HALLMARK FINANCIAL SERVICES INC (Form: 8-K)

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):

August 16, 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):

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

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

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

¨ 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 August 16, 2010, the Registrant issued a press release announcing its financial results for the quarter ended June 30, 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 August 16, 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: August 18, 2010	By:	/s/ Jeffrey R. Passmore
		Jeffrey R. Passmore, Chief Accounting Officer

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES SECOND QUARTER 2010 RESULTS

FORT WORTH, Texas, (August 16, 2010) - Hallmark Financial Services, Inc. (NASDAQ: HALL) (“Hallmark”) today reported second quarter 2010 net loss of $0.4 million compared to net earnings of $4.3 million reported for second quarter 2009. Year to date, Hallmark reported net earnings of $5.9 million, compared to $11.1 million reported for the same period the prior year. On a fully diluted basis, second quarter 2010 net loss was $0.02 per share as compared to net earnings of $0.20 per share for the second quarter of 2009. Year to date, Hallmark reported net earnings of $0.29 per diluted share, compared to $0.53 reported for the same period the prior year. Total revenues were $75.7 million for the second quarter 2010, up 7% from the $70.7 million reported for the second quarter of 2009. Year to date total revenues were $151.5 million, up 7% from the $141.7 million reported for the same period the prior year.

Mark J. Morrison, President and Chief Executive Officer, said, “This has been a disappointing quarter for Hallmark as we missed our targeted combined ratio due to a combination of factors affecting incurred losses in each of our three largest business units. First, we experienced large property losses from two hailstorms in Montana and an aberrant number of large property claims in our Standard Commercial business unit. Second, we set up additional reserves in our E&S Commercial business unit in response to late emerging general liability claims. Finally, we increased our expected loss ratio for the current accident year in our Personal Lines business unit as continued geographic growth and product expansion drive a higher percentage of less seasoned business in the total mix of policies in force. Despite the higher loss experience resulting in a 104.5% combined ratio for the quarter, we have maintained a profitable 99.0% combined ratio year to date.”

Mr. Morrison continued, “We are pleased that the geographic and product expansion in our Personal Segment and increased limits offered on policies marketed by our Excess & Umbrella business unit have both fueled our year-to-date premium production growth of 7% as compared to prior year. We continue to find relative strength in the personal lines market as commercial lines continue to experience a difficult underwriting environment. We will look for opportunities to grow and diversify our businesses, as with the recent announcement of our agreement to purchase State Auto National Insurance Company and its non-standard personal automobile book of business. However, underwriting profits, as opposed to premium growth or market share, remains the key component of our strategy. We can only achieve this goal by maintaining our underwriting discipline until market conditions improve.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share is down 2% sequentially from the prior quarter, but remains up 2% year to date and up 14% compared to the year ago quarter. Hallmark continues to be highly cash generative, with cash flow from operations year to date of $17.4 million. This positive cash flow contributed to the 10% increase year to date in total investments and cash and cash equivalents to $490 million, or approximately $24 per share. Within this amount, the portion committed to investments increased $78 million, or 24%, year to date as we continue to redeploy our cash into securities yielding significantly more than was previously being earned on the cash balances. As of the end of the quarter, Hallmark continues to have a significant amount of cash and cash equivalents of $85 million.”

	Three Months Ended
	June 30,
	2010			2009			% Change
	($ in thousands)
Produced premium (1)	$	81,768		$	77,595			5	%
Gross premiums written		83,180			75,053			11	%
Net premiums written		73,133			71,793			2	%
Net premiums earned		69,948			62,319			12	%
Investment income, net of expenses		3,276			3,467			-6	%
Net realized gain (loss) on investments		1,643			867			90	%
Total revenues		75,687			70,744			7	%
Net earnings (2)		(388	)		4,275			-
Net earnings per share - basic	$	(0.02	)	$	0.20			-
Net earnings per share - diluted	$	(0.02	)	$	0.20			-
Annualized return on average equity		-0.7	%		8.5	%		-
Book value per share	$	11.49		$	10.08			14	%
Cash flow from operations	$	9,242		$	19,931			-54	%

	Six Months Ended
	June 30,
	2010			2009			% Change
	($ in thousands)
Produced premium (1)	$	162,278		$	151,650			7	%
Gross premiums written		165,039			146,532			13	%
Net premiums written		145,928			141,040			3	%
Net premiums earned		136,963			121,749			12	%
Investment income, net of expenses		6,477			7,736			-16	%
Net realized gain (loss) on investments		5,446			519			949	%
Total revenues		151,510			141,654			7	%
Net earnings (2)		5,898			11,065			-47	%
Net earnings per share - basic	$	0.29		$	0.53			-45	%
Net earnings per share - diluted	$	0.29		$	0.53			-45	%
Return on average equity		5.2	%		11.4	%		-54	%
Book value per share	$	11.49		$	10.08			14	%
Cash flow from operations	$	17,449		$	28,782			-39	%

(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.

During the three and six months ended June 30, 2010, Hallmark’s total revenues were $75.7 million and $151.5 million, representing a 7% increase from the $70.7 million and $141.7 million in total revenues for the same periods of 2009. This increase in revenue was primarily attributable to increased earned premium due to increased production by the Personal Segment and gains realized on the investment portfolio. These increases in revenue were partially offset by reduced earned premium in the Standard Commercial Segment due to the deterioration of the general economic environment in our major markets.

Hallmark reported a net loss of $0.4 million and net income of $5.9 million for the three and six months ended June 30, 2010, which was $4.7 million and $5.2 million lower than the $4.3 million and $11.1 million net income reported for the same periods of 2009. On a diluted basis per share, net loss was $0.02 per share and net income was $0.29 per share for the three and six months ended June 30, 2010, respectively, as compared to net income of $0.20 and $0.53 per share for the same periods in 2009. The decrease in net income for the three and six months ending June 30, 2010 was primarily due to increased loss and loss adjustment expenses, including unfavorable prior year loss development of $4.3 million and $6.5 million recognized during the three and six months ended June 30, 2010, respectively, as compared to $1.8 million unfavorable development recognized for the three and six months ended June 30, 2009. Partially offsetting the increased loss and LAE was the increase in revenue for the three and six months ending June 30, 2010, as well as lower operating expenses due to lower production related expenses in the E&S Commercial and General Aviation business units and lower information technology costs in the Standard Commercial Segment.

Hallmark's net loss ratio was 74.4% and 69.5%, respectively, for the three and six months ended June 30, 2010 as compared to 61.2% and 61.6% for the same periods in 2009. Hallmark's net expense ratio was 30.1% and 29.5%, respectively, for the three and six months ended June 30, 2010 as compared to 30.5% and 30.6% for the same periods in 2009. Hallmark’s net combined ratio was 104.5% and 99.0% for the three and six months ended June 30, 2010 as compared to 91.7% and 92.2% for the same periods in 2009.

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)

	June 30			December 31
	2010			2009
	(unaudited)

ASSETS
Investments:
Debt securities, available-for-sale, at fair value (cost; $360,374 in 2010 and $287,108 in 2009)	$	364,694		$	291,876
Equity securities, available-for-sale, at fair value (cost; $34,035 in 2010 and $27,251 in 2009)		40,958			35,801

Total investments		405,652			327,677

Cash and cash equivalents		75,234			112,270
Restricted cash and cash equivalents		9,283			5,458
Premiums receivable		54,393			46,635
Accounts receivable		3,102			3,377
Receivable for securities		17			-
Ceded unearned premiums		15,133			12,997
Reinsurance recoverable		16,149			10,008
Deferred policy acquisition costs		22,736			20,792
Goodwill		41,080			41,080
Intangible assets, net		27,040			28,873
Federal income tax recoverable		3,242			-
Deferred federal income taxes,net		133			-
Prepaid expenses		1,669			923
Other assets		15,662			18,779

Total assets	$	690,525		$	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		214,448			184,662
Unearned premiums		136,190			125,089
Unearned revenue		169			191
Reinsurance balances payable		2,816			3,281
Accrued agent profit sharing		1,232			1,790
Accrued ceding commission payable		4,235			8,600
Pension liability		2,587			2,628
Deferred federal income taxes, net		-			942
Federal income tax payable		-			1,266
Payable for securities		25,621			19
Accounts payable and other accrued expenses		11,302			13,258

Total liabilities		458,102			401,228

Commitments and Contingencies

Redeemable non-controlling interest		1,179			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		121,403			121,016
Retained earnings		104,380			98,482
Accumulated other comprehensive income		6,966			8,589
Treasury stock, at cost (748,662 shares in 2010 and 757,828 in 2009)		(5,262	)		(5,327	)

Total stockholders' equity		231,244			226,517

	$	690,525		$	628,869

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2010			2009			2010			2009

Gross premiums written	$	83,180		$	75,053		$	165,039		$	146,532
Ceded premiums written		(10,047	)		(3,260	)		(19,111	)		(5,492	)
Net premiums written		73,133			71,793			145,928			141,040
Change in unearned premiums		(3,185	)		(9,474	)		(8,965	)		(19,291	)
Net premiums earned		69,948			62,319			136,963			121,749

Investment income, net of expenses		3,276			3,467			6,477			7,736
Net realized gains		1,643			867			5,446			519
Finance charges		1,771			1,449			3,414			2,799
Commission and fees		(963	)		2,627			(812	)		8,816
Other income		12			15			22			35

Total revenues		75,687			70,744			151,510			141,654

Losses and loss adjustment expenses		52,058			38,131			95,156			74,973
Other operating expenses		22,872			23,878			44,354			47,628
Interest expense		1,150			1,150			2,296			2,309
Amortization of intangible assets		916			782			1,832			1,496

Total expenses		76,996			63,941			143,638			126,406

Income (loss) before tax		(1,309	)		6,803			7,872			15,248
Income tax expense (benefit)		(953	)		2,519			1,937			4,181
Net income (loss)		(356	)		4,284			5,935			11,067
Less: Net income attributable to non-controlling interest		32			9			37			2

Net income (loss) attributable to Hallmark Financial Services, Inc.	$	(388	)	$	4,275		$	5,898		$	11,065

Net income (loss) per share attributable to Hallmark Financial
Services, Inc. common stockholders:
Basic	$	(0.02	)	$	0.20		$	0.29		$	0.53
Diluted	$	(0.02	)	$	0.20		$	0.29		$	0.53

Hallmark Financial Services, Inc.

Consolidated Segment Data

(Unaudited, $ in thousands)

	Three Months Ended June 30, 2010
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	18,804		$	40,351		$	22,613		$	-		$	81,768

Gross premiums written		18,792			41,775			22,613			-			83,180
Ceded premiums written		(909	)		(9,123	)		(15	)		-			(10,047	)
Net premiums written		17,883			32,652			22,598			-			73,133
Change in unearned premiums		(1,246	)		(2,036	)		97			-			(3,185	)
Net premiums earned		16,637			30,616			22,695			-			69,948

Total revenues		17,265			32,124			24,754			1,544			75,687

Losses and loss adjustment expenses		13,652			21,231			17,175			-			52,058

Pre-tax income (loss), net of
non-controlling interest		(1,870	)		967			1,132			(1,570	)		(1,341	)

Net loss ratio (2)		82.1	%		69.3	%		75.7	%					74.4	%
Net expense ratio (2)		32.5	%		29.5	%		22.5	%					30.1	%
Net combined ratio (2)		114.6	%		98.8	%		98.2	%					104.5	%

	Three Months Ended June 30, 2009
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	20,425		$	40,252		$	16,918		$	-		$	77,595

Gross premiums written		20,425			37,710			16,918			-			75,053
Ceded premiums written		(1,084	)		(2,176	)		-			-			(3,260	)
Net premiums written		19,341			35,534			16,918			-			71,793
Change in unearned premiums		(1,614	)		(8,158	)		298			-			(9,474	)
Net premiums earned		17,727			27,376			17,216			-			62,319

Total revenues		18,194			32,430			18,701			1,419			70,744

Losses and loss adjustment expenses		11,119			15,848			11,164			-			38,131

Pre-tax income (loss), net of
non-controlling interest		1,247			5,010			2,894			(2,357	)		6,794

Net loss ratio (2)		62.7	%		57.9	%		64.8	%					61.2	%
Net expense ratio (2)		32.1	%		30.2	%		20.7	%					30.5	%
Net combined ratio (2)		94.8	%		88.1	%		85.5	%					91.7	%

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.

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. 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

(Unaudited, $ in thousands)

	Six Months Ended June 30, 2010
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	36,901		$	75,633		$	49,744		$	-		$	162,278

Gross premiums written		36,889			78,406			49,744			-			165,039
Ceded premiums written		(1,945	)		(17,147	)		(19	)		-			(19,111	)
Net premiums written		34,944			61,259			49,725			-			145,928
Change in unearned premiums		(1,426	)		80			(7,619	)		-			(8,965	)
Net premiums earned		33,518			61,339			42,106			-			136,963

Total revenues		35,299			64,611			45,968			5,632			151,510

Losses and loss adjustment expenses		27,268			37,627			30,261			-			95,156

Pre-tax income (loss), net of
non-controlling interest		(2,809	)		7,314			3,782			(452	)		7,835

Net loss ratio (2)		81.4	%		61.3	%		71.9	%					69.5	%
Net expense ratio (2)		31.7	%		28.8	%		22.1	%					29.5	%
Net combined ratio (2)		113.1	%		90.1	%		94.0	%					99.0	%

	Six Months Ended June 30, 2009
	Standard			Specialty
	Commercial			Commercial			Personal