Net Income Up for Hallmark Financial Services

May 9, 2003

Dallas-based Hallmark Financial Services Inc. reported operating results for the first quarter ended March 31, 2003, noting its net income rose to $8.6 million, or $0.75 on a diluted per share basis, compared to a net loss of $1.5 million, or $0.14 on a diluted per share basis for the same period in 2002.

Total revenues were $18.7 million for the quarter ended March 31, 2003, as compared to $5.1 million for the corresponding 2002 period.

Excluding the extraordinary gain and the cumulative effect of a change in accounting principle described below, net income for the quarter ended March 31, 2003 was $0.4 million, as compared to net income of $0.2 million for the same period in 2002.

Hallmark’s first quarter 2003 earnings were favorably impacted by its recent acquisitions of Phoenix Indemnity Insurance Company (Phoenix), effective January 1, 2003, and Millers General Agency (MGA), effective December 1, 2002. The acquisition of Phoenix was accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations.” This statement requires that the company estimate the fair value of assets acquired and liabilities assumed by the company as of the date of the acquisition. In accordance with the application of SFAS 141, the company recognized an extraordinary gain of $8.2 million from the acquisition of Phoenix.

In addition, the company saw improvements in its normal operating earnings for the first quarter of 2003, as compared to 2002, due to improved loss ratios as a result of increases in premium rates in the company’s various insurance operations.

“The assimilation of our recent acquisitions and the operational enhancements at our existing Texas non-standard auto insurance operation are proceeding according to the Company’s plan,” stated Mark E. Schwarz, chairman and CEO.

Hallmark engages primarily in sale of property and casualty insurance products. Its business involves marketing, underwriting and premium financing of non-standard personal automobile insurance primarily in Texas, Arizona and New Mexico, commercial insurance in Texas, New Mexico, Idaho, Oregon and Washington, third party claims administration, and other insurance related services.

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