 3,671 104 2,065 (11,174)
Less: Net income attributable to non-controlling interest 258 6 324 28
Net income (loss) attributable to Hallmark Financial Services, Inc. $ 3,413 $ 98 $ 1,741 $ (11,202)
Net income (loss) per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic $ 0.18 $ 0.01 $ 0.09 $ (0.57)
Diluted $ 0.18 $ 0.01 $ 0.09 $ (0.57)
Hallmark Financial Services, Inc
Consolidated Segment Data
Three Months Ended September 30, 2012
Standard
Commercial
Segment
Specialty
Commercial
Segment
Personal
Segment
Corporate Consolidated
Gross premiums written $ 18,706 $ 62,349 $ 18,393 -- $ 99,448
Ceded premiums written (1,876) (12,385) (182) -- (14,443)
Net premiums written 16,830 49,964 18,211 -- 85,005
Change in unearned premiums 736 (6,396) 1,136 -- (4,524)
Net premiums earned 17,566 43,568 19,347 -- 80,481
Total revenues 17,761 46,373 21,172 314 85,620
Losses and loss adjustment expenses 12,476 25,532 14,831 -- 52,839
Pre-tax income (loss), net of non-controlling interest (529) 8,287 (345) (2,650) 4,763
Net loss ratio (1) 71.0% 58.6% 76.7% 65.7%
Net expense ratio (1) 33.4% 27.3% 29.3% 30.1%
Net combined ratio (1) 104.4% 85.9% 106.0% 95.8%
Three Months Ended September 30, 2011
Standard
Commercial
Segment
Specialty
Commercial
Segment
Personal
Segment
Corporate Consolidated
Gross premiums written $ 16,698 $ 48,417 $ 24,636 -- $ 89,751
Ceded premiums written (1,489) (10,444) 64 -- (11,869)
Net premiums written 15,209 37,973 24,700 -- 77,882
Change in unearned premiums 1,320 (2,993) (1,141) -- (2,814)
Net premiums earned 16,529 34,980 23,559 -- 75,068
Total revenues 20,258 36,814 25,637 1,039 83,748
Losses and loss adjustment expenses 10,703 23,356 22,077 -- 56,136
Pre-tax income (loss), net of non-controlling interest 4,260 2,691 (4,536) (1,715) 700
Net loss ratio (1) 64.8% 66.8% 93.7% 74.8%
Net expense ratio (1) 32.0% 29.8% 28.9% 31.6%
Net combined ratio (1) 96.8% 96.6% 122.6% 106.4%

1 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
Nine Months Ended September 30, 2012
Standard
Commercial
Segment
Specialty
Commercial
Segment
Personal
Segment
Corporate Consolidated
Gross premiums written $ 58,292 $ 178,690 $ 60,676 -- $ 297,658
Ceded premiums written (5,063) (36,948) (543) -- (42,554)
Net premiums written 53,229 141,742 60,133 -- 255,104
Change in unearned premiums (2,194) (19,449) 2,477 -- (19,166)
Net premiums earned 51,035 122,293 62,610 -- 235,938
Total revenues 53,791 129,812 68,508 1,066 253,177
Losses and loss adjustment expenses 39,253 76,827 52,779 -- 168,859
Pre-tax income (loss), net of non-controlling interest (2,601) 17,193 (5,747) (8,082) 763
Net loss ratio (1) 76.9% 62.8% 84.3% 71.6%
Net expense ratio (1) 33.8% 28.2% 28.5% 30.4%
Net combined ratio (1) 110.7% 91.0% 112.8% 102.0%
Nine Months Ended September 30, 2011
Standard
Commercial
Segment
Specialty
Commercial
Segment
Personal
Segment
Corporate Consolidated
Gross premiums written $ 52,702 $ 137,032 $ 81,100 -- $ 270,834
Ceded premiums written (4,053) (29,041) (4,668) -- (37,762)
Net premiums written 48,649 107,991 76,432 -- 233,072
Change in unearned premiums (867) (9,312) (6,134) -- (16,313)
Net premiums earned 47,782 98,679 70,298 -- 216,759
Total revenues 53,926 104,433 76,556 4,754 239,669
Losses and loss adjustment expenses 39,117 66,706 76,018 -- 181,841
Pre-tax income (loss), net of non-controlling interest (890) 6,955 (22,341) (3,974) (20,250)
Net loss ratio (1) 81.9% 67.6% 108.1% 83.9%
Net expense ratio (1) 32.5% 30.2% 26.8% 31.3%
Net combined ratio (1) 114.4% 97.8% 134.9% 115.2%

1 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.

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

Source:Hallmark Financial Services, Inc.