10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

Commission file number 001-11252

Hallmark Financial Services, Inc.

(Exact name of registrant as specified in its charter)

Nevada	87-0447375
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

777 Main Street, Suite 1000, Fort Worth, Texas	76102
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (817) 348-1600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨                 Accelerated filer  x

Non-accelerated filer ¨              Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, par value $.18 per share – 19,263,457 shares outstanding as of November 7, 2013.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

INDEX TO FINANCIAL STATEMENTS

	Page Number
Consolidated Balance Sheets at September 30, 2013 (unaudited) and December 31, 2012	3
Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 30, 2013 and September 30, 2012	4
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months and nine months ended September 30, 2013 and September 30, 2012	5
Consolidated Statements of Stockholders’ Equity (unaudited) for the three months and nine months ended September 30, 2013 and September 30, 2012	6
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and September 30, 2012	7
Notes to Consolidated Financial Statements (unaudited)	8

2

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except share amounts)

	September 30			December 31
	2013			2012
	(unaudited)
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (cost: $395,860 in 2013 and $397,800 in 2012)	$	396,647		$	401,435
Equity securities, available-for-sale, at fair value (cost: $24,033 in 2013 and $31,502 in 2012)		45,940			43,925
Total investments		442,587			445,360
Cash and cash equivalents		151,698			85,145
Restricted cash		8,700			8,707
Ceded unearned premiums		31,731			22,411
Premiums receivable		77,749			66,683
Accounts receivable		3,209			3,110
Receivable for securities		19			3
Reinsurance recoverable		61,193			51,970
Deferred policy acquisition costs		26,943			24,911
Goodwill		44,695			44,695
Intangible assets, net		20,647			23,068
Deferred federal income taxes, net		-			1,940
Prepaid expenses		1,611			1,480
Other assets		8,935			10,985
Total assets	$	879,717		$	790,468
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Revolving credit facility payable		1,473			1,473
Subordinated debt securities		56,702			56,702
Reserves for unpaid losses and loss adjustment expenses		360,248			313,416
Unearned premiums		191,367			162,502
Reinsurance balances payable		11,862			7,330
Pension liability		3,334			3,685
Payable for securities		6,380			-
Deferred federal income taxes, net		319			-
Federal income tax payable		1,075			1,518
Accounts payable and other accrued expenses		16,879			23,305
Total liabilities	$	649,639		$	569,931
Commitments and contingencies (Note 17)
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333; issued 20,872,831 shares in 2013 and 2012		3,757			3,757
Additional paid-in capital		122,720			122,475
Retained earnings		102,781			97,964
Accumulated other comprehensive income		12,378			7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost		(11,558	)		(11,558	)
Total stockholders' equity		230,078			220,537
	$	879,717		$	790,468

The accompanying notes are an integral part

of the consolidated financial statements

3

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Gross premiums written	$	123,664		$	99,448		$	351,278		$	297,658
Ceded premiums written		(20,775	)		(14,443	)		(54,948	)		(42,554	)
Net premiums written		102,889			85,005			296,330			255,104
Change in unearned premiums		(5,437	)		(4,524	)		(19,546	)		(19,166	)
Net premiums earned		97,452			80,481			276,784			235,938
Investment income, net of expenses		2,965			3,795			9,871			11,573
Net realized gains		6,950			982			9,723			1,854
Finance charges		1,484			1,374			4,396			4,538
Commission and fees		(251	)		(1,029	)		169			(1,033	)
Other income		13			17			110			307
Total revenues		108,613			85,620			301,053			253,177
Losses and loss adjustment expenses		68,158			52,839			204,955			168,859
Other operating expenses		29,139			25,726			83,911			77,077
Interest expense		1,150			1,137			3,449			3,464
Amortization of intangible assets		694			897			2,420			2,690
Total expenses		99,141			80,599			294,735			252,090
Income before tax		9,472			5,021			6,318			1,087
Income tax expense (benefit)		3,198			1,350			1,501			(978	)
Net income		6,274			3,671			4,817			2,065
Less: Net income attributable to
non-controlling interest		-			258			-			324
Net income attributable to Hallmark Financial Services, Inc.	$	6,274		$	3,413		$	4,817		$	1,741
Net income per share attributable to Hallmark Financial
Services, Inc. common stockholders:
Basic	$	0.33		$	0.18		$	0.25		$	0.09
Diluted	$	0.32		$	0.18		$	0.25		$	0.09

The accompanying notes are an integral part of the consolidated financial statements

4

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

($ in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net income	$	6,274		$	3,671		$	4,817		$	2,065
Other comprehensive (loss) income:
Change in net actuarial gain		123			120			371			362
Tax effect on change in net actuarial gain		(43	)		(42	)		(130	)		(127	)
Unrealized holding gains arising during the period		4,721			4,541			16,243			4,560
Tax effect on unrealized holding gains arising during the period		(1,652	)		(1,589	)		(5,685	)		(1,596	)
Reclassification adjustment for gains included in net income		(6,950	)		(926	)		(9,723	)		(2,044	)
Tax effect on reclassification adjustment for gains included in net income		2,433			324			3,403			715
Other comprehensive (loss) income, net of tax		(1,368	)		2,428			4,479			1,870
Comprehensive income	$	4,906		$	6,099		$	9,296		$	3,935
Less: comprehensive income attributable to non-controlling interest		-			258			-			324
Comprehensive income attributable to Hallmark Financial Services, Inc.	$	4,906		$	5,841		$	9,296		$	3,611

The accompanying notes are an integral

part of the consolidated financial statements

5

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Unaudited)

($ in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Common Stock
Balance, beginning of period	$	3,757		$	3,757		$	3,757		$	3,757
Balance, end of period		3,757			3,757			3,757			3,757
Additional Paid-In Capital
Balance, beginning of period		122,611			122,669			122,475			122,487
Accretion of redeemable noncontrolling interest		-			(321	)		-			(392	)
Equity based compensation		109			64			245			317
Balance, end of period		122,720			122,412			122,720			122,412
Retained Earnings
Balance, beginning of period		96,507			92,768			97,964			94,440
Net income attributable to Hallmark Financial Services, Inc.		6,274			3,413			4,817			1,741
Balance, end of period		102,781			96,181			102,781			96,181
Accumulated Other Comprehensive Income
Balance, beginning of period		13,746			5,888			7,899			6,446
Additional minimum pension liability, net of tax		80			78			241			235
Net unrealized holding gains arising during period, net of tax		3,069			2,952			10,558			2,964
Reclassification adjustment for gains included in net income, net of tax		(4,517	)		(602	)		(6,320	)		(1,329	)
Balance, end of period		12,378			8,316			12,378			8,316
Treasury Stock
Balance, beginning of period		(11,558	)		(11,558	)		(11,558	)		(11,558	)
Balance, end of period		(11,558	)		(11,558	)		(11,558	)		(11,558	)
Total Stockholders' Equity	$	230,078		$	219,108		$	230,078		$	219,108

The accompanying notes are an integral part

of the consolidated financial statements

6

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

($ in thousands)

	Nine Months Ended
	September 30
	2013			2012
Cash flows from operating activities:
Net income	$	4,817		$	2,065
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization expense		3,691			3,603
Deferred federal income taxes		(268	)		(2,241	)
Net realized gains		(9,723	)		(1,854	)
Share-based payments expense		245			317
Change in ceded unearned premiums		(9,320	)		(2,524	)
Change in premiums receivable		(11,066	)		(15,669	)
Change in accounts receivable		(99	)		586
Change in deferred policy acquisition costs		(2,032	)		(3,854	)
Change in unpaid losses and loss adjustment expenses		46,832			18,662
Change in unearned premiums		28,865			21,690
Change in reinsurance recoverable		(9,223	)		(7,375	)
Change in reinsurance balances payable		4,532			2,837
Change in current federal income tax (payable) recoverable		(443	)		6,915
Change in all other liabilities		(6,777	)		(1,180	)
Change in all other assets		13,489			6,209
Net cash provided by operating activities		53,520			28,187
Cash flows from investing activities:
Purchases of property and equipment		(920	)		(366	)
Net transfers from restricted cash		7			1,126
Purchases of investment securities		(139,791	)		(103,434	)
Maturities, sales and redemptions of investment securities		153,737			110,772
Net cash provided by investing activities		13,033			8,098
Cash flows from financing activities:
Activity under revolving credit facility, net		-			(2,577	)
Payment of contingent consideration		-			(350	)
Distribution to non-controlling interest		-			(147	)
Net cash used in financing activities		-			(3,074	)
Increase in cash and cash equivalents		66,553			33,211
Cash and cash equivalents at beginning of period		85,145			74,471
Cash and cash equivalents at end of period	$	151,698		$	107,682
Supplemental cash flow information:
Interest paid	$	3,439		$	3,464
Income taxes paid (recovered)	$	2,212		$	(5,951	)
Supplemental schedule of non-cash investing activities:
Change in receivable for securities related to investment disposals that settled after the balance sheet date	$	16		$	(1,566	)
Change in payable for securities related to investment purchases that settled after the balance sheet date	$	6,380		$	6,546

The accompanying notes are an integral part of the consolidated financial statements.

7

Hallmark Financial Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

1. General

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, “we,” “us” or “our”) is an insurance holding company engaged in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing our insurance products, as well as providing other insurance related services.

We pursue our business activities through subsidiaries whose operations are organized into five business units that are supported by our insurance company subsidiaries. Our Standard Commercial P&C business unit handles commercial insurance products and services in the standard market. Our Workers Compensation business unit specializes in small and middle market workers compensation business. Our E&S Commercial business unit handles primarily commercial insurance products and services in the excess and surplus lines market. Our Hallmark Select business unit offers (i) general aviation insurance products and services, (ii) low and middle market commercial umbrella and excess liability insurance, on both an admitted and non-admitted basis, focusing primarily on trucking, specialty automobile and non-fleet automobile coverage, and (iii) medical professional liability insurance products and services. Our Hallmark Select business unit is the combination of our operations previously known as our General Aviation business unit, our Excess & Umbrella business unit and the medical professional liability business handled by our E&S Commercial business unit. Our Personal Lines business unit handles personal insurance products and services. Our insurance company subsidiaries supporting these operating units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”).

These five business units are segregated into three reportable industry segments for financial accounting purposes. The Standard Commercial Segment includes the Standard Commercial P&C business unit and the Workers Compensation business unit. The Specialty Commercial Segment includes the E&S Commercial business unit and the Hallmark Select business unit, as well as certain specialty risk programs (“Specialty Programs”) which are managed by Hallmark. The Personal Segment consists solely of the Personal Lines business unit.

2. Basis of Presentation

Our unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include our accounts and the accounts of our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC.

8

The interim financial data as of September 30, 2013 and 2012 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the period ended September 30, 2013 are not necessarily indicative of the operating results to be expected for the full year.

Business Combinations

We account for business combinations using the acquisition method of accounting pursuant to Accounting Standards Codification (“ASC”) 805, “Business Combinations.” The base cash purchase price plus the estimated fair value of any non-cash or contingent consideration given for an acquired business is allocated to the assets acquired (including identified intangible assets) and liabilities assumed based on the estimated fair values of such assets and liabilities. The excess of the fair value of the total consideration given for an acquired business over the aggregate net fair values assigned to the assets acquired and liabilities assumed is recorded as goodwill. Contingent consideration is recognized as a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in the consolidated statements of operations. The valuation of contingent consideration requires assumptions regarding anticipated cash flows, probabilities of cash flows, discount rates and other factors. Significant judgment is employed in determining the propriety of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions, can materially impact the amount of contingent consideration expense we record in any given period. Indirect and general expenses related to business combinations are expensed as incurred.

Income Taxes

We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end. Deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes in effect for the year in which these temporary differences are expected to be recovered or settled.

Use of Estimates in the Preparation of the Financial Statements

Our preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting period. Refer to “Critical Accounting Estimates and Judgments” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Actual results could differ materially from those estimates.

9

Fair Value of Financial Instruments

Fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the financial instruments. Fair value estimates for financial instruments for which no or limited observable market data is available are based on judgments regarding current economic conditions, credit and interest rate risk. These estimates involve significant uncertainties and judgments and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique, including discount rate and estimates of future cash flows, could significantly affect these fair value estimates.

Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Restricted Cash: The carrying amount for restricted cash reported in the balance sheet approximates the fair value.

Revolving Credit Facility Payable: The carrying value of our bank revolving credit facility of $1.5 million approximates the fair value based on the current interest rate.

Subordinated Debt Securities: Our trust preferred securities have a carried value of $56.7 million and a fair value of $51.9 million as of September 30, 2013. The fair value of our trust preferred securities is based on discounted cash flows using a current yield to maturity of 8.0%, which is based on similar issues to discount future cash flows. Our trust preferred securities would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

For reinsurance balances, premiums receivable, federal income tax payable, other assets and other liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments.

Variable Interest Entities

On June 21, 2005, we formed Hallmark Statutory Trust I (“Trust I”), an unconsolidated trust subsidiary, for the sole purpose of issuing $30.0 million in trust preferred securities. Trust I used the proceeds from the sale of these securities and our initial capital contribution to purchase $30.9 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I.

On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0 million in trust preferred securities. Trust II used the proceeds from the sale of these securities and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II.

We evaluate on an ongoing basis our investments in Trust I and II (collectively the “Trusts”) and we do not have a variable interest in the Trusts.  Therefore, the Trusts are not included in our consolidated financial statements.

We are also involved in the normal course of business with variable interest entities (“VIE’s”) primarily as a passive investor in mortgage-backed securities and certain collateralized corporate bank loans issued by third party VIE’s. The maximum exposure to loss with respect to these investments is the investment carrying values included in the consolidated balance sheets.

10

Adoption of New Accounting Pronouncements

In January 2013, we adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) related to reporting and disclosure requirements about changes in accumulated other comprehensive income balances and reclassifications out of accumulated other comprehensive income. The new guidance is effective prospectively for fiscal and interim periods beginning after December 15, 2012. The adoption of this guidance did not have a material impact on our financial position or results of operations but did require additional disclosures.

3. Business Combinations

Effective August 29, 2008, we acquired 80% of the issued and outstanding membership interests in Heath XS, LLC and Hardscrabble Data Solutions, LLC for consideration of $15.0 million. In connection with the acquisition, we executed an operating agreement for each company. The operating agreements granted us the right to purchase the remaining 20% membership interests in the companies and granted an affiliate of the seller the right to require us to purchase such remaining membership interests. We exercised our call option effective September 30, 2012 and acquired the remaining 20% membership interests in the companies for $1.7 million.

Effective December 31, 2010, we acquired all of the issued and outstanding capital stock of HNIC for initial consideration of $14.0 million paid in cash on January 3, 2011 to State Auto Financial Corporation, Inc. In addition, an earnout of up to $2.0 million is payable to the seller quarterly in an amount equal to 2% of gross collected premiums on new or renewal personal lines insurance policies written by HNIC agents during the three years following closing. HNIC is an Ohio domiciled insurance company that writes non-standard personal automobile policies through independent agents in 21 states.

Effective July 1, 2011, we acquired all of the issued and outstanding capital stock of TBIC Holding Corporation (“TBIC Holding”) for initial consideration of $1.6 million paid in cash on July 1, 2011. In addition, a holdback purchase price of $350 thousand was paid during the third quarter of 2012. A contingent purchase price of up to $3.0 million may become payable following 16 full calendar quarters after closing based upon a formula contained in the acquisition agreement.

4. Fair Value

ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820, among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In addition, ASC 820 precludes the use of block discounts when measuring the fair value of instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities.

We determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820. In accordance with ASC 820, we utilize the following fair value hierarchy:

· Level 1: quoted prices in active markets for identical assets;

· Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, inputs of identical assets for less active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and

· Level 3: inputs to the valuation methodology that are unobservable for the asset or liability.

11

This hierarchy requires the use of observable market data when available.

Under ASC 820, we determine fair value based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy described above. Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated based upon our pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other factors as appropriate. These estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability.

Where quoted prices are available on active exchanges for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include common and preferred stock.

Level 2 investment securities include corporate bonds, collateralized corporate bank loans, municipal bonds, and U.S. Treasury securities for which quoted prices are not available on active exchanges for identical instruments. We use third party pricing services to determine fair values for each Level 2 investment security in all asset classes. Since quoted prices in active markets for identical assets are not available, these prices are determined using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other things. We have reviewed the processes used by the pricing services and have determined that they result in fair values consistent with the requirements of ASC 820 for Level 2 investment securities. In addition, using the prices received for the securities from the third party pricing services, we compare a sample of the prices against additional sources. We have not adjusted any prices received from the third party pricing services.

In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Level 3 investments are valued based on the best available data in order to approximate fair value. This data may be internally developed and consider risk premiums that a market participant would require. Investment securities classified within Level 3 include other less liquid investment securities.

There were no transfers between Level 1 and Level 2 securities during the periods presented.

12

The following table presents for each of the fair value hierarchy levels, our assets that are measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012 (in thousands):

	As of September 30, 2013
	Quoted Prices in		Other
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	-	$	34,114	$	-	$	34,114
Corporate bonds		-		59,393		-		59,393
Collateralized corporate bank loans		-		118,852		700		119,552
Municipal bonds		-		134,906		19,590		154,496
Mortgage-backed		-		29,092		-		29,092
Total debt securities		-		376,357		20,290		396,647
Financial services		7,690		-		-		7,690
All other		38,250		-		-		38,250
Total equity securities		45,940		-		-		45,940
Total debt and equity securities	$	45,940	$	376,357	$	20,290	$	442,587

	As of December 31, 2012
	Quoted Prices in		Other
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	-	$	40,061	$	-	$	40,061
Corporate bonds		-		81,547		-		81,547
Collateralized corporate bank loans		-		105,463		908		106,371
Municipal bonds		-		144,972		18,760		163,732
Mortgage-backed		-		9,724		-		9,724
Total debt securities		-		381,767		19,668		401,435
Financial services		14,887		-		-		14,887
All other		29,038		-		-		29,038
Total equity securities		43,925		-		-		43,925
Total debt and equity securities	$	43,925	$	381,767	$	19,668	$	445,360

13

Due to significant unobservable inputs into the valuation model for certain municipal bonds and a collateralized corporate bank loan in illiquid markets, we classified these investments as Level 3 in the fair value hierarchy. We used an income approach in order to derive an estimated fair value of the municipal bonds classified as Level 3, which included inputs such as expected holding period, benchmark swap rate, benchmark discount rate and a discount rate premium for illiquidity. The fair value of the collateralized corporate bank loan classified as Level 3 is based on discounted cash flows using current yield to maturity of 9.8%, which is based on the relevant spread over LIBOR for this particular loan to discount future cash flows. Significant changes in the unobservable inputs in the fair value measurement of our municipal bonds and collateralized corporate bank loan could result in a significant change in the fair value measurement.

The following table summarizes the changes in fair value for all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013 and 2012 (in thousands):

Beginning balance as of January 1, 2013	$	19,668
Sales		-
Settlements		(302	)
Purchases		-
Issuances		-
Total realized/unrealized gains included in net income		-
Net gains included in other comprehensive income		924
Transfers into Level 3		-
Transfers out of Level 3		-
Ending balance as of September 30, 2013	$	20,290
Beginning balance as of January 1, 2012	$	20,608
Sales		-
Settlements		(307	)
Purchases		-
Issuances		-
Total realized/unrealized gains included in net income		-
Net losses included in other comprehensive income		(530	)
Transfers into Level 3		-
Transfers out of Level 3		-
Ending balance as of September 30, 2012	$	19,771

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5. Investments

The amortized cost and estimated fair value of investments in debt and equity securities by category is as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
As of September 30, 2013	Cost		Gains		Losses			Value
U.S. Treasury securities and obligations of U.S. Government	$	34,083	$	31	$	-		$	34,114
Corporate bonds		58,633		1,285		(525	)		59,393
Collateralized corporate bank loans		119,626		475		(549	)		119,552
Municipal bonds		153,974		2,701		(2,179	)		154,496
Mortgage-backed		29,544		339		(791	)		29,092
Total debt securities		395,860		4,831		(4,044	)		396,647
Financial services		4,705		2,985		-			7,690
All other		19,328		19,644		(722	)		38,250
Total equity securities		24,033		22,629		(722	)		45,940
Total debt and equity securities	$	419,893	$	27,460	$	(4,766	)	$	442,587
As of December 31, 2012
U.S. Treasury securities and obligations of U.S. Government	$	40,050	$	14	$	(3	)	$	40,061
Corporate bonds		79,516		2,794		(763	)		81,547
Collateralized corporate bank loans		106,093		1,021		(743	)		106,371
Municipal bonds		162,479		4,023		(2,770	)		163,732
Mortgage-backed		9,662		97		(35	)		9,724
Total debt securities		397,800		7,949		(4,314	)		401,435
Financial services		11,008		3,880		(1	)		14,887
All other		20,494		9,058		(514	)		29,038
Total equity securities		31,502		12,938		(515	)		43,925
Total debt and equity securities	$	429,302	$	20,887	$	(4,829	)	$	445,360

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Major categories of net realized gains (losses) on investments are summarized as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
U.S. Treasury securities and obligations of U.S. Government	$	-		$	-		$	-		$	-
Corporate bonds		21			159			846			9
Collateralized corporate bank loans		44			93			316			229
Municipal bonds		(50	)		(50	)		(11	)		(294	)
Equity securities-financial services		6,935			8			7,579			78
Equity securities-all other		-			772			993			2,078
Gain on investments		6,950			982			9,723			2,100
Other-than-temporary impairments		-			-			-			(246	)
Net realized gains	$	6,950		$	982		$	9,723		$	1,854

We realized gross gains on investments of $7.1 million and $1.1 million during the three months ended September 30, 2013 and 2012, respectively and $9.9 million and $2.6 million for the nine months ended September 30, 2013 and 2012, respectively. We realized gross losses on investments of $0.1 million and $0.1 million for the three months ended September 30, 2013 and 2012.  We realized gross losses on investments of $0.2 million and $0.5 million for the nine months ended September 30, 2013 and 2012. We recorded proceeds from the sale of investment securities of $12.5 million and $3.5 million during the three months ended September 30, 2013 and 2012, respectively, and $30.2 million and $9.7 million for the nine months ended September 30, 2013 and 2012, respectively. Realized investment gains and losses are recognized in operations on the specific identification method.

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The following schedules summarize the gross unrealized losses showing the length of time that investments have been continuously in an unrealized loss position as of September 30, 2013 and December 31, 2012 (in thousands):

	As of September 30, 2013
	12 months or less					Longer than 12 months					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Treasury securities and obligations of U.S. Government	$	-	$	-		$	-	$	-		$	-	$	-
Corporate bonds		12,694		(156	)		3,048		(369	)		15,742		(525	)
Collateralized corporate bank loans		48,926		(368	)		6,915		(181	)		55,841		(549	)
Municipal bonds		28,861		(488	)		38,953		(1,691	)		67,814		(2,179	)
Mortgage-backed		14,328		(788	)		107		(3	)		14,435		(791	)
Total debt securities		104,809		(1,800	)		49,023		(2,244	)		153,832		(4,044	)
Financial services		-		-			-		-			-		-
All other		2,348		(722	)		-		-			2,348		(722	)
Total equity securities		2,348		(722	)		-		-			2,348		(722	)
Total debt and equity securities	$	107,157	$	(2,522	)	$	49,023	$	(2,244	)	$	156,180	$	(4,766	)

	As of December 31, 2012
	12 months or less					Longer than 12 months					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Treasury securities and obligations of U.S. Government	$	23,998	$	(3	)	$	-	$	-		$	23,998	$	(3	)
Corporate bonds		10,802		(38	)		6,910		(725	)		17,712		(763	)
Collateralized corporate bank loans		6,273		(97	)		14,236		(646	)		20,509		(743	)
Municipal bonds		30,073		(362	)		28,809		(2,408	)		58,882		(2,770	)
Mortgage-backed		7,367		(32	)		84		(3	)		7,451		(35	)
Total debt securities		78,513		(532	)		50,039		(3,782	)		128,552		(4,314	)
Financial services		92		(1	)		-		-			92		(1	)
All other		3,271		(514	)		-		-			3,271		(514	)
Total equity securities		3,363		(515	)		-		-			3,363		(515	)
Total debt and equity securities	$	81,876	$	(1,047	)	$	50,039	$	(3,782	)	$	131,915	$	(4,829	)

At September 30, 2013, the gross unrealized losses more than twelve months old were attributable to 75 debt security positions. At December 31, 2012, the gross unrealized losses more than twelve months old were attributable to 56 debt security positions. We consider these losses as a temporary decline in value as they are predominately on bonds that we do not intend to sell and do not believe we will be required to sell prior to recovery of our amortized cost basis. We see no other indications that the decline in values of these securities is other-than-temporary.

Based on evidence gathered through our normal credit evaluation process, we presently expect that all debt securities held in our investment portfolio will be paid in accordance with their contractual terms. Nonetheless, it is at least reasonably possible that the performance of certain issuers of these debt securities will be worse than currently expected resulting in additional future write-downs within our portfolio of debt securities.

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Also, as a result of the challenging market conditions, we expect the volatility in the valuation of our equity securities to continue in the foreseeable future. This volatility may lead to additional impairments on our equity securities portfolio or changes regarding retention strategies for certain equity securities.

We complete a detailed analysis each quarter to assess whether any decline in the fair value of any investment below cost is deemed other-than-temporary. All securities with an unrealized loss are reviewed. We recognize an impairment loss when an investment's value declines below cost, adjusted for accretion, amortization and previous other-than-temporary impairments and it is determined that the decline is other-than-temporary.

Debt Investments:   We assess whether we intend to sell, or it is more likely than not that we will be required to sell, a fixed maturity investment before recovery of its amortized cost basis less any current period credit losses.  For fixed maturity investments that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors.  The credit loss component is recognized in earnings and is the difference between the investment’s amortized cost basis and the present value of its expected future cash flows.  The remaining difference between the investment’s fair value and the present value of future expected cash flows is recognized in other comprehensive income.

Equity Investments:  Some of the factors considered in evaluating whether a decline in fair value for an equity investment is other-than-temporary include: (1) our ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value; (2) the recoverability of cost; (3) the length of time and extent to which the fair value has been less than cost; and (4) the financial condition and near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices. When it is determined that an equity investment is other-than-temporarily impaired, the security is written down to fair value, and the amount of the impairment is included in earnings as a realized investment loss. The fair value then becomes the new cost basis of the investment, and any subsequent recoveries in fair value are recognized at disposition. We recognize a realized loss when impairment is deemed to be other-than-temporary even if a decision to sell an equity investment has not been made. When we decide to sell a temporarily impaired available-for-sale equity investment and we do not expect the fair value of the equity investment to fully recover prior to the expected time of sale, the investment is deemed to be other-than-temporarily impaired in the period in which the decision to sell is made.

The amortized cost and estimated fair value of debt securities at September 30, 2013 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.

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	Amortized		Fair
	Cost		Value
	(in thousands)
Due in one year or less	$	63,230	$	63,768
Due after one year through five years		153,969		154,311
Due after five years through ten years		96,692		97,585
Due after ten years		52,424		51,891
Mortgage-backed		29,545		29,092
	$	395,860	$	396,647

6. Pledged Investments

We have pledged certain of our securities for the benefit of various state insurance departments and reinsurers. These securities are included with our available-for-sale debt securities because we have the ability to trade these securities. We retain the interest earned on these securities. These securities had a carrying value of $23.2 million and $24.3 million at September 30, 2013 and December 31, 2012, respectively.

7. Reserves for Unpaid Losses and Loss Adjustment Expenses

Unpaid losses and loss adjustment expenses (“LAE”) represent the estimated ultimate net cost of all reported and unreported losses incurred through each balance sheet date. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses. These reserves are revised periodically and are subject to the effects of trends in loss severity and frequency. Due to the inherent uncertainty in estimating unpaid losses and LAE, the actual ultimate amounts may differ from the recorded amounts. The estimates are periodically reviewed and adjusted as experience develops or new information becomes known. Such adjustments are included in current operations.

We recorded $0.5 million and $8.0 million of unfavorable prior years’ loss development during the three and nine months ended September 30, 2013, respectively. For the year to date, the $8.0 million unfavorable development was attributable to $5.0 million unfavorable development on claims incurred in the 2012 accident year, $2.4 million unfavorable development on claims incurred in the 2011 accident year and $1.6 million on claims incurred in the 2010 accident year, partially offset by $1.0 million favorable development on claims incurred in the 2009 and prior accident years. Our E&S Commercial business unit accounted for $11.7 million of the unfavorable development during the nine months ended September 30, 2013 primarily in our commercial auto liability line of business. Our Personal Lines business unit accounted for $1.5 million of the unfavorable development. These unfavorable developments were partially offset by favorable development of $1.6 million in our Hallmark Select business unit, $2.4 million in our Standard Commercial P&C business unit and $1.2 million in our Workers Compensation business unit.

The unfavorable development for our E&S Commercial business unit of $11.7 million was driven by unfavorable claims development primarily in our commercial auto liability line of business in the 2012, 2011, and 2010 accident years. The unfavorable loss development for our Personal Lines business unit of $1.5 million was primarily attributable to the 2012 accident year. The favorable development for our Hallmark Select business unit of $1.6 million was driven by favorable claims development in the 2011 and prior accident years related to our aircraft liability lines of business, partially offset by unfavorable claims development in the 2012 accident year related to our aircraft hullcoverage. The favorable loss development for our Standard Commercial P&C business unit of $2.4 million was primarily related to commercial auto liability in the 2010 and prior accident years, partially offset by unfavorable loss development related to commercial property in the 2012 accident year. The favorable loss development in our Workers Compensation business unit of $1.2 million was related to the 2012 and 2011 accident years.

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We recorded $2.2 million and $3.6 million of favorable prior years’ loss development during the three months and nine months ended September 30, 2012, respectively. For the first nine months of 2012, our Hallmark Select business unit experienced $2.6 million of favorable prior years’ loss development related to our liability and aircraft lines of business. Our Standard Commercial P&C business unit experienced $2.0 million of favorable prior years’ loss development primarily related to commercial property and auto liability partially offset by the late development of a general liability claim. Our Workers Compensation business unit experienced $0.8 million of favorable prior year loss reserve development. Our E&S Commercial business unit experienced $1.1 million of favorable prior year loss reserve development primarily related to general liability and commercial auto physical damage. These favorable developments were partially offset by unfavorable prior year loss development of $2.9 million in our Personal Lines business unit for the nine months ended September 30, 2012, of which $2.2 million was the result of unfavorable development in auto liability claims spread throughout various states. The remaining unfavorable prior years’ loss development for our Personal Lines business unit was the result of $0.7 million of unfavorable prior years’ loss development in our low value dwelling/homeowners line of business.

8. Share-Based Payment Arrangements

Our 2005 Long Term Incentive Plan (“2005 LTIP”) is a stock compensation plan for key employees and non-employee directors that was initially approved by the shareholders on May 26, 2005. There are 2,000,000 shares authorized for issuance under the 2005 LTIP. As of September 30, 2013, there were outstanding incentive stock options to purchase 1,087,618 shares of our common stock, non-qualified stock options to purchase 304,157 shares of our common stock and restricted stock units representing the right to receive up to 355,277 shares of our common stock. There are 237,115 shares reserved for future issuance under the 2005 LTIP. The exercise price of all such outstanding stock options is equal to the fair market value of our common stock on the date of grant.

Stock Options:

Incentive stock options granted under the 2005 LTIP prior to 2009 vest 10%, 20%, 30% and 40% on the first, second, third and fourth anniversary dates of the grant, respectively, and terminate five to ten years from the date of grant. Incentive stock options granted in 2009 and one grant of 5,000 incentive stock options in 2011 vest in equal annual increments on each of the first seven anniversary dates and terminate ten years from the date of grant. One grant of 25,000 incentive stock options in 2010 and one grant of 10,000 incentive stock options in 2011 vest in equal annual increments on each of the first three anniversary dates and terminate ten years from the date of grant. Non-qualified stock options granted under the 2005 LTIP generally vest 100% six months after the date of grant and terminate ten years from the date of grant. One grant of 200,000 non-qualified stock options in 2009 vests in equal annual increments on each of the first seven anniversary dates and terminates ten years from the date of grant.

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A summary of the status of our stock options as of and changes during the nine months ended September 30, 2013 is presented below:

						Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Number of			Exercise		Term		Value
	Shares			Price		(Years)		($000)
Outstanding at January 1, 2013		1,404,989		$	9.63
Granted		-
Exercised		-
Forfeited or expired		(13,214	)	$	7.90
Outstanding at September 30, 2013		1,391,775		$	9.65		4.5	$	1,327
Exercisable at September 30, 2013		1,189,036		$	10.17		4.3	$	870

The following table details the intrinsic value of options exercised, total cost of share-based payments charged against income before income tax benefit and the amount of related income tax benefit recognized in income for the periods indicated (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Intrinsic value of options exercised	$	-	$	-	$	-	$	-
Cost of share-based payments (non-cash)	$	52	$	64	$	156	$	317
Income tax benefit of share-based payments recognized in income	$	8	$	7	$	23	$	30

As of September 30, 2013, there was $0.5 million of total unrecognized compensation cost related to non-vested stock options granted under our plans, of which $52 thousand is expected to be recognized for the remainder of 2013 and $0.2 million is expected to be recognized each year in 2014 and 2015, $54 thousand is expected to be recognized in 2016 and $3 thousand is expected to be recognized in 2017.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of Hallmark’s and similar companies’ common stock for a period equal to the expected term. The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options’ expected lives on the dates of grant. Expected term is determined based on the simplified method as we do not have sufficient historical exercise data to provide a basis for estimating the expected term. There have been no options granted during 2012 or 2013.

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Restricted Stock Units:

The 2005 LTIP was amended by the shareholders on May 30, 2013 to authorize the grant of restricted stock units, in addition to the other types of awards available thereunder. Restricted stock units represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions. On July 27, 2012 and April 10, 2013, an aggregate of 129,463 and 122,823 restricted stock units, respectively, were conditionally granted to certain employees of the Company subject to shareholder approval of the amendments to the 2005 LTIP at the May 30, 2013 shareholder meeting. One conditional grant of 9,280 restricted stock units was forfeited prior to approval at the shareholder meeting.

The performance criteria for all restricted stock units require that the Company achieve certain compound average annual growth rates in book value per share over the vesting period in order to receive shares of common stock in amounts ranging from 50% to 150% of the number of restricted stock units granted. In addition, certain restricted stock units contain an additional performance criteria related to the attainment of an average combined ratio percentage over the vesting period. If and to the extent specified performance criteria have been achieved, the restricted stock units granted on July 27, 2012 will vest on March 31, 2015, and the restricted stock units granted on April 10, 2013 will vest on March 31, 2016.

Compensation cost is measured as an amount equal to the fair value of the restricted stock units and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the Company’s best estimate of the ultimate achievement level. The grant date fair value of the restricted stock units is $9.20 per unit. The Company incurred $58 thousand and $90 thousand of compensation expense related to the restricted stock units during the three and nine months ended September 30, 2013, respectively.

A summary of the status of our restricted stock units as of September 30, 2013 and changes during the nine months then ended is presented below:

	Number of
	Restricted
	Stock Units
Nonvested at January 1, 2013		-
Granted		243,006
Vested		-
Forfeited		(6,155	)
Nonvested at September 30, 2013		236,851

As of September 30, 2013, there was $0.6 million of total unrecognized compensation cost related to non-vested restricted stock units granted under our 2005 LTIP, of which $67 thousand is expected to be recognized for the remainder of 2013, $0.3 million is expected to be recognized in 2014, $0.2 million is expected to be recognized in 2015 and $53 thousand is expected to be recognized in 2016.

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9. Segment Information

The following is business segment information for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Revenues:
Standard Commercial Segment	$	21,163		$	17,761		$	62,160		$	53,791
Specialty Commercial Segment		60,787			46,373			168,127			129,812
Personal Segment		21,256			21,172			64,621			68,508
Corporate		5,407			314			6,145			1,066
Consolidated	$	108,613		$	85,620		$	301,053		$	253,177
Pre-tax income (loss) , net of non-controlling interest:
Standard Commercial Segment	$	1,163		$	(529	)	$	641		$	(2,601	)
Specialty Commercial Segment		7,564			8,287			11,828			17,193
Personal Segment		(1,613	)		(345	)		(3,331	)		(5,747	)
Corporate		2,358			(2,650	)		(2,820	)		(8,082	)
Consolidated	$	9,472		$	4,763		$	6,318		$	763

The following is additional business segment information as of the dates indicated (in thousands):

	September 30,		December 31,
	2013		2012
Assets
Standard Commercial Segment	$	144,231	$	145,162
Specialty Commercial Segment		526,160		432,208
Personal Segment		192,588		200,356
Corporate		16,738		12,742
	$	879,717	$	790,468

10. Reinsurance

We reinsure a portion of the risk we underwrite in order to control the exposure to losses and to protect capital resources. We cede to reinsurers a portion of these risks and pay premiums based upon the risk and exposure of the policies subject to such reinsurance. Ceded reinsurance involves credit risk and is generally subject to aggregate loss limits. Although the reinsurer is liable to us to the extent of the reinsurance ceded, we are ultimately liable as the direct insurer on all risks reinsured. Reinsurance recoverables are reported after allowances for uncollectible amounts. We monitor the financial condition of reinsurers on an ongoing basis and review our reinsurance arrangements periodically. Reinsurers are selected based on their financial condition, business practices and the price of their product offerings. In order to mitigate credit risk to reinsurance companies, most of our reinsurance recoverable balance as of September 30, 2013 was with reinsurers that had an A.M. Best rating of “A–” or better.

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The following table shows earned premiums ceded and reinsurance loss recoveries by period (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Ceded earned premiums	$	16,488	$	14,141	$	45,629	$	40,031
Reinsurance recoveries	$	9,197	$	8,582	$	24,770	$	22,633

We currently reinsure the following exposures on business generated by our business units:

· Property catastrophe. Our property catastrophe reinsurance reduces the financial impact a catastrophe could have on our commercial and personal property insurance lines. Catastrophes might include multiple claims and policyholders. Catastrophes include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires. Our property catastrophe reinsurance is excess-of-loss reinsurance, which provides us reinsurance coverage for losses in excess of an agreed-upon amount. We utilize catastrophe models to assist in determining appropriate retention and limits to purchase. Effective July 1, 2013, the terms of our property catastrophe reinsurance are:

o We retain the first $6.0 million of property catastrophe losses; and

o Our reinsurers reimburse us 100% for any loss occurrence in excess of our $6.0 million retention up to $29.0 million for each catastrophic occurrence, subject to an aggregate limit of $58.0 million.

· Commercial property. Our commercial property reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event or catastrophic loss may have on our results. The terms of our commercial property reinsurance are:

o We retain the first $1.0 million of loss for each commercial property risk;

o Our reinsurers reimburse us for the next $5.0 million for each commercial property risk, and $10.0 million for all commercial property risk involved in any one occurrence, in all cases subject to an aggregate limit of $30.0 million for all commercial property losses occurring during the treaty period; and

o Individual risk facultative reinsurance is purchased on any commercial property with limits above $6.0 million.

· Commercial casualty. Our commercial casualty reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event loss may have on our results. The terms of our commercial casualty reinsurance are:

o We retain the first $1.0 million of any commercial liability risk; and

o Our reinsurers reimburse us for the next $5.0 million for each commercial liability risk.

· Aviation. Effective July 1, 2013 we purchase proportional reinsurance where we cede 80% of the risk to reinsurers on the aviation risks produced in all states by our Hallmark Select business unit.

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· Workers Compensation. We purchase excess of loss reinsurance specific to the workers compensation risks underwritten by our Workers Compensation business unit. The terms of our workers compensation reinsurance are:

o We retain the first $1.0 million of each workers compensation loss; and

o Our reinsurers reimburse us 100% for the next $14.0 million for each workers compensation loss, subject to a maximum limit of $10.0 million for any one person and an aggregate limit of $28.0 million for all workers compensation losses.

· Personal Property. We purchase proportional reinsurance where we cede 60% of the risks to reinsurers on the low value dwelling/homeowners, renters and manufactured homes coverages produced in all states by our Personal Lines business unit.

· Standard Commercial P&C. We purchase proportional reinsurance where we cede 100% of the risks to reinsurers on the equipment breakdown coverage on our commercial multi-peril property and business owners risks and on the employment practices liability coverage on certain commercial multi-peril, general liability and business owners risks.

· Excess & Umbrella. We purchase proportional reinsurance where we retain 20% of each risk and cede the remaining 80% to reinsurers on the commercial umbrella and excess liability insurance produced by our Hallmark Select business unit.  In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty.

· Professional Liability. Effective June 1, 2013, we purchase proportional reinsurance on our medical professional liability risks produced by our Hallmark Select business unit where we retain 60% of each risk and cede the remaining 40% to reinsurers. In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty.

· E&S Commercial. We purchase facultative reinsurance on our commercial umbrella and excess liability risks produced by our E&S Commercial business unit where we retain 10% of the first $1.0 million of risk and cede the remaining 90% to reinsurers. We cede 100% of our commercial umbrella and excess liability risks in excess of $1.0 million.

· Hallmark County Mutual. HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas where we previously produced policies for third party county mutual insurance companies and reinsured 100% for a fronting fee. In addition, HCM is used to front business produced by unaffiliated third parties. HCM does not retain any business.

· Hallmark National Insurance Company. Simultaneous with the December 31, 2010 closing of our acquisition of HNIC, HNIC entered into reinsurance contracts with an affiliate of the seller pursuant to which such affiliate of the seller handles all claims and assumes all liabilities arising under policies issued by HNIC prior to closing or during a transition period following the closing.

11. Revolving Credit Facility Payable

Our First Restated Credit Agreement with The Frost National Bank dated January 27, 2006, as amended to date, provides a revolving credit facility of $15.0 million. We pay interest on the outstanding balance at our election at a rate of the prime rate or LIBOR plus 2.5%.  We pay an annual fee of 0.25% of the average daily unused balance of the credit facility. We pay letter of credit fees at the rate of 1.00% per annum.  Our obligations under the revolving credit facility are secured by a security interest in the capital stock of all of our subsidiaries, guarantees of all of our subsidiaries and the pledge of all of our non-insurance company assets.  The revolving credit facility contains covenants that, among other things, require us to maintain certain financial and operating ratios and restrict certain distributions, transactions and organizational changes.  We are in compliance with all of our covenants.  As of September 30, 2013, the balance on the revolving note was $1.5 million. The revolving note currently bears interest at 2.75% per annum.

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12. Subordinated Debt Securities

On June 21, 2005, we entered into a trust preferred securities transaction pursuant to which we issued $30.9 million aggregate principal amount of subordinated debt securities due in 2035. To effect the transaction, we formed Trust I as a Delaware statutory trust. Trust I issued $30.0 million of preferred securities to investors and $0.9 million of common securities to us. Trust I used the proceeds from these issuances to purchase the subordinated debt securities. Our Trust I subordinated debt securities bear an initial interest rate of 7.725% until June 15, 2015, at which time interest will adjust quarterly to the three-month LIBOR rate plus 3.25 percentage points. Trust I pays dividends on its preferred securities at the same rate. Under the terms of our Trust I subordinated debt securities, we pay interest only each quarter and the principal of the note at maturity. The subordinated debt securities are uncollaterized and do not require maintenance of minimum financial covenants. As of September 30, 2013, the balance of our Trust I subordinated debt was $30.9 million.

On August 23, 2007, we entered into a trust preferred securities transaction pursuant to which we issued $25.8 million aggregate principal amount of subordinated debt securities due in 2037. To effect the transaction, we formed Trust II as a Delaware statutory trust. Trust II issued $25.0 million of preferred securities to investors and $0.8 million of common securities to us. Trust II used the proceeds from these issuances to purchase the subordinated debt securities. Our Trust II subordinated debt securities bear an initial interest rate of 8.28% until September 15, 2017, at which time interest will adjust quarterly to the three-month LIBOR rate plus 2.90 percentage points. Trust II pays dividends on its preferred securities at the same rate. Under the terms of our Trust II subordinated debt securities, we pay interest only each quarter and the principal of the note at maturity. The subordinated debt securities are uncollaterized and do not require maintenance of minimum financial covenants. As of September 30, 2013, the balance of our Trust II subordinated debt was $25.8 million.

13. Deferred Policy Acquisition Costs

The following table shows total deferred and amortized policy acquisition cost activity by period (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Deferred	$	(34,995	)	$	(12,011	)	$	(53,243	)	$	(45,281	)
Amortized		34,715			11,084			51,211			41,427
Net	$	(280	)	$	(927	)	$	(2,032	)	$	(3,854	)

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14. Earnings per Share

The following table sets forth basic and diluted weighted average shares outstanding for the periods indicated (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Weighted average shares - basic		19,263		19,263		19,263		19,263
Effect of dilutive securities		107		14		97		4
Weighted average shares - assuming dilution		19,370		19,277		19,360		19,267

For the three months and nine months ended September 30, 2013, 779,999 shares of common stock potentially issuable upon the exercise of employee stock options were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive. For the three months and nine months ended September 30, 2012, 809,999 shares of common stock potentially issuable upon the exercise of employee stock options were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive.

15. Net Periodic Pension Cost

The following table details the net periodic pension cost incurred by period (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Interest cost	$	127		$	141		$	379		$	422
Amortization of net loss		123			120			371			362
Expected return on plan assets		(154	)		(146	)		(462	)		(438	)
Net periodic pension cost	$	96		$	115		$	288		$	346
Contributed amount	$	157		$	410		$	268		$	711

Refer to Note 14 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 for more discussion of our retirement plans.

16. Income Taxes

Our effective income tax rate for the first nine months ended September 30, 2013 and 2012 was 23.8% and -90.0%, respectively, which varied from the statutory tax rate due in large part to significant tax exempt income.  

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17. Commitments and Contingencies

In December 2010, our E&S Commercial business unit was informed by the Texas Comptroller of Public Accounts that a surplus lines tax audit covering the period January 1, 2007 through December 31, 2009 was complete. A subsidiary within our E&S Commercial business unit (“HSU”) frequently acts as a managing general underwriter (“MGU”) authorized to underwrite policies on behalf of Republic Vanguard Insurance Company and HSIC, both Texas eligible surplus lines insurance carriers. In its role as the MGU, HSU underwrites policies on behalf of these carriers while other agencies located in Texas, generally referred to as “producing agents,” deliver the policies to the insureds and collect all premiums due from the insureds. During the period under audit, the producing agents also collected the surplus lines premium taxes due on the policies from the insureds, held them in trust, and timely remitted those taxes to the Comptroller. We believe this system for collecting and paying the required surplus lines premium taxes complies in all respects with the Texas Insurance Code and other regulations, which clearly require that the same party who delivers the policies and collects the premiums will also collect premium taxes, hold premium taxes in trust, and pay premium taxes to the Comptroller. It also complies with long standing industry practice. The Comptroller asserts that HSU is liable for the surplus lines premium taxes related to policy transactions and premiums collected from surplus lines insureds during the audit period and that HSU owes $4.5 million in premium taxes, as well as $0.9 million in penalties and interest for the audit period.

We disagree with the Comptroller and intend to vigorously fight their assertion that HSU is liable for the surplus lines premium taxes. We have engaged in conversations with the Comptroller’s counsel and are waiting on the Comptroller’s position paper. At this stage, we cannot predict the course of any proceedings, the timing of any rulings or other significant events relating to such surplus lines tax audit.  Given these limitations and the inherent difficulty of projecting the outcome of regulatory disputes, we are presently unable to reasonably estimate the possible loss or legal costs that are likely to arise out of the surplus lines tax audit or any future proceedings relating to this matter. Therefore we have not accrued any amount as of September 30, 2013 related to this matter.

We are engaged in other legal proceedings in the ordinary course of business, none of which, either individually or in the aggregate, are believed likely to have a material adverse effect on our consolidated financial position or results of operations, in the opinion of management. The various legal proceedings to which we are a party are routine in nature and incidental to our business.

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18. Changes in Accumulated Other Comprehensive Income Balances

The changes in accumulated other comprehensive income balances as of September 30, 2013 and 2012 were as follows (in thousands):

	Minimum						Accumulated Other
	Pension			Unrealized			Comprehensive
	Liability			Gains (Loss)			Income
Balance at December 31, 2011	$	(2,978	)	$	9,424		$	6,446
Other comprehensive income (loss):
Change in net actuarial loss (see Note 15)		362			-			362
Tax effect on change in net actuarial loss		(127	)		-			(127	)
Net unrealized holding gains arising during the period		-			4,560			4,560
Tax effect on unrealized gains arising during the period		-			(1,596	)		(1,596	)
Reclassification adjustment for gains included in net realized gains		-			(2,044	)		(2,044	)
Tax effect on reclassification adjustment for gains included
in income tax expense		-			715			715
Other comprehensive income , net of tax		235			1,635			1,870
Balance at September 30, 2012	$	(2,743	)	$	11,059		$	8,316
Balance at December 31, 2012	$	(2,954	)	$	10,853		$	7,899
Other comprehensive income (loss):
Change in net actuarial loss (see Note 15)		371			-			371
Tax effect on change in net actuarial loss		(130	)		-			(130	)
Net unrealized holding gains arising during the period		-			16,243			16,243
Tax effect on unrealized gains arising during the period		-			(5,685	)		(5,685	)
Reclassification adjustment for gains included in net realized gains		-			(9,723	)		(9,723	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			3,403			3,403
Other comprehensive income, net of tax		241			4,238			4,479
Balance at September 30, 2013	$	(2,713	)	$	15,091		$	12,378

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read together with our consolidated financial statements and the notes thereto. This discussion contains forward-looking statements. Please see “Risks Associated with Forward-Looking Statements in this Form 10-Q” for a discussion of some of the uncertainties, risks and assumptions associated with these statements.

Introduction

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, “we,” “us” or “our”) is an insurance holding company that, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance, personal insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our Hallmark Select business which is written on a national basis. We pursue our business activities through subsidiaries whose operations are organized into five business units, which are supported by our insurance company subsidiaries.

Our non-carrier insurance activities are segregated by business units into the following reportable segments:

· Standard Commercial Segment. Our Standard Commercial Segment includes the standard lines commercial property/casualty insurance products and services handled by our Standard Commercial P&C business unit and the workers compensation insurance products handled by our Workers Compensation business unit.

· Specialty Commercial Segment. Our Specialty Commercial Segment includes the excess and surplus lines commercial property/casualty insurance products and services handled by our E&S Commercial business unit and the general aviation, commercial umbrella and excess liability and medical professional liability insurance products and services handled by our Hallmark Select business unit, as well as certain Specialty Programs which are managed at the parent level.

· Personal Segment. Our Personal Segment includes the non-standard personal automobile, low value dwelling/homeowners, renters, manufactured homes, motorcycle and business auto insurance products and services handled by our Personal Lines business unit.

The retained premium produced by these reportable segmentsis supported by the following insurance company subsidiaries:

· American Hallmark Insurance Company of Texas (“AHIC”) presently retains a portion of the risks on the commercial property/casualty and workers compensation policies marketed within the Standard Commercial Segment, retains a portion of the risks on personal policies marketed within the Personal Segment and retains a portion of the risks on the commercial, medical professional liability, aviation and satellite launch property/casualty policies marketed within the Specialty Commercial Segment.

· Hallmark Specialty Insurance Company (“HSIC”) presently retains a portion of the risks on the commercial property/casualty and medical professional liability policies marketed within the Specialty Commercial Segment and a portion of the commercial property/casualty policies marketed within the Standard Commercial Segment.

· Hallmark Insurance Company (“HIC”) presently retains a portion of the risks on both the personal policies marketed within the Personal Segment and the commercial and aviation property/casualty products marketed within the Specialty Commercial Segment.

· Hallmark National Insurance Company (“HNIC”) presently retains a portion of the risks on the personal policies marketed within the Personal Segment.

· Hallmark County Mutual Insurance Company (“HCM”) control and management is maintained through our wholly owned subsidiary CYR Insurance Management Company (“CYR”). CYR has as its primary asset a management agreement with HCM, which provides for CYR to have management and control of HCM. HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas. HCM does not retain any business.

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· Texas Builders Insurance Company (“TBIC”)retains a portion of the risks on the workers compensation policies marketed within our Standard Commercial Segment.

AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement pursuant to which AHIC retains 30% of the total net premiums written by any of them, HIC retains 27% of our total net premiums written by any of them, HSIC retains 30% of our total net premiums written by any of them and HNIC retains 13% of our total premiums written by any of them. Neither HCM nor TBIC is a party to the intercompany pooling arrangement. This pooling arrangement has no impact on our consolidated financial statements reported in accordance with U.S. generally accepted accounting principles (“GAAP”).

Results of Operations

Management Overview During the three and nine months ended September 30, 2013, our total revenues were $108.6 million and $301.1 million, representing a 27% and 19% increase, respectively, from the $85.6 million and $253.2 million in total revenues for the same period of 2012.  The growth in revenue was primarily attributable to increased premium production and resulting earned premium driven largely from our Specialty Commercial Segment and our Standard Commercial Segment. Further contributing to the increase in revenue were higher net realized gains on our investment portfolio and a lower adverse profit share commission revenue adjustment in our Standard Commercial Segment. These increases in revenue were partially offset by lower net investment income and lower year to date earned premium in our Personal Segment due mostly to the impact of discontinued products and a reduction of premium written in underperforming states.

The increase in revenue for the three and nine months ended September 30, 2013 was accompanied by increased loss and loss adjustment expenses (“LAE”) of $15.3 million and $36.1 million, respectively, as compared to the same periods in 2012. During the three months ended September 30, 2013 we recorded $0.5 million of unfavorable prior year loss development. During the three months ended September 30, 2012 we recorded $2.2 million of favorable prior year loss development. During the nine months ended September 30, 2013 we recorded $8.0 million of unfavorable prior year loss development. During the nine months ended September 30, 2012 we recorded to $3.6 million of favorable development. The increase in loss and LAE occurred despite a $3.1 million decrease in catastrophe losses to $8.5 million during the nine months ended September 30, 2013 from $11.6 million reported during the same period of 2012. Other operating expenses also increased due mostly to increased production related expenses in our E&S Commercial business unit.

We reported $6.3 million net income for the three months ended September 30, 2013, as compared to $3.4 million net income for the same period during 2012. We reported net income of $4.8 million for the nine months ended September 30, 2013, which was $3.1 million higher than the $1.7 million net income reported for the nine months ended September 30, 2012.  On a diluted basis per share, we reported net income of $0.32 per share for the three months ended September 30, 2013, as compared to net income of $0.18 per share for the same period in 2012.   On a diluted basis per share, net income per share was $0.25 for the nine months ended September 30, 2013, as compared to net income per share of $0.09 for the same period during 2012.

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Third Quarter 2013 as Compared to Third Quarter 2012

The following is additional business segment information for the three months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30
	Standard Commercial Segment						Specialty Commercial Segment						Personal Segment						Corporate					Consolidated
	2013			2012			2013			2012			2013			2012			2013		2012			2013			2012
Gross premiums written	$	21,444			18,706		$	83,453			62,349		$	18,767			18,393		$	-		-		$	123,664			99,448
Ceded premiums written		(1,837	)		(1,876	)		(17,932	)		(12,385	)		(1,006	)		(182	)		-		-			(20,775	)		(14,443	)
Net premiums written		19,607			16,830			65,521			49,964			17,761			18,211			-		-			102,889			85,005
Change in unearned premiums		332			736			(7,512	)		(6,396	)		1,743			1,136			-		-			(5,437	)		(4,524	)
Net premiums earned		19,939			17,566			58,009			43,568			19,504			19,347			-		-			97,452			80,481
Total revenues		21,163			17,761			60,787			46,373			21,256			21,172			5,407		314			108,613			85,620
Losses and loss adjustment expenses		13,537			12,476			37,914			25,532			16,707			14,831			-		-			68,158			52,839
Pre-tax income (loss), net of non-controlling interest		1,163			(529	)		7,564			8,287			(1,613	)		(345	)		2,358		(2,650	)		9,472			4,763
Net loss ratio (1)		67.9	%		71.0	%		65.4	%		58.6	%		85.7	%		76.7	%							69.9	%		65.7	%
Net expense ratio (1)		32.5	%		33.4	%		26.8	%		27.3	%		25.4	%		29.3	%							28.9	%		30.1	%
Net combined ratio (1)		100.4	%		104.4	%		92.2	%		85.9	%		111.1	%		106.0	%							98.8	%		95.8	%
Favorable (Unfavorable) Prior Year Development		1,408			71			(1,405	)		2,757			(534	)		(651	)		-		-			(531	)		2,177

(1) The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated for our 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.

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $21.4 million for the three months ended September 30, 2013, which was $2.7 million, or 15%, more than the $18.7 million reported for the same period in 2012. Net premiums written were $19.6 million for the three months ended September 30, 2013 as compared to $16.8 million reported for the same period in 2012. The increase in premium volume was primarily due to increased premium production in our Standard Commercial P&C business unit.

Total revenue for the Standard Commercial Segment of $21.2 million for the three months ended September 30, 2013 was $3.4 million more than the $17.8 million reported during the same period in 2012. This 19% increase in total revenue was mostly due to increased net premiums earned of $2.4 million and a $1.0 million lower adverse profit share commission revenue adjustment during the three months ended September 30, 2013 as compared to the same period in 2012.

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Our Standard Commercial Segment reported pre-tax income of $1.2 million for the three months ended September 30, 2013 as compared to a pre-tax loss of $0.5 million for the same period of 2012. The increased revenue discussed above was the primary driver of the increased pre-tax income for the three months ended September 30, 2013, partially offset by higher loss and LAE of $1.1 million and higher operating expenses of $0.6 million consisting primarily of increased production related expenses.

The Standard Commercial Segment reported a net loss ratio of 67.9% for the three months ended September 30, 2013 as compared to 71.0% for the same period of 2012. The gross loss ratio before reinsurance for the three months ended September 30, 2013 was 62.7% as compared to the 68.1% reported for the same period of 2012. The lower gross and net loss ratios for the three months ended September 30, 2013 were the result of lower current accident year loss trends and increased favorable loss reserve development of $1.4 million as compared to favorable loss reserve development of $0.1 million during the same period of 2012, partially offset by higher catastrophe losses during the third quarter of 2013 as compared to the same period in 2012. The gross and net loss results for the three months ended September 30, 2013 and 2012 include $2.2 million and $0.6 million, respectively, of catastrophe losses.

Specialty Commercial Segment

The $60.8 million of total revenue for the three months ended September 30, 2013 was $14.4 million higher than the $46.4 million reported by the Specialty Commercial Segment for the same period in 2012. This 31% increase in revenue was primarily due to higher net premiums earned of $14.4 million largely from increased production in both our E&S Commercial and Hallmark Select business units. Higher net investment income of $0.3 million was offset by lower commission revenue of $0.3 million due primarily to unfavorable profit share commission adjustments for the three months ended September 30, 2013 as compared to the third quarter of 2012.

Pre-tax income for the Specialty Commercial Segment of $7.6 million for the third quarter of 2013 was $0.7 million lower than the $8.3 million reported for the same period in 2012. The decrease in pre-tax income was primarily due to higher loss and LAE expenses of $12.4 million and higher operating expenses of $3.2 million, partially offset by lower amortization of intangible assets of $0.2 million, lower non-controlling interest of $0.3 million and the increased revenue discussed above. Our E&S Commercial business unit reported a $14.0 million increase in loss and LAE due primarily to increased premium production as well as unfavorable prior year loss development, partially offset by lower current accident year loss trends. Our Hallmark Select business unit reported a $0.8 million decrease in loss and LAE which consisted of (a) a $1.3 million decrease in loss and LAE due primarily to favorable prior year loss development in our aircraft and airport liability lines of business during the third quarter of 2013 as compared to unfavorable prior year loss reserve development during the third quarter of 2012, (b) a $0.1 million decrease in loss and LAE attributable to our medical professional liability insurance products, partially offset by (c) a $0.6 million increase in loss and LAE due to increased premium production in our commercial umbrella and excess liability line of business. Our Specialty Programs reported a $0.8 million decrease in loss and LAE due primarily to decreased current accident year loss trends. The increase in operating expenses for the three months ended September 30, 2013 was primarily the result of increased production related expenses of $2.7 million, increased salary and related expenses of $0.4 million and increased professional service fees of $0.1 million.

The Specialty Commercial Segment reported a net loss ratio of 65.4% for the three months ended September 30, 2013 as compared to 58.6% for the same period during 2012. The gross loss ratio before reinsurance was 65.1% for the three months ended September 30, 2013 as compared to 60.3% for the same period in 2012. The higher gross and net loss ratios include $1.4 million unfavorable prior years’ loss development for the three months ended September 30, 2013 as compared to $2.8 million favorable prior years’ loss development for the same period of 2012.

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Personal Segment

Gross premiums written for the Personal Segment were $18.8 million for the three months ended September 30, 2013, which was $0.4 million more than the $18.4 million reported for the same period in 2012. Net premiums written for our Personal Segment were $17.8 million in the third quarter of 2013, which was a decrease of $0.4 million from the $18.2 million reported for the same period of 2012. The decrease in net premium written was due mostly to a quota share reinsurance contract entered into during the first quarter of 2013 on our low value dwelling/homeowners, renters, and manufactured homes lines of business.

Total revenue for the Personal Segment were $21.3 million for the third quarter of 2013, which was $0.1 million more than the $21.2 million reported for the same period of 2012. Higher earned premium of $0.2 million and higher finance charges of $0.1 million, partially offset by decreased net investment income of $0.2 million, were the primary reasons for the increase in revenue for the period.

Pre-tax loss for the Personal Segment was $1.6 million for the three months ended September 30, 2013 as compared to pre-tax loss of $0.3 million for the same period of 2012. The higher pre-tax loss was primarily the result of increased losses and LAE of $1.9 million, partially offset by (a) lower operating expenses of $0.5 million due to lower production related expenses of $0.2 million and lower salary and related expenses of $0.3 million, and (b) the higher revenue discussed above.

The Personal Segment reported a net loss ratio of 85.7% for the three months ended September 30, 2013 as compared to 76.7% for the same period during 2012. The gross loss ratio before reinsurance was 85.3% for the three months ended September 30, 2013 as compared to 77.7% for the same period in 2012. The higher gross and net loss ratio are primarily the result of higher current accident year loss trends for the three months ended September 30, 2013 as compared to the same period of 2012. The loss and LAE during the three months ended September 30, 2013 and 2012 included unfavorable prior years’ loss reserve development of $0.5 million and $0.7 million, respectively. The Personal Segment reported a net expense ratio of 25.4% for the third quarter of 2013 as compared to 29.3% for the same period of 2012. The decrease in the expense ratio was due predominately to lower operating expenses.

Corporate

Total revenue for Corporate increased by $5.1 million for the three months ended September 30, 2013 as compared to the same period the prior year. This increase in total revenue was due to higher net realized gains on our investment portfolio of $6.0 million as compared to the same period of the prior year, partially offset by lower net investment income of $0.9 million for the three months ended September 30, 2013 as compared to the same period of the prior year.

Corporate pre-tax income was $2.4 million for the three months ended September 30, 2013 as compared to a pre-tax loss of $2.7 million for the same period during 2012. The increase in pre-tax income was primarily due to the increased revenue discussed above.

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Nine Months Ended September 30, 2013 as Compared to Nine Months Ended September 30, 2012

The following is additional business segment information for the nine months ended September 30, 2013 and 2012 (in thousands):

	Nine Months Ended September 30
	Standard Commercial Segment						Specialty Commercial Segment						Personal Segment						Corporate						Consolidated
	2013			2012			2013			2012			2013			2012			2013			2012			2013			2012
Gross premiums written	$	66,773			58,292		$	225,120			178,690		$	59,385			60,676		$	-			-		$	351,278			297,658
Ceded premiums written		(5,934	)		(5,063	)		(45,232	)		(36,948	)		(3,782	)		(543	)		-			-			(54,948	)		(42,554	)
Net premiums written		60,839			53,229			179,888			141,742			55,603			60,133			-			-			296,330			255,104
Change in unearned premiums		(2,763	)		(2,194	)		(20,302	)		(19,449	)		3,519			2,477			-			-			(19,546	)		(19,166	)
Net premiums earned		58,076			51,035			159,586			122,293			59,122			62,610			-			-			276,784			235,938
Total revenues		62,160			53,791			168,127			129,812			64,621			68,508			6,145			1,066			301,053			253,177
Losses and loss adjustment expenses		42,567			39,253			113,303			76,827			49,085			52,779			-			-			204,955			168,859
Pre-tax income (loss), net of non-controlling interest		641			(2,601	)		11,828			17,193			(3,331	)		(5,747	)		(2,820	)		(8,082	)		6,318			763
Net loss ratio (1)		73.3	%		76.9	%		71.0	%		62.8	%		83.0	%		84.3	%								74.0	%		71.6	%
Net expense ratio (1)		32.6	%		33.8	%		27.0	%		28.2	%		25.7	%		28.5	%								29.2	%		30.4	%
Net combined ratio (1)		105.9	%		110.7	%		98.0	%		91.0	%		108.7	%		112.8	%								103.2	%		102.0	%
Favorable (Unfavorable) Prior Year Development		3,630			2,827			(10,062	)		3,679			(1,531	)		(2,937	)		-			-			(7,963	)		3,569

(1) The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated for our 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.

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $66.8 million for the nine months ended September 30, 2013, which was $8.5 million, or 15%, more than the $58.3 million reported for the same period in 2012. Net premiums written were $60.8 million for the nine months ended September 30, 2013 as compared to $53.2 million reported for the same period in 2012. The increase in premium volume was primarily due to increased premium production in both our Standard Commercial P&C and Workers Compensation business units.

Total revenue for the Standard Commercial Segment of $62.2 million for the nine months ended September 30, 2013 was $8.4 million more than the $53.8 million reported during the same period in 2012. This 16% increase in total revenue was mostly due to increased net premiums earned of $7.0 million, higher net investment income of $0.1 million and a $1.3 million lower adverse profit share commission revenue adjustment during the nine months ended September 30, 2013 as compared to the same period the prior year.

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Our Standard Commercial Segment reported pre-tax income of $0.6 million for the nine months ended September 30, 2013 as compared to a pre-tax loss of $2.6 million for the same period of 2012. The increased revenue discussed above was the primary driver of the increased pre-tax income for the nine months ended September 30, 2013, partially offset by higher loss and LAE of $3.3 million and higher operating expenses of $1.9 million consisting primarily of higher production related expenses due to increased premium production.

The Standard Commercial Segment reported a net loss ratio of 73.3% for the nine months ended September 30, 2013 as compared to 76.9% for the same period in 2012. The gross loss ratio before reinsurance for the nine months ended September 30, 2013 was 68.7% as compared to the 75.4% reported for the same period of 2012. The lower gross and net loss ratios for the nine months ended September 30, 2013 were primarily the result of lower catastrophe losses coupled with increased favorable prior year loss reserve development. The gross and net loss results for the nine months ended September 30, 2013 and 2012 include catastrophe losses of $5.7 million and $9.4 million, respectively. During the nine months ended September 30, 2013 and 2012, the Standard Commercial Segment reported favorable loss reserve development of $3.6 million and $2.8 million, respectively.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were $225.1 million for the nine months ended September 30, 2013, which was $46.4 million, or 26%, more than the $178.7 million reported for the same period in 2012. Net premiums written were $179.9 million for the nine months ended September 30, 2013 as compared to $141.7 million reported for the same period in 2012. The increase in premium volume was primarily due to increased premium production in our E&S Commercial and Hallmark Select business units.

The $168.1 million of total revenue for the Specialty Commercial Segment for the nine months ended September 30, 2013 was $38.3 million higher than the $129.8 million reported for 2012. This 30% increase in revenue was due to higher net premiums earned of $37.3 million due predominately to increased production discussed above. Further contributing to this increased revenue was higher net investment income of $1.1 million partially offset by lower profit share commission revenue adjustment of $0.1 million for the nine months ended September 30, 2013 as compared to the same period of 2012.

Pre-tax income for the Specialty Commercial Segment of $11.8 million for the nine months ended September 30, 2013 was $5.4 million lower than the $17.2 million reported for the same period in 2012. The decrease in pre-tax income was primarily due to higher loss and LAE expenses of $36.5 million and higher operating expenses of $7.8 million, partially offset by lower amortization of intangible assets of $0.3 million, lower non-controlling interest of $0.3 million and the increased revenue discussed above. Our E&S Commercial business unit reported a $33.6 million increase in loss and LAE due primarily to increased premium volume and $11.7 million of unfavorable prior year loss reserve development as compared to $1.1 million of favorable development during the same period of 2012. In addition, our Hallmark Select business unit reported a $3.5 million increase in loss and LAE which consisted of (a) a $1.3 million increase in loss and LAE due to increased premium production in our commercial umbrella and excess liability line of business, (b) a $2.1 million increase in loss and LAE primarily due to large loss volatility in our aircraft hull coverage during the first nine months of 2013, (c) a $0.1 million increase in loss and LAE attributable to our medical professional liability insurance products. Partially offsetting the increase in Specialty Commercial Segment loss and LAE was a $0.6 million decrease in loss and LAE in our Specialty Programs due primarily to lower current accident year loss trends. The increase in operating expense was the combined result of increased production related expenses of $7.0 million, higher salary and related expenses of $0.4 million, higher professional service fees of $0.2 million and higher other operating expenses of $0.2 million.

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The Specialty Commercial Segment reported a net loss ratio of 71.0% for the nine months ended September 30, 2013 as compared to 62.8% for the same period during 2012. The gross loss ratio before reinsurance was 69.4% for the nine months ended September 30, 2013 as compared to 62.0% for the same period in 2012. The higher gross and net loss ratio include $10.1 million of unfavorable prior year development for the nine months ended September 30, 2013 as compared to $3.7 million of favorable prior year development for the same period during 2012. The Specialty Commercial Segment reported a net expense ratio of 27.0% for the first nine months of 2013 as compared to 28.2% reported for the same period the prior year. The decrease in the expense ratio is due primarily to increased net earned premium.

Personal Segment

Gross premiums written for the Personal Segment were $59.4 million for the nine months ended September 30, 2013, which was $1.3 million less than the $60.7 million reported for the same period in 2012. Net premiums written for our Personal Segment were $55.6 million in the first nine months of 2013, which was a decrease of $4.5 million, or 8%, from the $60.1 million reported for the same period of 2012. The decrease in net premium written was due mostly to exiting certain underperforming states and programs and a quota share reinsurance contract entered into during the first quarter of 2013 on our low value dwelling/homeowners, renters, and manufactured homes lines of business.

Total revenue for the Personal Segment decreased 6% to $64.6 million for the nine months ended September 30, 2013 from $68.5 million for the same period during 2012. Lower net premiums earned of $3.5 million due to lower premium production discussed above, decreased net investment income of $0.3 million and decreased finance charges of $0.1 million were the primary reasons for the decrease in revenue for the period.

Pre-tax loss for the Personal Segment was $3.3 million for the nine months ended September 30, 2013 as compared to pre-tax loss of $5.7 million for the same period of 2012. The lower pre-tax loss was primarily the result of (a) decreased losses and LAE of $3.7 million and (b) lower operating expenses of $2.6 million as a result of lower production related expenses of $1.7 million, lower salary and related expenses of $0.7 million and lower other operating expenses of $0.2 million,(c) partially offset by lower revenue discussed above.

The Personal Segment reported a net loss ratio of 83.0% for the nine months ended September 30, 2013 as compared to 84.3% for the same period of 2012. The gross loss ratio before reinsurance was 82.5% for the nine months ended September 30, 2013 as compared to 84.7% for the same period in 2012. The lower gross and net loss ratio is primarily the result of lower current accident year loss trends as well as lower adverse prior year loss reserve development for the nine months ended September 30, 2013 as compared to the same period of 2012. The loss and LAE during the nine months ended September 30, 2013 and 2012 included unfavorable prior years’ loss reserve development of $1.5 million and $2.9 million, respectively. The Personal Segment reported a net expense ratio of 25.7% for the first nine months of 2013 as compared to 28.5% for the same period of 2012. The decrease in the expense ratio was due predominately to lower production related expenses.

Corporate

Total revenue for Corporate was $6.1 million for the nine months ended September 30, 2013 as compared to $1.1 million for the same period of 2012. Net realized gains recognized on our investment portfolio were $9.7 million for the nine months ended September 30, 2013 as compared to $1.8 million during the same period during 2012. Net investment income decreased $2.6 million for the nine months ended September 30, 2013 as compared to the same period during 2012. Other income decreased $0.2 million for the nine months ended September 30, 2013 as compared to the same period during 2012.

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Corporate pre-tax loss was $2.8 million for the nine months ended September 30, 2013 as compared to an $8.1 million pre-tax loss for the same period the prior year. The decrease in pre-tax loss was the result of the increased revenue discussed above and lower operating expenses of $0.2 million due primarily to lower salary and related expenses during the nine months ended September 30, 2013 as compared to the same period the prior year.

Financial Condition and Liquidity

Sources and Uses of Funds

Our sources of funds are from insurance-related operations, financing activities and investing activities. Major sources of funds from operations include premiums collected (net of policy cancellations and premiums ceded), commissions, and processing and service fees. As a holding company, Hallmark is dependent on dividend payments and management fees from its subsidiaries to meet operating expenses and debt obligations. As of September 30, 2013, Hallmark had $6.7 million in unrestricted cash and cash equivalents at the holding company. Unrestricted cash and cash equivalents of our non-insurance subsidiaries were $7.7 million as of September 30, 2013. As of that date, our insurance subsidiaries held $137.3 million of unrestricted cash and cash equivalents as well as $396.6 million in debt securities with an average modified duration of 2.8 years. Accordingly, we do not anticipate selling long-term debt instruments to meet any liquidity needs.

AHIC and TBIC, domiciled in Texas, are limited in the payment of dividends to their stockholders in any 12-month period, without the prior written consent of the Texas Department of Insurance, to the greater of statutory net income for the prior calendar year or 10% of statutory policyholders’ surplus as of the prior year end. Dividends may only be paid from unassigned surplus funds. HIC, domiciled in Arizona, is limited in the payment of dividends to the lesser of 10% of prior year policyholders’ surplus or prior year's net investment income, without prior written approval from the Arizona Department of Insurance. HSIC, domiciled in Oklahoma, is limited in the payment of dividends to the greater of 10% of prior year policyholders’ surplus or prior year’s statutory net income, not including realized capital gains, without prior written approval from the Oklahoma Insurance Department. HNIC, domiciled in Ohio, is limited in the payment of dividends to the greater of 10% of statutory policyholders’ surplus as of the prior December 31 or statutory net income as of the prior December 31 without prior written approval from the Ohio Insurance Department. During 2013, the aggregate ordinary dividend capacity of these subsidiaries is $21.0 million, of which $15.1 million is available to Hallmark. As a county mutual, dividends from HCM are payable to policyholders. None of our insurance company subsidiaries paid a dividend to Hallmark during the first nine months of 2013 or the 2012 fiscal year.

Comparison of September 30, 2013 to December 31, 2012

On a consolidated basis, our cash and investments (excluding restricted cash) at September 30, 2013 were $594.3 million compared to $530.5 million at December 31, 2012. Cash flow from operations and the acquisition of debt securities settled subsequent to September 30, 2013 were the primary reasons for this increase.

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Comparison of Nine Months Ended September 30, 2013 and September 30, 2012

Net cash provided by our consolidated operating activities was $53.5 million for the first nine months of 2013 compared to net cash provided by operating activities of $28.2 million for the first nine months of 2012. The increase in operating cash flow was primarily due to higher collected premiums written mostly by our E&S Commercial business unit during the first nine months of 2013, partially offset by increased claim and operating expense payments.

Net cash provided by investing activities during the first nine months of 2013 was $13.0 million as compared to cash provided by investing activities during the first nine months of 2012 of $8.1 million.  The increase in cash provided by investing activities during the first nine months of 2013 was due to an increase in maturities, sales and redemptions of investment securities of $43.0 million, partially offset by an increase in purchases of debt and equity securities of $36.4 million, a $1.1 million decrease in transfers from restricted cash and an increase in purchases of property and equipment of $0.6 million.

There were no financing cash flow activities during the first nine months of 2013. Cash used in financing activities during the first nine months of 2012 was $3.1 million as a result of a $2.6 million repayment on our revolving credit facility, a $0.4 million payment of contingent consideration for the acquisition of TBIC, and a $0.1 million distribution to non-controlling interest.

Credit Facilities

Our First Restated Credit Agreement with The Frost National Bank dated January 27, 2006, as amended to date, provides a revolving credit facility of $15.0 million. We pay interest on the outstanding balance at our election at a rate of the prime rate or LIBOR plus 2.5%.  We pay an annual fee of 0.25% of the average daily unused balance of the credit facility. We pay letter of credit fees at the rate of 1.00% per annum.  Our obligations under the revolving credit facility are secured by a security interest in the capital stock of all of our subsidiaries, guarantees of all of our subsidiaries and the pledge of all of our non-insurance company assets.  The revolving credit facility contains covenants that, among other things, require us to maintain certain financial and operating ratios and restrict certain distributions, transactions and organizational changes.  We are in compliance with all of our covenants.  As of September 30, 2013, the balance on the revolving note was $1.5 million. The revolving note currently bears interest at 2.75% per annum.

Subordinated Debt Securities

On June 21, 2005, we entered into a trust preferred securities transaction pursuant to which we issued $30.9 million aggregate principal amount of subordinated debt securities due in 2035. To effect the transaction, we formed a Delaware statutory trust, Hallmark Statutory Trust I (“Trust I”). Trust I issued $30.0 million of preferred securities to investors and $0.9 million of common securities to us. Trust I used the proceeds from these issuances to purchase the subordinated debt securities. Our Trust I subordinated debt securities bear an initial interest rate of 7.725% until June 15, 2015, at which time interest will adjust quarterly to the three-month LIBOR rate plus 3.25 percentage points. Trust I pays dividends on its preferred securities at the same rate. Under the terms of our Trust I subordinated debt securities, we pay interest only each quarter and the principal of the note at maturity. The subordinated debt securities are uncollaterized and do not require maintenance of minimum financial covenants. As of September 30, 2013, the balance of our Trust I subordinated debt was $30.9 million.

On August 23, 2007, we entered into a trust preferred securities transaction pursuant to which we issued $25.8 million aggregate principal amount of subordinated debt securities due in 2037. To effect the transaction, we formed a Delaware statutory trust, Hallmark Statutory Trust II (“Trust II”). Trust II issued $25.0 million of preferred securities to investors and $0.8 million of common securities to us. Trust II used the proceeds from these issuances to purchase the subordinated debt securities. Our Trust II subordinated debt securities bear an initial interest rate of 8.28% until September 15, 2017, at which time interest will adjust quarterly to the three-month LIBOR rate plus 2.90 percentage points. Trust II pays dividends on its preferred securities at the same rate. Under the terms of our Trust II subordinated debt securities, we pay interest only each quarter and the principal of the note at maturity. The subordinated debt securities are uncollaterized and do not require maintenance of minimum financial covenants. As of September 30, 2013, the balance of our Trust II subordinated debt was $25.8 million.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes to the market risks discussed in Item 7A to Part II of our Form 10-K for the fiscal year ended December 31, 2012.

Item 4. Controls and Procedures.

The principal executive officer and principal financial officer of Hallmark have evaluated our disclosure controls and procedures and have concluded that, as of the end of the period covered by this report, such disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is timely recorded, processed, summarized and reported. The principal executive officer and principal financial officer also concluded that such disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under such Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. During the most recent fiscal quarter, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Risks Associated with Forward-Looking Statements Included in this Form 10-Q

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. These statements include the plans and objectives of management for future operations, including plans and objectives relating to future growth of our business activities and availability of funds. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, regulatory framework, weather-related events and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

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PART II

OTHER INFORMATION

Item 1.     Legal Proceedings.

In December 2010, our E&S Commercial business unit was informed by the Texas Comptroller of Public Accounts that a surplus lines tax audit covering the period January 1, 2007 through December 31, 2009 was complete. A subsidiary within our E&S Commercial business unit (“HSU”) frequently acts as a managing general underwriter (“MGU”) authorized to underwrite policies on behalf of Republic Vanguard Insurance Company and HSIC, both Texas eligible surplus lines insurance carriers. In its role as the MGU, HSU underwrites policies on behalf of these carriers while other agencies located in Texas, generally referred to as “producing agents,” deliver the policies to the insureds and collect all premiums due from the insureds. During the period under audit, the producing agents also collected the surplus lines premium taxes due on the policies from the insureds, held them in trust, and timely remitted those taxes to the Comptroller. We believe this system for collecting and paying the required surplus lines premium taxes complies in all respects with the Texas Insurance Code and other regulations, which clearly require that the same party who delivers the policies and collects the premiums will also collect premium taxes, hold premium taxes in trust, and pay premium taxes to the Comptroller. It also complies with long standing industry practice. The Comptroller asserts that HSU is liable for the surplus lines premium taxes related to policy transactions and premiums collected from surplus lines insureds during the audit period and that HSU owes $4.5 million in premium taxes, as well as $0.9 million in penalties and interest for the audit period.

We disagree with the Comptroller and intend to vigorously fight their assertion that HSU is liable for the surplus lines premium taxes. We have engaged in conversations with the Comptroller’s counsel and are waiting on the Comptroller’s position paper. At this stage, we cannot predict the course of any proceedings, the timing of any rulings or other significant events relating to such surplus lines tax audit.  Given these limitations and the inherent difficulty of projecting the outcome of regulatory disputes, we are presently unable to reasonably estimate the possible loss or legal costs that are likely to arise out of the surplus lines tax audit or any future proceedings relating to this matter. Therefore we have not accrued any amount as of September 30, 2013 related to this matter.

We are engaged in various legal proceedings that are routine in nature and incidental to our business. None of these proceedings, either individually or in the aggregate, are believed, in our opinion, to have a material adverse effect on our consolidated financial position or our results of operations.

Item 1A.     Risk Factors.

There have been no material changes to the risk factors discussed in Item 1A to Part I of our Form 10-K for the fiscal year ended December 31, 2012.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.        Defaults Upon Senior Securities.

None.

Item 4.        Mine Safety Disclosures.

None.

Item 5.       Other Information.

None.

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Item 6.        Exhibits.

The following exhibits are filed herewith or incorporated herein by reference:

Exhibit Number	Description
3(a)	Restated Articles of Incorporation of the registrant, as amended (incorporated by reference to Exhibit 3.1 to the registrant’s Registration Statement on Form S-1 [Registration No. 333-136414] filed September 8, 2006).
3(b)	Amended and Restated By-Laws of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed October 1, 2007).
10(a)	Eleventh Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and Frost Bank dated July 26, 2013 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed July 30, 2013).
31(a)	Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).
31(b)	Certification of principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a).
32(a)	Certification of principal executive officer Pursuant to 18 U.S.C. § 1350.
32(b)	Certification of principal financial officer Pursuant to 18 U.S.C. § 1350.
101 INS+	XBRL Instance Document.
101 SCH+	XBRL Taxonomy Extension Schema Document.
101 CAL+	XBRL Taxonomy Extension Calculation Linkbase Document.
101 LAB+	XBRL Taxonomy Extension Label Linkbase Document.
101 PRE+	XBRL Taxonomy Extension Presentation Linkbase Document.
101 DEF+	XBRL Taxonomy Extension Definition Linkbase Document.
+	Furnished with this Quarterly Report on Form 10-Q and included in Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012, (iv) Consolidated Statements of Stockholder’s Equity for the three and nine months ended September 30, 2013 and 2012, (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 and (vi) related notes.

42

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HALLMARK FINANCIAL SERVICES, INC.

(Registrant)

Date: November 7, 2013	/s/ Mark J. Morrison
	Mark J. Morrison, Chief Executive Officer and President

Date: November 7, 2013	/s/ Jeffrey R. Passmore
	Jeffrey R. Passmore, Chief Accounting Officer and Senior Vice President

43

EX-31.A

CERTIFICATION

I, Mark J. Morrison, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hallmark Financial Services, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.     The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the Registrant and have:

a)      designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)      evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)      disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.     The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a)      all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)      any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:   November 7, 2013
	/s/ Mark J. Morrison
	Mark J. Morrison, Chief Executive Officer

EX-31.B

CERTIFICATION

I, Jeffrey R. Passmore, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hallmark Financial Services, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.     The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the Registrant and have:

a)     designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)     disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.     The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a)     all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:   November 7, 2013
	/s/ Jeffrey R. Passmore
	Jeffrey R. Passmore, Chief Accounting Officer

EX-32.A

Exhibit 32(a)

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350

       I, Mark J. Morrison, Chief Executive Officer of Hallmark Financial Services, Inc. (the "Company"), hereby certify that the accompanying report on Form 10-Q for the quarter ended September 30, 2013, and filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended. I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   November 7, 2013

/s/ Mark J. Morrison

Mark J. Morrison,

Chief Executive Officer

EX-32.B

Exhibit 32(b)

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350

       I, Jeffrey R. Passmore, Chief Accounting Officer of Hallmark Financial Services, Inc. (the "Company"), hereby certify that the accompanying report on Form 10-Q for the quarter ended September 30, 2013 and filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended. I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:   November 7, 2013

/s/Jeffrey R. Passmore

Jeffrey R. Passmore

Chief Accounting Officer

XML

Reinsurance

9 Months Ended

Sep. 30, 2013

Reinsurance [Abstract]

Reinsurance

10. Reinsurance

We reinsure a portion of the risk we underwrite in order to control the exposure to losses and to protect capital resources.  We cede to reinsurers a portion of these risks and pay premiums based upon the risk and exposure of the policies subject to such reinsurance.  Ceded reinsurance involves credit risk and is generally subject to aggregate loss limits.  Although the reinsurer is liable to us to the extent of the reinsurance ceded, we are ultimately liable as the direct insurer on all risks reinsured.  Reinsurance recoverables are reported after allowances for uncollectible amounts.  We monitor the financial condition of reinsurers on an ongoing basis and review our reinsurance arrangements periodically.  Reinsurers are selected based on their financial condition, business practices and the price of their product offerings.  In order to mitigate credit risk to reinsurance companies, most of our reinsurance recoverable balance as of September 30, 2013 was with reinsurers that had an A.M. Best rating of “A–” or better.

The following table shows earned premiums ceded and reinsurance loss recoveries by period (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Ceded earned premiums	$       16,488	$   14,141	$         45,629	$ 40,031
Reinsurance recoveries	$         9,197	$     8,582	$         24,770	$ 22,633

We currently reinsure the following exposures on business generated by our business units:

· Property catastrophe.  Our property catastrophe reinsurance reduces the financial impact a catastrophe could have on our commercial and personal property insurance lines.  Catastrophes might include multiple claims and policyholders.  Catastrophes include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires.  Our property catastrophe reinsurance is excess-of-loss reinsurance, which provides us reinsurance coverage for losses in excess of an agreed-upon amount.  We utilize catastrophe models to assist in determining appropriate retention and limits to purchase.  Effective July 1, 2013, the terms of our property catastrophe reinsurance are:

o We retain the first $6.0 million of property catastrophe losses; and

o Our reinsurers reimburse us 100% for any loss occurrence in excess of our $6.0 million retention up to $29.0 million for each catastrophic occurrence, subject to an aggregate limit of $58.0 million.

· Commercial property.  Our commercial property reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event or catastrophic loss may have on our results.  The terms of our commercial property reinsurance are:

o We retain the first $1.0 million of loss for each commercial property risk;

o Our reinsurers reimburse us for the next $5.0 million for each commercial property risk, and $10.0 million for all commercial property risk involved in any one occurrence, in all cases subject to an aggregate limit of $30.0 million for all commercial property losses occurring during the treaty period; and

o Individual risk facultative reinsurance is purchased on any commercial property with limits above $6.0 million.

· Commercial casualty.  Our commercial casualty reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event loss may have on our results.  The terms of our commercial casualty reinsurance are:

o We retain the first $1.0 million of any commercial liability risk; and

o Our reinsurers reimburse us for the next $5.0 million for each commercial liability risk.

· Aviation.  Effective July 1, 2013 we purchase proportional reinsurance where we cede 80% of the risk to reinsurers on the aviation risks produced in all states by our Hallmark Select business unit. 

· Workers Compensation.  We purchase excess of loss reinsurance specific to the workers compensation risks underwritten by our Workers Compensation business unit.  The terms of our workers compensation reinsurance are:

o We retain the first $1.0 million of each workers compensation loss; and

o Our reinsurers reimburse us 100% for the next $14.0 million for each workers compensation loss, subject to a maximum limit of $10.0 million for any one person and an aggregate limit of $28.0 million for all workers compensation losses.

· Personal Property.  We purchase proportional reinsurance where we cede 60% of the risks to reinsurers on the low value dwelling/homeowners, renters and manufactured homes coverages produced in all states by our Personal Lines business unit.

· Standard Commercial P&C.  We purchase proportional reinsurance where we cede 100% of the risks to reinsurers on the equipment breakdown coverage on our commercial multi-peril property and business owners risks and on the employment practices liability coverage on certain commercial multi-peril, general liability and business owners risks.

· Excess & Umbrella.  We purchase proportional reinsurance where we retain 20% of each risk and cede the remaining 80% to reinsurers on the commercial umbrella and excess liability insurance produced by our Hallmark Select business unit.  In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty. 

· Professional Liability.  Effective June 1, 2013, we purchase proportional reinsurance on our medical professional liability risks produced by our Hallmark Select business unit where we retain 60% of each risk and cede the remaining 40% to reinsurers. In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty.

· E&S Commercial. We purchase facultative reinsurance on our commercial umbrella and excess liability risks produced by our E&S Commercial business unit where we retain 10% of the first $1.0 million of risk and cede the remaining 90% to reinsurers. We cede 100% of our commercial umbrella and excess liability risks in excess of $1.0 million.

· Hallmark County Mutual.  HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas where we previously produced policies for third party county mutual insurance companies and reinsured 100% for a fronting fee.  In addition, HCM is used to front business produced by unaffiliated third parties. HCM does not retain any business.

· Hallmark National Insurance Company.  Simultaneous with the December 31, 2010 closing of our acquisition of HNIC, HNIC entered into reinsurance contracts with an affiliate of the seller pursuant to which such affiliate of the seller handles all claims and assumes all liabilities arising under policies issued by HNIC prior to closing or during a transition period following the closing.

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Segment Information (Schedule of Business Segment Information) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenues:
Revenues	$ 108,613	$ 85,620	$ 301,053	$ 253,177
Pre-tax income (loss), net of non-controlling interest:
Pre-tax income, net of non-controlling interest	9,472	4,763	6,318	763
Standard Commercial Segment [Member]
Revenues:
Revenues	21,163	17,761	62,160	53,791
Pre-tax income (loss), net of non-controlling interest:
Pre-tax income, net of non-controlling interest	1,163	(529)	641	(2,601)
Specialty Commercial Segment [Member]
Revenues:
Revenues	60,787	46,373	168,127	129,812
Pre-tax income (loss), net of non-controlling interest:
Pre-tax income, net of non-controlling interest	7,564	8,287	11,828	17,193
Personal Segment [Member]
Revenues:
Revenues	21,256	21,172	64,621	68,508
Pre-tax income (loss), net of non-controlling interest:
Pre-tax income, net of non-controlling interest	(1,613)	(345)	(3,331)	(5,747)
Corporate [Member]
Revenues:
Revenues	5,407	314	6,145	1,066
Pre-tax income (loss), net of non-controlling interest:
Pre-tax income, net of non-controlling interest	$ 2,358	$ (2,650)	$ (2,820)	$ (8,082)

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Consolidated Statements of Operations [Abstract]
Gross premiums written	$ 123,664	$ 99,448	$ 351,278	$ 297,658
Ceded premiums written	(20,775)	(14,443)	(54,948)	(42,554)
Net premiums written	102,889	85,005	296,330	255,104
Change in unearned premiums	(5,437)	(4,524)	(19,546)	(19,166)
Net premiums earned	97,452	80,481	276,784	235,938
Investment income, net of expenses	2,965	3,795	9,871	11,573
Net realized gains	6,950	982	9,723	1,854
Finance charges	1,484	1,374	4,396	4,538
Commission and fees	(251)	(1,029)	169	(1,033)
Other income	13	17	110	307
Total revenues	108,613	85,620	301,053	253,177
Losses and loss adjustment expenses	68,158	52,839	204,955	168,859
Other operating expenses	29,139	25,726	83,911	77,077
Interest expense	1,150	1,137	3,449	3,464
Amortization of intangible assets	694	897	2,420	2,690
Total expenses	99,141	80,599	294,735	252,090
Income before tax	9,472	5,021	6,318	1,087
Income tax expense (benefit)	3,198	1,350	1,501	(978)
Net income	6,274	3,671	4,817	2,065
Less: Net income attributable to non-controlling interest		258		324
Net income attributable to Hallmark Financial Services, Inc.	$ 6,274	$ 3,413	$ 4,817	$ 1,741
Net income per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic	$ 0.33	$ 0.18	$ 0.25	$ 0.09
Diluted	$ 0.32	$ 0.18	$ 0.25	$ 0.09

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Business Combinations

9 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Business Combinations

3. Business Combinations

Effective August 29, 2008, we acquired 80% of the issued and outstanding membership interests in Heath XS, LLC and Hardscrabble Data Solutions, LLC for consideration of $15.0 million. In connection with the acquisition, we executed an operating agreement for each company. The operating agreements granted us the right to purchase the remaining 20% membership interests in the companies and granted an affiliate of the seller the right to require us to purchase such remaining membership interests. We exercised our call option effective September 30, 2012 and acquired the remaining 20% membership interests in the companies for $1.7 million.

Effective December 31, 2010, we acquired all of the issued and outstanding capital stock of HNIC for initial consideration of $14.0 million paid in cash on January 3, 2011 to State Auto Financial Corporation, Inc. In addition, an earnout of up to $2.0 million is payable to the seller quarterly in an amount equal to 2% of gross collected premiums on new or renewal personal lines insurance policies written by HNIC agents during the three years following closing. HNIC is an Ohio domiciled insurance company that writes non-standard personal automobile policies through independent agents in 21 states.

           Effective July 1, 2011, we acquired all of the issued and outstanding capital stock of TBIC Holding Corporation (“TBIC Holding”) for initial consideration of $1.6 million paid in cash on July 1, 2011. In addition, a holdback purchase price of $350 thousand was paid during the third quarter of 2012.  A contingent purchase price of up to $3.0 million may become payable following 16 full calendar quarters after closing based upon a formula contained in the acquisition agreement.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies [Abstract]

Commitments and Contingencies

17. Commitments and Contingencies

In December 2010, our E&S Commercial business unit was informed by the Texas Comptroller of Public Accounts that a surplus lines tax audit covering the period January 1, 2007 through December 31, 2009 was complete.  A subsidiary within our E&S Commercial business unit (“HSU”) frequently acts as a managing general underwriter (“MGU”) authorized to underwrite policies on behalf of Republic Vanguard Insurance Company and HSIC, both Texas eligible surplus lines insurance carriers.  In its role as the MGU, HSU underwrites policies on behalf of these carriers while other agencies located in Texas, generally referred to as “producing agents,” deliver the policies to the insureds and collect all premiums due from the insureds.  During the period under audit, the producing agents also collected the surplus lines premium taxes due on the policies from the insureds, held them in trust, and timely remitted those taxes to the Comptroller.  We believe this system for collecting and paying the required surplus lines premium taxes complies in all respects with the Texas Insurance Code and other regulations, which clearly require that the same party who delivers the policies and collects the premiums will also collect premium taxes, hold premium taxes in trust, and pay premium taxes to the Comptroller.  It also complies with long standing industry practice.  The Comptroller asserts that HSU is liable for the surplus lines premium taxes related to policy transactions and premiums collected from surplus lines insureds during the audit period and that HSU owes $4.5 million in premium taxes, as well as $0.9 million in penalties and interest for the audit period. 

We disagree with the Comptroller and intend to vigorously fight their assertion that HSU is liable for the surplus lines premium taxes. We have engaged in conversations with the Comptroller’s counsel and are waiting on the Comptroller’s position paper. At this stage, we cannot predict the course of any proceedings, the timing of any rulings or other significant events relating to such surplus lines tax audit.  Given these limitations and the inherent difficulty of projecting the outcome of regulatory disputes, we are presently unable to reasonably estimate the possible loss or legal costs that are likely to arise out of the surplus lines tax audit or any future proceedings relating to this matter. Therefore we have not accrued any amount as of September 30, 2013 related to this matter.

We are engaged in other legal proceedings in the ordinary course of business, none of which, either individually or in the aggregate, are believed likely to have a material adverse effect on our consolidated financial position or results of operations, in the opinion of management.  The various legal proceedings to which we are a party are routine in nature and incidental to our business.

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Reinsurance (Schedule of Reinsurance Ceded and Recoveries) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Reinsurance [Abstract]
Ceded earned premiums	$ 16,488	$ 14,141	$ 45,629	$ 40,031
Reinsurance recoveries	$ 9,197	$ 8,582	$ 24,770	$ 22,633

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Revolving Credit Facility Payable

9 Months Ended

Sep. 30, 2013

Revolving Credit Facility Payable [Abstract]

Revolving Credit Facility Payable

11. Revolving Credit Facility Payable

Our First Restated Credit Agreement with The Frost National Bank dated January 27, 2006, as amended to date, provides a revolving credit facility of $15.0 million. We pay interest on the outstanding balance at our election at a rate of the prime rate or LIBOR plus 2.5%.  We pay an annual fee of 0.25% of the average daily unused balance of the credit facility. We pay letter of credit fees at the rate of 1.00% per annum.  Our obligations under the revolving credit facility are secured by a security interest in the capital stock of all of our subsidiaries, guarantees of all of our subsidiaries and the pledge of all of our non-insurance company assets.  The revolving credit facility contains covenants that, among other things, require us to maintain certain financial and operating ratios and restrict certain distributions, transactions and organizational changes.  We are in compliance with all of our covenants.  As of September 30, 2013, the balance on the revolving note was $1.5 million.  The revolving note currently bears interest at 2.75% per annum. 

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Reserves for Unpaid Losses and Loss Adjustment Expenses (Narrative) (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense		$ 2.2		$ 3.6
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense	0.5		8.0
Loss and Loss Adjustment Expenses Incurred In 2012 Accident Year [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			5.0
Loss and Loss Adjustment Expenses Incurred In 2011 Accident Year [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			2.4
Loss and Loss Adjustment Expenses Incurred In 2010 Accident Year [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			1.6
Loss and Loss Adjustment Expenses Incurred In 2009 And Prior Accident Year [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			1.0
Personal Lines Business Unit [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			1.5	2.9
E & S Commercial Business Unit [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense				1.1
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			11.7
Standard Commercial Business Unit [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			2.4
Standard Commercial Business Unit [Member] | Loss Adjustment Expenses Recognized In 2010 [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			2.4
Hallmark Select Business Unit [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			1.6	2.6
Workers Compensation Risks [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			1.2	0.8
Commercial Auto Liability [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense				2.0
Auto [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense				2.2
Low Value Dwelling/Homeowners [Member] | Personal Lines Business Unit [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense				$ 0.7

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Revolving Credit Facility Payable (Narrative) (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Jan. 27, 2006
Line of Credit Facility [Line Items]
Line of credit facility, interest rate during period	2.75%
Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Line of credit facility, maximum borrowing capacity		$ 15.0
Line of credit facility, amount outstanding	$ 1.5
Debt instrument, description of variable rate basis	prime rate or LIBOR plus 2.5%
Debt instrument, basis spread on variable rate	2.50%
Line of credit facility, unused capacity, commitment fee Percentage	0.25%
Letter of Credit [Member]
Line of Credit Facility [Line Items]
Line of credit facility, commitment fee percentage	1.00%

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Business Combinations (Narrative) (Details) (USD $)	9 Months Ended	3 Months Ended					9 Months Ended	12 Months Ended
	Sep. 30, 2012	Sep. 30, 2012 TBIC Holding Corporation [Member]	Jul. 01, 2011 TBIC Holding Corporation [Member]	Sep. 30, 2012 Heath XS LLC and Hardscrabble Data Solutions LLC [Member]	Aug. 29, 2008 Heath XS LLC and Hardscrabble Data Solutions LLC [Member]	Dec. 31, 2010 State Auto Financial Corporation [Member]	Sep. 30, 2013 Hallmark National Insurance Company [Member] state	Dec. 31, 2010 Hallmark National Insurance Company [Member]	Jan. 03, 2011 Hallmark National Insurance Company [Member]
Business Acquisition [Line Items]
Ownership percentage acquired					80.00%
Total consideration for acquisition			$ 1,600,000		$ 15,000,000				$ 14,000,000
Percentage of ownership interests authorized for purchase				20.00%	20.00%
Redemption value of call and put option				1,700,000
Holdback purchase price estimated to pay	350,000	350,000
Gross collected premium, percentage								2.00%
Business acquisition, cost of acquired entity, purchase price, additional amount						2,000,000
Fair value of contingent consideration			$ 3,000,000
Number of states, independent agents operate							21

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Fair Value (Tables)

9 Months Ended

Sep. 30, 2013

Fair Value [Abstract]

Fair Value, Assets Measured on Recurring Basis

The following table presents for each of the fair value hierarchy levels, our assets that are measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012 (in thousands):

	As of September 30, 2013
	Quoted Prices in	Other
	Active Markets for	Observable	Unobservable
	Identical Assets	Inputs	Inputs
	(Level 1)	(Level 2)	(Level 3)	Total
U.S. Treasury securities and
obligations of U.S. Government	$              -	$ 34,114	$        -	$ 34,114
Corporate bonds	-	59,393	-	59,393
Collateralized corporate bank loans	-	118,852	700	119,552
Municipal bonds	-	134,906	19,590	154,496
Mortgage-backed	-	29,092	-	29,092
Total debt securities	-	376,357	20,290	396,647
Financial services	7,690	-	-	7,690
All other	38,250	-	-	38,250
Total equity securities	45,940	-	-	45,940
Total debt and equity securities	$ 45,940	$ 376,357	$ 20,290	$ 442,587

	As of December 31, 2012
	Quoted Prices in	Other
	Active Markets for	Observable	Unobservable
	Identical Assets	Inputs	Inputs
	(Level 1)	(Level 2)	(Level 3)	Total
U.S. Treasury securities and
obligations of U.S. Government	$              -	$ 40,061	$          -	$ 40,061
Corporate bonds	-	81,547	-	81,547
Collateralized corporate bank loans	-	105,463	908	106,371
Municipal bonds	-	144,972	18,760	163,732
Mortgage-backed	-	9,724	-	9,724
Total debt securities	-	381,767	19,668	401,435
Financial services	14,887	-	-	14,887
All other	29,038	-	-	29,038
Total equity securities	43,925	-	-	43,925
Total debt and equity securities	$ 43,925	$          381,767	$ 19,668	$ 445,360

Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation

The following table summarizes the changes in fair value for all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013 and 2012 (in thousands): 

Beginning balance as of January 1, 2013	$ 19,668
Sales	-
Settlements	(302)
Purchases	-
Issuances	-
Total realized/unrealized gains included in net income	-
Net gains included in other comprehensive income	924
Transfers into Level 3	-
Transfers out of Level 3	-
Ending balance as of September 30, 2013	$ 20,290
Beginning balance as of January 1, 2012	$ 20,608
Sales	-
Settlements	(307)
Purchases	-
Issuances	-
Total realized/unrealized gains included in net income	-
Net losses included in other comprehensive income	(530)
Transfers into Level 3	-
Transfers out of Level 3	-
Ending balance as of September 30, 2012	$ 19,771

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Basis of Presentation (Policy)

9 Months Ended

Sep. 30, 2013

Basis of Presentation [Abstract]

Business Combinations

Business Combinations

We account for business combinations using the acquisition method of accounting pursuant to Accounting Standards Codification (“ASC”) 805, “Business Combinations.” The base cash purchase price plus the estimated fair value of any non-cash or contingent consideration given for an acquired business is allocated to the assets acquired (including identified intangible assets) and liabilities assumed based on the estimated fair values of such assets and liabilities. The excess of the fair value of the total consideration given for an acquired business over the aggregate net fair values assigned to the assets acquired and liabilities assumed is recorded as goodwill. Contingent consideration is recognized as a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in the consolidated statements of operations. The valuation of contingent consideration requires assumptions regarding anticipated cash flows, probabilities of cash flows, discount rates and other factors. Significant judgment is employed in determining the propriety of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions, can materially impact the amount of contingent consideration expense we record in any given period. Indirect and general expenses related to business combinations are expensed as incurred.

Income Taxes

Income Taxes

We file a consolidated federal income tax return.  Deferred federal income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end.  Deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes in effect for the year in which these temporary differences are expected to be recovered or settled.

Use of Estimates in the Preparation of the Financial Statements

Use of Estimates in the Preparation of the Financial Statements

 Our preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting period.  Refer to “Critical Accounting Estimates and Judgments” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the financial instruments.  Fair value estimates for financial instruments for which no or limited observable market data is available are based on judgments regarding current economic conditions, credit and interest rate risk.  These estimates involve significant uncertainties and judgments and cannot be determined with precision.  As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument.  In addition, changes in the underlying assumptions used in the fair value measurement technique, including discount rate and estimates of future cash flows, could significantly affect these fair value estimates.

Cash and Cash Equivalents:  The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Restricted Cash:  The carrying amount for restricted cash reported in the balance sheet approximates the fair value. 

Revolving Credit Facility Payable:  The carrying value of our bank revolving credit facility of $1.5 million approximates the fair value based on the current interest rate. 

Subordinated Debt Securities:  Our trust preferred securities have a carried value of $56.7 million and a fair value of $51.9 million as of September 30, 2013.  The fair value of our trust preferred securities is based on discounted cash flows using a current yield to maturity of 8.0%, which is based on similar issues to discount future cash flows.  Our trust preferred securities would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

For reinsurance balances,  premiums receivable, federal income tax payable, other assets and other liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments.

Variable Interest Entities

Variable Interest Entities

On June 21, 2005, we formed Hallmark Statutory Trust I (“Trust I”), an unconsolidated trust subsidiary, for the sole purpose of issuing $30.0 million in trust preferred securities.  Trust I used the proceeds from the sale of these securities and our initial capital contribution to purchase $30.9 million of subordinated debt securities from Hallmark.  The debt securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I.

On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0 million in trust preferred securities.  Trust II used the proceeds from the sale of these securities and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark.  The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II.

We evaluate on an ongoing basis our investments in Trust I and II (collectively the “Trusts”) and we do not have a variable interest in the Trusts.  Therefore, the Trusts are not included in our consolidated financial statements. 

We are also involved in the normal course of business with variable interest entities (“VIE’s”) primarily as a passive investor in mortgage-backed securities and certain collateralized corporate bank loans issued by third party VIE’s.  The maximum exposure to loss with respect to these investments is the investment carrying values included in the consolidated balance sheets.

Adoption of New Accounting Pronouncements

Adoption of New Accounting Pronouncements

In January 2013, we adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) related to reporting and disclosure requirements about changes in accumulated other comprehensive income balances and reclassifications out of accumulated other comprehensive income.  The new guidance is effective prospectively for fiscal and interim periods beginning after December 15, 2012.  The adoption of this guidance did not have a material impact on our financial position or results of operations but did require additional disclosures.

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Investments (Schedule of Amortized Cost and Estimated Fair Value of Debt Securities by Contractual Maturities) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Schedule of Investments [Line Items]
Due in one year or less, Amortized Cost	$ 63,230
Due after one year through five years, Amortized Cost	153,969
Due after five years through ten years, Amortized Cost	96,692
Due after ten years, Amortized Cost	52,424
Debt Maturities, Amortized Cost	395,860
Due in one year or less, Fair Value	63,768
Due after one year through five years, Fair Value	154,311
Due after five years through ten years, Fair Value	97,585
Due after ten years, Fair Value	51,891
Debt Securities, Fair Value	396,647	401,435
Mortgage Backed [Member]
Schedule of Investments [Line Items]
Debt Maturities, Amortized Cost	29,545
Debt Securities, Fair Value	$ 29,092	$ 9,724

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Net Periodic Pension Cost (Tables)

9 Months Ended

Sep. 30, 2013

Net Periodic Pension Cost [Abstract]

Schedule of Net Benefit Costs

The following table details the net periodic pension cost incurred by period (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Interest cost	$ 127	$ 141	$ 379	$ 422
Amortization of net loss	123	120	371	362
Expected return on plan assets	(154)	(146)	(462)	(438)
Net periodic pension cost	$ 96	$ 115	$ 288	$ 346
Contributed amount	$ 157	$ 410	$ 268	$ 711

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Fair Value (Fair Value, Assets Measured on Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	$ 396,647	$ 401,435
Total equity securities	45,940	43,925
Total debt and equity securities	442,587	445,360
Us Treasury Securities and Obligations of U.S. Government [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	34,114	40,061
Corporate Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	59,393	81,547
Collateralized Corporate Bank Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	119,552	106,371
Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	154,496	163,732
Mortgage Backed [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	29,092	9,724
Financial Services [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total equity securities	7,690	14,887
All Other [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total equity securities	38,250	29,038
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total equity securities	45,940	43,925
Total debt and equity securities	45,940	43,925
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Financial Services [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total equity securities	7,690	14,887
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | All Other [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total equity securities	38,250	29,038
Other Observable Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	376,357	381,767
Total debt and equity securities	376,357	381,767
Other Observable Inputs, Level 2 [Member] | Us Treasury Securities and Obligations of U.S. Government [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	34,114	40,061
Other Observable Inputs, Level 2 [Member] | Corporate Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	59,393	81,547
Other Observable Inputs, Level 2 [Member] | Collateralized Corporate Bank Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	118,852	105,463
Other Observable Inputs, Level 2 [Member] | Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	134,906	144,972
Other Observable Inputs, Level 2 [Member] | Mortgage Backed [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	29,092	9,724
Unobservable Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	20,290	19,668
Total debt and equity securities	20,290	19,668
Unobservable Inputs, Level 3 [Member] | Collateralized Corporate Bank Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	700	908
Unobservable Inputs, Level 3 [Member] | Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	$ 19,590	$ 18,760

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Share-Based Payment Arrangements (Narrative) (Details) (USD $)	9 Months Ended	12 Months Ended	9 Months Ended		9 Months Ended						9 Months Ended		9 Months Ended			3 Months Ended	9 Months Ended			0 Months Ended			9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Long Term Incentive Plan 2005 [Member]	May 26, 2005 Long Term Incentive Plan 2005 [Member]	Sep. 30, 2013 Long Term Incentive Plan 2005 [Member] Minimum [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2013 Long Term Incentive Plan 2005 [Member] Maximum [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2013 Long Term Incentive Plan 2005 [Member] First Anniversary [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2013 Long Term Incentive Plan 2005 [Member] Second Anniversary [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2013 Long Term Incentive Plan 2005 [Member] Third Anniversary [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2013 Long Term Incentive Plan 2005 [Member] Fourth Anniversary [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2013 Incentive Stock Options 2010 [Member] Long Term Incentive Plan 2005 [Member]	Sep. 30, 2013 Incentive Stock Options 2011 [Member] 5,000 Grant [Member]	Sep. 30, 2013 Incentive Stock Options 2011 [Member] Long Term Incentive Plan 2005 [Member] 5,000 Grant [Member]	Sep. 30, 2013 Incentive Stock Options 2011 [Member] Long Term Incentive Plan 2005 [Member] 10,000 Grant [Member]	Sep. 30, 2013 Non Qualified Stock Options [Member] Long Term Incentive Plan 2005 [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member] Minimum [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member] Maximum [Member]	May 30, 2013 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]	Apr. 10, 2013 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]	Jul. 27, 2012 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock compensation plan, number of shares authorized				2,000,000
Number of incentive stock options to purchase shares of common stock outstanding			1,087,618
Number of non-qualified stock options to purchase shares of common stock outstanding			304,157												200,000
Number of restricted stock units to receive shares of common stock																							355,277
Shares reserved for future issuance			237,115
Share-based payment award vesting rights											3 years			3 years	7 years
Percentage of restricted stock units granted as result of meeting growth rates																		50.00%	150.00%
Number of options vested or expected to vest											25,000	5,000		10,000
Share-based payment, award vesting period			6 months										7 years
Incentive stock options termination period			10 years		5 years	10 years					10 years		10 years	10 years	10 years
Percentage of options vested or expected to vest			100.00%				10.00%	20.00%	30.00%	40.00%
Total unrecognized compensation cost related to non-vested share-based compensation arrangements	$ 500,000															$ 600,000	$ 600,000
Compensation costs expected to be recognized during remainder of 2013	52,000																						67,000
Compensation costs expected to be recognized during year two	200,000																						300,000
Compensation costs expected to be recognized during year three	200,000																						200,000
Compensation costs expected to be recognized during year four	54,000																						53,000
Compensation costs expected to be recognized during year five	3,000
Stock Options, Granted		0
Options granted, weighted average grant date fair value																$ 9.20	$ 9.20
Other than options, granted																					122,823	129,463	243,006
Other than options, forfeited																				9,280			6,155
Allocated share-based compensation expense																$ 58,000	$ 90,000

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Reinsurance (Tables)

9 Months Ended

Sep. 30, 2013

Reinsurance [Abstract]

Schedule of Reinsurance Ceded and Recoveries

The following table shows earned premiums ceded and reinsurance loss recoveries by period (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Ceded earned premiums	$       16,488	$   14,141	$         45,629	$ 40,031
Reinsurance recoveries	$         9,197	$     8,582	$         24,770	$ 22,633

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Commitments and Contingencies (Narrative) (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013
Commitments and Contingencies [Abstract]
Contingent liability, premium taxes	$ 4.5
Contingent liability, penalties and interest	$ 0.9

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Income Taxes (Narrative) (Details)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Income Taxes [Abstract]
Effective income tax rate, continuing operations	23.80%	(90.00%)

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Investments (Amortized Cost and Estimated Fair Value of Investments in Debt and Equity Securities by Category) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Schedule of Investments [Line Items]
Investments, Amortized Cost	$ 419,893	$ 429,302
Investments, Gross Unrealized Gains	27,460	20,887
Investments, Gross Unrealized Losses	(4,766)	(4,829)
Investments, Fair Value	442,587	445,360
Equity Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	24,033	31,502
Investments, Gross Unrealized Gains	22,629	12,938
Investments, Gross Unrealized Losses	(722)	(515)
Investments, Fair Value	45,940	43,925
Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	395,860	397,800
Investments, Gross Unrealized Gains	4,831	7,949
Investments, Gross Unrealized Losses	(4,044)	(4,314)
Investments, Fair Value	396,647	401,435
Us Treasury Securities and Obligations of U.S. Government [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	34,083	40,050
Investments, Gross Unrealized Gains	31	14
Investments, Gross Unrealized Losses		(3)
Investments, Fair Value	34,114	40,061
Corporate Bonds [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	58,633	79,516
Investments, Gross Unrealized Gains	1,285	2,794
Investments, Gross Unrealized Losses	(525)	(763)
Investments, Fair Value	59,393	81,547
Collateralized Corporate Bank Loans [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	119,626	106,093
Investments, Gross Unrealized Gains	475	1,021
Investments, Gross Unrealized Losses	(549)	(743)
Investments, Fair Value	119,552	106,371
Municipal Bonds [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	153,974	162,479
Investments, Gross Unrealized Gains	2,701	4,023
Investments, Gross Unrealized Losses	(2,179)	(2,770)
Investments, Fair Value	154,496	163,732
Mortgage Backed [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	29,544	9,662
Investments, Gross Unrealized Gains	339	97
Investments, Gross Unrealized Losses	(791)	(35)
Investments, Fair Value	29,092	9,724
Financial Services [Member] | Equity Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	4,705	11,008
Investments, Gross Unrealized Gains	2,985	3,880
Investments, Gross Unrealized Losses		(1)
Investments, Fair Value	7,690	14,887
All Other [Member] | Equity Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	19,328	20,494
Investments, Gross Unrealized Gains	19,644	9,058
Investments, Gross Unrealized Losses	(722)	(514)
Investments, Fair Value	$ 38,250	$ 29,038

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Changes in Accumulated Other Comprehensive Income Balances

9 Months Ended

Sep. 30, 2013

Changes in Accumulated Other Comprehensive Income Balances [Abstract]

Changes in Accumulated Other Comprehensive Income Balances

18. Changes in Accumulated Other Comprehensive Income Balances  

The changes in accumulated other comprehensive income balances as of September 30, 2013 and 2012 were as follows (in thousands):

	Minimum		Accumulated Other
	Pension	Unrealized	Comprehensive
	Liability	Gains (Loss)	Income
Balance at December 31, 2011	$ (2,978)	$ 9,424	$ 6,446
Other comprehensive income (loss):
Change in net actuarial loss (see Note 15)	362	-	362
Tax effect on change in net actuarial loss	(127)	-	(127)
Net unrealized holding gains arising during the period	-	4,560	4,560
Tax effect on unrealized gains arising during the period	-	(1,596)	(1,596)
Reclassification adjustment for gains included in net realized gains	-	(2,044)	(2,044)
Tax effect on reclassification adjustment for gains included
in income tax expense	-	715	715
Other comprehensive income , net of tax	235	1,635	1,870
Balance at September 30, 2012	$ (2,743)	$ 11,059	$ 8,316
Balance at December 31, 2012	$ (2,954)	$ 10,853	$ 7,899
Other comprehensive income (loss):
Change in net actuarial loss (see Note 15)	371	-	371
Tax effect on change in net actuarial loss	(130)	-	(130)
Net unrealized holding gains arising during the period	-	16,243	16,243
Tax effect on unrealized gains arising during the period	-	(5,685)	(5,685)
Reclassification adjustment for gains included in net realized gains	-	(9,723)	(9,723)
Tax effect on reclassification adjustment for gains included in income
tax expense	-	3,403	3,403
Other comprehensive income, net of tax	241	4,238	4,479
Balance at September 30, 2013	$ (2,713)	$ 15,091	$ 12,378

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Consolidated Statements of Stockholders' Equity (USD $) In Thousands	Common Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income [Member]	Treasury Stock [Member]	Total
Balance at Jun. 30, 2012	$ 3,757	$ 122,669	$ 92,768	$ 5,888	$ (11,558)
Accretion of redeemable noncontrolling interest		(321)
Equity based compensation		64
Net income attributable to Hallmark Financial Services, Inc.			3,413			3,413
Additional minimum pension liability, net of tax				78
Net unrealized holding gains arising during period, net of tax				2,952
Reclassification adjustment for gains included in net income, net of tax				(602)
Balance at Sep. 30, 2012	3,757	122,412	96,181	8,316	(11,558)	219,108
Balance at Dec. 31, 2011	3,757	122,487	94,440	6,446	(11,558)
Accretion of redeemable noncontrolling interest		(392)
Equity based compensation		317
Net income attributable to Hallmark Financial Services, Inc.			1,741			1,741
Additional minimum pension liability, net of tax				235
Net unrealized holding gains arising during period, net of tax				2,964
Reclassification adjustment for gains included in net income, net of tax				(1,329)
Balance at Sep. 30, 2012	3,757	122,412	96,181	8,316	(11,558)	219,108
Balance at Dec. 31, 2012	3,757	122,475	97,964	7,899	(11,558)	220,537
Equity based compensation		245
Net income attributable to Hallmark Financial Services, Inc.			4,817			4,817
Additional minimum pension liability, net of tax				241
Net unrealized holding gains arising during period, net of tax				10,558
Reclassification adjustment for gains included in net income, net of tax				(6,320)
Balance at Sep. 30, 2013	3,757	122,720	102,781	12,378	(11,558)	230,078
Balance at Jun. 30, 2013	3,757	122,611	96,507	13,746	(11,558)
Equity based compensation		109
Net income attributable to Hallmark Financial Services, Inc.			6,274			6,274
Additional minimum pension liability, net of tax				80
Net unrealized holding gains arising during period, net of tax				3,069
Reclassification adjustment for gains included in net income, net of tax				(4,517)
Balance at Sep. 30, 2013	$ 3,757	$ 122,720	$ 102,781	$ 12,378	$ (11,558)	$ 230,078

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General

9 Months Ended

Sep. 30, 2013

General [Abstract]

General

1. General

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, “we,” “us” or “our”) is an insurance holding company engaged in the sale of property/casualty insurance products to businesses and individuals.  Our business involves marketing, distributing, underwriting and servicing our insurance products, as well as providing other insurance related services. 

We pursue our business activities through subsidiaries whose operations are organized into five business units that are supported by our insurance company subsidiaries.  Our Standard Commercial P&C business unit handles commercial insurance products and services in the standard market. Our Workers Compensation business unit specializes in small and middle market workers compensation business. Our E&S Commercial business unit handles primarily commercial insurance products and services in the excess and surplus lines market. Our Hallmark Select business unit offers (i) general aviation insurance products and services, (ii) low and middle market commercial umbrella and excess liability insurance, on both an admitted and non-admitted basis, focusing primarily on trucking, specialty automobile and non-fleet automobile coverage, and (iii) medical professional liability insurance products and services. Our Hallmark Select business unit is the combination of our operations previously known as our General Aviation business unit, our Excess & Umbrella business unit and the medical professional liability business handled by our E&S Commercial business unit. Our Personal Lines business unit handles personal insurance products and services.  Our insurance company subsidiaries supporting these operating units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”).

These five business units are segregated into three reportable industry segments for financial accounting purposes.  The Standard Commercial Segment includes the Standard Commercial P&C business unit and the Workers Compensation business unit.  The Specialty Commercial Segment includes the E&S Commercial business unit and the Hallmark Select business unit, as well as certain specialty risk programs (“Specialty Programs”) which are managed by Hallmark.  The Personal Segment consists solely of the Personal Lines business unit.

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Fair Value

9 Months Ended

Sep. 30, 2013

Fair Value [Abstract]

Fair Value

4. Fair Value

ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820, among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In addition, ASC 820 precludes the use of block discounts when measuring the fair value of instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities.

We determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820.  In accordance with ASC 820, we utilize the following fair value hierarchy:

· Level 1: quoted prices in active markets for identical assets;

· Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, inputs of identical assets for less active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and

· Level 3: inputs to the valuation methodology that are unobservable for the asset or liability.

This hierarchy requires the use of observable market data when available.

Under ASC 820, we determine fair value based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.  It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy described above.  Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated based upon our pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other factors as appropriate.  These estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability.

Where quoted prices are available on active exchanges for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy.  Level 1 investment securities include common and preferred stock. 

Level 2 investment securities include corporate bonds, collateralized corporate bank loans, municipal bonds, and U.S. Treasury securities for which quoted prices are not available on active exchanges for identical instruments.  We use third party pricing services to determine fair values for each Level 2 investment security in all asset classes.  Since quoted prices in active markets for identical assets are not available, these prices are determined using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other things. We have reviewed the processes used by the pricing services and have determined that they result in fair values consistent with the requirements of  ASC 820 for Level 2 investment securities. In addition, using the prices received for the securities from the third party pricing services, we compare a sample of the prices against additional sources.  We have not adjusted any prices received from the third party pricing services.

In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy.  Level 3 investments are valued based on the best available data in order to approximate fair value.  This data may be internally developed and consider risk premiums that a market participant would require.  Investment securities classified within Level 3 include other less liquid investment securities.

There were no transfers between Level 1 and Level 2 securities during the periods presented.

The following table presents for each of the fair value hierarchy levels, our assets that are measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012 (in thousands):

	As of September 30, 2013
	Quoted Prices in	Other
	Active Markets for	Observable	Unobservable
	Identical Assets	Inputs	Inputs
	(Level 1)	(Level 2)	(Level 3)	Total
U.S. Treasury securities and
obligations of U.S. Government	$              -	$ 34,114	$        -	$ 34,114
Corporate bonds	-	59,393	-	59,393
Collateralized corporate bank loans	-	118,852	700	119,552
Municipal bonds	-	134,906	19,590	154,496
Mortgage-backed	-	29,092	-	29,092
Total debt securities	-	376,357	20,290	396,647
Financial services	7,690	-	-	7,690
All other	38,250	-	-	38,250
Total equity securities	45,940	-	-	45,940
Total debt and equity securities	$ 45,940	$ 376,357	$ 20,290	$ 442,587

	As of December 31, 2012
	Quoted Prices in	Other
	Active Markets for	Observable	Unobservable
	Identical Assets	Inputs	Inputs
	(Level 1)	(Level 2)	(Level 3)	Total
U.S. Treasury securities and
obligations of U.S. Government	$              -	$ 40,061	$          -	$ 40,061
Corporate bonds	-	81,547	-	81,547
Collateralized corporate bank loans	-	105,463	908	106,371
Municipal bonds	-	144,972	18,760	163,732
Mortgage-backed	-	9,724	-	9,724
Total debt securities	-	381,767	19,668	401,435
Financial services	14,887	-	-	14,887
All other	29,038	-	-	29,038
Total equity securities	43,925	-	-	43,925
Total debt and equity securities	$ 43,925	$          381,767	$ 19,668	$ 445,360

Due to significant unobservable inputs into the valuation model for certain municipal bonds and a collateralized corporate bank loan in illiquid markets, we classified these investments as Level 3 in the fair value hierarchy.  We used an income approach in order to derive an estimated fair value of the municipal bonds classified as Level 3, which included inputs such as expected holding period, benchmark swap rate, benchmark discount rate and a discount rate premium for illiquidity.  The fair value of the collateralized corporate bank loan classified as Level 3 is based on discounted cash flows using current yield to maturity of 9.8%, which is based on the relevant spread over LIBOR for this particular loan to discount future cash flows.  Significant changes in the unobservable inputs in the fair value measurement of our municipal bonds and collateralized corporate bank loan could result in a significant change in the fair value measurement.

The following table summarizes the changes in fair value for all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013 and 2012 (in thousands): 

Beginning balance as of January 1, 2013	$ 19,668
Sales	-
Settlements	(302)
Purchases	-
Issuances	-
Total realized/unrealized gains included in net income	-
Net gains included in other comprehensive income	924
Transfers into Level 3	-
Transfers out of Level 3	-
Ending balance as of September 30, 2013	$ 20,290
Beginning balance as of January 1, 2012	$ 20,608
Sales	-
Settlements	(307)
Purchases	-
Issuances	-
Total realized/unrealized gains included in net income	-
Net losses included in other comprehensive income	(530)
Transfers into Level 3	-
Transfers out of Level 3	-
Ending balance as of September 30, 2012	$ 19,771

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Basis of Presentation

9 Months Ended

Sep. 30, 2013

Basis of Presentation [Abstract]

Basis of Presentation

2. Basis of Presentation

Our unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include our accounts and the accounts of our subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting.  These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of September 30, 2013 and 2012 is unaudited.  However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods.  The results of operations for the period ended September 30, 2013 are not necessarily indicative of the operating results to be expected for the full year.

Business Combinations

We account for business combinations using the acquisition method of accounting pursuant to Accounting Standards Codification (“ASC”) 805, “Business Combinations.” The base cash purchase price plus the estimated fair value of any non-cash or contingent consideration given for an acquired business is allocated to the assets acquired (including identified intangible assets) and liabilities assumed based on the estimated fair values of such assets and liabilities. The excess of the fair value of the total consideration given for an acquired business over the aggregate net fair values assigned to the assets acquired and liabilities assumed is recorded as goodwill. Contingent consideration is recognized as a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in the consolidated statements of operations. The valuation of contingent consideration requires assumptions regarding anticipated cash flows, probabilities of cash flows, discount rates and other factors. Significant judgment is employed in determining the propriety of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions, can materially impact the amount of contingent consideration expense we record in any given period. Indirect and general expenses related to business combinations are expensed as incurred.

Income Taxes

We file a consolidated federal income tax return.  Deferred federal income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end.  Deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes in effect for the year in which these temporary differences are expected to be recovered or settled.

Use of Estimates in the Preparation of the Financial Statements

 Our preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting period.  Refer to “Critical Accounting Estimates and Judgments” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

Fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the financial instruments.  Fair value estimates for financial instruments for which no or limited observable market data is available are based on judgments regarding current economic conditions, credit and interest rate risk.  These estimates involve significant uncertainties and judgments and cannot be determined with precision.  As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument.  In addition, changes in the underlying assumptions used in the fair value measurement technique, including discount rate and estimates of future cash flows, could significantly affect these fair value estimates.

Cash and Cash Equivalents:  The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Restricted Cash:  The carrying amount for restricted cash reported in the balance sheet approximates the fair value. 

Revolving Credit Facility Payable:  The carrying value of our bank revolving credit facility of $1.5 million approximates the fair value based on the current interest rate. 

Subordinated Debt Securities:  Our trust preferred securities have a carried value of $56.7 million and a fair value of $51.9 million as of September 30, 2013.  The fair value of our trust preferred securities is based on discounted cash flows using a current yield to maturity of 8.0%, which is based on similar issues to discount future cash flows.  Our trust preferred securities would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

For reinsurance balances,  premiums receivable, federal income tax payable, other assets and other liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments.

Variable Interest Entities

On June 21, 2005, we formed Hallmark Statutory Trust I (“Trust I”), an unconsolidated trust subsidiary, for the sole purpose of issuing $30.0 million in trust preferred securities.  Trust I used the proceeds from the sale of these securities and our initial capital contribution to purchase $30.9 million of subordinated debt securities from Hallmark.  The debt securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I.

On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0 million in trust preferred securities.  Trust II used the proceeds from the sale of these securities and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark.  The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II.

We evaluate on an ongoing basis our investments in Trust I and II (collectively the “Trusts”) and we do not have a variable interest in the Trusts.  Therefore, the Trusts are not included in our consolidated financial statements. 

We are also involved in the normal course of business with variable interest entities (“VIE’s”) primarily as a passive investor in mortgage-backed securities and certain collateralized corporate bank loans issued by third party VIE’s.  The maximum exposure to loss with respect to these investments is the investment carrying values included in the consolidated balance sheets.

Adoption of New Accounting Pronouncements

In January 2013, we adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) related to reporting and disclosure requirements about changes in accumulated other comprehensive income balances and reclassifications out of accumulated other comprehensive income.  The new guidance is effective prospectively for fiscal and interim periods beginning after December 15, 2012.  The adoption of this guidance did not have a material impact on our financial position or results of operations but did require additional disclosures.

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Fair Value (Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Fair Value [Abstract]
Beginning balance	$ 19,668	$ 20,608
Sales
Settlements	(302)	(307)
Purchases
Issuances
Total realized/unrealized gains included in net income
Net gain (losses) included in other comprehensive income	924	(530)
Transfers into Level 3
Transfers out of Level 3
Ending balance	$ 20,290	$ 19,771

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Investments (Tables)

9 Months Ended

Sep. 30, 2013

Investments [Abstract]

Amortized Cost and Estimated Fair Value of Investments in Debt and Equity Securities by Category

The amortized cost and estimated fair value of investments in debt and equity securities by category is as follows (in thousands):

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
As of September 30, 2013	Cost	Gains	Losses	Value
U.S. Treasury securities and
obligations of U.S. Government	$ 34,083	$ 31	$                  -	$ 34,114
Corporate bonds	58,633	1,285	(525)	59,393
Collateralized corporate bank loans	119,626	475	(549)	119,552
Municipal bonds	153,974	2,701	(2,179)	154,496
Mortgage-backed	29,544	339	(791)	29,092
Total debt securities	395,860	4,831	(4,044)	396,647
Financial services	4,705	2,985	-	7,690
All other	19,328	19,644	(722)	38,250
Total equity securities	24,033	22,629	(722)	45,940
Total debt and equity securities	$ 419,893	$ 27,460	$ (4,766)	$ 442,587
As of December 31, 2012
U.S. Treasury securities and
obligations of U.S. Government	$ 40,050	$ 14	$ (3)	$ 40,061
Corporate bonds	79,516	2,794	(763)	81,547
Collateralized corporate bank loans	106,093	1,021	(743)	106,371
Municipal bonds	162,479	4,023	(2,770)	163,732
Mortgage-backed	9,662	97	(35)	9,724
Total debt securities	397,800	7,949	(4,314)	401,435
Financial services	11,008	3,880	(1)	14,887
All other	20,494	9,058	(514)	29,038
Total equity securities	31,502	12,938	(515)	43,925
Total debt and equity securities	$ 429,302	$ 20,887	$ (4,829)	$ 445,360

Summary of Realized Gain (Loss) on Investments

Major categories of net realized gains (losses) on investments are summarized as follows (in thousands):

	Three Months Ended		Nine Months Ended
	September 30		September 30
	2013	2012	2013	2012
U.S. Treasury securities and
obligations of U.S. Government	$             -	$         -	$       -	$      -
Corporate bonds	21	159	846	9
Collateralized corporate bank loans	44	93	316	229
Municipal bonds	(50)	(50)	(11)	(294)
Equity securities-financial services	6,935	8	7,579	78
Equity securities-all other	-	772	993	2,078
Gain on investments	6,950	982	9,723	2,100
Other-than-temporary impairments	-	-	-	(246)
Net realized gains	$ 6,950	$         982	$ 9,723	$  1,854

Summary of Gross Unrealized Losses for Investments that have been Continuously in Unrealized Loss Position

The following schedules summarize the gross unrealized losses showing the length of time that investments have been continuously in an unrealized loss position as of September 30, 2013 and December 31, 2012 (in thousands):

	As of September 30, 2013
	12 months or less		Longer than 12 months		Total
		Unrealized		Unrealized		Unrealized
	Fair Value	Losses	Fair Value	Losses	Fair Value	Losses
U.S. Treasury securities and obligations
of U.S. Government	$                   -	$                -	$                -	$                 -	$                  -	$                  -
Corporate bonds	12,694	(156)	3,048	(369)	15,742	(525)
Collateralized corporate bank loans	48,926	(368)	6,915	(181)	55,841	(549)
Municipal bonds	28,861	(488)	38,953	(1,691)	67,814	(2,179)
Mortgage-backed	14,328	(788)	107	(3)	14,435	(791)
Total debt securities	104,809	(1,800)	49,023	(2,244)	153,832	(4,044)
Financial services	-	-	-	-	-	-
All other	2,348	(722)	-	-	2,348	(722)
Total equity securities	2,348	(722)	-	-	2,348	(722)
Total debt and equity securities	$ 107,157	$ (2,522)	$ 49,023	$ (2,244)	$ 156,180	$ (4,766)
	As of  December 31, 2012
	12 months or less		Longer than 12 months		Total
		Unrealized		Unrealized		Unrealized
	Fair Value	Losses	Fair Value	Losses	Fair Value	Losses
U.S. Treasury securities and obligations
of U.S. Government	$ 23,998	$ (3)	$              -	$             -	$ 23,998	$ (3)
Corporate bonds	10,802	(38)	6,910	(725)	17,712	(763)
Collateralized corporate bank loans	6,273	(97)	14,236	(646)	20,509	(743)
Municipal bonds	30,073	(362)	28,809	(2,408)	58,882	(2,770)
Mortgage-backed	7,367	(32)	84	(3)	7,451	(35)
Total debt securities	78,513	(532)	50,039	(3,782)	128,552	(4,314)
Financial services	92	(1)	-	-	92	(1)
All other	3,271	(514)	-	-	3,271	(514)
Total equity securities	3,363	(515)	-	-	3,363	(515)
Total debt and equity securities	$ 81,876	$ (1,047)	$ 50,039	$ (3,782)	$ 131,915	$ (4,829)

Schedule of Amortized Cost and Estimated Fair Value of Debt Securities by Contractual Maturities

	Amortized	Fair
	Cost	Value
	(in thousands)
Due in one year or less	$ 63,230	$ 63,768
Due after one year through five years	153,969	154,311
Due after five years through ten years	96,692	97,585
Due after ten years	52,424	51,891
Mortgage-backed	29,545	29,092
	$ 395,860	$ 396,647

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Deferred Policy Acquisition Costs (Tables)

9 Months Ended

Sep. 30, 2013

Deferred Policy Acquisition Costs [Abstract]

Deferred Amortized Policy Acquisition Costs

The following table shows total deferred and amortized policy acquisition cost activity by period (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Deferred	$              (34,995)	$        (12,011)	$         (53,243)	$  (45,281)
Amortized	34,715	11,084	51,211	41,427
Net	$                (280)	$           (927)	$          (2,032)	$   (3,854)

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Basis of Presentation (Narrative) (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended		0 Months Ended		9 Months Ended	0 Months Ended
	Sep. 30, 2013	Sep. 30, 2013 Revolving Credit Facility Payable [Member]	Jun. 21, 2005 Hallmark Statutory Trust I [Member]	Aug. 23, 2007 Hallmark Statutory Trust II [Member]	Sep. 30, 2013 Subordinated Debt [Member]	Jun. 21, 2005 Subordinated Debt [Member] Hallmark Statutory Trust I [Member]	Aug. 23, 2007 Subordinated Debt [Member] Hallmark Statutory Trust II [Member]
Variable Interest Entity [Line Items]
Line of credit facility, amount outstanding		$ 1.5
Trust preferred securities, carrying value					56.7
Trust preferred securities, fair value					51.9
Current yield to maturity percentage	9.80%				8.00%
Proceeds from issuance of trust preferred securities			30.0	25.0
Payments to acquire trust preferred investments						$ 30.9	$ 25.8

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Reinsurance (Narrative) (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013
E&S Commercial [Member]
Retention for reinsurance losses	$ 1.0
Proportional reinsurance retention, percentage	10.00%
Concentration of ceded credit risk, percentage	100.00%
Concentration of ceded credit risk remaining, percentage	90.00%
Excess and Umbrella Business Unit [Member]
Proportional reinsurance retention, percentage	20.00%
Concentration of ceded credit risk, percentage	80.00%
Standard Commercial Segment [Member]
Proportional reinsurance cede risk, percentage	100.00%
Professional Liability [Member] | Prior to June 1, 2012 [Member]
Proportional reinsurance cede risk, percentage	40.00%
Proportional reinsurance retention, percentage	60.00%
Hallmark County Mutual [Member]
Proportional reinsurance retention, percentage	100.00%
Catastrophe [Member]
Retention for reinsurance losses	6.0
Catastrophe [Member] | All States [Member]
Retention for reinsurance losses	6.0
Reinsurers reimbursement, percentage	100.00%
Reinsurers reimbursement retention, maximum limit	29.0
Reinsurers reimbursement retention, aggregate limit	58.0
Commercial Property [Member]
Retention for reinsurance losses	1.0
Commercial property risk value	6.0
Reinsurers reimbursement retention for any one disaster occurrence	10.0
Reinsurers reimbursement retention for each disaster occurrence	5.0
Reinsurers reimbursement retention, aggregate limit	30.0
Commercial Liability Risk [Member]
Retention for reinsurance losses	1.0
Reinsurers reimbursement retention for each disaster occurrence	5.0
Workers Compensation Risks [Member]
Retention for reinsurance losses	1.0
Reinsurers reimbursement, percentage	100.00%
Reinsurers reimbursement retention for each disaster occurrence	14.0
Reinsurers reimbursement retention, maximum limit	10.0
Reinsurers reimbursement retention, aggregate limit	28.0
Liability Loss [Member]
Proportional reinsurance cede risk, percentage	80.00%
Personal Property [Member]
Proportional reinsurance cede risk, percentage	60.00%
Minimum [Member] | E&S Commercial [Member]
Retention for reinsurance losses	$ 1.0

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Share-Based Payment Arrangements (Summary of the Status of Stock Options) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Share-Based Payment Arrangements [Abstract]
Stock Options, Outstanding at January 1, 2013	1,404,989
Stock Options, Granted		0
Stock Options, Exercised
Stock Options, Forfeited or expired	(13,214)
Stock Options, Outstanding at September 30, 2013	1,391,775	1,404,989
Stock Options, Exercisable at September 30, 2013	1,189,036
Weighted Average Exercise Price, Outstanding at January 1, 2013	$ 9.63
Weighted Average Exercise Price, Forfeited or expired	$ 7.90
Weighted Average Exercise Price, Outstanding at September 30, 2013	$ 9.65	$ 9.63
Weighted Average Exercise Price, Exercisable at September 30, 2013	$ 10.17
Average Remaining Contractual Term, Outstanding at September 30, 2013	4 years 6 months
Average Remaining Contractual Term, Exercisable at September 30, 2013	4 years 3 months 18 days
Aggregate Intrinsic Value, Outstanding at September 30, 2013	$ 1,327
Aggregate Intrinsic Value, Exercisable at September 30, 2013	$ 870

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Investments (Summary of Gross Unrealized Losses for Investments that have been Continuously in Unrealized Loss Position) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Schedule of Investments [Line Items]
Fair Value 12 months or less	$ 107,157	$ 81,876
Unrealized Losses 12 months or less	(2,522)	(1,047)
Fair Value Longer than 12 months	49,023	50,039
Unrealized Losses Longer than 12 months	(2,244)	(3,782)
Total Fair Value	156,180	131,915
Total Unrealized Losses	(4,766)	(4,829)
Equity Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	2,348	3,363
Unrealized Losses 12 months or less	(722)	(515)
Total Fair Value	2,348	3,363
Total Unrealized Losses	(722)	(515)
Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	104,809	78,513
Unrealized Losses 12 months or less	(1,800)	(532)
Fair Value Longer than 12 months	49,023	50,039
Unrealized Losses Longer than 12 months	(2,244)	(3,782)
Total Fair Value	153,832	128,552
Total Unrealized Losses	(4,044)	(4,314)
Us Treasury Securities and Obligations of U.S. Government [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less		23,998
Unrealized Losses 12 months or less		(3)
Total Fair Value		23,998
Total Unrealized Losses		(3)
Corporate Bonds [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	12,694	10,802
Unrealized Losses 12 months or less	(156)	(38)
Fair Value Longer than 12 months	3,048	6,910
Unrealized Losses Longer than 12 months	(369)	(725)
Total Fair Value	15,742	17,712
Total Unrealized Losses	(525)	(763)
Collateralized Corporate Bank Loans [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	48,926	6,273
Unrealized Losses 12 months or less	(368)	(97)
Fair Value Longer than 12 months	6,915	14,236
Unrealized Losses Longer than 12 months	(181)	(646)
Total Fair Value	55,841	20,509
Total Unrealized Losses	(549)	(743)
Municipal Bonds [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	28,861	30,073
Unrealized Losses 12 months or less	(488)	(362)
Fair Value Longer than 12 months	38,953	28,809
Unrealized Losses Longer than 12 months	(1,691)	(2,408)
Total Fair Value	67,814	58,882
Total Unrealized Losses	(2,179)	(2,770)
Mortgage Backed [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	14,328	7,367
Unrealized Losses 12 months or less	(788)	(32)
Fair Value Longer than 12 months	107	84
Unrealized Losses Longer than 12 months	(3)	(3)
Total Fair Value	14,435	7,451
Total Unrealized Losses	(791)	(35)
Financial Services [Member] | Equity Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less		92
Unrealized Losses 12 months or less		(1)
Total Fair Value		92
Total Unrealized Losses		(1)
All Other [Member] | Equity Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	2,348	3,271
Unrealized Losses 12 months or less	(722)	(514)
Total Fair Value	2,348	3,271
Total Unrealized Losses	$ (722)	$ (514)

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Consolidated Balance Sheets Parenthetical [Abstract]
Debt securities, available-for-sale, cost (in dollars)	$ 395,860	$ 397,800
Equity securities, available for sale, cost (in dollars)	$ 24,033	$ 31,502
Common stock, par value (in dollars per share)	$ 0.18	$ 0.18
Common stock, authorized shares	33,333,333	33,333,333
Common stock, issued shares	20,872,831	20,872,831
Treasury stock, shares	1,609,374	1,609,374

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Reserves for Unpaid Losses and Loss Adjustment Expenses

9 Months Ended

Sep. 30, 2013

Reserves for Unpaid Losses and Loss Adjustment Expenses [Abstract]

Reserve for Losses and Loss Adjustment Expenses

7. Reserves for Unpaid Losses and Loss Adjustment Expenses

Unpaid losses and loss adjustment expenses (“LAE”) represent the estimated ultimate net cost of all reported and unreported losses incurred through each balance sheet date.  The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses.  These reserves are revised periodically and are subject to the effects of trends in loss severity and frequency.  Due to the inherent uncertainty in estimating unpaid losses and LAE, the actual ultimate amounts may differ from the recorded amounts.  The estimates are periodically reviewed and adjusted as experience develops or new information becomes known.  Such adjustments are included in current operations.

We recorded $0.5 million and $8.0 million of unfavorable prior years’ loss development during the three and nine months ended September 30, 2013, respectively.  For the year to date, the $8.0 million unfavorable development was attributable to $5.0 million unfavorable development on claims incurred in the 2012 accident year, $2.4 million unfavorable development on claims incurred in the 2011 accident year and $1.6 million on claims incurred in the 2010 accident year, partially offset by $1.0 million favorable development on claims incurred in the 2009 and prior accident years.  Our E&S Commercial business unit accounted for $11.7 million of the unfavorable development during the nine months ended September 30, 2013 primarily in our commercial auto liability line of business.  Our Personal Lines business unit accounted for $1.5 million of the unfavorable development. These unfavorable developments were partially offset by favorable development of $1.6 million in our Hallmark Select business unit, $2.4 million in our Standard Commercial P&C business unit and $1.2 million in our Workers Compensation business unit.

The unfavorable development for our E&S Commercial business unit of $11.7 million was driven by unfavorable claims development primarily in our commercial auto liability line of business in the 2012, 2011, and 2010 accident years. The unfavorable loss development for our Personal Lines business unit of $1.5 million was primarily attributable to the 2012  accident year.  The favorable development for our Hallmark Select business unit of $1.6 million was driven by favorable claims development in the 2011 and prior accident years related to our aircraft liability lines of business, partially offset by unfavorable claims development in the 2012 accident year related to our aircraft hullcoverage. The favorable loss development for our Standard Commercial P&C business unit of $2.4 million was primarily related to commercial auto liability in the 2010 and prior accident years, partially offset by unfavorable loss development related to commercial property in the 2012 accident year.  The favorable loss development in our Workers Compensation business unit of $1.2 million was related to the 2012 and 2011 accident years.

We recorded $2.2 million and $3.6 million of favorable prior years’ loss development during the three months and nine months ended September 30, 2012, respectively. For the first nine months of 2012, our Hallmark Select business unit experienced $2.6 million of favorable prior years’ loss development related to our liability and aircraft lines of business. Our Standard Commercial P&C business unit experienced $2.0 million of favorable prior years’ loss development primarily related to commercial property and auto liability partially offset by the late development of a general liability claim. Our Workers Compensation business unit experienced $0.8 million of favorable prior year loss reserve development. Our E&S Commercial business unit experienced $1.1 million of favorable prior year loss reserve development primarily related to general liability and commercial auto physical damage. These favorable developments were partially offset by unfavorable prior year loss development of $2.9 million in our Personal Lines business unit for the nine months ended September 30, 2012, of which $2.2 million was the result of unfavorable development in auto liability claims spread throughout various states. The remaining unfavorable prior years’ loss development for our Personal Lines business unit was the result of $0.7 million of unfavorable prior years’ loss development in our low value dwelling/homeowners line of business.

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Consolidated Statements of Comprehensive Income [Abstract]
Net income	$ 6,274	$ 3,671	$ 4,817	$ 2,065
Other comprehensive (loss) income:
Change in net actuarial gain	123	120	371	362
Tax effect on change in net actuarial gain	(43)	(42)	(130)	(127)
Unrealized holding gains arising during the period	4,721	4,541	16,243	4,560
Tax effect on unrealized holding gains arising during the period	(1,652)	(1,589)	(5,685)	(1,596)
Reclassification adjustment for (gains) losses included in net income	(6,950)	(926)	(9,723)	(2,044)
Tax effect on reclassification adjustment for gains included in net income	2,433	324	3,403	715
Other comprehensive (loss) income, net of tax	(1,368)	2,428	4,479	1,870
Comprehensive income	4,906	6,099	9,296	3,935
Less: comprehensive income attributable to non-controlling interest		258		324
Comprehensive income attributable to Hallmark Financial Services, Inc.	$ 4,906	$ 5,841	$ 9,296	$ 3,611

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Subordinated Debt Securities (Narrative) (Details) (USD $) In Millions, unless otherwise specified	0 Months Ended				0 Months Ended
	Jun. 21, 2005 Subordinated Debt Due In 2035 [Member]	Jun. 25, 2005 Subordinated Debt Due In 2035 [Member] Trust I [Member]	Jun. 21, 2005 Subordinated Debt Due In 2035 [Member] Trust I [Member]	Sep. 30, 2013 Subordinated Debt Due In 2035 [Member] Trust I [Member]	Aug. 23, 2007 Subordinated Debt Due In 2037 [Member]	Aug. 23, 2007 Subordinated Debt Due In 2037 [Member] Trust II [Member]	Sep. 30, 2013 Subordinated Debt Due In 2037 [Member] Trust II [Member]
Subordinated Borrowing [Line Items]
Long-term debt, gross	$ 30.9			$ 30.9	$ 25.8		$ 25.8
Proceeds from issuance of trust preferred securities			30.0			25.0
Proceeds from issuance of common stock			$ 0.9			$ 0.8
Subordinated borrowing, interest rate			7.725%			8.28%
Debt instrument, interest rate fixed to floating date	Jun. 15, 2015					Sep. 15, 2017
Debt instrument, maturity date	Jun. 15, 2035				Sep. 15, 2037
Debt instrument, description of variable rate basis		interest will adjust quarterly to the three-month LIBOR rate plus 3.25 percentage				three-month LIBOR rate plus 2.90 percentage
Debt instrument, basis spread on variable rate			3.25%			2.90%

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
ASSETS
Debt securities, available-for-sale, at fair value (cost: $395,860 in 2013 and $397,800 in 2012)	$ 396,647	$ 401,435
Equity securities, available-for-sale, at fair value (cost: $24,033 in 2013 and $31,502 in 2012)	45,940	43,925
Total investments	442,587	445,360
Cash and cash equivalents	151,698	85,145
Restricted cash	8,700	8,707
Ceded unearned premiums	31,731	22,411
Premiums receivable	77,749	66,683
Accounts receivable	3,209	3,110
Receivable for securities	19	3
Reinsurance recoverable	61,193	51,970
Deferred policy acquisition costs	26,943	24,911
Goodwill	44,695	44,695
Intangible assets, net	20,647	23,068
Deferred federal income taxes, net		1,940
Prepaid expenses	1,611	1,480
Other assets	8,935	10,985
Total assets	879,717	790,468
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving credit facility payable	1,473	1,473
Subordinated debt securities	56,702	56,702
Reserves for unpaid losses and loss adjustment expenses	360,248	313,416
Unearned premiums	191,367	162,502
Reinsurance balances payable	11,862	7,330
Pension liability	3,334	3,685
Payable for securities	6,380
Deferred federal income taxes, net	319
Federal income tax payable	1,075	1,518
Accounts payable and other accrued expenses	16,879	23,305
Total liabilities	649,639	569,931
Commitments and contingencies (Note 17)
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333; issued 20,872,831 shares in 2013 and 2012	3,757	3,757
Additional paid-in capital	122,720	122,475
Retained earnings	102,781	97,964
Accumulated other comprehensive income	12,378	7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost	(11,558)	(11,558)
Total stockholders' equity	230,078	220,537
Liabilities and equity, total	$ 879,717	$ 790,468

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Share-Based Payment Arrangements (Schedule of Options, Grants in Period and Grant Date Intrinsic Value) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Cost of share-based payments (non-cash)			$ 245	$ 317
Employee Stock Option [Member]
Intrinsic value of options exercised
Cost of share-based payments (non-cash)	52	64	156	317
Income tax benefit of share-based payments recognized in income	$ 8	$ 7	$ 23	$ 30

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Share-Based Payment Arrangements (Tables)

9 Months Ended

Sep. 30, 2013

Share-Based Payment Arrangements [Abstract]

Summary of the Status of Stock Options

A summary of the status of our stock options as of and changes during the nine months ended September 30, 2013 is presented below:

			Average
		Weighted	Remaining	Aggregate
		Average	Contractual	Intrinsic
	Number of	Exercise	Term	Value
	Shares	Price	(Years)	($000)
Outstanding at January 1, 2013	1,404,989	$      9.63
Granted	-
Exercised	-
Forfeited or expired	(13,214)	$      7.90
Outstanding at September 30, 2013	1,391,775	$      9.65	4.5	$       1,327
Exercisable at September 30, 2013	1,189,036	$    10.17	4.3	$          870

Schedule of Options, Grants in Period and Grant Date Intrinsic Value

The following table details the intrinsic value of options exercised, total cost of share-based payments charged against income before income tax benefit and the amount of related income tax benefit recognized in income for the periods indicated (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Intrinsic value of options exercised	$          -	$            -	$          -	$         -
Cost of share-based payments (non-cash)	$        52	$            64	$        156	$     317
Income tax benefit of share-based
payments recognized in income	$          8	$              7	$          23	$       30

Summary of the Status of Restricted Stock Units

A summary of the status of our restricted stock units as of September 30, 2013 and changes during the nine months then ended is presented below:

	Number of
	Restricted
	Stock Units
Nonvested at January 1, 2013	-
Granted	243,006
Vested	-
Forfeited	(6,155)
Nonvested at September 30, 2013	236,851

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Taxes [Abstract]

Income Taxes

16.   Income Taxes

Our effective income tax rate for the first nine months ended September 30, 2013 and 2012 was 23.8% and-90.0%, respectively, which varied from the statutory tax rate due in large part to significant tax exempt income.      

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Investments (Summary of Realized Gain (Loss) on Investments) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Schedule of Investments [Line Items]
Gain on investments	$ 6,950	$ 982	$ 9,723	$ 2,100
Other-than-temporary impairments				(246)
Net realized gains	6,950	982	9,723	1,854
Corporate Bonds [Member]
Schedule of Investments [Line Items]
Gain on investments	21	159	846	9
Collateralized Corporate Bank Loans [Member]
Schedule of Investments [Line Items]
Gain on investments	44	93	316	229
Municipal Bonds [Member]
Schedule of Investments [Line Items]
Gain on investments	(50)	(50)	(11)	(294)
Financial Services [Member]
Schedule of Investments [Line Items]
Gain on investments	6,935	8	7,579	78
All Other [Member]
Schedule of Investments [Line Items]
Gain on investments		$ 772	$ 993	$ 2,078

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Segment Information (Schedule of Additional Business Segment Information) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Segment Reporting Information [Line Items]
Assets	$ 879,717	$ 790,468
Standard Commercial Segment [Member]
Segment Reporting Information [Line Items]
Assets	144,231	145,162
Specialty Commercial Segment [Member]
Segment Reporting Information [Line Items]
Assets	526,160	432,208
Personal Segment [Member]
Segment Reporting Information [Line Items]
Assets	192,588	200,356
Corporate [Member]
Segment Reporting Information [Line Items]
Assets	$ 16,738	$ 12,742

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Changes in Accumulated Other Comprehensive Income Balances (Schedule of Changes in Accumulated Other Comprehensive Income) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Accumulated Other Comprehensive Income Loss [Line Items]
Beginning Balance			$ 7,899
Other comprehensive (loss) income:
Change in net actuarial loss (see Note 15)	123	120	371	362
Tax effect on change in net actuarial loss	(43)	(42)	(130)	(127)
Net unrealized holding gains arising during the period	4,721	4,541	16,243	4,560
Tax effect on unrealized gains arising during the period	(1,652)	(1,589)	(5,685)	(1,596)
Reclassification adjustment for losses included in net realized gains (losses)	(6,950)	(926)	(9,723)	(2,044)
Tax effect on reclassification adjustment for gains and losses included in income tax expense	2,433	324	3,403	715
Other comprehensive income , net of tax	(1,368)	2,428	4,479	1,870
Ending Balance	12,378		12,378
Minimum Pension Liability [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Beginning Balance			(2,954)	(2,978)
Other comprehensive (loss) income:
Change in net actuarial loss (see Note 15)			371	362
Tax effect on change in net actuarial loss			(130)	(127)
Other comprehensive income , net of tax			241	235
Ending Balance	(2,713)	(2,743)	(2,713)	(2,743)
Accumulated Net Unrealized Investment Gain (Loss) [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Beginning Balance			10,853	9,424
Other comprehensive (loss) income:
Net unrealized holding gains arising during the period			16,243	4,560
Tax effect on unrealized gains arising during the period			(5,685)	(1,596)
Reclassification adjustment for losses included in net realized gains (losses)			(9,723)	(2,044)
Tax effect on reclassification adjustment for gains and losses included in income tax expense			3,403	715
Other comprehensive income , net of tax			4,238	1,635
Ending Balance	15,091	11,059	15,091	11,059
Accumulated Other Comprehensive Income [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Beginning Balance			7,899	6,446
Other comprehensive (loss) income:
Change in net actuarial loss (see Note 15)			371	362
Tax effect on change in net actuarial loss			(130)	(127)
Net unrealized holding gains arising during the period			16,243	4,560
Tax effect on unrealized gains arising during the period			(5,685)	(1,596)
Reclassification adjustment for losses included in net realized gains (losses)			(9,723)	(2,044)
Tax effect on reclassification adjustment for gains and losses included in income tax expense			3,403	715
Other comprehensive income , net of tax			4,479	1,870
Ending Balance	$ 12,378	$ 8,316	$ 12,378	$ 8,316

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Fair Value (Narrative) (Details)	9 Months Ended
	Sep. 30, 2013
Fair Value [Abstract]
Current yield to maturity percentage	9.80%

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Changes in Accumulated Other Comprehensive Income Balances (Tables)

9 Months Ended

Sep. 30, 2013

Changes in Accumulated Other Comprehensive Income Balances [Abstract]

Schedule of Changes in Accumulated Other Comprehensive Income

The changes in accumulated other comprehensive income balances as of September 30, 2013 and 2012 were as follows (in thousands):

	Minimum		Accumulated Other
	Pension	Unrealized	Comprehensive
	Liability	Gains (Loss)	Income
Balance at December 31, 2011	$ (2,978)	$ 9,424	$ 6,446
Other comprehensive income (loss):
Change in net actuarial loss (see Note 15)	362	-	362
Tax effect on change in net actuarial loss	(127)	-	(127)
Net unrealized holding gains arising during the period	-	4,560	4,560
Tax effect on unrealized gains arising during the period	-	(1,596)	(1,596)
Reclassification adjustment for gains included in net realized gains	-	(2,044)	(2,044)
Tax effect on reclassification adjustment for gains included
in income tax expense	-	715	715
Other comprehensive income , net of tax	235	1,635	1,870
Balance at September 30, 2012	$ (2,743)	$ 11,059	$ 8,316
Balance at December 31, 2012	$ (2,954)	$ 10,853	$ 7,899
Other comprehensive income (loss):
Change in net actuarial loss (see Note 15)	371	-	371
Tax effect on change in net actuarial loss	(130)	-	(130)
Net unrealized holding gains arising during the period	-	16,243	16,243
Tax effect on unrealized gains arising during the period	-	(5,685)	(5,685)
Reclassification adjustment for gains included in net realized gains	-	(9,723)	(9,723)
Tax effect on reclassification adjustment for gains included in income
tax expense	-	3,403	3,403
Other comprehensive income, net of tax	241	4,238	4,479
Balance at September 30, 2013	$ (2,713)	$ 15,091	$ 12,378

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General (Narrative) (Details)	9 Months Ended
	Sep. 30, 2013 segment
General [Abstract]
Operating business units of subsidiaries	5
Number of reportable segments	3

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Pledged Investments

9 Months Ended

Sep. 30, 2013

Pledged Investments [Abstract]

Pledged Investments

6. Pledged Investments

We have pledged certain of our securities for the benefit of various state insurance departments and reinsurers. These securities are included with our available-for-sale debt securities because we have the ability to trade these securities. We retain the interest earned on these securities. These securities had a carrying value of $23.2 million and $24.3 million at September 30, 2013 and December 31, 2012, respectively.

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Net Periodic Pension Cost (Schedule of Net Benefit Costs) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Net Periodic Pension Cost [Abstract]
Interest cost	$ 127	$ 141	$ 379	$ 422
Amortization of net loss	123	120	371	362
Expected return on plan assets	(154)	(146)	(462)	(438)
Net periodic pension cost	96	115	288	346
Contributed amount	$ 157	$ 410	$ 268	$ 711

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2013

Segment Information [Abstract]

Schedule of Business Segment Information

The following is business segment information for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Revenues:
Standard Commercial Segment	$ 21,163	$ 17,761	$ 62,160	$ 53,791
Specialty Commercial Segment	60,787	46,373	168,127	129,812
Personal Segment	21,256	21,172	64,621	68,508
Corporate	5,407	314	6,145	1,066
Consolidated	$ 108,613	$ 85,620	$ 301,053	$ 253,177
Pre-tax income (loss) , net of non-controlling interest:
Standard Commercial Segment	$ 1,163	$ (529)	$ 641	$ (2,601)
Specialty Commercial Segment	7,564	8,287	11,828	17,193
Personal Segment	(1,613)	(345)	(3,331)	(5,747)
Corporate	2,358	(2,650)	(2,820)	(8,082)
Consolidated	$ 9,472	$ 4,763	$ 6,318	$ 763

Schedule of Additional Business Segment Information

The following is additional business segment information as of the dates indicated (in thousands):

	September 30,	December 31,
	2013	2012
Assets
Standard Commercial Segment	$                  144,231	$     145,162
Specialty Commercial Segment	526,160	432,208
Personal Segment	192,588	200,356
Corporate	16,738	12,742
	$                  879,717	$     790,468

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Investments (Narrative) (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013 security	Sep. 30, 2012	Sep. 30, 2013 security	Sep. 30, 2012	Dec. 31, 2012 security
Investments [Abstract]
Gross gains on investments	$ 7.1	$ 1.1	$ 9.9	$ 2.6
Gross losses on investments	0.1	0.1	0.2	0.5
Proceeds from sale of investment securities	$ 12.5	$ 3.5	$ 30.2	$ 9.7
Number of debt security positions	75		75		56

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Segment Information

9 Months Ended

Sep. 30, 2013

Segment Information [Abstract]

Segment Information

9. Segment Information

The following is business segment information for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Revenues:
Standard Commercial Segment	$ 21,163	$ 17,761	$ 62,160	$ 53,791
Specialty Commercial Segment	60,787	46,373	168,127	129,812
Personal Segment	21,256	21,172	64,621	68,508
Corporate	5,407	314	6,145	1,066
Consolidated	$ 108,613	$ 85,620	$ 301,053	$ 253,177
Pre-tax income (loss) , net of non-controlling interest:
Standard Commercial Segment	$ 1,163	$ (529)	$ 641	$ (2,601)
Specialty Commercial Segment	7,564	8,287	11,828	17,193
Personal Segment	(1,613)	(345)	(3,331)	(5,747)
Corporate	2,358	(2,650)	(2,820)	(8,082)
Consolidated	$ 9,472	$ 4,763	$ 6,318	$ 763

The following is additional business segment information as of the dates indicated (in thousands):

	September 30,	December 31,
	2013	2012
Assets
Standard Commercial Segment	$                  144,231	$     145,162
Specialty Commercial Segment	526,160	432,208
Personal Segment	192,588	200,356
Corporate	16,738	12,742
	$                  879,717	$     790,468

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Investments

9 Months Ended

Sep. 30, 2013

Investments [Abstract]

Investments

5. Investments

The amortized cost and estimated fair value of investments in debt and equity securities by category is as follows (in thousands):

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
As of September 30, 2013	Cost	Gains	Losses	Value
U.S. Treasury securities and
obligations of U.S. Government	$ 34,083	$ 31	$                  -	$ 34,114
Corporate bonds	58,633	1,285	(525)	59,393
Collateralized corporate bank loans	119,626	475	(549)	119,552
Municipal bonds	153,974	2,701	(2,179)	154,496
Mortgage-backed	29,544	339	(791)	29,092
Total debt securities	395,860	4,831	(4,044)	396,647
Financial services	4,705	2,985	-	7,690
All other	19,328	19,644	(722)	38,250
Total equity securities	24,033	22,629	(722)	45,940
Total debt and equity securities	$ 419,893	$ 27,460	$ (4,766)	$ 442,587
As of December 31, 2012
U.S. Treasury securities and
obligations of U.S. Government	$ 40,050	$ 14	$ (3)	$ 40,061
Corporate bonds	79,516	2,794	(763)	81,547
Collateralized corporate bank loans	106,093	1,021	(743)	106,371
Municipal bonds	162,479	4,023	(2,770)	163,732
Mortgage-backed	9,662	97	(35)	9,724
Total debt securities	397,800	7,949	(4,314)	401,435
Financial services	11,008	3,880	(1)	14,887
All other	20,494	9,058	(514)	29,038
Total equity securities	31,502	12,938	(515)	43,925
Total debt and equity securities	$ 429,302	$ 20,887	$ (4,829)	$ 445,360

Major categories of net realized gains (losses) on investments are summarized as follows (in thousands):

	Three Months Ended		Nine Months Ended
	September 30		September 30
	2013	2012	2013	2012
U.S. Treasury securities and
obligations of U.S. Government	$             -	$         -	$       -	$      -
Corporate bonds	21	159	846	9
Collateralized corporate bank loans	44	93	316	229
Municipal bonds	(50)	(50)	(11)	(294)
Equity securities-financial services	6,935	8	7,579	78
Equity securities-all other	-	772	993	2,078
Gain on investments	6,950	982	9,723	2,100
Other-than-temporary impairments	-	-	-	(246)
Net realized gains	$ 6,950	$         982	$ 9,723	$  1,854

We realized gross gains on investments of $7.1 million and $1.1 million during the three months ended September 30, 2013 and 2012, respectively and $9.9million and $2.6 million for the nine months ended September 30, 2013 and 2012, respectively. We realized gross losses on investments of $0.1 million and $0.1 million for the three months ended September 30, 2013 and 2012.  We realized gross losses on investments of $0.2 million and $0.5 million for the nine months ended September 30, 2013 and 2012. We recorded proceeds from the sale of investment securities of $12.5 million and $3.5 million during the three months ended September 30, 2013 and 2012, respectively, and $30.2 million and $9.7 million for the nine months ended September 30, 2013 and 2012, respectively. Realized investment gains and losses are recognized in operations on the specific identification method.

The following schedules summarize the gross unrealized losses showing the length of time that investments have been continuously in an unrealized loss position as of September 30, 2013 and December 31, 2012 (in thousands):

	As of September 30, 2013
	12 months or less		Longer than 12 months		Total
		Unrealized		Unrealized		Unrealized
	Fair Value	Losses	Fair Value	Losses	Fair Value	Losses
U.S. Treasury securities and obligations
of U.S. Government	$                   -	$                -	$                -	$                 -	$                  -	$                  -
Corporate bonds	12,694	(156)	3,048	(369)	15,742	(525)
Collateralized corporate bank loans	48,926	(368)	6,915	(181)	55,841	(549)
Municipal bonds	28,861	(488)	38,953	(1,691)	67,814	(2,179)
Mortgage-backed	14,328	(788)	107	(3)	14,435	(791)
Total debt securities	104,809	(1,800)	49,023	(2,244)	153,832	(4,044)
Financial services	-	-	-	-	-	-
All other	2,348	(722)	-	-	2,348	(722)
Total equity securities	2,348	(722)	-	-	2,348	(722)
Total debt and equity securities	$ 107,157	$ (2,522)	$ 49,023	$ (2,244)	$ 156,180	$ (4,766)
	As of  December 31, 2012
	12 months or less		Longer than 12 months		Total
		Unrealized		Unrealized		Unrealized
	Fair Value	Losses	Fair Value	Losses	Fair Value	Losses
U.S. Treasury securities and obligations
of U.S. Government	$ 23,998	$ (3)	$              -	$             -	$ 23,998	$ (3)
Corporate bonds	10,802	(38)	6,910	(725)	17,712	(763)
Collateralized corporate bank loans	6,273	(97)	14,236	(646)	20,509	(743)
Municipal bonds	30,073	(362)	28,809	(2,408)	58,882	(2,770)
Mortgage-backed	7,367	(32)	84	(3)	7,451	(35)
Total debt securities	78,513	(532)	50,039	(3,782)	128,552	(4,314)
Financial services	92	(1)	-	-	92	(1)
All other	3,271	(514)	-	-	3,271	(514)
Total equity securities	3,363	(515)	-	-	3,363	(515)
Total debt and equity securities	$ 81,876	$ (1,047)	$ 50,039	$ (3,782)	$ 131,915	$ (4,829)

At September 30, 2013, the gross unrealized losses more than twelve months old were attributable to 75 debt security positions.  At December 31, 2012, the gross unrealized losses more than twelve months old were attributable to 56 debt security positions.  We consider these losses as a temporary decline in value as they are predominately on bonds that we do not intend to sell and do not believe we will be required to sell prior to recovery of our amortized cost basis.  We see no other indications that the decline in values of these securities is other-than-temporary.

Based on evidence gathered through our normal credit evaluation process, we presently expect that all debt securities held in our investment portfolio will be paid in accordance with their contractual terms.  Nonetheless, it is at least reasonably possible that the performance of certain issuers of these debt securities will be worse than currently expected resulting in additional future write-downs within our portfolio of debt securities.

Also, as a result of the challenging market conditions, we expect the volatility in the valuation of our equity securities to continue in the foreseeable future. This volatility may lead to additional impairments on our equity securities portfolio or changes regarding retention strategies for certain equity securities.  

We complete a detailed analysis each quarter to assess whether any decline in the fair value of any investment below cost is deemed other-than-temporary. All securities with an unrealized loss are reviewed.  We recognize an impairment loss when an investment's value declines below cost, adjusted for accretion, amortization and previous other-than-temporary impairments and it is determined that the decline is other-than-temporary.

Debt Investments:   We assess whether we intend to sell, or it is more likely than not that we will be required to sell, a fixed maturity investment before recovery of its amortized cost basis less any current period credit losses.  For fixed maturity investments that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors.  The credit loss component is recognized in earnings and is the difference between the investment’s amortized cost basis and the present value of its expected future cash flows.  The remaining difference between the investment’s fair value and the present value of future expected cash flows is recognized in other comprehensive income.

Equity Investments:  Some of the factors considered in evaluating whether a decline in fair value for an equity investment is other-than-temporary include: (1) our ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value; (2) the recoverability of cost; (3) the length of time and extent to which the fair value has been less than cost; and (4) the financial condition and near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices. When it is determined that an equity investment is other-than-temporarily impaired, the security is written down to fair value, and the amount of the impairment is included in earnings as a realized investment loss. The fair value then becomes the new cost basis of the investment, and any subsequent recoveries in fair value are recognized at disposition. We recognize a realized loss when impairment is deemed to be other-than-temporary even if a decision to sell an equity investment has not been made. When we decide to sell a temporarily impaired available-for-sale equity investment and we do not expect the fair value of the equity investment to fully recover prior to the expected time of sale, the investment is deemed to be other-than-temporarily impaired in the period in which the decision to sell is made.

The amortized cost and estimated fair value of debt securities at September 30, 2013 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.

	Amortized	Fair
	Cost	Value
	(in thousands)
Due in one year or less	$ 63,230	$ 63,768
Due after one year through five years	153,969	154,311
Due after five years through ten years	96,692	97,585
Due after ten years	52,424	51,891
Mortgage-backed	29,545	29,092
	$ 395,860	$ 396,647

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net income	$ 4,817	$ 2,065
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization expense	3,691	3,603
Deferred federal income taxes	(268)	(2,241)
Net realized gains	(9,723)	(1,854)
Share-based payments expense	245	317
Change in ceded unearned premiums	(9,320)	(2,524)
Change in premiums receivable	(11,066)	(15,669)
Change in accounts receivable	(99)	586
Change in deferred policy acquisition costs	(2,032)	(3,854)
Change in unpaid losses and loss adjustment expenses	46,832	18,662
Change in unearned premiums	28,865	21,690
Change in reinsurance recoverable	(9,223)	(7,375)
Change in reinsurance balances payable	4,532	2,837
Change in current federal income tax (payable) recoverable	(443)	6,915
Change in all other liabilities	(6,777)	(1,180)
Change in all other assets	13,489	6,209
Net cash provided by operating activities	53,520	28,187
Cash flows from investing activities:
Purchases of property and equipment	(920)	(366)
Net transfers from restricted cash	7	1,126
Purchases of investment securities	(139,791)	(103,434)
Maturities, sales and redemptions of investment securities	153,737	110,772
Net cash provided by investing activities	13,033	8,098
Cash flows from financing activities:
Activity under revolving credit facility, net		(2,577)
Payment of contingent consideration		(350)
Distribution to non-controlling interest		(147)
Net cash used in financing activities		(3,074)
Increase in cash and cash equivalents	66,553	33,211
Cash and cash equivalents at beginning of period	85,145	74,471
Cash and cash equivalents at end of period	151,698	107,682
Supplemental cash flow information:
Interest paid	3,439	3,464
Income taxes paid (recovered)	2,212	(5,951)
Supplemental schedule of non-cash investing activities:
Change in receivable for securities related to investment disposals that settled after the balance sheet date	16	(1,566)
Change in payable for securities related to investment purchases that settled after the balance sheet date	$ 6,380	$ 6,546

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Share-Based Payment Arrangements (Summary of the Status of Restricted Stock Units) (Details) (Long Term Incentive Plan 2005 [Member], Restricted Stock Units (RSUs) [Member])	0 Months Ended			9 Months Ended
	May 30, 2013	Apr. 10, 2013	Jul. 27, 2012	Sep. 30, 2013
Long Term Incentive Plan 2005 [Member] | Restricted Stock Units (RSUs) [Member]
Granted		122,823	129,463	243,006
Forfeited	(9,280)			(6,155)
Nonvested at September 30, 2013				236,851

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Pledged Investments (Narrative) (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Pledged Investments [Abstract]
Securities Available-for-sale Pledged, Carrying Value	$ 23.2	$ 24.3

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Earnings per Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings per Share [Abstract]

Schedule of Weighted Average Number of Shares Outstanding

The following table sets forth basic and diluted weighted average shares outstanding for the periods indicated (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Weighted average shares - basic	19,263	19,263	19,263	19,263
Effect of dilutive securities	107	14	97	4
Weighted average shares - assuming dilution	19,370	19,277	19,360	19,267

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Deferred Policy Acquisition Costs (Deferred Amortized Policy Acquisition Costs) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Document and Entity Information [Abstract]
Deferred	$ (34,995)	$ (12,011)	$ (53,243)	$ (45,281)
Amortized	34,715	11,084	51,211	41,427
Net	$ (280)	$ (927)	$ (2,032)	$ (3,854)

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Subordinated Debt Securities

9 Months Ended

Sep. 30, 2013

Subordinated Debt Securities [Abstract]

Subordinated Debt Securities

12.  Subordinated Debt Securities

On June 21, 2005, we entered into a trust preferred securities transaction pursuant to which we issued $30.9 million aggregate principal amount of subordinated debt securities due in 2035.  To effect the transaction, we formed Trust I as a Delaware statutory trust.  Trust I issued $30.0 million of preferred securities to investors and $0.9 million of common securities to us.  Trust I used the proceeds from these issuances to purchase the subordinated debt securities.  Our Trust I subordinated debt securities bear an initial interest rate of 7.725% until June 15, 2015, at which time interest will adjust quarterly to the three-month LIBOR rate plus 3.25 percentage points.  Trust I pays dividends on its preferred securities at the same rate.  Under the terms of our Trust I subordinated debt securities, we pay interest only each quarter and the principal of the note at maturity.  The subordinated debt securities are uncollaterized and do not require maintenance of minimum financial covenants. As of September 30, 2013, the balance of our Trust I subordinated debt was $30.9 million.

On August 23, 2007, we entered into a trust preferred securities transaction pursuant to which we issued $25.8 million aggregate principal amount of subordinated debt securities due in 2037.  To effect the transaction, we formed Trust II as a Delaware statutory trust.  Trust II issued $25.0 million of preferred securities to investors and $0.8 million of common securities to us.  Trust II used the proceeds from these issuances to purchase the subordinated debt securities.  Our Trust II subordinated debt securities bear an initial interest rate of 8.28% until September 15, 2017, at which time interest will adjust quarterly to the three-month LIBOR rate plus 2.90 percentage points.  Trust II pays dividends on its preferred securities at the same rate.  Under the terms of our Trust II subordinated debt securities, we pay interest only each quarter and the principal of the note at maturity.  The subordinated debt securities are uncollaterized and do not require maintenance of minimum financial covenants. As of September 30, 2013, the balance of our Trust II subordinated debt was $25.8 million.

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Share-Based Payment Arrangements

9 Months Ended

Sep. 30, 2013

Share-Based Payment Arrangements [Abstract]

Share-Based Payment Arrangements

8. Share-Based Payment Arrangements

Our 2005 Long Term Incentive Plan (“2005 LTIP”) is a stock compensation plan for key employees and non-employee directors that was initially approved by the shareholders on May 26, 2005.  There are 2,000,000 shares authorized for issuance under the 2005 LTIP.  As of September 30, 2013, there were outstanding incentive stock options to purchase 1,087,618 shares of our common stock, non-qualified stock options to purchase 304,157 shares of our common stock and restricted stock units representing the right to receive up to 355,277 shares of our common stock. There are 237,115 shares reserved for future issuance under the 2005 LTIP.  The exercise price of all such outstanding stock options is equal to the fair market value of our common stock on the date of grant.

Stock Options:

Incentive stock options granted under the 2005 LTIP prior to 2009 vest 10%,  20%,  30% and 40% on the first, second, third and fourth anniversary dates of the grant, respectively, and terminate five to ten years from the date of grant.  Incentive stock options granted in 2009 and one grant of 5,000 incentive stock options in 2011 vest in equal annual increments on each of the first seven anniversary dates and terminate ten years from the date of grant.  One grant of 25,000incentive stock options in 2010 and one grant of 10,000incentive stock options in 2011 vest in equal annual increments on each of the first three anniversary dates and terminateten years from the date of grant.  Non-qualified stock options granted under the 2005 LTIP generally vest 100%six months after the date of grant and terminate ten years from the date of grant.  One grant of 200,000 non-qualified stock options in 2009 vests in equal annual increments on each of the first seven anniversary dates and terminates ten years from the date of grant. 

A summary of the status of our stock options as of and changes during the nine months ended September 30, 2013 is presented below:

			Average
		Weighted	Remaining	Aggregate
		Average	Contractual	Intrinsic
	Number of	Exercise	Term	Value
	Shares	Price	(Years)	($000)
Outstanding at January 1, 2013	1,404,989	$      9.63
Granted	-
Exercised	-
Forfeited or expired	(13,214)	$      7.90
Outstanding at September 30, 2013	1,391,775	$      9.65	4.5	$       1,327
Exercisable at September 30, 2013	1,189,036	$    10.17	4.3	$          870

The following table details the intrinsic value of options exercised, total cost of share-based payments charged against income before income tax benefit and the amount of related income tax benefit recognized in income for the periods indicated (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Intrinsic value of options exercised	$          -	$            -	$          -	$         -
Cost of share-based payments (non-cash)	$        52	$            64	$        156	$     317
Income tax benefit of share-based
payments recognized in income	$          8	$              7	$          23	$       30

As of September 30, 2013, there was $0.5million of total unrecognized compensation cost related to non-vested stock options granted under our plans, of which $52 thousand is expected to be recognized for the remainder of 2013 and $0.2million is expected to be recognized each year in 2014 and 2015,  $54 thousand is expected to be recognized in 2016 and $3 thousand is expected to be recognized in 2017.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model.  Expected volatilities are based on the historical volatility of Hallmark’s and similar companies’ common stock for a period equal to the expected term.  The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options’ expected lives on the dates of grant.  Expected term is determined based on the simplified method as we do not have sufficient historical exercise data to provide a basis for estimating the expected term.  There have been no options granted during 2012 or 2013. 

Restricted Stock Units:

The 2005 LTIP was amended by the shareholders on May 30, 2013 to authorize the grant of restricted stock units, in addition to the other types of awards available thereunder.  Restricted stock units represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions.  On July 27, 2012 and April 10, 2013, an aggregate of 129,463 and 122,823 restricted stock units, respectively, were conditionally granted to certain employees of the Company subject to shareholder approval of the amendments to the 2005 LTIP at the May 30, 2013 shareholder meeting. One conditional grant of 9,280 restricted stock units was forfeited prior to approval at the shareholder meeting. 

The performance criteria for all restricted stock units require that the Company achieve certain compound average annual growth rates in book value per share over the vesting period in order to receive shares of common stock in amounts ranging from 50% to 150% of the number of restricted stock units granted.  In addition, certain restricted stock units contain an additional performance criteria related to the attainment of an average combined ratio percentage over the vesting period.   If and to the extent specified performance criteria have been achieved, the restricted stock units granted on July 27, 2012 will vest on March 31, 2015, and the restricted stock units granted on April 10, 2013 will vest on March 31, 2016.

Compensation cost is measured as an amount equal to the fair value of the restricted stock units and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the Company’s best estimate of the ultimate achievement level.  The grant date fair value of the restricted stock units is $9.20 per unit.  The Company incurred $58 thousand and $90 thousand of compensation expense related to the restricted stock units during the three and nine months ended September 30, 2013, respectively.

A summary of the status of our restricted stock units as of September 30, 2013 and changes during the nine months then ended is presented below:

	Number of
	Restricted
	Stock Units
Nonvested at January 1, 2013	-
Granted	243,006
Vested	-
Forfeited	(6,155)
Nonvested at September 30, 2013	236,851

As of September 30, 2013, there was $0.6million of total unrecognized compensation cost related to non-vested restricted stock units granted under our 2005 LTIP, of which $67 thousand is expected to be recognized for the remainder of 2013, $0.3million is expected to be recognized in 2014, $0.2million is expected to be recognized in 2015 and $53thousand is expected to be recognized in 2016.

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Net Periodic Pension Cost

9 Months Ended

Sep. 30, 2013

Net Periodic Pension Cost [Abstract]

Net Periodic Pension Cost

15. Net Periodic Pension Cost

The following table details the net periodic pension cost incurred by period (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Interest cost	$ 127	$ 141	$ 379	$ 422
Amortization of net loss	123	120	371	362
Expected return on plan assets	(154)	(146)	(462)	(438)
Net periodic pension cost	$ 96	$ 115	$ 288	$ 346
Contributed amount	$ 157	$ 410	$ 268	$ 711

Refer to Note 14 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 for more discussion of our retirement plans.

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Deferred Policy Acquisition Costs

9 Months Ended

Sep. 30, 2013

Deferred Policy Acquisition Costs [Abstract]

Deferred Policy Acquisition Costs

13. Deferred Policy Acquisition Costs

The following table shows total deferred and amortized policy acquisition cost activity by period (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Deferred	$              (34,995)	$        (12,011)	$         (53,243)	$  (45,281)
Amortized	34,715	11,084	51,211	41,427
Net	$                (280)	$           (927)	$          (2,032)	$   (3,854)

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 07, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	HALLMARK FINANCIAL SERVICES INC
Entity Central Index Key	0000819913
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Trading Symbol	hall
Entity Common Stock, Shares Outstanding		19,263,457
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2013
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2013

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Earnings per Share

9 Months Ended

Sep. 30, 2013

Earnings per Share [Abstract]

Earnings per Share

14. Earnings per Share

The following table sets forth basic and diluted weighted average shares outstanding for the periods indicated (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Weighted average shares - basic	19,263	19,263	19,263	19,263
Effect of dilutive securities	107	14	97	4
Weighted average shares - assuming dilution	19,370	19,277	19,360	19,267

For the three months and nine months ended September 30, 2013, 779,999 shares of common stock potentially issuable upon the exercise of employee stock options were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive.  For the three months and nine months ended September 30, 2012, 809,999 shares of common stock potentially issuable upon the exercise of employee stock options were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive. 

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Earnings per Share (Schedule of Weighted Average Number of Shares Outstanding) (Details) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Earnings per Share [Abstract]
Weighted average shares - basic	19,263	19,263	19,263	19,263
Effect of dilutive securities	107	14	97	4
Weighted average shares - assuming dilution	19,370	19,277	19,360	19,267

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Earnings per Share (Narrative) (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Earnings per Share [Abstract]
Antidilutive securities excluded from computation of earnings per share, amount	779,999	809,999	779,999	809,999