Unassociated Document

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES FOURTH QUARTER AND FISCAL YEAR 2008 EARNINGS RESULTS

FORT WORTH, Texas, (March 26, 2009) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported fiscal 2008 net income of $12.9 million compared to $27.9 million reported for fiscal 2007. Hallmark reported a net loss of $2.4 million for the fourth quarter of 2008 compared to net income of $7.3 million reported for the fourth quarter of 2007. On a fully diluted basis, fiscal 2008 net income was $0.62 per share and fourth quarter 2008 was a net loss of $0.12 per share, as compared to net income of $1.34 per share and $0.35 per share for the similar periods of 2007. Total revenues were $268.7 million and $60.2 million for fiscal 2008 and the fourth quarter 2008, representing a 2% and a 14% decrease from the $275.2 million and $69.9 million reported for the similar periods of 2007.

The fourth quarter and fiscal 2008 results were impacted by investment impairments we recognized to reflect market conditions, investment losses realized for tax planning purposes, a valuation allowance on our deferred tax asset and the hurricanes that hit the Texas coast during the third quarter. The following table details these items and their impact on our reported net income and diluted earnings per share ($ in thousands, except per share amounts):

		4Q08		Per Share			FY2008			Per Share

Net income (loss)	$	(2,407	)	$	(0.12	)	$	12,899		$	0.62

Investment impairments after tax		(3,634	)	$	(0.17	)		(5,749	)	$	(0.28	)
Net realized investment losses after tax		(2,772	)	$	(0.13	)		(1,570	)	$	(0.08	)
Deferred tax valuation allowance		(2,969	)	$	(0.14	)		(2,969	)	$	(0.14	)
Net hurricane loss and LAE after tax		-		$	-			(3,900	)	$	(0.19	)

Impact on net income or loss from significant items	$	(9,375	)	$	(0.44	)	$	(14,188	)	$	(0.69	)

Book value per share was also impacted by unrealized investment losses due to continued market turmoil, recognized investment impairments, realized investment losses and the hurricanes. The table below details the impact of these and other items during the fourth quarter and fiscal 2008 on our reported book value per share.

		4Q08		FY2008

Beginning book value per share	$	9.11		$	8.65

Impacted by:
Recognized investment impairment after tax	$	(0.17	)	$	(0.28	)
Realized investment losses after tax	$	(0.13	)	$	(0.08	)
Unrealized investment losses after tax	$	(0.28	)	$	(0.59	)
Deferred tax valuation allowance	$	(0.18	)	$	(0.22	)
Additional minimum pension liability	$	(0.11	)	$	(0.11	)
Net hurricane loss and LAE after tax	$	-		$	(0.19	)
All other items	$	0.37		$	1.43

Book value per share as of December 31, 2008	$	8.61		$	8.61

Mark J. Morrison, President and Chief Executive Officer, said, ``Not only did the trend of deteriorating economic conditions, decreasing prices and increased competition continue through the fourth quarter of the year, but 2008 produced one of the most costly catastrophe years on record in the United States. Hallmark has not escaped the events of 2008 unscathed. However, our unrelenting focus on underwriting discipline and bottom-line profitability has again resulted in strong underwriting margins in each of our operating units. Despite incurring over $6 million in losses from three hurricanes that made landfall on the Texas and Louisiana coasts, we were able to achieve our underwriting profit target for the year with a combined ratio under 90%. This marks the fifth consecutive year we have exceeded this target.”

Mr. Morrison continued, ``Underwriting discipline in a soft market cycle does not come without a price. As a result of our discipline, premium production declined 3.6% in 2008. If the competitive and economic environments do not improve, production could decline further in the future. 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.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “The significant decline in general economic conditions, the massive disruptions in financial markets and the magnitude of catastrophe losses that occurred over the past year created challenges for most companies in our industry. Although there are signs of easing in the soft market conditions for certain lines of business, most would agree that the competitive landscape and general economic climate will continue to create headwinds for our industry in the coming year. Despite these challenges, we expect our competitive strengths and growth strategies will allow Hallmark to continue to produce superior results.”

Mr. Schwarz continued, “Hallmark’s growth in book value per share was flat for the year due to approximately $8.8 million in recognized impairment losses that reflect current market prices for certain securities. With few exceptions, it is our expectation we will hold these securities until they recover in value. Despite the negative contribution to book value growth, Hallmark’s investment portfolio performed comparatively well in the face of extremely volatile market conditions. Net investment income increased 30% over the same quarter of last year and for the year has grown by 22%. We continue to maintain a diversified portfolio, with fixed income investments representing 91% of invested assets and 89% of the fixed income securities being rated investment grade. Our fixed income investment holdings are comprised of 76% tax-exempt securities and 22% short-term investments. As of the end of the year, our portfolio had a modified duration of 3.3 years and a tax-equivalent yield over 8.3%. Hallmark remains financially strong and has ample liquidity, with $59 million of cash and cash equivalents, excess capital held at the holding company and cash flow from operations of over $46 million for the year.''

	Three Months Ended
	December 31,
	2008			2007			% Change
	($ in thousands)
Gross premiums written	$	57,492		$	55,933			3	%
Net premiums written		55,073			53,881			2	%
Net premiums earned		58,384			59,250			-1	%
Commission and fee income		6,000			4,710			27	%
Investment income, net of expenses		4,367			3,369			30	%
Gain (loss) on investments		(9,856	)		1,287			-866	%
Total revenues		60,196			69,916			-14	%
Net income (loss)		(2,407	)		7,276			-133	%
Common EPS - basic	$	(0.12	)	$	0.35			-134	%
Common EPS - diluted	$	(0.12	)	$	0.35			-134	%
Annualized return on average equity		-5.2	%		16.5	%		-132	%
Book value per share	$	8.61		$	8.65			0	%
Cash flow from operations	$	9,138		$	17,796			-49	%

	Fiscal Year Ended
	December 31,
	2008			2007			% Change
	($ in thousands)
Gross premiums written	$	243,849		$	249,472			-2	%
Net premiums written		234,927			238,811			-2	%
Net premiums earned		236,320			225,971			5	%
Commission and fee income		22,280			28,054			-21	%
Investment income, net of expenses		16,049			13,180			22	%
Gain (loss) on investments		(11,261	)		2,586			-535	%
Total revenues		268,690			275,166			-2	%
Net income		12,899			27,863			-54	%
Common EPS - basic	$	0.62		$	1.34			-54	%
Common EPS - diluted	$	0.62		$	1.34			-54	%
Annualized return on average equity		7.2	%		16.9	%		-57	%
Book value per share	$	8.61		$	8.65			0	%
Cash flow from operations	$	46,296		$	79,563			-42	%

The decrease in total revenue for the three months ended December 31, 2008 was primarily due to recognized impairment losses on our investment portfolio and lower earned premium. The decrease in total revenues for the year ended December 31, 2008 was primarily due to recognized impairment losses on our investment portfolio and lower commission and fee income partially offset by increased earned premium and investment income.

Standard Commercial Segment revenues decreased $1.6 million and $2.4 million, or 7% and 3%, during the three months and year ended December 31, 2008 as compared to the same periods during 2007, due primarily to lower earned premium as a result of increased competition, rate pressure and deterioration of the economic environment in the U.S. Specialty Commercial Segment revenues increased $0.7 million and $1.3 million, or 2% and 1%, during the three months and year ended December 31, 2008 as compared to the same periods of 2007, due to the acquisition of our Heath XS Operating Unit in the third quarter and increased retention of business. Revenues from the Personal Segment increased $1.6 million and $6.2 million, or 11% and 11%, during the three months and year ended December 31, 2008 as compared to the same periods during 2007, due largely to geographic expansion into new states. Corporate revenue decreased $10.4 million and $11.6 million for the three months and year ended December 31, 2008 primarily due to losses recognized on our investment portfolio of $9.9 million and $11.3 million during the three months and year ended December 31, 2008 as compared to recognized gains on our investment portfolio of $1.3 million and $2.6 million during the same period in the prior year, partially offset by increased investment income of $0.7 million and $2.3 million for the same periods primarily due to changes in capital allocation.

On a diluted basis per share, net income (loss) was ($0.12) and $0.62 per share for the three months and year ended December 31, 2008 as compared to $0.35 and $1.34 per share for the same periods in 2007. The decrease in net income for the three months and year ended December 31, 2008 was primarily attributable to decreased revenue and recognized losses on investments discussed above and higher loss and loss adjustment expenses due to hurricane related losses in 2008.

Hallmark's net loss ratio was 57.8% for the fourth quarter of 2008 as compared to 56.2% for the fourth quarter of 2007. For fiscal 2008, Hallmark’s net loss ratio was 61.0% as compared to 58.8% for fiscal 2007. Hallmark's net expense ratio was 28.8% for the fourth quarter of 2008 as compared to 27.7% for the fourth quarter of 2007. For fiscal 2008, Hallmark’s net expense ratio was 28.9% as compared to 27.8% for fiscal 2007. Hallmark maintained a profitable net combined ratio of 86.6% for the fourth quarter of 2008 and 89.9% for fiscal 2008 as compared to 83.9% and 86.6% for the same periods 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 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
December 31, 2008 and 2007
(In thousands)

ASSETS	2008			2007
Investments:
Debt securities, available-for-sale, at fair value	$	268,513		$	250,359
Equity securities, available-for-sale, at fair value		25,003			15,166

Total investments		293,516			265,525

Cash and cash equivalents		59,134			146,219
Restricted cash and cash equivalents		8,033			16,043
Prepaid reinsurance premiums		1,349			942
Premiums receivable		44,032			46,026
Accounts receivable		4,531			5,219
Receivable for securities		1,031			27,395
Reinsurance recoverable		8,218			4,952
Deferred policy acquisition costs		19,524			19,757
Excess of cost over fair value of net assets acquired		41,080			30,025
Intangible assets		28,969			23,781
Current federal income tax recoverable		696			-
Deferred federal income taxes		6,696			275
Prepaid expenses		1,007			1,240
Other assets		20,582			19,583

	$	538,398		$	606,982

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable	$	60,919		$	60,814
Structured settlements		-			10,000
Reserves for unpaid losses and loss adjustment expenses		156,363			125,338
Unearned premiums		102,192			102,998
Unearned revenue		2,037			2,949
Accrued agent profit sharing		2,151			2,844
Accrued ceding commission payable		8,605			12,099
Pension liability		4,309			1,669
Payable for securities		3,606			91,401
Current federal income tax payable		-			864
Accounts payable and other accrued expenses		18,067			16,385

		358,249			427,361
Commitments and contingencies

Redeemable minority interest		737			-


Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares in 2008 and 2007; issued 20,841,782 shares in 2008 and 20,776,080 shares in 2007		3,751			3,740
Capital in excess of par value		119,928			118,459
Retained earnings		72,242			59,343
Accumulated other comprehensive loss		(16,432	)		(1,844	)
Treasury stock, 7,828 shares in 2008 and 2007, at cost		(77	)		(77	)

Total stockholders’ equity		179,412			179,621

	$	538,398		$	606,982

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
($ in thousands, except per share amounts)

	Three Months Ended						Fiscal Year Ended
	December 31						December 31

	2008			2007			2008			2007

Gross premiums written	$	57,492		$	55,933		$	243,849		$	249,472
Ceded premiums written		(2,419	)		(2,052	)		(8,922	)		(10,661	)
Net premiums written		55,073			53,881			234,927			238,811
Change in unearned premiums		3,311			5,369			1,393			(12,840	)
Net premiums earned		58,384			59,250			236,320			225,971

Investment income, net of expenses		4,367			3,369			16,049			13,180
Gain (loss) on investments		(9,856	)		1,287			(11,261	)		2,586
Finance charges		1,280			1,225			5,174			4,702
Commission and fees		6,000			4,710			22,280			28,054
Processing and service fees		16			71			114			657
Other income		5			4			14			16

Total revenues		60,196			69,916			268,690			275,166

Losses and loss adjustment expenses		33,730			33,298			144,244			132,918
Other operating expenses		24,982			23,761			96,096			94,272
Interest expense		1,188			1,306			4,745			3,914
Amortization of intangible assets		715			574			2,481			2,293

Total expenses		60,615			58,939			247,566			233,397

Income (loss) before tax and minority interest		(419	)		10,977			21,124			41,769
Income tax expense		1,953			3,701			8,175			13,906
Income (loss) before minority interest		(2,372	)		7,276			12,949			27,863
Minority interest		35			-			50			-


Net income (loss)	$	(2,407	)	$	7,276		$	12,899		$	27,863

Common stockholders net income (loss) per share:
Basic	$	(0.12	)	$	0.35		$	0.62		$	1.34
Diluted	$	(0.12	)	$	0.35		$	0.62		$	1.34

Hallmark Financial Services, Inc.

Consolidated Segment Data

	Three Months Ended December 31, 2008
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	17,863		$	41,752		$	14,191		$	-		$	73,806

Gross premiums written		17,863			25,438			14,191			-			57,492
Ceded premiums written		(1,162	)		(1,257	)		-			-			(2,419	)
Net premiums written		16,701			24,181			14,191			-			55,073
Change in unearned premiums		2,210			674			427			-			3,311
Net premiums earned		18,911			24,855			14,618			-			58,384

Total revenues		19,458			33,265			16,198			(8,725	)		60,196

Losses and loss adjustment expenses		13,052			10,667			10,012			(1	)		33,730

Pre-tax income (loss), net of
minority interest		579			8,727			1,942			(11,702	)		(454	)

Net loss ratio (2)		69.0	%		42.9	%		68.5	%					57.8	%
Net expense ratio (2)		27.0	%		30.5	%		22.0	%					28.8	%
Net combined ratio (2)		96.0	%		73.4	%		90.5	%					86.6	%

	Three Months Ended December 31, 2007
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	20,739		$	32,771		$	12,688		$	-		$	66,198

Gross premiums written		20,729			22,516			12,688			-			55,933
Ceded premiums written		(1,220	)		(832	)		-			-			(2,052	)
Net premiums written		19,509			21,684			12,688			-			53,881
Change in unearned premiums		2,126			2,511			732			-			5,369
Net premiums earned		21,635			24,195			13,420			-			59,250

Total revenues		21,024			32,564			14,614			1,714			69,916

Losses and loss adjustment expenses		10,859			13,086			9,357			(4	)		33,298

Pre-tax income (loss)		3,290			7,711			1,375			(1,399	)		10,977

Net loss ratio (2)		50.2	%		54.1	%		69.7	%					56.2	%
Net expense ratio (2)		27.1	%		30.5	%		23.6	%					27.7	%
Net combined ratio (2)		77.3	%		84.6	%		93.3	%					83.9	%

Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by our operations. We believe this is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or retained by third party insurance carriers.

The net loss ratio is calculated as incurred losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated as underwriting expenses of our insurance company subsidiaries (which include provisional ceding commissions, direct agent commissions, premium taxes and assessments, professional fees, other general underwriting expenses and allocated overhead expenses) and 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

	Fiscal Year Ended December 31, 2008
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	80,193		$	146,054		$	60,834		$	-		$	287,081

Gross premiums written		80,190			102,825			60,834			-			243,849
Ceded premiums written		(4,829	)		(4,093	)		-			-			(8,922	)
Net premiums written		75,361			98,732			60,834			-			234,927
Change in unearned premiums		4,434			(1,226	)		(1,815	)		-			1,393
Net premiums earned		79,795			97,506			59,019			-			236,320

Total revenues		84,075			127,882			64,475			(7,742	)		268,690

Losses and loss adjustment expenses		49,270			55,933			39,042			(1	)		144,244

Pre-tax income (loss), net of
minority interest		9,683			21,328			8,989			(18,926	)		21,074

Net loss ratio (2)		61.7	%		57.4	%		66.2	%					61.0	%
Net expense ratio (2)		27.1	%		30.7	%		22.2	%					28.9	%
Net combined ratio (2)		88.8	%		88.1	%		88.4	%					89.9	%

	Fiscal Year Ended December 31, 2007
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated

Produced premium (1)	$	90,985		$	151,003		$	55,916		$	-		$	297,904

Gross premiums written		90,868			102,688			55,916			-			249,472
Ceded premiums written		(6,273	)		(4,388	)		-			-			(10,661	)
Net premiums written		84,595			98,300			55,916			-			238,811
Change in unearned premiums		(840	)		(9,589	)		(2,411	)		-			(12,840	)
Net premiums earned		83,755			88,711			53,505			-			225,971

Total revenues		86,512			126,550			58,268			3,836			275,166

Losses and loss adjustment expenses		48,480			48,484			35,969			(15	)		132,918

Pre-tax income (loss)		12,415			28,338			7,523			(6,507	)		41,769

Net loss ratio (2)		57.9	%		54.7	%		67.2	%					58.8	%
Net expense ratio (2)		27.3	%		31.1	%		23.2	%					27.8	%
Net combined ratio (2)		85.2	%		85.8	%		90.4	%					86.6	%