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):   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

EX-99.1

  

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.