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

FORT WORTH, Texas, Aug. 9 /PRNewswire-FirstCall/ — Hallmark Financial Services, Inc. today reported quarterly net income of $8.8 million for the second quarter ended June 30, 2007 as compared to a net loss of $2.8 million reported for the second quarter of 2006. On a diluted basis, net income per share was $0.42 for the three months ended June 30, 2007 as compared to a net loss of $0.18 per share for the same period in 2006. During the quarter ended June 30, 2007, Hallmark reported total revenues of $68.7 million, representing a 46% increase over the $47.2 million in total revenues for the second quarter of 2006.

Mark J. Morrison, President and Chief Executive Officer, said, “We are very pleased to report that the second quarter of 2007 represented the highest quarterly revenues and profit in the Company’s history. The increase in revenue for the quarter was primarily the result of the continued execution of our plan to increase the retention of the business we produce which, in turn, had the intended result of increasing our bottom line. Even with the general softening market conditions across the property & casualty industry, our overall production growth and policy rates in the quarter and year-to-date have been in line with our expectations. For the six months ended June 30, 2007, gross premiums produced by our operating units have collectively grown by 9.6% over the same period last year. This growth is largely a result of our strategy of controlled geographic expansion into states where business is less price sensitive and where we feel we can achieve adequate pricing for our policies. Our underwriting margins continue to be strong in each of our operating units as we have maintained favorable policy retention levels without the need to give significant rate concessions.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Profitable underwriting continues to be our focus and is reflected in a combined ratio of 86.9% year-to-date and an annualized return on average equity of 18%. Year- over-year growth in book value per share was 22% at quarter end.”

Three Months Ended Six Months EndedJune 30,June 30,2007200620072006($ in thousands) ($ in thousands)Gross premiums written$66,577 $47,876 $131,235 $95,611Net premiums written62,29645,392123,06791,171Net premiums earned55,31034,259106,95862,693Commission and fee income8,15910,01616,06422,280Investment income, net of expenses3,0472,2366,0374,593Realized gain (loss)828(1,283)881(1,366)Total revenues68,73647,187132,69491,707Net income (loss)8,815(2,842)13,785(416)Common EPS – basic$0.42$(0.18)$0.66$(0.03)Common EPS – diluted$0.42$(0.18)$0.66$(0.03)Annualized return on average equity22.0%-10.9%17.5%-0.8%Book value per share$7.91$6.47$7.91$6.47Cash flow from operations$25,619 $20,091$44,594 $29,673

The increase in net income for both the quarter and year-to-date was largely due to the improved results of the 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 half of 2006 was adversely impacted by $9.6 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 the Standard Commercial and Personal Segments during the second quarter and year-to-date 2007.

Increased retention of business produced by the Specialty Commercial Segment and increased production by the Personal Segment were the primary causes of the increase in revenue. Specialty Commercial Segment revenues increased $15.8 million and $28.0 million, or 92% and 84%, during the three months and six months ended June 30, 2007, respectively, as compared to the same periods of 2006. Revenues from the Personal Segment increased $2.8 million and $5.8 million, or 24% and 25%, during the three and six months ended June 30, 2007, respectively, due largely to geographic expansion into new states. The retention of business produced by the Standard Commercial Segment that was previously retained by third parties was the primary reason for that segment’s $0.7 million and $5.0 million increase in revenue for the three months and six months ended June 30, 2007, respectively. Realized gains of $0.8 million and $0.9 million for the three months and six months ended June 30, 2007, respectively, as compared to realized losses of $1.4 million recognized for both the same periods the prior year, were the primary reason for the increase in revenue for Corporate.

Net investment income for the three months ended June 30, 2007 was $3.0 million as compared to $2.2 million for the same period in 2006. Net investment income for the six months ended June 30, 2007 was $6.0 million as compared to $4.6 million for the same period in 2006. The increase 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 has no exposure in its investment portfolio to sub-prime mortgages and less than $5 thousand total exposure in mortgage backed securities.

Hallmark’s net losses and loss adjustment expenses and its net loss ratio for the three months ended June 30, 2007 were $30.7 million and 55.5%, respectively, compared to $20.2 million and 59.0%, respectively, for the same period in 2006. Hallmark’s net losses and loss adjustment expenses and its net loss ratio for the six months ended June 30, 2007 were $62.9 million and 58.8%, respectively, compared to $36.9 million and 58.8%, respectively, for the same period in 2006. Hallmark recognized $1.9 million of favorable development on prior years’ loss reserve estimates during the second quarter of 2007 as compared to $0.9 million of favorable development recognized during the same period in 2006. Hallmark recognized $2.1 million of favorable development on prior years’ loss reserve estimates during the first six months of 2007 as compared to $0.8 million of favorable development recognized during the same period in 2006. Hallmark’s other operating costs and expenses and its expense ratio for the three months ended June 30, 2007 were $23.7 million and 27.9%, respectively, compared to $20.0 million and 26.8%, respectively, for the same period in 2006. Hallmark’s other operating costs and expenses and its expense ratio for the six months ended June 30, 2007 were $46.4 million and 28.1%, respectively, compared to $41.1 million and 27.7%, 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/casualty insurance products to businesses and individuals. Our 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, Louisiana, Idaho, Oregon, Montana, Missouri 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)June 30December 31ASSETS20072006(unaudited)(audited)Investments:Debt securities, available-for-sale,at market value$160,547$133,030Equity securities, available-for-sale,at market value30,1924,580Short-term investments, available-for-sale,at market value64,08625,275Total investments254,825162,885Cash and cash equivalents41,79281,474Restricted cash and cash equivalents10,04224,569Premiums receivable54,56944,644Accounts receivable12,44113,223Prepaid reinsurance premium1,7731,629Reinsurance recoverable6,5055,930Deferred policy acquisition costs20,21417,145Excess of cost over fair value of netassets acquired31,42731,427Intangible assets24,92726,074Prepaid expenses1,1871,769Other assets10,6395,184Total assets$470,341$415,953LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilities:Notes payable$35,130$35,763Structured settlements9,79424,587Unpaid losses and loss adjustmentexpenses104,38877,564Unearned premiums107,85991,606Unearned revenue3,7775,734Reinsurance balances payable1,2711,060Accrued agent profit sharing1,2561,784Accrued ceding commission payable7,0593,956Pension liability2,8953,126Deferred federal income taxes1,2252,310Current federal income tax payable4,6522,132Accounts payable and other accruedexpenses26,76815,600Total liabilities306,074265,222Commitments and ContingenciesStockholders’ equity:Common stock, $.18 par value(authorized 33,333,333 sharesin 2007 and 2006; issued 20,776,080shares in 2007 and 2006)3,7403,740Additional paid in capital118,085117,932Retained earnings45,26531,480Accumulated other comprehensive loss(2,746)(2,344)Treasury stock, at cost (7,828 sharesin 2007 and 2006)(77)(77)Total stockholders’ equity164,267150,731$470,341$415,953Hallmark Financial Services, Inc. and SubsidiariesConsolidated Statements of Operations(Unaudited)($ in thousands, except per share amounts)Three Months EndedSix Months EndedJune 30June 302007200620072006Gross premiums written $66,577$47,876$131,235$95,611Ceded premiums written (4,281)(2,484)(8,168)(4,440)Net premiums written62,29645,392123,06791,171Change in unearnedpremiums(6,986)(11,133)(16,109)(28,478)Net premiums earned55,31034,259106,95862,693Investment income,net of expenses3,0472,2366,0374,593Realized gain (loss)828(1,283)881(1,366)Finance charges1,1851,2162,2711,903Commission and fees8,15910,01616,06422,280Processing and servicefees2037274751,584Other income416820Total revenues68,73647,187132,69491,707Losses and lossadjustment expenses30,71220,19962,89736,889Other operatingexpenses23,72320,02746,42441,053Interest expense7961,6621,5823,247Interest expense fromamortization ofdiscount onconvertible notes-8,508-9,625Amortization ofintangible asset5735731,1461,146Total expenses55,80450,969112,04991,960Income (loss)before tax12,932(3,782)20,645(253)Income tax expense(benefit)4,117(940)6,860163Net income (loss)$8,815$(2,842)$13,785$(416)Common stockholdersnet income (loss)per share:Basic$0.42$(0.18)$0.66$(0.03)Diluted$0.42$(0.18)$0.66$(0.03)Hallmark Financial Services, Inc.Consolidated Segment DataThree Months Ended June 30, 2007StandardSpecialtyCommercial Commercial PersonalSegmentSegmentSegment Corporate ConsolidatedProduced premium24,75140,95613,298-79,005Gross premiumswritten24,74028,54013,297-66,577Ceded premiumswritten(2,804)(1,477)–(4,281)Net premiumswritten21,93627,06313,297-62,296Change inunearnedpremiums(1,731)(5,474)219-(6,986)Net premiumsearned20,20521,58913,516-55,310Total revenues20,00332,97814,6961,05968,736Losses andloss adjustmentexpenses11,26710,6358,813(3)30,712Pre-tax income(loss)2,6649,4412,176(1,349)12,932Net lossratio (1)55.8%49.3%65.2%55.5%Net expenseratio (1)27.0%32.0%22.8%27.9%Net combinedratio (1)82.8%81.3%88.0%83.4%Three Months Ended June 30, 2006StandardSpecialtyCommercial Commercial PersonalSegmentSegmentSegment Corporate ConsolidatedProducedpremium23,48835,28510,739-69,512Gross premiumswritten23,45313,68410,739-47,876Ceded premiumswritten(2,067)(417)–(2,484)Net premiumswritten21,38613,26710,739-45,392Change inunearnedpremiums(4,532)(6,258)(343)-(11,133)Net premiumsearned16,8547,00910,396-34,259Total revenues19,26417,14611,890(1,113)47,187Losses and lossadjustmentexpenses10,0183,7076,482(8)20,199Pre-tax income(loss)2,7733,4392,393(12,387)(3,782)Net lossratio (1)59.4%52.9%62.4%59.0%Net expenseratio (1)28.9%22.4%26.2%26.8%Net combinedratio (1)88.3%75.3%88.6%85.8%(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.Consolidated Segment DataSix Months Ended June 30, 2007StandardSpecialtyCommercial Commercial PersonalSegmentSegmentSegment Corporate ConsolidatedProducedpremium48,30180,31328,374-156,988Gross premiumswritten48,22154,64128,373-131,235Ceded premiumswritten(5,439)(2,729)–(8,168)Net premiumswritten42,78251,91228,373-123,067Change inunearnedpremiums(2,655)(11,230)(2,224)(16,109)Net premiumsearned40,12740,68226,149-106,958Total revenues41,77061,07628,4691,379132,694Losses and lossadjustmentexpenses24,10821,71617,080(7)62,897Pre-tax income(loss)5,42314,1274,294(3,199)20,645Net lossratio (1)60.1%53.4%65.3%58.8%Net expenseratio (1)27.5%31.8%23.2%28.1%Net combinedratio (1)87.6%85.2%88.5%86.9%Six Months Ended June 30, 2006StandardSpecialtyCommercial Commercial PersonalSegmentSegmentSegment Corporate ConsolidatedProducedpremium47,15274,29021,838-143,280Gross premiumswritten46,91726,85621,838-95,611Ceded premiumswritten(3,852)(588)–(4,440)Net premiumswritten43,06526,26821,838-91,171Change inunearnedpremiums(11,899)(14,880)(1,699)-(28,478)Net premiumsearned31,16611,38820,139-62,693Total revenues36,80433,11422,687(898)91,707Losses and lossadjustmentexpenses17,8186,51912,568(16)36,889Pre-tax income(loss)6,1335,0584,444(15,888)(253)Net lossratio (1)57.2%57.3%62.4%58.8%Net expenseratio (1)29.8%24.3%26.4%27.7%Net combinedratio (1)87.0%81.6%88.8%86.5%(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/