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

FORT WORTH, Texas, Nov. 7, 2007 (PRIME NEWSWIRE) — Hallmark Financial Services, Inc. (Nasdaq:HALL) today reported quarterly net income of $6.6 million for the third quarter ended September 30, 2007 as compared to $4.9 million reported for the third quarter of 2006. On a diluted basis, net income per share was $0.32 for the three months ended September 30, 2007 as compared to $0.27 per share for the same period in 2006. During the quarter ended September 30, 2007, Hallmark reported total revenues of $72.2 million, representing a 28% increase over the $56.4 million in total revenues for the third quarter of 2006.

Mark J. Morrison, President and Chief Executive Officer, said, “Our strong quarterly earnings are the expected result of the continued execution of our plan to increase the retention of the business we produce. Even with softening market conditions across the property/casualty insurance industry, our overall production growth and policy rates for the year have been in line with our expectations. For the nine months ended September 30, 2007, gross premiums produced by our operating units have collectively grown by 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 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 87.8% and an annualized return on average equity of 17% for the year to date. Year-over-year growth in book value per share was 21% at quarter end.”

Three Months EndedSeptember 30,——————————–20072006% Change————————($ in thousands) Gross premiums written$ 62,304$ 58,1077% Net premiums written61,52555,00512% Net premiums earned59,42542,19441% Commission and fee income7,2809,943-27% Investment income, net ofexpenses3,7742,91230% Gain (loss) on investments418(135)NM Total revenues72,21856,36528% Net income6,5824,87735% Common EPS – basic$0.32$ 0.2719% Common EPS – diluted$0.32$ 0.2719% Annualized return on averageequity15.7%16.5%-5% Book value per share$8.29$6.8321% Cash flow from operations$ 17,173$ 15,8239%Nine Months EndedSeptember 30,——————————–20072006% Change————————($ in thousands) Gross premiums written$193,539$153,71826% Net premiums written184,592146,17626% Net premiums earned166,383104,88759% Commission and fee income23,34432,223-28% Investment income, net ofexpenses9,8117,50531% Gain (loss) on investments1,299(1,501)NM Total revenues204,912148,07238% Net income20,3674,461357% Common EPS – basic$0.98$0.28250% Common EPS – diluted$0.98$0.28250% Annualized return on averageequity16.8%5.8%190% Book value per share$8.29$6.8321% Cash flow from operations$ 61,767$ 45,49636%

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 nine months 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 third 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 $9.9 million and $37.8 million, or 43% and 68%, during the three months and nine months ended September 30, 2007, respectively, as compared to the same periods of 2006. Revenues from the Personal Segment increased $2.9 million and $8.7 million, or 24% and 25%, during the three and nine months ended September 30, 2007, respectively, due largely to geographic expansion into new states. Increased retention of business was also the primary reason for the Standard Commercial Segment’s $2.6 million and $7.5 million increases in revenue for the three months and nine months ended September 30, 2007, respectively. Gains on investments of $0.4 million and $1.3 million for the three months and nine months ended September 30, 2007, respectively, as compared to losses on investments of $0.1 million and $1.5 million recognized for 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 September 30, 2007 was $3.8 million as compared to $2.9 million for the same period in 2006. Net investment income for the nine months ended September 30, 2007 was $9.8 million as compared to $7.5 million for the same period in 2006. The increase reflected higher yields 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 $4 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 September 30, 2007 were $36.7 million and 61.8%, respectively, compared to $23.6 million and 55.9%, respectively, for the same period in 2006. Hallmark’s net losses and loss adjustment expenses and its net loss ratio for the nine months ended September 30, 2007 were $99.6 million and 59.9%, respectively, compared to $60.5 million and 57.7%, respectively, for the same period in 2006. Hallmark recognized $0.8 million of favorable development on prior years’ loss reserve estimates during the third quarter of 2007 as compared to $1.2 million of favorable development recognized during the same period in 2006. Hallmark recognized $2.9 million of favorable development on prior years’ loss reserve estimates during the first nine months of 2007 as compared to $2.0 million of favorable development recognized during the same period in 2006. Hallmark’s other operating expenses and its expense ratio for the three months ended September 30, 2007 were $24.1 million and 27.7%, respectively, compared to $23.0 million and 27.8%, respectively, for the same period in 2006. Hallmark’s other operating expenses and its expense ratio for the nine months ended September 30, 2007 were $70.5 million and 27.9%, respectively, compared to $64.1 million and 27.8%, 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/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance, non-standard personal automobile insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our general aviation business which is written on a national basis. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol “HALL.”

The Hallmark Financial Services, Inc. logo is available at http://www.primenewswire.com/newsroom/prs/?pkgid=4395

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.

Hallmark Financial Services, Inc. and SubsidiariesConsolidated Balance Sheets($ in thousands)Sept. 30Dec. 31ASSETS20072006———————-(unaudited) (audited) Investments:Debt securities, available-for-sale, atmarket value$163,054$133,030Equity securities, available-for-sale, atmarket value41,9884,580Short-term investments, available-for-sale,at market value56,31125,275—————-Total investments261,353162,885Cash and cash equivalents61,68181,474 Restricted cash and cash equivalents15,64624,569 Premiums receivable53,13644,644 Accounts receivable18,50313,223 Prepaid reinsurance premium1,1541,629 Reinsurance recoverable5,7815,930 Deferred policy acquisition costs20,77617,145 Excess of cost over fair value of net assetsacquired30,02531,427 Intangible assets24,35426,074 Prepaid expenses1,0941,769 Other assets12,1315,184—————-Total assets$505,634$415,953================LIABILITIES AND STOCKHOLDERS’ EQUITY———————————— Liabilities:Notes payable$ 60,681$ 35,763Structured settlements9,89724,587Unpaid losses and loss adjustment expenses116,13677,564Unearned premiums108,36591,606Unearned revenue3,3565,734Reinsurance balances payable–1,060Accrued agent profit sharing1,9901,784Accrued ceding commission payable7,0523,956Pension liability2,8843,126Deferred federal income taxes1152,310Current federal income tax payable3362,132Accounts payable and other accrued expenses22,73615,600—————-Total liabilities333,548265,222Commitments and ContingenciesStockholders’ equity:Common stock, $.18 par value (authorized33,333,333 shares in 2007 and 2006; issued20,776,080 shares in 2007 and 2006)3,7403,740Additional paid in capital118,283117,932Retained earnings51,84731,480Accumulated other comprehensive loss(1,707)(2,344)Treasury stock, at cost (7,828 shares in 2007and 2006)(77)(77)—————-Total stockholders’ equity172,086150,731—————-$505,634$415,953================Hallmark Financial Services, Inc. and SubsidiariesConsolidated Statements of Operations(Unaudited)($ in thousands, except per share amounts)Three Months EndedNine Months EndedSeptember 30September 30—————————————-2007200620072006——————————–Gross premiums written$ 62,304$ 58,107$193,539$153,718 Ceded premiums written(779)(3,102)(8,947)(7,542)——————————–Net premiums written61,52555,005184,592146,176Change in unearnedpremiums(2,100)(12,811)(18,209)(41,289)——————————–Net premiums earned59,42542,194166,383104,887Investment income, netof expenses3,7742,9129,8117,505 Gain (loss) oninvestments418(135)1,299(1,501) Finance charges1,2061,0373,4772,940 Commission and fees7,2809,94323,34432,223 Processing and servicefees1114105861,994 Other income441224——————————–Total revenues72,21856,365204,912148,072Losses and lossadjustment expenses36,72323,58999,62060,478 Other operatingexpenses24,08723,04470,51164,097 Interest expense1,0261,5272,6084,774 Interest expense fromamortization ofdiscount onconvertible notes——9,625 Amortization ofintangible asset5735731,7191,719——————————–Total expenses62,40948,733174,458140,693Income before tax9,8097,63230,4547,379Income tax expense3,2272,75510,0872,918——————————–Net income$ 6,582$ 4,877$ 20,367$ 4,461================================Common stockholdersnet income per share:Basic$0.32$0.27$0.98$0.28================================Diluted$0.32$0.27$0.98$0.28================================Three Months Ended September 30, 2007————————————————Standard SpecialtyCommercial Commercial PersonalConsol-SegmentSegmentSegmentCorporate idated——– ———- ——– ——— ——Produced premium21,94537,91914,854–74,718———————————–Gross premiumswritten21,91825,53114,855–62,304 Ceded premiumswritten198(977)—-(779)———————————– Net premiums written22,11624,55414,855–61,525 Change in unearnedpremiums(311)(870)(919)–(2,100)———————————– Net premiums earned21,80523,68413,936–59,425Total revenues23,53032,76015,18574372,218Losses and lossadjustment expenses13,51313,6829,532(4)36,723Pre-tax income (loss)3,5146,3501,854(1,909)9,809Net loss ratio (1)62.0%57.8%68.4%61.8% Net expenseratio (1)27.3%30.8%22.9%27.7%—————————- Net combinedratio (1)89.3%88.6%91.3%89.5%============================Three Months Ended September 30, 2006————————————————Standard SpecialtyCommercial Commercial PersonalConsol-SegmentSegmentSegmentCorporate idated——– ———- ——– ——— ——Produced premium22,20641,32012,278–75,804———————————–Gross premiumswritten21,96723,86212,278–58,107 Ceded premiumswritten(2,270)(832)—-(3,102)———————————– Net premiums written19,69723,03012,278–55,005 Change in unearnedpremiums(497) (11,256)(1,058)–(12,811)———————————– Net premiums earned19,20011,77411,220–42,194Total revenues20,96422,88912,25725556,365Losses and lossadjustment expenses9,3477,4506,800(8)23,589Pre-tax income (loss) 5,1122,8672,316(2,663)7,632Net loss ratio (1)48.7%63.3%60.6%55.9% Net expenseratio (1)28.1%30.7%24.3%27.8%—————————- Net combinedratio (1)76.8%94.0%84.9%83.7%============================(1) Net loss ratio is calculated as total net losses and lossadjustment expenses divided by net premiums earned, eachdetermined in accordance with GAAP. Net expense ratio iscalculated as total underwriting expenses of our insurancecompany subsidiaries, including allocated overhead expenses andoffset by agency fee income, divided by net premiums earned, eachdetermined in accordance with GAAP. Net combined ratio iscalculated as the sum of the net loss ratio and the net expenseratio.Nine Months Ended September 30, 2007————————————————Standard SpecialtyCommercial Commercial PersonalConsol-SegmentSegmentSegmentCorporate idated——– ———- ——– ——— ——Produced premium70,246118,23243,228–231,706———————————–Gross premiumswritten70,13980,17243,228–193,539 Ceded premiumswritten(5,241)(3,706)—-(8,947)———————————– Net premiums written64,89876,46643,228–184,592 Change in unearnedpremiums(2,966) (12,100)(3,143)–(18,209)———————————– Net premiums earned61,93264,36640,085–166,383Total revenues65,30093,83643,6542,122204,912Losses and lossadjustment expenses37,62135,39826,612(11)99,620Pre-tax income (loss)8,93720,4776,148(5,108)30,454Net loss ratio (1)60.7%55.0%66.4%59.9% Net expenseratio (1)27.4%31.4%23.1%27.9%—————————- Net combinedratio (1)88.1%86.4%89.5%87.8%============================Nine Months Ended September 30, 2006————————————————Standard SpecialtyCommercial Commercial PersonalConsol-SegmentSegmentSegmentCorporate idated——– ———- ——– ——— ——Produced premium69,357115,61034,116–219,083———————————–Gross premiumswritten68,88450,71834,116–153,718 Ceded premiumswritten(6,122)(1,420)—-(7,542)———————————– Net premiums written62,76249,29834,116–146,176 Change in unearnedpremiums(12,396) (26,136)(2,757)–(41,289)———————————– Net premiums earned50,36623,16231,359–104,887Total revenues57,76856,00334,944(643) 148,072Losses and lossadjustment expenses27,16513,96919,369(25)60,478Pre-tax income (loss) 11,2457,9256,760(18,551)7,379Net loss ratio (1)53.9%60.3%61.8%57.7% Net expenseratio (1)29.1%27.6%25.7%27.8%—————————- Net combinedratio (1)83.0%87.9%87.5%85.5%============================(1) Net loss ratio is calculated as total net losses and lossadjustment expenses divided by net premiums earned, eachdetermined in accordance with GAAP. Net expense ratio iscalculated as total underwriting expenses of our insurancecompany subsidiaries, including allocated overhead expenses andoffset by agency fee income, divided by net premiums earned, eachdetermined in accordance with GAAP. Net combined ratio iscalculated as the sum of the net loss ratio and the net expenseratio.

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CONTACT: Hallmark Financial Services, Inc.Mark J. Morrison, President and Chief Executive Officer817.348.1600www.hallmarkgrp.com