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, 2014

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 – 19,084,308 shares outstanding as of November 7, 2014.

PART I

FINANCIAL INFORMATION

Item 1.  Financial Statements 

INDEX TO FINANCIAL STATEMENTS
	Page Number
Consolidated Balance Sheets at September 30, 2014 (unaudited) and December 31, 2013	3
Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 30, 2014 and September 30, 2013	4
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months and nine months ended September 30, 2014 and September 30, 2013	5
Consolidated Statements of Stockholders’ Equity (unaudited) for the three months and nine months ended September 30, 2014 and September 30, 2013	6
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and September 30, 2013	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
ASSETS	2014			2013
	(unaudited)
Investments:
Debt securities, available-for-sale, at fair value (cost: $411,000 in 2014 and $408,627 in 2013)	$	411,262		$	410,095
Equity securities, available-for-sale, at fair value (cost: $24,967 in 2014 and $24,902 in 2013)		54,678			51,230
Total investments		465,940			461,325
Cash and cash equivalents		160,027			141,666
Restricted cash		16,882			12,190
Ceded unearned premiums		61,989			44,988
Premiums receivable		82,472			71,157
Accounts receivable		2,754			2,382
Receivable for securities		2,825			1,320
Reinsurance recoverable		105,437			76,818
Deferred policy acquisition costs		20,665			22,586
Goodwill		44,695			44,695
Intangible assets, net		18,044			19,953
Federal income tax recoverable		688			-
Prepaid expenses		2,031			1,531
Other assets		7,730			8,412
Total assets	$	992,179		$	909,023
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Revolving credit facility payable		-			1,473
Subordinated debt securities		56,702			56,702
Reserves for unpaid losses and loss adjustment expenses		414,752			382,640
Unearned premiums		205,184			185,303
Reinsurance balances payable		32,647			20,598
Pension liability		776			1,433
Payable for securities		10,086			206
Federal income tax payable		-			719
Deferred federal income taxes, net		3,548			2,825
Accounts payable and other accrued expenses		20,604			19,006
Total liabilities	$	744,299		$	670,905
Commitments and Contingencies (Note 17)
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333; issued 20,872,831
shares in 2014 and 2013		3,757			3,757
Additional paid-in capital		122,913			122,827
Retained earnings		115,871			106,209
Accumulated other comprehensive income		18,276			16,883
Treasury stock (1,748,840 shares in 2014 and 1,609,374 in 2013), at cost		(12,937	)		(11,558	)
Total stockholders' equity		247,880			238,118
	$	992,179		$	909,023

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,
	2014			2013			2014			2013
Gross premiums written	$	122,723		$	123,664		$	363,245		$	351,278
Ceded premiums written		(38,698	)		(20,775	)		(122,596	)		(54,948	)
Net premiums written		84,025			102,889			240,649			296,330
Change in unearned premiums		(6,878	)		(5,437	)		(2,879	)		(19,546	)
Net premiums earned		77,147			97,452			237,770			276,784
Investment income, net of expenses		2,912			2,965			9,139			9,871
Net realized (losses) gains		(23	)		6,950			(122	)		9,723
Finance charges		1,300			1,484			4,067			4,396
Commission and fees		71			(251	)		(1,528	)		169
Other income		10			13			36			110
Total revenues		81,417			108,613			249,362			301,053
Losses and loss adjustment expenses		50,509			68,158			155,781			204,955
Other operating expenses		24,409			29,139			75,055			83,911
Interest expense		1,140			1,150			3,435			3,449
Amortization of intangible assets		631			694			1,909			2,420
Total expenses		76,689			99,141			236,180			294,735
Income before tax		4,728			9,472			13,182			6,318
Income tax expense		1,265			3,198			3,520			1,501
Net income		3,463			6,274			9,662			4,817
Net income per share:
Basic	$	0.18		$	0.33		$	0.50		$	0.25
Diluted	$	0.18		$	0.32		$	0.50		$	0.25

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,
	2014			2013			2014			2013
Net income	$	3,463		$	6,274		$	9,662		$	4,817
Other comprehensive income (loss):
Change in net actuarial gain		40			123			122			371
Tax effect on change in net actuarial gain		(14	)		(43	)		(43	)		(130	)
Unrealized holding (losses) gains arising during the period		(221	)		4,721			1,900			16,243
Tax effect on unrealized holding (losses) gains arising during the period		77			(1,652	)		(665	)		(5,685	)
Reclassification adjustment for losses (gains) included in net income		23			(6,950	)		122			(9,723	)
Tax effect on reclassification adjustment for (losses) gains included in net income		(8	)		2,433			(43	)		3,403
Other comprehensive (loss) income, net of tax		(103	)		(1,368	)		1,393			4,479
Comprehensive income	$	3,360		$	4,906		$	11,055		$	9,296

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,
	2014			2013			2014			2013
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		123,048			122,611			122,827			122,475
Equity based compensation		(135	)		109			87			245
Stock options exercised		-			-			(1	)		-
Balance, end of period		122,913			122,720			122,913			122,720
Retained Earnings
Balance, beginning of period		112,408			96,507			106,209			97,964
Net income		3,463			6,274			9,662			4,817
Balance, end of period		115,871			102,781			115,871			102,781
Accumulated Other Comprehensive Income
Balance, beginning of period		18,379			13,746			16,883			7,899
Additional minimum pension liability, net of tax		26			80			79			241
Net unrealized holding (losses) gains arising during period, net of tax		(144	)		3,069			1,235			10,558
Reclassification adjustment for losses (gains) included in net income, net of tax		15			(4,517	)		79			(6,320	)
Balance, end of period		18,276			12,378			18,276			12,378
Treasury Stock
Balance, beginning of period		(12,278	)		(11,558	)		(11,558	)		(11,558	)
Acquisition of treasury stock		(659	)		-			(1,395	)		-
Stock options exercised		-			-			16			-
Balance, end of period		(12,937	)		(11,558	)		(12,937	)		(11,558	)
Total Stockholders' Equity	$	247,880		$	230,078		$	247,880		$	230,078

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
	2014			2013
Cash flows from operating activities:
Net income	$	9,662		$	4,817
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization expense		2,822			3,691
Deferred federal income taxes		(182	)		(268	)
Net realized losses (gains)		122			(9,723	)
Share-based payments expense		87			245
Change in ceded unearned premiums		(17,001	)		(9,320	)
Change in premiums receivable		(11,315	)		(11,066	)
Change in accounts receivable		(372	)		(99	)
Change in deferred policy acquisition costs		1,921			(2,032	)
Change in unpaid losses and loss adjustment expenses		32,112			46,832
Change in unearned premiums		19,881			28,865
Change in reinsurance recoverable		(28,619	)		(9,223	)
Change in reinsurance balances payable		12,049			4,532
Change in current federal income tax recoverable/payable		(1,407	)		(443	)
Change in all other liabilities		941			(6,777	)
Change in all other assets		1,009			13,489
Net cash provided by operating activities		21,710			53,520
Cash flows from investing activities:
Purchases of property and equipment		(809	)		(920	)
Net transfers (into) from restricted cash		(4,692	)		7
Purchases of investment securities		(108,753	)		(139,791	)
Maturities, sales and redemptions of investment securities		113,758			153,737
Net cash (used in) provided by investing activities		(496	)		13,033
Cash flows from financing activities:
Activity under revolving credit facility, net		(1,473	)		-
Proceeds from exercise of employee stock options		15			-
Purchase of treasury shares		(1,395	)		-
Net cash used in financing activities		(2,853	)		-
Increase in cash and cash equivalents		18,361			66,553
Cash and cash equivalents at beginning of period		141,666			85,145
Cash and cash equivalents at end of period	$	160,027		$	151,698
Supplemental cash flow information:
Interest paid	$	3,435		$	3,439
Income taxes paid	$	5,109		$	2,212
Supplemental schedule of non-cash investing activities:
Change in receivable for securities related to investment disposals that settled
after the balance sheet date	$	1,505		$	16
Change in payable for securities related to investment purchases that settled
after the balance sheet date	$	(9,880	)	$	6,380

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 primarily 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, (iii) medical professional liability insurance products and services, and (iv) satellite launch insurance products. Our Personal Lines business unit handles personal insurance products and services. Our insurance company subsidiaries supporting these business units are American Hallmark Insurance Company of Texas, Hallmark Insurance Company, Hallmark Specialty Insurance Company, Hallmark County Mutual Insurance Company, Hallmark National Insurance Company and Texas Builders Insurance Company.

These five business units are segregated into three reportable industry segments for financial accounting purposes. The Standard Commercial Segment includes our Standard Commercial P&C business unit and our Workers Compensation business unit. The Specialty Commercial Segment includes our E&S Commercial business unit and our Hallmark Select business unit, as well as certain specialty risk programs which are managed by Hallmark. The Personal Segment presently consists solely of our 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, 2013 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of September 30, 2014 and 2013 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, 2014 are not necessarily indicative of the operating results to be expected for the full year.

8

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, 2013 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.

9

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 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 $49.4 million as of September 30, 2014. 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/recoverable, 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 Trust II (collectively the “Trusts”) and have determined that 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.

New Accounting Pronouncements

In May 2014, the FASB issued guidance which revises the criteria for revenue recognition. Insurance contracts are excluded from the scope of the new guidance. Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. Incremental costs of obtaining a contract may be capitalized to the extent the entity expects to recover those costs. The guidance is effective for reporting periods beginning after December 15, 2016 and is to be applied retrospectively. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations and financial position.

10

3. Business Combinations

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.

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.

11

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, 2014 and December 31, 2013 (in thousands): 

	As of September 30, 2014
	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	$	-	$	75,358	$	-	$	75,358
Corporate bonds		-		30,752		-		30,752
Collateralized corporate bank loans		-		111,897		303		112,200
Municipal bonds		-		127,748		14,240		141,988
Mortgage-backed		-		50,964		-		50,964
Total debt securities		-		396,719		14,543		411,262
Total equity securities		54,678		-		-		54,678
Total debt and equity securities	$	54,678	$	396,719	$	14,543	$	465,940

	As of December 31, 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	$	-	$	78,753	$	-	$	78,753
Corporate bonds		-		43,875		-		43,875
Collateralized corporate bank loans		-		101,585		593		102,178
Municipal bonds		-		140,628		16,924		157,552
Mortgage-backed		-		27,737		-		27,737
Total debt securities		-		392,578		17,517		410,095
Total equity securities		51,230		-		-		51,230
Total debt and equity securities	$	51,230	$	392,578	$	17,517	$	461,325

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 9.1%, 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.

12

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, 2014 and 2013 (in thousands):

Beginning balance as of January 1, 2014	$	17,517
Sales		-
Settlements		(3,434	)
Purchases		-
Issuances		-
Total realized/unrealized gains included in net income		-
Net gains included in other comprehensive income		460
Transfers into Level 3		-
Transfers out of Level 3		-
Ending balance as of September 30, 2014	$	14,543
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

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, 2014	Cost		Gains		Losses			Value
U.S. Treasury securities and
obligations of U.S. Government	$	75,390	$	44	$	(76	)	$	75,358
Corporate bonds		29,569		1,183		-			30,752
Collateralized corporate bank loans		113,839		192		(1,831	)		112,200
Municipal bonds		141,140		2,514		(1,666	)		141,988
Mortgage-backed		51,062		571		(669	)		50,964
Total debt securities		411,000		4,504		(4,242	)		411,262
Total equity securities		24,967		29,714		(3	)		54,678
Total debt and equity securities	$	435,967	$	34,218	$	(4,245	)	$	465,940
As of December 31, 2013
U.S. Treasury securities and
obligations of U.S. Government	$	78,894	$	24	$	(165	)	$	78,753
Corporate bonds		42,946		1,379		(450	)		43,875
Collateralized corporate bank loans		102,053		614		(489	)		102,178
Municipal bonds		156,950		2,577		(1,975	)		157,552
Mortgage-backed		27,784		460		(507	)		27,737
Total debt securities		408,627		5,054		(3,586	)		410,095
Total equity securities		24,902		26,642		(314	)		51,230
Total debt and equity securities	$	433,529	$	31,696	$	(3,900	)	$	461,325

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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
	2014			2013			2014			2013
U.S. Treasury securities and
obligations of U.S. Government	$	-		$	-		$	-		$	-
Corporate bonds		(22	)		21			111			846
Collateralized corporate bank loans		10			44			99			316
Municipal bonds		(69	)		(50	)		(123	)		(11	)
Mortgage-backed		29			-			31			-
Equity securities		29			6,935			34			8,572
(Loss) gain on investments		(23	)		6,950			152			9,723
Other-than-temporary impairments		-			-			(274	)		-
Net realized (losses) gains	$	(23	)	$	6,950		$	(122	)	$	9,723

We realized gross gains on investments of $0.1 million and $7.1 million during the three months ended September 30, 2014 and 2013, respectively and $0.4 million and $9.9 million for the nine months ended September 30, 2014 and 2013, respectively. We realized gross losses on investments of $0.1 million for the three months ended both September 30, 2014 and 2013.  We realized gross losses on investments of $0.2 million for the nine months both ended September 30, 2014 and 2013. We recorded proceeds from the sale of investment securities of $0.6 million and $12.5 million during the three months ended September 30, 2014 and 2013, respectively, and $14.9 million and $30.2 million for the nine months ended September 30, 2014 and 2013, 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, 2014 and December 31, 2013 (in thousands):

	As of September 30, 2014
	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	$	29,723	$	(76	)	$	-	$	-		$	29,723	$	(76	)
Corporate bonds		113		-			-		-			113		-
Collateralized corporate bank loans		72,134		(874	)		8,057		(957	)		80,191		(1,831	)
Municipal bonds		30,834		(787	)		22,715		(879	)		53,549		(1,666	)
Mortgage-backed		10,214		(236	)		3,977		(433	)		14,191		(669	)
Total debt securities		143,018		(1,973	)		34,749		(2,269	)		177,767		(4,242	)
Total equity securities		283		(3	)		-		-			283		(3	)
Total debt and equity securities	$	143,301	$	(1,976	)	$	34,749	$	(2,269	)	$	178,050	$	(4,245	)

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	As of  December 31, 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	$	47,162	$	(165	)	$	-	$	-		$	47,162	$	(165	)
Corporate bonds		5,649		(56	)		4,421		(394	)		10,070		(450	)
Collateralized corporate bank loans		23,026		(422	)		6,968		(67	)		29,994		(489	)
Municipal bonds		35,719		(413	)		34,684		(1,562	)		70,403		(1,975	)
Mortgage-backed		1,383		(229	)		4,840		(278	)		6,223		(507	)
Total debt securities		112,939		(1,285	)		50,913		(2,301	)		163,852		(3,586	)
Total equity securities		316		(2	)		2,721		(312	)		3,037		(314	)
Total debt and equity securities	$	113,255	$	(1,287	)	$	53,634	$	(2,613	)	$	166,889	$	(3,900	)

At September 30, 2014, the gross unrealized losses more than twelve months old were attributable to 46 debt security positions. At December 31, 2013, the gross unrealized losses more than twelve months old were attributable to 84 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.

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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, 2014 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	$	55,209	$	55,553
Due after one year through five years		168,202		169,167
Due after five years through ten years		106,628		105,598
Due after ten years		29,899		29,980
Mortgage-backed		51,062		50,964
	$	411,000	$	411,262

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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 $20.9 million and $29.1 million at September 30, 2014 and December 31, 2013, 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 $1.5 million of unfavorable prior years’ net loss development during the three months ended September 30, 2014. We recorded $5.4 million of favorable prior year net loss development during the nine months ended September 30, 2014. For the year to date, the $5.4 million of favorable development was attributable to $6.9 million favorable development on claims incurred in the 2013 accident year, $3.6 million favorable development on claims incurred during the 2011 accident year, partially offset by $3.4 million unfavorable development on claims incurred in the 2012 accident year and $1.7 million unfavorable development on claims incurred in the 2010 and prior accident years. During the nine months ended September 30, 2014, our Standard Commercial P&C business unit accounted for $3.0 million of the favorable development. Our Personal Lines Segment accounted for $3.1 million of the favorable development, our Workers Compensation business unit accounted for $1.9 million of the favorable development and our Hallmark Select business unit accounted for $0.7 million of the favorable development. These favorable developments were partially offset by unfavorable development of $3.3 million in our E&S Commercial business unit. The favorable development for our Standard Commercial P&C business unit of $3.0 million was driven primarily by our general liability line of business in the 2011 accident year. The favorable development for our Personal Lines Segment of $3.1 million was primarily attributable to the 2013 accident year. The favorable development of $1.9 million for our Workers Compensation business unit was primarily attributable to the 2013 and 2012 accident years. The favorable development of $0.7 million in our Hallmark Select business unit consisted of $0.9 million of favorable development in our commercial excess liability line of business and $0.5 million in our professional medical liability products, partially offset by $0.7 million of unfavorable development in our general aviation line of business. The unfavorable development of $3.3 million in our E&S Commercial business unit was primarily driven by unfavorable development in our commercial auto liability and general liability lines of business. 

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 hull coverage. 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. 

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, 2014, there were outstanding incentive stock options to purchase 1,010,594 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 464,771 shares of our common stock. There are 202,504 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.

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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 vests in equal annual increments on each of the first three anniversary dates and terminates 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.

A summary of the status of our stock options as of and changes during the nine months ended September 30, 2014 is presented below:

						Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Number of			Exercise		Term		Value
	Shares			Price		(Years)		($000)
Outstanding at January 1, 2014		1,387,489		$	9.66
Granted		-
Exercised		(2,142	)	$	6.61
Forfeited or expired		(70,596	)	$	9.50
Outstanding at September 30, 2014		1,314,751		$	9.67		3.5	$	2,098
Exercisable at September 30, 2014		1,201,178		$	9.96		3.4	$	1,683

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,
	2014		2013		2014		2013
Intrinsic value of options exercised	$	-	$	-	$	9	$	-
Cost of share-based payments (non-cash)	$	35	$	52	$	133	$	156
Income tax benefit of share-based
payments recognized in income	$	8	$	8	$	23	$	23

As of September 30, 2014, there was $262 thousand of total unrecognized compensation cost related to non-vested stock options granted under our plans, of which $43 thousand is expected to be recognized for the remainder of 2014, $171 thousand is expected to be recognized during 2015, $45 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 were no stock options granted during the first nine months of 2014 or 2013.

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Restricted Stock Units:

The 2005 LTIP was amended by the stockholders 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. Subsequently on September 8, 2014, an aggregate of 175,983 restricted stock units were granted to certain employees.

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, the restricted stock units granted on April 10, 2013 will vest on March 31, 2016, the restricted stock units granted on September 8, 2014 (except for one grant) will vest on March 31, 2017 and one grant of restricted stock units on September 8, 2014 will vest on March 31, 2018. Grantees of restricted stock units do not have any rights of a stockholder of the Company, and do not participate in any distributions to common stockholders of the Company until the award fully vests upon satisfaction of the vesting schedule, performance criteria and other conditions set forth in the grant agreement.

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 granted in 2012 and 2013 is $9.20 per unit. The grant date fair value of the restricted stock units granted in 2014 is $9.66 per unit. The Company incurred a benefit to compensation expense of $170 thousand and $46 thousand related to the restricted stock units during the three and nine months ended September 30, 2014, respectively. The Company incurred compensation expense of $58 thousand and $89 thousand related to the restricted stock units during the three and nine months ended September 30, 2013, respectively. The Company recorded an income tax expense of $59 thousand and $16 thousand related to the restricted stock units during the three and nine months ended September 30, 2014, respectively. The Company recorded an income tax benefit of $20 thousand and $31 thousand 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, 2014 and changes during the nine months then ended is presented below: 

	Number of
	Restricted
	Stock Units
Non-vested at January 1, 2014		236,851
Granted		175,983
Vested		-
Forfeited		(102,987	)
Non-vested at September 30, 2014		309,847

As of September 30, 2014, there was $979 thousand of total unrecognized compensation cost related to non-vested restricted stock units granted under our 2005 LTIP, of which $95 thousand is expected to be recognized during the remainder of 2014, $352 thousand is expected to be recognized in 2015, $334 thousand is expected to be recognized in 2016, $169 thousand is expected to be recognized in 2017 and $29 thousand is expected to be recognized in 2018.

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9. Segment Information

The following is business segment information for the three and nine months ended September 30, 2014 and 2013 (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Revenues:
Standard Commercial Segment	$	20,985		$	21,163		$	60,667		$	62,160
Specialty Commercial Segment		57,983			60,787			179,167			168,127
Personal Segment		4,225			21,256			14,699			64,621
Corporate		(1,776	)		5,407			(5,171	)		6,145
Consolidated	$	81,417		$	108,613		$	249,362		$	301,053
Pre-tax income (loss):
Standard Commercial Segment	$	2,244		$	1,163		$	318		$	641
Specialty Commercial Segment		7,653			7,564			27,042			11,828
Personal Segment		662			(1,613	)		1,916			(3,331	)
Corporate		(5,831	)		2,358			(16,094	)		(2,820	)
Consolidated	$	4,728		$	9,472		$	13,182		$	6,318

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

	September 30,		December 31,
	2014		2013
Assets
Standard Commercial Segment	$	146,411	$	142,143
Specialty Commercial Segment		603,324		536,894
Personal Segment		222,790		210,825
Corporate		19,654		19,161
	$	992,179	$	909,023

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, 2014 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,
	2014		2013		2014		2013
Ceded earned premiums	$	37,360	$	16,488	$	105,594	$	45,629
Reinsurance recoveries	$	25,785	$	9,197	$	74,302	$	24,770

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, 2014 the terms of our property catastrophe reinsurance are:

o We retain the first $3.0 million of property catastrophe losses; and

o Our reinsurers reimburse us 100% for any loss occurrence in excess of our $3.0 million retention up to $32.0 million for each catastrophic occurrence, subject to an aggregate limit of $64.0 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. 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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· Occupational Accident. We purchase excess-of-loss reinsurance coverage for the occupational accident insurance product produced by our Standard Commercial P&C business unit. The terms of occupational accident reinsurance are:

o We retain the first $1.0 million of any occupational accident risk; and

o Our reinsurers reimburse us for the next $5.0 million for each occupational accident risk up to $10.0 million for each occurrence.

· 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. Effective March 1, 2014, we purchase proportional reinsurance where we cede 80% 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. For policies written effective February 1, 2013 through February 28, 2014, we ceded 60% of these risks to reinsurers.

· Personal Auto. We purchase proportional reinsurance where we cede 90% of the risks to reinsurers on the nonstandard automobile risks produced in certain 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. 

· Professional Liability. Effective June 1, 2014, we purchase excess of loss reinsurance on our medical professional liability risks produced by our Hallmark Select business unit. The terms of our professional liability reinsurance are as follows:

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

o Our reinsurers reimburse us for the next $2.0 million for each professional liability loss occurrence.

Prior to June 1, 2014, we purchased proportional reinsurance on our medical professional liability risks produced by our Hallmark Select business unit where we retained 60% of each risk and ceded the remaining 40% to reinsurers.

· 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. Effective May 1, 2014, we purchase proportional reinsurance on the commercial auto liability risks produced by a program underwriter in our E&S Commercial business unit where we retain 20% of each risk and cede the remaining 80% to reinsurers.

• 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.

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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, 2014, we had no outstanding borrowings under this revolving credit facility.

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, 2014, 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, 2014, 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,
	2014			2013			2014			2013
Deferred	$	3,873		$	(34,995	)	$	(19,749	)	$	(53,243	)
Amortized		(4,782	)		34,715			21,670			51,211
Net	$	(909	)	$	(280	)	$	1,921		$	(2,032	)

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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,
	2014		2013		2014		2013
Weighted average shares - basic		19,181		19,263		19,227		19,263
Effect of dilutive securities		168		107		137		97
Weighted average shares - assuming dilution		19,349		19,370		19,364		19,360

For the three and nine months ended September 30, 2014, 715,832 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 each of the three and nine month periods 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. 

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,
	2014			2013			2014			2013
Interest cost	$	133		$	127		$	399		$	379
Amortization of net loss		41			123			122			371
Expected return on plan assets		(175	)		(154	)		(524	)		(462	)
Net periodic pension cost	$	(1	)	$	96		$	(3	)	$	288
Contributed amount	$	299		$	157		$	533		$	268

Refer to Note 14 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013 for more discussion of our retirement plans.

16. Income Taxes

Our effective income tax rate for the first nine months ended September 30, 2014 and 2013 was 26.7% and 23.8%, respectively. The rates varied from the statutory tax rate primarily due to the amount of tax exempt income compared to taxable income.  

17. Commitments and Contingencies

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, 2014 and 2013 were as follows (in thousands):

	Minimum						Accumulated Other
	Pension			Unrealized			Comprehensive
	Liability			Gains (Loss)			Income (Loss)
Balance at December 31, 2012	$	(2,954	)	$	10,853		$	7,899
Other comprehensive income :
Change in net actuarial loss		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
Balance at December 31, 2013	$	(1,480	)	$	18,363		$	16,883
Other comprehensive income :
Change in net actuarial gain		122			-			122
Tax effect on change in net actuarial gain		(43	)		-			(43	)
Net unrealized holding gains arising during the period		-			1,900			1,900
Tax effect on unrealized gains arising during the period		-			(665	)		(665	)
Reclassification adjustment for losses included in net realized gains		-			122			122
Tax effect on reclassification adjustment for losses included in income
tax expense		-			(43	)		(43	)
Other comprehensive income, net of tax		79			1,314			1,393
Balance at September 30, 2014	$	(1,401	)	$	19,677		$	18,276

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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 and occupational accident 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, satellite launch, 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 risk 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 segments is supported by our American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark Insurance Company (“HIC”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”) insurance subsidiaries. In addition, control and management of Hallmark County Mutual (“HCM”) 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.

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. 

Results of Operations

Management overview. During the three and nine months ended September 30, 2014, our total revenues were $81.4 million and $249.4 million, representing a decrease of 25% and 17%, respectively, from the $108.6 million and $301.1 million in total revenues for the same periods of 2013.  This decrease in revenue was primarily attributable to lower net earned premiums in our Personal Segment due to the quota share reinsurance contract entered into during the fourth quarter of 2013 on our non-standard automobile risk produced in certain states. Further contributing to the decrease in revenue were significant realized gains recognized in our investment portfolio for the three and nine months ended September 30, 2013, lower net investment income for the three and nine months ended September 30, 2014, and adverse profit share commission revenue adjustments in our Standard Commercial Segment for the nine months ended September 30, 2014.

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The decrease in revenue for the three and nine months ended September 30, 2014 was offset by decreased loss and loss adjustment expenses (“LAE”) of $17.6 million and $49.2 million, respectively, as compared to the same periods in 2013. During the three months ended September 30, 2014 and 2013 we recorded unfavorable prior year net loss reserve development of $1.5 million and $0.5 million, respectively. During the nine months ended September 30, 2014 we recorded $5.4 million of favorable prior year net loss reserve development compared to $8.0 million of unfavorable prior year net loss reserve development during the nine months ended September 30, 2013. The decrease in loss and LAE occurred despite a $5.4 million increase in net catastrophe losses to $13.9 million during the nine months ended September 30, 2014 from $8.5 million reported for the same period of 2013. Other operating expenses also decreased due mostly to decreased production related expenses in our Specialty Commercial Segment and Personal Segment, partially offset by $0.7 million of one-time CEO transition costs and $0.2 million of costs related to a previously announced public debt offering.

We reported net income of $3.5 million and $9.7 million for the three and nine months ended September 30, 2014 as compared to net income of $6.3 million and $4.8 million for the three and nine months ended September 30, 2013. On a diluted basis per share, we reported net income of $0.18 per share for the three months ended September 30, 2014, as compared to net income of $0.32 per share for the same period in 2013. On a diluted basis per share, net income per share was $0.50 for the nine months ended September 30, 2014 as compared to net income per share of $0.25 for the same period during 2013.

Third Quarter 2014 as Compared to Third Quarter 2013

The following is additional business segment information for the three months ended September 30, 2014 and 2013 (in thousands):

	Three Months Ended September 30
	Standard Commercial Segment						Specialty Commercial Segment						Personal Segment						Corporate					Consolidated
	2014			2013			2014			2013			2014			2013			2014			2013		2014			2013
Gross premiums written	$	20,850			21,444		$	87,886			83,453		$	13,987			18,767		$	-			-	$	122,723			123,664
Ceded premiums written		(1,639	)		(1,837	)		(25,534	)		(17,932	)		(11,525	)		(1,006	)		-			-		(38,698	)		(20,775	)
Net premiums written		19,211			19,607			62,352			65,521			2,462			17,761			-			-		84,025			102,889
Change in unearned premiums		614			332			(7,736	)		(7,512	)		244			1,743			-			-		(6,878	)		(5,437	)
Net premiums earned		19,825			19,939			54,616			58,009			2,706			19,504			-			-		77,147			97,452
Total revenues		20,985			21,163			57,983			60,787			4,225			21,256			(1,776	)		5,407		81,417			108,613
Losses and loss adjustment expenses		12,545			13,537			36,844			37,914			1,120			16,707			-			-		50,509			68,158
Pre-tax income (loss)		2,244			1,163			7,653			7,564			662			(1,613	)		(5,831	)		2,358		4,728			9,472
Net loss ratio (1)		63.3	%		67.9	%		67.5	%		65.4	%		41.4	%		85.7	%							65.5	%		69.9	%
Net expense ratio (1)		32.1	%		32.5	%		25.7	%		26.8	%		57.9	%		25.4	%							30.7	%		28.9	%
Net combined ratio (1)		95.4	%		100.4	%		93.2	%		92.2	%		99.3	%		111.1	%							96.2	%		98.8	%
Favorable (Unfavorable) Prior Year Development		(288	)		1,408			(2,369	)		(1,405	)		1,205			(534	)		-			-		(1,452	)		(531	)

(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 as total underwriting expenses 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.  

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Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $20.8 million for the three months ended September 30, 2014, which was $0.6 million, or 3%, less than the $21.4 million reported for the same period in 2013. Net premiums written were $19.2 million for the three months ended September 30, 2014 as compared to $19.6 million reported for the same period in 2013. The decrease in premium volume was primarily due to decreased premium production in our Standard Commercial P&C business unit, partially offset by increased premium production in our Workers Compensation business unit.

Total revenue for the Standard Commercial Segment of $21.0 million for the three months ended September 30, 2014 was $0.2 million less than the $21.2 million reported during the same period in 2013. This 1% decrease in total revenue was due to decreased net premiums earned of $0.1 million and lower net investment income of $0.1 million.

Our Standard Commercial Segment reported pre-tax income of $2.2 million for the three months ended September 30, 2014 which was $1.0 million higher than the $1.2 million reported for the same period of 2013. Lower loss and LAE of $1.0 million and lower operating expenses of $0.2 million were the primary drivers for the higher pre-tax income, partially offset by the decreased revenue discussed above.

The Standard Commercial Segment reported a net loss ratio of 63.3% for the three months ended September 30, 2014 as compared to 67.9% for the same period of 2013. The gross loss ratio before reinsurance for the three months ended September 30, 2014 was 70.0% as compared to the 62.7% reported for the same period of 2013. The increase in the gross loss ratio was impacted by adverse prior year reserve development of $0.3 million recognized for the three months ended September 30, 2014 as compared to favorable prior year reserve development of $1.4 million recognized during the same period the prior year. This increase in the gross loss ratio was partially offset by lower catastrophe related losses during the third quarter of 2014 as compared to the same period of 2013. The net loss results include $2.2 million of catastrophe related losses during the three months ended September 30, 2013.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were $87.9 million for the three months ended September 30, 2014, which was $4.4 million, or 5%, more than the $83.5 million reported for the same period of 2013. The increase in gross premium volume was due to increased production in both our E&S Commercial and Hallmark Select business units. Net premiums written were $62.4 million for the three months ended September 30, 2014 as compared to $65.5 million for the same period of 2013. The lower net premiums written was primarily due to increased ceded premium under a quota share reinsurance agreement entered into during the second quarter of 2014 on business produced by a program underwriter in our E&S Commercial business unit.

The $58.0 million of total revenue for the three months ended September 30, 2014 was $2.8 million lower than the $60.8 million reported by the Specialty Commercial Segment for the same period in 2013. This 5% decrease in revenue was primarily due to lower net premiums earned of $3.4 million largely from the quota share agreement referenced above and a quota share agreement entered into during the third quarter of 2013 in our Hallmark Select business unit on our general aviation line of business. The decrease in earned premium was partially offset by higher net investment income of $0.4 million and higher commission revenue of $0.2 million due primarily to a favorable profit share commission adjustment for the three months ended September 30, 2014 as compared to an unfavorable commission adjustment for the same period of 2013.

Pre-tax income for the Specialty Commercial Segment of $7.7 million for the third quarter of 2014 was $0.1 million higher than the $7.6 million reported for the same period in 2013. The increase in pre-tax income was primarily the result of lower loss and LAE expenses of $1.1 million due primarily to lower net earned premiums caused by the recent quota share reinsurance agreements. Further contributing to the increase in pre-tax income for the three months ended September 30, 2014 was lower operating expenses of $1.8 million related to increased ceding commission on the quota share reinsurance agreements referenced above. These increases to pre-tax income were partially offset by the decreased revenue discussed above.

Our E&S Commercial business unit reported a $0.9 million decrease in loss and LAE due primarily to the new quota share agreement referenced above. In addition, our Hallmark Select business unit reported a $0.2 million decrease in loss and LAE which consisted of (a) a $0.9 million decrease in loss and LAE primarily due to increased reinsurance recoveries on the general aviation quota share reinsurance entered into during the third quarter of 2013, partially offset by unfavorable prior year net loss reserve development during the third quarter of 2014 as compared to favorable prior year net loss reserve development during the same period of 2013, (b) a $0.2 million decrease in loss and LAE attributable to our medical professional liability insurance products, (c) a $0.1 million increase in loss and LAE attributable to our satellite insurance business and (d) a $0.8 million increase in loss and LAE due to increased production in our commercial umbrella and excess liability line of business, as well as unfavorable prior year net loss reserve development for the three months ended September 30, 2014.

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The Specialty Commercial Segment reported a net loss ratio of 67.5% for the three months ended September 30, 2014 as compared to 65.4% for the same period during 2013. The gross loss ratio before reinsurance was 65.8% for the three months ended September 30, 2014 as compared to 65.1% for the same period in 2013. The higher gross and net ratios are primarily the result of $2.4 million unfavorable prior years’ net loss reserve development for the three months ended September 30, 2014 as compared to $1.4 million unfavorable prior years’ net loss reserve development for the same period of 2013. The Specialty Commercial Segment reported a net expense ratio of 25.7% for the three months ended September 30, 2014, as compared to 26.8% reported for the same period the prior year. The decrease in the expense ratio is due primarily to lower operating expenses due to increased ceding commissions on the quota share reinsurance agreements discussed above.

Personal Segment

Gross premiums written for the Personal Segment were $14.0 million for the three months ended September 30, 2014, which was $4.8 million, or 25%, less than the $18.8 million reported for the same period in 2013. Net premiums written for our Personal Segment were $2.5 million in the third quarter of 2014, which was a decrease of $15.3 million, or 86%, from the $17.8 million reported for the third quarter of 2013. The decrease in the gross premiums written was due mostly to reduced business in our discontinued states and programs to focus on our ongoing core profitable business. The decrease in net premium written was due mostly to a quota share reinsurance contract entered into during the fourth quarter of 2013 on our non-standard automobile risk produced in certain states.

Total revenue for the Personal Segment decreased 80% to $4.2 million for the third quarter of 2014 from $21.3 million for the third quarter of 2013. Decreased net premiums earned of $16.8 million, decreased net investment income of $0.1 million and lower finance charges of $0.2 million were the primary reasons for the decrease in revenue for the period.

Pre-tax income for the Personal Segment was $0.7 million for the three months ended September 30, 2014 as compared to pre-tax loss of $1.6 million for the same period of 2013. The pre-tax income for the three months ended September 30, 2014 was the result of decreased losses and LAE of $15.6 million and lower operating expenses of $3.7 million due primarily to lower production related expenses driven by increased ceding commission on the non-standard automobile quota share agreement entered into during the fourth quarter of 2013 and lower amortization of intangible assets of $0.1 million. These decreases were partially offset by lower revenue discussed above.

The Personal Segment reported a net loss ratio of 41.4% for the three months ended September 30, 2014 as compared to 85.7% for the third quarter of 2013. The gross loss ratio before reinsurance was 67.7% for the three months ended September 30, 2014 as compared to 85.3% for the same period in 2013. The lower gross and net loss ratios are primarily the result of favorable prior year net loss reserve development. The gross loss ratio also improved due to lower current accident year loss trends whereas the net loss ratio was adversely impacted by a lower ceded loss ratio as compared to prior year. The loss and LAE during the three months ended September 30, 2014 included $1.2 million of favorable prior year net loss reserve development as compared to $0.5 million of unfavorable prior year net loss reserve development for the same period of 2013. The Personal Segment reported a net expense ratio of 57.9% for the third quarter of 2014 as compared to 25.4% for the same period of 2013. The increase in the expense ratio was due predominately to the impact of the quota share reinsurance agreement entered into during the fourth quarter of 2013.

Corporate

Total revenue for Corporate decreased by $7.2 million for the three months ended September 30, 2014 as compared to the same period the prior year. This decrease in total revenue was due to lower net investment income of $0.2 million and net realized losses of $23 thousand recognized during the three months ended September 30, 2014 as compared to net realized gains of $7.0 million for the three months ended September 30, 2013.

Corporate pre-tax loss was $5.8 million for the three months ended September 30, 2014 as compared to pre-tax income of $2.4 million for the same period of 2013. The decline in pre-tax results was primarily due to the decreased revenue discussed above and higher operating expenses of $1.0 million primarily as a result of $0.7 million of one-time CEO transition costs and $0.2 million in costs related to a previously announced public debt offering.

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Nine Months Ended September 30, 2014 as Compared to Nine Months Ended September 30, 2013

The following is additional business segment information for the nine months ended September 30, 2014 and 2013 (in thousands):

	Nine Months Ended September 30
	Standard Commercial Segment						Specialty Commercial Segment						Personal Segment						Corporate						Consolidated
	2014			2013			2014			2013			2014			2013			2014			2013			2014			2013
Gross premiums written	$	64,477			66,773		$	248,615			225,120		$	50,153			59,385		$	-			-		$	363,245			351,278
Ceded premiums written		(5,870	)		(5,934	)		(75,260	)		(45,232	)		(41,466	)		(3,782	)		-			-			(122,596	)		(54,948	)
Net premiums written		58,607			60,839			173,355			179,888			8,687			55,603			-			-			240,649			296,330
Change in unearned premiums		56			(2,763	)		(4,066	)		(20,302	)		1,131			3,519			-			-			(2,879	)		(19,546	)
Net premiums earned		58,663			58,076			169,289			159,586			9,818			59,122			-			-			237,770			276,784
Total revenues		60,667			62,160			179,167			168,127			14,699			64,621			(5,171	)		6,145			249,362			301,053
Losses and loss adjustment expenses		41,497			42,567			109,027			113,303			5,257			49,085			-			-			155,781			204,955
Pre-tax income (loss)		318			641			27,042			11,828			1,916			(3,331	)		(16,094	)		(2,820	)		13,182			6,318
Net loss ratio (1)		70.7	%		73.3	%		64.4	%		71.0	%		53.5	%		83.0	%								65.5	%		74.0	%
Net expense ratio (1)		32.6	%		32.6	%		25.8	%		27.0	%		44.9	%		25.7	%								30.4	%		29.2	%
Net combined ratio (1)		103.3	%		105.9	%		90.2	%		98.0	%		98.4	%		108.7	%								95.9	%		103.2	%
Favorable (Unfavorable) Prior Year Development		4,847			3,630			(2,600	)		(10,062	)		3,112			(1,531	)		-			-			5,359			(7,963	)

(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 as total underwriting expenses 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 $64.5 million for the nine months ended September 30, 2014, which was $2.3 million, or 3%, less than the $66.8 million reported for the same period in 2013. Net premiums written were $58.6 million for the nine months ended September 30, 2014 as compared to $60.8 million reported for the same period in 2013. The decrease in premium volume was due to decreased premium production in our Standard Commercial P&C business unit.

Total revenue for the Standard Commercial Segment of $60.7 million for the nine months ended September 30, 2014 was $1.5 million less than the $62.2 million reported during the same period in 2013. This 2% decrease in total revenue was mostly due to an increased adverse profit share commission revenue adjustment of $1.8 million and lower net investment income of $0.3 million, partially offset by higher net premiums earned of $0.6 million for the nine months ended September 30, 2014 as compared to the same period of 2013.

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Our Standard Commercial Segment reported pre-tax income of $0.3 million for the nine months ended September 30, 2014 as compared to pre-tax income of $0.6 million for the same period of 2013. The decrease in pre-tax income for the Standard Commercial Segment was the result of the decreased revenue discussed above, partially offset by lower loss and LAE of $1.1 million and lower operating expenses of $0.1 million primarily consisting of lower production related expenses.

The Standard Commercial Segment reported a net loss ratio of 70.7% for the nine months ended September 30, 2014 as compared to 73.3% for the same period in 2013. The gross loss ratio before reinsurance for the nine months ended September 30, 2014 was 76.0% as compared to the 68.7% reported for the same period of 2013. The increase in the gross loss ratio was primarily due to $15.2 million of gross catastrophe losses for the nine months ended September 30, 2014 as compared to $5.7 million of gross catastrophe losses reported for the prior year. The net loss ratio improved primarily due to $7.6 million of ceded loss recoveries in the first nine months of 2014 as compared to $1.4 million reported in the same period the prior year. The Standard Commercial Segment reported $12.5 million of net catastrophe losses for the nine months ended September 30, 2014 as compared to $5.7 million for the same period the prior year.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were $248.6 million for the nine months ended September 30, 2014, which was $23.5 million, or 10%, more than the $225.1 million reported for the same period in 2013. The increase in premium volume was due to increased premium production in both our E&S Commercial and our Hallmark Select business units. Net premiums written were $173.4 million for the nine months ended September 30, 2014 as compared to $179.9 million reported for the same period in 2013. The lower net premiums written was primarily due to a quota share reinsurance agreement entered into during the third quarter of 2013 in our Hallmark Select business unit on our general aviation line of business and a quota share agreement entered into during the second quarter of 2014 on business produced by a program underwriter in our E&S Commercial business unit.

The $179.2 million of total revenue for the Specialty Commercial Segment for the nine months ended September 30, 2014 was $11.1 million higher than the $168.1 million reported for 2013. This 7% increase in revenue was due to higher net premiums earned of $9.7 million due predominately to increased production discussed above. Further contributing to this increased revenue was higher net investment income of $1.3 million and higher commissions and fees revenue of $0.1 million. 

Pre-tax income for the Specialty Commercial Segment of $27.0 million for the nine months ended September 30, 2014 was $15.2 million higher than the $11.8 million reported for the same period in 2013. This 129% increase in pre-tax income was primarily due to the increased revenue discussed above, lower loss and LAE expenses of $4.3 million and lower amortization of intangible assets of $0.2 million, partially offset by higher operating expenses of $0.4 million.

Our E&S Commercial business unit reported a $0.9 million decrease in loss and LAE for the nine months ended September 30, 2014 as compared to the same period during 2013. Our Hallmark Select business unit reported a $3.4 million decrease in loss and LAE which consisted of (a) a $5.3 million decrease in loss and LAE primarily due to increased reinsurance recoveries on the general aviation quota share agreement entered into during the third quarter of 2013, partially offset by unfavorable prior year net loss reserve development during the first nine months of 2014 as compared to favorable prior year net loss reserve development during the first nine months of 2013, (b) a $1.0 million increase in loss and LAE due primarily to increased premium production in our commercial umbrella and excess liability line of business, inclusive of $0.9 million of favorable prior year net loss reserve development during the first nine months of 2014, and (c) a $0.9 million increase in loss and LAE in our satellite insurance business due primarily to the occurrence of insured satellite losses during the current year-to-date. An increase of $0.4 million in operating expense was the combined result of increased salary and related expenses of $0.9 million due primarily to increased incentive compensation accruals compared to the prior period and higher other operating expenses of $0.2 million, partially offset by lower production related expenses of $0.7 million due to increased ceding commissions on the quota share reinsurance agreements discussed above.

The Specialty Commercial Segment reported a net loss ratio of 64.4% for the nine months ended September 30, 2014 as compared to 71.0% for the same period during 2013. The gross loss ratio before reinsurance was 64.3% for the nine months ended September 30, 2014 as compared to 69.4% for the same period in 2013. The lower gross and net loss ratio include $2.6 million of unfavorable prior year net loss reserve development for the nine months ended September 30, 2014 as compared to $10.1 million of unfavorable prior year net loss reserve development for the nine months ended September 30, 2013, as well as improved current accident year loss trends. The Specialty Commercial Segment reported $0.8 million in net catastrophe losses for the nine months ended September 30, 2014 as compared to $1.4 million in net catastrophe losses for the same period of 2013. The Specialty Commercial Segment reported a net expense ratio of 25.8% for the first nine months of 2014 as compared to 27.0% reported for the same period the prior year. The decrease in the expense ratio is due primarily to the effect of increased net earned premium on fixed operating expenses and the increased ceding commission on quota share reinsurance agreements discussed above.

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Personal Segment

Gross premiums written for the Personal Segment were $50.2 million for the nine months ended September 30, 2014, which was $9.2 million, or 16%, less than the $59.4 million reported for the same period in 2013. Net premiums written for our Personal Segment were $8.7 million in the first nine months of 2014, which was a decrease of $46.9 million, or 84%, from the $55.6 million reported for the same period of 2013. The decrease in the gross premiums written was due mostly to reduced business in our discontinued states and programs to focus on our ongoing core profitable business. The decrease in net premium written was due mostly to a quota share reinsurance contract entered into during the fourth quarter of 2013 on our non-standard automobile risks produced in certain states.

Total revenue for the Personal Segment decreased 77% to $14.7 million for the nine months ended September 30, 2014 from $64.6 million for the same period during 2013. Decreased net earned premium of $49.3 million due to the quota share reinsurance agreement discussed above, decreased net investment income of $0.3 million and decreased finance charges of $0.3 million were the primary reasons for the decrease in revenue for the period.

Pre-tax income for the Personal Segment was $1.9 million for the nine months ended September 30, 2014 as compared to pre-tax loss of $3.3 million for the same period of 2013. The pre-tax income was the result of decreased losses and LAE of $43.8 million and lower operating expenses of $11.1 million primarily due to lower production related expenses driven by increased ceding commission on the quota share reinsurance agreement entered during the fourth quarter of 2013, as well as lower amortization of intangible assets of $0.2 million. These increases to pre-tax income were partially offset by the decreased revenue discussed above.

The Personal Segment reported a net loss ratio of 53.5% for the nine months ended September 30, 2014 as compared to 83.0% for the same period of 2013. The gross loss ratio before reinsurance was 69.7% for the nine months ended September 30, 2014 as compared to 82.5% for the same period in 2013. The lower gross and net loss ratios were primarily the result of favorable prior year net loss reserve development. The loss and LAE during the nine months ended September 30, 2014 included $3.1 million of favorable prior years’ net loss reserve development as compared to $1.5 million of unfavorable prior years’ net loss reserve development for the same period of 2013. The Personal Segment reported $0.6 million in net catastrophe losses for the nine months ended September 30, 2014 as compared to $1.4 million in net catastrophe losses for the same period of 2013.The Personal Segment reported a net expense ratio of 44.9% for the first nine months of 2014 as compared to 25.7% for the same period of 2013. The increase in the net expense ratio was due predominately to the impact of the quota share reinsurance agreement entered into during the fourth quarter of 2013.

Corporate

Total revenue for Corporate decreased by $11.3 million for the nine months ended September 30, 2014 as compared to the same period the prior year. This decrease in total revenue was due to lower net realized gains on our investment portfolio of $9.8 million as compared to the same period of the prior year and lower net investment income of $1.5 million for the nine months ended September 30, 2014 as compared to the same period of the prior year.

Corporate pre-tax loss was $16.1 million for the nine months ended September 30, 2014 as compared to a $2.8 million pre-tax loss for the same period the prior year. The increase in pre-tax loss was the result of decreased revenue and higher operating expenses of $2.0 million during the nine months ended September 30, 2014 as compared to the same period the prior year due primarily to $0.7 million of one-time CEO transition costs, $0.2 million of costs related to a previously announced public debt offering, and $1.0 million higher salary and related costs due mostly to increased incentive compensation accruals compared to the prior period.

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, 2014, Hallmark had $13.5 million in unrestricted cash and cash equivalents at the holding company. Unrestricted cash and cash equivalents of our non-insurance subsidiaries were $1.5 million as of September 30, 2014. As of that date, our insurance subsidiaries held $145.0 million of unrestricted cash and cash equivalents as well as $411.3 million in debt securities with an average modified duration of 2.7 years. Accordingly, we do not anticipate selling long-term debt instruments to meet any liquidity needs.

32

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 2014, the aggregate ordinary dividend capacity of these subsidiaries is $22.5 million, of which $15.6 million is available to Hallmark. As a county mutual, dividends from HCM are payable to policyholders. During the first nine months of 2014, our insurance company subsidiaries paid $6.0 million in dividends to Hallmark. None of our insurance company subsidiaries paid a dividend to Hallmark during the 2013 fiscal year. 

Comparison of September 30, 2014 to December 31, 2013

On a consolidated basis, our cash and investments (excluding restricted cash) at September 30, 2014 were $626.0 million compared to $603.0 million at December 31, 2013. Cash flow from operations and an increase in investment fair values were the primary reasons for this increase.

Comparison of Nine Months Ended September 30, 2014 and September 30, 2013

Net cash provided by our consolidated operating activities was $21.7 million for the first nine months of 2014 as compared to net cash provided by operating activities of $53.5 million for the first nine months of 2013. The decrease in operating cash flow was primarily due to increased ceded premium payments, partially offset by lower net paid losses and increased collected provisional ceding commission.

 Net cash used in investing activities during the first nine months of 2014 was $0.5 million as compared to cash provided by investing activities during the first nine months of 2013 of $13.0 million.  The decrease in cash provided by investing activities during the first nine months of 2014 was due to a decrease in maturities, sales and redemptions of investment securities of $40.0 million and an increase in transfers into restricted cash of $4.7 million, partially offset by a decrease in purchases of debt and equity securities of $31.0 million and a decrease in purchases of property and equipment of $0.1 million.

Cash used in financing activities during the first nine months of 2014 was $2.9 million as a result of a $1.5 million repayment on our revolving credit facility and $1.4 million related to the repurchase of our common stock. There were no financing cash flow activities during the first nine months of 2013.

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, 2014, we had no outstanding borrowings under this revolving credit facility.

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, 2014, the balance of our Trust I subordinated debt was $30.9 million.

33

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, 2014, the balance of our Trust II subordinated debt was $25.8 million.

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, 2013.

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.

34

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

  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 1 of our Form 10-K for the fiscal year ended December 31, 2013.

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

Our stock buyback program initially announced on April 18, 2008, authorized the repurchase of up to 1,000,000 shares of our common stock in the open market or in privately negotiated transactions (the “Stock Repurchase Plan”). On January 24, 2011, we announced an increased authorization to repurchase up to an additional 3,000,000 shares. The Stock Repurchase Plan does not have an expiration date.

The following table furnishes information for purchases made pursuant to the Stock Repurchase Plan during the quarter ended September 30, 2014: 

					Cumulative Number		Maximum Number of
			Average		of Shares Purchased		Shares that May Yet
	Total Number of		Price Paid		as Part of Publicly		Be Purchased Under
Period	Shares Purchased		Per Share		Announced Plan		the Plan
July 1-31, 2014		2,618	$	9.73		1,705,247		2,294,753
August 1-31, 2014		-	$	-		1,705,247		2,294,753
September 1-30, 2014		62,073	$	10.21		1,767,320		2,232,680

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

35

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)	Twelfth Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and Frost Bank dated August 8, 2014 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 12, 2014).
10(b)	Letter agreement dated August 13, 2014, between Hallmark Financial Services, Inc. and Naveen Anand (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 15, 2014).
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) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013,   (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Stockholder’s Equity for the three and nine months ended September 30, 2014 and 2013, (v)  Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 and (vi) related notes.

36

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, 2014	/s/ Naveen Anand
	Naveen Anand, Chief Executive Officer and President
Date: November 7, 2014
	/s/ Jeffrey R. Passmore
	Jeffrey R. Passmore, Chief Accounting Officer and Senior Vice President

37

EX-31.(A)

Exhibit 31(a)

CERTIFICATION

I, Naveen Anand, 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, 2014

/s/ Naveen Anand

Naveen Anand

Chief Executive Officer

(principal executive officer)

EX-31.(B)

Exhibit 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, 2014 

/s/ Jeffrey R. Passmore

Jeffrey R. Passmore

Chief Accounting Officer

(principal financial officer)

EX-32.(A)

Exhibit 32(a)

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

I, Naveen Anand, 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, 2014, 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, 2014

/s/ Naveen Anand

Naveen Anand

Chief Executive Officer

(principal 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, 2014 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, 2014 

/s/ Jeffrey R. Passmore

Jeffrey R. Passmore

Chief Accounting Officer

(principal financial officer)

XML

Fair Value (Narrative) (Details) (USD $)	9 Months Ended
	Sep. 30, 2014
Fair value, equity, Level 1 to Level 2 transfers, amount	$ 0
Fair value, equity, Level 2 to Level 1 transfers, amount	$ 0
Collateralized Bank Loan [Member]
Current yield to maturity percentage	9.10%

XML

Segment Information (Schedule of Additional Business Segment Information) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Segment Reporting Information [Line Items]
Assets	$ 992,179	$ 909,023
Standard Commercial Segment [Member]
Segment Reporting Information [Line Items]
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Specialty Commercial Segment [Member]
Segment Reporting Information [Line Items]
Assets	603,324	536,894
Personal Segment [Member]
Segment Reporting Information [Line Items]
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Corporate [Member]
Segment Reporting Information [Line Items]
Assets	$ 19,654	$ 19,161

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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]
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Loss and Loss Adjustment Expenses Incurred in 2010 and Prior Accident Year [Member]
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Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			1.7
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]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			3.1
Unfavorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense				1.5
Personal Lines Business Unit [Member] | Loss and Loss Adjustment Expenses Incurred in 2013 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			3.1
Personal Lines Business Unit [Member] | 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				1.5
E & S Commercial 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			3.3	11.7
E & S Commercial Business Unit [Member] | Loss And Loss Adjustment Expenses Incurred In 2012, 2011 and 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				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			3.0	2.4
Standard Commercial Business Unit [Member] | 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]
Favorable Adjustment to Prior Years Liability for Unpaid Claims and Claims Adjustment Expense			3.0
Standard Commercial Business Unit [Member] | 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]
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			0.7	1.6
Hallmark Select Business Unit [Member] | Loss and Loss Adjustment Expenses Incurred in 2011 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				1.6
General Aviation [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
Hallmark Select Commerical Excess 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			0.9
Hallmark Select Professional Medical 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			0.5
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			1.9	1.2
Workers Compensation Risks [Member] | Loss And Loss Adjustment Expenses Incurred In 2013 and 2012 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			1.9
Workers Compensation Risks [Member] | Loss And Loss Adjustment Expenses Incurred In 2012 and 2011 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				$ 1.2

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Reinsurance (Narrative) (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2014	Feb. 28, 2014
E&S Commercial [Member]
Retention for reinsurance losses	$ 1.0
Proportional reinsurance cede risk, percentage	90.00%
Proportional reinsurance retention, percentage	10.00%
E&S Commercial Umbrella and Excess Liability Risks [Member]
Proportional reinsurance cede risk, percentage	80.00%
Proportional reinsurance retention, percentage	20.00%
Excess and Umbrella Business Unit [Member]
Proportional reinsurance cede risk, percentage	100.00%
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]
Retention for reinsurance losses	1.0
Reinsurers reimbursement retention for each disaster occurrence	2.0
Professional Liability [Member] | Prior To June 1, 2014 [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] | All States [Member]
Retention for reinsurance losses	3.0
Reinsurers reimbursement, percentage	100.00%
Reinsurers reimbursement retention, maximum limit	32.0
Reinsurers reimbursement retention, aggregate limit	64.0
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	80.00%	60.00%
Personal Auto [Member]
Proportional reinsurance cede risk, percentage	90.00%
Occupational Accident [Member]
Retention for reinsurance losses	1.0
Reinsurers reimbursement retention for each disaster occurrence	5.0
Reinsurers reimbursement retention, maximum limit	$ 10.0

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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, 2014	Dec. 31, 2013
Schedule of Investments [Line Items]
Due in one year or less, Amortized Cost	$ 55,209
Due after one year through five years, Amortized Cost	168,202
Due after five years through ten years, Amortized Cost	106,628
Due after ten years, Amortized Cost	29,899
Debt Maturities, Amortized Cost	411,000
Due in one year or less, Fair Value	55,553
Due after one year through five years, Fair Value	169,167
Due after five years through ten years, Fair Value	105,598
Due after ten years, Fair Value	29,980
Debt Securities, Fair Value	411,262	410,095
Mortgage Backed [Member]
Schedule of Investments [Line Items]
Debt Maturities, Amortized Cost	51,062
Debt Securities, Fair Value	$ 50,964	$ 27,737

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Earnings per Share (Tables)

9 Months Ended

Sep. 30, 2014

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,
	2014	2013	2014	2013
Weighted average shares - basic	19,181	19,263	19,227	19,263
Effect of dilutive securities	168	107	137	97
Weighted average shares - assuming dilution	19,349	19,370	19,364	19,360

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Revolving Credit Facility Payable (Narrative) (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Jan. 27, 2006
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	$ 0
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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Changes in Accumulated Other Comprehensive Income Balances

9 Months Ended

Sep. 30, 2014

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, 2014 and 2013 were as follows (in thousands):

	Minimum		Accumulated Other
	Pension	Unrealized	Comprehensive
	Liability	Gains (Loss)	Income (Loss)
Balance at December 31, 2012	$ (2,954)	$ 10,853	$ 7,899
Other comprehensive income :
Change in net actuarial loss	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
Balance at December 31, 2013	$ (1,480)	$ 18,363	$ 16,883
Other comprehensive income :
Change in net actuarial gain	122	-	122
Tax effect on change in net actuarial gain	(43)	-	(43)
Net unrealized holding gains arising during the period	-	1,900	1,900
Tax effect on unrealized gains arising during the period	-	(665)	(665)
Reclassification adjustment for losses included in net realized gains	-	122	122
Tax effect on reclassification adjustment for losses included in income
tax expense	-	(43)	(43)
Other comprehensive income, net of tax	79	1,314	1,393
Balance at September 30, 2014	$ (1,401)	$ 19,677	$ 18,276

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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
	Sep. 30, 2014
Share-Based Payment Arrangements [Abstract]
Stock Options, Outstanding at January 1, 2014	1,387,489
Stock Options, Exercised	(2,142)
Stock Options, Forfeited or Expired	(70,596)
Stock Options, Outstanding at September 30, 2014	1,314,751
Stock Options, Exercisable at September 30, 2014	1,201,178
Weighted Average Exercise Price, Outstanding at January 1, 2014	$ 9.66
Weighted Average Exercise Price, Exercised	$ 6.61
Weighted Average Exercise Price, Forfeited or Expired	$ 9.50
Weighted Average Exercise Price, Outstanding at September 30, 2014	$ 9.67
Weighted Average Exercise Price, Exercisable at September 30, 2014	$ 9.96
Average Remaining Contractual Term, Outstanding at September 30, 2014	3 years 6 months
Average Remaining Contractual Term, Exercisable at September 30, 2014	3 years 4 months 24 days
Aggregate Intrinsic Value, Outstanding at September 30, 2014	$ 2,098
Aggregate Intrinsic Value, Exercisable at September 30, 2014	$ 1,683

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Investments (Narrative) (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014 security	Sep. 30, 2013	Sep. 30, 2014 security	Sep. 30, 2013	Dec. 31, 2013 security
Investments [Abstract]
Gross gains on investments	$ 0.1	$ 7.1	$ 0.4	$ 9.9
Gross losses on investments	0.1	0.1	0.2	0.2
Proceeds from sale of investment securities	$ 0.6	$ 12.5	$ 14.9	$ 30.2
Number of debt security positions	46		46		84

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Basis of Presentation (Narrative) (Details) (USD $) In Millions, unless otherwise specified	0 Months Ended		9 Months Ended	0 Months Ended
	Jun. 21, 2005 Hallmark Statutory Trust I [Member]	Aug. 23, 2007 Hallmark Statutory Trust II [Member]	Sep. 30, 2014 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]
Trust preferred securities, carrying value			$ 56.7
Trust preferred securities, fair value			49.4
Current yield to maturity percentage			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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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		6 Months Ended	9 Months Ended
	Apr. 10, 2013	Jul. 27, 2012	Jun. 30, 2013	Sep. 30, 2014
Long Term Incentive Plan 2005 [Member] | Restricted Stock Units (RSUs) [Member]
Nonvested at January 1, 2014				236,851
Granted	122,823	129,463		175,983
Forfeited			(9,280)	(102,987)
Nonvested at September 30, 2014				309,847

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Earnings per Share [Abstract]
Weighted average shares - basic	19,181	19,263	19,227	19,263
Effect of dilutive securities	168	107	137	97
Weighted average shares - assuming dilution	19,349	19,370	19,364	19,360

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Pledged Investments (Narrative) (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Pledged Investments [Abstract]
Securities available-for-sale pledged, carrying value	$ 20.9	$ 29.1

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Basis of Presentation

9 Months Ended

Sep. 30, 2014

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, 2013 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of September 30, 2014 and 2013 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, 2014 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, 2013 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    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 $49.4 million as of September 30, 2014.  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/recoverable, 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 Trust II (collectively the “Trusts”) and have determined that 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.

New Accounting Pronouncements

In May 2014, the FASB issued guidance which revises the criteria for revenue recognition.  Insurance contracts are excluded from the scope of the new guidance.  Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer.  Incremental costs of obtaining a contract may be capitalized to the extent the entity expects to recover those costs.  The guidance is effective for reporting periods beginning after December 15, 2016 and is to be applied retrospectively.  The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations and financial position.

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Net Periodic Pension Cost [Abstract]
Interest cost	$ 133	$ 127	$ 399	$ 379
Amortization of net loss	41	123	122	371
Expected return on plan assets	(175)	(154)	(524)	(462)
Net periodic pension cost	(1)	96	(3)	288
Contributed amount	$ 299	$ 157	$ 533	$ 268

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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	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Schedule of Investments [Line Items]
Investments, Amortized Cost	$ 435,967	$ 433,529
Investments, Gross Unrealized Gains	34,218	31,696
Investments, Gross Unrealized Losses	(4,245)	(3,900)
Investments, Fair Value	465,940	461,325
Equity Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	24,967	24,902
Investments, Gross Unrealized Gains	29,714	26,642
Investments, Gross Unrealized Losses	(3)	(314)
Investments, Fair Value	54,678	51,230
Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	411,000	408,627
Investments, Gross Unrealized Gains	4,504	5,054
Investments, Gross Unrealized Losses	(4,242)	(3,586)
Investments, Fair Value	411,262	410,095
US Treasury Securities and Obligations of U.S. Government [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	75,390	78,894
Investments, Gross Unrealized Gains	44	24
Investments, Gross Unrealized Losses	(76)	(165)
Investments, Fair Value	75,358	78,753
Corporate Bonds [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	29,569	42,946
Investments, Gross Unrealized Gains	1,183	1,379
Investments, Gross Unrealized Losses		(450)
Investments, Fair Value	30,752	43,875
Collateralized Corporate Bank Loans [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	113,839	102,053
Investments, Gross Unrealized Gains	192	614
Investments, Gross Unrealized Losses	(1,831)	(489)
Investments, Fair Value	112,200	102,178
Municipal Bonds [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	141,140	156,950
Investments, Gross Unrealized Gains	2,514	2,577
Investments, Gross Unrealized Losses	(1,666)	(1,975)
Investments, Fair Value	141,988	157,552
Mortgage Backed [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Investments, Amortized Cost	51,062	27,784
Investments, Gross Unrealized Gains	571	460
Investments, Gross Unrealized Losses	(669)	(507)
Investments, Fair Value	$ 50,964	$ 27,737

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Share-Based Payment Arrangements (Tables)

9 Months Ended

Sep. 30, 2014

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, 2014 is presented below:

			Average
		Weighted	Remaining	Aggregate
		Average	Contractual	Intrinsic
	Number of	Exercise	Term	Value
	Shares	Price	(Years)	($000)
Outstanding at January 1, 2014	1,387,489	$      9.66
Granted	-
Exercised	(2,142)	$       6.61
Forfeited or expired	(70,596)	$       9.50
Outstanding at September 30, 2014	1,314,751	$       9.67	3.5	$       2,098
Exercisable at September 30, 2014	1,201,178	$       9.96	3.4	$       1,683

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,
	2014	2013	2014	2013
Intrinsic value of options exercised	$          -	$            -	$          9	$         -
Cost of share-based payments (non-cash)	$        35	$         52	$        133	$     156
Income tax benefit of share-based
payments recognized in income	$          8	$            8	$          23	$       23

Summary of the Status of Restricted Stock Units

A summary of the status of our restricted stock units as of September 30, 2014 and changes during the nine months then ended is presented below:

	Number of
	Restricted
	Stock Units
Non-vested at January 1, 2014	236,851
Granted	175,983
Vested	-
Forfeited	(102,987)
Non-vested at September 30, 2014	309,847

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Investments (Tables)

9 Months Ended

Sep. 30, 2014

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, 2014	Cost	Gains	Losses	Value
U.S. Treasury securities and
obligations of U.S. Government	$                 75,390	$  44	$                     (76)	$                 75,358
Corporate bonds	29,569	1,183	-	30,752
Collateralized corporate bank loans	113,839	192	(1,831)	112,200
Municipal bonds	141,140	2,514	(1,666)	141,988
Mortgage-backed	51,062	571	(669)	50,964
Total debt securities	411,000	4,504	(4,242)	411,262
Total equity securities	24,967	29,714	(3)	54,678
Total debt and equity securities	$ 435,967	$ 34,218	$ (4,245)	$ 465,940
As of December 31, 2013
U.S. Treasury securities and
obligations of U.S. Government	$ 78,894	$ 24	$ (165)	$ 78,753
Corporate bonds	42,946	1,379	(450)	43,875
Collateralized corporate bank loans	102,053	614	(489)	102,178
Municipal bonds	156,950	2,577	(1,975)	157,552
Mortgage-backed	27,784	460	(507)	27,737
Total debt securities	408,627	5,054	(3,586)	410,095
Total equity securities	24,902	26,642	(314)	51,230
Total debt and equity securities	$ 433,529	$ 31,696	$ (3,900)	$ 461,325

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
	2014	2013	2014	2013
U.S. Treasury securities and
obligations of U.S. Government	$             -	$         -	$       -	$      -
Corporate bonds	(22)	21	111	846
Collateralized corporate bank loans	10	44	99	316
Municipal bonds	(69)	(50)	(123)	(11)
Mortgage-backed	29	-	31	-
Equity securities	29	6,935	34	8,572
(Loss) gain on investments	(23)	6,950	152	9,723
Other-than-temporary impairments	-	-	(274)	-
Net realized (losses) gains	$ (23)	$       6,950	$ (122)	$  9,723

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, 2014 and December 31, 2013 (in thousands):

	As of September 30, 2014
	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	$ 29,723	$ (76)		$                -	$                 -		$ 29,723	$ (76)
Corporate bonds	113	-		-	-		113	-
Collateralized corporate bank loans	72,134	(874)		8,057	(957)		80,191	(1,831)
Municipal bonds	30,834	(787)		22,715	(879)		53,549	(1,666)
Mortgage-backed	10,214	(236)		3,977	(433)		14,191	(669)
Total debt securities	143,018	(1,973)		34,749	(2,269)		177,767	(4,242)
Total equity securities	283	(3)		-	-		283	(3)
Total debt and equity securities	$ 143,301	$ (1,976)		$ 34,749	$ (2,269)		$ 178,050	$ (4,245)
	As of  December 31, 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	$ 47,162	$ (165)		$              -	$             -		$ 47,162	$ (165)
Corporate bonds	5,649	(56)		4,421	(394)		10,070	(450)
Collateralized corporate bank loans	23,026	(422)		6,968	(67)		29,994	(489)
Municipal bonds	35,719	(413)		34,684	(1,562)		70,403	(1,975)
Mortgage-backed	1,383	(229)		4,840	(278)		6,223	(507)
Total debt securities	112,939	(1,285)		50,913	(2,301)		163,852	(3,586)
Total equity securities	316	(2)		2,721	(312)		3,037	(314)
Total debt and equity securities	$ 113,255	$ (1,287)		$ 53,634	$ (2,613)		$ 166,889	$ (3,900)

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	$ 55,209	$ 55,553
Due after one year through five years	168,202	169,167
Due after five years through ten years	106,628	105,598
Due after ten years	29,899	29,980
Mortgage-backed	51,062	50,964
	$ 411,000	$ 411,262

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Reinsurance [Abstract]
Ceded earned premiums	$ 37,360	$ 16,488	$ 105,594	$ 45,629
Reinsurance recoveries	$ 25,785	$ 9,197	$ 74,302	$ 24,770

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Schedule of Investments [Line Items]
(Loss) gain on investments	$ (23)	$ 6,950	$ 152	$ 9,723
Other-than-temporary impairment			(274)
Net realized (losses) gains	(23)	6,950	(122)	9,723
Corporate Bonds [Member]
Schedule of Investments [Line Items]
(Loss) gain on investments	(22)	21	111	846
Collateralized Corporate Bank Loans [Member]
Schedule of Investments [Line Items]
(Loss) gain on investments	10	44	99	316
Municipal Bonds [Member]
Schedule of Investments [Line Items]
(Loss) gain on investments	(69)	(50)	(123)	(11)
Mortgage Backed [Member]
Schedule of Investments [Line Items]
(Loss) gain on investments	29		31
Equity Securities [Member]
Schedule of Investments [Line Items]
(Loss) gain on investments	$ 29	$ 6,935	$ 34	$ 8,572

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2014

Segment Information [Abstract]

Schedule of Business Segment Information

The following is business segment information for the three and nine months ended September 30, 2014 and 2013 (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
Revenues:
Standard Commercial Segment	$ 20,985	$ 21,163	$ 60,667	$ 62,160
Specialty Commercial Segment	57,983	60,787	179,167	168,127
Personal Segment	4,225	21,256	14,699	64,621
Corporate	(1,776)	5,407	(5,171)	6,145
Consolidated	$ 81,417	$ 108,613	$ 249,362	$ 301,053
Pre-tax income (loss):
Standard Commercial Segment	$ 2,244	$ 1,163	$ 318	$ 641
Specialty Commercial Segment	7,653	7,564	27,042	11,828
Personal Segment	662	(1,613)	1,916	(3,331)
Corporate	(5,831)	2,358	(16,094)	(2,820)
Consolidated	$ 4,728	$ 9,472	$ 13,182	$ 6,318

Schedule of Additional Business Segment Information

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

	September 30,	December 31,
	2014	2013
Assets
Standard Commercial Segment	$                    146,411	$     142,143
Specialty Commercial Segment	603,324	536,894
Personal Segment	222,790	210,825
Corporate	19,654	19,161
	$                    992,179	$     909,023

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Reinsurance (Tables)

9 Months Ended

Sep. 30, 2014

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,
	2014	2013	2014	2013
Ceded earned premiums	$          37,360	$   16,488	$           105,594	$ 45,629
Reinsurance recoveries	$          25,785	$     9,197	$             74,302	$ 24,770

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General

9 Months Ended

Sep. 30, 2014

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 primarily 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, (iii) medical professional liability insurance products and services, and (iv) satellite launch insurance products.  Our Personal Lines business unit handles personal insurance products and services.  Our insurance company subsidiaries supporting these business units are American Hallmark Insurance Company of Texas, Hallmark Insurance Company, Hallmark Specialty Insurance Company, Hallmark County Mutual Insurance Company, Hallmark National Insurance Company and Texas Builders Insurance Company.

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

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Deferred Policy Acquisition Costs (Tables)

9 Months Ended

Sep. 30, 2014

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,
	2014	2013	2014	2013
Deferred	$               3,873	$        (34,995)	$           (19,749)	$  (53,243)
Amortized	(4,782)	34,715	21,670	51,211
Net	$               (909)	$           (280)	$                1,921	$   (2,032)

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Fair Value (Fair Value, Assets Measured on Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	$ 411,262	$ 410,095
Total equity securities	54,678	51,230
Total debt and equity securities	465,940	461,325
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	75,358	78,753
Corporate Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	30,752	43,875
Collateralized Corporate Bank Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	112,200	102,178
Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	141,988	157,552
Mortgage Backed [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	50,964	27,737
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	54,678	51,230
Total debt and equity securities	54,678	51,230
Other Observable Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	396,719	392,578
Total debt and equity securities	396,719	392,578
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	75,358	78,753
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	30,752	43,875
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	111,897	101,585
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	127,748	140,628
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	50,964	27,737
Unobservable Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	14,543	17,517
Total debt and equity securities	14,543	17,517
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	303	593
Unobservable Inputs, Level 3 [Member] | Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total debt securities	$ 14,240	$ 16,924

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenues [Abstract]
Revenues	$ 81,417	$ 108,613	$ 249,362	$ 301,053
Pre-tax income (loss) [Abstract]
Pre-tax income (loss)	4,728	9,472	13,182	6,318
Standard Commercial Segment [Member]
Revenues [Abstract]
Revenues	20,985	21,163	60,667	62,160
Pre-tax income (loss) [Abstract]
Pre-tax income (loss)	2,244	1,163	318	641
Specialty Commercial Segment [Member]
Revenues [Abstract]
Revenues	57,983	60,787	179,167	168,127
Pre-tax income (loss) [Abstract]
Pre-tax income (loss)	7,653	7,564	27,042	11,828
Personal Segment [Member]
Revenues [Abstract]
Revenues	4,225	21,256	14,699	64,621
Pre-tax income (loss) [Abstract]
Pre-tax income (loss)	662	(1,613)	1,916	(3,331)
Corporate [Member]
Revenues [Abstract]
Revenues	(1,776)	5,407	(5,171)	6,145
Pre-tax income (loss) [Abstract]
Pre-tax income (loss)	$ (5,831)	$ 2,358	$ (16,094)	$ (2,820)

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
ASSETS
Debt securities, available-for-sale, at fair value (cost: $411,000 in 2014 and $408,627 in 2013)	$ 411,262	$ 410,095
Equity securities, available-for-sale, at fair value (cost: $24,967 in 2014 and $24,902 in 2013)	54,678	51,230
Total investments	465,940	461,325
Cash and cash equivalents	160,027	141,666
Restricted cash	16,882	12,190
Ceded unearned premiums	61,989	44,988
Premiums receivable	82,472	71,157
Accounts receivable	2,754	2,382
Receivable for securities	2,825	1,320
Reinsurance recoverable	105,437	76,818
Deferred policy acquisition costs	20,665	22,586
Goodwill	44,695	44,695
Intangible assets, net	18,044	19,953
Federal income tax recoverable	688
Prepaid expenses	2,031	1,531
Other assets	7,730	8,412
Total assets	992,179	909,023
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving credit facility payable		1,473
Subordinated debt securities	56,702	56,702
Reserves for unpaid losses and loss adjustment expenses	414,752	382,640
Unearned premiums	205,184	185,303
Reinsurance balances payable	32,647	20,598
Pension liability	776	1,433
Payable for securities	10,086	206
Federal income tax payable		719
Deferred federal income taxes, net	3,548	2,825
Accounts payable and other accrued expenses	20,604	19,006
Total liabilities	744,299	670,905
Commitments and Contingencies (Note 17)
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333; issued 20,872,831 shares in 2014 and 2013	3,757	3,757
Additional paid-in capital	122,913	122,827
Retained earnings	115,871	106,209
Accumulated other comprehensive income	18,276	16,883
Treasury stock (1,748,840 shares in 2014 and 1,609,374 in 2013), at cost	(12,937)	(11,558)
Total stockholders' equity	247,880	238,118
Liabilities and equity, total	$ 992,179	$ 909,023

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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	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Schedule of Investments [Line Items]
Fair Value 12 months or less	$ 143,301	$ 113,255
Unrealized Losses 12 months or less	(1,976)	(1,287)
Fair Value Longer than 12 months	34,749	53,634
Unrealized Losses Longer than 12 months	(2,269)	(2,613)
Total Fair Value	178,050	166,889
Total Unrealized Losses	(4,245)	(3,900)
Equity Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	283	316
Unrealized Losses 12 months or less	(3)	(2)
Fair Value Longer than 12 months		2,721
Unrealized Losses Longer than 12 months		(312)
Total Fair Value	283	3,037
Total Unrealized Losses	(3)	(314)
Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	143,018	112,939
Unrealized Losses 12 months or less	(1,973)	(1,285)
Fair Value Longer than 12 months	34,749	50,913
Unrealized Losses Longer than 12 months	(2,269)	(2,301)
Total Fair Value	177,767	163,852
Total Unrealized Losses	(4,242)	(3,586)
US Treasury Securities and Obligations of U.S. Government [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	29,723	47,162
Unrealized Losses 12 months or less	(76)	(165)
Total Fair Value	29,723	47,162
Total Unrealized Losses	(76)	(165)
Corporate Bonds [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	113	5,649
Unrealized Losses 12 months or less		(56)
Fair Value Longer than 12 months		4,421
Unrealized Losses Longer than 12 months		(394)
Total Fair Value	113	10,070
Total Unrealized Losses		(450)
Collateralized Corporate Bank Loans [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	72,134	23,026
Unrealized Losses 12 months or less	(874)	(422)
Fair Value Longer than 12 months	8,057	6,968
Unrealized Losses Longer than 12 months	(957)	(67)
Total Fair Value	80,191	29,994
Total Unrealized Losses	(1,831)	(489)
Municipal Bonds [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	30,834	35,719
Unrealized Losses 12 months or less	(787)	(413)
Fair Value Longer than 12 months	22,715	34,684
Unrealized Losses Longer than 12 months	(879)	(1,562)
Total Fair Value	53,549	70,403
Total Unrealized Losses	(1,666)	(1,975)
Mortgage Backed [Member] | Debt Securities [Member]
Schedule of Investments [Line Items]
Fair Value 12 months or less	10,214	1,383
Unrealized Losses 12 months or less	(236)	(229)
Fair Value Longer than 12 months	3,977	4,840
Unrealized Losses Longer than 12 months	(433)	(278)
Total Fair Value	14,191	6,223
Total Unrealized Losses	$ (669)	$ (507)

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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, 2013	$ 3,757	$ 122,611	$ 96,507	$ 13,746	$ (11,558)
Equity based compensation		109
Net income			6,274			6,274
Additional minimum pension liability, net of tax				80
Net unrealized holding (losses) gains arising during period, net of tax				3,069
Reclassification adjustment for losses (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
Balance at Dec. 31, 2012	3,757	122,475	97,964	7,899	(11,558)
Equity based compensation		245
Net income			4,817			4,817
Additional minimum pension liability, net of tax				241
Net unrealized holding (losses) gains arising during period, net of tax				10,558
Reclassification adjustment for losses (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 Dec. 31, 2013	3,757	122,827	106,209	16,883	(11,558)	238,118
Acquisition of treasury stock					(1,395)
Stock options exercised		(1)			16
Equity based compensation		87
Net income			9,662			9,662
Additional minimum pension liability, net of tax				79
Net unrealized holding (losses) gains arising during period, net of tax				1,235
Reclassification adjustment for losses (gains) included in net income, net of tax				79
Balance at Sep. 30, 2014	3,757	122,913	115,871	18,276	(12,937)	247,880
Balance at Jun. 30, 2014	3,757	123,048	112,408	18,379	(12,278)
Acquisition of treasury stock					(659)
Equity based compensation		(135)
Net income			3,463			3,463
Additional minimum pension liability, net of tax				26
Net unrealized holding (losses) gains arising during period, net of tax				(144)
Reclassification adjustment for losses (gains) included in net income, net of tax				15
Balance at Sep. 30, 2014	$ 3,757	$ 122,913	$ 115,871	$ 18,276	$ (12,937)	$ 247,880

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Document and Entity Information [Abstract]
Deferred	$ 3,873	$ (34,995)	$ (19,749)	$ (53,243)
Amortized	(4,782)	34,715	21,670	51,211
Net	$ (909)	$ (280)	$ 1,921	$ (2,032)

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Changes in Accumulated Other Comprehensive Income Balances (Tables)

9 Months Ended

Sep. 30, 2014

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, 2014 and 2013 were as follows (in thousands):

	Minimum		Accumulated Other
	Pension	Unrealized	Comprehensive
	Liability	Gains (Loss)	Income (Loss)
Balance at December 31, 2012	$ (2,954)	$ 10,853	$ 7,899
Other comprehensive income :
Change in net actuarial loss	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
Balance at December 31, 2013	$ (1,480)	$ 18,363	$ 16,883
Other comprehensive income :
Change in net actuarial gain	122	-	122
Tax effect on change in net actuarial gain	(43)	-	(43)
Net unrealized holding gains arising during the period	-	1,900	1,900
Tax effect on unrealized gains arising during the period	-	(665)	(665)
Reclassification adjustment for losses included in net realized gains	-	122	122
Tax effect on reclassification adjustment for losses included in income
tax expense	-	(43)	(43)
Other comprehensive income, net of tax	79	1,314	1,393
Balance at September 30, 2014	$ (1,401)	$ 19,677	$ 18,276

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Net Periodic Pension Cost

9 Months Ended

Sep. 30, 2014

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,
	2014	2013	2014	2013
Interest cost	$ 133	$ 127	$ 399	$ 379
Amortization of net loss	41	123	122	371
Expected return on plan assets	(175)	(154)	(524)	(462)
Net periodic pension cost	$ (1)	$ 96	$ (3)	$ 288
Contributed amount	$ 299	$ 157	$ 533	$ 268

Refer to Note 14 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013 for more discussion of our retirement plans.

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General (Narrative) (Details)	9 Months Ended
	Sep. 30, 2014 segment
General [Abstract]
Operating business units of subsidiaries	5
Number of reportable segments	3

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2014

Commitments and Contingencies [Abstract]

Commitments and Contingencies

17. Commitments and Contingencies

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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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash flows from operating activities:
Net income	$ 9,662	$ 4,817
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization expense	2,822	3,691
Deferred federal income taxes	(182)	(268)
Net realized losses (gains)	122	(9,723)
Share-based payments expense	87	245
Change in ceded unearned premiums	(17,001)	(9,320)
Change in premiums receivable	(11,315)	(11,066)
Change in accounts receivable	(372)	(99)
Change in deferred policy acquisition costs	1,921	(2,032)
Change in unpaid losses and loss adjustment expenses	32,112	46,832
Change in unearned premiums	19,881	28,865
Change in reinsurance recoverable	(28,619)	(9,223)
Change in reinsurance balances payable	12,049	4,532
Change in current federal income tax recoverable/payable	(1,407)	(443)
Change in all other liabilities	941	(6,777)
Change in all other assets	1,009	13,489
Net cash provided by operating activities	21,710	53,520
Cash flows from investing activities:
Purchases of property and equipment	(809)	(920)
Net transfers (into) from restricted cash	(4,692)	7
Purchases of investment securities	(108,753)	(139,791)
Maturities, sales and redemptions of investment securities	113,758	153,737
Net cash (used in) provided by investing activities	(496)	13,033
Cash flows from financing activities:
Activity under revolving credit facility, net	(1,473)
Proceeds from exercise of employee stock options	15
Purchase of treasury shares	(1,395)
Net cash used in financing activities	(2,853)
Increase in cash and cash equivalents	18,361	66,553
Cash and cash equivalents at beginning of period	141,666	85,145
Cash and cash equivalents at end of period	160,027	151,698
Supplemental cash flow information:
Interest paid	3,435	3,439
Income taxes paid	5,109	2,212
Supplemental schedule of non-cash investing activities:
Change in receivable for securities related to investment disposals that settled after the balance sheet date	1,505	16
Change in payable for securities related to investment purchases that settled after the balance sheet date	$ (9,880)	$ 6,380

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Consolidated Balance Sheets [Abstract]
Debt securities, available-for-sale, cost (in dollars)	$ 411,000	$ 408,627
Equity securities, available for sale, cost (in dollars)	$ 24,967	$ 24,902
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	1,748,840	1,609,374

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Reinsurance

9 Months Ended

Sep. 30, 2014

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, 2014 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,
	2014	2013	2014	2013
Ceded earned premiums	$          37,360	$   16,488	$           105,594	$ 45,629
Reinsurance recoveries	$          25,785	$     9,197	$             74,302	$ 24,770

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, 2014 the terms of our property catastrophe reinsurance are:

o We retain the first $3.0 million of property catastrophe losses; and   

o Our reinsurers reimburse us 100% for any loss occurrence in excess of our $3.0 million retention up to $32.0 million for each catastrophic occurrence, subject to an aggregate limit of $64.0 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.  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. 

· Occupational Accident.  We purchase excess-of-loss reinsurance coverage for the occupational accident insurance product produced by our Standard Commercial P&C business unit.  The terms of occupational accident reinsurance are:

o We retain the first $1.0 million of any occupational accident risk; and

o Our reinsurers reimburse us for the next $5.0 million for each occupational accident risk up to $10.0 million for each occurrence.

· 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.  Effective March 1, 2014, we purchase proportional reinsurance where we cede 80% 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.  For policies written effective February 1, 2013 through February 28, 2014, we ceded 60% of these risks to reinsurers.

· Personal Auto.  We purchase proportional reinsurance where we cede 90% of the risks to reinsurers on the nonstandard automobile risks produced in certain 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. 

· Professional Liability.  Effective June 1, 2014, we purchase excess of loss reinsurance on our medical professional liability risks produced by our Hallmark Select business unit. The terms of our professional liability reinsurance are as follows:

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

o Our reinsurers reimburse us for the next $2.0 million for each professional liability loss occurrence.

Prior to June 1, 2014, we purchased proportional reinsurance on our medical professional liability risks produced by our Hallmark Select business unit where we retained 60% of each risk and ceded the remaining 40% to reinsurers.

· 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. Effective May 1, 2014, we purchase proportional reinsurance on the commercial auto liability risks produced by a program underwriter in our E&S Commercial business unit where we retain 20% of each risk and cede the remaining 80% to reinsurers.

· 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.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2014	Nov. 07, 2014
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		19,084,308
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2014
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2014

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Revolving Credit Facility Payable

9 Months Ended

Sep. 30, 2014

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, 2014, we had no outstanding borrowings under this revolving credit facility. 

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Consolidated Statements of Operations [Abstract]
Gross premiums written	$ 122,723	$ 123,664	$ 363,245	$ 351,278
Ceded premiums written	(38,698)	(20,775)	(122,596)	(54,948)
Net premiums written	84,025	102,889	240,649	296,330
Change in unearned premiums	(6,878)	(5,437)	(2,879)	(19,546)
Net premiums earned	77,147	97,452	237,770	276,784
Investment income, net of expenses	2,912	2,965	9,139	9,871
Net realized (losses) gains	(23)	6,950	(122)	9,723
Finance charges	1,300	1,484	4,067	4,396
Commission and fees	71	(251)	(1,528)	169
Other income	10	13	36	110
Total revenues	81,417	108,613	249,362	301,053
Losses and loss adjustment expenses	50,509	68,158	155,781	204,955
Other operating expenses	24,409	29,139	75,055	83,911
Interest expense	1,140	1,150	3,435	3,449
Amortization of intangible assets	631	694	1,909	2,420
Total expenses	76,689	99,141	236,180	294,735
Income before tax	4,728	9,472	13,182	6,318
Income tax expense	1,265	3,198	3,520	1,501
Net income	$ 3,463	$ 6,274	$ 9,662	$ 4,817
Net income per share:
Basic	$ 0.18	$ 0.33	$ 0.50	$ 0.25
Diluted	$ 0.18	$ 0.32	$ 0.50	$ 0.25

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Investments

9 Months Ended

Sep. 30, 2014

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, 2014	Cost	Gains	Losses	Value
U.S. Treasury securities and
obligations of U.S. Government	$                 75,390	$  44	$                     (76)	$                 75,358
Corporate bonds	29,569	1,183	-	30,752
Collateralized corporate bank loans	113,839	192	(1,831)	112,200
Municipal bonds	141,140	2,514	(1,666)	141,988
Mortgage-backed	51,062	571	(669)	50,964
Total debt securities	411,000	4,504	(4,242)	411,262
Total equity securities	24,967	29,714	(3)	54,678
Total debt and equity securities	$ 435,967	$ 34,218	$ (4,245)	$ 465,940
As of December 31, 2013
U.S. Treasury securities and
obligations of U.S. Government	$ 78,894	$ 24	$ (165)	$ 78,753
Corporate bonds	42,946	1,379	(450)	43,875
Collateralized corporate bank loans	102,053	614	(489)	102,178
Municipal bonds	156,950	2,577	(1,975)	157,552
Mortgage-backed	27,784	460	(507)	27,737
Total debt securities	408,627	5,054	(3,586)	410,095
Total equity securities	24,902	26,642	(314)	51,230
Total debt and equity securities	$ 433,529	$ 31,696	$ (3,900)	$ 461,325

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
	2014	2013	2014	2013
U.S. Treasury securities and
obligations of U.S. Government	$             -	$         -	$       -	$      -
Corporate bonds	(22)	21	111	846
Collateralized corporate bank loans	10	44	99	316
Municipal bonds	(69)	(50)	(123)	(11)
Mortgage-backed	29	-	31	-
Equity securities	29	6,935	34	8,572
(Loss) gain on investments	(23)	6,950	152	9,723
Other-than-temporary impairments	-	-	(274)	-
Net realized (losses) gains	$ (23)	$       6,950	$ (122)	$  9,723

We realized gross gains on investments of $0.1million and $7.1 million during the three months ended September 30, 2014 and 2013, respectively and $0.4million and $9.9 million for the nine months ended September 30, 2014 and 2013, respectively. We realized gross losses on investments of $0.1 million for the three months ended both September 30, 2014 and 2013.  We realized gross losses on investments of $0.2 million for the nine months both ended September 30, 2014 and 2013.  We recorded proceeds from the sale of investment securities of $0.6million and $12.5 million during the three months ended September 30, 2014 and 2013, respectively, and $14.9 million and $30.2 million for the nine months ended September 30, 2014 and 2013, 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, 2014 and December 31, 2013 (in thousands):

	As of September 30, 2014
	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	$ 29,723	$ (76)		$                -	$                 -		$ 29,723	$ (76)
Corporate bonds	113	-		-	-		113	-
Collateralized corporate bank loans	72,134	(874)		8,057	(957)		80,191	(1,831)
Municipal bonds	30,834	(787)		22,715	(879)		53,549	(1,666)
Mortgage-backed	10,214	(236)		3,977	(433)		14,191	(669)
Total debt securities	143,018	(1,973)		34,749	(2,269)		177,767	(4,242)
Total equity securities	283	(3)		-	-		283	(3)
Total debt and equity securities	$ 143,301	$ (1,976)		$ 34,749	$ (2,269)		$ 178,050	$ (4,245)
	As of  December 31, 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	$ 47,162	$ (165)		$              -	$             -		$ 47,162	$ (165)
Corporate bonds	5,649	(56)		4,421	(394)		10,070	(450)
Collateralized corporate bank loans	23,026	(422)		6,968	(67)		29,994	(489)
Municipal bonds	35,719	(413)		34,684	(1,562)		70,403	(1,975)
Mortgage-backed	1,383	(229)		4,840	(278)		6,223	(507)
Total debt securities	112,939	(1,285)		50,913	(2,301)		163,852	(3,586)
Total equity securities	316	(2)		2,721	(312)		3,037	(314)
Total debt and equity securities	$ 113,255	$ (1,287)		$ 53,634	$ (2,613)		$ 166,889	$ (3,900)

At September 30, 2014, the gross unrealized losses more than twelve months old were attributable to 46 debt security positions.  At December 31, 2013, the gross unrealized losses more than twelve months old were attributable to 84 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, 2014 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	$ 55,209	$ 55,553
Due after one year through five years	168,202	169,167
Due after five years through ten years	106,628	105,598
Due after ten years	29,899	29,980
Mortgage-backed	51,062	50,964
	$ 411,000	$ 411,262

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Fair Value

9 Months Ended

Sep. 30, 2014

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 notransfers 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, 2014 and December 31, 2013 (in thousands):

	As of September 30, 2014
	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	$              -	$ 75,358	$        -	$ 75,358
Corporate bonds	-	30,752	-	30,752
Collateralized corporate bank loans	-	111,897	303	112,200
Municipal bonds	-	127,748	14,240	141,988
Mortgage-backed	-	50,964	-	50,964
Total debt securities	-	396,719	14,543	411,262
Total equity securities	54,678	-	-	54,678
Total debt and equity securities	$ 54,678	$ 396,719	$ 14,543	$ 465,940

	As of December 31, 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	$              -	$ 78,753	$          -	$ 78,753
Corporate bonds	-	43,875	-	43,875
Collateralized corporate bank loans	-	101,585	593	102,178
Municipal bonds	-	140,628	16,924	157,552
Mortgage-backed	-	27,737	-	27,737
Total debt securities	-	392,578	17,517	410,095
Total equity securities	51,230	-	-	51,230
Total debt and equity securities	$ 51,230	$          392,578	$ 17,517	$ 461,325

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 9.1%, 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, 2014 and 2013 (in thousands): 

Beginning balance as of January 1, 2014	$ 17,517
Sales	-
Settlements	(3,434)
Purchases	-
Issuances	-
Total realized/unrealized gains included in net income	-
Net gains included in other comprehensive income	460
Transfers into Level 3	-
Transfers out of Level 3	-
Ending balance as of September 30, 2014	$ 14,543
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

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Income Taxes

9 Months Ended

Sep. 30, 2014

Income Taxes [Abstract]

Income Taxes

16.   Income Taxes

Our effective income tax rate for the first nine months ended September 30, 2014 and 2013 was 26.7% and 23.8%, respectively. The rates varied from the statutory tax rate primarily due to the amount of tax exempt income compared to taxable income.      

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Subordinated Debt Securities

9 Months Ended

Sep. 30, 2014

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, 2014, 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, 2014, 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, 2014

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, 2014, there were outstanding incentive stock options to purchase 1,010,594 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 464,771 shares of our common stock. There are 202,504 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 vests in equal annual increments on each of the first three anniversary dates and terminatesten 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, 2014 is presented below:

			Average
		Weighted	Remaining	Aggregate
		Average	Contractual	Intrinsic
	Number of	Exercise	Term	Value
	Shares	Price	(Years)	($000)
Outstanding at January 1, 2014	1,387,489	$      9.66
Granted	-
Exercised	(2,142)	$       6.61
Forfeited or expired	(70,596)	$       9.50
Outstanding at September 30, 2014	1,314,751	$       9.67	3.5	$       2,098
Exercisable at September 30, 2014	1,201,178	$       9.96	3.4	$       1,683

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,
	2014	2013	2014	2013
Intrinsic value of options exercised	$          -	$            -	$          9	$         -
Cost of share-based payments (non-cash)	$        35	$         52	$        133	$     156
Income tax benefit of share-based
payments recognized in income	$          8	$            8	$          23	$       23

As of September 30, 2014, there was $262 thousand of total unrecognized compensation cost related to non-vested stock options granted under our plans, of which $43 thousand is expected to be recognized for the remainder of 2014, $171 thousand is expected to be recognized during 2015, $45 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 were no stock options granted during the first nine months of 2014 or 2013.

Restricted Stock Units:

The 2005 LTIP was amended by the stockholders 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.  Subsequently on September 8, 2014, an aggregate of 175,983 restricted stock units were granted to certain employees. 

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, the restricted stock units granted on April 10, 2013 will vest on March 31, 2016, the restricted stock units granted on September 8, 2014 (except for one grant) will vest on March 31, 2017 and one grant of restricted stock units on September 8, 2014 will vest on March 31, 2018.   Grantees of restricted stock units do not have any rights of a stockholder of the Company, and do not participate in any distributions to common stockholders of the Company until the award fully vests upon satisfaction of the vesting schedule, performance criteria and other conditions set forth in the grant agreement. 

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 granted in 2012 and 2013 is $9.20 per unit.  The grant date fair value of the restricted stock units granted in 2014 is $9.66 per unit.  The Company incurred a benefit to compensation expense of $170 thousand and $46 thousand related to the restricted stock units during the three and nine months ended September 30, 2014, respectively.  The Company incurred compensation expense of $58 thousand and $89 thousand related to the restricted stock units during the three and nine months ended September 30, 2013, respectively.  The Company recorded an income tax expense of $59 thousand and $16 thousand related to the restricted stock units during the three and nine months ended September 30, 2014, respectively.  The Company recorded an income tax benefit of $20 thousand and $31 thousand 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, 2014 and changes during the nine months then ended is presented below:

	Number of
	Restricted
	Stock Units
Non-vested at January 1, 2014	236,851
Granted	175,983
Vested	-
Forfeited	(102,987)
Non-vested at September 30, 2014	309,847

As of September 30, 2014, there was $979 thousand of total unrecognized compensation cost related to non-vested restricted stock units granted under our 2005 LTIP, of which $95 thousand is expected to be recognized during the remainder of 2014, $352 thousand is expected to be recognized in 2015, $334 thousand is expected to be recognized in 2016, $169 thousand is expected to be recognized in 2017 and $29 thousand is expected to be recognized in 2018.

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Earnings per Share (Narrative) (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Earnings per Share [Abstract]
Antidilutive securities excluded from computation of earnings per share, amount	715,832	779,999	715,832	779,999

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Pledged Investments

9 Months Ended

Sep. 30, 2014

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 $20.9 million and $29.1 million at September 30, 2014 and December 31, 2013, respectively.

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Reserves for Unpaid Losses and Loss Adjustment Expenses

9 Months Ended

Sep. 30, 2014

Reserves for Unpaid Losses and Loss Adjustment Expenses [Abstract]

Reserves for Unpaid 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 $1.5 million of unfavorable prior years’ net loss development during the three months ended September 30, 2014.  We recorded $5.4 million of favorable prior year net loss development during the nine months ended September 30, 2014.  For the year to date, the $5.4 million of favorable development was attributable to $6.9 million favorable development on claims incurred in the 2013 accident year, $3.6 million favorable development on claims incurred during the 2011 accident year, partially offset by $3.4 million unfavorable development on claims incurred in the 2012 accident year and $1.7 million unfavorable development on claims incurred in the 2010 and prior accident years. During the nine months ended September 30, 2014, our Standard Commercial P&C business unit accounted for $3.0 million of the favorable development. Our Personal Lines Segment accounted for $3.1 million of the favorable development, our Workers Compensation business unit accounted for $1.9 million of the favorable development and our Hallmark Select business unit accounted for $0.7 million of the favorable development. These favorable developments were partially offset by unfavorable development of $3.3 million in our E&S Commercial business unit. The favorable development for our Standard Commercial P&C business unit of $3.0 million was driven primarily by our general liability line of business in the 2011 accident year. The favorable development for our Personal Lines Segment of $3.1 million was primarily attributable to the 2013 accident year. The favorable development of $1.9 million for our Workers Compensation business unit was primarily attributable to the 2013 and 2012 accident years. The favorable development of $0.7 million in our Hallmark Select business unit consisted of $0.9 million of favorable development in our commercial excess liability line of business and $0.5 million in our professional medical liability products, partially offset by $0.7 million of unfavorable development in our general aviation line of business. The unfavorable development of $3.3 million in our E&S Commercial business unit was primarily driven by unfavorable development in our commercial auto liability and general liability lines of business.

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 hull coverage. 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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Segment Information

9 Months Ended

Sep. 30, 2014

Segment Information [Abstract]

Segment Information

9. Segment Information

The following is business segment information for the three and nine months ended September 30, 2014 and 2013 (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
Revenues:
Standard Commercial Segment	$ 20,985	$ 21,163	$ 60,667	$ 62,160
Specialty Commercial Segment	57,983	60,787	179,167	168,127
Personal Segment	4,225	21,256	14,699	64,621
Corporate	(1,776)	5,407	(5,171)	6,145
Consolidated	$ 81,417	$ 108,613	$ 249,362	$ 301,053
Pre-tax income (loss):
Standard Commercial Segment	$ 2,244	$ 1,163	$ 318	$ 641
Specialty Commercial Segment	7,653	7,564	27,042	11,828
Personal Segment	662	(1,613)	1,916	(3,331)
Corporate	(5,831)	2,358	(16,094)	(2,820)
Consolidated	$ 4,728	$ 9,472	$ 13,182	$ 6,318

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

	September 30,	December 31,
	2014	2013
Assets
Standard Commercial Segment	$                    146,411	$     142,143
Specialty Commercial Segment	603,324	536,894
Personal Segment	222,790	210,825
Corporate	19,654	19,161
	$                    992,179	$     909,023

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance			$ 16,883
Other comprehensive income (loss):
Change in net actuarial loss	40	123	122	371
Tax effect on change in net actuarial gain	(14)	(43)	(43)	(130)
Net unrealized holding gains (losses) arising during the period	(221)	4,721	1,900	16,243
Tax effect on unrealized gains arising during the period	77	(1,652)	(665)	(5,685)
Reclassification adjustment for losses included in net realized gains (losses)	23	(6,950)	122	(9,723)
Tax effect on reclassification adjustment for (losses) gains included in net income	(8)	2,433	(43)	3,403
Other comprehensive income (loss), net of tax	(103)	(1,368)	1,393	4,479
Ending Balance	18,276		18,276
Minimum Pension Liability [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance			(1,480)	(2,954)
Other comprehensive income (loss):
Change in net actuarial loss			122	371
Tax effect on change in net actuarial gain			(43)	(130)
Other comprehensive income (loss), net of tax			79	241
Ending Balance	(1,401)	(2,713)	(1,401)	(2,713)
Unrealized Gain (Loss) [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance			18,363	10,853
Other comprehensive income (loss):
Net unrealized holding gains (losses) arising during the period			1,900	16,243
Tax effect on unrealized gains arising during the period			(665)	(5,685)
Reclassification adjustment for losses included in net realized gains (losses)			122	(9,723)
Tax effect on reclassification adjustment for (losses) gains included in net income			(43)	3,403
Other comprehensive income (loss), net of tax			1,314	4,238
Ending Balance	19,677	15,091	19,677	15,091
Accumulated Other Comprehensive Income [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance			16,883	7,899
Other comprehensive income (loss):
Change in net actuarial loss			122	371
Tax effect on change in net actuarial gain			(43)	(130)
Net unrealized holding gains (losses) arising during the period			1,900	16,243
Tax effect on unrealized gains arising during the period			(665)	(5,685)
Reclassification adjustment for losses included in net realized gains (losses)			122	(9,723)
Tax effect on reclassification adjustment for (losses) gains included in net income			(43)	3,403
Other comprehensive income (loss), net of tax			1,393	4,479
Ending Balance	$ 18,276	$ 12,378	$ 18,276	$ 12,378

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Income Taxes (Narrative) (Details)	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Income Taxes [Abstract]
Effective income tax rate, continuing operations	26.70%	23.80%

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Net Periodic Pension Cost (Tables)

9 Months Ended

Sep. 30, 2014

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,
	2014	2013	2014	2013
Interest cost	$ 133	$ 127	$ 399	$ 379
Amortization of net loss	41	123	122	371
Expected return on plan assets	(175)	(154)	(524)	(462)
Net periodic pension cost	$ (1)	$ 96	$ (3)	$ 288
Contributed amount	$ 299	$ 157	$ 533	$ 268

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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, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Cost of share-based payments (non-cash)			$ 87	$ 245
Employee Stock Option [Member]
Intrinsic value of options exercised			9
Cost of share-based payments (non-cash)	35	52	133	156
Income tax benefit of share-based payments recognized in income	$ 8	$ 8	$ 23	$ 23

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Earnings per Share

9 Months Ended

Sep. 30, 2014

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,
	2014	2013	2014	2013
Weighted average shares - basic	19,181	19,263	19,227	19,263
Effect of dilutive securities	168	107	137	97
Weighted average shares - assuming dilution	19,349	19,370	19,364	19,360

For the three and nine months ended September 30, 2014, 715,832 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 each of the three and nine month periods 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. 

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Basis of Presentation (Policy)

9 Months Ended

Sep. 30, 2014

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, 2013 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    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 $49.4 million as of September 30, 2014.  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/recoverable, 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 Trust II (collectively the “Trusts”) and have determined that 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.

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Share-Based Payment Arrangements (Narrative) (Details) (USD $) In Thousands, except Share data, unless otherwise specified		9 Months Ended							9 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		24 Months Ended			0 Months Ended		6 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2014 Long Term Incentive Plan 2005 [Member]	Sep. 30, 2014 Long Term Incentive Plan 2005 [Member] Minimum [Member]	Sep. 30, 2014 Long Term Incentive Plan 2005 [Member] Maximum [Member]	Sep. 30, 2014 Long Term Incentive Plan 2005 [Member] First Anniversary [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2014 Long Term Incentive Plan 2005 [Member] Second Anniversary [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2014 Long Term Incentive Plan 2005 [Member] Third Anniversary [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2014 Long Term Incentive Plan 2005 [Member] Fourth Anniversary [Member] Option Issued Prior to 2009 [Member]	Sep. 30, 2014 Incentive Stock Options 2010 [Member] Long Term Incentive Plan 2005 [Member]	Sep. 30, 2014 Incentive Stock Options 2011 [Member] 5,000 Grant [Member]	Sep. 30, 2014 Incentive Stock Options 2011 [Member] Long Term Incentive Plan 2005 [Member] 5,000 Grant [Member]	Sep. 30, 2014 Non Qualified Stock Options [Member] Long Term Incentive Plan 2005 [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2013 Restricted Stock Units (RSUs) [Member]	Dec. 31, 2013 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member] Minimum [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member] Maximum [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]	Jun. 30, 2013 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of non-qualified stock options to purchase shares of common stock outstanding												200,000
Share-based payment award vesting rights									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
Share-based payment, award vesting period											7 years
Incentive stock options termination period			5 years	10 years					10 years		10 years
Non qualified stock options termination period		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	$ 262																						$ 979
Compensation costs expected to be recognized during remainder of the fiscal period	43																						95
Compensation costs expected to be recognized during year two	171																						352
Compensation costs expected to be recognized during year three	45																						334
Compensation costs expected to be recognized during year four	3																						169
Compensation costs expected to be recognized during year five																							29
Other than options, granted																				122,823	129,463		175,983
Other than options, forfeited																						9,280	102,987
Allocated share-based compensation expense													170	58	46	89
Options granted, weighted average grant date fair value															$ 9.66		$ 9.20
Income tax benefit of share-based payments recognized in income													$ 59	$ 20	$ 16	$ 31

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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, 2014	Sep. 30, 2013
Fair Value [Abstract]
Beginning balance	$ 17,517	$ 19,668
Settlements	(3,434)	(302)
Net gains included in other comprehensive income	460	924
Ending balance	$ 14,543	$ 20,290

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Consolidated Statements of Comprehensive Income [Abstract]
Net income	$ 3,463	$ 6,274	$ 9,662	$ 4,817
Other comprehensive income (loss):
Change in net actuarial gain	40	123	122	371
Tax effect on change in net actuarial gain	(14)	(43)	(43)	(130)
Unrealized holding (losses) gains arising during the period	(221)	4,721	1,900	16,243
Tax effect on unrealized holding (losses) gains arising during the period	77	(1,652)	(665)	(5,685)
Reclassification adjustment for (losses) gains included in net income	23	(6,950)	122	(9,723)
Tax effect on reclassification adjustment for (losses) gains included in net income	(8)	2,433	(43)	3,403
Other comprehensive (loss) income, net of tax	(103)	(1,368)	1,393	4,479
Comprehensive income	$ 3,360	$ 4,906	$ 11,055	$ 9,296

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Business Combinations

9 Months Ended

Sep. 30, 2014

Business Combinations [Abstract]

Business Combinations

3. Business Combinations

           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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Subordinated Debt Securities (Narrative) (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended		0 Months Ended	9 Months Ended			0 Months Ended	9 Months Ended
	Sep. 30, 2014 Subordinated Debt Due In 2035 [Member]	Jun. 21, 2005 Subordinated Debt Due In 2035 [Member]	Jun. 21, 2005 Subordinated Debt Due In 2035 [Member] Trust I [Member]	Sep. 30, 2014 Subordinated Debt Due In 2035 [Member] Trust I [Member]	Sep. 30, 2014 Subordinated Debt Due In 2037 [Member]	Aug. 23, 2007 Subordinated Debt Due In 2037 [Member]	Aug. 23, 2007 Subordinated Debt Due In 2037 [Member] Trust II [Member]	Sep. 30, 2014 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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Fair Value (Tables)

9 Months Ended

Sep. 30, 2014

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, 2014 and December 31, 2013 (in thousands):

	As of September 30, 2014
	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	$              -	$ 75,358	$        -	$ 75,358
Corporate bonds	-	30,752	-	30,752
Collateralized corporate bank loans	-	111,897	303	112,200
Municipal bonds	-	127,748	14,240	141,988
Mortgage-backed	-	50,964	-	50,964
Total debt securities	-	396,719	14,543	411,262
Total equity securities	54,678	-	-	54,678
Total debt and equity securities	$ 54,678	$ 396,719	$ 14,543	$ 465,940

	As of December 31, 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	$              -	$ 78,753	$          -	$ 78,753
Corporate bonds	-	43,875	-	43,875
Collateralized corporate bank loans	-	101,585	593	102,178
Municipal bonds	-	140,628	16,924	157,552
Mortgage-backed	-	27,737	-	27,737
Total debt securities	-	392,578	17,517	410,095
Total equity securities	51,230	-	-	51,230
Total debt and equity securities	$ 51,230	$          392,578	$ 17,517	$ 461,325

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, 2014 and 2013 (in thousands): 

Beginning balance as of January 1, 2014	$ 17,517
Sales	-
Settlements	(3,434)
Purchases	-
Issuances	-
Total realized/unrealized gains included in net income	-
Net gains included in other comprehensive income	460
Transfers into Level 3	-
Transfers out of Level 3	-
Ending balance as of September 30, 2014	$ 14,543
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

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Business Combinations (Narrative) (Details) (USD $)	0 Months Ended		3 Months Ended
	Jul. 01, 2011	Jul. 02, 2011 TBIC Holding Corporation [Member]	Sep. 30, 2012 TBIC Holding Corporation [Member]	Jul. 01, 2011 TBIC Holding Corporation [Member]
Business Acquisition [Line Items]
Total consideration for acquisition		$ 1,600,000
Holdback purchase price paid			350,000
Fair value of contingent consideration				$ 3,000,000
Contingent purchase payable period benchmark	4 years

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Deferred Policy Acquisition Costs

9 Months Ended

Sep. 30, 2014

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,
	2014	2013	2014	2013
Deferred	$               3,873	$        (34,995)	$           (19,749)	$  (53,243)
Amortized	(4,782)	34,715	21,670	51,211
Net	$               (909)	$           (280)	$                1,921	$   (2,032)