UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

 
Date of report (Date of earliest event reported):  
May 13, 2010
 
HALLMARK FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Nevada
(State or Other Jurisdiction of Incorporation)
 
001-11252
87-0447375
(Commission File Number)
(IRS Employer Identification No.)
 
777 Main Street, Suite 1000, Fort Worth, Texas
76102
(Address of Principal Executive Offices) 
(Zip Code)
                 
817-348-1600
(Registrant’s Telephone Number, Including Area Code)
 
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
 
 
 
Item 2.02      Results of Operations and Financial Condition

On May 13, 2010, the Registrant issued a press release announcing its financial results for the quarter ended March 31, 2010.  A copy of the Registrant’s press release is attached as Exhibit 99.1 to this Current Report.


Item 9.01      Financial Statements and Exhibits

(c)
Exhibits.
   
  99.1     Press release dated May 13, 2010  

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.
 
  HALLMARK FINANCIAL SERVICES, INC.  
       
       
Date:  May 14, 2010  
By:
/s/ Jeffrey R. Passmore  
    Jeffrey R. Passmore, Chief Accounting Officer  
       
       
 
 
 
 
   
 
FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.
ANNOUNCES FIRST QUARTER 2010 EARNINGS RESULTS

FORT WORTH, Texas, (May 13, 2010) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported first quarter 2010 net earnings of $6.3 million compared to $6.8 million reported for first quarter 2009.  On a fully diluted basis, first quarter 2010 net earnings were $0.31 per share as compared to $0.33 per share for the first quarter of 2009.  Total revenues were $75.8 million for the first quarter 2010 as compared to $70.9 million for the first quarter of 2009.

Mark J. Morrison, President and Chief Executive Officer, said, “Our premium production increased 9% this quarter compared to a year ago due to continued geographic and product expansion in our Personal Segment and increased limits offered on policies marketed by our Excess & Umbrella business unit.  However, our consistent underwriting discipline despite soft market and adverse economic conditions contributed to a decrease in premium production in our Standard Commercial Segment and generally flat production in each of the other lines of business in our Specialty Commercial Segment.”
 
Mr. Morrison continued, “Underwriting profits have been and will remain the key component of our strategy. We can only achieve this goal by remaining disciplined in soft market conditions. Thus, our primary focus will continue to be on underwriting profitability, as opposed to premium growth or market share as evidenced by our profitable 93.2% combined ratio for the quarter.  We delivered this result despite several large property losses that emerged during the quarter in our Standard Commercial business unit. The combined ratios reported in each of our other business units were better than our 90% target.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share increased 4% during the first quarter due to a combination of solid underwriting profits and strong investment performance.  Other operating metrics continue to be strong with cash flow from operations of $12 million and comprehensive income of $9 million during the quarter.”

Mr. Schwarz continued, “Total investments and cash and cash equivalents of $465 million as of March 31, 2010 were up 4% compared to December 31, 2009.  Investment income for the quarter declined 25% from the prior year due to near zero yields for cash and short term securities.  As of the end of the quarter, we had $118 million of cash and cash equivalents, plus other securities with short maturities, available to be deployed in higher yielding investments should suitable opportunities arise.”


   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
   
% Change
 
   
($ in thousands)
       
Produced premium (1)
  $ 80,451     $ 74,055       9 %
Gross premiums written
    81,859       71,479       15 %
Net premiums written
    72,795       69,247       5 %
Net premiums earned
    67,015       59,430       13 %
Investment income, net of expenses
    3,201       4,269       -25 %
Net realized gain (loss) on investments
    3,803       (348 )     -  
Total revenues
    75,823       70,910       7 %
Net earnings (2)
    6,286       6,790       -7 %
Net earnings per share - basic
  $ 0.31     $ 0.33       -6 %
Net earnings per share - diluted
  $ 0.31     $ 0.33       -6 %
Annualized return on average equity
    10.9 %     14.7 %     -26 %
Book value per share
  $ 11.70     $ 9.13       28 %
Cash flow from operations
  $ 12,010     $ 8,851       36 %
 
 (1) Produced premium is a non-GAAP measurement that management uses to track total premium produced by Hallmark’s operations. Hallmark believes it is a useful tool for users of its financial statements to measure premium production whether retained by Hallmark’s insurance company subsidiaries or assumed by third party insurance carriers who pay it commission revenue. Produced premium excludes unaffiliated third party premium fronted by its Hallmark County Mutual Insurance Company subsidiary.

(2) Net earnings is net income attributable to Hallmark Financial Services, Inc. as reported in the consolidated statements of operations as determined in accordance with GAAP.

The increase in total revenue for the three months ended March 31, 2010 was primarily attributable to increased earned premium due to increased production by the Personal Segment and gains realized on the investment portfolio.  These increases to revenue were partially offset by reduced earned premium in the Standard Commercial Segment.

Standard Commercial Segment revenues decreased $2.0 million, or 10%, during the three months ended March 31, 2010 as compared to the same period during 2009, due primarily to lower earned premium as a result of deterioration of the economic environment in its major markets.  Specialty Commercial Segment revenues declined $0.3 million, or 1% during the three months ended March 31, 2010 as compared to the same period the prior year due to lower commission and fee revenue related to profit sharing commission adjustments reported during the first quarter of 2009 as well as increased retention of business.  This decrease in revenue was partially offset by increased net premiums earned as a result of increased retention of business in the E&S Commercial business unit and increased earned premium in the Excess & Umbrella business unit.  Revenues from the Personal Segment increased $3.7 million, or 21%, during the three months ended March 31, 2010 as compared to the same period during 2009, due mostly to continued geographic expansion.  Corporate revenue increased $3.6 million primarily due to gains recognized on the investment portfolio of $3.8 million during the three months ended March 31, 2010 as compared to recognized losses on our investment portfolio of $0.3 million during the same period in 2009.  This increase in revenue was offset by lower investment income of $0.6 million for the three months ended March 31, 2010 as compared to the same period in the prior year.

On a diluted basis per share, Hallmark’s net earnings were $0.31 per share for the three months ended March 31, 2010 as compared to $0.33 per share for the same period in 2009.   The decrease in net earnings for the three months ended March 31, 2010 was primarily attributable to increased loss and loss adjustment expense due mostly to unfavorable prior year loss reserve development of $2.2 million recognized during the three months ended March 31, 2010.  In addition to increased revenues, the increase in loss and loss adjustment expenses were partially offset by lower operating expenses due to lower production related expenses in the E&S Commercial business unit and the General Aviation business unit and lower information technology costs in our Standard Commercial Segment.

 
Hallmark's net loss ratio was 64.3% for the first quarter of 2010 as compared to 62.0% for the first quarter of 2009.  Hallmark's net expense ratio was 28.9% for the first quarter of 2010 as compared to 30.8% for the first quarter of 2009.  Hallmark maintained a profitable net combined ratio of 93.2% for the first quarter of 2010 as compared to 92.8% for the same period in the prior year.

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)
 
   
March 31
   
December 31
 
ASSETS
 
2010
   
2009
 
   
(unaudited)
       
Investments:
           
   Debt securities, available-for-sale, at fair value (cost; $305,355 in 2010 and $287,108 in 2009)
  $ 310,474     $ 291,876  
   Equity securities, available-for-sale, at fair value (cost; $24,367 in 2010 and $27,251 in 2009)
    36,343       35,801  
                 
Total investments
    346,817       327,677  
                 
Cash and cash equivalents
    110,556       112,270  
Restricted cash and cash equivalents
    7,505       5,458  
Premiums receivable
    53,439       46,635  
Accounts receivable
    3,308       3,377  
Receivable for securities
    2,704       -  
Prepaid reinsurance premiums
    14,296       12,997  
Reinsurance recoverable
    10,999       10,008  
Deferred policy acquisition costs
    22,198       20,792  
Goodwill
    41,080       41,080  
Intangible assets, net
    27,956       28,873  
Prepaid expenses
    1,524       923  
Other assets
    13,241       18,779  
                 
Total assets
  $ 655,623     $ 628,869  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Liabilities:
               
   Note payable
  $ 2,800     $ 2,800  
   Subordinated debt securities
    56,702       56,702  
   Reserves for unpaid losses and loss adjustment expenses
    196,546       184,662  
   Unearned premiums
    132,167       125,089  
   Unearned revenue
    180       191  
   Reinsurance balances payable
    713       3,281  
   Accrued agent profit sharing
    612       1,790  
   Accrued ceding commission payable
    4,233       8,600  
   Pension liability
    2,655       2,628  
   Deferred federal income taxes
    2,368       942  
   Federal income tax payable
    2,588       1,266  
   Payable for securities
    7,001       19  
   Accounts payable and other accrued expenses
    10,459       13,258  
                 
Total liabilities
    419,024       401,228  
                 
Commitments and Contingencies
               
                 
Redeemable non-controlling interest
    1,063       1,124  
                 
                 
Stockholders' equity:
               
   Common stock, $0.18 par value (authorized 33,333,333 shares in 2010 and 2009;
               
   issued 20,872,831 in 2010 and 2009)
    3,757       3,757  
   Additional paid-in capital
    121,196       121,016  
   Retained earnings
    104,768       98,482  
   Accumulated other comprehensive income
    11,083       8,589  
   Treasury stock, at cost (749,495 shares in 2010 and 757,828 in 2009)
    (5,268 )     (5,327 )
                 
Total stockholders' equity
    235,536       226,517  
                 
    $ 655,623     $ 628,869  
 
 
Hallmark Financial Services, Inc. and Subsidiaries
 
Consolidated Statements of Operations
 
(Unaudited)
 
($ in thousands, except per share amounts)
 
       
   
Three Months Ended
 
   
March 31
 
             
   
2010
   
2009
 
             
Gross premiums written
  $ 81,859     $ 71,479  
Ceded premiums written
    (9,064 )     (2,232 )
  Net premiums written
    72,795       69,247  
  Change in unearned premiums
    (5,780 )     (9,817 )
  Net premiums earned
    67,015       59,430  
                 
Investment income, net of expenses
    3,201       4,269  
Net realized gains (losses)
    3,803       (348 )
Finance charges
    1,643       1,350  
Commission and fees
    151       6,189  
Processing and service fees
    3       15  
Other income
    7       5  
                 
Total revenues
    75,823       70,910  
                 
Losses and loss adjustment expenses
    43,098       36,842  
Other operating expenses
    21,482       23,750  
Interest expense
    1,146       1,159  
Amortization of intangible assets
    916       714  
                 
Total expenses
    66,642       62,465  
                 
Income before tax
    9,181       8,445  
Income tax expense
    2,890       1,662  
Net income
    6,291       6,783  
Less: Net income (loss) attributable to
               
         non-controlling  interest
    5       (7 )
                 
Net income attributable to Hallmark Financial Services, Inc.
  $ 6,286     $ 6,790  
                 
Net income per share attributable to Hallmark Financial
               
Services, Inc. common stockholders:
               
  Basic
  $ 0.31     $ 0.33  
  Diluted
  $ 0.31     $ 0.33  


Consolidated Segment Data
 
(Unaudited; $ in thousands)
 
                               
   
Three Months Ended March 31, 2010
 
   
Standard
   
Specialty
                   
   
Commercial
   
Commercial
   
Personal
             
   
Segment
   
Segment
   
Segment
   
Corporate
   
Consolidated
 
                               
Produced premium (1)
  $ 18,097     $ 35,282     $ 27,131     $ -     $ 80,510  
                                         
Gross premiums written
    18,097       36,631       27,131       -       81,859  
Ceded premiums written
    (1,036 )     (8,024 )     (4 )     -       (9,064 )
Net premiums written
    17,061       28,607       27,127       -       72,795  
Change in unearned premiums
    (180 )     2,116       (7,716 )     -       (5,780 )
Net premiums earned
    16,881       30,723       19,411       -       67,015  
                                         
Total revenues
    18,034       32,487       21,214       4,088       75,823  
                                         
Losses and loss adjustment expenses
    13,616       16,396       13,086       -       43,098  
                                         
Pre-tax  income (loss), net of
                                       
non-controlling interest
    (939 )     6,347       2,650       1,118       9,176  
                                         
Net loss ratio (2)
    80.6 %     53.4 %     67.4 %             64.3 %
Net expense ratio (2)
    30.9 %     28.0 %     21.6 %             28.9 %
Net combined ratio (2)
    111.5 %     81.4 %     89.0 %             93.2 %
                                         
   
Three Months Ended March 31, 2009
 
   
Standard
   
Specialty
                         
   
Commercial
   
Commercial
   
Personal
                 
   
Segment
   
Segment
   
Segment
   
Corporate
   
Consolidated
 
                                         
Produced premium (1)
  $ 19,147     $ 34,282     $ 20,626     $ -     $ 74,055  
                                         
Gross premiums written
    19,147       31,706       20,626       -       71,479  
Ceded premiums written
    (1,103 )     (1,129 )     -       -       (2,232 )
Net premiums written
    18,044       30,577       20,626       -       69,247  
Change in unearned premiums
    406       (5,626 )     (4,597 )     -       (9,817 )
Net premiums earned
    18,450       24,951       16,029       -       59,430  
                                         
Total revenues
    20,020       32,825       17,535       530       70,910  
                                         
Losses and loss adjustment expenses
    11,346       14,933       10,563       -       36,842  
                                         
Pre-tax  income (loss), net of
                                       
non-controlling interest
    2,576       5,682       2,619       (2,425 )     8,452  
                                         
Net loss ratio (2)
    61.5 %     59.8 %     65.9 %             62.0 %
Net expense ratio (2)
    32.3 %     30.0 %     21.0 %             30.8 %
Net combined ratio (2)
    93.8 %     89.8 %     86.9 %             92.8 %
 
1
Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by Hallmark’s operations.  Hallmark believes this is a useful tool for users of its financial statements to measure premium production whether retained by Hallmark’s insurance company subsidiaries or assumed by third party insurance carriers who pay it commission revenue.  Produced premium excludes unaffiliated third party premium fronted by its Hallmark County Mutual Insurance Company subsidiary.
 
2
The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP.  During the second quarter of 2009 Hallmark changed the method in which the net expense ratio is calculated.  The net expense ratio is now 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.  All prior periods have been restated to conform to the new method, resulting in an increase to the consolidated net expense ratio of 1.3% for the three months ended March 31, 2009.  Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.