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): March 14, 2013

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 March 14, 2013, the Registrant issued a press release announcing its financial results for the quarter and fiscal year ended December 31, 2012. 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 March 14, 2013

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:   March 14, 2013	By:	/s/ Jeffrey R. Passmore
		Jeffrey R. Passmore, Chief Accounting Officer

EX-99.1

777 Main Street, Suite 1000

Fort Worth, Texas 76102

P | 817.348.1600  F | 817.348.1815

www.hallmarkgrp.com

 

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES FOURTH QUARTER AND FISCAL YEAR 2012 RESULTS

FORT WORTH, Texas, (March 14, 2013) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported fourth quarter 2012 net income of $1.8 million, or $0.09 per share, compared to net income of $0.3 million, or $0.02 per share reported for fourth quarter 2011. Hallmark reported net income of $3.5 million, or $0.18 per share, for fiscal 2012 as compared to a net loss of $10.9 million, or $0.55 per share, reported for fiscal 2011. Total revenues were $88.6 million for the fourth quarter 2012 as compared to $83.1 million for the fourth quarter of 2011. Fiscal 2012 total revenues were $341.8 million, up 6% from the $322.8 million reported for fiscal 2011.

Mark J. Morrison, President and Chief Executive Officer, said, “The positive results for the quarter continue to reflect improvement in underwriting profitability due to the decisive actions taken over the past year, including a continuation of meaningful rate increases across most all business units and exiting unprofitable states and product lines in our Personal Segment. Our fourth quarter combined ratio of 99.1% and earnings of $0.09 per share evidence this improvement and reflect the favorable underlying trends within our business.”

Mr. Morrison continued, “The year-over-year increase in revenue continues to be largely driven by organic growth from the operating units that comprise our Specialty Commercial Segment. We have seen an increase in premium production generated from favorable rate trends, as well as from added insured exposure units that suggests improving economic conditions in the markets in which we operate. We continue to see middle single-digit to low double-digit rate increases across all operations with the exception of General Aviation, which continues to be impacted by increased competition in a contracting market. We expect these trends to continue throughout 2013 as we continue to closely monitor pricing and pursue rate increases in most all of our lines of business.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Book value per share was $11.45 at the end of the year, an increase of 2% over prior year. Cash flow from operations was $5.5 million in the fourth quarter and $33.7 million for fiscal 2012, up from $24.6 million in the prior year. Total cash and investments increased 6% during fiscal 2012 to $539.2 million, or $27.99 per share.”

Mr. Schwarz continued, “Despite holding a greater amount of fixed income securities during 2012, net investment income was nearly $0.6 million less than prior year due to a 70 basis point decline in tax equivalent book yield to 4.4%.  Hallmark continues to carry significant cash of $93.9 million as of December 31, 2012, which we seek to opportunistically deploy in ways that will generate a higher return for shareholders in the future.”

4th Quarter
	2012		2011		% Change
	($ in thousands, unaudited)
Gross premiums written		92,184		84,047		10	%
Net premiums written		77,385		70,804		9	%
Net premiums earned		83,498		76,282		9	%
Investment income, net of expenses		3,720		4,115		-10	%
Net realized gains		89		456		-80	%
Total revenues		88,623		83,102		7	%
Net income (1)		1,783		311		473	%
Net income per share - basic	$	0.09	$	0.02		350	%
Net income per share - diluted	$	0.09	$	0.02		350	%
Book value per share	$	11.45	$	11.19		2	%
Cash flow from operations		5,495		9,602		-43	%

Fiscal Year
	2012		2011			% Change
	($ in thousands)
Gross premiums written		389,842		354,881			10	%
Net premiums written		332,489		303,876			9	%
Net premiums earned		319,436		293,041			9	%
Investment income, net of expenses		15,293		15,880			-4	%
Net realized gains		1,943		3,633			-47	%
Total revenues		341,800		322,771			6	%
Net income (loss) (1)		3,524		(10,891	)		NM
Net income (loss) per share - basic	$	0.18	$	(0.55	)		NM
Net income (loss) per share - diluted	$	0.18	$	(0.55	)		NM
Book value per share	$	11.45	$	11.19			2	%
Cash flow from operations		33,682		24,610			37	%

(1) Net income (loss) is net income (loss) attributable to Hallmark Financial Services, Inc. as reported in the consolidated statements of operations as determined in accordance with U.S. generally accepted accounting principles (GAAP).

Fiscal Year 2012 Commentary

During fiscal 2012, total revenues were $341.8 million, representing an approximately 6% increase over the $322.8 million in total revenues for fiscal 2011. The growth in revenue was primarily attributable to increased premium production and resulting earned premium driven largely from the E&S Commercial business unit and from the acquisition of the Workers Compensation business unit during the third quarter of 2011. The increase in revenue was partially offset by an adverse profit share commission revenue adjustment in the Standard Commercial P&C business unit, combined with lower finance charges and earned premium in the Personal Segment due mostly to the impact of a reduction of premium written in underperforming states and products exited over the past twelve months. Further offsetting the increase in revenue was lower net realized gains for the period ended December 31, 2012.

Net income attributable to Hallmark was $3.5 million for the year ended December 31, 2012, as compared to a net loss of $10.9 million for the year ended December 31, 2011. On a diluted per share basis, net income attributable to Hallmark was $0.18 per share for fiscal 2012 as compared to a net loss of $0.55 per share for fiscal 2011.

The increase in revenue for the year ended December 31, 2012 was complemented by decreased loss and loss adjustment expenses due primarily to improved current accident year loss trends in the Standard Commercial P&C business unit and Personal Lines business unit as well as $3.7 million of favorable prior year loss development for the year ended December 31, 2012 as compared to $16.4 million of adverse reserve development recognized during the prior year. Of the $16.4 million unfavorable development recognized for the year ended December 31, 2011, $10.3 million was a result of adverse prior year loss reserve development in the Personal Segment in Florida. In addition, the results for the years ended December 31, 2012 and 2011 included $11.7 million and $10.3 million, respectively, in current accident year net losses from weather related claims.

Hallmark's consolidated net loss ratio was 68.9% and 70.9% for the three and twelve months ended December 31, 2012 as compared to 75.2% and 81.6% for the same periods in 2011. Hallmark's net expense ratio was 30.2% and 30.8% for the three and twelve months ended December 31, 2012 as compared to 29.3% and 30.8% for the same periods in 2011. Hallmark’s net combined ratio was 99.1% and 101.7% for the three and twelve months ended December 31, 2012 as compared to 104.5% and 112.4% for the same periods in 2011.

About Hallmark Financial Services, Inc.

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 and personal lines of property/casualty insurance products, as well as providing other insurance related services. Hallmark 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)	As of December 31
ASSETS	2012		2011
Investments:			(as adjusted)
Debt securities, available-for-sale, at fair value (cost: $397,800 in 2012 and $380,578 in 2011)	$	401,435	$	380,469
Equity securities, available-for-sale, at fair value (cost: $31,502 in 2012 and $30,465 in 2011)		43,925		44,159
Total investments		445,360		424,628
Cash and cash equivalents		85,145		74,471
Restricted cash		8,707		9,372
Ceded unearned premiums		22,411		19,470
Premiums receivable		66,683		53,513
Accounts receivable		3,110		3,946
Receivable for securities		3		2,617
Reinsurance recoverable		51,970		42,734
Deferred policy acquisition costs		24,911		22,554
Goodwill		44,695		44,695
Intangible assets, net		23,068		26,654
Deferred federal income taxes, net		1,940		-
Federal income tax recoverable		-		6,738
Prepaid expenses		1,480		1,458
Other assets		10,985		13,209
Total Assets	$	790,468	$	746,059

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Revolving credit facility payable	$	1,473		$	4,050
Subordinated debt securities		56,702			56,702
Reserves for unpaid losses and loss adjustment expenses		313,416			296,945
Unearned premiums		162,502			146,104
Reinsurance balances payable		7,330			3,139
Pension liability		3,685			3,971
Payable for securities		-			203
Federal income tax payable		1,518			-
Deferred federal income taxes, net		-			135
Accounts payable and other accrued expenses		23,305			17,954
Total Liabilities		569,931			529,203
Commitments and contingencies
Redeemable non-controlling interest		-			1,284
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2012 and 2011		3,757			3,757
Additional paid-in capital		122,475			122,487
Retained earnings		97,964			94,440
Accumulated other comprehensive income		7,899			6,446
Treasury stock (1,609,374 shares in 2012 and 2011), at cost		(11,558	)		(11,558	)
Total Stockholders’ Equity		220,537			215,572
	$	790,468		$	746,059

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations	Three Months Ended						Fiscal Year Ended
($ in thousands, except share amounts)	December 31						December 31
	2012			2011			2012			2011
				(as adjusted)						(as adjusted)
Gross premiums written	$	92,184		$	84,047		$	389,842		$	354,881
Ceded premiums written		(14,799	)		(13,243	)		(57,353	)		(51,005	)
Net premiums written		77,385			70,804			332,489			303,876
Change in unearned premiums		6,113			5,478			(13,053	)		(10,835	)
Net premiums earned		83,498			76,282			319,436			293,041
Investment income, net of expenses		3,720			4,115			15,293			15,880
Net realized gains		89			456			1,943			3,633
Finance charges		1,419			1,678			5,957			6,826
Commission and fees		(112	)		558			(1,145	)		3,175
Other income		9			13			316			216
Total revenues		88,623			83,102			341,800			322,771
Losses and loss adjustment expenses		57,555			57,394			226,414			239,235
Other operating expenses		26,715			23,216			103,792			95,106
Interest expense		1,170			1,161			4,634			4,631
Amortization of intangible assets		896			896			3,586			3,586
Total expenses		86,336			82,667			338,426			342,558
Income (loss) before tax		2,287			435			3,374			(19,787	)
Income tax expense (benefit)		504			94			(474	)		(8,954	)
Net income (loss)		1,783			341			3,848			(10,833	)
Less: net income attributable to non-controlling interest		-			30			324			58
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	1,783		$	311		$	3,524		$	(10,891	)
Net income (loss) per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic	$	0.09		$	0.02		$	0.18		$	(0.55	)
Diluted	$	0.09		$	0.02		$	0.18		$	(0.55	)

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
($ in thousands)	Three Months Ended December 31
	Standard Commercial Segment						Specialty Commercial Segment						Personal Segment						Corporate						Consolidated
	2012			2011			2012			2011			2012			2011			2012			2011			2012			2011
Gross premiums written	$	18,799			16,718		$	57,005			47,988		$	16,380			19,341		$	-			-		$	92,184			84,047
Ceded premiums written		(1,937	)		(1,423	)		(12,694	)		(11,702	)		(168	)		(118	)		-			-			(14,799	)		(13,243	)
Net premiums written		16,862			15,295			44,311			36,286			16,212			19,223			-			-			77,385			70,804
Change in unearned premiums		1,258			1,509			2,226			528			2,629			3,441			-			-			6,113			5,478
Net premiums earned		18,120			16,804			46,537			36,814			18,841			22,664			-			-			83,498			76,282
Total revenues		19,328			18,904			49,105			38,405			20,641			24,795			(451	)		998			88,623			83,102
Losses and loss adjustment expenses		13,575			11,823			27,153			20,559			16,827			25,012			-			-			57,555			57,394
Pre-tax income (loss), net of non-controlling interest (2)		115			2,225			8,739			7,393			(2,788	)		(7,306	)		(3,779	)		(1,907	)		2,287			405
Net loss ratio (1)		74.9	%		70.4	%		58.3	%		55.8	%		89.3	%		110.4	%		-			-			68.9	%		75.2	%
Net expense ratio (1)		31.2	%		27.6	%		28.0	%		29.0	%		28.4	%		24.3	%		-			-			30.2	%		29.3	%
Net combined ratio (1)		106.1	%		98.0	%		86.3	%		84.8	%		117.7	%		134.7	%		-			-			99.1	%		104.5	%

¹ 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 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. The net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

² Amounts for 2011 have been adjusted for the adoption of a change in accounting principle related to deferred policy acquisition costs. (See, “Adoption of New Accounting Pronouncements” in Note 1 to the audited consolidated financial statements, included in Hallmark’s Form 10-K for the year ended December 31, 2012.)

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Segment Data
($ in thousands)	Year Ended December 31
	Standard Commercial Segment						Specialty Commercial Segment						Personal Segment						Corporate						Consolidated
	2012			2011			2012			2011			2012			2011			2012			2011			2012			2011
Gross premiums written	$	77,091			69,420		$	235,695			185,020		$	77,056			100,441		$	-			-		$	389,842			354,881
Ceded premiums written		(7,000	)		(5,476	)		(49,642	)		(40,743	)		(711	)		(4,786	)		-			-			(57,353	)		(51,005	)
Net premiums written		70,091			63,944			186,053			144,277			76,345			95,655			-			-			332,489			303,876
Change in unearned premiums		(936	)		642			(17,223	)		(8,784	)		5,106			(2,693	)		-			-			(13,053	)		(10,835	)
Net premiums earned		69,155			64,586			168,830			135,493			81,451			92,962			-			-			319,436			293,041
Total revenues		73,119			72,830			178,917			142,838			89,149			101,351			615			5,752			341,800			322,771
Losses and loss adjustment expenses		52,828			50,940			103,980			87,265			69,606			101,030			-			-			226,414			239,235
Pre-tax income (loss), net of non-controlling interest (2)		(2,486	)		1,335			25,932			14,348			(8,535	)		(29,647	)		(11,861	)		(5,881	)		3,050			(19,845	)
Net loss ratio (1)		76.4	%		78.9	%		61.6	%		64.4	%		85.5	%		108.7	%		-			-			70.9	%		81.6	%
Net expense ratio (1)		33.2	%		32.3	%		28.3	%		29.6	%		28.5	%		25.8	%		-			-			30.8	%		30.8	%
Net combined ratio (1)		109.6	%		111.2	%		89.9	%		94.0	%		114.0	%		134.5	%		-			-			101.7	%		112.4	%

¹ 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 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. The net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

² Amounts for 2011 have been adjusted for the adoption of a change in accounting principle related to deferred policy acquisition costs. (See, “Adoption of New Accounting Pronouncements” in Note 1 to the audited consolidated financial statements, included in Hallmark’s Form 10-K for the year ended December 31, 2012.)