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

FORT WORTH, Texas, May 10 /PRNewswire-FirstCall/ — Hallmark Financial Services, Inc. today reported quarterly net income of $5.0 million for the first quarter ended March 31, 2007, representing a 105% increase over net income of $2.4 million for the first quarter of 2006. On a diluted basis, net income to the common stockholders was $0.24 per share for the three months ended March 31, 2007 as compared to $0.14 per share for the same period in 2006. During the quarter ended March 31, 2007, Hallmark reported total revenues of $64.0 million, representing a 44% increase over the $44.5 million in total revenues for the first quarter of 2006.

Mark J. Morrison, President and Chief Executive Officer, said, “We are very pleased to report the positive results the Company achieved during the first quarter. The increase in revenue for the quarter was primarily the result of executing our plan to increase the retention of the business we produce which, in turn, had the intended result of increasing our bottom line.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Profitable underwriting remains our focus and is reflected in a combined ratio of 90.5% for the first quarter of 2007. Annualized return on average equity was 13% and is expected to improve in the future as a result of continued planned increases in retained premium volume. Year over year growth in book value per share was 17% at quarter end.”

Three Months EndedMarch 31,20072006($ in thousands)Gross premiums written$64,658$47,735Net premiums written60,77145,779Net premiums earned51,64828,434Commission and fees7,90512,264Investment income, net of expenses2,9902,357Realized gain (loss) on investments53(83)Total revenues63,95844,520Net income4,9702,426Common EPS – basic$0.24$0.14Common EPS – diluted$0.24$0.14Annualized return on average equity13.0%10.9%Book value per share$7.52$6.42Cash flow from operations$18,975$9,582

The increase in net income was largely due to the improved results of our 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 quarter of 2006 was adversely impacted by $1.1 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 our Standard Commercial Segment during the first quarter of 2007.

Increased retention of business produced by our Specialty Commercial Segment was the primary cause of the increase in revenue. Specialty Commercial Segment revenues increased $12.1 million, or 76%, during the three months ended March 31, 2007 as compared to the same period of 2006. Increased retention of business was also the primary reason for the $4.2 million increase in revenue from the Standard Commercial Segment during the first quarter of 2007. Earned premiums from our Personal Segment also contributed $2.9 million to the increase in revenue for the three months ended March 31, 2007.

Net investment income for the three months ended March 31, 2007 was $3.0 million as compared to $2.4 million for the same period in 2006. The increase of 27% reflected higher interest rates 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’s net losses and loss adjustment expenses and its net loss ratio for the three months ended March 31, 2007 were $32.2 million and 62.3%, respectively, compared to $16.7 million and 58.7%, respectively, for the same period in 2006. Hallmark did not recognize any development of prior years’ loss reserve estimates during either the first quarter 2007 or 2006. The increase in the net loss ratio is primarily due to a decrease in incurred losses inuring to our reinsurance coverage for the first quarter of 2007 as compared to the first quarter of 2006. Hallmark’s other operating costs and expenses and its expense ratio for the three months ended March 31, 2007 were $22.7 million and 28.2%, respectively, compared to $21.0 million and 28.8%, 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 and casualty insurance products to businesses and individuals. The Company’s business involves marketing, distributing, underwriting and servicing commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana, Louisiana, Oklahoma, Arkansas and Washington; marketing, distributing, underwriting and servicing non-standard personal automobile insurance in Texas, New Mexico, Arizona, Oklahoma, Arkansas, Idaho, Oregon and Washington; marketing, distributing, underwriting and servicing general aviation insurance in 47 states; and providing other insurance related services. The Company is headquartered in Fort Worth, Texas and its common stock is presently 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 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.

For further information, please contact: Mark J. Morrison, President and Chief Executive Officer at 817.348.1600http://www.hallmarkgrp.com/Hallmark Financial Services, Inc. and SubsidiariesConsolidated Balance Sheets($ in thousands)March 31December 31ASSETS20072006(unaudited)(audited)Investments:Debt securities, available-for-sale,at market value$133,122$125,784Equity securities, available-for-sale,at market value37,4484,580Short-term investments, available-for-sale,at market value10,32525,275Total investments180,895155,639Cash and cash equivalents75,82381,474Restricted cash and investments17,01331,815Premiums receivable49,49744,644Accounts receivable11,42513,223Prepaid reinsurance premium1,6371,629Reinsurance balances receivable5,083—Reinsurance recoverable5,2835,930Deferred policy acquisition costs18,92917,145Excess of cost over fair value of netassets acquired31,42731,427Intangible assets25,50126,074Prepaid expenses1,4181,769Other assets8,2405,184Total assets$432,171$415,953LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilities:Notes payable$36,016$35,763Structured settlements9,69124,587Unpaid losses and loss adjustment expenses90,84077,564Unearned premiums100,58191,606Unearned revenue4,5085,734Reinsurance balances payable—1,060Accrued agent profit sharing5941,784Accrued ceding commission payable7,2063,956Pension liability3,1213,126Deferred federal income taxes3,7082,310Current federal income tax payable1,6842,132Accounts payable and other accrued expenses18,10815,600Total liabilities276,057265,222Commitments and ContingenciesStockholders’ equity:Common stock, $.18 par value (authorized33,333,333 shares in 2007 and 2006;issued 20,776,066 shares in 2007 and 2006)3,7403,740Additional paid in capital117,983117,932Retained earnings36,45031,480Accumulated other comprehensive loss(1,982)(2,344)Treasury stock, at cost (7,828 shares in2007 and 2006)(77)(77)Total stockholders’ equity156,114150,731$432,171$415,953Hallmark Financial Services, Inc. and SubsidiariesConsolidated Statements of Operations(Unaudited)($ in thousands, except per share amounts)20072006Gross premiums written$64,658$47,735Ceded premiums written(3,887)(1,956)Net premiums written60,77145,779Change in unearned premiums(9,123)(17,345)Net premiums earned51,64828,434Investment income, net of expenses2,9902,357Realized gain (loss)53(83)Finance charges1,086687Commission and fees7,90512,264Processing and service fees272857Other income44Total revenues63,95844,520Losses and loss adjustment expenses32,18516,690Other operating costs and expenses22,70121,026Interest expense7861,585Interest expense from amortization ofdiscount on convertible notes—1,117Amortization of intangible asset573573Total expenses56,24540,991Income before tax7,7133,529Income tax expense2,7431,103Net income$4,970$2,426Common stockholders net income per share:Basic$0.24$0.14Diluted$0.24$0.14Convertible noteholders net income per share:Basicn/a$0.14Dilutedn/a$0.14Three Months Ended March 31, 2007Standard SpecialtyCommercial Commercial PersonalSegment SegmentSegment Corporate ConsolidatedProduced premium23,55039,35715,076—77,983Gross premiums written23,48126,10115,076—64,658Ceded premiums written(2,635) (1,252)——(3,887)Net premiums written20,84624,84915,076—60,771Change in unearnedpremiums(924) (5,756)(2,443)—(9,123)Net premiums earned19,92219,09312,633—51,648Total revenues21,76728,09813,77332063,958Losses and lossadjustment expenses12,84111,0818,267(4)32,185Pre-tax income2,7594,6862,118(1,850)7,713Net loss ratio (1)64.5%58.0%65.4%62.3%Net expense ratio (1)28.0%31.5%23.6%28.2%Net combined ratio(1)92.5%89.5%89.0%90.5%Three Months Ended March 31, 2006Standard SpecialtyCommercial Commercial PersonalSegment SegmentSegment Corporate ConsolidatedProduced premium23,66439,00511,099—73,768Gross premiums written23,46413,17211,099—47,735Ceded premiums written(1,785)(171)——(1,956)Net premiums written21,67913,00111,099—45,779Change in unearnedpremiums(7,367) (8,622)(1,356)—(17,345)Net premiums earned14,3124,3799,743—28,434Total revenues17,54015,96810,79721544,520Losses and lossadjustment expenses7,8002,8126,086(8)16,690Pre-tax income3,3601,6192,051(3,501)3,529Net loss ratio (1)54.5%64.2%62.5%58.7%Net expense ratio (1)30.8%27.3%26.7%28.8%Net combined ratio (1)85.3%91.5%89.2%87.5%(1) Net loss ratio is calculated as total net losses and loss adjustmentexpenses divided by net premiums earned, each determined inaccordance with GAAP. Net expense ratio is calculated as totalunderwriting expenses of our insurance company subsidiaries,including allocated overhead expenses and offset by agency feeincome, divided by net premiums earned, each determined in accordancewith GAAP. Net combined ratio is calculated as the sum of the netloss ratio and the net expense ratio.

Hallmark Financial Services, Inc.

CONTACT: Mark J. Morrison, President and Chief Executive Officer ofHallmark Financial Services, Inc., +1-817-348-1600

Web site: http://www.hallmarkgrp.com/