10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended DECEMBER 31, 2013

Or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________________ to _________________________________

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 Incorporation or Organization)	(I.R.S. Employer 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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock $.18 par value	Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes¨Nox

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨Nox

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.

Yesx 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).

YesxNo¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨

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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer¨ Accelerated filerx 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¨Nox

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $129.9 million

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 19,263,457 shares of common stock, $.18 par value per share, outstanding as of March 12, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. Unless the context requires otherwise, in this Form 10-K the term “Hallmark” refers solely to Hallmark Financial Services, Inc. and the terms “we,” “our,” and “us” refer to Hallmark and its subsidiaries. The direct and indirect subsidiaries of Hallmark are referred to in this Form 10-K in the manner identified in the chart under “Item 1. Business – Operational Structure.”

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

This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are intended to be covered by the safe harbors created thereby. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or similar expressions. 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. Statements regarding the following subjects are forward-looking by their nature:

· our business and growth strategies;

· our performance goals;

· our projected financial condition and operating results;

· our understanding of our competition;

· industry and market trends;

· the impact of technology on our products, operations and business; and

· any other statements or assumptions that are not historical facts.

The forward-looking statements included in this Form 10-K are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to these forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions, legislative initiatives, 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 these 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-K will prove to be accurate. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of such information should not be regarded as a representation that our objectives and plans will be achieved.

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PART I

Item 1. Business.

Who We Are

We are a diversified property/casualty insurance group that serves businesses and individuals in specialty and niche markets.

We offer standard commercial insurance, specialty commercial insurance and personal insurance in selected market subcategories that are characteristically low-severity and predominately short-tailed risks. We focus on marketing, distributing, underwriting and servicing property/casualty insurance products that require specialized underwriting expertise or market knowledge. We believe this approach provides us the best opportunity to achieve favorable policy terms and pricing. The insurance policies we produce are written by our six insurance company subsidiaries as well as unaffiliated insurers.

We market, distribute, underwrite and service our property/casualty insurance products primarily through five business units, each of which has a specific focus. Our Standard Commercial P&C business unit primarily handles standard commercial insurance and occupational accident insurance, our Workers Compensation business unit specializes in small and middle market workers compensation business, and 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 Hallmark Select business unit is the combination of our operations previously known as our General Aviation business unit, our Excess & Umbrella business unit, the medical professional liability business previously handled by our E&S Commercial business unit and the satellite launch insurance products previously managed at the parent level. Our Personal Lines business unit focuses on non-standard personal automobile insurance and complementary personal insurance products and services. The subsidiaries comprising our Workers Compensation business unit were acquired July 1, 2011.

Each business unit has its own management team with significant experience in distributing products to its target markets and proven success in achieving underwriting profitability and providing efficient claims management. Each business unit is responsible for marketing, distribution, underwriting and claims management while we provide capital management, reinsurance, actuarial, investment, financial reporting, technology and legal services and other administrative support at the parent level. We believe this approach optimizes our operating results by allowing us to effectively penetrate our selected specialty and niche markets while maintaining operational controls, managing risks, controlling overhead and efficiently allocating our capital across business units. We expect future growth to be derived from organic growth in the premium production of our existing business units and selected opportunistic acquisitions that meet our criteria.

What We Do

We market commercial and personal lines of property/casualty insurance products which are tailored to the risks and coverages required by the insured. We believe that most of our target markets are underserved by larger property/casualty insurers because of the specialized nature of the underwriting required. We are able to offer these products profitably as a result of the expertise of our experienced underwriters. We also believe our long-standing relationships with independent general agencies and retail agents and the service we provide differentiate us from larger property/casualty insurers.

Our Standard Commercial P&C business unit primarily underwrites low-severity, short-tailed commercial property/casualty insurance products in the standard market. These products have historically produced stable loss results and include general liability, commercial automobile, commercial property and umbrella coverages. Our Standard Commercial P&C business unit currently markets its products through a network of 356 independent agents primarily serving businesses in the non-urban areas of Texas, New Mexico, Oregon, Idaho, Montana, Washington, Utah, Wyoming, Arkansas, Hawaii and Missouri. In addition our Standard Commercial P&C business unit offers occupational accident coverage in Texas through an underwriting agency that specializes in the occupational accident insurance market.

Our Workers Compensation business unit, which was acquired July 1, 2011, offers small and middle market workers compensation insurance products. Our Workers Compensation business unit currently markets its products through a network of 154 independent agents in Texas and Montana, with a predominate portion of its distribution in Texas.

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Our E&S Commercial business unit primarily offers commercial property/casualty insurance products in the excess and surplus lines market. Excess and surplus lines insurance provides coverage for difficult to place risks that do not fit the underwriting criteria of insurers operating in the standard market. Our E&S Commercial business unit focuses on middle market commercial risks that do not meet the underwriting requirements of standard insurers due to factors such as loss history, number of years in business, minimum premium size and types of business operation. Our E&S Commercial business unit primarily writes commercial automobile, general liability, commercial property and excess casualty. Our E&S Commercial business unit markets its products in 26 states through 11 wholesale brokers, a program underwriter and 77 general agency offices, as well as 188 independent retail agents in Texas and Oregon.

Our Hallmark Select business unit offers small and middle market commercial excess liability, umbrella and general liability insurance on both an admitted and non-admitted basis ; general aviation property/casualty insurance primarily for private and small commercial aircraft and airports; satellite launch property/casualty insurance products; and medical professional liability insurance on an excess and surplus lines basis.

The small and middle market commercial excess liability, umbrella and general liability insurance underwritten by our Hallmark Select business unit focuses primarily on trucking, specialty automobile, and non-fleet automobile coverage. Typical risks range from one power unit to fleets of up to 200 power units. Our Hallmark Select business unit markets these products through 117 wholesale brokers in 49 states.

The aircraft liability and hull insurance products underwritten by our Hallmark Select business unit are targeted to transitional or non-standard pilots who may have difficulty obtaining insurance from a standard carrier. Airport liability insurance is marketed to smaller, regional airports. Our Hallmark Select business unit markets these general aviation insurance products through 192 independent specialty brokers in 48 states. The satellite launch property/casualty policies produced by our Hallmark Select business unit are marketed through underwriting agencies with technical knowledge of space insurance. We can retain up to $2.0 million per risk for satellite launches and in-orbit coverage for up to 12 months.

The medical professional liability insurance underwritten on an excess and surplus basis by our Hallmark Select business unit focuses on healthcare professionals that do not meet the underwriting requirements of standard insurers due to factors such as loss history, number of years in business, minimum premium size and types of business operation. Our Hallmark Select business unit markets these medical professional liability insurance products through 18 wholesale brokers in 49 states.

Our Personal Lines business unit offers non-standard personal automobile policies, which generally provide the minimum limits of liability coverage mandated by state law to drivers who find it difficult to obtain insurance from standard carriers due to various factors including age, driving record, claims history or limited financial resources. Our Personal Lines business unit also provides personal insurance products complementary to non-standard personal automobile insurance such as policies covering low value dwelling/homeowners, renters and manufactured homes. Our Personal Lines business unit markets these policies through 3,335 independent retail agents in 15 states.

Our insurance company subsidiaries are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”). We acquired TBIC on July 1, 2011. AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement, pursuant to which AHIC retains 30% of the net premiums written by any of them, HIC retains 27% of the net premiums written by any of them, HSIC retains 30% of the net premiums written by any of them and HNIC retains 13% of the net premiums written by any of them. A.M. Best Company (“A.M. Best”), a nationally recognized insurance industry rating service and publisher, has pooled its ratings of these four insurance company subsidiaries and assigned a financial strength rating of “A–” (Excellent) and an issuer credit rating of “a-” to each of these individual insurance company subsidiaries and to the pool formed by these four insurance company subsidiaries. Also, A.M. Best has assigned a financial strength rating of “A–” (Excellent) and an issuer credit rating of “a-” to HCM. A.M. Best does not assign a financial strength rating or an issuer credit rating to TBIC.

Our five business units are segregated into three reportable industry segments for financial accounting purposes. The Standard Commercial Segment consists of the Standard Commercial P&C business unit and the Workers Compensation business unit. The Specialty Commercial Segment includes our E&S Commercial business unit and Hallmark Select business unit, as well as certain specialty risk programs (“Specialty Programs”) which are managed at the parent level. The Personal Segment presently consists solely of our Personal Lines business unit. The following table displays the gross premiums written and net premiums by these reportable segments for affiliated and unaffiliated insurers for the years ended December 31, 2013, 2012 and 2011.

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	Year Ended December 31,
	2013		2012		2011
	(dollars in thousands)
Gross Premiums Written:
Standard Commercial Segment (1)	$	87,147	$	77,091	$	69,420
Specialty Commercial Segment		296,108		235,695		185,020
Personal Segment		76,772		77,056		100,441
Total	$	460,027	$	389,842	$	354,881
Net Premiums Written:
Standard Commercial Segment (1)	$	79,466	$	70,091	$	63,944
Specialty Commercial Segment		235,655		186,053		144,277
Personal Segment		45,644		76,345		95,655
Total	$	360,765	$	332,489	$	303,876

(1) The Workers Compensation business unit included in the Standard Commercial Segment was acquired effective July 1, 2011.

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Operational Structure

Our insurance company subsidiaries retain a portion of the premiums produced by our business units. The following chart reflects the operational structure of our organization, including the subsidiaries comprising our business units and the business units included in each reportable segment as of December 31, 2013.

Standard Commercial Segment

The Standard Commercial Segment of our business includes our Standard Commercial P&C business unit and our Workers Compensation business unit. During 2013, our Standard Commercial P&C business unit accounted for approximately 90% and our Workers Compensation business unit accounted for the remaining 10% of the aggregate premiums produced by the Standard Commercial Segment.

Standard Commercial P&C business unit. Our Standard Commercial P&C business unit markets, underwrites and services standard commercial lines insurance primarily in the non-urban areas of Texas, New Mexico, Idaho, Oregon, Montana, Washington, Utah, Wyoming, Arkansas, Hawaii and Missouri. The subsidiaries comprising our Standard Commercial P&C business unit include American Hallmark Insurance Services, a regional managing general agency, and ECM, a claims administration company. American Hallmark Insurance Services targets customers that are in low-severity classifications in the standard commercial market, which as a group have relatively stable loss results. The typical customer is a small to midsize business with a policy that covers property, general liability and automobile exposures. Our Standard Commercial P&C business unit underwriting criteria exclude lines of business and classes of risks that are considered to be high-severity or volatile, or which involve significant latent injury potential or other long-tailed liability exposures. ECM administers the claims on the insurance policies produced by American Hallmark Insurance Services. In addition our Standard Commercial P&C business unit offers occupational accident coverage in Texas through an underwriting agency that is a specialist in the occupational accident insurance market. Products offered by our Standard Commercial P&C business unit include the following:

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· Commercial automobile. Commercial automobile insurance provides third-party bodily injury and property damage coverage and first-party property damage coverage against losses resulting from the ownership, maintenance or use of automobiles and trucks in connection with an insured’s business.

· General liability. General liability insurance provides coverage for third-party bodily injury and property damage claims arising from accidents occurring on the insured’s premises or from their general business operations.

· Umbrella. Umbrella insurance provides coverage for third-party liability claims where the loss amount exceeds coverage limits provided by the insured’s underlying general liability and commercial automobile policies.

· Commercial property. Commercial property insurance provides first-party coverage for the insured’s real property, business personal property, and business interruption losses caused by fire, wind, hail, water damage, theft, vandalism and other insured perils.

· Commercial multi-peril. Commercial multi-peril insurance provides a combination of property and liability coverage that can include commercial automobile coverage on a single policy.

· Business owner’s. Business owner’s insurance provides a package of coverage designed for small to midsize businesses with homogeneous risk profiles. Coverage includes general liability, commercial property and commercial automobile.

· Occupational accident. Occupational accident insurance provides an alternative to statutory workers compensation insurance in Texas. Coverage includes medical, short term disability and accidental death and dismemberment.

Our Standard Commercial P&C business unit markets its property/casualty insurance products through 356 independent agencies operating in its target markets. Our Standard Commercial P&C business unit applies a strict agent selection process and seeks to provide its independent agents some degree of non-contractual geographic exclusivity. Our Standard Commercial P&C business unit also strives to provide its independent agents with convenient access to product information and personalized service. As a result, the Standard Commercial P&C business unit has historically maintained excellent relationships with its producing agents, as evidenced by the 22 year average tenure of the 14 agency groups that each produced more than $1.0 million in premium during the year ended December 31, 2013. During 2013, the top ten agency groups produced approximately 37%, and no individual agency group produced more than 9%, of the total premium volume of our Standard Commercial P&C business unit.

Our Standard Commercial P&C business unit writes most risks on a package basis using a commercial multi-peril policy or a business owner’s policy. Umbrella policies are written only when our Standard Commercial P&C business unit also writes the insured’s underlying general liability and commercial automobile coverage. Through December 31, 2005, our Standard Commercial P&C business unit marketed policies on behalf of Clarendon National Insurance Company (“Clarendon”), a third-party insurer. Our Standard Commercial P&C business unit earns a commission based on a percentage of the earned premium it produced for Clarendon. The commission percentage is determined by the underwriting results of the policies produced. Our Standard Commercial P&C business unit presently markets all new and renewal policies exclusively for AHIC.

All of the commercial policies written by our Standard Commercial P&C business unit are for a term of 12 months. If the insured is unable or unwilling to pay for the entire premium in advance, we provide an installment payment plan that requires the insured to pay 20% or 25% down and the remaining payments over eight months. We charge installment fees of up to $7.50 per payment for the installment payment plan.

Workers Compensation business unit. Our Workers Compensation business unit markets, underwrites and services workers compensation insurance in Texas and Montana. The subsidiaries comprising our Workers Compensation business unit include TBIC Holding which has two wholly-owned subsidiaries, TBIC, a Texas domiciled workers compensation insurance carrier and TBICRM, which provides risk management services to customers of TBIC. The subsidiaries comprising the Workers Compensation business unit were acquired July 1, 2011.

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Our Workers Compensation business unit markets its products through 154 independent agencies operating in Texas and Montana, with a predominate portion of its distribution in Texas. During 2013, the top ten agency groups produced approximately 45%, and no individual agency group produced more than 9%, of the total premium volume of our Workers Compensation business unit.

Specialty Commercial Segment

The Specialty Commercial Segment of our business includes our E&S Commercial business unit and our Hallmark Select business unit, as well as certain Specialty Programs which are managed at the parent level. During 2013, our E&S Commercial business unit accounted for approximately 72% of the aggregate premiums produced by the Specialty Commercial Segment, with our commercial umbrella and excess liability, general aviation, medical professional liability and satellite launch insurance products handled by our Hallmark Select business unit accounting for 17%, 6%, 2% and 1%, respectively. Our Specialty Programs accounted for the remaining 2% of the premium produced by the Specialty Commercial Segment during 2013.

E&S Commercial business unit. Our E&S Commercial business unit markets, underwrites, finances and services commercial lines insurance in 26 states with a particular emphasis on commercial automobile, general liability and commercial property risks produced on an excess and surplus lines basis. Excess and surplus lines insurance provides coverage for difficult to place risks that do not fit the underwriting criteria of insurers operating in the standard market. The subsidiaries comprising our E&S Commercial business unit include HSU, which is a regional managing general underwriter, TGASRI which is a Texas managing general agency, and PAAC, which provides premium financing for policies marketed by HSU and certain unaffiliated general and retail agents. HSU accounts for approximately 99% of the premium volume financed by PAAC.

Our E&S Commercial business unit focuses on middle market commercial risks that do not meet the underwriting requirements of traditional standard insurers due to issues such as loss history, number of years in business, minimum premium size and types of business operation. During 2013, commercial automobile, general liability and commercial property accounted for approximately 83%, 12% and 4%, respectively, of the premiums produced by our E&S Commercial business unit. Target risks for commercial automobile insurance are business auto and trucking for hire fleets, excluding hazardous or flammable materials haulers. Target risks for general liability insurance are small business risk exposures including artisan contractors, sales and service organizations, and building and premises liability exposures. Target risks for commercial property insurance are low- to mid-value structures including office buildings, mercantile shops, restaurants and rental dwellings, in each case with aggregate property limits of less than $500,000. The commercial insurance products offered by our E&S Commercial business unit include the following:

• Commercial automobile. Commercial automobile insurance provides third-party bodily injury and property damage coverage and first-party property damage coverage against losses resulting from the ownership, maintenance or use of automobiles and trucks in connection with an insured’s business.

· General liability. General liability insurance provides coverage for third-party bodily injury and property damage claims arising from accidents occurring on the insured’s premises or from their general business operations.

· Commercial property. Commercial property insurance provides first-party coverage for the insured’s real property, business personal property, theft and business interruption losses caused by fire, wind, hail, water damage, vandalism and other insured perils. Windstorm, hurricane and hail are generally excluded in coastal areas.

· Commercial excess liability. Commercial excess liability insurance is designed to provide an extra layer of protection for bodily injury, personal and advertising injury, or property damage losses above the primary layer of commercial automobile, general liability and employer’s liability insurance. The excess insurance does not begin until the limits of liability in the primary layer have been exhausted. The excess layer provides not only higher limits, but catastrophic protection from large losses.

· Commercial umbrella. Commercial umbrella insurance protects businesses for bodily injury, personal and advertising injury, or property damage claims in excess of the limits of their primary commercial automobile, general liability and employers liability policies, and for some claims excluded by their primary policies (subject to a deductible). Umbrella insurance provides not only higher limits, but catastrophic protection for large losses.

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Our E&S Commercial business unit markets its products in 26 states through 11 wholesale brokers, a program underwriter and 77 general agency offices, as well as 188 independent retail agents in Texas and Oregon. Our E&S Commercial business unit strives to simplify the placement of its excess and surplus lines policies by providing our general agents with a web rating portal which allows for instantaneous quoting and signature-ready applications which can be emailed or faxed to its independent retail agents. During 2013, general agents produced 80%, the program underwriter produced 12%, retail agents produced 5% and wholesale brokers produced 3% of total premiums produced by our E&S Commercial business unit. During 2013, the top ten general agents produced approximately 36%, the top ten wholesale brokers produced approximately 3% and no general agent produced more than 7%, of the total premium volume of our E&S Commercial business unit. During the same period, the top ten retail agents produced approximately 3%, and no retail agent produced more than 1%, of the total premium volume of our E&S Commercial business unit.

Through 2008, all business of our E&S Commercial business unit was produced under a fronting agreement with member companies of the Republic Group (“Republic”), which granted our E&S Commercial business unit the authority to develop underwriting programs, set rates, appoint retail and general agents, underwrite risks, issue policies and adjust and pay claims. We assumed 70% of the risk under this arrangement in 2008. In 2009, our E&S Commercial business unit wrote a portion of its policies under a fronting arrangement with Republic pursuant to which we assumed 100% of the risk. Commission revenue was generated under the fronting agreement on the portion of premiums not assumed by AHIC. An additional commission may be earned if certain loss ratio targets are met. Additional revenue was generated from fully earned policy fees and installment billing fees charged on legacy personal lines products. Since 2010, in states where we were not yet licensed to offer a non-admitted product, we utilized a fronting arrangement with a third party pursuant to which we assumed all of the risk and then retroceded a portion of the risk to third party reinsurers.

The majority of the commercial policies written by our E&S Commercial business unit are for a term of 12 months. Exceptions include certain commercial automobile policies that are written for a term that coincides with the annual harvest of crops and special event general liability policies that are written for the term of the event, which is generally one to two days. Commercial lines policies are paid in full up front or financed with various premium finance companies, including PAAC.

Hallmark Select business unit. Our Hallmark Select business unit offers small and middle market commercial excess liability, umbrella and general liability insurance on both an admitted and non-admitted basis focusing primarily on trucking, specialty automobile, and non-fleet automobile coverage, general aviation property/casualty insurance primarily for private and small commercial aircraft and airports, satellite launch insurance products and medical professional liability insurance on an excess and surplus lines basis.

The small and middle market commercial excess liability, umbrella and general liability insurance underwritten by our Hallmark Select business unit is offered on an admitted and non-admitted basis in 49 states. Limits of liability offered are from $1,000,000 to $5,000,000 in coverage in excess of the primary carrier’s limits of liability. The principal focus of the excess & umbrella insurance products offered is transportation, specifically trucking for hire, specialty automobile and non-fleet automobile coverage. The Hallmark Select business unit also provides umbrella and excess liability coverage for small to midsize businesses in class categories such as contracting, manufacturing, hospitality and service. The majority of the excess & umbrella and general liability insurance policies written by our Hallmark Select business unit are on an annual basis. However, exceptions are common in an attempt to have policy effective dates coincide with those of the primary insurance policies. Policy premiums are due in full 30 days from the inception date of the policy. Our excess & umbrella insurance and general liability insurance products are offered through 117 wholesale brokers. During 2013, the top ten wholesale brokers accounted for 52% of our excess & umbrella and general liability premium volume, with no single wholesale broker accounting for more than 16%. During 2013, commercial excess liability risks accounted for 94% of the premiums, with the remaining 6% coming from commercial umbrella and general liability risks. The commercial excess & umbrella and general liability insurance products offered by our Hallmark Select business unit include the following:

· Commercial excess liability. Commercial excess liability insurance is designed to provide an extra layer of protection for bodily injury, personal and advertising injury, or property damage losses above the primary layer of commercial automobile, general liability and employer’s liability insurance. The excess insurance does not begin until the limits of liability in the primary layer have been exhausted. The excess layer provides not only higher limits, but catastrophic protection from large losses.

· Commercial umbrella. Commercial umbrella insurance protects businesses for bodily injury, personal and advertising injury, or property damage claims in excess of the limits of their primary commercial automobile, general liability and employers liability policies, and for some claims excluded by their primary policies (subject to a deductible). Umbrella insurance provides not only higher limits, but catastrophic protection for large losses.

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· Commercial general liability. General liability insurance provides coverage for third-party bodily injury and property damage claims arising from accidents occurring on the insured’s premises or from their general business operations.

In states where we are not admitted, our excess & umbrella and general liability insurance policies are written under a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of the risk to third party reinsurers. We presently reinsure or retrocede 80% of the excess & umbrella and general liability risk on policies written by our Hallmark Select business unit.

Our Hallmark Select business unit markets, underwrites and services general aviation property/casualty insurance in 48 states. The subsidiaries marketing our general aviation insurance products include Aerospace Insurance Managers, which markets standard aviation coverages, ASRI, which markets excess and surplus lines aviation coverages, and ACMG, which handles claims management. Aerospace Insurance Managers is one of only a few similar entities in the U.S. and has focused on developing a well-defined niche centering on transitional pilots, older aircraft and small airports and aviation-related businesses. In addition, our Hallmark Select business unit offers satellite launch property/casualty policies marketed through underwriting agencies with technical knowledge of space insurance. The general aviation and satellite launch products offered by our Hallmark Select business unit include the following:

· Aircraft. Aircraft insurance provides third-party bodily injury and property damage coverage and first-party hull damage coverage against losses resulting from the ownership, maintenance or use of aircraft.

· Airport liability. Airport liability insurance provides coverage for third-party bodily injury and property damage claims arising from accidents occurring on airport premises or from their operations.

· Satellite. We can retain up to $2.0 million per risk for satellite launches and in-orbit coverage for up to 12 months.

Our Hallmark Select business unit distributes its general aviation insurance products through 192 aviation specialty brokers. These specialty brokers submit to Aerospace Insurance Managers requests for aviation insurance quotations received from the states in which we operate and our Hallmark Select business unit selectively determines the risks fitting its target niche for which it will prepare a quote. During 2013, the top ten independent specialty brokers produced approximately 31%, and no broker produced more than 6%, of the total general aviation premium volume of our Hallmark Select business unit. Our Hallmark Select business unit independently develops, underwrites and prices each general aviation coverage written. We target pilots who may lack experience in the type of aircraft they have acquired or are transitioning between types of aircraft. We also target pilots who may be over the age limits of other insurers. We do not accept aircraft that are used for hazardous purposes such as crop dusting or heli-skiing. Liability limits are controlled, with approximately 91% of the aircraft written in 2013 bearing per-occurrence limits of $1,000,000 and per-passenger limits of $100,000 or less. The average insured aircraft hull value for aircraft written in 2013 was approximately $157,000. All general aviation policies produced by our Hallmark Select business unit are written through our insurance company subsidiaries.

Our Hallmark Select business unit markets medical professional liability insurance on an excess and surplus lines basis. Medical professional liability insurance provides coverage for third-party bodily injury claims resulting from professional services provided by physicians, surgeons, podiatrists and medical entities. Our Hallmark Select business unit distributes its medical professional liability insurance products through 18 wholesale brokers in 49 states.

Specialty Programs. Our Specialty Programs consist of fronting and agency arrangements which are managed at the parent level. The Specialty Programs business presently consists primarily of a fronting arrangement in Texas for a third party insurance company.

Personal Segment / Personal Lines Business Unit

The Personal Segment of our business presently consists solely of our Personal Lines business unit. Our Personal Lines business unit markets and services non-standard personal automobile policies and low value dwelling/homeowners, renters and manufactured homes in 15 states. We conduct this business under the name Hallmark Insurance Company. Hallmark Insurance Company provides management, policy and claims administration services to HIC and includes the operations of American Hallmark General Agency, Inc. and Hallmark Claims Services, Inc. Our non-standard personal automobile insurance generally provides for the minimum limits of liability coverage mandated by state laws to drivers who find it difficult to purchase automobile insurance from standard carriers as a result of various factors, including driving record, vehicle, age, claims history, or limited financial resources. Products offered by our Personal Lines business unit include the following:

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· Personal automobile. Personal automobile insurance is the primary product offered by our Personal Lines business unit. Our policies typically provide coverage to individuals for bodily injury and property damage at the minimum limits required by law, and for physical damage to an insured’s own vehicle from collision and various other perils. In addition, many states require policies to provide for first party personal injury protection, frequently referred to as no-fault coverage.

· Low value dwelling/homeowners. Low value dwelling/homeowners insurance provides coverage against insured’s property being destroyed or damaged by various perils and coverage for liability exposure of the insured.

· Renters. Renters insurance provides coverage for the contents of a renter’s home or apartment and for liability. Renter’s policies are similar to homeowners insurance, except they do not cover the structure.

· Manufactured homes. Manufactured home insurance covers mobile home owners against various perils and may include the liability exposure of the insured.

Our Personal Lines business unit markets its products through 3,335 independent retail agents operating in its target geographic markets. Non-standard automobile represented 88% of the premiums produced during 2013. Our Personal Lines business unit qualifies new agent appointments in order to establish an efficient network of independent agents to effectively penetrate its highly competitive markets. Our Personal Lines business unit periodically evaluates its independent agents and discontinues the appointment of agents whose production history does not satisfy certain standards. During 2013, the top ten independent agency groups produced approximately 36%, and no individual agency group produced more than 16%, of the total premium volume of our Personal Lines business unit.

During 2013, personal automobile liability coverage accounted for approximately 85% and personal automobile physical damage coverage accounted for the remaining 15% of the total non-standard automobile premiums produced by our Personal Lines business unit. Our most common policy term is a six month policy. We do offer additional terms of one-, two-, three and twelve-month policies in certain markets. Our typical non-standard personal automobile customer is unable or unwilling to pay a full or half year premium in advance. Accordingly, we currently offer a direct bill program where the premiums are directly billed to the insured on a monthly basis. We charge installment fees for each payment under the direct bill program.

Our Personal Lines business unit markets its products in 15 states directly for HIC, AHIC and HNIC. In Texas, our Personal Lines business unit also markets its policies through reinsurance arrangements with unaffiliated companies. We provide non-standard personal automobile coverage in Texas through a reinsurance arrangement with Old American County Mutual Fire Insurance Company (“OACM”) pursuant to which American Hallmark General Agency, Inc. holds a managing general agency appointment from OACM to manage the sale and servicing of OACM policies. HIC reinsures 100% of the OACM policies produced by American Hallmark General Agency, Inc. under these reinsurance arrangements. During the third quarter of 2009, HCM began fronting a portion of the business previously written through OACM.

Our Competitive Strengths

We believe that we enjoy the following competitive strengths:

· Specialized market knowledge and underwriting expertise. All of our business units possess extensive knowledge of the specialty and niche markets in which they operate, which we believe allows them to effectively structure and market their property/casualty insurance products. Our Personal Lines business unit has a thorough understanding of the unique characteristics of the non-standard personal automobile market. Our Standard Commercial P&C business unit and Workers Compensation business unit have significant underwriting experience in their target markets for standard commercial property/casualty insurance products. In addition, our E&S Commercial business unit and Hallmark Select business unit have developed specialized underwriting expertise which enhances their ability to profitably underwrite non-standard property/casualty insurance coverages.

· Tailored market strategies. Each of our business units has developed its own customized strategy for penetrating the specialty or niche markets in which it operates. These strategies include distinctive product structuring, marketing, distribution, underwriting and servicing approaches by each business unit. As a result, we are able to structure our property/casualty insurance products to serve the unique risk and coverage needs of our insureds. We believe these market-specific strategies enable us to provide policies tailored to the target customer that are appropriately priced and fit our risk profile.

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· Superior agent and customer service. We believe performing the underwriting, billing, customer service and claims management functions at the business unit level allows us to provide superior service to both our independent agents and insured customers. The easy-to-use interfaces and responsiveness of our business units enhance their relationships with the independent agents who sell our policies. We also believe our consistency in offering our insurance products through hard and soft markets helps to build and maintain the loyalty of our independent agents. Our customized products, flexible payment plans and prompt claims processing are similarly beneficial to our insureds.

· Market diversification. We believe operating in various specialty and niche segments of the property/casualty insurance market diversifies both our revenues and our risks. We also believe our business units generally operate on different market cycles, producing more earnings stability than if we focused entirely on one product. As a result of the pooling arrangement among four of our insurance company subsidiaries, we are able to efficiently allocate our capital among these various specialty and niche markets in response to market conditions and expansion opportunities. We believe this market diversification reduces our risk profile and enhances our profitability.

· Experienced management team. Our senior corporate management has an average of over 20 years of insurance experience. In addition, our business units have strong management teams, with an average of more than 20 years of insurance industry experience for the heads of our business units and an average of more than 15 years of underwriting experience for our underwriters. Our management has significant experience in all aspects of property/casualty insurance, including underwriting, claims management, actuarial analysis, reinsurance and regulatory compliance. In addition, Hallmark’s senior management has a strong track record of acquiring businesses that expand our product offerings and improve our profitability profile.

Our Strategy

We are striving to become a “Best in Class” specialty insurance company offering products in specialty and niche markets through the following strategies:

· Focusing on underwriting discipline and operational efficiency. We seek to consistently generate an underwriting profit on the business we write in hard and soft markets. Our business units have a strong track record of underwriting discipline and operational efficiency, which we seek to continue. We believe that in soft markets our competitors often offer policies at a low or negative underwriting profit in order to maintain or increase their premium volume and market share. In contrast, we seek to write business based on its profitability rather than focusing solely on premium production. To that end, we provide financial incentives to many of our underwriters and independent agents based on underwriting profitability.

· Achieving organic growth in our existing business lines. We believe we can achieve organic growth in our existing business lines by consistently providing our insurance products through market cycles, expanding geographically, expanding our product offerings, expanding our agency relationships and further penetrating our existing customer base. We believe our extensive market knowledge and strong agency relationships position us to compete effectively in our various specialty and niche markets. We also believe there is a significant opportunity to expand some of our existing business lines into new geographical areas and through new agency relationships while maintaining our underwriting discipline and operational efficiency. In addition, we believe there is an opportunity for some of our business units to further penetrate their existing customer bases with additional products offered by other business units.

· Pursuing selected, opportunistic acquisitions. We seek to opportunistically acquire insurance organizations that operate in specialty or niche property/casualty insurance markets that are complementary to our existing operations. We seek to acquire companies with experienced management teams, stable loss results and strong track records of underwriting profitability and operational efficiency. Where appropriate, we intend to ultimately retain profitable business produced by the acquired companies that would otherwise be retained by unaffiliated insurers. Our management has significant experience in evaluating potential acquisition targets, structuring transactions to ensure continued success and integrating acquired companies into our operational structure.

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· Maintaining a strong balance sheet. We seek to maintain a strong balance sheet by employing conservative investment, reinsurance and reserving practices and to measure our performance based on long-term growth in book value per share.

Distribution

We market our property/casualty insurance products predominately through independent general agents, retail agents and specialty brokers. Therefore, our relationships with independent agents and brokers are critical to our ability to identify, attract and retain profitable business. Each of our business units has developed its own tailored approach to establishing and maintaining its relationships with these independent distributors of our products. These strategies focus on providing excellent service to our agents and brokers, maintaining a consistent presence in our target niche and specialty markets through hard and soft market cycles and fairly compensating the agents and brokers who market our products. Our business units also regularly evaluate independent general and retail agents based on the underwriting profitability of the business they produce and their performance in relation to our objectives.

Except for the products of our Hallmark Select business unit, the distribution of property/casualty insurance products by our business units is geographically concentrated. For the twelve months ended December 31, 2013, five states accounted for approximately 67% of the gross premiums retained by our insurance company subsidiaries.

The following table reflects the geographic distribution of our insured risks, as represented by direct and assumed premiums written by our business segments for the twelve months ended December 31, 2013.

	Standard			Specialty
	Commercial			Commercial			Personal						Percent of
State	Segment			Segment			Segment			Total			Total
	(dollars in thousands)
Texas	$	37,881		$	171,308		$	28,726		$	237,915			51.7	%
Louisiana		-			22,798			-			22,798			5.0	%
Arizona		-			1,126			15,049			16,175			3.5	%
Oregon		14,320			560			(7	)		14,873			3.2	%
New Mexico		8,923			816			4,927			14,666			3.2	%
All other states		26,023			99,500			28,077			153,600			33.4	%
Total gross premiums written	$	87,147		$	296,108		$	76,772		$	460,027
Percent of total		18.9	%		64.4	%		16.7	%		100.0	%

Underwriting

The underwriting process employed by our business units involves securing an adequate level of underwriting information, identifying and evaluating risk exposures and then pricing the risks we choose to accept. Each of our business units offering commercial, healthcare professional or aviation insurance products employs its own underwriters with in-depth knowledge of the specific niche and specialty markets targeted by that business unit. We employ a disciplined underwriting approach that seeks to provide policies appropriately tailored to the specified risks and to adopt price structures that will be supported in the applicable market. Our experienced commercial, healthcare professional and aviation underwriters have developed underwriting principles and processes appropriate to the coverages offered by their respective business units.

We believe that managing the underwriting process through our business units capitalizes on the knowledge and expertise of their personnel in specific markets and results in better underwriting decisions. All of our underwriters have established limits of underwriting authority based on their level of experience. We also provide financial incentives to many of our underwriters based on underwriting profitability.

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To better diversify our revenue sources and manage our risk, we seek to maintain an appropriate business mix among our business units. At the beginning of each year, we establish a target net loss ratio for each business unit. We then monitor the actual net loss ratio on a monthly basis. If any line of business fails to meet its target net loss ratio, we seek input from our underwriting, actuarial and claims management personnel to develop a corrective action plan. Depending on the particular circumstances, that plan may involve tightening underwriting guidelines, increasing rates, modifying product structure, re-evaluating independent agency relationships or discontinuing unprofitable coverages or classes of risk.

An insurance company’s underwriting performance is traditionally measured by its statutory loss and loss adjustment expense ratio, its statutory expense ratio and its statutory combined ratio. The statutory loss and loss adjustment expense ratio, which is calculated as the ratio of net losses and loss adjustment expenses (“LAE”) incurred to net premiums earned, helps to assess the adequacy of the insurer’s rates, the propriety of its underwriting guidelines and the performance of its claims department. The statutory expense ratio, which is calculated as the ratio of underwriting and operating expenses to net premiums written, assists in measuring the insurer’s cost of processing and managing the business. The statutory combined ratio, which is the sum of the statutory loss and LAE ratio and the statutory expense ratio, is indicative of the overall profitability of an insurer’s underwriting activities, with a combined ratio of less than 100% indicating profitable underwriting results.

The following table shows, for the periods indicated, (i) our gross premiums written (in thousands); and (ii) our underwriting results as measured by the net statutory loss and LAE ratio, the statutory expense ratio, and the statutory combined ratio.

	Year Ended December 31,
	2013			2012			2011
Gross premiums written	$	460,027		$	389,842		$	354,881
Statutory loss & LAE ratio		72.2	%		72.0	%		82.8	%
Statutory expense ratio		34.7	%		33.5	%		32.8	%
Statutory combined ratio		106.9	%		105.5	%		115.6	%

These statutory ratios do not reflect the deferral of policy acquisition costs, investment income, premium finance revenues, or the elimination of inter-company transactions required by U.S. generally accepted accounting principles (“GAAP”).

The premium-to-surplus percentage measures the relationship between net premiums written in a given period (premiums written, less returned premiums and reinsurance ceded to other carriers) to policyholders surplus (admitted assets less liabilities), determined on the basis of statutory accounting practices prescribed or permitted by insurance regulatory authorities. State insurance department regulators expect insurance companies to maintain a premium-to-surplus percentage of not more than 300%. For the years ended December 31, 2013, 2012 and 2011, our consolidated premium-to-surplus ratios were 184%, 188% and 176%, respectively.

Claims Management and Administration

We believe that effective claims management is critical to our success and that our claims management process is cost-effective, delivers the appropriate level of claims service and produces superior claims results. Our claims management philosophy emphasizes the delivery of courteous, prompt and effective claims handling and embraces responsiveness to policyholders and agents. Our claims strategy focuses on thorough investigation, timely evaluation and fair settlement of covered claims while consistently maintaining appropriate case reserves. We seek to compress the cycle time of claim resolution in order to control both loss and claim handling cost. We also strive to control legal expenses by negotiating competitive rates with defense counsel and vendors, establishing litigation budgets and monitoring invoices.

Each of our business units maintains its own dedicated staff of specialized claims personnel to manage and administer claims arising under policies produced through their respective operations. The claims process is managed through a combination of experienced claims managers, seasoned claims supervisors, trained staff adjusters and independent adjustment or appraisal services, when appropriate. All adjusters are licensed in those jurisdictions for which they handle claims that require licensing. Limits on settlement authority are established for each claims supervisor and staff adjuster based on their level of experience. Certain independent adjusters have limited authority to settle claims. Claim exposures are periodically and systematically reviewed by claim supervisors and managers as a method of quality and loss control. Large loss exposures are reviewed at least quarterly with senior management of the business unit and monitored by Hallmark senior management.

Claims personnel receive in-house training and are required to attend various continuing education courses pertaining to topics such as best practices, fraud awareness, legal environment, legislative changes and litigation management. Depending on the criteria of each business unit, our claims adjusters are assigned a variety of claims to enhance their knowledge and ensure their continued development in efficiently handling claims. As of December 31, 2013, our business units had a total of 91 claims managers, supervisors and adjusters with an average experience of approximately 12 years.

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Analysis of Losses and LAE

Our consolidated financial statements include an estimated reserve for unpaid losses and LAE. We estimate our reserve for unpaid losses and LAE by using case-basis evaluations and statistical projections, which include inferences from both losses paid and losses incurred. We also use recent historical cost data and periodic reviews of underwriting standards and claims management practices to modify the statistical projections. We give consideration to the impact of inflation in determining our loss reserves, but do not discount reserve balances.

The amount of reserves represents our estimate of the ultimate cost of all unpaid losses and LAE incurred. These estimates are subject to the effect of trends in claim severity and frequency. We regularly review the estimates and adjust them as claims experience develops and new information becomes known. Such adjustments are included in current operations, including increases and decreases, net of reinsurance, in the estimate of ultimate liabilities for insured events of prior years.

Changes in loss development patterns and claim payments can significantly affect the ability of insurers to estimate reserves for unpaid losses and related expenses. We seek to continually improve our loss estimation process by refining our ability to analyze loss development patterns, claim payments and other information within a legal and regulatory environment that affects development of ultimate liabilities. Future changes in estimates of claim costs may adversely affect future period operating results. However, such effects cannot be reasonably estimated currently.

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Reconciliation of reserve for unpaid losses and LAE. The following table provides a reconciliation of our beginning and ending reserve balances on a net-of-reinsurance basis for the years ended December 31, 2013, 2012 and 2011, to the gross-of-reinsurance amounts reported in our balance sheets at December 31, 2013, 2012 and 2011.

	As of and for Year Ended December 31,
	2013			2012			2011
	(dollars in thousands)
Reserve for unpaid losses and LAE, net of reinsurance recoverables, January 1	$	263,832		$	254,901		$	213,723
Acquisition of subsidiaries effective July 1		-			-			8,816
Provision for losses and LAE for claims occurring in the current period		251,391			230,089			222,869
Increase (decrease) in reserve for unpaid losses and LAE for claims occurring in prior periods		9,954			(3,675	)		16,366
Payments for losses and LAE, net of reinsurance:
Current period		(101,897	)		(107,945	)		(101,025	)
Prior periods		(110,812	)		(109,538	)		(105,848	)
Reserve for unpaid losses and LAE at December 31, net of reinsurance recoverable		312,468			263,832			254,901
Reinsurance recoverable on unpaid losses and LAE at December 31		70,172			49,584			42,044
Reserve for unpaid losses and LAE at December 31, gross of reinsurance	$	382,640		$	313,416		$	296,945

The $10.0 million unfavorable development, $3.7 million favorable development and $16.4 million unfavorable development in prior accident years recognized in 2013, 2012 and 2011, respectively, represent normal changes in our loss reserve estimates. In 2013 and 2011, the aggregate loss reserve estimates for prior years were increased to reflect unfavorable loss development when the available information indicated a reasonable likelihood that the ultimate losses would be more than the previous estimates. In 2012, the aggregate loss reserve estimates for prior years were decreased to reflect favorable loss development when the available information indicated a reasonable likelihood that the ultimate losses would be less than the previous estimates. Generally, changes in reserves are caused by variations between actual experience and previous expectations and by reduced emphasis on the Bornhuetter-Ferguson method due to the aging of the accident years. (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Judgments - Reserves for unpaid losses and loss adjustment expenses.”)

The $10.0 million increase in reserves for unpaid losses and LAE recognized in 2013 was attributable to $5.0 million unfavorable development on claims incurred in the 2012 accident year, $1.7 million unfavorable development on claims incurred in the 2011 accident year and $3.3 million unfavorable development on claims incurred in the 2010 and prior accident years. Our E&S Commercial business unit and Personal Lines business unit accounted for $16.0 million and $1.8 million of the increase in reserves recognized during 2013. The increase in reserves for our E&S Commercial business unit was primarily related to commercial auto liability line of business. The increase in reserves for our Personal Lines business unit was primarily related to personal auto in the 2012 accident year. These unfavorable developments were partially offset by favorable prior years’ loss development of $3.7 million in our Standard Commercial P&C business unit, $2.6 million in our Hallmark Select business unit and $1.5 million in our Workers Compensation business unit. The decrease in reserves for our Standard Commercial P&C business unit was primarily related to commercial auto and general liability line of business. The decrease in reserves for our Hallmark Select business unit was driven by $2.3 million of favorable claims development in the 2011 and prior accident years related to our aircraft liability lines of business, partially offset by $0.1 million unfavorable claims development in the 2012 accident year related to our aircraft hull coverage. Further contributing to the decrease in reserves for our Hallmark Select business unit was $0.4 million of favorable claims development in our excess & umbrella lines of business. The decrease in reserves for our Workers Compensation business unit was related to the 2012 and 2011 accident years.

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The $3.7 million decrease in reserves for unpaid losses and LAE recognized in 2012 was attributable to $0.4 million favorable development on claims incurred in the 2011 accident year, $0.8 million favorable development on claims incurred in the 2010 accident year and $2.5 million favorable development on claims incurred in the 2009 and prior accident years. Our Standard Commercial P&C business unit, Hallmark Select business unit and E&S Commercial business unit accounted for $3.7 million, $3.3 million and $0.3 million, respectively, of the decrease in reserves recognized during 2012. The decrease in reserves for our Standard Commercial P&C business unit was primarily related to commercial auto, commercial property and general liability lines of business. The decrease in reserves for our Hallmark Select business unit was primarily related to our aircraft liability lines of business. The decrease in reserves for our E&S Commercial business unit was primarily related to general liability. These favorable developments were partially offset by unfavorable prior years’ loss development of $3.6 million in our Personal Lines business unit related to auto liability claims spread throughout various states and our low value dwelling/homeowners line of business.

The $16.4 million increase in reserves for unpaid losses and LAE recognized in 2011 was attributable to $15.0 million unfavorable development on claims incurred in the 2010 accident year, $3.6 million unfavorable development on claims incurred in the 2009 accident year and $2.2 million favorable development on claims incurred in the 2008 and prior accident years. Our Personal Lines business unit and E&S Commercial business unit accounted for $19.6 million and $3.7 million, respectively, of the increase in reserves recognized during 2011. The $19.6 million increase in reserves during 2011 for our Personal Lines business unit includes $10.3 million which was attributable to Florida developing much worse than expected due primarily to rapid growth in the claim volume from Florida, the complexity related to Florida personal injury protection coverage claims and the high incidence of fraudulent claims in that market. The remaining unfavorable prior years’ loss development for our Personal Lines business unit was primarily due to rapid geographic expansion. The increase in reserves for our E&S Commercial business unit was primarily related to commercial auto and physical damage and general liability lines of business. These unfavorable developments were partially offset by favorable prior years’ loss development of $6.1 million in our Hallmark Select business unit related to our aircraft liability lines of business and $0.8 million in our Standard Commercial P&C business unit primarily related to our commercial property lines of business.

Analysis of loss and LAE reserve development. The following table shows the development of our loss reserves, net of reinsurance, for years ended December 31, 2003 through 2013. Section A of the table shows the estimated liability for unpaid losses and LAE, net of reinsurance, recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in prior years that are unpaid at the balance sheet date, including losses that have been incurred but not yet reported to us. Section B of the table shows the re-estimated amount of the previously recorded liability, based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims.

Cumulative Redundancy/ (Deficiency) (Section C of the table) represents the aggregate change in the estimates over all prior years. Thus, changes in ultimate development estimates are included in operations over a number of years, minimizing the significance of such changes in any one year.

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ANALYSIS OF LOSS AND LAE DEVELOPMENT

As of and for Year Ended December 31

	2003		2004			2005			2006			2007			2008			2009			2010			2011			2012			2013
	(dollars in thousands)
A. Reserve for unpaid loss & LAE, net of reinsurance recoverables	$	21,197	$	17,700		$	25,997		$	72,801		$	120,849		$	150,025		$	176,250		$	213,723		$	254,901		$	263,832		$	312,468
B. Net reserve re-estimated as of:
One year later		20,003		15,300			24,820			66,387			119,034			151,645			185,440			230,089			251,226			273,786
Two years later		19,065		15,473			24,903			68,490			118,646			155,155			183,689			226,856			256,198
Three years later		19,698		13,962			23,144			68,809			120,444			154,738			181,268			230,145
Four years later		18,551		14,166			23,455			69,847			119,771			155,520			185,848
Five years later		18,769		13,163			24,425			71,879			123,949			158,842
Six years later		17,784		17,857			25,403			78,396			128,006
Seven years later		18,521		17,597			30,704			79,939
Eight years later		18,297		17,605			32,395
Nine years later		18,312		18,108
Ten years later		18,601
C. Net cumulative redundancy (deficiency)		2,596		(408	)		(6,398	)		(7,138	)		(7,157	)		(8,817	)		(9,598	)		(16,422	)		(1,297	)		(9,954	)
D. Cumulative amount of claims paid, net of reserve recoveries through:
One year later		12,217		8,073			16,721			30,061			50,458			64,810			73,647			105,848			109,538			110,812
Two years later		15,814		12,004			22,990			46,860			78,314			95,385			121,222			156,176			163,803
Three years later		18,162		13,113			24,562			58,322			93,286			120,133			146,956			188,044
Four years later		17,997		13,750			27,231			65,084			105,251			131,912			162,704
Five years later		18,415		13,102			28,833			71,082			112,029			140,618
Six years later		17,735		17,498			30,367			75,225			118,171
Seven years later		18,083		17,557			31,058			75,141
Eight years later		18,120		17,551			33,171
Nine years later		18,115		17,915
Ten years later		18,601
Net reserve-December 31		21,197		17,700			25,997			72,801			120,849			150,025			176,250			213,723			254,901			263,832			312,468
Reinsurance recoverables		7,259		1,948			324			4,763			4,489			6,338			8,412			37,954			42,044			49,584			70,172
Gross reserve-December 31		28,456		19,648			26,321			77,564			125,338			156,363			184,662			251,677			296,945			313,416			382,640
Net re-estimated reserve		18,601		18,108			32,395			79,939			128,006			158,842			185,848			230,145			256,198			273,786
Re-estimated reinsurance recoverable		4,419		1,050			1,776			6,702			7,919			7,443			7,195			37,582			43,277			49,084
Gross re-estimated reserve		23,020		19,158			34,171			86,641			135,925			166,285			193,043			267,727			299,475			322,870
Gross cumulative redundancy (deficiency)	$	5,436	$	490		$	(7,850	)	$	(9,077	)	$	(10,587	)	$	(9,922	))	$	(8,381	)	$	(16,050	)	$	(2,530	)	$	(9,454	)

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Reinsurance

We reinsure a portion of the risk we underwrite in order to control our exposure to losses and to protect our 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. Our reinsurance facilities are subject to annual renewal. In order to mitigate credit risk to reinsurance companies, most of our reinsurance recoverable balance as of December 31, 2013 was with reinsurers that had an A.M. Best rating of “A-” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

The following table presents our gross and net premiums written and earned and reinsurance recoveries for each of the last three years (in thousands).

	Year Ended December 31,
	2013			2012			2011
Gross premiums written	$	460,027		$	389,842		$	354,881
Ceded premiums written		(99,262	)		(57,353	)		(51,005	)
Net premiums written	$	360,765		$	332,489		$	303,876
Gross premiums earned	$	437,226		$	373,849		$	350,080
Ceded premiums earned		(76,685	)		(54,413	)		(57,039	)
Net premiums earned	$	360,541		$	319,436		$	293,041
Reinsurance recoveries	$	45,456		$	29,014		$	32,941

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

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

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

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

· Commercial property. Our commercial property reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event or catastrophic loss may have on our results. Effective July 1, 2013, 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.

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· 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. Effective July 1, 2013, the terms of our commercial casualty reinsurance are:

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

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

· Aviation. Effective July 1, 2013 we purchased 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 February 1, 2013 we purchased proportional reinsurance where we cede 60% of the risks to reinsurers on the low value dwelling/homeowners, renters and manufactured homes coverages produced in all states by our Personal Lines business unit.

· Personal Auto. Effective October 1, 2013 we purchased 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 owner’s risks and on the employment practices liability coverage on certain commercial multi-peril, general liability and business owner’s risks.

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

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

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

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

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

Investment Portfolio

Our investment objective is to maximize current yield while maintaining safety of capital together with sufficient liquidity for ongoing insurance operations. Our investment portfolio is composed of fixed-income and equity securities. As of December 31, 2013, we had total invested assets of $461.3 million. If market rates were to increase by 1%, the fair value of our fixed-income securities as of December 31, 2013 would decrease by approximately $12.2 million. The following table shows the fair values of various categories of fixed-income securities, the percentage of the total fair value of our invested assets represented by each category and the tax equivalent book yield based on fair value of each category of invested assets as of December 31, 2013 and 2012.

	As of December 31, 2013								As of December 31, 2012
	Fair		Percent  of						Fair		Percent  of
	Value		Total			Yield			Value		Total			Yield
	(in thousands)								(in thousands)
Category:
Corporate bonds	$	43,875		10.7	%		3.8	%	$	81,547		20.3	%		4.6	%
Collateralized corporate bank loans		102,178		24.9	%		4.0	%		106,371		26.5	%		4.8	%
Municipal bonds		157,552		38.4	%		5.0	%		163,732		40.8	%		5.1	%
US Treasury securities and
obligations of U.S. Government		78,753		19.2	%		0.5	%		40,061		10.0	%		0.3	%
Mortgage backed		27,737		6.8	%		2.7	%		9,724		2.4	%		2.9	%
Total	$	410,095		100.0	%		3.6	%	$	401,435		100.0	%		4.4	%

The weighted average credit rating for our fixed-income portfolio, using ratings assigned by Standard and Poor’s Rating Services (a division of the McGraw-Hill Companies, Inc.), was A- at December 31, 2013. The following table shows the distribution of our fixed-income portfolio by Standard and Poor’s rating as a percentage of total fair value as of December 31, 2013 and 2012:

	As of			As of
	December 31, 2013			December 31, 2012
Rating:
"AAA"		0.9	%		1.1	%
"AA"		33.7	%		17.9	%
"A"		22.4	%		18.1	%
"BBB"		18.9	%		37.1	%
"BB"		18.6	%		19.8	%
"B"		4.5	%		3.0	%
"CCC"		0.7	%		0.1	%
"NR"		0.3	%		2.9	%
Total		100.0	%		100.0	%

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The following table shows the composition of our fixed-income portfolio by remaining time to maturity as of December 31, 2013 and 2012.

	As of December 31, 2013					As of December 31, 2012
			Percentage of					Percentage of
			Total					Total
	Fair Value		Fair Value			Fair Value		Fair Value
	(in thousands)					(in thousands)
Remaining time to maturity:
Less than one year	$	71,969		17.6	%	$	68,739		17.1	%
One to five years		163,006		39.7	%		169,811		42.3	%
Five to ten years		108,761		26.5	%		102,770		25.6	%
More than ten years		38,622		9.4	%		50,391		12.6	%
Mortgage-backed		27,737		6.8	%		9,724		2.4	%
Total	$	410,095		100.0	%	$	401,435		100.0	%

Our investment strategy is to conservatively manage our investment portfolio by investing primarily in readily marketable, investment-grade, fixed-income securities. As of December 31, 2013, 11% of our investment portfolio was invested in equity securities. Our investment portfolio is managed internally. We regularly review our portfolio for declines in value. 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. The following table details the net unrealized gain balance by invested asset category as of December 31, 2013.

	Net Unrealized
	Gain Balance
Category	(in thousands)
Corporate bonds	$	929
Collateralized corporate bank loans		125
Municipal bonds		602
Equity securities		26,328
U.S. Treasury securities and obligations of U.S. Government		(141	)
Mortgage-backed		(47	)
Total	$	27,796

As part of our overall investment strategy, we also maintain an integrated cash management system utilizing on-line banking services and daily overnight investment accounts to maximize investment earnings on all available cash.

Technology

The majority of our technology systems are based on products licensed from insurance-specific technology vendors that have been substantially customized to meet the unique needs of our various business units. Our technology systems primarily consist of integrated central processing computers, a series of server-based computer networks and various communications systems that allow our various operations to share systems solutions and communicate to the corporate office in a timely, secure and consistent manner. We maintain backup facilities and systems through a contract with a leading provider of computer disaster recovery services. Each business unit bears the information services expenses specific to its operations as well as a portion of the corporate services expenses. Increases to vendor license and service fees are capped per annum.

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We believe the implementation of our various technology systems has increased our efficiency in the processing of our business, resulting in lower operating costs. Additionally, our systems enable us to provide a high level of service to our agents and policyholders by processing our business in a timely and efficient manner, communicating and sharing data with our agents and providing a variety of methods for the payment of premiums. We believe these systems have also improved the accumulation and analysis of information for our management.

Ratings

Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other rating agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance. A.M. Best has pooled its ratings of our AHIC, HIC, HSIC and HNIC subsidiaries and assigned a financial strength rating of “A-” (Excellent) and an issuer credit rating of “a-” to each of these individual insurance company subsidiaries and to the pool formed by the four insurance company subsidiaries. A.M. Best has also assigned a financial strength rating of “A-” (Excellent) and an issuer credit rating of “a-” to HCM. A.M. Best does not assign a financial strength rating or an issuer credit rating to TBIC. An “A–” rating is the fourth highest of 15 rating categories used by A.M. Best. In evaluating an insurer’s financial and operating performance, A.M. Best reviews the company’s profitability, indebtedness and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated fair value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best’s ratings reflect its opinion of an insurer’s financial strength, operating performance and ability to meet its obligations to policyholders and are not an evaluation directed at investors or recommendations to buy, sell or hold an insurer’s stock.

Competition

The property/casualty insurance market, our primary source of revenue, is highly competitive and, except for regulatory considerations, has very few barriers to entry. According to A.M. Best, there were 3,196 property/casualty insurance companies and 2,135 property/casualty insurance groups operating in North America as of July 16, 2013. Our Standard Commercial P&C business unit competes with a variety of large national standard commercial lines carriers such as Liberty Mutual Group, Travelers Companies, Inc., Cincinnati Financial Corporation and The Hartford Financial Services Group, as well as numerous smaller regional companies. The primary competition for the occupational accident insurance product offered by our Standard Commercial P&C unit includes such carriers as Great American Insurance Group, One Beacon Insurance Company, North American Insurance Company and Service Lloyds. The primary competition for our Workers Compensation business unit includes such carriers as Texas Mutual Insurance Company, Service Lloyds Insurance Company, Employers Insurance Company, The Hartford Financial Services Group and FirstComp Insurance Company. The primary competition for our E&S Commercial business unit includes such carriers as Accident Insurance Company, Atlantic Casualty Insurance Company, National Casualty, National Liability & Fire Insurance Company, Northland Insurance Company, Scottsdale Insurance Company, Spirit Commercial Auto Risk Retention Group and Lloyds of London. Our Hallmark Select business unit considers its primary competition for our excess & umbrella and general liability insurance products to include such carriers as American International Group, Inc., First Mercury Insurance Company, Axis Insurance Company, XL Specialty Insurance, W.R. Berkley Corporation and, to a lesser extent, a number of national standard lines carriers such as Travelers Companies, Inc. and Liberty Mutual Group. The primary competitors for our general aviation insurance products produced by our Hallmark Select business unit are Phoenix Aviation Managers, Starr Aviation, Chartis, United States Specialty Insurance Company, W. Brown & Company, United States Aircraft Insurance Group , Global Aerospace and Allianz Aviation Managers. The primary competition for the medical professional liability insurance products produced by our Hallmark Select business unit are Admiral Insurance Company, Catlin Insurance Company, CNA Financial Corporation, Evanston Insurance Company, Kinsale Insurance Company, Lexington Insurance Company, ProAssurance Corporation, RSUI Group and TDC Companies. Although our Personal Lines business unit competes with large national insurers such as Allstate Corporation, GEICO Corporation and Progressive Insurance Company, as a participant in the non-standard personal automobile marketplace its competition is most directly associated with numerous regional companies and managing general agencies. Our competitors include entities that have, or are affiliated with entities that have, greater financial and other resources than we have.

Generally, we compete on price, customer service, coverages offered, claims handling, financial stability, agent commission and support, customer recognition and geographic coverage. We compete with companies who use independent agents, captive agent networks, direct marketing channels or a combination thereof.

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Insurance Regulation

AHIC, HCM and TBIC are domiciled in Texas, HIC is domiciled in Arizona, HSIC is domiciled in Oklahoma and HNIC is domiciled in Ohio. Therefore, our insurance operations are regulated by the Texas Department of Insurance, the Arizona Department of Insurance, the Oklahoma Insurance Department and the Ohio Department of Insurance, as well as the applicable insurance department of each state in which we issue policies. Our insurance company subsidiaries are required to file quarterly and annual statements of their financial condition prepared in accordance with statutory accounting practices with the insurance departments of their respective states of domicile and the applicable insurance department of each state in which they write business. The financial conditions of our insurance company subsidiaries, including the adequacy of surplus, loss reserves and investments, are subject to review by the insurance department of their respective states of domicile.

Periodic financial and market conduct examinations. The insurance departments of the states of domicile for our insurance company subsidiaries have broad authority to enforce insurance laws and regulations through examinations, administrative orders, civil and criminal enforcement proceedings, and suspension or revocation of an insurer’s certificate of authority or an agent’s license. The state insurance departments that have jurisdiction over our insurance company subsidiaries may conduct on-site visits and examinations of the insurance companies' affairs, especially as to their financial condition, ability to fulfill their obligations to policyholders, market conduct, claims practices and compliance with other laws and applicable regulations. Typically, these examinations are conducted every three to five years. In addition, if circumstances dictate, regulators are authorized to conduct special or target examinations of insurance companies to address particular concerns or issues. The results of these examinations can give rise to injunctive relief, regulatory orders requiring remedial or other corrective action on the part of the company that is the subject of the examination, assessment of fines, or other penalties against that company. In extreme cases, including actual or pending insolvency, the insurance department may take over, or appoint a receiver to take over, the management or operations of an insurer or an agent’s business or assets.

Guaranty funds. All insurance companies are subject to assessments for state-administered funds that cover the claims and expenses of insolvent or impaired insurers. The size of the assessment is determined each year by the total claims on the fund that year. Each insurer is assessed a pro rata share based on its direct premiums written in that state. Payments to the fund may generally be recovered by the insurer through deductions from its premium taxes over a specified period of years.

Transactions between insurance companies and their affiliates. Hallmark is also regulated as an insurance holding company by the Texas Department of Insurance, the Arizona Department of Insurance, the Oklahoma Insurance Department and the Ohio Insurance Department. Financial transactions between Hallmark or any of its affiliates and our insurance company subsidiaries are subject to regulation. Transactions between our insurance company subsidiaries and their affiliates generally must be disclosed to state regulators, and prior regulatory approval generally is required before any material or extraordinary transaction may be consummated or any management agreement, services agreement, expense sharing arrangement or other contract providing for the rendering of services on a regular, systematic basis is implemented. State regulators may refuse to approve or may delay approval of such a transaction, which may impact our ability to innovate or operate efficiently.

Dividends. Dividends and distributions to Hallmark by our insurance company subsidiaries are restricted by the insurance regulations of the respective state in which each insurance company subsidiary is domiciled. As property/casualty insurance companies domiciled in the state of Texas, AHIC and TBIC may only pay dividends from unassigned surplus funds. In addition, AHIC and TBIC must obtain the approval of the Texas Department of Insurance before the payment of extraordinary dividends, which are defined as dividends or distributions of cash or other property the fair market value of which combined with the fair market value of each other dividend or distribution made in the preceding 12 months exceeds the greater of: (1) statutory net income as of the prior December 31^st or (2) 10% of statutory policyholders’ surplus as of the prior December 31. HIC, domiciled in Arizona, may pay dividends out of that part of its available surplus funds that is derived from realized net profits on its business. Without prior written approval from the Arizona Department of Insurance, HIC may not pay extraordinary dividends, which are defined as dividends or distributions of cash or other property the fair market value of which combined with the fair market value of each other dividend or distribution made in the preceding 12 months exceeds the lesser of: (1) 10% of statutory policyholders’ surplus as of the prior December 31 or (2) net investment income as of the prior December 31. HSIC, domiciled in Oklahoma, may only pay dividends out of that part of its available surplus funds that is derived from realized net profits on its business. Without prior written approval from the Oklahoma Insurance Department, HSIC may not pay extraordinary dividends, which are defined as dividends or distributions of cash or other property the fair market value of which combined with the fair market value of each other dividend or distribution made in the preceding 12 months exceeds the greater of: (1) 10% of statutory policyholders’ surplus as of the prior December 31 or (2) statutory net income as of the prior December 31, not including realized capital gains. HNIC, domiciled in Ohio, may only pay dividends out of that part of its available surplus funds that is derived from earned surplus to shareholders. Without prior written approval from the Ohio Department of Insurance, HNIC may not pay extraordinary dividends, which are defined as dividends or distributions of cash or other property the fair market value of which combined with the fair market value of each other dividend or distribution made in the preceding 12 months exceeds the greater of: (1) 10% of statutory policyholders’ surplus as of the prior December 31 or (2) statutory net income as of the prior December 31. As a county mutual, dividends from HCM are payable to policyholders.

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Risk-based capital requirements. The National Association of Insurance Commissioners requires property/casualty insurers to file a risk-based capital calculation according to a specified formula. The purpose of the formula is twofold: (1) to assess the adequacy of an insurer’s statutory capital and surplus based upon a variety of factors such as potential risks related to investment portfolio, ceded reinsurance and product mix; and (2) to assist state regulators under the RBC for Insurers Model Act by providing thresholds at which a state commissioner is authorized and expected to take regulatory action. As of December 31, 2013, the adjusted capital under the risk-based capital calculation of each of our insurance company subsidiaries substantially exceeded the minimum requirements.

Required licensing. Our non-insurance company subsidiaries are subject to and in compliance with the licensing requirements of the department of insurance in each state in which they produce business. These licenses govern, among other things, the types of insurance coverages, agency and claims services and products that we may offer consumers in these states. Such licenses typically are issued only after we file an appropriate application and satisfy prescribed criteria. Generally, each state requires one officer to maintain an agent license. Claims adjusters employed by us are also subject to the licensing requirements of each state in which they conduct business. Each employed claim adjuster either holds or has applied for the required licenses. Our premium finance subsidiaries are subject to licensing, financial reporting and certain financial requirements imposed by the Texas Department of Insurance, as well as regulations promulgated by the Texas Office of Consumer Credit Commissioner.

Regulation of insurance rates and approval of policy forms. The insurance laws of most states in which our subsidiaries operate require insurance companies to file insurance rate schedules and insurance policy forms for review and approval. State insurance regulators have broad discretion in judging whether our rates are adequate, not excessive and not unfairly discriminatory and whether our policy forms comply with law. The speed at which we can change our rates depends, in part, on the method by which the applicable state’s rating laws are administered. Generally, state insurance regulators have the authority to disapprove our rates or request changes in our rates.

Restrictions on cancellation, non-renewal or withdrawal. Many states have laws and regulations that limit an insurance company’s ability to exit a market. For example, certain states limit an automobile insurance company’s ability to cancel or not renew policies. Some states prohibit an insurance company from withdrawing from one or more lines of business in the state, except pursuant to a plan approved by the state insurance department. In some states, this applies to significant reductions in the amount of insurance written, not just to a complete withdrawal. State insurance departments may disapprove a plan that may lead to market disruption.

Investment restrictions. We are subject to state laws and regulations that require diversification of our investment portfolios and that limit the amount of investments in certain categories. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture.

Trade practices. The manner in which we conduct the business of insurance is regulated by state statutes in an effort to prohibit practices that constitute unfair methods of competition or unfair or deceptive acts or practices. Prohibited practices include disseminating false information or advertising; defamation; boycotting, coercion and intimidation; false statements or entries; unfair discrimination; rebating; improper tie-ins with lenders and the extension of credit; failure to maintain proper records; failure to maintain proper complaint handling procedures; and making false statements in connection with insurance applications for the purpose of obtaining a fee, commission or other benefit.

Unfair claims practices. Generally, insurance companies, adjusting companies and individual claims adjusters are prohibited by state statutes from engaging in unfair claims practices on a flagrant basis or with such frequency to indicate a general business practice. Examples of unfair claims practices include:

· misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;

· failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

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· failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under insurance policies;

· failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;

· attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled;

· attempting to settle claims on the basis of an application that was altered without notice to, or knowledge and consent of, the insured;

· compelling insureds to institute suits to recover amounts due under policies by offering substantially less than the amounts ultimately recovered in suits brought by them;

· refusing to pay claims without conducting a reasonable investigation;

· making claim payments to an insured without indicating the coverage under which each payment is being made;

· delaying the investigation or payment of claims by requiring an insured, claimant or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information;

· failing, in the case of claim denials or offers of compromise or settlement, to promptly provide a reasonable and accurate explanation of the basis for such actions; and

· not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.

Employees

As of December 31, 2013, we employed 376 people on a full-time basis. None of our employees are represented by labor unions. We consider our employee relations to be good.

Available Information

The Company’s executive offices are located at 777 Main Street, Suite 1000 Fort Worth, Texas 76102. The Company’s mailing address is 777 Main Street, Suite 1000 Fort Worth, Texas 76102. Its telephone number is (817) 348-1600. The Company’s website address is www.hallmarkgrp.com. The Company files annual, quarterly and current reports, proxy statements and other information and documents with the U.S. Securities and Exchange Commission (the “SEC”), which are made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available at www.sec.gov. The Company makes available free of charge on its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after it electronically files them with or furnishes them to the SEC.

Item 1A. Risk Factors.

Our success depends on our ability to price accurately the risks we underwrite.

Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks. Adequate rates are necessary to generate premiums sufficient to pay losses, loss settlement expenses and underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully, and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our control, including:

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· the availability of sufficient reliable data and our ability to properly analyze available data;

· the uncertainties that inherently characterize estimates and assumptions;

· our selection and application of appropriate pricing techniques; and

· changes in applicable legal liability standards and in the civil litigation system generally.

Consequently, we could underprice risks, which would adversely affect our profit margins, or we could overprice risks, which could reduce our sales volume and competitiveness. In either case, our profitability could be materially and adversely affected.

Our results may fluctuate as a result of cyclical changes in the property/casualty insurance industry.

Our revenue is primarily attributable to property/casualty insurance, which as an industry is cyclical in nature and has historically been characterized by soft markets followed by hard markets. A soft market is a period of relatively high levels of price competition, less restrictive underwriting standards and generally low premium rates. A hard market is a period of capital shortages resulting in lack of insurance availability, relatively low levels of competition, more selective underwriting of risks and relatively high premium rates. If we find it necessary to reduce premiums or limit premium increases due to competitive pressures on pricing in a softening market, we may experience a reduction in our premiums written and in our profit margins and revenues, which could adversely affect our financial results.

Estimating reserves is inherently uncertain. If our loss reserves are not adequate, it will have an unfavorable impact on our results.

We maintain loss reserves to cover our estimated ultimate liability for unpaid losses and LAE for reported and unreported claims incurred as of the end of each accounting period. Reserves represent management’s estimates of what the ultimate settlement and administration of claims will cost and are not reviewed by an independent actuary. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claim severity and frequency, judicial theories of liability, and other factors. These variables are affected by both internal and external events, such as changes in claims handling procedures, inflation, judicial trends and legislative changes. Many of these factors are not quantifiable. Additionally, there may be a significant lag between the occurrence of an event and the time it is reported to us. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. For example, a 1% change in December 31, 2013 unpaid losses and LAE would have produced a $3.8 million change to pretax earnings. Our gross loss and LAE reserves totaled $382.6 million at December 31, 2013. Our loss and LAE reserves, net of reinsurance recoverable on unpaid loss and LAE, were $312.5 million at that date. Because setting reserves is inherently uncertain, there can be no assurance that the current reserves will prove adequate.

Our failure to maintain favorable financial strength ratings could negatively impact our ability to compete successfully.

Third-party rating agencies assess and rate the claims-paying ability of insurers based upon criteria established by the agencies. AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement, pursuant to which AHIC retains 30% of the net premiums written by any of them, HIC retains 27% of the net premiums written by any of them, HSIC retains 30% of the net premiums written by any of them and HNIC retains 13% of the net premiums written by any of them. A.M. Best has pooled its ratings of these four insurance company subsidiaries and assigned a financial strength rating of “A–” (Excellent) and an issuer credit rating of “a-” to each of these individual insurance company subsidiaries and to the pool formed by these four insurance company subsidiaries. Also, A.M. Best has assigned HCM a financial strength rating of “A–” (Excellent) and an issuer credit rating of “a-”. A.M. Best does not assign a financial strength rating or an issuer credit rating to TBIC.

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These financial strength ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength and quality of insurers. These ratings are not evaluations directed to potential purchasers of our common stock and are not recommendations to buy, sell or hold our common stock. Our ratings are subject to change at any time and could be revised downward or revoked at the sole discretion of the rating agencies. We believe that the ratings assigned by A.M. Best are an important factor in marketing our products. Our ability to retain our existing business and to attract new business in our insurance operations depends largely on these ratings. Our failure to maintain our ratings, or any other adverse development with respect to our ratings, could cause our current and future independent agents and insureds to choose to transact their business with more highly rated competitors. If A.M. Best downgrades our ratings or publicly indicates that our ratings are under review, it is likely that we would not be able to compete as effectively with our competitors, and our ability to sell insurance policies could decline. If that happens, our sales and earnings would decrease. For example, many of our agencies and insureds have guidelines that require us to have an A.M. Best financial strength rating of “A-” (Excellent) or higher. A reduction of our A.M. Best rating below “A-” would prevent us from issuing policies to insureds or potential insureds with such ratings requirements.

Lenders and reinsurers also use our A.M. Best ratings as a factor in deciding whether to transact business with us. The failure of our insurance company subsidiaries to maintain their current ratings could dissuade a lender or reinsurance company from conducting business with us or might increase our interest or reinsurance costs. In addition, a ratings downgrade by A.M. Best below “A-” would require us to post collateral in support of our obligations under certain of our reinsurance agreements pursuant to which we assume business.

The loss of key executives could disrupt our business.

Our success will depend in part upon the continued service of certain key executives. Our success will also depend on our ability to attract and retain additional executives and personnel. We do not have employment agreements with our Chief Executive Officer or any of our other executive officers. The loss of key personnel, or our inability to recruit and retain additional qualified personnel, could cause disruption in our business and could prevent us from fully implementing our business strategies, which could materially and adversely affect our business, growth and profitability.

Our industry is very competitive, which may unfavorably impact our results of operations.

The property/casualty insurance market, our primary source of revenue, is highly competitive and, except for regulatory considerations, has very few barriers to entry. According to A.M. Best, there were 3,196 property/casualty insurance companies and 2,135 property/casualty insurance groups operating in North America as of July 16, 2013. Our competitors include entities that have, or are affiliated with entities that have, greater financial and other resources than we have. In addition, competitors may attempt to increase market share by lowering rates. In that case, we could experience reductions in our underwriting margins, or sales of our insurance policies could decline as customers purchase lower-priced products from our competitors. Losing business to competitors offering similar products at lower prices, or having other competitive advantages, could adversely affect our results of operations.

Our results may be unfavorably impacted if we are unable to obtain adequate reinsurance.

As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk, especially catastrophe risks that we and our insurance company subsidiaries underwrite. Our catastrophe and non-catastrophe reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our current reinsurance facilities or to obtain other reinsurance facilities in adequate amounts and at favorable rates. The amount, availability and cost of reinsurance are subject to prevailing market conditions beyond our control, and may affect our ability to write additional premiums as well as our profitability. If we are unable to obtain adequate reinsurance protection for the risks we have underwritten, we will either be exposed to greater losses from these risks or we will reduce the level of business that we underwrite, which will reduce our revenue.

If the companies that provide our reinsurance do not pay our claims in a timely manner, we could incur severe losses.

We purchase reinsurance by transferring, or ceding, part of the risk we have assumed to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us of our liability to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers. We cannot assure that our reinsurers will pay all of our reinsurance claims, or that they will pay our claims on a timely basis. At December 31, 2013, we had a total of $121.8 million due us from reinsurers, including $76.8 million of recoverables from losses and $45.0 million in ceded unearned premiums. The largest amount due us from a single reinsurer as of December 31, 2013 was $13.5 million reinsurance and premium recoverable from Partner Reinsurance Company of the United States. If any of our reinsurers are unable or unwilling to pay amounts they owe us in a timely fashion, we could suffer a significant loss or a shortage of liquidity, which would have a material adverse effect on our business and results of operations.

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Catastrophic losses are unpredictable and may adversely affect our results of operations, liquidity and financial condition.

Property/casualty insurance companies are subject to claims arising out of catastrophes that may have a significant effect on their results of operations, liquidity and financial condition. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hail storms, explosions, severe winter weather and fires, and may include man-made events, such as terrorist attacks. The incidence, frequency, and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.

Claims from catastrophic events could reduce our net income, cause substantial volatility in our financial results for any fiscal quarter or year or otherwise adversely affect our financial condition, liquidity or results of operations. Catastrophes may also negatively affect our ability to write new business. Increases in the value and geographic concentration of insured property and the effects of inflation could increase the severity of claims from catastrophic events in the future.

Catastrophe models may not accurately predict future losses.

Along with other insurers in the industry, we use models developed by third-party vendors in assessing our exposure to catastrophe losses that assume various conditions and probability scenarios. However, these models do not necessarily accurately predict future losses or accurately measure losses currently incurred. Catastrophe models, which have been evolving since the early 1990s, use historical information about various catastrophes and detailed information about our in-force business. While we use this information in connection with our pricing and risk management activities, there are limitations with respect to their usefulness in predicting losses in any reporting period. Examples of these limitations are significant variations in estimates between models and modelers and material increases and decreases in model results due to changes and refinements of the underlying data elements and assumptions. Such limitations lead to questionable predictive capability and post-event measurements that have not been well understood or proven to be sufficiently reliable. In addition, the models are not necessarily reflective of company or state-specific policy language, demand surge for labor and materials or loss settlement expenses, all of which are subject to wide variation by catastrophe. Because the occurrence and severity of catastrophes are inherently unpredictable and may vary significantly from year to year, historical results of operations may not be indicative of future results of operations.

We are subject to comprehensive regulation, and our results may be unfavorably impacted by these regulations.

We are subject to comprehensive governmental regulation and supervision. Most insurance regulations are designed to protect the interests of policyholders rather than of the stockholders and other investors of the insurance companies. These regulations, generally administered by the department of insurance in each state in which we do business, relate to, among other things:

· approval of policy forms and rates;

· standards of solvency, including risk-based capital measurements, which are a measure developed by the National Association of Insurance Commissioners and used by the state insurance regulators to identify insurance companies that potentially are inadequately capitalized;

· licensing of insurers and their agents;

· restrictions on the nature, quality and concentration of investments;

· restrictions on the ability of insurance company subsidiaries to pay dividends;

· restrictions on transactions between insurance company subsidiaries and their affiliates;

· requiring certain methods of accounting;

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· periodic examinations of operations and finances;

· the use of non-public consumer information and related privacy issues;

· the use of credit history in underwriting and rating;

· limitations on the ability to charge policy fees;

· the acquisition or disposition of an insurance company or of any company controlling an insurance company;

· involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, assessments and other governmental charges;

· restrictions on the cancellation or non-renewal of policies and, in certain jurisdictions, withdrawal from writing certain lines of business;

· prescribing the form and content of records of financial condition to be filed;

· requiring reserves for unearned premium, losses and other purposes; and

· with respect to premium finance business, the federal Truth-in-Lending Act and similar state statutes. In states where specific statutes have not been enacted, premium finance is generally subject to state usury laws that are applicable to consumer loans.

State insurance departments also conduct periodic examinations of the affairs of insurance companies and require filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. Our business depends on compliance with applicable laws and regulations and our ability to maintain valid licenses and approvals for our operations. Regulatory authorities may deny or revoke licenses for various reasons, including violations of regulations. Changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could have a material adverse affect on our operations. In addition, we could face individual, group and class-action lawsuits by our policyholders and others for alleged violations of certain state laws and regulations. Each of these regulatory risks could have an adverse effect on our profitability.

State statutes limit the aggregate amount of dividends that our subsidiaries may pay Hallmark, thereby limiting its funds to pay expenses and dividends.

Hallmark is a holding company and a legal entity separate and distinct from its subsidiaries. As a holding company without significant operations of its own, Hallmark’s principal sources of funds are dividends and other sources of funds from its subsidiaries. State insurance laws limit the ability of Hallmark’s insurance company subsidiaries to pay dividends and require our insurance company subsidiaries to maintain specified minimum levels of statutory capital and surplus. The aggregate maximum amount of dividends permitted by law to be paid by an insurance company does not necessarily define an insurance company’s actual ability to pay dividends. The actual ability to pay dividends may be further constrained by business and regulatory considerations, such as the impact of dividends on surplus, by our competitive position and by the amount of premiums that we can write. Without regulatory approval, the aggregate maximum amount of dividends that could be paid to Hallmark in 2014 by our insurance company subsidiaries is $15.6 million. State insurance regulators have broad discretion to limit the payment of dividends by insurance companies and Hallmark’s right to participate in any distribution of assets of one of our insurance company subsidiaries is subject to prior claims of policyholders and creditors except to the extent that its rights, if any, as a creditor are recognized. Consequently, Hallmark’s ability to pay debts, expenses and cash dividends to our stockholders may be limited.

Our insurance company subsidiaries are subject to minimum capital and surplus requirements. Failure to meet these requirements could subject us to regulatory action.

Our insurance company subsidiaries are subject to minimum capital and surplus requirements imposed under the laws of their respective states of domicile and each state in which they issue policies. Any failure by one of our insurance company subsidiaries to meet minimum capital and surplus requirements imposed by applicable state law will subject it to corrective action, which may include requiring adoption of a comprehensive financial plan, revocation of its license to sell insurance products or placing the subsidiary under state regulatory control. Any new minimum capital and surplus requirements adopted in the future may require us to increase the capital and surplus of our insurance company subsidiaries, which we may not be able to do.

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We are subject to assessments and other surcharges from state guaranty funds, mandatory reinsurance arrangements and state insurance facilities, which may reduce our profitability.

Virtually all states require insurers licensed to do business therein to bear a portion of the unfunded obligations of impaired or insolvent insurance companies. These obligations are funded by assessments, which are levied by guaranty associations within the state, up to prescribed limits, on all member insurers in the state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer was engaged. Accordingly, the assessments levied on us by the states in which we are licensed to write insurance may increase as we increase our premiums written. In addition, as a condition to the ability to conduct business in certain states, insurance companies are required to participate in mandatory reinsurance funds. The effect of these assessments and mandatory reinsurance arrangements, or changes in them, could reduce our profitability in any given period or limit our ability to grow our business.

We monitor developments with respect to various state facilities, such as the Texas FAIR Plan and the Texas Windstorm Insurance Association. The impact of any catastrophe experience on these facilities could result in the facilities recognizing a financial deficit or a financial deficit greater than the level currently estimated. They may, in turn, have the ability to assess participating insurers when financial deficits occur, adversely affecting our results of operations. While these facilities are generally designed so that the ultimate cost is borne by policyholders, the exposure to assessments and the availability of recoupments or premium rate increases from these facilities may not offset each other in our financial statements. Moreover, even if they do offset each other, they may not offset each other in financial statements for the same fiscal period due to the ultimate timing of the assessments and recoupments or premium rate increases, as well as the possibility of policies not being renewed in subsequent years.

Adverse securities market conditions can have a significant and negative impact on our investment portfolio.

Our results of operations depend in part on the performance of our invested assets. As of December 31, 2013, 89% of our investment portfolio was invested in fixed-income securities. Certain risks are inherent in connection with fixed-income securities, including loss upon default and price volatility in reaction to changes in interest rates and general market factors. In general, the fair value of a portfolio of fixed-income securities increases or decreases inversely with changes in the market interest rates, while net investment income realized from future investments in fixed-income securities increases or decreases along with interest rates. In addition, 12% of our fixed-income securities have call or prepayment options. This subjects us to reinvestment risk should interest rates fall and issuers call their securities. Furthermore, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An investment has prepayment risk when there is a risk that cash flows from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. The fair value of our fixed-income securities as of December 31, 2013 was $410.1 million. If market interest rates were to increase 1%, the fair value of our fixed-income securities would decrease by approximately $12.2 million as of December 31, 2013. The calculated change in fair value was determined using duration modeling assuming no prepayments.

In addition to the general risks described above, although 76% of our portfolio is investment-grade, our fixed-income securities are nonetheless subject to credit risk. If any of the issuers of our fixed-income securities suffer financial setbacks, the ratings on the fixed-income securities could fall (with a concurrent fall in market value) and, in a worst case scenario, the issuer could default on its obligations. As of December 31, 2013 Hallmark had $0.3 million exposed in its investment portfolio to sub-prime mortgages and $27.7 million total exposure in mortgage-backed securities. Future changes in the fair value of our available-for-sale securities will be reflected in other comprehensive income.

Similar treatment is not available for liabilities. Therefore, interest rate fluctuations could adversely affect our stockholders’ equity, total comprehensive income and/or cash flows.

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We rely on independent agents and specialty brokers to market our products and their failure to do so would have a material adverse effect on our results of operations.

We market and distribute our insurance programs exclusively through independent insurance agents and specialty insurance brokers. As a result, our business depends in large part on the marketing efforts of these agents and brokers and on our ability to offer insurance products and services that meet the requirements of the agents, the brokers and their customers. However, these agents and brokers are not obligated to sell or promote our products and many sell or promote competitors’ insurance products in addition to our products. Some of our competitors have higher financial strength ratings, offer a larger variety of products, set lower prices for insurance coverage and/or offer higher commissions than we do. Therefore, we may not be able to continue to attract and retain independent agents and brokers to sell our insurance products. The failure or inability of independent agents and brokers to market our insurance products successfully could have a material adverse impact on our business, financial condition and results of operations.

We may experience difficulty in integrating acquisitions into our operations.

The successful integration of any newly acquired businesses into our operations will require, among other things, the retention and assimilation of their key management, sales and other personnel; the coordination of their lines of insurance products and services; the adaptation of their technology, information systems and other processes; and the retention and transition of their customers. Unexpected difficulties in integrating any acquisition could result in increased expenses and the diversion of management time and resources. If we do not successfully integrate any acquired business into our operations, we may not realize the anticipated benefits of the acquisition, which could have a material adverse impact on our financial condition and results of operations. Further, any potential acquisitions may require significant capital outlays and, if we issue equity or convertible debt securities to pay for an acquisition, the issuance may be dilutive to our existing stockholders.

Our internal controls are not fail-safe.

We continually enhance our operating procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements. As a result of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control objectives have been or will be met, and that every instance of error or fraud has been or will be detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by individual acts or by collusion of two or more persons. The design of any system of controls is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Internal controls may also become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Further, the design of a control system must reflect resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our internal controls and procedures are designed to provide reasonable, not absolute, assurance that the control objectives are met.

Our geographic concentration ties our performance to the business, economic and regulatory conditions of certain states.

The following states accounted for 67% of our gross written premiums for 2013: Texas (52%), Louisiana (5%), Arizona (4%), Oregon (3%) and New Mexico (3%). Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in the principal states in which we do business. Changes in any of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified. In addition, our exposure to severe losses from localized natural perils, such as windstorms or hailstorms, is increased in those areas where we have written significant numbers of property/casualty insurance policies.

The exclusions and limitations in our policies may not be enforceable.

Many of the policies we issue include exclusions or other conditions that define and limit coverage, which exclusions and conditions are designed to manage our exposure to certain types of risks and expanding theories of legal liability. In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than the statutory period under which these claims can be brought by our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted modifying or barring the use of these exclusions and limitations. This could result in higher than anticipated losses and LAE by extending coverage beyond our underwriting intent or increasing the number or size of claims, which could have a material adverse effect on our operating results. In some instances, these changes may not become apparent until sometime after we have issued the insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.

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We rely on our information technology and telecommunications systems and the failure or disruption of these systems could disrupt our operations and adversely affect our results of operations.

Our business is highly dependent upon the successful and uninterrupted functioning of our information technology and telecommunications systems. We rely on these systems to process new and renewal business, provide customer service, make claims payments and facilitate collections and cancellations, as well as to perform actuarial and other analytical functions necessary for pricing and product development. Our systems could fail of their own accord or might be disrupted by factors such as natural disasters, power disruptions or surges, computer hackers or terrorist attacks. Failure or disruption of these systems for any reason could interrupt our business and adversely affect our results of operations.

Cyber security risks in particular are evolving and include malicious software, unauthorized access to data and other electronic security breaches. We have not experienced cyber security attacks in the past and believe that we have adopted appropriate measures to mitigate potential risks to our information technology systems. However, the timing, nature and scope of cyber security attacks are difficult to predict and prevent. Therefore, we could be subject to operational delays, compromised confidential or proprietary information, destruction or corruption of data, manipulation or improper use of our systems and networks, financial losses from remedial actions and/or damage to our reputation from cyber security attacks. A cyber security attack on our information technology systems could disrupt our business and adversely affect our results of operations and financial position.

Global climate change may have an adverse effect on our financial statements.

Although uncertainty remains as to the nature and effect of greenhouse gas emissions, we could suffer losses if global climate change results in an increase in the frequency and severity of natural disasters. As with traditional natural disasters, claims arising from these incidents could increase our exposure to losses and have a material adverse impact on our business, results of operations, and/or financial condition.

Item 1B. Unresolved Staff Comments.

Not applicable

Item 2. Properties.

Our corporate headquarters and Standard Commercial P&C business unit are located at 777 Main Street, Suite 1000, Fort Worth, Texas. The suite is located in a high-rise office building and contains 27,808 square feet of space. The rent is currently $47,505 per month pursuant to a lease which expires June 30, 2022.

Our Workers Compensation business unit is presently located at 11612 Bee Caves Road, Austin, Texas. The suite is located in a low-rise office building and contains 8,373 square feet of space of which 1,037 square feet is sub-leased. The gross rent is currently $17,269 per month pursuant to a lease which expires October 31, 2017.

Our E&S Commercial business unit is presently located at 7550 IH-10 West, San Antonio, Texas. These leased premises consist of a 16,599 square foot office suite and 800 square feet of storage space. The rent is currently $32,632 per month pursuant to a lease that expires November 30, 2020.

Our Hallmark Select business unit is located at 15280 Addison Road, Suites 250 and 260, Addison, Texas. The suites are located in a low-rise office building and contain an aggregate of 12,277 square feet of space. The rent is currently $14,834 per month pursuant to a lease that expires July 31, 2018. Our Hallmark Select business unit also maintains a branch office in Glendale, California. Rent on the suite is currently $2,500 per month pursuant to a lease which expires July 31, 2015. Our Hallmark Select business unit also maintains a small office in Chicago, Illinois, the fixed rent on which is currently $8,265 per month under a lease that expires April 30, 2017.

Our Personal Lines business unit is located at 6500 Pinecrest, Suite 100, Plano, Texas. The suite is located in a one story office building and contains 23,941 square feet of space. The rent is currently $28,611 per month pursuant to a lease that expires January 31, 2016.

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Item 3. Legal Proceedings.

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

We disagree with the Comptroller and intend to vigorously fight their assertion that HSU is liable for the surplus lines premium taxes. During the past year we have been engaged in conversations with the Comptroller’s counsel. We are currently in negotiations with the Comptroller to settle the matter. However, we are presently unable to reasonably estimate the possible loss or legal costs that are likely to arise out of the surplus lines tax audit or any future proceedings relating to this matter. Therefore we have not accrued any amount as of December 31, 2013 related to this matter.

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

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Common Stock

Our common stock is currently traded on the Nasdaq Global Market under the symbol “HALL.” The following table shows the high and low sales prices of our common stock on the Nasdaq Global Market for each quarter since January 1, 2012.

Period	High Sale		Low Sale
Year Ended December 31, 2013:
First quarter	$	9.67	$	8.36
Second quarter		9.40		8.03
Third quarter		10.03		8.18
Fourth quarter		9.52		8.05
Year Ended December 31, 2012:
First quarter	$	8.09	$	6.57
Second quarter		8.30		6.95
Third quarter		8.32		7.29
Fourth quarter		9.71		6.71

Holders

As of March 5, 2014, there were 1,866 shareholders of record of our common stock.

Dividends

Hallmark has never paid dividends on its common stock. Our board of directors intends to continue this policy for the foreseeable future in order to retain earnings for development of our business.

Hallmark is a holding company and a legal entity separate and distinct from its subsidiaries. As a holding company, Hallmark is dependent on dividend payments and management fees from its subsidiaries to pay dividends and make other payments. State insurance laws limit the ability of our insurance company subsidiaries to pay dividends to Hallmark. As property/casualty insurance companies domiciled in the state of Texas, AHIC and TBIC are limited in the payment of dividends to Hallmark 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. 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 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. For all our insurance companies, dividends may only be paid from unassigned surplus funds. As a county mutual, dividends from HCM are payable to policyholders.

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Equity Compensation Plan Information

The following table sets forth information regarding shares of our common stock authorized for issuance under our equity compensation plans as of December 31, 2013.

					Number of securities
	Number of securities				remaining available
	to be issued upon		Weighted-average		for future issuance
	exercise of outstanding		exercise price of		under equity compensation
	options, warrants and		outstanding options,		plans [excluding securities
Plan Category	rights		warrants and rights		reflected in column (a)](1)
	(a)		(b)		(c)
Equity compensation plans approved by security holders		1,387,489	$	9.66		241,401
Equity compensation plans not approved by security holders		-		-		-
Total		1,387,489	$	9.66		241,401

(1) Securities remaining available for future issuance are net of a maximum of 355,277 shares of common stock issuable pursuant to outstanding restricted stock units, subject to applicable vesting requirements and performance criteria.  See Note 13 to the audited consolidated financial statements included in this report.

Issuer Repurchases

We did not repurchase any shares of our common stock during the fourth quarter of 2013.

Performance Graph

The following graph compares the five year cumulative total return provided shareholders on Hallmark’s common stock relative to the cumulative total returns of the NASDAQ Composite Index, the NASDAQ Insurance Index, and the S&P Property & Casualty Insurance Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 2008 and its relative performance is tracked through December 31, 2013.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Hallmark Financial Services, Inc., the NASDAQ Composite Index,

the S&P Property & Casualty Insurance Index, and the NASDAQ Insurance Index

*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

Copyright© 2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

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Item 6. Selected Financial Data

	Year Ended December 31,
	2013			2012			2011			2010			2009
	(in thousands, except per share data)
Statement of Operations Data:
Gross premiums written	$	460,027		$	389,842		$	354,881		$	320,973		$	287,558
Ceded premiums written		(99,262	)		(57,353	)		(51,005	)		(39,332	)		(25,818	)
Net premiums written		360,765			332,489			303,876			281,641			261,740
Change in unearned premiums		(224	)		(13,053	)		(10,835	)		(3,370	)		(10,668	)
Net premiums earned		360,541			319,436			293,041			278,271			251,072
Investment income, net of expenses		12,884			15,293			15,880			14,849			14,947
Realized gains		10,540			1,943			3,633			8,402			3,032
Finance charges		5,830			5,957			6,826			7,054			5,874
Commission and fees		(487	)		(1,145	)		3,175			(1,575	)		12,011
Other income		120			316			216			59			103
Total revenues		389,428			341,800			322,771			307,060			287,039
Loss and loss adjustment expenses		261,345			226,414			239,235			202,544			153,619
Other operating costs and expenses		109,289			103,792			95,106			87,882			92,233
Interest expense		4,599			4,634			4,631			4,598			4,602
Amortization of intangible assets		3,115			3,586			3,586			3,665			3,328
Total expenses		378,348			338,426			342,558			298,689			253,782
Income (loss) before tax		11,080			3,374			(19,787	)		8,371			33,257
Income tax expense (benefit)		2,835			(474	)		(8,954	)		863			8,630
Net income (loss)		8,245			3,848			(10,833	)		7,508			24,627
Less: Net income attributable to non-controlling interest		-			324			58			105			52
Net income (loss) attributable to Hallmark Financial Services, Inc.		8,245			3,524			(10,891	)		7,403			24,575
Net income (loss) per share attributable to
Hallmark Financial Services, Inc. common stockholders:
Basic	$	0.43		$	0.18		$	(0.55	)	$	0.37		$	1.19
Diluted	$	0.43		$	0.18		$	(0.55	)	$	0.37		$	1.19

	As of December 31, 2013
Balance Sheet Items:	2013		2012		2011		2010		2009
Total investments	$	461,325	$	445,360	$	424,628	$	432,441	$	327,677
Total assets	$	909,023	$	790,468	$	746,059	$	736,557	$	628,869
Reserves for unpaid loss and loss adjustment expenses	$	382,640	$	313,416	$	296,945	$	251,677	$	184,662
Unearned premiums	$	185,303	$	162,502	$	146,104	$	140,965	$	125,089
Total liabilities	$	670,905	$	569,931	$	529,203	$	499,919	$	401,228
Total stockholders' equity	$	238,118	$	220,537	$	215,572	$	235,278	$	226,517
Book value per share	$	12.36	$	11.45	$	11.19	$	11.69	$	11.26

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Item 7. 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-K” for a discussion of some of the uncertainties, risks and assumptions associated with these statements.

Overview

Hallmark is an insurance holding company which, through its subsidiaries, engages 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 business units and are supported by our insurance carrier subsidiaries.

Our insurance activities are organized by business units into the following reportable segments:

· Standard Commercial Segment. The 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. Our Standard Commercial P&C business unit is comprised of our American Hallmark Insurance Services and ECM subsidiaries. Our Workers Compensation business unit is comprised of our TBIC Holdings, TBIC and TBICRM subsidiaries. The Workers Compensation business unit was acquired July 1, 2011.

· 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 Programs which are managed at the parent level. Our E&S Commercial business unit is comprised of our HSU, PAAC and TGASRI subsidiaries. Our Hallmark Select business unit is comprised of our Aerospace Insurance Managers, ASRI, ACMG, HXS and HDS subsidiaries.

· Personal Segment. The 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 that is comprised of American Hallmark General Agency, Inc. and Hallmark Claims Services, Inc., both of which do business as Hallmark Insurance Company.

The retained premium produced by these reportable segments is supported by our American Hallmark Insurance Company of Texas, Hallmark Specialty Insurance Company, Hallmark Insurance Company, Hallmark National Insurance Company and Texas Builders Insurance Company insurance subsidiaries. In addition, control and management of Hallmark County Mutual 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 net premiums written by any of them, HIC retains 27% of the net premiums written by any of them, HSIC retains 30% of the net premiums written by any of them and HNIC retains 13% of the net premiums written by any of them. Neither HCM nor TBIC is a party to the intercompany pooling arrangement.

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Critical Accounting Estimates and Judgments

The significant accounting policies requiring our estimates and judgments are discussed below. Such estimates and judgments are based on historical experience, changes in laws and regulations, observance of industry trends and information received from third parties. While the estimates and judgments associated with the application of these accounting policies may be affected by different assumptions or conditions, we believe the estimates and judgments associated with the reported consolidated financial statement amounts are appropriate in the circumstances. For additional discussion of our accounting policies, see Note 1 to the audited consolidated financial statements included in this report.

Impairment of investments. 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.

Fair values of financial instruments. Accounting Standards Codification (“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;

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· 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 stock and preferred stock.

Level 2 investment securities include corporate bonds, collateralized corporate bank loans, municipal bonds, U.S. Treasury securities, other obligations of the U.S. Government and mortgage-backed securities for which quoted prices are not available on active exchanges for identical instruments. We use a third party pricing service 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 service 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 third-party pricing sources.

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.

Deferred policy acquisition costs. Policy acquisition costs (mainly commission, underwriting and marketing expenses) that vary with and are primarily related to the successful acquisition of new and renewal insurance contracts are deferred and charged to operations over periods in which the related premiums are earned. Ceding commissions from reinsurers, which include expense allowances, are deferred and recognized over the period premiums are earned for the underlying policies reinsured.

The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. A premium deficiency exists if the sum of expected claim costs and claim adjustment expenses, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums and expected investment income on those unearned premiums, as computed on a product line basis. We routinely evaluate the realizability of deferred policy acquisition costs. At December 31, 2013 and 2012, there was no premium deficiency related to deferred policy acquisition costs.

Goodwill. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (October 1 ) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For purposes of evaluating goodwill for impairment, we have determined that our reporting units are the same as our business units except for the Hallmark Select business unit for which reporting units are at the component level (“one level below”). Our consolidated balance sheet as of December 31, 2013 includes goodwill of acquired businesses of $44.7 million that is assigned to our business units as follows: Standard Commercial P&C business unit - $2.1 million; E&S Commercial business unit - $19.9 million; Hallmark Select business unit- $17.4 million (comprised of $7.7 million for the excess & umbrella component and $9.7 million for the general aviation and satellite component); and Personal Lines business unit - $5.3 million. This amount has been recorded as a result of prior business acquisitions accounted for under the acquisition method of accounting. Under ASC 350, “Intangibles- Goodwill and Other,” goodwill is tested for impairment annually. We completed our last annual test for impairment on the first day of the fourth quarter of 2013 and determined that there was no impairment.

A significant amount of judgment is required in performing goodwill impairment tests. Such tests include estimating the fair value of our reporting units. As required by ASC 350, we compare the estimated fair value of each reporting unit with its carrying amount, including goodwill. Under ASC 350, fair value refers to the amount for which the entire reporting unit may be bought or sold.

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The determination of fair value was based on an income approach utilizing discounted cash flows. The valuation methodology utilized is subject to key judgments and assumptions. Estimates of fair value are inherently uncertain and represent management’s reasonable expectation regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Declines in estimated fair value could result in goodwill impairments in future periods which could materially adversely affect our results of operations or financial position.

The income approach to determining fair value computed the projections of the cash flows that the reporting unit is expected to generate converted into a present value equivalent through discounting. Significant assumptions in the income approach model include income projections, discount rates and terminal growth values. The income projections reflect an improved premium pricing environment across most of our lines of business that began in 2012 and continued throughout 2013. The income projections also include loss and LAE assumptions which reflect recent historical claim trends and the movement towards a more favorable pricing environment. The income projections also include assumptions for expense growth and investment yields which are based on business plans for each of our business units. The discount rate was based on a risk free rate plus a beta adjusted equity risk premium and specific company risk premium. The assumptions were based on historical experience, expectations of future performance, expected market conditions and other factors requiring judgment and estimates. While we believe the assumptions used in these models were reasonable, the inherent uncertainty in predicting future performance and market conditions may change over time and influence the outcome of future testing.

The fair values of each of our business units were in excess of their respective carrying values, including goodwill, as a result of our annual test for impairment during the fourth quarter 2013. However, a 18% decline in the fair value of our Standard Commercial P&C business unit, a 11% decline in the fair value of our E&S Commercial business unit, a 6% decline in the fair value of our Personal Lines business unit, a 53% decline in the fair value of our excess & umbrella component or a 11% decline in the fair value of our general aviation and satellite component would have caused the carrying value of the respective reporting unit to be in excess of its fair value, resulting in the need to perform the second step of impairment testing prescribed by ASC 350, which could have resulted in an impairment to our goodwill.

The market capitalization of Hallmark’s common stock has been below book value during 2013. We consider our market capitalization in assessing the reasonableness of the fair values estimated for our business units in connection with our goodwill impairment testing. We believe the current market displacement caused by global financial market conditions, as well as the limited daily trading volume of Hallmark shares has resulted in a decrease in our market capitalization that is not representative of a long-term decrease in value. The valuation analysis discussed above supports our view that goodwill was not impaired at October 1, 2013. Through December 31, 2013, there were no indicators of impairment.

While we believe the estimates and assumptions used in determining the fair value of our business units were reasonable, actual results could vary materially. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, we may be required to perform the second step of impairment testing prescribed by ASC 350 in future periods and impairment of goodwill could result. We cannot predict future events that might impact the fair value of our business units and goodwill impairment. Such events include, but are not limited to, increased competition in insurance markets and global economic changes.

Deferred income tax assets and liabilities. We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis 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. A valuation allowance is provided against our deferred tax assets to the extent that we do not believe it is more likely than not that future taxable income will be adequate to realize these future tax benefits.

Reserves for unpaid losses and LAE. Reserves for unpaid losses and LAE are established for claims that have already been incurred by the policyholder but which we have not yet paid. Unpaid losses and 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. (See “Item 1. Business – Analysis of Losses and LAE” and “-Analysis of Loss and LAE Reserve Development.”)

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Although considerable variability is inherent in such estimates, we believe that our reserves for unpaid losses and LAE are adequate. Due to the inherent uncertainty in estimating unpaid losses and LAE, the actual ultimate amounts may differ from the recorded amounts. A small percentage change could result in a material effect on reported earnings. For example, a 1% change in December 31, 2013 reserves for unpaid losses and LAE would have produced a $3.8 million change to pretax earnings. The estimates are continually reviewed and adjusted as experience develops or new information becomes known. Such adjustments are included in current operations.

An actuarial range of ultimate unpaid losses and LAE is developed independent of management’s best estimate and is only used to assess the reasonableness of that estimate. There is no exclusive method for determining this range, and judgment enters into the process. The primary actuarial technique utilized is a loss development analysis in which ultimate losses are projected based upon historical development patterns. The primary assumption underlying this loss development analysis is that the historical development patterns will be a reasonable predictor of the future development of losses for accident years which are less mature. An alternate actuarial technique, known as the Bornhuetter-Ferguson method, combines an analysis of loss development patterns with an initial estimate of expected losses or loss ratios. This approach is most useful for recent accident years. In addition to assuming the stability of loss development patterns, this technique is heavily dependent on the accuracy of the initial estimate of expected losses or loss ratios. Consequently, the Bornhuetter-Ferguson method is primarily used to confirm the results derived from the loss development analysis.

The range of unpaid losses and LAE estimated by our actuary as of December 31, 2013 was $337.7 million to $388.6 million. Our best estimate of unpaid losses and LAE as of December 31, 2013 is $382.6 million. Our carried reserve for unpaid losses and LAE as of December 31, 2013 is comprised of $189.2 million in case reserves and $193.4 million in incurred but not reported reserves. In setting this estimate of unpaid losses and LAE, we have assumed, among other things, that current trends in loss frequency and severity will continue and that the actuarial analysis was empirically valid. We have established a best estimate of unpaid losses and LAE, which is approximately $19.5 million higher than the midpoint or 98.5% of the high end of the actuarial range at December 31, 2013 as compared to $18.7 million above the midpoint or 97.1% of the high end of the actuarial range at December 31, 2012. We expect our best estimate to move within the actuarial range from year to year due to changes in our operations and changes within the marketplace. Due to the inherent uncertainty in reserve estimates, there can be no assurance that the actual losses ultimately experienced will fall within the actuarial range. However, because of the breadth of the actuarial range, we believe that it is reasonably likely that actual losses will fall within such range.

Our reserve requirements are also interrelated with product pricing and profitability. We must price our products at a level sufficient to fund our policyholder benefits and still remain profitable. Because claim expenses represent the single largest category of our expenses, inaccuracies in the assumptions used to estimate the amount of such benefits can result in our failing to price our products appropriately and to generate sufficient premiums to fund our operations.

Recognition of profit sharing commissions. Profit sharing commission is calculated and recognized when the loss ratio, as determined by a qualified actuary, deviates from contractual targets. We receive a provisional commission as policies are produced as an advance against the later determination of the profit sharing commission actually earned. The profit sharing commission is an estimate that varies with the estimated loss ratio and is sensitive to changes in that estimate.

The following table details the profit sharing commission revenue sensitivity of the Standard Commercial P&C business unit to the actual ultimate loss ratio for each effective quota share treaty at 5.0% above and below the current estimate, which we believe is a reasonably likely range of variance ($ in thousands).

	Treaty Effective Dates
	7/1/01			7/1/02			7/1/03			7/1/04
Provisional loss ratio		60.0	%		59.0	%		59.0	%		64.2	%
Estimated ultimate loss ratio recorded at December 31, 2013		63.5	%		64.5	%		60.9	%		63.7	%
Effect of actual 5.0% above estimated loss ratio at December 31, 2013		-			-		$	(3,360	)	$	(3,790	)
Effect of actual 5.0% below estimated loss ratio at December 31, 2013	$	1,850		$	3,055		$	2,667		$	3,790

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The following table details the profit sharing commission revenue sensitivity of the E&S Commercial business unit for each effective quota share treaty at 5.0% above and below the current estimate, which we believe is a reasonably likely range of variance ($ in thousands).

	Treaty Effective Dates
	1/1/06			1/1/07			1/1/08
Provisional loss ratio		65.0	%		65.0	%		65.0	%
Estimated ultimate loss ratio recorded at December 31, 2013		58.6	%		63.2	%		59.0	%
Effect of actual 5.0% above estimated loss ratio at December 31, 2013	$	(3,096	)	$	(860	)	$	(1,618	)
Effect of actual 5.0% below estimated loss ratio at December 31, 2013	$	2,854		$	2,351		$	1,626

Results of Operations

Comparison of Years ended December 31, 2013 and December 31, 2012

Management overview. During fiscal 2013, our total revenues were $389.4 million, representing an approximately 14% increase over the $341.8 million in total revenues for fiscal 2012. The growth in revenue was primarily attributable to increased premium production and resulting earned premium driven largely from our Specialty Commercial Segment and our Standard Commercial Segment. Further contributing to the increase in revenue were higher net realized gains on our investment portfolio and a lower adverse profit share commission revenue adjustment in our Standard Commercial Segment. These increases in revenue were partially offset by lower net investment income and lower year to date earned premium in our Personal Segment due mostly to the impact of discontinued products and a reduction of premium written in underperforming states.

The increase in revenue for the year ended December 31, 2013 was accompanied by increased loss and LAE of $34.9 million as compared to the same period of 2012. During the twelve months ended December 31, 2013 we recorded $10.0 million of unfavorable prior year loss development. During the twelve months ended December 31, 2012 we recorded $3.7 million of favorable prior year loss development. The increase in loss and LAE occurred despite a $1.5 million decrease in catastrophe losses to $10.2 million during the year ended December 31, 2013 from $11.7 million reported for the same period of 2012. Other operating expenses also increased due mostly to increased production related expenses in our E&S Commercial business unit.

We reported net income of $8.2 million for the year ended December 31, 2013, as compared to net income of $3.5 million for the year ended December 31, 2012. On a diluted per share basis, net income attributable to Hallmark was $0.43 per share for fiscal 2013 as compared to net income of $0.18 per share for fiscal 2012.

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Segment information

The following is additional business segment information for the years ended December 31, 2013 and 2012 (in thousands):

	Year Ended December 31, 2013
	Standard						Specialty
	Commercial						Commercial						Personal
	Segment						Segment						Segment						Corporate						Consolidated
	2013			2012			2013			2012			2013			2012			2013			2012			2013			2012
Gross premiums written	$	87,147		$	77,091		$	296,108		$	235,695		$	76,772		$	77,056		$	-		$	-		$	460,027		$	389,842
Ceded premiums written		(7,681	)		(7,000	)		(60,453	)		(49,642	)		(31,128	)		(711	)		-			-			(99,262	)		(57,353	)
Net premiums written		79,466			70,091			235,655			186,053			45,644			76,345			-			-			360,765			332,489
Change in unearned premiums		(1,290	)		(936	)		(17,090	)		(17,223	)		18,156			5,106			-			-			(224	)		(13,053	)
Net premiums earned		78,176			69,155			218,565			168,830			63,800			81,451			-			-			360,541			319,436
Total revenues		83,306			73,119			229,734			178,917			71,081			89,149			5,307			615			389,428			341,800
Losses and loss adjustment expenses		56,143			52,828			152,546			103,980			52,656			69,606			-			-			261,345			226,414
Pre-tax income (loss), net of non-controlling interest		1,980			(2,486	)		19,527			25,932			(3,416	)		(8,535	)		(7,011	)		(11,861	)		11,080			3,050
Net loss ratio (1)		71.8	%		76.4	%		69.8	%		61.6	%		82.5	%		85.5	%								72.5	%		70.9	%
Net expense ratio (1)		32.2	%		33.2	%		26.6	%		28.3	%		26.7	%		28.5	%								29.2	%		30.8	%
Net combined ratio (1)		104.0	%		109.6	%		96.4	%		89.9	%		109.2	%		114.0	%								101.7	%		101.7	%
Favorable (Unfavorable) Prior Year Development		5,235			3,744			(13,381	)		3,577			(1,808	)		(3,646	)		-			-			(9,954	)		3,675

1 The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated for our business units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. For the business units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

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Standard Commercial Segment.

Gross premiums written for the Standard Commercial Segment were $87.1 million for the year ended December 31, 2013, which was $10.0 million, or approximately 13%, more than the $77.1 million reported for the same period in 2012. Net premiums written were $79.5 million for the year ended December 31, 2013 as compared to $70.1 million reported for the same period in 2012. The increase in premium volume was primarily due to increased premium production in both our Standard Commercial P&C and Workers Compensation business units.

Total revenue for the Standard Commercial Segment of $83.3 million for the year ended December 31, 2013 was $10.2 million more than the $73.1 million reported during the year ended December 31, 2012. This increase in total revenue was the result of increased net earned premiums of $9.0 million, higher net investment income of $0.1 million and a $1.1 million lower adverse profit share commission revenue adjustment during the year ended December 31, 2013 as compared to the same period during 2012.

Our Standard Commercial Segment reported pre-tax income was $2.0 million for the year ended December 31, 2013 as compared to a pre-tax loss of $2.5 million for the same period of 2012. The increased revenue discussed above was the primary driver of the increased pre-tax income for the year ended December 31, 2013, partially offset by higher loss and LAE of $3.3 million and higher operating expenses of $2.4 million consisting primarily of higher production related expenses due to increased premium production.

The net loss ratio for the year ended December 31, 2013 was 71.8% as compared to the 76.4% reported for 2012. The gross loss ratio before reinsurance was 67.8% for the year ended December 31, 2013 as compared to 74.8% for the prior year. The lower gross and net loss ratios for the year ended December 31, 2013 were aided by lower catastrophe losses coupled with increased favorable prior year loss reserve development. The net loss ratios for the years ended December 31, 2013 and 2012 included catastrophe losses of $6.0 million and $9.5 million, respectively. During the years ended December 31, 2013 and 2012, the Standard Commercial Segment reported favorable loss reserve development of $5.2 million and $3.7 million, respectively. The Standard Commercial Segment reported a net expense ratio of 32.2% for the year ended December 31, 2013 as compared to 33.2% reported for the same period the prior year. The decrease in net expense ratio was due primarily to the increased premium volume.

Specialty Commercial Segment.

Gross premiums written for the Specialty Commercial Segment were $296.1 million for the year ended December 31, 2013, which was $60.4 million, or 26%, more than the $235.7 million reported for the same period in 2012. Net premiums written were $235.7 million for the year ended December 31, 2013 as compared to $186.1 million reported for the same period in 2012. The increase in premium volume was due to increased premium production in both our E&S Commercial and Hallmark Select business units.

The $229.7 million of total revenue for the year ended December 31, 2013 was $50.8 million higher than the $178.9 million reported for 2012. This 28% increase in revenue was due to higher net premiums earned of $49.7 million due predominately to increased production discussed above. Further contributing to this increased revenue was higher net investment income of $1.6 million partially offset by lower profit share commission revenue adjustment of $0.5 million for the year ended December 31, 2013 as compared to the same period of 2012.

Pre-tax income for the Specialty Commercial Segment of $19.5 million for the year ended December 31, 2013 was $6.4 million lower than the $25.9 million reported for the same period in 2012. The decrease in pre-tax income was primarily due to higher loss and LAE expenses of $48.6 million and higher operating expenses of $9.4 million, partially offset by lower amortization of intangible assets of $0.5 million, lower non-controlling interest of $0.3 million and the increased revenue discussed above. Our E&S Commercial business unit reported a $45.7 million increase in loss and LAE due primarily to increased premium volume and $16.0 million of unfavorable prior year loss reserve development as compared to $0.3 million of favorable development during the same period of 2012. In addition, our Hallmark Select business unit reported a $2.9 million increase in loss and LAE which consisted of (a) a $1.4 million increase in loss and LAE due to increased premium production in our commercial umbrella and excess liability line of business, (b) a $2.5 million increase in loss and LAE primarily due to large loss volatility in our aircraft hull coverage during fiscal 2013, (c) a $0.3 million increase in loss and LAE attributable to our medical professional liability insurance products and (d) a $1.3 million decrease in loss and LAE in our satellite insurance products due primarily to decreased premium volume as well as lower current accident year loss trends. The increase in operating expense was the combined result of increased production related expenses of $8.7 million, higher salary and related expenses of $0.4 million, higher professional service fees of $0.5 million partially offset by lower other operating expenses of $0.2 million.

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The Specialty Commercial Segment reported a net loss ratio of 69.8% for the year ended December 31, 2013 as compared to 61.6% for the same period during 2012. The gross loss ratio before reinsurance was 68.5% for the year ended December 31, 2013 as compared to 61.1% for the same period in 2012. The higher gross and net loss ratio included $13.4 million of unfavorable prior year loss reserve development for the year ended December 31, 2013 as compared to $3.6 million of favorable prior year loss reserve development for the same period during 2012. The Specialty Commercial Segment reported a net expense ratio of 26.6% for the year ended December 31, 2013 as compared to 28.3% reported for the same period the prior year. The decrease in the net expense ratio was due primarily to increased net premium volume.

Personal Segment.

Gross premiums written for the Personal Segment were $76.8 million for the year ended December 31, 2013, which was $0.3 million less than the $77.1 million reported for the same period in 2012. Net premiums written for our Personal Segment were $45.6 million in the year ended December 31, 2013, which was a decrease of $30.7 million, or 40%, from the $76.3 million reported for the same period of 2012. The decrease in net premium written was due mostly to exiting certain underperforming states and programs and quota share reinsurance contracts entered into during the first quarter of 2013 on our low value dwelling/homeowners, renters, and manufactured homes lines of business and during the fourth quarter of 2013 on our non- standard automobile risks produced in certain states.

Total revenue for the Personal Segment decreased 20% to $71.1 million for the year ended December 31, 2013 from $89.1 million the prior year. Lower net premiums earned of $17.7 million and lower net investment income of $0.4 million, partially offset by higher other income of $0.1 million, were the primary reason for the decrease in revenue for the period.

Our Personal Segment reported a pre-tax loss of $3.4 million for the year ended December 31, 2013 as compared to a pre-tax loss of $8.5 million for the same period of 2012. The lower pre-tax loss was the result of lower losses and LAE of $16.9 million and lower operating expenses of $6.2 million, primarily due to lower production related expenses driven by increased ceding commission on the quota share agreements entered into during 2013. The decline in pre-tax loss was partially offset by lower revenue discussed above.

The Personal Segment reported a net loss ratio of 82.5% for the year ended December 31, 2013 as compared to 85.5% for 2012. The gross loss ratio before reinsurance was 80.6% for the year ended December 31, 2013 as compared to 85.6% for the same period in 2012. The lower gross and net loss ratio were primarily the result of lower current accident year loss trends as well as lower unfavorable prior year loss reserve development for the year ended December 31, 2013 as compared to the same period of 2012. Loss and LAE during the years ended December 31, 2013 and 2012 included unfavorable prior years’ loss reserve development of $1.8 million and $3.6 million, respectively. The Personal Segment reported a net expense ratio of 26.7% for the year ended December 31, 2013 as compared to 28.5% for the same period of 2012. The decrease in the expense ratio was due predominately to lower production related expenses.

Corporate.

Total revenue for Corporate was $5.3 million for the year ended December 31, 2013 as compared to $0.6 million for the same period of 2012. Net realized gains recognized on our investment portfolio were $10.5 million for the year ended December 31, 2013 as compared to $1.9 million during the same period during 2012. Net investment income decreased $3.7 million for the year ended December 31, 2013 as compared to the same period during 2012. Other income decreased $0.2 million for the year ended December 31, 2013 as compared to the same period during 2012.

Corporate pre-tax loss was $7.0 million for the year ended December 31, 2013 as compared to a $11.9 million pre-tax loss for the same period the prior year. The decrease in pre-tax loss was the result of the increased revenue discussed above and lower operating expenses of $0.2 million due primarily to lower salary and related expenses during the year ended December 31, 2013 as compared to the same period the prior year.

Comparison of Years ended December 31, 2012 and December 31, 2011

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

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

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

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Segment information.

The following is additional business segment information for the years ended December 31, 2012 and 2011 (in thousands):

	Year Ended December 31, 2012
	Standard						Specialty
	Commercial						Commercial						Personal
	Segment						Segment						Segment						Corporate						Consolidated
	2012			2011			2012			2011			2012			2011			2012			2011			2012			2011
Gross premiums written	$	77,091		$	69,420		$	235,695		$	185,020		$	77,056		$	100,441		$	-		$	-		$	389,842		$	354,881
Ceded premiums written		(7,000	)		(5,476	)		(49,642	)		(40,743	)		(711	)		(4,786	)		-			-			(57,353	)		(51,005	)
Net premiums written		70,091			63,944			186,053			144,277			76,345			95,655			-			-			332,489			303,876
Change in unearned premiums		(936	)		642			(17,223	)		(8,784	)		5,106			(2,693	)		-			-			(13,053	)		(10,835	)
Net premiums earned		69,155			64,586			168,830			135,493			81,451			92,962			-			-			319,436			293,041
Total revenues		73,119			72,830			178,917			142,838			89,149			101,351			615			5,752			341,800			322,771
Losses and loss adjustment expenses		52,828			50,940			103,980			87,265			69,606			101,030			-			-			226,414			239,235
Pre-tax income (loss), net of non-controlling interest		(2,486	)		1,335			25,932			14,348			(8,535	)		(29,647	)		(11,861	)		(5,881	)		3,050			(19,845	)
Net loss ratio (1)		76.4	%		78.9	%		61.6	%		64.4	%		85.5	%		108.7	%								70.9	%		81.6	%
Net expense ratio (1)		33.2	%		32.3	%		28.3	%		29.6	%		28.5	%		25.8	%								30.8	%		30.8	%
Net combined ratio (1)		109.6	%		111.2	%		89.9	%		94.0	%		114.0	%		134.5	%								101.7	%		112.4	%
Favorable (Unfavorable) Prior Year Development		3,744			848			3,577			2,436			(3,646	)		(19,650	)		-			-			3,675			(16,366	)

1 The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated for our business units that retain 100% of produced premium as total operating expenses for the unit offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. For the business units that do not retain 100% of the produced premium, the net expense ratio is calculated as underwriting expenses of the insurance company subsidiaries for the unit offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

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Standard Commercial Segment.

Gross premiums written for the Standard Commercial Segment were $77.1 million for the year ended December 31, 2012, which was $7.7 million, or approximately 11%, more than the $69.4 million reported for the same period in 2011. Net premiums written were $70.1 million for the year ended December 31, 2012 as compared to $63.9 million reported for the same period in 2011. The increase in gross premium volume was due predominately to the acquisition of our Workers Compensation business unit during the third quarter of 2011.

Total revenue for the Standard Commercial Segment of $73.1 million for the year ended December 31, 2012 was $0.3 million more than the $72.8 million reported during the year ended December 31, 2011. This increase in total revenue was the result of increased net earned premiums of $4.6 million due primarily to the acquisition of our Workers Compensation business unit during the third quarter of 2011 and higher net investment income of $0.9 million. This increase in revenue was partially offset by an adverse profit share commission revenue adjustment of $1.5 million during the year ended December 31, 2012 as compared to a favorable profit share commission revenue adjustment of $3.7 million during the same period of 2011.

Our Standard Commercial Segment reported a pre-tax loss of $2.5 million for the year ended December 31, 2012 as compared to pre-tax income of $1.3 million for the same period of 2011. Higher operating expenses of $2.2 million primarily due to the acquisition of our Workers Compensation business unit during the third quarter of 2011 and higher loss and LAE of $1.9 million contributed to this increase in pre-tax loss for the year ended December 31, 2012. Partially offsetting this increase in pre-tax loss was the increased revenue discussed above.

The net loss ratio for the year ended December 31, 2012 was 76.4% as compared to the 78.9% reported for 2011. The gross loss ratio before reinsurance was 74.8% for the year ended December 31, 2012 as compared to 77.4% for the prior year. The lower gross and net loss ratios for the year ended December 31, 2012 were aided by lower current accident year loss trends excluding catastrophe losses. The net loss ratios for the years ended December 31, 2012 and 2011 include $9.5 million and $7.7 million, respectively, of weather related losses. During the years ended December 31, 2012 and 2011 the Standard Commercial Segment reported $3.7 million and $0.8 million, respectively, of favorable prior years’ loss reserve development.

Specialty Commercial Segment.

Gross premiums written for the Specialty Commercial Segment were $235.7 million for the year ended December 31, 2012, which was $50.7 million, or 27%, more than the $185.0 million reported for the same period in 2011. Net premiums written were $186.1 million for the year ended December 31, 2012 as compared to $144.3 million reported for the same period in 2011. The increase in premium volume was primarily due to increased premium production in our E&S Commercial business unit and Hallmark Select business units.

The $178.9 million of total revenue for the year ended December 31, 2012 was $36.1 million higher than the $142.8 million reported for 2011. This 25% increase in revenue was due to higher net premiums earned of $33.3 million due predominately to increased production discussed above. Further contributing to this increased revenue was higher net investment income of $2.0 million and an adverse profit share commission revenue adjustment of $0.8 million for the year ended December 31, 2011.

Pre-tax income for the Specialty Commercial Segment of $25.9 million for the year ended December 31, 2012 was $11.6 million higher than the $14.3 million reported for the same period in 2011. The increase in pre-tax income was primarily due to the increased revenue discussed above partially offset by higher loss and LAE expenses of $16.7 million, higher operating expenses of $7.6 million and $0.3 million in expense related to the acquisition of the non-controlling interest in our Hallmark Select business unit during the third quarter of 2012. Our E&S Commercial business unit reported a $11.8 million increase in loss and LAE due primarily to increased premium volume partially offset by lower accident year loss trends. Our Hallmark Select business reported a $4.9 million increase in loss and LAE which consisted of (a) a $0.8 million increase in loss and LAE due to increased premium production in our commercial umbrella and excess liability line of business, (b) a $1.7 million increase in loss and LAE primarily due to increased current accident year loss trends in our general aviation line of business, (c) a $1.6 million increase in loss and LAE in our satellite insurance business due primarily to increased current accident year loss trends and (d) a $0.8 million increase in loss and LAE in our medical professional liability insurance products. The increased operating expenses during 2012 were primarily the result of increased production related expenses of $6.6 million, higher salary and related expense of $1.1 million and higher other operating expenses of $0.2 million, partially offset by lower professional service fees of $0.3 million.

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The Specialty Commercial Segment reported a net loss ratio of 61.6% for 2012 as compared to 64.4% for 2011. The lower net loss ratio was due primarily to overall lower current accident year loss trends and favorable prior year development for the year ended December 31, 2012 of $3.6 million as compared to $2.4 million favorable prior year development for the same period of 2011.

Personal Segment.

Gross premiums written for the Personal Segment were $77.1 million for the year ended December 31, 2012, which was $23.3 million, or 23%, less than the $100.4 million reported for the same period in 2011. The decrease in premium was due mostly to exiting Florida and certain other underperforming states and programs.

Total revenue for the Personal Segment decreased 12% to $89.1 million for the year ended December 31, 2012 from $101.4 million the prior year. Lower earned premium of $11.5 million and lower finance charges of $0.7 million were the primary reason for the decrease in revenue for the period.

Our Personal Segment reported a pre-tax loss of $8.5 million for the year ended December 31, 2012 as compared to a pre-tax loss of $29.6 million for the same period of 2011. The lower pre-tax loss was the result of lower losses and LAE of $31.4 million and lower operating expenses of $1.8 million, primarily production related expenses. The decline in pre-tax loss was partially offset by lower revenue discussed above.

The Personal Segment reported a net loss ratio of 85.5% for the year ended December 31, 2012 as compared to 108.7% for 2011. The decrease in the net loss ratio was primarily due to normalizing claims experience during 2012 as compared to extremely adverse claims development during 2011 due to rapid growth in the Florida claim volume and the complexity related to Florida personal injury protection claims. The loss ratio for the year ended December 31, 2012 included improving current accident year loss trends in our non-standard auto line of business partially offset by increased weather and fire related losses in our low value dwelling/homeowners line of business. The loss and LAE during the year ended December 31, 2012 included $3.6 million of adverse prior year development as compared to $19.7 million of adverse prior year development for the same period during 2011. The Personal Segment reported a net expense ratio of 28.5% for the year ended December 31, 2012 as compared to 25.8% for the prior year. The increase in the expense ratio was due predominately to growth in staffing.

Corporate.

Total revenue for corporate decreased by $5.1 million for the year ended December 31, 2012 as compared to the prior year. This decrease in total revenue was due primarily to gains of $1.9 million recognized on our investment portfolio for the year ended December 31, 2012 as compared to $3.7 million of gains recognized during the same period in 2011. Further contributing to this decrease in revenue was lower net investment income of $3.4 million for the year ended December 31, 2012 as compared to the same period of the prior year.

Corporate pre-tax loss was $11.9 million for the year ended December 31, 2012 as compared to a $5.9 million pre-tax loss for the same period the prior year. The increase in pre-tax loss was the result of the decreased revenue discussed above and higher operating expenses of $0.9 million due primarily to lower reductions recorded to the expected earn-out payable in conjunction with the acquisition of HNIC for the year ended December 31, 2012 as compared to the same period in 2011.

Liquidity and Capital Resources

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 December 31, 2013, Hallmark had $8.1 million in unrestricted cash and invested assets. Unrestricted cash and invested assets of our non-insurance subsidiaries were $8.4 million as of December 31, 2013. As of that date, our insurance subsidiaries held $125.2 million of cash and cash equivalents as well as $410.1 million in debt securities with an average modified duration of 3.0 years. Accordingly, we do not anticipate selling long-term debt instruments to meet any liquidity needs.

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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. 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. For all our insurance companies, dividends may only be paid from unassigned surplus funds. 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. None of our insurance company subsidiaries paid a dividend during the years ended December 31, 2013 or 2012.

The state insurance departments also regulate financial transactions between our insurance subsidiaries and their affiliated companies. Applicable regulations require approval of management fees, expense sharing contracts and similar transactions. The net amount paid in management fees by our insurance subsidiaries to Hallmark and our non-insurance company subsidiaries was $8.2 million, $9.0 million and $6.0 million during each of 2013, 2012 and 2011, respectively.

Statutory capital and surplus is calculated as statutory assets less statutory liabilities. The various state insurance departments that regulate our insurance company subsidiaries require us to maintain a minimum statutory capital and surplus. As of December 31, 2013, our insurance company subsidiaries reported statutory capital and surplus of $196.3 million, substantially greater than the minimum requirements for each state. Each of our insurance company subsidiaries is also required to satisfy certain risk-based capital requirements. (See, “Item 1. Business – Insurance Regulation – Risk-based Capital Requirements.”). As of December 31, 2013, the adjusted capital under the risk-based capital calculation of each of our insurance company subsidiaries substantially exceeded the minimum requirements. Our total statutory premium-to-surplus percentage for the years ended December 31, 2013 and 2012 was 184% and 188%, respectively.

Comparison of December 31, 2013 to December 31, 2012

On a consolidated basis, our cash and investments, excluding restricted cash and investments, at December 31, 2013 were $603.0 million compared to $530.5 million at December 31, 2012. Cash from operating activities was the primary reason for this increase.

Comparison of Years Ended December 31, 2013 and December 31, 2012

Net cash provided by our consolidated operating activities was $68.3 million for the year ended December 31, 2013 compared to $33.7 million for the year ended December 31, 2012. The increase in operating cash flow was primarily due to higher collected premiums written by our Specialty Commercial Segment during the year ended December 31, 2013 as compared to the same period in 2012, partially offset by increased operating expense payments and federal income tax payments during 2013 as compared to federal income tax refunds during 2012.

Cash used in investing activities during the year ended December 31, 2013 was $11.8 million as compared to $18.1 million for the prior year. The decrease in cash used in investing activities was primarily attributable to a $65.8 million increase in maturities, sales and redemptions of investment securities, partially offset by a $54.8 million increase in purchases of investment securities, a $0.6 million increase in purchases of property and equipment and $4.1 million increase in cash flow into restricted cash accounts.

There were no financing cash flow activities during the year ended December 31, 2013. Cash used in financing activities during the year ended December 31, 2012 was $4.9 million as a result of a $2.6 million repayment on our revolving credit facility, a $0.3 million payment of holdback consideration for the acquisition of TBIC, $1.7 million paid during the fourth quarter of 2012 for the acquisition of the 20% non-controlling interest in the subsidiaries comprising our Excess & Umbrella business unit and a $0.3 million distribution to non-controlling interest for our Excess & Umbrella business unit.

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 December 31, 2013, the balance on the revolving note was $1.5 million. The revolving note currently bears interest at 2.75% per annum.

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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 Hallmark Statutory Trust I (“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 uncollateralized and do not require maintenance of minimum financial covenants. As of December 31, 2013, the balance of our Trust I subordinated debt was $30.9 million.

On August 23, 2007, we entered into a trust preferred securities transaction pursuant to which we issued $25.8 million aggregate principal amount of subordinated debt securities due in 2037. To effect the transaction, we formed Hallmark Statutory Trust II (“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 uncollateralized and do not require maintenance of minimum financial covenants. As of December 31, 2013, the balance of our Trust II subordinated debt was $25.8 million.

Long-Term Contractual Obligations

Set forth below is a summary of long-term contractual obligations as of December 31, 2013. Amounts represent estimates of gross undiscounted amounts payable over time. In addition, certain unpaid losses and LAE are ceded to others under reinsurance contracts and are, therefore, recoverable. Such potential recoverables are not reflected in the table.

	Estimated Payments by Period (in thousands)
	Total		2014		2015-2016		2017-2018		After 2018
Notes payable	$	1,473	$	-	$	1,473	$	-	$	-
Subordinated debt securities		56,702		-		-		-		56,702
Interest on notes payable		54		41		13		-		-
Interest on subordinated debt securities		91,199		4,388		8,573		7,976		70,262
Unpaid losses and LAE (1)		382,640		152,852		128,070		51,871		49,847
Operating leases		11,440		1,987		3,610		2,677		3,166
Purchase obligations		1,706		1,580		126		-		-

(1) The payout pattern for unpaid losses and LAE is based upon historical payment patterns and does not represent actual contractual obligations. The timing and amount ultimately paid will likely vary from these estimates.

Based on 2014 budgeted and year-to-date cash flow information, we believe that we have sufficient liquidity to meet our projected insurance obligations, operational expenses and capital expenditure requirements for the next 12 months.

Effects of Inflation

We do not believe that inflation has a material effect on our results of operations, except for the effect that inflation may have on interest rates and claim costs. The effects of inflation are considered in pricing and estimating reserves for unpaid losses and LAE. The actual effects of inflation on results of operations are not known until claims are ultimately settled. In addition to general price inflation, we are exposed to the upward trend in the judicial awards for damages. We attempt to mitigate the effects of inflation in the pricing of policies and establishing reserves for losses and LAE.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We believe that interest rate risk, credit risk and equity risk are the types of market risk to which we are principally exposed.

Interest rate risk. Our investment portfolio consists largely of investment-grade, fixed-income securities, all of which are classified as available-for-sale. Accordingly, the primary market risk exposure to these securities is interest rate risk. In general, the fair value of a portfolio of fixed-income securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in fixed-income securities increases or decreases along with interest rates. The fair value of our fixed-income securities as of December 31, 2013 was $410.1 million. The effective duration of our portfolio as of December 31, 2013 was 3.0 years. Should interest rates increase 1.0%, our fixed-income investment portfolio would be expected to decline in market value by 3.0%, or $12.2 million, representing the effective duration multiplied by the change in market interest rates. Conversely, a 1.0% decline in interest rates would be expected to result in a 3.0%, or $12.2 million, increase in the fair value of our fixed-income investment portfolio.

Credit risk. An additional exposure to our fixed-income securities portfolio is credit risk. We attempt to manage the credit risk by investing primarily in investment-grade securities and limiting our exposure to a single issuer. As of December 31, 2013, our fixed-income investments were in the following: U.S. Treasury bonds – 19.2%; municipal bonds – 38.4%; collateralized corporate bank loans – 24.9%; corporate bonds – 10.7%; and asset-backed – 6.8%. As of December 31, 2013, 75.9% of our fixed-income securities were rated investment-grade by nationally recognized statistical rating organizations.

We are also subject to credit risk with respect to reinsurers to whom we have ceded underwriting risk. Although a reinsurer is liable for losses to the extent of the coverage it assumes, we remain obligated to our policyholders in the event that the reinsurers do not meet their obligations under the reinsurance agreements. In order to mitigate credit risk to reinsurance companies, most of our reinsurance recoverable balance as of December 31, 2013 was with reinsurers having an A.M. Best rating of “A-” or better.

Equity price risk. Investments in equity securities that are subject to equity price risk made up 11.1% of our portfolio as of December 31, 2013. The carrying values of equity securities are based on quoted market prices as of the balance sheet date. Market prices are subject to fluctuation and, consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported fair value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the issuer, the relative price of alternative investments and general market conditions. Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security being sold.

The fair value of our equity securities as of December 31, 2013 was $51.2 million. The fair value of our equity securities would increase or decrease by $15.4 million assuming a hypothetical 30% increase or decrease in market prices as of the balance sheet date. This would increase or decrease stockholders’ equity by 4.2%. The selected hypothetical change does not reflect what should be considered the best or worsed case scenario.

Item 8. Financial Statements and Supplementary Data.

The following consolidated financial statements of Hallmark and its subsidiaries are filed as part of this report.

Description	Page Number
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets at December 31, 2013 and 2012	F-3
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011	F-4
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2012 and 2011	F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended
December 31, 2013, 2012 and 2011	F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2013, 2012 and 2011	F-7
Notes to Consolidated Financial Statements	F-8
Financial Statement Schedules	F-43

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure 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 three month period ended December 31, 2013, there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as such phrase is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Accounting Officer, an evaluation of the effectiveness of our internal control over financial reporting was conducted based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework). Based upon that evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2013.

Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements as of December 31, 2013 included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting as of December 31, 2013. The Ernst & Young LLP attestation report, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2013, is included in this Item under the heading “Attestation Report of Independent Registered Public Accounting Firm.”

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Hallmark Financial Services, Inc. and subsidiaries

We have audited Hallmark Financial Services, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Hallmark Financial Services, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hallmark Financial Services, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 of Hallmark Financial Services, Inc. and subsidiaries and our report dated March 12, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Fort Worth, Texas

March 12, 2014

56

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by Item 10 is incorporated by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

Item 11. Executive Compensation.

The information required by Item 11 is incorporated by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by Item 12 is incorporated by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by Item 13 is incorporated by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

Item 14. Principal Accounting Fees and Services.

The information required by Item 14 is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

57

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)(1)	Financial Statements
	The following consolidated financial statements, notes thereto and related information are included in Item 8 of this report:
	Report of Independent Registered Public Accounting Firm
	Consolidated Balance Sheets at December 31, 2013 and 2012
	Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011
	Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2012 and 2011
	Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
	Notes to Consolidated Financial Statements
(a)(2)	Financial Statement Schedules
	The following financial statement schedules are included in this report:
	Schedule II – Condensed Financial Information of Registrant (Parent Company Only)
	Schedule III – Supplemental Insurance Information
	Schedule IV – Reinsurance
	Schedule VI – Supplemental Information Concerning Property-Casualty Insurance Operations
(a)(3)	Exhibit Index

The following exhibits are either filed with this report or incorporated by reference:

Exhibit Number	Description
3.1	Restated Articles of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the registrant’s Registration Statement on Form S-1 [Registration No. 333-136414] filed September 8, 2006).
3.2	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).
4.1	Specimen certificate for common stock, $0.18 par value, of the registrant (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the registrant’s Registration Statement on Form S-1 [Registration No. 333-136414] filed September 8, 2006).
4.2	Indenture dated June 21, 2005, between Hallmark Financial Services, Inc. and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed June 27, 2005).
4.3	Amended and Restated Declaration of Trust of Hallmark Statutory Trust I dated as of June 21, 2005, among Hallmark Financial Services, Inc., as sponsor, Chase Bank USA, National Association, as Delaware trustee, and JPMorgan Chase Bank, National Association, as institutional trustee, and Mark Schwarz and Mark Morrison, as administrators (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed June 27, 2005).
4.4	Form of Junior Subordinated Debt Security Due 2035 (included in Exhibit 4.2 above).
4.5	Form of Capital Security Certificate (included in Exhibit 4.3 above).
4.6	First Restated Credit Agreement dated January 27, 2006, between Hallmark Financial Services, Inc. and The Frost National Bank (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed February 2, 2006).
4.7	Indenture dated as of August 23, 2007, between Hallmark Financial Services, Inc. and The Bank of New York Trust Company, National Association (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed August 24, 2007).

58

4.8	Amended and Restated Declaration of Trust of Hallmark Statutory Trust II dated as of August 23, 2007, among Hallmark Financial Services, Inc., as sponsor, The Bank of New York (Delaware), as Delaware trustee, and The Bank of New York Trust Company, National Association, as institutional trustee, and Mark Schwarz and Mark Morrison, as administrators (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed August 24, 2007).
4.9	Form of Junior Subordinated Debt Security Due 2037 (included in Exhibit 4.7 above).
4.10	Form of Capital Security Certificate (included in Exhibit 4.8 above).
4.11	Fifth Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and The Frost National Bank dated February 20, 2008 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed February 25, 2008).
4.12	Sixth Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and The Frost National Bank dated January 21, 2010 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed January 25, 2010).
4.13	Seventh Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and The Frost National Bank dated May 27, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 17, 2010).
4.14	Eighth Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and The Frost National Bank dated March 21, 2011 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 21, 2011).
4.15	Ninth Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and Frost Bank dated July 10, 2012 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed July 12, 2012).
4.16	Tenth Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and Frost Bank dated September 30, 2012 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed October 1, 2012).
4.17	Eleventh Amendment to First Restated Credit Agreement among Hallmark Financial Services, Inc. and its subsidiaries and Frost Bank dated July 26, 2013 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed July 30, 2013).
10.1	Office Lease for 6500 Pinecrest, Plano, Texas, dated July 22, 2008, between Hallmark Financial Services, Inc. and Legacy Tech IV Associates, Limited Partnership (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed July 29, 2008).
10.2	Lease Agreement for 777 Main Street, Fort Worth, Texas, dated June 12, 2003 between Hallmark Financial Services, Inc. and Crescent Real Estate Funding I, L.P. (incorporated by reference to Exhibit 10(a) to the registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003).
10.3	Office Lease by and between SAOP Northwest Center, L.P. and Hallmark Specialty Underwriters, Inc. dated January 29, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed February 2, 2010).
10.4	Office Lease by and between Minol Center, L.P. and Aerospace Insurance Managers, Inc. dated August 9, 2010 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed August 17, 2010).
10.5	Office Lease by and between Civic Opera, L.P. and Hallmark Specialty Underwriters, Inc. dated December 27, 2010 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed January 4, 2011).

59

10.6		First Amendment to Office Lease between MS Crescent One SPV, LLC and Hallmark Financial Services, Inc., dated February 28, 2011 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 1, 2011).
10.7*		Form of Indemnification Agreement between Hallmark Financial Services, Inc. and its officers and directors, adopted July 19, 2002 (incorporated by reference to Exhibit 10(c) to the registrant’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2002).
10.8*		Hallmark Financial Services, Inc. 2005 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 3, 2005).
10.9*		Form of Incentive Stock Option Grant Agreement (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed June 3, 2005).
10.10*		Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed June 3, 2005).
10.11		Guarantee Agreement dated as of June 21, 2005, by Hallmark Financial Services, Inc. for the benefit of the holders of trust preferred securities (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 27, 2005).
10.12*		Hallmark Financial Services, Inc. Amended and Restated 2005 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 3, 2013).
10.13*	+	Form of Restricted Stock Unit Award Agreement.
10.14		Guarantee Agreement dated as of August 23, 2007, by Hallmark Financial Services, Inc. for the benefit of the holders of trust preferred securities (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 24, 2007).
10.15		Stock Purchase Agreement dated March 25, 2011, between American Hallmark Insurance Company of Texas and Robert C. Siddons, Stephen W. Gurasich, Andrew J. Reynolds, Paul W. Keller, Kerry A. Keller and Austin Engineering Co., Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated March 25, 2011).
21+		List of subsidiaries of the registrant.
23 (a)+		Consent of Independent Registered Public Accounting Firm.
31(a)+		Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(b).
31(b)+		Certification of principal financial officer required by Rule 13a-14(a) or Rule 15d-14(b).
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.

61

101 DEF+		XBRL Taxonomy Extension Definition Linkbase Document.
	*	Management contract or compensatory plan or arrangement.
	+	Filed herewith.

62

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			HALLMARK FINANCIAL SERVICES, INC.
			(Registrant)
Date:	March 12, 2014	By:	/s/ Mark J. Morrison
			Mark J. Morrison, Chief Executive Officer and
			President
Date:	March 12, 2014	By:	/s/ Jeffrey R. Passmore
			Jeffrey R. Passmore, Chief Accounting Officer and Senior
			Vice President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date:	March 12, 2014	/s/ Mark J. Morrison
		Mark J. Morrison, Chief Executive Officer and
		President (Principal Executive Officer)
Date:	March 12, 2014	/s/ Jeffrey R. Passmore
		Jeffrey R. Passmore, Chief Accounting Officer and Senior
		Vice President (Principal Financial Officer and Principal Accounting Officer)
Date:	March 12, 2014	/s/ Mark E. Schwarz
		Mark E. Schwarz, Executive Chairman
Date:	March 12, 2014	/s/ James H. Graves
		James H. Graves, Director
Date:	March 12, 2014	/s/ Jim W. Henderson
		Jim W. Henderson, Director
Date:	March 12, 2014	/s/ Scott T. Berlin
		Scott T. Berlin, Director

63

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Description	Page Number
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets at December 31, 2013 and 2012	F-3
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011	F-4
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2012 and 2011	F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011	F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011	F-7
Notes to Consolidated Financial Statements	F-8
Financial Statement Schedules	F-43

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Hallmark Financial Services, Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of Hallmark Financial Services, Inc. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedules listed in Item 15(a)(2). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hallmark Financial Services, Inc. and subsidiaries at December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We also have audited in accordance with the standards of the Public Company Oversight Board (United States), Hallmark Financial Services, Inc. and subsidiaries internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated March 12, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Fort Worth, Texas

March 12, 2014

F-2

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2013 and 2012

($ in thousands)

	2013			2012
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (cost; $408,627 in 2013 and $397,800 in 2012)	$	410,095		$	401,435
Equity securities, available-for-sale, at fair value (cost; $24,902 in 2013 and $31,502 in 2012)		51,230			43,925
Total investments		461,325			445,360
Cash and cash equivalents		141,666			85,145
Restricted cash		12,190			8,707
Ceded unearned premiums		44,988			22,411
Premiums receivable		71,157			66,683
Accounts receivable		2,382			3,110
Receivable for securities		1,320			3
Reinsurance recoverable		76,818			51,970
Deferred policy acquisition costs		22,586			24,911
Goodwill		44,695			44,695
Intangible assets, net		19,953			23,068
Deferred federal income taxes, net		-			1,940
Prepaid expenses		1,531			1,480
Other assets		8,412			10,985
Total assets	$	909,023		$	790,468
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Revolving credit facility payable	$	1,473		$	1,473
Subordinated debt securities		56,702			56,702
Reserves for unpaid losses and loss adjustment expenses		382,640			313,416
Unearned premiums		185,303			162,502
Reinsurance balances payable		20,598			7,330
Pension liability		1,433			3,685
Payable for securities		206			-
Federal income tax payable		719			1,518
Deferred federal income taxes, net		2,825			-
Accounts payable and other accrued expenses		19,006			23,305
Total liabilities		670,905			569,931
Commitments and contingencies (Note 16)
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2013 and 2012		3,757			3,757
Additional paid-in capital		122,827			122,475
Retained earnings		106,209			97,964
Accumulated other comprehensive income		16,883			7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost		(11,558	)		(11,558	)
Total stockholders’ equity		238,118			220,537
	$	909,023		$	790,468

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

F-3

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2013, 2012 and 2011

($ in thousands, except per share amounts)

	2013			2012			2011
Gross premiums written	$	460,027		$	389,842		$	354,881
Ceded premiums written		(99,262	)		(57,353	)		(51,005	)
Net premiums written		360,765			332,489			303,876
Change in unearned premiums		(224	)		(13,053	)		(10,835	)
Net premiums earned		360,541			319,436			293,041
Investment income, net of expenses		12,884			15,293			15,880
Net realized gains		10,540			1,943			3,633
Finance charges		5,830			5,957			6,826
Commission and fees		(487	)		(1,145	)		3,175
Other income		120			316			216
Total revenues		389,428			341,800			322,771
Losses and loss adjustment expenses		261,345			226,414			239,235
Operating expenses		109,289			103,792			95,106
Interest expense		4,599			4,634			4,631
Amortization of intangible assets		3,115			3,586			3,586
Total expenses		378,348			338,426			342,558
Income (loss) before tax		11,080			3,374			(19,787	)
Income tax expense (benefit)		2,835			(474	)		(8,954	)
Net income (loss)		8,245			3,848			(10,833	)
Less: Net income attributable to non-controlling interest		-			324			58
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	8,245		$	3,524		$	(10,891	)
Net income (loss) per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic	$	0.43		$	0.18		$	(0.55	)
Diluted	$	0.43		$	0.18		$	(0.55	)

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

F-4

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, 2013, 2012 and 2011

(In thousands)

	2013			2012			2011
Net income (loss)	$	8,245		$	3,848		$	(10,833	)
Other comprehensive income (loss):
Change in net actuarial gain (loss)		2,268			37			(1,468	)
Tax effect on change in net actuarial gain (loss)		(794	)		(13	)		514
Unrealized holding gains arising during the period		22,094			4,388			191
Tax effect on unrealized holding gains arising during the period		(7,733	)		(1,536	)		(67	)
Reclassification adjustment for gains included in net income (loss)		(10,540	)		(2,189	)		(3,633	)
Tax effect on reclassification adjustment for gains included in net income (loss)		3,689			766			1,272
Other comprehensive income (loss), net of tax		8,984			1,453			(3,191	)
Comprehensive income (loss)	$	17,229		$	5,301		$	(14,024	)
Less: comprehensive income attributable to non-controlling interest		-			324			58
Comprehensive income (loss) attributable to Hallmark Financial Services, Inc.	$	17,229		$	4,977		$	(14,082	)

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

F-5

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the years ended December 31, 2013, 2012 and 2011

(In thousands)

	Number				Additional						Accumulated Other						Number			Total
	of		Par		Paid-In			Retained			Comprehensive			Treasury			of			Stockholders'
	Shares		Value		Capital			Earnings			Income (Loss)			Stock			Shares			Equity
Balance at January 1, 2011		20,873	$	3,757	$	121,815		$	105,331		$	9,637		$	(5,262	)		749		$	235,278
Acquisition of treasury shares		-		-		-			-			-			(6,401	)		875			(6,401	)
Equity incentive plan activity		-		-		709			-			-			-			-			709
Stock options exercised		-		-		(6	)		-			-			105			(15	)		99
Accretion of redeemable non-controlling interest		-		-		(31	)		-			-			-			-			(31	)
Net loss, as adjusted		-		-		-			(10,891	)		-			-			-			(10,891	)
Other comprehensive loss, net of tax		-		-		-			-			(3,191	)		-			-			(3,191	)
Balance at December 31, 2011		20,873	$	3,757	$	122,487		$	94,440		$	6,446		$	(11,558	)		1,609		$	215,572
Equity incentive plan activity		-		-		380			-			-			-			-			380
Accretion of redeemable non-controlling interest		-		-		(392	)		-			-			-			-			(392	)
Net income		-		-		-			3,524			-			-			-			3,524
Other comprehensive income, net of tax		-		-		-			-			1,453			-			-			1,453
Balance at December 31, 2012		20,873	$	3,757	$	122,475		$	97,964		$	7,899		$	(11,558	)		1,609		$	220,537
Equity incentive plan activity		-		-		352			-			-			-			-			352
Net income		-		-		-			8,245			-			-			-			8,245
Other comprehensive income, net of tax		-		-		-			-			8,984			-			-			8,984
Balance at December 31, 2013		20,873	$	3,757	$	122,827		$	106,209		$	16,883		$	(11,558	)		1,609		$	238,118

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

F-6

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2013, 2012 and 2011

($ in thousands)

	2013			2012			2011
Cash flows from operating activities:
Net income (loss)	$	8,245		$	3,848		$	(10,833	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization expense		4,300			4,421			5,064
Deferred federal income taxes		(257	)		(2,851	)		(2,895	)
Net realized gains		(10,540	)		(1,943	)		(3,633	)
Share-based payments expense		352			380			709
Change in ceded unearned premiums		(22,577	)		(2,941	)		6,034
Change in premiums receivable		(4,474	)		(13,170	)		(3,842	)
Change in accounts receivable		728			836			2,347
Change in deferred policy acquisition costs		2,325			(2,357	)		(1,621	)
Change in unpaid losses and loss adjustment expenses		69,224			16,471			33,088
Change in unearned premiums		22,801			16,398			4,801
Change in reinsurance recoverable		(24,848	)		(9,236	)		227
Change in reinsurance balances payable		13,268			4,191			(246	)
Change in current federal income tax (recoverable)payable		(799	)		8,256			(2,470	)
Change in all other liabilities		(6,551	)		5,396			(5,707	)
Change in all other assets		17,141			5,983			3,587
Net cash provided by operating activities		68,338			33,682			24,610
Cash flows from investing activities:
Purchases of property and equipment, net		(673	)		(107	)		(1,586	)
Acquisitions of subsidiaries, net of cash received		-			-			(13,334	)
Net transfers (into) from restricted cash		(3,483	)		665			(4,095	)
Purchases of investment securities		(222,399	)		(167,626	)		(265,684	)
Maturities, sales and redemptions of investment securities		214,738			148,968			280,918
Net cash used in investing activities		(11,817	)		(18,100	)		(3,781	)
Cash flows from financing activities:
Activity under revolving credit facility, net		-			(2,577	)		1,250
Repayment of notes payable of acquired subsidiary		-			-			(1,660	)
Redemption of non-controlling interest		-			(1,700	)		-
Distribution to non-controlling interest		-			(281	)		(165	)
Payment of contingent consideration		-			(350	)		-
Proceeds from exercise of employee stock options		-			-			99
Purchase of treasury shares		-			-			(6,401	)
Net cash used in financing activities		-			(4,908	)		(6,877	)
Increase in cash and cash equivalents		56,521			10,674			13,952
Cash and cash equivalents at beginning of year		85,145			74,471			60,519
Cash and cash equivalents at end of year	$	141,666		$	85,145		$	74,471
Supplemental cash flow information:
Interest paid	$	(4,599	)	$	(4,656	)	$	(4,620	)
Income taxes (paid) recovered	$	(3,891	)	$	5,879		$	3,589
Supplemental schedule of non-cash activities:
Change in receivable for securities related to investment disposals that settled after the balance sheet date	$	(1,317	)	$	2,614		$	(402	)
Change in payable for securities related to investment purchases that settled after the balance sheet date	$	206		$	(203	)	$	(2,290	)

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

F-7

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

1.    Accounting Policies:

General

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, the “Company”, “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 and is comprised of American Hallmark Insurance Services, Inc. (“American Hallmark Insurance Services”) and Effective Claims Management, Inc. (“ECM”). Our Workers Compensation business unit specializes in small and middle market workers compensation business and is comprised of TBIC Holding Corporation, Inc. (“TBIC Holding”), Texas Builders Insurance Company (“TBIC”) and TBIC Risk Management (“TBICRM”). The subsidiaries comprising our Workers Compensation business unit were acquired July 1, 2011. Our E&S Commercial business unit handles primarily commercial insurance products and services and is comprised of Hallmark Specialty Underwriters, Inc. (“HSU”), Pan American Acceptance Corporation (“PAAC”) and TGA Special Risk, Inc. (“TGASRI”). 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 Hallmark Select business unit is the combination of our operations previously known as our General Aviation business unit, our Excess & Umbrella business unit, the medical professional liability business previously handled by our E&S Commercial business unit and the satellite launch insurance products previously managed at the parent level. Our Hallmark Select business unit is comprised of Aerospace Insurance Managers, Inc. (“Aerospace Insurance Managers”), Aerospace Special Risk, Inc. (“ASRI”), Aerospace Claims Management Group, Inc. (“ACMG”), Heath XS, LLC (“HXS”) and Hardscrabble Data Solutions, LLC (“HDS”). Our Personal Lines business unit handles personal insurance products and services and is comprised of American Hallmark General Agency, Inc. and Hallmark Claims Services, Inc. (both of which do business as Hallmark Insurance Company). Our insurance company subsidiaries supporting these business units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and TBIC.

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 (“Specialty Programs”) which are managed by Hallmark. The Personal Segment presently consists solely of our Personal Lines business unit.

Basis of Presentation

The accompanying consolidated financial statements include the accounts and operations of Hallmark and its subsidiaries. Intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) which, as to our insurance company subsidiaries, differ from statutory accounting practices prescribed or permitted for insurance companies by insurance regulatory authorities.

Use of Estimates in the Preparation of Financial Statements

Our preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities at the dates of the financial statements and our reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Since future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment may be reflected in the financial statements in future periods.

F-8

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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 are reported at carry value of $56.7 million and $56.7 million, and have a fair value of $53.2 million and $48.2 million, as of December 31, 2013 and 2012, respectively. The fair value of our trust preferred securities is based on discounted cash flows using current yields to maturity of 8.0% and 8.0% as of December 31, 2013 and 2012, respectively, which are based on similar issues to discount future cash flows and would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

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

Investments

Debt and equity securities available for sale are reported at fair value. Unrealized gains and losses are recorded as a component of stockholders’ equity, net of related tax effects. Equity securities that are determined to have other-than-temporary impairment are recognized as a loss on investments in the consolidated statements of operations. Debt securities that are determined to have other-than-temporary impairment are recognized as a loss on investments in the consolidated statements of operations for the portion that is related to credit deterioration with the remaining portion recognized in other comprehensive income. Debt security premiums and discounts are amortized into earnings using the effective interest method. Maturities of debt securities and sales of equity securities are recorded in receivable for securities until the cash is settled. Purchases of debt and equity securities are recorded in payable for securities until the cash is settled.

Realized investment gains and losses are recognized in operations on the specific identification method.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted Cash

We collect premiums from customers and, after deducting authorized commissions, remit these premiums to the Company’s consolidated insurance subsidiaries. Unremitted insurance premiums are held in a fiduciary capacity until disbursed to the Company’s consolidated insurance subsidiaries.

Premiums Receivable

Premiums receivable represent amounts due from policyholders or independent agents for premiums written and uncollected. These balances are carried at net realizable value.

F-9

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

Reinsurance

We are routinely involved in reinsurance transactions with other companies. Reinsurance premiums, losses and loss adjustment expenses (“LAE”) are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. (See Note 7.)

Deferred Policy Acquisition Costs

Policy acquisition costs (mainly commission, underwriting and marketing expenses) that are directly related to the successful acquisition of new and renewal insurance contracts are deferred and charged to operations over periods in which the related premiums are earned. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, expected investment income, losses and LAE and certain other costs expected to be incurred as the premiums are earned. If the computation results in an estimated net realizable value less than zero, a liability will be accrued for the premium deficiency. During 2013, 2012 and 2011, we deferred $55.0 million, $62.2 million and $49.4 million of policy acquisition costs and amortized $57.3 million, $59.8 million and $47.8 million of deferred policy acquisition costs, respectively. Therefore, the net (amortization) deferrals of policy acquisition costs were ($2.3) million, $2.4 million and $1.6 million for 2013, 2012 and 2011, respectively.

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.

Goodwill and Intangible Assets, net

We account for our goodwill and intangible assets according to ASC 350, “Intangibles – Goodwill and Other.” ASC 350 (1) prohibits the amortization of goodwill and indefinite-lived intangible assets, (2) requires testing of goodwill and indefinite-lived intangible assets on an annual basis for impairment (and more frequently if the occurrence of an event or circumstance indicates an impairment), (3) requires testing of definite-lived intangible assets if the occurrence of an event or circumstances indicates an impairment, (4) requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and (5) removes the forty-year limitation on the amortization period of intangible assets that have finite lives. We have elected to perform our goodwill impairment test on the first day of the fourth quarter, October 1, of each year.

Leases

We have several leases, primarily for office facilities and computer equipment, which expire in various years through 2022. Some of these leases include rent escalation provisions throughout the term of the lease. We expense the average annual cost of the lease with the difference to the actual rent invoices recorded as deferred rent which is classified in accounts payable and other accrued expenses on our consolidated balance sheets.

F-10

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

Property and Equipment

Property and equipment (including leasehold improvements), aggregating $14.7 million and $13.6 million, at December 31, 2013 and 2012, respectively, which is included in other assets, is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets (three to ten years). Depreciation expense for 2013, 2012 and 2011 was $1.2 million, $1.2 million and $1.5 million, respectively. Accumulated depreciation was $12.6 million and $11.4 million at December 31, 2013 and 2012, respectively.

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 we do not have variable interests in the Trusts. Therefore, the Trusts are not consolidated in our consolidated financial statements.

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

Losses and Loss Adjustment Expenses

Losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred through December 31, 2013, 2012 and 2011. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses. These estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, we believe that the reserves for unpaid losses and LAE are adequate. The estimates are continually reviewed and adjusted as experience develops or new information becomes known. Such adjustments are included in current operations.

Redeemable Non-Controlling Interest

We accreted the redeemable non-controlling interest to its redemption value from the date of issuance to the redemption date using the interest method. Changes in redemption value were considered a change in accounting estimate. We followed the two class method of computing earnings per share. We treated only the portion of the periodic adjustment to the redeemable non-controlling interest carrying amount that reflects a redemption in excess of fair value as being akin to an actual dividend. Effective September 30, 2012, we exercised our call option and acquired the remaining 20% membership interests in the subsidiaries for $1.7 million.

F-11

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

Activity related to non-controlling interest for the years ended December 31, 2013 and 2012 is as follows (in thousands):

	2013		2012
Beginning balance	$	-	$	1,284
Accretion of redeemable non-controlling interest		-		392
Net income attributable to non-controlling interest		-		324
Distribution to non-controlling interest		-		(281	)
Redemption of non-controlling interest		-		(1,700	)
Other		-		(19	)
Ending balance	$	-	$	-

Recognition of Premium Revenues

Insurance premiums are earned pro rata over the terms of the policies. Insurance policy fees are earned as of the effective date of the policy. Upon cancellation, any unearned premium is refunded to the insured. Insurance premiums written include gross policy fees of $13.2 million, $11.8 million and $13.5 million for the years ended December 31, 2013, 2012, and 2011, respectively. Insurance premiums on monthly reporting workers’ compensation policies are earned on the conclusion of the monthly coverage period. Deposit premiums for workers’ compensation policies are earned upon the expiration of the policy.

Finance Charges

We receive premium installment fees for each direct bill payment from policyholders. Installment fee income is classified as finance charges on the consolidated statement of operations and is recognized as the fee is invoiced.

Relationship with Third Party Insurers

Through December 31, 2005, our Standard Commercial P&C business unit marketed policies on behalf of Clarendon National Insurance Company (“Clarendon”), a third-party insurer. Through December 31, 2008, all business of our E&S Commercial business unit was produced under a fronting agreement with member companies of the Republic Group (“Republic”), a third-party insurer. These insurance contracts on third party paper are accounted for under agency accounting. Ceding commissions and other fees received under these arrangements were classified as unearned commission revenue until earned pro rata over the terms of the policies.

Profit sharing commission is calculated and recognized when the loss ratio, as determined by a qualified actuary, deviates from contractual targets. We received a provisional commission as policies were produced as an advance against the later determination of the profit sharing commission actually earned. The profit sharing commission is an estimate that varies with the estimated loss ratio and is sensitive to changes in that estimate. Profit share commission is classified as commissions and fees on the consolidated statement of operations

The following table details the profit sharing commission provisional loss ratio compared to the estimated ultimate loss ratio for each effective quota share treaty between the Standard Commercial P&C business unit and Clarendon.

F-12

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

	Treaty Effective Dates
	07/1/01			07/1/02			07/1/03			07/1/04
Provisional loss ratio		60.0	%		59.0	%		59.0	%		64.2	%
Estimated ultimate loss ratio recorded to at December 31, 2013		63.5	%		64.5	%		60.9	%		63.7	%

As of December 31, 2013, we had a net receivable of $0.1 million on these profit share treaties. The payable or receivable is the difference between the cash received to date and the recognized commission revenue based on the estimated ultimate loss ratio.

The following table details the profit sharing commission revenue provisional loss ratio compared to the estimated ultimate loss ratio for the effective quota share treaty between the E&S Commercial business unit and Republic.

	Treaty Effective Dates
	01/01/06			01/01/07			01/01/08
Provisional loss ratio		65.0	%		65.0	%		65.0	%
Estimated ultimate loss ratio recorded to at December 31, 2013		58.6	%		63.2	%		59.0	%

As of December 31, 2013, we had a net payable of $1.2 million on these profit share treaties. The payable or receivable is the difference between the cash received to date and the recognized commission revenue based on the estimated ultimate loss ratio.

Agent Commissions

We pay monthly commissions to agents based on written premium produced, but generally recognize the expense pro rata over the term of the policy. If the policy is cancelled prior to its expiration, the unearned portion of the agent commission is refundable to us. The unearned portion of commissions paid to agents is included in deferred policy acquisition costs. Commission expenses related to the insurance policies issued by our Hallmark Select business unit for third party insurance carriers and not assumed by our insurance company subsidiaries are recognized as of the effective date of the policy.

We annually pay a profit sharing commission to our independent agency force based upon the results of the business produced by each agent. We estimate and accrue this liability to commission expense in the year the business is produced.

Commission expense is classified as other operating expenses in the consolidated statement of operations.

Income Taxes

We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis 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.

F-13

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

Earnings Per Share

The computation of earnings per share is based upon the weighted average number of common shares outstanding during the period plus the effect of common shares potentially issuable (in periods in which they have a dilutive effect), primarily from stock options. (See Notes 11 and 13.)

Adoption of New Accounting Pronouncements

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

F-14

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

2. 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
	Cost		Gains		Losses			Value
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
As of December 31, 2012
U.S. Treasury securities and obligations of U.S. Government	$	40,050	$	14	$	(3	)	$	40,061
Corporate bonds		79,516		2,794		(763	)		81,547
Collateralized corporate bank loans		106,093		1,021		(743	)		106,371
Municipal bonds		162,479		4,023		(2,770	)		163,732
Mortgage-backed		9,662		97		(35	)		9,724
Total debt securities		397,800		7,949		(4,314	)		401,435
Total equity securities		31,502		12,938		(515	)		43,925
Total debt and equity securities	$	429,302	$	20,887	$	(4,829	)	$	445,360

F-15

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

Major categories of net investment income are summarized as follows (in thousands):

	Twelve Months Ended
	December 31
	2013			2012			2011
U.S. Treasury securities and obligations of U.S. Government	$	143		$	53		$	115
Corporate bonds		2,341			4,218			3,851
Collateralized corporate bank loans		4,653			5,261			5,284
Municipal bonds		5,245			5,616			6,632
Mortgage-backed		737			106			86
Equity securities		484			534			484
Cash and cash equivalents		157			246			163
		13,760			16,034			16,615
Investment expenses		(876	)		(741	)		(735	)
Investment income, net of expenses	$	12,884		$	15,293		$	15,880

No investments in any entity or its affiliates exceeded 10% of stockholders’ equity at December 31, 2013 or 2012.

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

	Twelve Months Ended
	December 31
	2013			2012			2011
U.S. Treasury securities and obligations of U.S. Government	$	-		$	-		$	35
Corporate bonds		853			13			300
Collateralized corporate bank loans		373			391			699
Municipal bonds		(156	)		(441	)		(500	)
Equity securities		9,470			2,226			3,099
Net realized gain		10,540			2,189			3,633
Other-than-temporary impairments		-			(246	)		-
Gain on investments	$	10,540		$	1,943		$	3,633

We realized gross gains on investments of $10.9 million, $2.9 million, and $4.6 million during the years ended December 31, 2013, 2012 and 2011, respectively. We realized gross losses on investments of $0.4 million, $0.7 million and $1.0 million during the years ended December 31, 2013, 2012 and 2011, respectively. We recorded proceeds from the sale of investment securities of $33.4 million, $12.4 million and $62.7 million during the years ended December 31, 2013, 2012 and 2011, respectively. Realized investment gains and losses are recognized in operations on the specific identification method.

F-16

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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 December 31, 2013 and December 31, 2012 (in thousands):

	As of December 31, 2013
	12 months or less					Longer than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized 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	)

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

At December 31, 2013, the gross unrealized losses more than twelve months old were attributable to 84 debt security positions. At December 31, 2012, the gross unrealized losses more than twelve months old were attributable to 56 debt security positions. We consider these losses as a temporary decline in value as they are predominately on bonds that we do not intend to sell and do not believe we will be required to sell prior to recovery of our amortized cost basis. We see no other indications that the decline in values of these securities is other-than-temporary.

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

F-17

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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 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. We did not recognized other-than-temporary losses on our debt securities portfolio during 2013.

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 December 31, 2013 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.

	Amortized		Fair
	Cost		Value
	(in thousands)
Due in one year or less	$	71,490	$	71,969
Due after one year through five years		162,203		163,006
Due after five years through ten years		107,915		108,761
Due after ten years		39,235		38,622
Mortgage-backed		27,784		27,737
	$	408,627	$	410,095

We have certain of our securities pledged 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 $29.1 million at December 31, 2013 and a carrying value of $24.3 million at December 31, 2012.

F-18

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

3. 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, U.S. Treasury securities, other obligations of the U.S. Government and mortgage-backed 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 third party pricing services. There were no transfers between Level 1 and Level 2 securities.

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.

F-19

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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 December 31, 2013 and December 31, 2012 (in thousands).

	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

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

F-20

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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 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 9.3%, 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 year ended December 31, 2013 and 2012 (in thousands).

	2013			2012
Beginning balance as of January 1	$	19,668		$	20,608
Sales		(3,157	)		(429	)
Settlements		-			-
Purchases		-			-
Issuances		-			-
Total realized/unrealized gains included in net income		-			-
Net gains (losses) included in other comprehensive income		1,006			(511	)
Transfers into Level 3		-			-
Transfers out of Level 3		-			-
Ending balance as of December 31	$	17,517		$	19,668

4. Goodwill and Intangible Assets:

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

Effective July 1, 2011, we acquired all of the issued and outstanding capital stock of 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. We recorded a bargain purchase gain of $165 thousand on the acquisition which is reported in other income. The gain resulted from the difference in the estimated purchase price and the fair value of the net assets acquired and liabilities assumed as of July 1, 2011. TBIC is a Texas domiciled insurance company that writes workers compensation insurance through independent agents in Texas only.

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (October 1 ) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For purposes of evaluating goodwill for impairment, we have determined that our reporting units are the same as our business units except for the Hallmark Select business unit for which reporting units are at the component level (“one level below”). Our consolidated balance sheet as of December 31, 2013 includes goodwill of acquired businesses of $44.7 million that is assigned to our business units as follows: Standard Commercial P&C business unit - $2.1 million; E&S Commercial business unit - $19.9 million; Hallmark Select business unit- $17.4 million (comprised of $7.7 million for the excess & umbrella component and $9.7 million for the general aviation and satellite component); and Personal Lines business unit - $5.3 million. This amount has been recorded as a result of prior business acquisitions accounted for under the acquisition method of accounting. Under ASC 350, “Intangibles- Goodwill and Other,” goodwill is tested for impairment annually. We completed our last annual test for impairment on the first day of the fourth quarter of 2013 and determined that there was no impairment.

F-21

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

The income approach to determining fair value computed the projections of the cash flows that the reporting unit was expected to generate converted into a present value equivalent through discounting. Significant assumptions in the income approach model included income projections, discount rates and terminal growth values. The income projections reflected an improved premium pricing environment across most of our lines of business that began in 2012 and continued throughout 2013. The income projections also included loss and LAE assumptions which reflected recent historical claim trends and the movement towards a more favorable pricing environment. The income projections also included assumptions for expense growth and investment yields which were based on business plans for each of our business units. The discount rate was based on a risk free rate plus a beta adjusted equity risk premium and specific company risk premium. The assumptions were based on historical experience, expectations of future performance, expected market conditions and other factors requiring judgment and estimates. While we believe the assumptions used in these models were reasonable, the inherent uncertainty in predicting future performance and market conditions may change over time and influence the outcome of future testing.

During 2013, 2012, and 2011, we completed the first step prescribed by ASC 350 for testing for impairment and determined that there was no impairment.

We have obtained various intangible assets from several acquisitions since 2002. The table below details the gross and net carrying amounts of these assets by major category (in thousands):

	December 31,
	2013			2012
Gross Carrying Amount:
Customer/agent relationships	$	32,177		$	32,177
Tradename		3,440			3,440
Management agreement		3,232			3,232
Non-compete & employment agreements		4,235			4,235
Insurance licenses		1,300			1,300
Total gross carrying amount		44,384			44,384
Accumulated Amortization:
Customer/agent relationships		(15,322	)		(13,084	)
Tradename		(1,700	)		(1,471	)
Management agreement		(3,232	)		(2,895	)
Non-compete & employment agreements		(4,177	)		(3,866	)
Total accumulated amortization		(24,431	)		(21,316	)
Total net carrying amount	$	19,953		$	23,068

Insurance licenses are not amortized because they have an indefinite life. We amortize definite-lived intangible assets straight line over their respective lives. The estimated aggregate amortization expense for definite-lived intangible assets for the next five years is as follows (in thousands):

2014	$	2,526
2015	$	2,468
2016	$	2,468
2017	$	2,468
2018	$	2,468

The weighted average amortization period for definite-lived intangible assets by major class is as follows:

	Years
Tradename	15
Customer relationships	15
Management agreement	4
Non-compete agreements	5

The aggregate weighted average period to amortize these assets is approximately 13 years.

F-22

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

5. Other Assets:

The following table details our other assets as of December 31, 2013 and 2012 (in thousands):

	2013		2012
Profit sharing commission receivable	$	641	$	2,083
Accrued investment income		3,030		3,568
Debt issuance costs		1,156		1,207
Investment in unconsolidated trust subsidiaries		1,702		1,702
Fixed assets		1,773		2,284
Other assets		110		141
	$	8,412	$	10,985

6. Reserves for Unpaid Losses and Loss Adjustment Expenses:

Activity in the reserves for unpaid losses and LAE is summarized as follows (in thousands):

	2013		2012			2011
Balance at January 1	$	313,416	$	296,945		$	251,677
Less reinsurance recoverable		49,584		42,044			37,954
Net Balance at January 1		263,832		254,901			213,723
Acquisition of subsidiaries effective July 1		-		-			8,816
Incurred related to:
Current year		251,391		230,089			222,869
Prior years		9,954		(3,675	)		16,366
Total incurred		261,345		226,414			239,235
Paid related to:
Current year		101,897		107,945			101,025
Prior years		110,812		109,538			105,848
Total paid		212,709		217,483			206,873
Net Balance at December 31		312,468		263,832			254,901
Plus reinsurance recoverable		70,172		49,584			42,044
Balance at December 31	$	382,640	$	313,416		$	296,945

The $10.0 million unfavorable development, $3.7 million favorable development and $16.4 million unfavorable development in prior accident years recognized in 2013, 2012 and 2011, respectively, represent normal changes in our loss reserve estimates. In 2013 and 2011, the aggregate loss reserve estimates for prior years were increased to reflect unfavorable loss development when the available information indicated a reasonable likelihood that the ultimate losses would be more than the previous estimates. In 2012, the aggregate loss reserve estimates for prior years were decreased to reflect favorable loss development when the available information indicated a reasonable likelihood that the ultimate losses would be less than the previous estimates. Generally, changes in reserves are caused by variations between actual experience and previous expectations and by reduced emphasis on the Bornhuetter-Ferguson method due to the aging of the accident years.

F-23

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

The $10.0 million increase in reserves for unpaid losses and LAE recognized in 2013 was attributable to $5.0 million unfavorable development on claims incurred in the 2012 accident year, $1.7 million unfavorable development on claims incurred in the 2011 accident year and $3.3 million unfavorable development on claims incurred in the 2010 and prior accident years. Our E&S Commercial business unit and Personal Lines business unit accounted for $16.0 million and $1.8 million of the increase in reserves recognized during 2013. The increase in reserves for our E&S Commercial business unit was primarily related to commercial auto liability line of business. The increase in reserves for our Personal Lines business unit was primarily related to personal auto in the 2012 accident year. These unfavorable developments were partially offset by favorable prior years’ loss development of $3.7 million in our Standard Commercial P&C business unit, $2.6 million in our Hallmark Select business unit and $1.5 million in our Workers Compensation business unit. The decrease in reserves for our Standard Commercial P&C business unit was primarily related to commercial auto and general liability line of business. The decrease in reserves for our Hallmark Select business unit was driven by $2.3 million of favorable claims development in the 2011 and prior accident years related to our aircraft liability lines of business, partially offset by $0.1 million unfavorable claims development in the 2012 accident year related to our aircraft hull coverage. Further contributing to the decrease in reserves for our Hallmark Select business unit was $0.4 million of favorable claims development in our excess & umbrella lines of business. The decrease in reserves for our Workers Compensation business unit was related to the 2012 and 2011 accident years.

The $3.7 million decrease in reserves for unpaid losses and LAE recognized in 2012 was attributable to $0.4 million favorable development on claims incurred in the 2011 accident year, $0.8 million favorable development on claims incurred in the 2010 accident year and $2.5 million favorable development on claims incurred in the 2009 and prior accident years. Our Standard Commercial P&C business unit, Hallmark Select business unit and E&S Commercial business unit accounted for $3.7 million, $3.3 million and $0.3 million, respectively, of the decrease in reserves recognized during 2012. The decrease in reserves for our Standard Commercial P&C business unit was primarily related to commercial auto, commercial property and general liability lines of business. The decrease in reserves for our Hallmark Select business unit was primarily related to our aircraft liability lines of business. The decrease in reserves for our E&S Commercial business unit was primarily related to general liability. These favorable developments were partially offset by unfavorable prior years’ loss development of $3.6 million in our Personal Lines business unit related to auto liability claims spread throughout various states and our low value dwelling/homeowners line of business.

The $16.4 million increase in reserves for unpaid losses and LAE recognized in 2011 was attributable to $15.0 million unfavorable development on claims incurred in the 2010 accident year, $3.6 million unfavorable development on claims incurred in the 2009 accident year and $2.2 million favorable development on claims incurred in the 2008 and prior accident years. Our Personal Lines business unit and E&S Commercial business unit accounted for $19.6 million and $3.7 million, respectively, of the increase in reserves recognized during 2011. The $19.6 million increase in reserves during 2011 for our Personal Lines business unit includes $10.3 million, which was attributable to Florida developing much worse than expected due primarily to rapid growth in the claim volume from Florida, the complexity related to Florida personal injury protection coverage claims and the high incidence of fraudulent claims in that market. The remaining unfavorable prior years’ loss development for our Personal Lines business unit was primarily due to rapid geographic expansion. The increase in reserves for our E&S Commercial business unit was primarily related to commercial auto and physical damage and general liability lines of business. These unfavorable developments were partially offset by favorable prior years’ loss development of $6.1 million in our Hallmark Select business unit related to our aircraft liability lines of business and $0.8 million in our Standard Commercial P&C business unit primarily related to our commercial property lines of business.

7. 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 December 31, 2013 was with reinsurers that had an A.M. Best rating of “A-” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

F-24

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

The following table presents our gross and net premiums written and earned and reinsurance recoveries for each of the last three years (in thousands):

	2013			2012			2011
Premium Written :
Direct	$	458,020		$	385,624		$	350,089
Assumed		2,007			4,218			4,792
Ceded		(99,262	)		(57,353	)		(51,005	)
	$	360,765		$	332,489		$	303,876
Premium Earned:
Direct	$	434,022		$	369,735		$	344,642
Assumed		3,204			4,114			5,438
Ceded		(76,685	)		(54,413	)		(57,039	)
	$	360,541		$	319,436		$	293,041
Reinsurance recoveries	$	45,456		$	29,014		$	32,941

Included in reinsurance recoverable on the consolidated balance sheets are paid loss recoverables of $6.1 million and $1.0 million as of December 31, 2013 and 2012, respectively.

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

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

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

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

· Commercial property. Our commercial property reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event or catastrophic loss may have on our results. Effective July 1, 2013 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.

F-25

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

· 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. Effective July 1, 2013 the terms of our commercial casualty reinsurance are:

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

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

· Aviation. Effective July 1, 2013 we purchased 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 February 1, 2013 we purchased proportional reinsurance where we cede 60% of the risks to reinsurers on the low value dwelling/homeowners, renters and manufactured homes coverages produced in all states by our Personal Lines business unit.  

· Personal Auto. Effective October 1, 2013 we purchased 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. In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty.

F-26

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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

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

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

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

8. Revolving Credit Facility and Notes 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. As of December 31, 2013, we were in compliance with all of our covenants. As of December 31, 2013 and 2012, the balance on the revolving note was $1.5 million and $1.5 million, respectively. The revolving note currently bears interest at 2.75% per annum.

9. 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 December 31, 2013, the balance of our Trust I subordinated debt was $30.9 million.

On August 23, 2007, we entered into a trust preferred securities transaction pursuant to which we issued $25.8 million aggregate principal amount of subordinated debt securities due in 2037. To effect the transaction, we formed Trust II as a Delaware statutory trust. Trust II issued $25.0 million of preferred securities to investors and $0.8 million of common securities to us. Trust II used the proceeds from these issuances to purchase the subordinated debt securities. Our Trust II subordinated debt securities bear an initial interest rate of 8.28% until September 15, 2017, at which time interest will adjust quarterly to the three-month LIBOR rate plus 2.90 percentage points. Trust II pays dividends on its preferred securities at the same rate. Under the terms of our Trust II subordinated debt securities, we pay interest only each quarter and the principal of the note at maturity. The subordinated debt securities are uncollaterized and do not require maintenance of minimum financial covenants. As of December 31, 2013, the balance of our Trust II subordinated debt was $25.8 million.

F-27

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

10. Segment Information:

We pursue our business activities primarily through subsidiaries whose operations are organized into producing units and are supported by our insurance carrier subsidiaries. Our non-carrier insurance activities are organized by business units into the following reportable segments:

· Standard Commercial Segment. The 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. Our Standard Commercial P&C business unit is comprised of our American Hallmark Insurance Services and ECM subsidiaries. Our Workers Compensation business unit is comprised of our TBIC Holdings, TBIC and TBICRM subsidiaries. The Workers Compensation business unit was acquired July 1, 2011.

· Specialty Commercial Segment. The Specialty Commercial Segment includes the excess and surplus lines commercial property/casualty insurance products and services handled by our E&S Commercial business unit and the general aviation, commercial umbrella and excess liability, medical professional liability and satellite launch insurance products and services handled by our Hallmark Select business unit, as well as certain Specialty Programs which are managed at the parent level. Our E&S Commercial business unit is comprised of our HSU, PAAC and TGASRI subsidiaries. Our Hallmark Select business unit is comprised of our Aerospace Insurance Managers, ASRI, ACMG, HXS and HDS subsidiaries.

· Personal Segment. The Personal Segment includes the non-standard personal automobile, low value dwelling/homeowners, renters and motorcycle insurance products and services handled by our Personal Lines business unit which is comprised of American Hallmark General Agency, Inc. and Hallmark Claims Services, Inc., both of which do business as Hallmark Insurance Company.

The retained premium produced by these reportable segments is supported by our AHIC, HSIC, HIC, HNIC and TBIC insurance company subsidiaries. In addition, control and management of 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 net premiums written by any of them, HIC retains 27% of the net premiums written by any of them, HSIC retains 30% of the net premiums written by any of them and HNIC retains 13% of the net premiums written by any of them. Neither HCM nor TBIC is a party to the intercompany pooling arrangement.

F-28

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

The following is additional business segment information for the twelve months ended December 31, 2013, 2012 and 2011 (in thousands):

	2013			2012			2011
Revenues
Standard Commercial Segment	$	83,306		$	73,119		$	72,830
Specialty Commercial Segment		229,734			178,917			142,838
Personal Segment		71,081			89,149			101,351
Corporate		5,307			615			5,752
Consolidated	$	389,428		$	341,800		$	322,771
Depreciation and Amortization Expense
Standard Commercial Segment	$	201		$	186		$	174
Specialty Commercial Segment		2,896			2,892			3,293
Personal Segment		1,111			1,230			1,431
Corporate		92			113			166
Consolidated	$	4,300		$	4,421		$	5,064
Interest Expense
Standard Commercial Segment	$	-		$	-		$	-
Specialty Commercial Segment		-			-			-
Personal Segment		-			-			-
Corporate		4,599			4,634			4,631
Consolidated	$	4,599		$	4,634		$	4,631
Tax Expense (Benefit)
Standard Commercial Segment	$	312		$	372		$	(376	)
Specialty Commercial Segment		3,613			1,875			4,454
Personal Segment		(398	)		(968	)		(13,991	)
Corporate		(692	)		(1,753	)		959
Consolidated	$	2,835		$	(474	)	$	(8,954	)
Pre-tax Income (Loss), net of non-controlling interest
Standard Commercial Segment	$	1,980		$	(2,486	)	$	1,335
Specialty Commercial Segment		19,527			25,932			14,348
Personal Segment		(3,416	)		(8,535	)		(29,647	)
Corporate		(7,011	)		(11,861	)		(5,881	)
Consolidated	$	11,080		$	3,050		$	(19,845	)

F-29

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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

	December 31,
	2013		2012
Assets
Standard Commercial Segment	$	142,143	$	145,162
Specialty Commercial Segment		536,894		432,208
Personal Segment		210,825		200,356
Corporate		19,161		12,742
Consolidated	$	909,023	$	790,468

11. Earnings Per Share:

We have adopted the provisions of ASC 260, “Earnings Per Share,” requiring presentation of both basic and diluted earnings per share. A reconciliation of the numerators and denominators of the basic and diluted per share calculations is presented below (in thousands, except per share amounts):

	2013		2012		2011
Numerator for both basic and diluted earnings per share:
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	8,245	$	3,524	$	(10,891	)
Denominator, basic shares		19,263		19,263		19,673
Effect of dilutive securities:
Stock-based compensation awards		98		6		-
Denominator, diluted shares		19,361		19,269		19,673
Basic earnings per share:	$	0.43	$	0.18	$	(0.55	)
Diluted earnings per share:	$	0.43	$	0.18	$	(0.55	)

We had 779,999 shares, 794,999 shares and 809,999 shares of common stock potentially issuable upon exercise of employee stock options for years ended December 31, 2013, 2012 and 2011, respectively, that were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive. These instruments expire at varying times from 2016 to 2021.

F-30

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

12. Regulatory Capital Restrictions:

Hallmark, as a holding company, is dependent on dividend payments and management fees from its subsidiaries to fund its operating expenses, debt obligations and capital needs, including the ability to pay dividends to its stockholders. Hallmark has never paid dividends on its common stock. Hallmark intends to continue this policy for the foreseeable future in order to retain earnings for development of its business. There are no regulatory or contractual restrictions on the ability of Hallmark to pay dividends other than customary default provisions and the impact of any dividend payment on financial ratio covenants in certain credit agreements. However there are restrictions on the ability of Hallmark’s insurance carrier subsidiaries to transfer funds to the holding company. The amount of retained earnings that is unrestricted for the payment of dividends by Hallmark to its shareholders was $29.8 million as of December 31, 2013.

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. 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. For all our insurance companies, dividends may only be paid from unassigned surplus funds. 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. None of our insurance company subsidiaries paid a dividend during the years ended December 31, 2013 or 2012. The total restricted net assets of our insurance company subsidiaries as of December 31, 2013, was approximately $208.3 million.

The state insurance departments also regulate financial transactions between our insurance subsidiaries and their affiliated companies. Applicable regulations require approval of management fees, expense sharing contracts and similar transactions. The net amount paid in management fees by our insurance subsidiaries to Hallmark and our non-insurance company subsidiaries was $8.2 million, $9.0 million and $6.0 million during each of 2013, 2012 and 2011, respectively.

Statutory capital and surplus is calculated as statutory assets less statutory liabilities. The various state insurance departments that regulate our insurance company subsidiaries require us to maintain a minimum statutory capital and surplus. As of December 31, 2013 and 2012, our insurance company subsidiaries reported statutory capital and surplus of $196.3 million and $176.5 million, respectively, substantially greater than the minimum requirements for each state. For the years ended December 31, 2013, 2012, 2011, respectively, our insurance company subsidiaries reported statutory net income of $6.1 million, statutory net income of $3.1 million and statutory net loss of $17.2 million, respectively.

The National Association of Insurance Commissioners requires property/casualty insurers to file a risk-based capital calculation according to a specified formula. The purpose of the formula is twofold: (1) to assess the adequacy of an insurer’s statutory capital and surplus based upon a variety of factors such as potential risks related to investment portfolio, ceded reinsurance and product mix; and (2) to assist state regulators under the RBC for Insurers Model Act by providing thresholds at which a state commissioner is authorized and expected to take regulatory action. As of December 31, 2013, the adjusted capital under the risk-based capital calculation of each of our insurance company subsidiaries substantially exceeded the minimum requirements.

F-31

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

13. 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 December 31, 2013, there were outstanding incentive stock options to purchase 1,083,332 shares of our common stock, non-qualified stock options to purchase 304,157 shares of our common stock and restricted stock units representing the right to receive up to 355,277 shares of our common stock. There are 241,401 shares reserved for future issuance under the 2005 LTIP. The exercise price of all such outstanding stock options is equal to the fair market value of our common stock on the date of grant.

Stock Options:

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

A summary of the status of our stock options as of December 31, 2013 and changes during the year then ended is presented below:

				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Number of			Exercise		Term		Value
	Shares			Price		(Years)		($000)
Outstanding at January 1, 2013		1,404,989		$	9.63
Granted		-
Exercised		-
Forfeited or expired		(17,500	)	$	7.58
Outstanding at December 31, 2013		1,387,489		$	9.66		4.2	$	1,329
Exercisable at December 31, 2013		1,181,417		$	10.19		4.0	$	866

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):

	2013		2012		2011
Intrinsic value of options exercised	$	-	$	-	$	4
Cost of share-based payments (non-cash)	$	207	$	380	$	709
Income tax benefit of share-based payments recognized in income	$	30	$	38	$	30

As of December 31, 2013, there was $0.5 million of total unrecognized compensation cost related to non-vested stock options granted under our plans, of which $0.2 million is expected to be recognized each year in 2014 and 2015, $54 thousand is expected to be recognized in 2016 and $3 thousand is expected to be recognized in 2017.

F-32

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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 in 2013 or 2012. Stock options granted in 2011 had a weighted average grant date fair value of $2.52, expected term of 5.8 years, expected volatility of 30.9% and risk free interest rate of 1.4%.

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.

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

Compensation cost is measured as an amount equal to the fair value of the restricted stock units and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the Company’s best estimate of the ultimate achievement level. The grant date fair value of the restricted stock units is $9.20 per unit. The Company incurred $145 thousand of compensation expense related to the restricted stock units during the year ended December 31, 2013.

A summary of the status of our restricted stock units as of December 31, 2013 and changes during the year then ended is presented below:

	Number of
	Restricted
	Stock Units
Nonvested at January 1, 2013		-
Granted		243,006
Vested		-
Forfeited		(6,155	)
Nonvested at December 31, 2013		236,851

As of December 31, 2013, there was $0.5 million of total unrecognized compensation cost related to non-vested restricted stock units granted under our 2005 LTIP, of which $0.2 million is expected to be recognized in 2014, $0.2 million is expected to be recognized in 2015 and $49 thousand is expected to be recognized in 2016.

F-33

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

14. Retirement Plans:

Certain employees of the Standard Commercial Segment were participants in a defined cash balance plan covering all full-time employees who had completed at least 1,000 hours of service. This plan was frozen in March 2001 in anticipation of distribution of plan assets to members upon plan termination. All participants were vested when the plan was frozen.

The following tables provide detail of the changes in benefit obligations, components of benefit costs, weighted-average assumptions, and plan assets for the retirement plan as of and for the twelve months ending December 31, 2013, 2012 and 2011 (in thousands) using a measurement date of December 31.

	2013			2012			2011
Assumptions (end of period):
Discount rate used in determining benefit obligation		4.49	%		3.89	%		4.50	%
Rate of compensation increase		N/A			N/A			N/A
Reconciliation of funded status (end of period):
Accumulated benefit obligation	$	(12,284	)	$	(13,439	)	$	(12,990	)
Projected benefit obligation	$	(12,284	)	$	(13,439	)	$	(12,990	)
Fair value of plan assets		10,851			9,754			9,019
Funded status	$	(1,433	)	$	(3,685	)	$	(3,971	)
Net actuarial loss		(2,277	)		(4,545	)		(4,582	)
Accumulated other comprehensive loss		(2,277	)		(4,545	)		(4,582	)
Prepaid pension cost		844			860			611
Net amount recognized as of December 31	$	(1,433	)	$	(3,685	)	$	(3,971	)
Changes in projected benefit obligation:
Benefit obligation as of beginning of period	$	13,439		$	12,990		$	12,050
Interest cost		505			564			609
Actuarial liability (gain)/loss		(824	)		700			1,160
Benefits paid		(836	)		(815	)		(829	)
Benefit obligation as of end of period	$	12,284		$	13,439		$	12,990
Change in plan assets:
Fair value of plan assets as of beginning of period	$	9,754		$	9,019		$	9,217
Actual return on plan assets (net of expenses)		1,565			839			(4	)
Employer contributions		368			711			635
Benefits paid		(836	)		(815	)		(829	)
Fair value of plan assets as of end of period	$	10,851		$	9,754		$	9,019
Net periodic pension cost:
Service cost - benefits earned during the period	$	-		$	-		$	-
Interest cost on projected benefit obligation		505			564			609
Expected return on plan assets		(615	)		(584	)		(590	)
Recognized actuarial loss		495			482			287
Net periodic pension cost	$	385		$	462		$	306
Discount rate		3.89	%		4.50	%		5.25	%
Expected return on plan assets		6.50	%		6.50	%		6.50	%
Rate of compensation increase		N/A			N/A			N/A

F-34

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

Estimated future benefit payments by fiscal year (in thousands):

2014	$	889
2015	$	897
2016	$	885
2017	$	884
2018	$	878
2019-2023	$	4,170

As of December 31, 2013, the fair value of the plan assets was composed of cash and cash equivalents of $0.3 million, bonds and notes of $3.5 million and equity securities of $7.1 million.

Our investment objectives are to preserve capital and to achieve long-term growth through a favorable rate of return equal to or greater than 5% over the long-term (60 year) average inflation rate as measured by the consumer price index. The objective of the equity portion of the portfolio is to achieve a return in excess of the Standard & Poor’s 500 index. The objective of the fixed income portion of the portfolio is to add stability, consistency, safety and total return to the total fund portfolio.

We prohibit investments in options, futures, precious metals, short sales and purchase on margin. We also restrict the investment in fixed income securities to “A” rated or better by Moody’s or Standard & Poor’s rating services and restrict investments in common stocks to only those that are listed and actively traded on one or more of the major United States stock exchanges, including NASDAQ. We manage to an asset allocation of 45% to 75% in equity securities. An investment in any single stock issue is restricted to 5% of the total portfolio value and 90% of the securities held in mutual or commingled funds must meet the criteria for common stocks.

To develop the expected long-term rate of return on assets assumption, we consider the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 6.5% long-term rate of return on assets assumption. To develop the discount rate used in determining the benefit obligation we used the Mercer Yield Curve at the measurement date to match the timing and amounts of projected future benefits.

We estimate contributing $0.7 million to the defined benefit cash balance plan during 2014. We expect our 2014 periodic pension cost to be $(4) thousand, the components of which are interest cost of $0.5 million, expected return on plan assets of ($0.7) million and amortization of actuarial loss of $0.2 million.

The following table shows the weighted-average asset allocation for the defined benefit cash balance plan held as of December 31, 2013 and 2012.

	12/31/13			12/31/12
Asset Category:
Fixed income securities		32	%		33	%
Equity securities		65	%		63	%
Other		3	%		4	%
Total		100	%		100	%

Effective January 1, 2008, we determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820. (See Note 3.)

F-35

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

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

	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
Debt securities	$	-	$	3,448	$	-	$	3,448
Equity securities		7,080		-		-		7,080
Total	$	7,080	$	3,448	$	-	$	10,528

	As of December 31, 2012
	Quoted Prices in		Other
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Debt securities	$	-	$	3,188	$	-	$	3,188
Equity securities		6,153		-		-		6,153
Total	$	6,153	$	3,188	$	-	$	9,341

Our plan assets also include cash and cash equivalents of $0.3 million and $0.4 million at December 31, 2013 and 2012, respectively, and are carried at cost which approximates fair value.

We sponsor two defined contribution plans. Under these plans, employees may contribute a portion of their compensation on a tax-deferred basis, and we may contribute a discretionary amount each year. We contributed $0.3 million, $0.1 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

F-36

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

15. Income Taxes:

The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2013 and 2012, are as follows (in thousands):

	2013			2012
Deferred tax liabilities:
Deferred policy acquisition costs	$	(7,905	)	$	(8,719	)
Net unrealized holding gain on investments		(9,730	)		(5,622	)
Agency relationship		(85	)		(94	)
Intangible assets		(6,129	)		(6,852	)
Goodwill		(325	)		(116	)
Fixed assets		(499	)		(685	)
Other		(263	)		(275	)
Total deferred tax liabilities		(24,936	)		(22,363	)
Deferred tax assets:
Unearned premiums		9,822			9,806
Alternative minimum tax		442			1,651
Amortization of non-compete agreements		417			476
Pension liability		797			1,591
Net operating loss carry-forward		611			702
Unpaid loss and loss adjustment expense		8,173			7,549
Rent reserve		366			363
Investment impairments		660			1,256
Other		823			909
Total deferred tax assets		22,111			24,303
Deferred federal income taxes, net	$	(2,825	)	$	1,940

A reconciliation of the income tax provisions based on the statutory tax rate to the provision reflected in the consolidated financial statements for the years ended December 31, 2013, 2012 and 2011, is as follows (in thousands):

	2013			2012			2011
Computed expected income tax expense (benefit) at statutory regulatory tax rate	$	3,878		$	1,181		$	(6,926	)
Meals and entertainment		25			28			44
Tax exempt interest		(1,314	)		(1,631	)		(1,835	)
Dividends received deduction		(101	)		(111	)		(99	)
State taxes (net of federal benefit)		276			298			84
Other		71			(239	)		(222	)
Income tax expense (benefit)	$	2,835		$	(474	)	$	(8,954	)
Current income tax expense (benefit)	$	3,092		$	2,377		$	(6,059	)
Deferred tax benefit		(257	)		(2,851	)		(2,895	)
Income tax expense (benefit)	$	2,835		$	(474	)	$	(8,954	)

F-37

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

We have available, for federal income tax purposes, unused net operating loss of approximately $1.7 million at December 31, 2013. The losses were acquired as part of the HIC and HCM acquisitions and may be used to offset future taxable income. Utilization of the losses is limited under Internal Revenue Code Section 382. The Internal Revenue Code provides that effective with tax years beginning September 1997, the carry-back and carry-forward periods are 2 years and 20 years, respectively, with respect to newly generated operating losses. The net operating losses will expire if unused, as follows (in thousands):

Year
2021	$	650
2022		878
2028		2
2030		25
2031		45
2032		77
2033		70
	$	1,747

We are no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for years prior to 2010. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions at December 31, 2013.

F-38

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

16. Commitments and Contingencies:

We have several leases, primarily for office facilities and computer equipment, which expire in various years through 2022. Certain of these leases contain renewal options. Rental expense amounted to $2.2 million, $2.3 million and $2.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Future minimum lease payments under non-cancelable operating leases as of December 31, 2013 are as follows (in thousands):

Year
2014	$	1,987
2015		1,969
2016		1,641
2017		1,484
2018		1,193
2019 and thereafter		3,166
Total minimum lease payments	$	11,440

From time to time, assessments are levied on us by the guaranty association of the states where we offer our insurance products. Such assessments are made primarily to cover the losses of policyholders of insolvent or rehabilitated insurers. Since these assessments can generally be recovered through a reduction in future premium taxes paid, we capitalize the assessments that can be recovered as they are paid and amortize the capitalized balance against our premium tax expense. We paid an assessment of $29 thousand in 2013. We paid an assessment of $0.1 million in 2012 that was expensed. There were no assessments during 2011.

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

We disagree with the Comptroller and intend to vigorously fight their assertion that HSU is liable for the surplus lines premium taxes. During the past year we have been engaged in conversations with the Comptroller’s counsel. We are currently in negotiations with the Comptroller to settle the matter. However, we are presently unable to reasonably estimate the possible loss or legal costs that are likely to arise out of the surplus lines tax audit or any future proceedings relating to this matter. Therefore we have not accrued any amount as of December 31, 2013 related to this matter.

We are engaged in 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.

F-39

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

17. Changes in Accumulated Other Comprehensive Income Balances:

The changes in accumulated other comprehensive income balances as of December 31, 2013, 2012, and 2011 were as follows (in thousands):

							Accumulated Other
	Pension			Unrealized			Comprehensive
	Liability			Gains (Loss)			Income (Loss)
Balance at January 1, 2011	$	(2,024	)	$	11,661		$	9,637
Other comprehensive loss:
Change in net actuarial loss		(1,468	)		-			(1,468	)
Tax effect on change in net actuarial loss		514			-			514
Unrealized holding gains arising during the period		-			191			191
Tax effect on unrealized gains arising during the period		-			(67	)		(67	)
Reclassification adjustment for gains included in net realized gains		-			(3,633	)		(3,633	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			1,272			1,272
Other comprehensive loss, net of tax		(954	)		(2,237	)		(3,191	)
Balance at December 31, 2011	$	(2,978	)	$	9,424		$	6,446
Other comprehensive income:
Change in net actuarial gain		37			-			37
Tax effect on change in net actuarial gain		(13	)		-			(13	)
Unrealized holding gains arising during the period		-			4,388			4,388
Tax effect on unrealized gains arising during the period		-			(1,536	)		(1,536	)
Reclassification adjustment for gains included in net realized gains		-			(2,189	)		(2,189	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			766			766
Other comprehensive income, net of tax		24			1,429			1,453
Balance at December 31, 2012	$	(2,954	)	$	10,853		$	7,899
Other comprehensive income:
Change in net actuarial gain		2,268			-			2,268
Tax effect on change in net actuarial gain		(794	)		-			(794	)
Unrealized holding gains arising during the period		-			22,094			22,094
Tax effect on unrealized gains arising during the period		-			(7,733	)		(7,733	)
Reclassification adjustment for gains included in net realized gains		-			(10,540	)		(10,540	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			3,689			3,689
Other comprehensive income, net of tax		1,474			7,510			8,984
Balance at December 31, 2013	$	(1,480	)	$	18,363		$	16,883

F-40

18. Concentrations of Credit Risk:

We maintain cash and cash equivalents in accounts with seven financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. We monitor the financial stability of the depository institutions regularly and do not believe excessive risk of depository institution failure existed at December 31, 2013.

We are also subject to credit risk with respect to reinsurers to whom we have ceded underwriting risk. Although a reinsurer is liable for losses to the extent of the coverage it assumes, we remain obligated to our policyholders in the event that the reinsurers do not meet their obligations under the reinsurance agreements. In order to mitigate credit risk to reinsurance companies, we monitor the financial condition of reinsurers on an ongoing basis and review our reinsurance arrangements periodically. Most of our reinsurance recoverable balances as of December 31, 2013 were with reinsurers that had an A.M. Best rating of “A-” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

F-41

HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011

19. Unaudited Selected Quarterly Financial Information:

Following is a summary of the unaudited interim results of operations for the years ended December 31, 2013 and 2012 (in thousands, except per share data). In the opinion of management, all adjustments necessary to present fairly the results of operations for such periods have been made.

	2013									2012
	Q1		Q2			Q3		Q4		Q1		Q2			Q3		Q4
Total revenue	$	93,141	$	99,299		$	108,613	$	88,375	$	82,986	$	84,571		$	85,620	$	88,623
Total expense		90,978		104,616			99,141		83,613		82,769		88,722			80,599		86,336
Income (loss) before tax		2,163		(5,317	)		9,472		4,762		217		(4,151	)		5,021		2,287
Income tax expense (benefit)		469		(2,166	)		3,198		1,334		23		(2,351	)		1,350		504
Net income (loss)		1,694		(3,151	)		6,274		3,428		194		(1,800	)		3,671		1,783
Net income attributable to non-controlling interest		-		-			-		-		23		43			258		-
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	1,694		(3,151	)	$	6,274	$	3,428	$	171	$	(1,843	)	$	3,413	$	1,783
Basic earnings (loss) per share:	$	0.09	$	(0.16	)	$	0.33	$	0.18	$	0.01	$	(0.10	)	$	0.18	$	0.09
Diluted earnings (loss) per share:	$	0.09	$	(0.16	)	$	0.32	$	0.18	$	0.01	$	(0.10	)	$	0.18	$	0.09

F-42

FINANCIAL STATEMENT SCHEDULES

Schedule II – Condensed Financial Information of Registrant (Parent Company Only)

HALLMARK FINANCIAL SERVICES, INC.

BALANCE SHEETS

December 31, 2013 and 2012

(In thousands)

	2013			2012
ASSETS
Cash and cash equivalents	$	8,063		$	1,112
Investment in subsidiaries		316,295			296,258
Deferred federal income taxes		930			2,112
Other assets		3,729			3,416
	$	329,017		$	302,898
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Revolving credit facility payable	$	1,473		$	1,473
Subordinated debt securities		56,702			56,702
Current federal income tax payable		3,353			7,047
Accounts payable and other accrued expenses		29,371			17,139
		90,899			82,361
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2013 and in 2012		3,757			3,757
Capital in excess of par value		122,827			122,475
Retained earnings		106,209			97,964
Accumulated other comprehensive income		16,883			7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost		(11,558	)		(11,558	)
Total stockholders’ equity		238,118			220,537
Total liabilities and stockholders’ equity	$	329,017		$	302,898

See accompanying report of independent registered public accounting firm.

F-43

Schedule II (Continued) – Condensed Financial Information of Registrant (Parent Company Only)

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF OPERATIONS

For the years ended December 31, 2013, 2012 and 2011

(In thousands)

	2013			2012			2011
Investment loss, net of expenses	$	(190	)	$	(181	)	$	(194	)
Management fee income		8,518			8,485			7,288
		8,328			8,304			7,094
Operating expenses		7,764			8,079			7,851
Interest expense		4,599			4,634			4,631
Amortization of intangible assets		-			17			42
		12,363			12,730			12,524
Loss before equity in undistributed earnings (loss) of subsidiaries and income tax benefit		(4,035	)		(4,426	)		(5,430	)
Income tax benefit		(1,227	)		(1,627	)		(1,669	)
Loss before equity in undistributed earnings (loss) of subsidiaries		(2,808	)		(2,799	)		(3,761	)
Equity in undistributed share of earnings (loss) in subsidiaries		11,053			6,323			(7,130	)
Net income (loss)	$	8,245		$	3,524		$	(10,891	)
Comprehensive income (loss)	$	17,229		$	4,977		$	(14,082	)

See accompanying report of independent registered public accounting firm.

F-44

FINANCIAL STATEMENT SCHEDULES

Schedule II (Continued) – Condensed Financial Information of Registrant (Parent Company Only)

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2013, 2012 and 2011

(In thousands)

	2013			2012			2011
Cash flows from operating activities:
Net income (loss)	$	8,245		$	3,524		$	(10,891	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization expense		92			113			168
Deferred income tax expense (benefit)		1,182			(1,725	)		(215	)
Undistributed share of (earnings) loss of subsidiaries		(11,053	)		(6,323	)		7,130
Change in current federal income tax (recoverable)payable		(3,694	)		4,030			(4,838	)
Change in all other liabilities		12,232			357			5,155
Change in all other assets		63			450			1,074
Net cash provided by (used in) operating activities		7,067			426			(2,417	)
Cash flows from investing activities:
Purchases of property and equipment, net		(116	)		(46	)		(205	)
Net cash used in investing activities		(116	)		(46	)		(205	)
Cash flows from financing activities:
Proceeds from exercise of employee stock options		-			-			99
Purchase of treasury shares		-			-			(6,401	)
Activity under revolving credit facility, net		-			(2,577	)		1,250
Net cash used in financing activities		-			(2,577	)		(5,052	)
Increase (decrease) in cash and cash equivalents		6,951			(2,197	)		(7,674	)
Cash and cash equivalents at beginning of year		1,112			3,309			10,983
Cash and cash equivalents at end of year	$	8,063		$	1,112		$	3,309
Supplemental cash flow information:
Interest paid	$	(4,599	)	$	(4,656	)	$	(4,620	)
Income taxes (paid) recovered	$	(1,285	)	$	3,932		$	(3,383	)

See accompanying report of independent registered public accounting firm.

F-45

FINANCIAL STATEMENT SCHEDULES

Schedule III - Supplementary Insurance Information

(In thousands)

Column A	Column B		Column C		Column D		Column E		Column F		Column G			Column H		Column I		Column J		Column K
			Future
			Policy
			Benefits,
			Losses,				Other									Amortization
	Deferred		Claims and				Policy							Benefits,		of Deferred
	Policy		Loss				Claims				Net			Claims, Losses		Policy		Other		Net
	Acquisition		Adjustment		Unearned		and Benefits		Premium		Investment			and Settlement		Acquisition		Operating		Premiums
Segment	Costs		Expenses		Premiums		Payable		Revenue		Income			Expenses		Costs		Expenses		Written
2013
Personal Segment	$	660	$	38,294	$	17,989	$	-	$	63,800	$	2,065		$	52,656	$	17,759	$	16,957	$	45,644
Standard Commercial Segment		6,124		111,473		36,309		-		78,176		5,031			56,143		8,254		25,313		79,466
Specialty Commercial Segment		15,802		232,873		131,005		-		218,565		11,021			152,546		31,264		56,974		235,655
Corporate		-		-		-		-		-		(5,233	)		-		-		7,720		-
Consolidated	$	22,586	$	382,640	$	185,303	$	-	$	360,541	$	12,884		$	261,345	$	57,277	$	106,964	$	360,765
2012
Personal Segment	$	4,952	$	40,387	$	21,125	$	-	$	81,451	$	2,449		$	69,606	$	17,250	$	26,413	$	76,345
Standard Commercial Segment		5,968		103,610		35,073		-		69,155		4,925			52,828		10,825		22,742		70,091
Specialty Commercial Segment		13,991		169,419		106,304		-		168,830		9,435			103,980		31,730		49,170		186,053
Corporate		-		-		-		-		-		(1,516	)		-		-		7,825		-
Consolidated	$	24,911	$	313,416	$	162,502	$	-	$	319,436	$	15,293		$	226,414	$	59,805	$	106,150	$	332,489
2011
Personal Segment	$	6,020	$	53,280	$	26,307	$	-	$	92,962	$	2,470		$	101,030	$	13,865	$	29,706	$	95,655
Standard Commercial Segment		5,976		100,487		32,854		-		64,586		4,061			50,940		12,721		20,589		63,944
Specialty Commercial Segment		10,558		143,178		86,943		-		135,493		7,416			87,265		21,189		39,471		144,277
Corporate		-		-		-		-		-		1,933			-		-		6,962		-
Consolidated	$	22,554	$	296,945	$	146,104	$	-	$	293,041	$	15,880		$	239,235	$	47,775	$	96,728	$	303,876

See accompanying report of independent registered public accounting firm.

F-46

FINANCIAL STATEMENT SCHEDULES

Schedule IV – Reinsurance

(In thousands)

Column A	Column B		Column C		Column D		Column E		Column F
			Ceded to		Assumed				Percentage
	Gross		Other		From Other		Net		of Amount
Year Ended December 31, 2013	Amount		Companies		Companies		Amount		Assumed to Net
Life insurance in force	$	-	$	-	$	-	$	-
Premiums
Life insurance	$	-	$	-	$	-	$	-
Accident and health insurance		-		-		-		-
Property and liability insurance		434,022		76,685		3,204		360,541		0.89	%
Title Insurance		-		-		-		-
Total premiums	$	434,022	$	76,685	$	3,204	$	360,541		0.89	%
Year Ended December 31, 2012
Life insurance in force	$	-	$	-	$	-	$	-
Premiums
Life insurance	$	-	$	-	$	-	$	-
Accident and health insurance		-		-		-		-
Property and liability insurance		369,735		54,413		4,114		319,436		1.29	%
Title Insurance		-		-		-		-
Total premiums	$	369,735	$	54,413	$	4,114	$	319,436		1.29	%
Year Ended December 31, 2011
Life insurance in force	$	-	$	-	$	-	$	-
Premiums
Life insurance	$	-	$	-	$	-	$	-
Accident and health insurance		-		-		-		-
Property and liability insurance		344,642		57,039		5,438		293,041		1.86	%
Title Insurance		-		-		-		-
Total premiums	$	344,642	$	57,039	$	5,438	$	293,041		1.86	%

See accompanying report of independent registered public accounting firm.

F-47

FINANCIAL STATEMENT SCHEDULES

Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations

(In thousands)

Column A	Column B		Column C		Column D		Column E		Column F		Column G		Column H					Column I		Column J		Column K
			Reserves										Claims and Claim Adjustment					Amortization		Paid
	Deferred		for Unpaid		Discount								Expenses Incurred Related to					of Deferred		Claims and
Affiliation	Policy		Claims and		if any,						Net		(1)		(2)			Policy		Claims
With	Acquisition		Claim Adjustment		Deducted		Unearned		Earned		Investment		Current		Prior			Acquisition		Adjustment		Net Premiums
Registrant	Costs		Expenses		In Column C		Premiums		Premiums		Income		Year		Years			Costs		Expenses		Written
(a) Consolidated
property-casualty
Entities
2013	$	22,586	$	382,640	$	-	$	185,303	$	360,541	$	12,884	$	251,391	$	9,954		$	57,277	$	212,709	$	360,765
2012	$	24,911	$	313,416	$	-	$	162,502	$	319,436	$	15,293	$	230,089	$	(3,675	)	$	59,805	$	217,483	$	332,489
2011	$	22,554	$	296,945	$	-	$	146,104	$	293,041	$	15,880	$	222,869	$	16,366		$	47,775	$	206,873	$	303,876

See accompanying report of independent registered public accounting firm.

F-48

EX-10.13

HALLMARK FINANCIAL SERVICES, INC.

RESTRICTED STOCK UNIT AWARD AGREEMENT

To:

Hallmark Financial Services, Inc. (the “Company”) grants to you (the “Participant”) restricted stock units (“Units”), as follows:

Date of Grant:
Units Granted:
Vesting Date:
Performance Criteria:	As set forth in Exhibit A and Exhibit B hereto

The attached Terms and Conditions comprise an integral part of this Restricted Stock Unit Award Agreement (this “Agreement”), and the Units granted hereby are subject to such Terms and Conditions. The Units are granted pursuant to and subject to all of the terms and conditions of the Hallmark Financial Services, Inc. 2005 Long Term Incentive Plan, as now or hereafter amended (the “2005 LTIP”). The Compensation Committee of the Company’s Board of Directors (the “Committee”) will administer this Agreement and any decision of the Committee will be final and conclusive. Terms not defined herein have the meanings provided in the 2005 LTIP.

By your signature below, you agree to be bound by the provisions of this Agreement and the 2005 LTIP.

HALLMARK FINANCIAL SERVICES, INC.
By:
	Mark E. Schwarz, Executive Chairman
PARTICIPANT:

Page 1

TERMS AND CONDITIONS

The following Terms and Conditions comprise an integral part of the Restricted Stock Unit Award Agreement to which these Terms and Conditions are attached.

RECITALS

A.           Participant is regularly employed by the Company (as used herein, including one of its subsidiaries) in a capacity that has been determined by the Committee to comply with the requirements for eligibility to participate in the 2005 LTIP, and the Company desires that Participant remain in the employment of the Company and contribute to the growth and success of the Company.

B.           The Committee has determined to grant to Participant restricted stock units in order to encourage Participant to remain in the employment of the Company and to contribute to the growth and success of the Company by affording Participant an opportunity to obtain an increased proprietary interest in the Company so as to assure a closer identification between Participant’s interests and the interest of the Company.

1. Grant of Restricted Stock Units.

Subject to the terms and conditions of the 2005 LTIP, the Company has granted to Participant the number of Units indicated in this Agreement. Each Unit so granted represents the right to receive one share (or multiple thereof in accordance with Exhibit A and Exhibit B hereto) of the common stock, $0.03 par value per share, of the Company (the “Common Stock”), subject to satisfaction of the vesting schedule, performance criteria and other conditions set forth herein.

2. Vesting.

The Units will become fully vested and nonforfeitable if (i) Participant remains continuously employed by the Company through the Vesting Date indicated in this Agreement, or vesting is accelerated as provided herein, and (b) at least the minimum performance criteria set forth in Exhibit A and Exhibit B hereto have been satisfied. Of the number of Units granted to Participant, 50% will be subject to the performance criteria set forth in Exhibit A and 50% will be subject to the performance criteria set forth in Exhibit B.

3. Performance Criteria.

The number of shares issuable with respect to each Unit shall be determined based on the performance criteria set forth in Exhibit A and Exhibit B hereto.

4. Delivery of Shares.

The Company will deliver to Participant the number of shares of its Common Stock issuable pursuant to this Agreement promptly (and, in any event within 90 days) following the Vesting Date. If necessary or appropriate to ensure orderly administration of the Company’s payroll and tax reporting obligations, the Company may accelerate vesting and delivery of shares up to of 30 days before the Vesting Date.

Page 2

5. Forfeiture of Units.

All unvested Units will be forfeited in the event the Participant ceases to be an employee of the Company before the Vesting Date for any reason other than (i) the employee's retirement from employment at or after Retirement Age (as defined in Section 14 of the 2005 LTIP), (ii) the employee's death or total and permanent disability (as defined in Section 15 of the 2005 LTIP), or (iii) the Committee otherwise determines, in its sole discretion, that such Units should not be forfeited. If Participant ceases to be an employee of the Company before the Vesting Date under any of the circumstances set forth in clauses (i)-(iii) of the preceding sentence, then the number of Units indicated in this Agreement will be vested on a pro rata basis based on the number of full months from the Award Date until the Vesting Date which have elapsed as of the date of termination. In such event, the Company will deliver shares of its Common Stock to the Participant promptly following the otherwise applicable Vesting Date, subject to Section 13 below.

6. Change in Control.

Upon the occurrence of a Change in Control (as defined in Section 22 of the 2005 LTIP), all Units shall immediately become fully vested. In such event, the Company will deliver shares of its Common Stock to the Participant promptly following the otherwise applicable Vesting Date, subject to Section 13 below.

7. Delay for Specified Employees.

With respect to a Participant who ceases to be an employee of the Company before the Vesting Date under any of the circumstances set forth in clauses (i)-(iii) of the first sentence of Section 5 above, if such Participant is a “specified employee” (as defined in Section 409A(a)(2)(B)(i) of the Code and the generally applicable Internal Revenue Service guidance thereunder) on the date of separation, then, notwithstanding anything in Section 5 to the contrary, no shares will be delivered for Units until at least the date that is six months after the date of separation (or until the date of death, if earlier).

8. Nontransferability of Units.

The Units granted under this Agreement shall be transferable only to the extent permitted under the 2005 LTIP. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Units contrary to the provisions of the 2005 LTIP, or the levy of any execution, attachment or similar process upon the Units , shall be null and void and without effect.

Page 3

9. Compliance with Securities and Other Laws.

The Company shall not be required to deliver any shares of its Common Stock in respect of Units if the delivery thereof would constitute a violation by either Participant or the Company of any provision of any law or regulation of any governmental authority or any national securities exchange or market system. As a condition of any delivery of shares of its Common Stock, the Company may place legends on certificates representing such shares, issue stop transfer orders and require such agreements or undertakings from Participant as the Company may deem necessary or advisable to assure compliance with any such laws or regulations including, if the Company or its counsel deems it appropriate, representations from Participant that (s)he is acquiring the shares solely for investment and not with a view to distribution and that no distribution of such shares acquired by Participant will be made unless registered pursuant to applicable federal and state securities laws or, in the opinion of counsel of the Company, such registration is unnecessary.

10. No Rights of a Stockholder or of Continued Employment.

Participant shall not have any of the rights of a stockholder of the Company with respect to Units except to the extent that one or more certificates for shares of the Common Stock shall have been delivered to Participant, or Participant has been determined to be a stockholder of record by the Company’s transfer agent, upon satisfaction of the vesting schedule, performance criteria and other conditions set forth herein. Further, nothing herein shall confer upon Participant any right to remain in the employ of the Company.

11. Interpretation of this Agreement.

The administration of the 2005 LTIP has been vested in the Committee, and all questions of interpretation of this Agreement shall be subject to determination by the Committee, which determination shall be final and binding on Participant.

12. Units Subject to 2005 LTIP.

The Units are granted subject to the terms and provisions of the 2005 LTIP, as such plan is now and may be hereafter subsequently amended, which 2005 LTIP is incorporated herein by reference. In case of any conflict between the provisions hereof and the 2005 LTIP, the terms and provisions of the 2005 LTIP shall be controlling.

13. Code Section 409A.

This Agreement is intended to comply with the applicable requirements of Sections 409A(a)(2) through (4) of the Code, and will be interpreted to the extent context reasonably permits in accordance with this intent. The parties agree to modify this Agreement or the timing (but not the amount) of any delivery of shares to the extent necessary to comply with Section 409A of the Code and avoid application of any taxes, penalties, or interest thereunder. However, in the event that any amounts payable under this Agreement are subject to any taxes, penalties or interest under Section 409A of the Code or otherwise, the Participant will be solely liable for the payment thereof.

Page 4

EXHIBIT A

PERFORMANCE CRITERIA

Page 5

EX-21

Exhibit 21

Subsidiaries of Hallmark Financial Services, Inc.

Name of Subsidiary		Jurisdiction of Incorporation
o	Aerospace Claims Management Group, Inc.*	Texas
o	Aerospace Flight, Inc.*	Texas
o	Aerospace Holdings, LLC*	Texas
o	Aerospace Insurance Managers, Inc.*	Texas
o	Aerospace Special Risk, Inc.*	Texas
o	American Hallmark General Agency, Inc.	Texas
	(d/b/a Hallmark Insurance Company)
o	American Hallmark Insurance Company of Texas*	Texas
o	American Hallmark Insurance Services, Inc.*	Texas
o	CYR Insurance Management Company*	Texas
o	Effective Claims Management, Inc.*	Texas
o	Hallmark Claims Service, Inc.	Texas
	(d/b/a Hallmark Insurance Company)
o	Hallmark County Mutual Insurance Company*	Texas
	(controlled through a management agreement)
o	Hallmark Finance Corporation*	Texas
o	Hallmark Insurance Company*	Arizona
o	Hallmark National Insurance Company*	Ohio
o	Hallmark Specialty Insurance Company*	Oklahoma
o	Hardscrabble Data Solutions, LLC*	New Jersey
o	Heath XS, LLC*	New Jersey
o	Pan American Acceptance Corporation*	Texas
o	TBIC Holding Corporation, Inc.*	Texas
o	TBIC Risk Management, Inc.*	Texas
o	Texas Builders Insurance Company*	Texas
o	Hallmark Specialty Underwriters, Inc.*	Texas
o	TGA Special Risk, Inc.*	Texas

* Conducts business under its corporate name.

EX-23.A

Exhibit 23(a)

Consent Of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:   

(1) Registration Statement (Form S-8 No. 333-41220) pertaining to the Hallmark Financial Services, Inc. 1991 Key Employee Stock Option Plan, Hallmark Financial Services, Inc. 1994 Key Employee Long Term Incentive Plan and Hallmark Financial Services, Inc. 1994 Non-Employee Director Stock Option Plan;

(2) Registration Statement (Form S-8 No. 333-140000) pertaining to Hallmark Financial Services, Inc. 2005 Long Term Incentive Plan;

(3) Registration Statement (Form S-8 No. 333-160050) pertaining to Hallmark Financial Services, Inc. 2005 Long Term Incentive Plan; and

(4) Registration Statement (Form S-3 No. 333-171696) and related Prospectus pertaining to the registration of 3,274,830 shares of common stock;

of our reports dated March 12, 2014, with respect to the consolidated financial statements and schedules of Hallmark Financial Services, Inc. and subsidiaries and the effectiveness of internal control over financial reporting of Hallmark Financial Services, Inc. and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2013.

/s/ Ernst & Young LLP

Fort Worth, Texas

March 12, 2014

EX-31.A

Exhibit 31(a)

CERTIFICATIONS

I, Mark J. Morrison, certify that:

1.     I have reviewed this annual report on Form 10-K 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:       March 12, 2014

/s/ Mark J. Morrison

Mark J. Morrison, Chief Executive Officer

EX-31.B

Exhibit 31(b)

CERTIFICATIONS

I, Jeffrey R. Passmore, certify that:

1.     I have reviewed this annual report on Form 10-K 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:       March 12, 2014

/s/ Jeffrey R. Passmore

Jeffrey R. Passmore, Chief Accounting Officer

EX-32.A

Exhibit 32(a)

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

       I, Mark J. Morrison, Chief Executive Officer of Hallmark Financial Services, Inc. (the "Company"), hereby certify that the accompanying annual report on Form 10-K for the fiscal year ended December 31, 2013, and filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) 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:       March 12, 2014

/s/ Mark J. Morrison

Mark J. Morrison,

Chief Executive Officer

EX-32.B

Exhibit 32(b)

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

       I, Jeffrey R. Passmore, Chief Accounting Officer of Hallmark Financial Services, Inc. (the "Company"), hereby certify that the accompanying annual report on Form 10-K for the fiscal year ended December 31, 2013, and filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) 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:        March 12, 2014

/s/ Jeffrey R. Passmore

Jeffrey R. Passmore,

Chief Accounting Officer

XML

Segment Information (Tables)

12 Months Ended

Dec. 31, 2013

Segment Information [Abstract]

Schedule of Segment Reporting, by Segment

The following is additional business segment information for the twelve months ended December 31, 2013, 2012 and 2011 (in thousands):

	2013			2012			2011
Revenues
Standard Commercial Segment	$	83,306		$	73,119		$	72,830
Specialty Commercial Segment		229,734			178,917			142,838
Personal Segment		71,081			89,149			101,351
Corporate		5,307			615			5,752
Consolidated	$	389,428		$	341,800		$	322,771
Depreciation and Amortization Expense
Standard Commercial Segment	$	201		$	186		$	174
Specialty Commercial Segment		2,896			2,892			3,293
Personal Segment		1,111			1,230			1,431
Corporate		92			113			166
Consolidated	$	4,300		$	4,421		$	5,064
Interest Expense
Standard Commercial Segment	$	-		$	-		$	-
Specialty Commercial Segment		-			-			-
Personal Segment		-			-			-
Corporate		4,599			4,634			4,631
Consolidated	$	4,599		$	4,634		$	4,631
Tax Expense (Benefit)
Standard Commercial Segment	$	312		$	372		$	(376	)
Specialty Commercial Segment		3,613			1,875			4,454
Personal Segment		(398	)		(968	)		(13,991	)
Corporate		(692	)		(1,753	)		959
Consolidated	$	2,835		$	(474	)	$	(8,954	)
Pre-tax Income (Loss), net of non-controlling interest
Standard Commercial Segment	$	1,980		$	(2,486	)	$	1,335
Specialty Commercial Segment		19,527			25,932			14,348
Personal Segment		(3,416	)		(8,535	)		(29,647	)
Corporate		(7,011	)		(11,861	)		(5,881	)
Consolidated	$	11,080		$	3,050		$	(19,845	)

Schedule of Segment Reporting Additional Information by Segment

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

	December 31,
	2013		2012
Assets
Standard Commercial Segment	$	142,143	$	145,162
Specialty Commercial Segment		536,894		432,208
Personal Segment		210,825		200,356
Corporate		19,161		12,742
Consolidated	$	909,023	$	790,468

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Investments (Summary of Gross Unrealized Loss Position) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Fair Value 12 months or less	$ 113,255	$ 81,876
Unrealized Losses 12 months or less	(1,287)	(1,047)
Fair Value Longer than 12 months	53,634	50,039
Unrealized Losses Longer than 12 months	(2,613)	(3,782)
Fair Value Total	166,889	131,915
Unrealized Losses Total	(3,900)	(4,829)
Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value 12 months or less	112,939	78,513
Unrealized Losses 12 months or less	(1,285)	(532)
Fair Value Longer than 12 months	50,913	50,039
Unrealized Losses Longer than 12 months	(2,301)	(3,782)
Fair Value Total	163,852	128,552
Unrealized Losses Total	(3,586)	(4,314)
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value 12 months or less	316	3,363
Unrealized Losses 12 months or less	(2)	(515)
Fair Value Longer than 12 months	2,721
Unrealized Losses Longer than 12 months	(312)
Fair Value Total	3,037	3,363
Unrealized Losses Total	(314)	(515)
U.S. Treasury securities and obligations of U.S. Government [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value 12 months or less	47,162	23,998
Unrealized Losses 12 months or less	(165)	(3)
Fair Value Total	47,162	23,998
Unrealized Losses Total	(165)	(3)
Corporate Bonds [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value 12 months or less	5,649	10,802
Unrealized Losses 12 months or less	(56)	(38)
Fair Value Longer than 12 months	4,421	6,910
Unrealized Losses Longer than 12 months	(394)	(725)
Fair Value Total	10,070	17,712
Unrealized Losses Total	(450)	(763)
Collateralized Corporate Bank Loans [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value 12 months or less	23,026	6,273
Unrealized Losses 12 months or less	(422)	(97)
Fair Value Longer than 12 months	6,968	14,236
Unrealized Losses Longer than 12 months	(67)	(646)
Fair Value Total	29,994	20,509
Unrealized Losses Total	(489)	(743)
Municipal Bonds [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value 12 months or less	35,719	30,073
Unrealized Losses 12 months or less	(413)	(362)
Fair Value Longer than 12 months	34,684	28,809
Unrealized Losses Longer than 12 months	(1,562)	(2,408)
Fair Value Total	70,403	58,882
Unrealized Losses Total	(1,975)	(2,770)
Collateralized Mortgage Backed Securities [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value 12 months or less	1,383	7,367
Unrealized Losses 12 months or less	(229)	(32)
Fair Value Longer than 12 months	4,840	84
Unrealized Losses Longer than 12 months	(278)	(3)
Fair Value Total	6,223	7,451
Unrealized Losses Total	$ (507)	$ (35)

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Accounting Policies (Activity Related to Non-Controlling Interest) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Accounting Policies [Abstract]
Beginning balance		$ 1,284
Accretion of redeemable non-controlling interest		392
Net income attributable to non-controlling interest		324
Distribution to non-controlling interest		(281)
Redemption of non-controlling interest		(1,700)
Other		(19)
Ending balance

XML

Segment Information (Narrative) (Details)	12 Months Ended
	Dec. 31, 2013
American Hallmark Insurance Company [Member]
Net premiums written, percentage	30.00%
Hallmark Insurance Company (Payer) [Member]
Net premiums written, percentage	27.00%
Hallmark Specialty Insurance Company [Member]
Net premiums written, percentage	30.00%
Hallmark National Insurance Company [Member]
Net premiums written, percentage	13.00%

XML

Investments (Schedule of Amortized Cost and Estimated Fair Value of Debt Securities) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Due in one year or less	$ 71,490
Amortized Cost, Due after one year through five years	162,203
Amortized Cost, Due after five years through ten years	107,915
Amortized Cost, Amortized Cost Due after ten years	39,235
Debt Maturities, Amortized Cost	408,627
Fair Value, Due in one year or less	71,969
Fair Value, Due after one year through five years	163,006
Fair Value, Due after five years through ten years	108,761
Fair Value, Due after ten years	38,622
Debt securities	410,095	401,435
Collateralized Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Debt Maturities, Amortized Cost	27,784
Debt securities	$ 27,737	$ 9,724

XML

Share-based Payment Arrangements (Schedule of Options, Grants in Period, Grant Date Intrinsic Value) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Cost of share-based payments (non-cash)	$ 352	$ 380	$ 709
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Intrinsic value of options exercised			4
Cost of share-based payments (non-cash)	207	380	709
Income tax benefit of share-based payments recognized in income	$ 30	$ 38	$ 30

XML

Unaudited Selected Quarterly Financial Information (Tables)

12 Months Ended

Dec. 31, 2013

Unaudited Selected Quarterly Financial Information [Abstract]

Schedule of Quarterly Financial Information

Following is a summary of the unaudited interim results of operations for the years ended December 31, 2013 and 2012 (in thousands, except per share data). In the opinion of management, all adjustments necessary to present fairly the results of operations for such periods have been made.

	2013									2012
	Q1		Q2			Q3		Q4		Q1		Q2			Q3		Q4
Total revenue	$	93,141	$	99,299		$	108,613	$	88,375	$	82,986	$	84,571		$	85,620	$	88,623
Total expense		90,978		104,616			99,141		83,613		82,769		88,722			80,599		86,336
Income (loss) before tax		2,163		(5,317	)		9,472		4,762		217		(4,151	)		5,021		2,287
Income tax expense (benefit)		469		(2,166	)		3,198		1,334		23		(2,351	)		1,350		504
Net income (loss)		1,694		(3,151	)		6,274		3,428		194		(1,800	)		3,671		1,783
Net income attributable to non-controlling interest		-		-			-		-		23		43			258		-
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	1,694		(3,151	)	$	6,274	$	3,428	$	171	$	(1,843	)	$	3,413	$	1,783
Basic earnings (loss) per share:	$	0.09	$	(0.16	)	$	0.33	$	0.18	$	0.01	$	(0.10	)	$	0.18	$	0.09
Diluted earnings (loss) per share:	$	0.09	$	(0.16	)	$	0.32	$	0.18	$	0.01	$	(0.10	)	$	0.18	$	0.09

XML

Investments (Tables)

12 Months Ended

Dec. 31, 2013

Investments [Abstract]

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

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 December 31, 2013	Cost		Gains		Losses			Value
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
As of December 31, 2012
U.S. Treasury securities and obligations of U.S. Government	$	40,050	$	14	$	(3	)	$	40,061
Corporate bonds		79,516		2,794		(763	)		81,547
Collateralized corporate bank loans		106,093		1,021		(743	)		106,371
Municipal bonds		162,479		4,023		(2,770	)		163,732
Mortgage-backed		9,662		97		(35	)		9,724
Total debt securities		397,800		7,949		(4,314	)		401,435
Total equity securities		31,502		12,938		(515	)		43,925
Total debt and equity securities	$	429,302	$	20,887	$	(4,829	)	$	445,360

Major Categories of Investment Income

Major categories of net investment income are summarized as follows (in thousands):

	Twelve Months Ended
	December 31
	2013			2012			2011
U.S. Treasury securities and obligations of U.S. Government	$	143		$	53		$	115
Corporate bonds		2,341			4,218			3,851
Collateralized corporate bank loans		4,653			5,261			5,284
Municipal bonds		5,245			5,616			6,632
Mortgage-backed		737			106			86
Equity securities		484			534			484
Cash and cash equivalents		157			246			163
		13,760			16,034			16,615
Investment expenses		(876	)		(741	)		(735	)
Investment income, net of expenses	$	12,884		$	15,293		$	15,880

Major Categories of Net Realized Gains on Investments

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

	Twelve Months Ended
	December 31
	2013			2012			2011
U.S. Treasury securities and obligations of U.S. Government	$	-		$	-		$	35
Corporate bonds		853			13			300
Collateralized corporate bank loans		373			391			699
Municipal bonds		(156	)		(441	)		(500	)
Equity securities		9,470			2,226			3,099
Net realized gain		10,540			2,189			3,633
Other-than-temporary impairments		-			(246	)		-
Gain on investments	$	10,540		$	1,943		$	3,633

Summary of Gross 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 December 31, 2013 and December 31, 2012 (in thousands):

	As of December 31, 2013
	12 months or less					Longer than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized 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	)

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

Schedule of Amortized Cost and Estimated Fair Value of Debt Securities

The amortized cost and estimated fair value of debt securities at December 31, 2013 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.

	Amortized		Fair
	Cost		Value
	(in thousands)
Due in one year or less	$	71,490	$	71,969
Due after one year through five years		162,203		163,006
Due after five years through ten years		107,915		108,761
Due after ten years		39,235		38,622
Mortgage-backed		27,784		27,737
	$	408,627	$	410,095

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Share-based Payment Arrangements (Schedule of Nonvested Restricted Stock Units Activity) (Details) (Long Term Incentive Plan 2005 [Member], Restricted Stock Units (RSUs) [Member])	0 Months Ended			12 Months Ended
	May 30, 2013	Apr. 10, 2013	Jul. 27, 2012	Dec. 31, 2013
Long Term Incentive Plan 2005 [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Nonvested at January 1, 2013
Granted		122,823	129,463	243,006
Forfeited	(9,280)			(6,155)
Nonvested at December 31, 2013				236,851

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Earnings Per Share (Narrative)(Details)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Earnings Per Share [Abstract]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	779,999	794,999	809,999

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Commitments and Contingencies (Narrative) (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Commitments and Contingencies [Abstract]
Operating leases, rent expense, net	$ 2,200,000	$ 2,300,000	$ 2,000,000
Payments of assessment	29,000	100,000	0
Contingent liability premium taxes	4,500,000
Contingent liability penalties and interest	$ 900,000

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Fair Value (Fair Value of Assets Measured on a Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	$ 410,095	$ 401,435
Equity securities	51,230	43,925
Debt and equity securities	461,325	445,360
U.S. Treasury securities and obligations of U.S. Government [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	78,753	40,061
Corporate Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	43,875	81,547
Collateralized Corporate Bank Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	102,178	106,371
Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	157,552	163,732
Collateralized Mortgage Backed Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	27,737	9,724
Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Equity securities	51,230	43,925
Debt and equity securities	51,230	43,925
Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	392,578	381,767
Debt and equity securities	392,578	381,767
Fair Value, Inputs, Level 2 [Member] | U.S. Treasury securities and obligations of U.S. Government [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	78,753	40,061
Fair Value, Inputs, Level 2 [Member] | Corporate Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	43,875	81,547
Fair Value, Inputs, Level 2 [Member] | Collateralized Corporate Bank Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	101,585	105,463
Fair Value, Inputs, Level 2 [Member] | Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	140,628	144,972
Fair Value, Inputs, Level 2 [Member] | Collateralized Mortgage Backed Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	27,737	9,724
Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	17,517	19,668
Debt and equity securities	17,517	19,668
Fair Value, Inputs, Level 3 [Member] | Collateralized Corporate Bank Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	593	908
Fair Value, Inputs, Level 3 [Member] | Municipal Bonds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Debt securities	$ 16,924	$ 18,760

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Share-based Payment Arrangements (Narrative) (Details) (USD $)	12 Months Ended					12 Months Ended		12 Months Ended				12 Months Ended			0 Months Ended			12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2013 Minimum [Member]	Dec. 31, 2013 Maximum [Member]	Dec. 31, 2013 Long Term Incentive Plan 2005 [Member]	May 26, 2005 Long Term Incentive Plan 2005 [Member]	Dec. 31, 2013 Long Term Incentive Plan 2005 [Member] Minimum [Member]	Dec. 31, 2013 Long Term Incentive Plan 2005 [Member] Maximum [Member] Option Issued Prior To 2009 [Member]	Dec. 31, 2013 Incentive Stock Options 2011 [Member] Option Issued Prior To 2009 [Member] 5,000 Grant [Member]	Dec. 31, 2013 Incentive Stock Options 2011 [Member] Long Term Incentive Plan 2005 [Member]	Dec. 31, 2013 Incentive Stock Options 2011 [Member] Long Term Incentive Plan 2005 [Member] 10,000 Grant [Member]	Dec. 31, 2013 Non Qualified Stock Options [Member] Long Term Incentive Plan 2005 [Member]	Dec. 31, 2013 Restricted Stock Units (RSUs) [Member]	May 30, 2013 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]	Apr. 10, 2013 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]	Jul. 27, 2012 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]	Dec. 31, 2013 Restricted Stock Units (RSUs) [Member] Long Term Incentive Plan 2005 [Member]	Dec. 31, 2013 Vesting Percentage First Anniversary [Member] Long Term Incentive Plan 2005 [Member] Option Issued Prior To 2009 [Member]	Dec. 31, 2013 Vesting Percentage Second Anniversary [Member] Long Term Incentive Plan 2005 [Member] Option Issued Prior To 2009 [Member]	Dec. 31, 2013 Vesting Percentage Third Anniversary [Member] Long Term Incentive Plan 2005 [Member] Option Issued Prior To 2009 [Member]	Dec. 31, 2013 Vesting Percentage Fourth Anniversary [Member] Long Term Incentive Plan 2005 [Member] Option Issued Prior To 2009 [Member]	Dec. 31, 2013 Vesting Equal Increments on Each Anniversary First Through the Seventh [Member] Incentive Stock Options 2011 [Member] Long Term Incentive Plan 2005 [Member] 5,000 Grant [Member]	Dec. 31, 2013 Vesting Equal Increments on Each Anniversary First Through the Seventh [Member] Non Qualified Stock Options [Member] Long Term Incentive Plan 2005 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation arrangement by share-based payment award, number of shares authorized							2,000,000
Share-based compensation arrangement by share-based payment award, incentive stock options to purchase number of shares						1,083,332
Share-based compensation arrangement by share-based payment award, non-qualified stock options to purchase number of shares						304,157							200,000
Share-based compensation arrangement by share-based payment award, restricted stock options to purchase number of shares						355,277
Share-based compensation by share-based payment award, remaining available shares for issuance						241,401
Share-based compensation arrangement by share-based payment award, award vesting rights, percentage													100.00%						10.00%	20.00%	30.00%	40.00%
Stock-based compensation incentive stock options grant under incentive plan termination period								5 years	10 years			10 years	10 years										10 years
Share-based compensation arrangement by share based payment award options vested and expected to vest number										5,000	25,000	10,000
Share-based compensation arrangement by share-based payment award, award vesting period												3 years	6 months										7 years	7 years
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized	$ 500,000																	$ 500,000
Employee Service Share-based Compensation Nonvested Awards, Total Compensation Cost Expected to Recognize During Remainder of Year Two	200,000																	200,000
Employee Service Share-based Compensation Nonvested Awards, Total Compensation Cost Expected to Recognize During Remainder of Year Three	200,000																	200,000
Employee Service Share-based Compensation Nonvested Awards, Total Compensation Cost Expected to Recognize During Remainder of Year Four	54,000																	49,000
Employee Service Share-based Compensation Nonvested Awards, Total Compensation Cost Expected to Recognize During Remainder of Year Five	3,000
Stock options, Granted	0	0
Options granted, weighted average grant date fair value			$ 2.52
Options contractual term	4 years 2 months 12 days		5 years 9 months 18 days
Expected volatility			30.90%
Risk free interest rate			1.40%
Other than options, granted																122,823	129,463	243,006
Other than options granted, weighted average grant date fair value														$ 9.20
Other than options, forfeited															9,280			6,155
Percentage of restricted stock units granted as result of meeting growth rates				50.00%	150.00%
Allocated share-based compensation expense														$ 145,000

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Income Taxes (Schedule of Deferred Tax Assets and Liabilities) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Deferred tax liabilities:
Deferred policy acquisition costs	$ (7,905)	$ (8,719)
Net unrealized holding gain on investments	(9,730)	(5,622)
Agency relationship	(85)	(94)
Intangible assets	(6,129)	(6,852)
Goodwill	(325)	(116)
Fixed assets	(499)	(685)
Other	(263)	(275)
Total deferred tax liabilities	(24,936)	(22,363)
Deferred tax assets:
Unearned premiums	9,822	9,806
Alternative minimum tax	442	1,651
Amortization of non-compete agreements	417	476
Pension liability	797	1,591
Net operating loss carry-forward	611	702
Unpaid loss and loss adjustment expense	8,173	7,549
Rent reserve	366	363
Investment impairments	660	1,256
Other	823	909
Total deferred tax assets	22,111	24,303
Deferred federal income taxes, net	$ (2,825)	$ 1,940

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Retirement Plans (Changes in Benefit Obligations, Components of Benefit Costs, Weighted-Average Assumptions, and Plan Assets) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Assumptions (end of period):
Discount rate used in determining benefit obligation	4.49%	3.89%	4.50%
Rate of compensation increase	0.00%	0.00%	0.00%
Reconciliation of funded status (end of period):
Accumulated benefit obligation	$ (12,284)	$ (13,439)	$ (12,990)
Projected benefit obligation	(12,284)	(13,439)	(12,990)
Fair value of plan assets	10,851	9,754	9,019
Defined Benefit Plan, Funded Status of Plan, Total	(1,433)	(3,685)	(3,971)
Net actuarial loss	(2,277)	(4,545)	(4,582)
Accumulated other comprehensive loss	(2,277)	(4,545)	(4,582)
Prepaid pension cost	844	860	611
Net amount recognized as of December 31	(1,433)	(3,685)	(3,971)
Changes in projected benefit obligation:
Benefit obligation as of beginning of period	13,439	12,990	12,050
Interest cost	505	564	609
Actuarial liability loss	(824)	700	1,160
Benefits paid	(836)	(815)	(829)
Benefit obligation as of end of period	12,284	13,439	12,990
Change in plan assets:
Fair value of plan assets as of beginning of period	9,754	9,019	9,217
Actual return on plan assets (net of expenses)	1,565	839	(4)
Employer contributions	368	711	635
Benefits paid	836	815	829
Fair value of plan assets as of end of period	10,851	9,754	9,019
Net periodic pension cost:
Interest cost on projected benefit obligation	505	564	609
Expected return on plan assets	(615)	(584)	(590)
Recognized actuarial loss	495	482	287
Net periodic pension cost	$ 385	$ 462	$ 306
Discount rate	3.89%	4.50%	5.25%
Expected return on plan assets	6.50%	6.50%	6.50%
Rate of compensation increase	0.00%	0.00%	0.00%

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Income Taxes (Schedule of Effective Income Tax Rate Reconciliation) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Income Taxes [Abstract]
Computed expected income tax expense (benefit) at statutory regulatory tax rate									$ 3,878	$ 1,181	$ (6,926)
Meals and entertainment									25	28	44
Tax exempt interest									(1,314)	(1,631)	(1,835)
Dividends received deduction									(101)	(111)	(99)
State taxes (net of federal benefit)									276	298	84
Other									71	(239)	(222)
Income tax expense (benefit)	1,334	3,198	(2,166)	469	504	1,350	(2,351)	23	2,835	(474)	(8,954)
Current income tax (benefit) expense									3,092	2,377	(6,059)
Deferred income tax expense (benefit)									(257)	(2,851)	(2,895)
Income tax (benefit) expense	$ 1,334	$ 3,198	$ (2,166)	$ 469	$ 504	$ 1,350	$ (2,351)	$ 23	$ 2,835	$ (474)	$ (8,954)

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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	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Share-based Payment Arrangements [Abstract]
Stock options, Outstanding at January 1, 2013	1,404,989
Stock options, Granted	0	0
Stock options, exercised (in shares)
Stock options, forfeited or expired	(17,500)
Stock options, Outstanding at December 31, 2013	1,387,489	1,404,989
Stock options, Exercisable at December 31, 2013	1,181,417
Weighted Average Exercise Price, Outstanding at January 1, 2013	$ 9.63
Weighted Average Exercise Price, Forfeited or expired	$ 7.58
Weighted Average Exercise Price, Outstanding at December 31, 2013	$ 9.66	$ 9.63
Weighted Average Exercise Price, Exercisable at December 31, 2013	$ 10.19
Average Remaining Contractual Term, Outstanding at December 31, 2013 (in years)	4 years 2 months 12 days		5 years 9 months 18 days
Average Remaining Contractual Term, Exercisable at December 31, 2013 (in years)	4 years
Aggregate Intrinsic Value, Outstanding at December 31, 2013	$ 1,329
Aggregate Intrinsic Value, Exercisable at December 31, 2013	$ 866

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Segment Information (Schedule of Segment Reporting, by Segment) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Revenues
Revenues	$ 88,375	$ 108,613	$ 99,299	$ 93,141	$ 88,623	$ 85,620	$ 84,571	$ 82,986	$ 389,428	$ 341,800	$ 322,771
Depreciation and Amortization Expense
Depreciation and Amortization Expense									4,300	4,421	5,064
Interest Expense
Interest Expense									4,599	4,634	4,631
Tax Expense (Benefit)
Income tax expense (benefit)	1,334	3,198	(2,166)	469	504	1,350	(2,351)	23	2,835	(474)	(8,954)
Pre-tax income (loss), net of non-controlling interest:
Consolidated pre-tax income (loss), net of non-controlling interest									11,080	3,050	(19,845)
Standard Commercial Segment [Member]
Revenues
Revenues									83,306	73,119	72,830
Depreciation and Amortization Expense
Depreciation and Amortization Expense									201	186	174
Tax Expense (Benefit)
Income tax expense (benefit)									312	372	(376)
Pre-tax income (loss), net of non-controlling interest:
Consolidated pre-tax income (loss), net of non-controlling interest									1,980	(2,486)	1,335
Specialty Commercial Segment [Member]
Revenues
Revenues									229,734	178,917	142,838
Depreciation and Amortization Expense
Depreciation and Amortization Expense									2,896	2,892	3,293
Tax Expense (Benefit)
Income tax expense (benefit)									3,613	1,875	4,454
Pre-tax income (loss), net of non-controlling interest:
Consolidated pre-tax income (loss), net of non-controlling interest									19,527	25,932	14,348
Personal Segment [Member]
Revenues
Revenues									71,081	89,149	101,351
Depreciation and Amortization Expense
Depreciation and Amortization Expense									1,111	1,230	1,431
Tax Expense (Benefit)
Income tax expense (benefit)									(398)	(968)	(13,991)
Pre-tax income (loss), net of non-controlling interest:
Consolidated pre-tax income (loss), net of non-controlling interest									(3,416)	(8,535)	(29,647)
Corporate [Member]
Revenues
Revenues									5,307	615	5,752
Depreciation and Amortization Expense
Depreciation and Amortization Expense									92	113	166
Interest Expense
Interest Expense									4,599	4,634	4,631
Tax Expense (Benefit)
Income tax expense (benefit)									(692)	(1,753)	959
Pre-tax income (loss), net of non-controlling interest:
Consolidated pre-tax income (loss), net of non-controlling interest									$ (7,011)	$ (11,861)	$ (5,881)

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Concentrations of Credit Risk

12 Months Ended

Dec. 31, 2013

Concentrations of Credit Risk [Abstract]

Concentrations of Credit Risk

18. Concentrations of Credit Risk:

We maintain cash and cash equivalents in accounts with seven financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. We monitor the financial stability of the depository institutions regularly and do not believe excessive risk of depository institution failure existed at December 31, 2013.

We are also subject to credit risk with respect to reinsurers to whom we have ceded underwriting risk. Although a reinsurer is liable for losses to the extent of the coverage it assumes, we remain obligated to our policyholders in the event that the reinsurers do not meet their obligations under the reinsurance agreements. In order to mitigate credit risk to reinsurance companies, we monitor the financial condition of reinsurers on an ongoing basis and review our reinsurance arrangements periodically. Most of our reinsurance recoverable balances as of December 31, 2013 were with reinsurers that had an A.M. Best rating of “A-” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

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Investments (Narrative) (Details) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013 security	Dec. 31, 2012 security	Dec. 31, 2011
Investments [Abstract]
Maximum restricted level of investment upon stockholders equity	10.00%	10.00%
Gross realized gains on investments	$ 10.9	$ 2.9	$ 4.6
Gross realized losses on investments	0.4	0.7	1.0
Proceeds from sale of available-for-sale securities	33.4	12.4	62.7
Number of debt security positions	84	56
Securities pledged for the benefit of various state insurance departments and reinsurers	$ 29.1	$ 24.3

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Retirement Plans (Tables)

12 Months Ended

Dec. 31, 2013

Retirement Plans [Abstract]

Changes in Benefit Obligations, Components of Benefit Costs, Weighted-Average Assumptions, and Plan Assets

The following tables provide detail of the changes in benefit obligations, components of benefit costs, weighted-average assumptions, and plan assets for the retirement plan as of and for the twelve months ending December 31, 2013, 2012 and 2011 (in thousands) using a measurement date of December 31.

4
	2013			2012			2011
Assumptions (end of period):
Discount rate used in determining benefit obligation		4.49	%		3.89	%		4.50	%
Rate of compensation increase		N/A			N/A			N/A
Reconciliation of funded status (end of period):
Accumulated benefit obligation	$	(12,284	)	$	(13,439	)	$	(12,990	)
Projected benefit obligation	$	(12,284	)	$	(13,439	)	$	(12,990	)
Fair value of plan assets		10,851			9,754			9,019
Funded status	$	(1,433	)	$	(3,685	)	$	(3,971	)
Net actuarial loss		(2,277	)		(4,545	)		(4,582	)
Accumulated other comprehensive loss		(2,277	)		(4,545	)		(4,582	)
Prepaid pension cost		844			860			611
Net amount recognized as of December 31	$	(1,433	)	$	(3,685	)	$	(3,971	)
Changes in projected benefit obligation:
Benefit obligation as of beginning of period	$	13,439		$	12,990		$	12,050
Interest cost		505			564			609
Actuarial liability (gain)/loss		(824	)		700			1,160
Benefits paid		(836	)		(815	)		(829	)
Benefit obligation as of end of period	$	12,284		$	13,439		$	12,990
Change in plan assets:
Fair value of plan assets as of beginning of period	$	9,754		$	9,019		$	9,217
Actual return on plan assets (net of expenses)		1,565			839			(4	)
Employer contributions		368			711			635
Benefits paid		(836	)		(815	)		(829	)
Fair value of plan assets as of end of period	$	10,851		$	9,754		$	9,019
Net periodic pension cost:
Service cost - benefits earned during the period	$	-		$	-		$	-
Interest cost on projected benefit obligation		505			564			609
Expected return on plan assets		(615	)		(584	)		(590	)
Recognized actuarial loss		495			482			287
Net periodic pension cost	$	385		$	462		$	306
Discount rate		3.89	%		4.50	%		5.25	%
Expected return on plan assets		6.50	%		6.50	%		6.50	%
Rate of compensation increase		N/A			N/A			N/A

Estimated Future Benefit Payments

Estimated future benefit payments by fiscal year (in thousands):

4
2014	$	889
2015	$	897
2016	$	885
2017	$	884
2018	$	878
2019-2023	$	4,170

Weighted-Average Asset Allocation for the Defined Benefit Cash Balance Plan

The following table shows the weighted-average asset allocation for the defined benefit cash balance plan held as of December 31, 2013 and 2012.

	12/31/13			12/31/12
Asset Category:
Fixed income securities		32	%		33	%
Equity securities		65	%		63	%
Other		3	%		4	%
Total		100	%		100	%

Schedule of Fair Value, Assets Measured on Recurring Basis

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

	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
Debt securities	$	-	$	3,448	$	-	$	3,448
Equity securities		7,080		-		-		7,080
Total	$	7,080	$	3,448	$	-	$	10,528

	As of December 31, 2012
	Quoted Prices in		Other
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Debt securities	$	-	$	3,188	$	-	$	3,188
Equity securities		6,153		-		-		6,153
Total	$	6,153	$	3,188	$	-	$	9,341

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Regulatory Capital Restrictions (Narrative) (Details) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Regulatory Capital Restrictions [Line Items]
Retained earnings, unappropriated	$ 29.8
Aggregate amount of shareholder dividends, maximum available next current fiscal year	15.6
Hallmark Insurance Company (Payer) [Member] | Hallmark (Payee) [Member]
Regulatory Capital Restrictions [Line Items]
Insurance agency management fee	8.2	9.0	6.0
Subsidiaries [Member]
Regulatory Capital Restrictions [Line Items]
Statutory Accounting Practices, Future Dividend Payments Restrictions	lesser of 10% of prior year policyholders' surplus or prior year's net investment income
Aggregate amount of shareholder dividends, maximum available next current fiscal year	22.5
American Hallmark Insurance Company and Texas Builders Insurance Company [Member]
Regulatory Capital Restrictions [Line Items]
Statutory Accounting Practices, Future Dividend Payments Restrictions	greater of statutory net income for the prior calendar year or 10% of statutory policyholders' surplus as of the prior year end
Hallmark National Insurance Company [Member]
Regulatory Capital Restrictions [Line Items]
Statutory Accounting Practices, Future Dividend Payments Restrictions	greater of 10% of statutory policyholders' surplus as of the prior December 31 or statutory net income as of the prior December 31
Hallmark Specialty Insurance Com [Member]
Regulatory Capital Restrictions [Line Items]
Statutory Accounting Practices, Future Dividend Payments Restrictions	greater of 10% of prior year policyholders' surplus or prior year's statutory net income, not including realized capital gains
Hallmark Insurance Company Subsidiaries [Member]
Regulatory Capital Restrictions [Line Items]
Amount of restricted net assets for consolidated and unconsolidated subsidiaries	208.3
Statutory accounting practices, statutory capital and surplus, balance	196.3	176.5
Statutory accounting practices, statutory net income amount	6.1	3.1
Statutory accounting practices statutory net loss amount			$ 17.2

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Schedule III - Supplementary Insurance Information (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Supplementary Insurance Information, by Segment [Line Items]
Deferred Policy Acquisition Costs	$ 22,586	$ 24,911	$ 22,554
Future Policy Benefits, Losses, Claims and Loss Adjustment Expenses	382,640	313,416	296,945
Unearned Premiums	185,303	162,502	146,104
Premium Revenue	360,541	319,436	293,041
Net Investment Income	12,884	15,293	15,880
Benefits Claims, Losses and Settlement Expenses	261,345	226,414	239,235
Amortization of Deferred Policy Acquisition Costs	57,277	59,805	47,775
Other Operating Expenses	106,964	106,150	96,728
Net Premiums Written	360,765	332,489	303,876
Personal Segment [Member]
Supplementary Insurance Information, by Segment [Line Items]
Deferred Policy Acquisition Costs	660	4,952	6,020
Future Policy Benefits, Losses, Claims and Loss Adjustment Expenses	38,294	40,387	53,280
Unearned Premiums	17,989	21,125	26,307
Premium Revenue	63,800	81,451	92,962
Net Investment Income	2,065	2,449	2,470
Benefits Claims, Losses and Settlement Expenses	52,656	69,606	101,030
Amortization of Deferred Policy Acquisition Costs	17,759	17,250	13,865
Other Operating Expenses	16,957	26,413	29,706
Net Premiums Written	45,644	76,345	95,655
Standard Commercial Segment [Member]
Supplementary Insurance Information, by Segment [Line Items]
Deferred Policy Acquisition Costs	6,124	5,968	5,976
Future Policy Benefits, Losses, Claims and Loss Adjustment Expenses	111,473	103,610	100,487
Unearned Premiums	36,309	35,073	32,854
Premium Revenue	78,176	69,155	64,586
Net Investment Income	5,031	4,925	4,061
Benefits Claims, Losses and Settlement Expenses	56,143	52,828	50,940
Amortization of Deferred Policy Acquisition Costs	8,254	10,825	12,721
Other Operating Expenses	25,313	22,742	20,589
Net Premiums Written	79,466	70,091	63,944
Specialty Commercial Segment [Member]
Supplementary Insurance Information, by Segment [Line Items]
Deferred Policy Acquisition Costs	15,802	13,991	10,558
Future Policy Benefits, Losses, Claims and Loss Adjustment Expenses	232,873	169,419	143,178
Unearned Premiums	131,005	106,304	86,943
Premium Revenue	218,565	168,830	135,493
Net Investment Income	11,021	9,435	7,416
Benefits Claims, Losses and Settlement Expenses	152,546	103,980	87,265
Amortization of Deferred Policy Acquisition Costs	31,264	31,730	21,189
Other Operating Expenses	56,974	49,170	39,471
Net Premiums Written	235,655	186,053	144,277
Corporate [Member]
Supplementary Insurance Information, by Segment [Line Items]
Net Investment Income	(5,233)	(1,516)	1,933
Other Operating Expenses	$ 7,720	$ 7,825	$ 6,962

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Reserves for Unpaid Losses and Loss Adjustment Expenses (Tables)

12 Months Ended

Dec. 31, 2013

Reserves for Unpaid Losses and Loss Adjustment Expenses [Abstract]

Activity in the Reserves for Unpaid Losses and Loss Adjustment Expense

Activity in the reserves for unpaid losses and LAE is summarized as follows (in thousands):

	2013		2012			2011
Balance at January 1	$	313,416	$	296,945		$	251,677
Less reinsurance recoverable		49,584		42,044			37,954
Net Balance at January 1		263,832		254,901			213,723
Acquisition of subsidiaries effective July 1		-		-			8,816
Incurred related to:
Current year		251,391		230,089			222,869
Prior years		9,954		(3,675	)		16,366
Total incurred		261,345		226,414			239,235
Paid related to:
Current year		101,897		107,945			101,025
Prior years		110,812		109,538			105,848
Total paid		212,709		217,483			206,873
Net Balance at December 31		312,468		263,832			254,901
Plus reinsurance recoverable		70,172		49,584			42,044
Balance at December 31	$	382,640	$	313,416		$	296,945

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Investments (Major Categories of Investment Income) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Investment income	$ 13,760	$ 16,034	$ 16,615
Investment expenses	(876)	(741)	(735)
Investment income, net of expenses	12,884	15,293	15,880
U.S. Treasury securities and obligations of U.S. Government [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment income	143	53	115
Corporate Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment income	2,341	4,218	3,851
Collateralized Corporate Bank Loans [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment income	4,653	5,261	5,284
Municipal Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment income	5,245	5,616	6,632
Collateralized Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment income	737	106	86
Cash and Cash Equivalents [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment income	157	246	163
Parent Company [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment income, net of expenses	(190)	(181)	(194)
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment income	$ 484	$ 534	$ 484

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Reinsurance (Schedule of Reinsurance Ceded and Recoveries) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Premium Written :
Direct	$ 458,020	$ 385,624	$ 350,089
Assumed	2,007	4,218	4,792
Ceded	(99,262)	(57,353)	(51,005)
Premiums Written, Net, Property and Casualty	360,765	332,489	303,876
Premium Earned:
Direct	434,022	369,735	344,642
Assumed	3,204	4,114	5,438
Ceded	(76,685)	(54,413)	(57,039)
Premiums Earned, Net, Property and Casualty	360,541	319,436	293,041
Reinsurance recoveries	$ 45,456	$ 29,014	$ 32,941

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Goodwill and Intangible Assets (Schedule of Estimated Aggregate Amortization Expense for Finite-Lived Intangible Assets) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Goodwill and Intangible Assets [Abstract]
2014	$ 2,526
2015	2,468
2016	2,468
2017	2,468
2018	$ 2,468

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Accounting Policies (Narrative) (Details) (USD $)	12 Months Ended				12 Months Ended					12 Months Ended		0 Months Ended		0 Months Ended
	Dec. 31, 2013 segment	Dec. 31, 2012	Dec. 31, 2011	Sep. 30, 2012	Dec. 31, 2013 Minimum [Member]	Dec. 31, 2012 Minimum [Member]	Dec. 31, 2013 Maximum [Member]	Dec. 31, 2012 Maximum [Member]	Sep. 30, 2012 Remaining Interest [Member]	Dec. 31, 2013 Subordinated Debt [Member]	Dec. 31, 2012 Subordinated Debt [Member]	Jun. 21, 2005 Subordinated Debt [Member] Hallmark Statutory Trust I [Member]	Dec. 31, 2013 Subordinated Debt [Member] Hallmark Statutory Trust I [Member]	Aug. 23, 2007 Subordinated Debt [Member] Hallmark Statutory Trust I I [Member]	Dec. 31, 2013 Subordinated Debt [Member] Hallmark Statutory Trust I I [Member]	Dec. 31, 2013 Quota Share Treaty Effective January 1, 2006 [Member]	Jul. 01, 2004 Standard Commercial P & C Business Unit [Member]	Jul. 01, 2003 Standard Commercial P & C Business Unit [Member]	Jul. 01, 2002 Standard Commercial P & C Business Unit [Member]	Jul. 01, 2001 Standard Commercial P & C Business Unit [Member]	Jan. 01, 2008 E & S Commercial Business Unit [Member]	Jan. 01, 2007 E & S Commercial Business Unit [Member]	Jan. 01, 2006 E & S Commercial Business Unit [Member]	Aug. 29, 2008 Excess and Umbrella Business Unit [Member]
Number of reportable segments	3
Long-term debt, gross										$ 56,700,000	$ 56,700,000	$ 30,900,000	$ 30,900,000	$ 25,800,000	$ 25,800,000
Proceeds from issuance of trust preferred securities												30,000,000		25,000,000
Trust Preferred Securities, fair value										53,200,000	48,200,000
Current yield to maturity, percentage	9.30%									8.00%	8.00%
Deferred policy acquisition costs, additions	55,000,000	62,200,000	49,400,000
Deferred policy acquisition costs, amortized	(57,300,000)	(59,800,000)	(47,800,000)
Deferred policy acquisition cost, amortization expense	(2,300,000)	2,400,000	1,600,000
Property and equipment, gross	14,700,000	13,600,000
Property and equipment, estimated useful lives					3 years	3 years	10 years	10 years
Property and equipment, depreciation method	straight-line method	straight-line method
Depreciation	1,200,000	1,200,000	1,500,000
Property and equipment, accumulated depreciation	12,600,000	11,400,000
Business acquisition, percentage of voting interests acquired									20.00%															80.00%
Business acquisition, purchase price of voting interests acquired				1,700,000
Premiums earned, net, other insurance	13,200,000	11,800,000	13,500,000
Profit sharing payable																1,200,000
Profit sharing receivable	100,000
Provisional loss ratio																	64.20%	59.00%	59.00%	60.00%	65.00%	65.00%	65.00%
Estimated ultimate loss ratio																	63.70%	60.90%	64.50%	63.50%	59.00%	63.20%	58.60%
Retained earnings	106,209,000	97,964,000
Decrease in deferred policy acquisition costs	$ (2,325,000)	$ 2,357,000	$ 1,621,000

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Investments

12 Months Ended

Dec. 31, 2013

Investments [Abstract]

Investments

2. 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 December 31, 2013	Cost		Gains		Losses			Value
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
As of December 31, 2012
U.S. Treasury securities and obligations of U.S. Government	$	40,050	$	14	$	(3	)	$	40,061
Corporate bonds		79,516		2,794		(763	)		81,547
Collateralized corporate bank loans		106,093		1,021		(743	)		106,371
Municipal bonds		162,479		4,023		(2,770	)		163,732
Mortgage-backed		9,662		97		(35	)		9,724
Total debt securities		397,800		7,949		(4,314	)		401,435
Total equity securities		31,502		12,938		(515	)		43,925
Total debt and equity securities	$	429,302	$	20,887	$	(4,829	)	$	445,360

Major categories of net investment income are summarized as follows (in thousands):

	Twelve Months Ended
	December 31
	2013			2012			2011
U.S. Treasury securities and obligations of U.S. Government	$	143		$	53		$	115
Corporate bonds		2,341			4,218			3,851
Collateralized corporate bank loans		4,653			5,261			5,284
Municipal bonds		5,245			5,616			6,632
Mortgage-backed		737			106			86
Equity securities		484			534			484
Cash and cash equivalents		157			246			163
		13,760			16,034			16,615
Investment expenses		(876	)		(741	)		(735	)
Investment income, net of expenses	$	12,884		$	15,293		$	15,880

No investments in any entity or its affiliates exceeded 10% of stockholders’ equity at December 31, 2013 or 2012.

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

	Twelve Months Ended
	December 31
	2013			2012			2011
U.S. Treasury securities and obligations of U.S. Government	$	-		$	-		$	35
Corporate bonds		853			13			300
Collateralized corporate bank loans		373			391			699
Municipal bonds		(156	)		(441	)		(500	)
Equity securities		9,470			2,226			3,099
Net realized gain		10,540			2,189			3,633
Other-than-temporary impairments		-			(246	)		-
Gain on investments	$	10,540		$	1,943		$	3,633

We realized gross gains on investments of $10.9 million, $2.9 million, and $4.6 million during the years ended December 31, 2013, 2012 and 2011, respectively. We realized gross losses on investments of $0.4 million, $0.7 million and $1.0 million during the years ended December 31, 2013, 2012 and 2011, respectively. We recorded proceeds from the sale of investment securities of $33.4 million, $12.4 million and $62.7 million during the years ended December 31, 2013, 2012 and 2011, 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 December 31, 2013 and December 31, 2012 (in thousands):

	As of December 31, 2013
	12 months or less					Longer than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized 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	)

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

At December 31, 2013, the gross unrealized losses more than twelve months old were attributable to 84 debt security positions. At December 31, 2012, the gross unrealized losses more than twelve months old were attributable to 56 debt security positions. We consider these losses as a temporary decline in value as they are predominately on bonds that we do not intend to sell and do not believe we will be required to sell prior to recovery of our amortized cost basis. We see no other indications that the decline in values of these securities is other-than-temporary.

Based on evidence gathered through our normal credit evaluation process, we presently expect that all debt securities held in our investment portfolio will be paid in accordance with their contractual terms. Nonetheless, it is at least reasonably possible that the performance of certain issuers of these debt securities will be worse than currently expected resulting in 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 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. We did not recognized other-than-temporary losses on our debt securities portfolio during 2013.

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 December 31, 2013 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.

	Amortized		Fair
	Cost		Value
	(in thousands)
Due in one year or less	$	71,490	$	71,969
Due after one year through five years		162,203		163,006
Due after five years through ten years		107,915		108,761
Due after ten years		39,235		38,622
Mortgage-backed		27,784		27,737
	$	408,627	$	410,095

We have certain of our securities pledged 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 $29.1 million at December 31, 2013 and a carrying value of $24.3 million at December 31, 2012.

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Goodwill and Intangible Assets (Schedule of Weighted Average Amortization Period for Definite Lived Intangible Assets by Major Cass) (Details)	12 Months Ended
	Dec. 31, 2013
Finite-Lived Intangible Assets [Line Items]
Weighted average period to amortize acquired intangible assets	13 years
Trade Names [Member]
Finite-Lived Intangible Assets [Line Items]
Weighted average period to amortize acquired intangible assets	15 years
Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Weighted average period to amortize acquired intangible assets	15 years
Management Agreement [Member]
Finite-Lived Intangible Assets [Line Items]
Weighted average period to amortize acquired intangible assets	4 years
Non-compete & Employment Agreements [Member]
Finite-Lived Intangible Assets [Line Items]
Weighted average period to amortize acquired intangible assets	5 years

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

Schedule of Deferred Tax Assets and Liabilities

The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2013 and 2012, are as follows (in thousands):

	2013			2012
Deferred tax liabilities:
Deferred policy acquisition costs	$	(7,905	)	$	(8,719	)
Net unrealized holding gain on investments		(9,730	)		(5,622	)
Agency relationship		(85	)		(94	)
Intangible assets		(6,129	)		(6,852	)
Goodwill		(325	)		(116	)
Fixed assets		(499	)		(685	)
Other		(263	)		(275	)
Total deferred tax liabilities		(24,936	)		(22,363	)
Deferred tax assets:
Unearned premiums		9,822			9,806
Alternative minimum tax		442			1,651
Amortization of non-compete agreements		417			476
Pension liability		797			1,591
Net operating loss carry-forward		611			702
Unpaid loss and loss adjustment expense		8,173			7,549
Rent reserve		366			363
Investment impairments		660			1,256
Other		823			909
Total deferred tax assets		22,111			24,303
Deferred federal income taxes, net	$	(2,825	)	$	1,940

Schedule of Effective Income Tax Rate Reconciliation

A reconciliation of the income tax provisions based on the statutory tax rate to the provision reflected in the consolidated financial statements for the years ended December 31, 2013, 2012 and 2011, is as follows (in thousands):

	2013			2012			2011
Computed expected income tax expense (benefit) at statutory regulatory tax rate	$	3,878		$	1,181		$	(6,926	)
Meals and entertainment		25			28			44
Tax exempt interest		(1,314	)		(1,631	)		(1,835	)
Dividends received deduction		(101	)		(111	)		(99	)
State taxes (net of federal benefit)		276			298			84
Other		71			(239	)		(222	)
Income tax expense (benefit)	$	2,835		$	(474	)	$	(8,954	)
Current income tax expense (benefit)	$	3,092		$	2,377		$	(6,059	)
Deferred tax benefit		(257	)		(2,851	)		(2,895	)
Income tax expense (benefit)	$	2,835		$	(474	)	$	(8,954	)

Summary of Operating Loss Carryforwards

The net operating losses will expire if unused, as follows (in thousands):

Year
2021	$	650
2022		878
2028		2
2030		25
2031		45
2032		77
2033		70
	$	1,747

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Schedule IV -Reinsurance

12 Months Ended

Dec. 31, 2013

Supplemental Schedule of Reinsurance Premiums For Insurance Companies [Abstract]

Reinsurance

Schedule IV – Reinsurance

(In thousands)

Column A	Column B				Column C			Column D			Column E		Column F
	Gross				Ceded to			Assumed			Net		Percentage
	Amount				Other			From Other			Amount		of Amount
Year Ended December 31, 2013					Companies			Companies					Assumed to Net
Life insurance in force	$	-	$	-		$	-		$	-
Premiums
Life insurance	$	-	$	-		$	-		$	-
Accident and health insurance		-		-			-			-
Property and liability insurance		434,022		76,685			3,204			360,541		0.89		%
Title Insurance		-		-			-			-
Total premiums	$	434,022	$	76,685		$	3,204		$	360,541		0.89		%
Year Ended December 31, 2012
Life insurance in force	$	-	$	-		$	-		$	-
Premiums
Life insurance	$	-	$	-		$	-		$	-
Accident and health insurance		-		-			-			-
Property and liability insurance		369,735		54,413			4,114			319,436		1.29		%
Title Insurance		-		-			-			-
Total premiums	$	369,735	$	54,413		$	4,114		$	319,436		1.29		%
Year Ended December 31, 2011
Life insurance in force	$	-	$	-		$	-		$	-
Premiums
Life insurance	$	-	$	-		$	-		$	-
Accident and health insurance		-		-			-			-
Property and liability insurance		344,642		57,039			5,438			293,041		1.86		%
Title Insurance		-		-			-			-
Total premiums	$	344,642	$	57,039		$	5,438		$	293,041		1.86		%

See accompanying report of independent registered public accounting firm.

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Schedule III -Supplementary Insurance Information

12 Months Ended

Dec. 31, 2013

Supplementary Insurance Information [Abstract]

Supplementary Insurance Information

Schedule III - Supplementary Insurance Information

(In thousands)

Column A	Column B		Column C		Column D		Column E		Column F		Column G			Column H		Column I		Column J		Column K
Segment	Deferred		Future		Unearned		Other		Premium		Net			Benefits,		Amortization		Other		Net
	Policy		Policy		Premiums		Policy		Revenue		Investment			Claims, Losses		of Deferred		Operating		Premiums
	Acquisition		Benefits,				Claims				Income			and Settlement		Policy		Expenses		Written
	Costs		Losses,				and Benefits							Expenses		Acquisition
			Claims and				Payable									Costs
			Loss
			Adjustment
			Expenses
2013
Personal Segment	$	660	$	38,294	$	17,989	$	-	$	63,800	$	2,065		$	52,656	$	17,759	$	16,957	$	45,644
Standard Commercial Segment		6,124		111,473		36,309		-		78,176		5,031			56,143		8,254		25,313		79,466
Specialty Commercial Segment		15,802		232,873		131,005		-		218,565		11,021			152,546		31,264		56,974		235,655
Corporate		-		-		-		-		-		(5,233	)		-		-		7,720		-
Consolidated	$	22,586	$	382,640	$	185,303	$	-	$	360,541	$	12,884		$	261,345	$	57,277	$	106,964	$	360,765
2012
Personal Segment	$	4,952	$	40,387	$	21,125	$	-	$	81,451	$	2,449		$	69,606	$	17,250	$	26,413	$	76,345
Standard Commercial Segment		5,968		103,610		35,073		-		69,155		4,925			52,828		10,825		22,742		70,091
Specialty Commercial Segment		13,991		169,419		106,304		-		168,830		9,435			103,980		31,730		49,170		186,053
Corporate		-		-		-		-		-		(1,516	)		-		-		7,825		-
Consolidated	$	24,911	$	313,416	$	162,502	$	-	$	319,436	$	15,293		$	226,414	$	59,805	$	106,150	$	332,489
2011
Personal Segment	$	6,020	$	53,280	$	26,307	$	-	$	92,962	$	2,470		$	101,030	$	13,865	$	29,706	$	95,655
Standard Commercial Segment		5,976		100,487		32,854		-		64,586		4,061			50,940		12,721		20,589		63,944
Specialty Commercial Segment		10,558		143,178		86,943		-		135,493		7,416			87,265		21,189		39,471		144,277
Corporate		-		-		-		-		-		1,933			-		-		6,962		-
Consolidated	$	22,554	$	296,945	$	146,104	$	-	$	293,041	$	15,880		$	239,235	$	47,775	$	96,728	$	303,876

See accompanying report of independent registered public accounting firm.

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Fair Value (Narrative) (Details)	12 Months Ended
	Dec. 31, 2013
Fair Value [Abstract]
Current yield to maturity, percentage	9.30%

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Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2013

Commitments and Contingencies [Abstract]

Schedule of Future Minimum Rental Payments for Operating Leases

Future minimum lease payments under non-cancelable operating leases as of December 31, 2013 are as follows (in thousands):

4
Year
2014	$	1,987
2015		1,969
2016		1,641
2017		1,484
2018		1,193
2019 and thereafter		3,166
Total minimum lease payments	$	11,440

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Schedule VI -Supplemental Information Concerning Property-Casualty Insurance Operations

12 Months Ended

Dec. 31, 2013

Supplemental Information For Property, Casualty Insurance Underwriters [Abstract]

Supplemental Information Concerning Property-Casualty Insurance Operations

FINANCIAL STATEMENT SCHEDULES

Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations

(In thousands)

Column A	Column B		Column C		Column D		Column E		Column F		Column G		Column H					Column I		Column J		Column K
Affiliation	Deferred		Reserves		Discount		Unearned		Earned		Net		Claims and Claim Adjustment					Amortization		Paid		Net Premiums
With	Policy		for Unpaid		if any,		Premiums		Premiums		Investment		Expenses Incurred Related to					of Deferred		Claims and		Written
Registrant	Acquisition		Claims and		Deducted						Income		(1)		(2)			Policy		Claims
	Costs		Claim Adjustment		In Column C								Current		Prior			Acquisition		Adjustment
			Expenses										Year		Years			Costs		Expenses
(a) Consolidated
property-casualty
Entities
2013	$	22,586	$	382,640	$	-	$	185,303	$	360,541	$	12,884	$	251,391	$	9,954		$	57,277	$	212,709	$	360,765
2012	$	24,911	$	313,416	$	-	$	162,502	$	319,436	$	15,293	$	230,089	$	(3,675	)	$	59,805	$	217,483	$	332,489
2011	$	22,554	$	296,945	$	-	$	146,104	$	293,041	$	15,880	$	222,869	$	16,366		$	47,775	$	206,873	$	303,876

See accompanying report of independent registered public accounting firm.

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Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

General

General

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, the “Company”, “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 and is comprised of American Hallmark Insurance Services, Inc. (“American Hallmark Insurance Services”) and Effective Claims Management, Inc. (“ECM”). Our Workers Compensation business unit specializes in small and middle market workers compensation business and is comprised of TBIC Holding Corporation, Inc. (“TBIC Holding”), Texas Builders Insurance Company (“TBIC”) and TBIC Risk Management (“TBICRM”). The subsidiaries comprising our Workers Compensation business unit were acquired July 1, 2011. Our E&S Commercial business unit handles primarily commercial insurance products and services and is comprised of Hallmark Specialty Underwriters, Inc. (“HSU”), Pan American Acceptance Corporation (“PAAC”) and TGA Special Risk, Inc. (“TGASRI”). 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 Hallmark Select business unit is the combination of our operations previously known as our General Aviation business unit, our Excess & Umbrella business unit, the medical professional liability business previously handled by our E&S Commercial business unit and the satellite launch insurance products previously managed at the parent level. Our Hallmark Select business unit is comprised of Aerospace Insurance Managers, Inc. (“Aerospace Insurance Managers”), Aerospace Special Risk, Inc. (“ASRI”), Aerospace Claims Management Group, Inc. (“ACMG”), Heath XS, LLC (“HXS”) and Hardscrabble Data Solutions, LLC (“HDS”).  Our Personal Lines business unit handles personal insurance products and services and is comprised of American Hallmark General Agency, Inc. and Hallmark Claims Services, Inc. (both of which do business as Hallmark Insurance Company). Our insurance company subsidiaries supporting these business units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and TBIC.

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 (“Specialty Programs”) which are managed by Hallmark. The Personal Segment presently consists solely of our Personal Lines business unit.

Basis of Presentation

Basis of Presentation

The accompanying consolidated financial statements include the accounts and operations of Hallmark and its subsidiaries. Intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) which, as to our insurance company subsidiaries, differ from statutory accounting practices prescribed or permitted for insurance companies by insurance regulatory authorities.

Use of Estimates in the Preparation of Financial Statements

Use of Estimates in the Preparation of Financial Statements

Our preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities at the dates of the financial statements and our reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Since future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment may be reflected in the financial statements in future periods.

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 are reported at carry value of $56.7 million and $56.7 million, and have a fair value of $53.2million and $48.2 million, as of December 31, 2013 and 2012, respectively. The fair value of our trust preferred securities is based on discounted cash flows using current yields to maturity of 8.0%and 8.0% as of December 31, 2013 and 2012, respectively, which are based on similar issues to discount future cash flows and would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

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

Investments

Investments

Debt and equity securities available for sale are reported at fair value. Unrealized gains and losses are recorded as a component of stockholders’ equity, net of related tax effects. Equity securities that are determined to have other-than-temporary impairment are recognized as a loss on investments in the consolidated statements of operations. Debt securities that are determined to have other-than-temporary impairment are recognized as a loss on investments in the consolidated statements of operations for the portion that is related to credit deterioration with the remaining portion recognized in other comprehensive income. Debt security premiums and discounts are amortized into earnings using the effective interest method. Maturities of debt securities and sales of equity securities are recorded in receivable for securities until the cash is settled. Purchases of debt and equity securities are recorded in payable for securities until the cash is settled.

Realized investment gains and losses are recognized in operations on the specific identification method.

Cash and Cash Equivalents

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted Cash

Restricted Cash

We collect premiums from customers and, after deducting authorized commissions, remit these premiums to the Company’s consolidated insurance subsidiaries. Unremitted insurance premiums are held in a fiduciary capacity until disbursed to the Company’s consolidated insurance subsidiaries.

Premiums Receivable

Premiums Receivable

Premiums receivable represent amounts due from policyholders or independent agents for premiums written and uncollected. These balances are carried at net realizable value.

Reinsurance

Reinsurance

We are routinely involved in reinsurance transactions with other companies. Reinsurance premiums, losses and loss adjustment expenses (“LAE”) are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. (See Note 7.)

Deferred Policy Acquisition Costs

Deferred Policy Acquisition Costs

Policy acquisition costs (mainly commission, underwriting and marketing expenses) that are directly related to the successful acquisition of new and renewal insurance contracts are deferred and charged to operations over periods in which the related premiums are earned. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, expected investment income, losses and LAE and certain other costs expected to be incurred as the premiums are earned. If the computation results in an estimated net realizable value less than zero, a liability will be accrued for the premium deficiency. During 2013, 2012 and 2011, we deferred $55.0million, $62.2 million and $49.4 million of policy acquisition costs and amortized $57.3million, $59.8 million and $47.8 million of deferred policy acquisition costs, respectively. Therefore, the net (amortization) deferrals of policy acquisition costs were ($2.3)million, $2.4 million and $1.6 million for 2013, 2012 and 2011, respectively.

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.

Goodwill and Intangible Assets, net

Goodwill and Intangible Assets, net

We account for our goodwill and intangible assets according to ASC 350, “Intangibles – Goodwill and Other.” ASC 350 (1) prohibits the amortization of goodwill and indefinite-lived intangible assets, (2) requires testing of goodwill and indefinite-lived intangible assets on an annual basis for impairment (and more frequently if the occurrence of an event or circumstance indicates an impairment), (3) requires testing of definite-lived intangible assets if the occurrence of an event or circumstances indicates an impairment, (4) requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and (5) removes the forty-year limitation on the amortization period of intangible assets that have finite lives.  We have elected to perform our goodwill impairment test on the first day of the fourth quarter, October 1, of each year.

Leases

Leases

We have several leases, primarily for office facilities and computer equipment, which expire in various years through 2022. Some of these leases include rent escalation provisions throughout the term of the lease. We expense the average annual cost of the lease with the difference to the actual rent invoices recorded as deferred rent which is classified in accounts payable and other accrued expenses on our consolidated balance sheets.

Property and Equipment

Property and Equipment

Property and equipment (including leasehold improvements), aggregating $14.7million and $13.6 million, at December 31, 2013 and 2012, respectively, which is included in other assets, is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets (three to ten years). Depreciation expense for 2013, 2012 and 2011 was $1.2million, $1.2 million and $1.5 million, respectively. Accumulated depreciation was $12.6million and $11.4 million at December 31, 2013 and 2012, respectively.

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 we do not have variable interests in the Trusts. Therefore, the Trusts are not consolidated in our consolidated financial statements.

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

Losses and Loss Adjustment Expenses

Losses and Loss Adjustment Expenses

Losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred through December 31, 2013, 2012 and 2011. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses. These estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, we believe that the reserves for unpaid losses and LAE are adequate. The estimates are continually reviewed and adjusted as experience develops or new information becomes known. Such adjustments are included in current operations.

Redeemable Non-Controlling Interest

Redeemable Non-Controlling Interest

We accreted the redeemable non-controlling interest to its redemption value from the date of issuance to the redemption date using the interest method. Changes in redemption value were considered a change in accounting estimate. We followed the two class method of computing earnings per share. We treated only the portion of the periodic adjustment to the redeemable non-controlling interest carrying amount that reflects a redemption in excess of fair value as being akin to an actual dividend. Effective September 30, 2012,we exercised our call option and acquired the remaining 20% membership interests in the subsidiaries for $1.7 million.

Activity related to non-controlling interest for the years ended December 31, 2013 and 2012 is as follows (in thousands):

	2013		2012
Beginning balance	$	-	$	1,284
Accretion of redeemable non-controlling interest		-		392
Net income attributable to non-controlling interest		-		324
Distribution to non-controlling interest		-		(281	)
Redemption of non-controlling interest		-		(1,700	)
Other		-		(19	)
Ending balance	$	-	$	-

Recognition of Premium Revenues

Recognition of Premium Revenues

Insurance premiums are earned pro rata over the terms of the policies. Insurance policy fees are earned as of the effective date of the policy. Upon cancellation, any unearned premium is refunded to the insured. Insurance premiums written include gross policy fees of $13.2 million, $11.8 million and $13.5 million for the years ended December 31, 2013, 2012, and 2011, respectively. Insurance premiums on monthly reporting workers’ compensation policies are earned on the conclusion of the monthly coverage period. Deposit premiums for workers’ compensation policies are earned upon the expiration of the policy.

Finance Charges

Finance Charges

We receive premium installment fees for each direct bill payment from policyholders. Installment fee income is classified as finance charges on the consolidated statement of operations and is recognized as the fee is invoiced.

Relationship with Third Party Insurers

Relationship with Third Party Insurers

Through December 31, 2005, our Standard Commercial P&C business unit marketed policies on behalf of Clarendon National Insurance Company (“Clarendon”), a third-party insurer. Through December 31, 2008, all business of our E&S Commercial business unit was produced under a fronting agreement with member companies of the Republic Group (“Republic”), a third-party insurer. These insurance contracts on third party paper are accounted for under agency accounting. Ceding commissions and other fees received under these arrangements were classified as unearned commission revenue until earned pro rata over the terms of the policies.

Recognition of Commission Revenues of Our Standard and Specialty Commercial Segments

Profit sharing commission is calculated and recognized when the loss ratio, as determined by a qualified actuary, deviates from contractual targets. We received a provisional commission as policies were produced as an advance against the later determination of the profit sharing commission actually earned. The profit sharing commission is an estimate that varies with the estimated loss ratio and is sensitive to changes in that estimate.  Profit share commission is classified as commissions and fees on the consolidated statement of operations

The following table details the profit sharing commission provisional loss ratio compared to the estimated ultimate loss ratio for each effective quota share treaty between the Standard Commercial P&C business unit and Clarendon.

	Treaty Effective Dates
	07/1/01		07/1/02		07/1/03		07/1/04
Provisional loss ratio	60.0	%	59.0	%	59.0	%	64.2	%
Estimated ultimate loss ratio recorded to at December 31, 2013	63.5	%	64.5	%	60.9	%	63.7	%

As of December 31, 2013, we had a net receivable of $0.1million on these profit share treaties. The payable or receivable is the difference between the cash received to date and the recognized commission revenue based on the estimated ultimate loss ratio.

The following table details the profit sharing commission revenue provisional loss ratio compared to the estimated ultimate loss ratio for the effective quota share treaty between the E&S Commercial business unit and Republic.

	Treaty Effective Dates
	01/01/06			01/01/07			01/01/08
Provisional loss ratio		65.0	%		65.0	%		65.0	%
Estimated ultimate loss ratio recorded to at December 31, 2013		58.6	%		63.2	%		59.0	%

As of December 31, 2013, we had a net payable of $1.2million on these profit share treaties.  The payable or receivable is the difference between the cash received to date and the recognized commission revenue based on the estimated ultimate loss ratio.

Agent Commissions

Agent Commissions

We pay monthly commissions to agents based on written premium produced, but generally recognize the expense pro rata over the term of the policy. If the policy is cancelled prior to its expiration, the unearned portion of the agent commission is refundable to us. The unearned portion of commissions paid to agents is included in deferred policy acquisition costs. Commission expenses related to the insurance policies issued by our Hallmark Select business unit for third party insurance carriers and not assumed by our insurance company subsidiaries are recognized as of the effective date of the policy.

We annually pay a profit sharing commission to our independent agency force based upon the results of the business produced by each agent. We estimate and accrue this liability to commission expense in the year the business is produced.

Commission expense is classified as other operating expenses in the consolidated statement of operations.

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 basis 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.

Earnings Per Share

Earnings Per Share

The computation of earnings per share is based upon the weighted average number of common shares outstanding during the period plus the effect of common shares potentially issuable(in periods in which they have a dilutive effect), primarily from stock options. (See Notes 11 and 13.)

Adoption of New Accounting Pronouncements

Adoption of New Accounting Pronouncements

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

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Accounting Policies

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Accounting Policies

1. Accounting Policies:

General

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, the “Company”, “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 and is comprised of American Hallmark Insurance Services, Inc. (“American Hallmark Insurance Services”) and Effective Claims Management, Inc. (“ECM”). Our Workers Compensation business unit specializes in small and middle market workers compensation business and is comprised of TBIC Holding Corporation, Inc. (“TBIC Holding”), Texas Builders Insurance Company (“TBIC”) and TBIC Risk Management (“TBICRM”). The subsidiaries comprising our Workers Compensation business unit were acquired July 1, 2011. Our E&S Commercial business unit handles primarily commercial insurance products and services and is comprised of Hallmark Specialty Underwriters, Inc. (“HSU”), Pan American Acceptance Corporation (“PAAC”) and TGA Special Risk, Inc. (“TGASRI”). 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 Hallmark Select business unit is the combination of our operations previously known as our General Aviation business unit, our Excess & Umbrella business unit, the medical professional liability business previously handled by our E&S Commercial business unit and the satellite launch insurance products previously managed at the parent level. Our Hallmark Select business unit is comprised of Aerospace Insurance Managers, Inc. (“Aerospace Insurance Managers”), Aerospace Special Risk, Inc. (“ASRI”), Aerospace Claims Management Group, Inc. (“ACMG”), Heath XS, LLC (“HXS”) and Hardscrabble Data Solutions, LLC (“HDS”).  Our Personal Lines business unit handles personal insurance products and services and is comprised of American Hallmark General Agency, Inc. and Hallmark Claims Services, Inc. (both of which do business as Hallmark Insurance Company). Our insurance company subsidiaries supporting these business units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and TBIC.

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 (“Specialty Programs”) which are managed by Hallmark. The Personal Segment presently consists solely of our Personal Lines business unit.

Basis of Presentation

The accompanying consolidated financial statements include the accounts and operations of Hallmark and its subsidiaries. Intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) which, as to our insurance company subsidiaries, differ from statutory accounting practices prescribed or permitted for insurance companies by insurance regulatory authorities.

Use of Estimates in the Preparation of Financial Statements

Our preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities at the dates of the financial statements and our reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Since future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment may be reflected in the financial statements in future periods.

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 are reported at carry value of $56.7 million and $56.7 million, and have a fair value of $53.2million and $48.2 million, as of December 31, 2013 and 2012, respectively. The fair value of our trust preferred securities is based on discounted cash flows using current yields to maturity of 8.0%and 8.0% as of December 31, 2013 and 2012, respectively, which are based on similar issues to discount future cash flows and would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

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

Investments

Debt and equity securities available for sale are reported at fair value. Unrealized gains and losses are recorded as a component of stockholders’ equity, net of related tax effects. Equity securities that are determined to have other-than-temporary impairment are recognized as a loss on investments in the consolidated statements of operations. Debt securities that are determined to have other-than-temporary impairment are recognized as a loss on investments in the consolidated statements of operations for the portion that is related to credit deterioration with the remaining portion recognized in other comprehensive income. Debt security premiums and discounts are amortized into earnings using the effective interest method. Maturities of debt securities and sales of equity securities are recorded in receivable for securities until the cash is settled. Purchases of debt and equity securities are recorded in payable for securities until the cash is settled.

Realized investment gains and losses are recognized in operations on the specific identification method.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted Cash

We collect premiums from customers and, after deducting authorized commissions, remit these premiums to the Company’s consolidated insurance subsidiaries. Unremitted insurance premiums are held in a fiduciary capacity until disbursed to the Company’s consolidated insurance subsidiaries.

Premiums Receivable

Premiums receivable represent amounts due from policyholders or independent agents for premiums written and uncollected. These balances are carried at net realizable value.

Reinsurance

We are routinely involved in reinsurance transactions with other companies. Reinsurance premiums, losses and loss adjustment expenses (“LAE”) are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. (See Note 7.)

Deferred Policy Acquisition Costs

Policy acquisition costs (mainly commission, underwriting and marketing expenses) that are directly related to the successful acquisition of new and renewal insurance contracts are deferred and charged to operations over periods in which the related premiums are earned. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, expected investment income, losses and LAE and certain other costs expected to be incurred as the premiums are earned. If the computation results in an estimated net realizable value less than zero, a liability will be accrued for the premium deficiency. During 2013, 2012 and 2011, we deferred $55.0million, $62.2 million and $49.4 million of policy acquisition costs and amortized $57.3million, $59.8 million and $47.8 million of deferred policy acquisition costs, respectively. Therefore, the net (amortization) deferrals of policy acquisition costs were ($2.3)million, $2.4 million and $1.6 million for 2013, 2012 and 2011, respectively.

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.

Goodwill and Intangible Assets, net

We account for our goodwill and intangible assets according to ASC 350, “Intangibles – Goodwill and Other.” ASC 350 (1) prohibits the amortization of goodwill and indefinite-lived intangible assets, (2) requires testing of goodwill and indefinite-lived intangible assets on an annual basis for impairment (and more frequently if the occurrence of an event or circumstance indicates an impairment), (3) requires testing of definite-lived intangible assets if the occurrence of an event or circumstances indicates an impairment, (4) requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill, and (5) removes the forty-year limitation on the amortization period of intangible assets that have finite lives.  We have elected to perform our goodwill impairment test on the first day of the fourth quarter, October 1, of each year.

Leases

We have several leases, primarily for office facilities and computer equipment, which expire in various years through 2022. Some of these leases include rent escalation provisions throughout the term of the lease. We expense the average annual cost of the lease with the difference to the actual rent invoices recorded as deferred rent which is classified in accounts payable and other accrued expenses on our consolidated balance sheets.

Property and Equipment

Property and equipment (including leasehold improvements), aggregating $14.7million and $13.6 million, at December 31, 2013 and 2012, respectively, which is included in other assets, is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets (three to ten years). Depreciation expense for 2013, 2012 and 2011 was $1.2million, $1.2 million and $1.5 million, respectively. Accumulated depreciation was $12.6million and $11.4 million at December 31, 2013 and 2012, respectively.

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 we do not have variable interests in the Trusts. Therefore, the Trusts are not consolidated in our consolidated financial statements.

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

Losses and Loss Adjustment Expenses

Losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred through December 31, 2013, 2012 and 2011. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses. These estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, we believe that the reserves for unpaid losses and LAE are adequate. The estimates are continually reviewed and adjusted as experience develops or new information becomes known. Such adjustments are included in current operations.

Redeemable Non-Controlling Interest

We accreted the redeemable non-controlling interest to its redemption value from the date of issuance to the redemption date using the interest method. Changes in redemption value were considered a change in accounting estimate. We followed the two class method of computing earnings per share. We treated only the portion of the periodic adjustment to the redeemable non-controlling interest carrying amount that reflects a redemption in excess of fair value as being akin to an actual dividend. Effective September 30, 2012,we exercised our call option and acquired the remaining 20% membership interests in the subsidiaries for $1.7 million.

Activity related to non-controlling interest for the years ended December 31, 2013 and 2012 is as follows (in thousands):

	2013		2012
Beginning balance	$	-	$	1,284
Accretion of redeemable non-controlling interest		-		392
Net income attributable to non-controlling interest		-		324
Distribution to non-controlling interest		-		(281	)
Redemption of non-controlling interest		-		(1,700	)
Other		-		(19	)
Ending balance	$	-	$	-

Recognition of Premium Revenues

Insurance premiums are earned pro rata over the terms of the policies. Insurance policy fees are earned as of the effective date of the policy. Upon cancellation, any unearned premium is refunded to the insured. Insurance premiums written include gross policy fees of $13.2 million, $11.8 million and $13.5 million for the years ended December 31, 2013, 2012, and 2011, respectively. Insurance premiums on monthly reporting workers’ compensation policies are earned on the conclusion of the monthly coverage period. Deposit premiums for workers’ compensation policies are earned upon the expiration of the policy.

Finance Charges

We receive premium installment fees for each direct bill payment from policyholders. Installment fee income is classified as finance charges on the consolidated statement of operations and is recognized as the fee is invoiced.

Relationship with Third Party Insurers

Through December 31, 2005, our Standard Commercial P&C business unit marketed policies on behalf of Clarendon National Insurance Company (“Clarendon”), a third-party insurer. Through December 31, 2008, all business of our E&S Commercial business unit was produced under a fronting agreement with member companies of the Republic Group (“Republic”), a third-party insurer. These insurance contracts on third party paper are accounted for under agency accounting. Ceding commissions and other fees received under these arrangements were classified as unearned commission revenue until earned pro rata over the terms of the policies.

Profit sharing commission is calculated and recognized when the loss ratio, as determined by a qualified actuary, deviates from contractual targets. We received a provisional commission as policies were produced as an advance against the later determination of the profit sharing commission actually earned. The profit sharing commission is an estimate that varies with the estimated loss ratio and is sensitive to changes in that estimate.  Profit share commission is classified as commissions and fees on the consolidated statement of operations

The following table details the profit sharing commission provisional loss ratio compared to the estimated ultimate loss ratio for each effective quota share treaty between the Standard Commercial P&C business unit and Clarendon.

	Treaty Effective Dates
	07/1/01		07/1/02		07/1/03		07/1/04
Provisional loss ratio	60.0	%	59.0	%	59.0	%	64.2	%
Estimated ultimate loss ratio recorded to at December 31, 2013	63.5	%	64.5	%	60.9	%	63.7	%

As of December 31, 2013, we had a net receivable of $0.1million on these profit share treaties. The payable or receivable is the difference between the cash received to date and the recognized commission revenue based on the estimated ultimate loss ratio.

The following table details the profit sharing commission revenue provisional loss ratio compared to the estimated ultimate loss ratio for the effective quota share treaty between the E&S Commercial business unit and Republic.

	Treaty Effective Dates
	01/01/06			01/01/07			01/01/08
Provisional loss ratio		65.0	%		65.0	%		65.0	%
Estimated ultimate loss ratio recorded to at December 31, 2013		58.6	%		63.2	%		59.0	%

As of December 31, 2013, we had a net payable of $1.2million on these profit share treaties.  The payable or receivable is the difference between the cash received to date and the recognized commission revenue based on the estimated ultimate loss ratio.

Agent Commissions

We pay monthly commissions to agents based on written premium produced, but generally recognize the expense pro rata over the term of the policy. If the policy is cancelled prior to its expiration, the unearned portion of the agent commission is refundable to us. The unearned portion of commissions paid to agents is included in deferred policy acquisition costs. Commission expenses related to the insurance policies issued by our Hallmark Select business unit for third party insurance carriers and not assumed by our insurance company subsidiaries are recognized as of the effective date of the policy.

We annually pay a profit sharing commission to our independent agency force based upon the results of the business produced by each agent. We estimate and accrue this liability to commission expense in the year the business is produced.

Commission expense is classified as other operating expenses in the consolidated statement of operations.

Income Taxes

We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis 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.

Earnings Per Share

The computation of earnings per share is based upon the weighted average number of common shares outstanding during the period plus the effect of common shares potentially issuable(in periods in which they have a dilutive effect), primarily from stock options. (See Notes 11 and 13.)

Adoption of New Accounting Pronouncements

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

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Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Activity Related to Non-Controlling Interest

Activity related to non-controlling interest for the years ended December 31, 2013 and 2012 is as follows (in thousands):

	2013		2012
Beginning balance	$	-	$	1,284
Accretion of redeemable non-controlling interest		-		392
Net income attributable to non-controlling interest		-		324
Distribution to non-controlling interest		-		(281	)
Redemption of non-controlling interest		-		(1,700	)
Other		-		(19	)
Ending balance	$	-	$	-

Schedule of Profit Sharing Commission

The following table details the profit sharing commission provisional loss ratio compared to the estimated ultimate loss ratio for each effective quota share treaty between the Standard Commercial P&C business unit and Clarendon.

	Treaty Effective Dates
	07/1/01		07/1/02		07/1/03		07/1/04
Provisional loss ratio	60.0	%	59.0	%	59.0	%	64.2	%
Estimated ultimate loss ratio recorded to at December 31, 2013	63.5	%	64.5	%	60.9	%	63.7	%

The following table details the profit sharing commission revenue provisional loss ratio compared to the estimated ultimate loss ratio for the effective quota share treaty between the E&S Commercial business unit and Republic.

	Treaty Effective Dates
	01/01/06			01/01/07			01/01/08
Provisional loss ratio		65.0	%		65.0	%		65.0	%
Estimated ultimate loss ratio recorded to at December 31, 2013		58.6	%		63.2	%		59.0	%

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Retirement Plans (Weighted-Average Asset Allocation for the Defined Benefit Cash Balance Plan) (Details)	Dec. 31, 2013	Dec. 31, 2012
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, actual plan asset allocations	100.00%	100.00%
Fixed Income Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, actual plan asset allocations	32.00%	33.00%
Equity Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, actual plan asset allocations	65.00%	63.00%
Other Liabilities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, actual plan asset allocations	3.00%	4.00%

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Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2013

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

A reconciliation of the numerators and denominators of the basic and diluted per share calculations is presented below (in thousands, except per share amounts):

)
	2013		2012			2011
Numerator for both basic and diluted earnings per share:
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	8,245		$	3,524		$	(10,891	)
Denominator, basic shares		19,263			19,263			19,673
Effect of dilutive securities:
Stock-based compensation awards		98			6			-
Denominator, diluted shares		19,361			19,269			19,673
Basic earnings per share:	$	0.43		$	0.18		$	(0.55	)
Diluted earnings per share:	$	0.43		$	0.18		$	(0.55	)

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Investments (Major Categories of Net Realized Gains on Investments) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Net realized gain	$ 10,540	$ 2,189	$ 3,633
Other-than-temporary impairments		(246)
Gain on investments	10,540	1,943	3,633
U.S. Treasury securities and obligations of U.S. Government [Member]
Schedule of Available-for-sale Securities [Line Items]
Net realized gain			35
Corporate Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Net realized gain	853	13	300
Collateralized Corporate Bank Loans [Member]
Schedule of Available-for-sale Securities [Line Items]
Net realized gain	373	391	699
Municipal Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Net realized gain	(156)	(441)	(500)
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Net realized gain	$ 9,470	$ 2,226	$ 3,099

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Segment Information (Schedule of Segment Reporting Additional Information by Segment) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Assets	$ 909,023	$ 790,468
Standard Commercial Segment [Member]
Assets	142,143	145,162
Specialty Commercial Segment [Member]
Assets	536,894	432,208
Personal Segment [Member]
Assets	210,825	200,356
Corporate [Member]
Assets	$ 19,161	$ 12,742

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
ASSETS
Debt securities, available-for-sale, at fair value (cost; $408,627 in 2013 and $397,800 in 2012)	$ 410,095	$ 401,435
Equity securities, available-for-sale, at fair value (cost; $24,902 in 2013 and $31,502 in 2012)	51,230	43,925
Total investments	461,325	445,360
Cash and cash equivalents	141,666	85,145
Restricted cash	12,190	8,707
Ceded unearned premiums	44,988	22,411
Premiums receivable	71,157	66,683
Accounts receivable	2,382	3,110
Receivable for securities	1,320	3
Reinsurance recoverable	76,818	51,970
Deferred policy acquisition costs	22,586	24,911
Goodwill	44,695	44,695
Intangible assets, net	19,953	23,068
Deferred federal income taxes, net		1,940
Prepaid expenses	1,531	1,480
Other assets	8,412	10,985
Total assets	909,023	790,468
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving credit facility payable	1,473	1,473
Subordinated debt securities	56,702	56,702
Reserves for unpaid losses and loss adjustment expenses	382,640	313,416
Unearned premiums	185,303	162,502
Reinsurance balances payable	20,598	7,330
Pension liability	1,433	3,685
Payable for securities	206
Federal income tax payable	719	1,518
Deferred federal income taxes, net	2,825
Accounts payable and other accrued expenses	19,006	23,305
Total liabilities	670,905	569,931
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2013 and 2012	3,757	3,757
Additional paid-in capital	122,827	122,475
Retained earnings	106,209	97,964
Accumulated other comprehensive income	16,883	7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost	(11,558)	(11,558)
Total stockholders equity	238,118	220,537
Liabilities and Equity, Total	$ 909,023	$ 790,468

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Changes in Accumulated Other Comprehensive Income Balances (Tables)

12 Months Ended

Dec. 31, 2013

Comprehensive Income (Loss) Note [Abstract]

Schedule of Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income balances as of December 31, 2013, 2012, and 2011 were as follows (in thousands):

							Accumulated Other
	Pension			Unrealized			Comprehensive
	Liability			Gains (Loss)			Income (Loss)
Balance at January 1, 2011	$	(2,024	)	$	11,661		$	9,637
Other comprehensive loss:
Change in net actuarial loss		(1,468	)		-			(1,468	)
Tax effect on change in net actuarial loss		514			-			514
Unrealized holding gains arising during the period		-			191			191
Tax effect on unrealized gains arising during the period		-			(67	)		(67	)
Reclassification adjustment for gains included in net realized gains		-			(3,633	)		(3,633	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			1,272			1,272
Other comprehensive loss, net of tax		(954	)		(2,237	)		(3,191	)
Balance at December 31, 2011	$	(2,978	)	$	9,424		$	6,446
Other comprehensive income:
Change in net actuarial gain		37			-			37
Tax effect on change in net actuarial gain		(13	)		-			(13	)
Unrealized holding gains arising during the period		-			4,388			4,388
Tax effect on unrealized gains arising during the period		-			(1,536	)		(1,536	)
Reclassification adjustment for gains included in net realized gains		-			(2,189	)		(2,189	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			766			766
Other comprehensive income, net of tax		24			1,429			1,453
Balance at December 31, 2012	$	(2,954	)	$	10,853		$	7,899
Other comprehensive income:
Change in net actuarial gain		2,268			-			2,268
Tax effect on change in net actuarial gain		(794	)		-			(794	)
Unrealized holding gains arising during the period		-			22,094			22,094
Tax effect on unrealized gains arising during the period		-			(7,733	)		(7,733	)
Reclassification adjustment for gains included in net realized gains		-			(10,540	)		(10,540	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			3,689			3,689
Other comprehensive income, net of tax		1,474			7,510			8,984
Balance at December 31, 2013	$	(1,480	)	$	18,363		$	16,883

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Schedule II - Condensed Financial Information of Registrant (Parent Company Only) (Cash Flows) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Cash flows from operating activities:
Net income (loss)	$ 3,428	$ 6,274	$ (3,151)	$ 1,694	$ 1,783	$ 3,671	$ (1,800)	$ 194	$ 8,245	$ 3,848	$ (10,833)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization expense									4,300	4,421	5,064
Deferred income tax expense (benefit)									(257)	(2,851)	(2,895)
Realized loss									(10,540)	(1,943)	(3,633)
Change in current federal income tax (recoverable) payable									(799)	8,256	(2,470)
Change in all other liabilities									(6,551)	5,396	(5,707)
Change in all other assets									17,141	5,983	3,587
Net cash provided by operating activities									68,338	33,682	24,610
Cash flows from investing activities:
Purchases of property and equipment, net									(673)	(107)	(1,586)
Purchase of fixed maturity and equity securities									(222,399)	(167,626)	(265,684)
Maturities and redemptions of investment securities									214,738	148,968	280,918
Net cash used in investing activities									(11,817)	(18,100)	(3,781)
Cash flows from financing activities:
Proceeds from exercise of employee stock options											99
Purchase of treasury shares											(6,401)
Activity under revolving credit facility, net										(2,577)	1,250
Net cash used in financing activities										(4,908)	(6,877)
Increase in cash and cash equivalents									56,521	10,674	13,952
Cash and cash equivalents at beginning of year				85,145				74,471	85,145	74,471	60,519
Cash and cash equivalents at end of year	141,666				85,145				141,666	85,145	74,471
Supplemental cash flow information:
Interest paid									(4,599)	(4,656)	(4,620)
Income taxes (paid) recovered									(3,891)	5,879	3,589
Parent Company [Member]
Cash flows from operating activities:
Net income (loss)									8,245	3,524	(10,891)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization expense									92	113	168
Deferred income tax expense (benefit)									1,182	(1,725)	(215)
Undistributed share of (earnings) loss of subsidiaries									(11,053)	(6,323)	7,130
Change in current federal income tax (recoverable) payable									(3,694)	4,030	(4,838)
Change in all other liabilities									12,232	357	5,155
Change in all other assets									63	450	1,074
Net cash provided by operating activities									7,067	426	(2,417)
Cash flows from investing activities:
Purchases of property and equipment, net									(116)	(46)	(205)
Net cash used in investing activities									(116)	(46)	(205)
Cash flows from financing activities:
Proceeds from exercise of employee stock options											99
Purchase of treasury shares											(6,401)
Activity under revolving credit facility, net										(2,577)	1,250
Net cash used in financing activities										(2,577)	(5,052)
Increase in cash and cash equivalents									6,951	(2,197)	(7,674)
Cash and cash equivalents at beginning of year				1,112				3,309	1,112	3,309	10,983
Cash and cash equivalents at end of year	8,063				1,112				8,063	1,112	3,309
Supplemental cash flow information:
Interest paid									(4,599)	(4,656)	(4,620)
Income taxes (paid) recovered									$ (1,285)	$ 3,932	$ (3,383)

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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 (Loss) [Member]	Treasury Stock [Member]	Total
Beginning balance at Dec. 31, 2010	$ 20,873	$ 121,815	$ 105,331	$ 9,637	$ (5,262)	$ 235,278
Beginning balance (in shares) at Dec. 31, 2010	3,757				749
Acquisition of treasury shares					(6,401)	(6,401)
Acquisition of treasury shares (in shares)					875
Equity incentive plan activity		709				709
Stock options exercised		(6)			105	99
Stock options, exercised (in shares)					(15)
Accretion of redeemable non-controlling interest		(31)				(31)
Net income (loss)			(10,891)			(10,891)
Other comprehensive income (loss), net of tax				(3,191)		(3,191)
Ending balance at Dec. 31, 2011	3,757	122,487	94,440	6,446	(11,558)	215,572
Ending balance (in shares) at Dec. 31, 2011	20,873				1,609
Equity incentive plan activity		380				380
Accretion of redeemable non-controlling interest		(392)				(392)
Net income (loss)			3,524			3,524
Other comprehensive income (loss), net of tax				1,453		1,453
Ending balance at Dec. 31, 2012	3,757	122,475	97,964	7,899	(11,558)	220,537
Ending balance (in shares) at Dec. 31, 2012	20,873				1,609
Equity incentive plan activity		352				352
Stock options, exercised (in shares)
Net income (loss)			8,245			8,245
Other comprehensive income (loss), net of tax				8,984		8,984
Ending balance at Dec. 31, 2013	$ 3,757	$ 122,827	$ 106,209	$ 16,883	$ (11,558)	$ 238,118
Ending balance (in shares) at Dec. 31, 2013	20,873				1,609

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Schedule II - Condensed Financial Information of Registrant (Parent Company Only) (Balance Sheet Extra) (Details) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Common stock, par value (in dollars per share)	$ 0.18	$ 0.18
Common stock, authorized shares	33,333,333	33,333,333
Common stock, issued shares	20,872,831	20,872,831
Treasury stock, shares	1,609,374	1,609,374
Parent Company [Member]
Common stock, par value (in dollars per share)	$ 0.18	$ 0.18
Common stock, authorized shares	33,333,333	33,333,333
Common stock, issued shares	20,872,831	20,872,831
Treasury stock, shares	1,609,374	1,609,374

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Goodwill and Intangible Assets (Narrative) (Details) (USD $)	12 Months Ended				0 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2013 Standard Commercial P & C Business Unit [Member]	Jul. 01, 2011 TBIC Holding Corporation Inc [Member]	Sep. 30, 2012 TBIC Holding Corporation Inc [Member]	Jul. 01, 2011 TBIC Holding Corporation Inc [Member] Maximum [Member]	Dec. 31, 2013 E & S Commercial Business Unit [Member]	Dec. 31, 2013 Hallmark Select Business Unit [Member]	Dec. 31, 2013 Excess and Umbrella Business Unit [Member]	Aug. 29, 2008 Excess and Umbrella Business Unit [Member]	Sep. 30, 2012 Excess and Umbrella Business Unit [Member] Put or Call Option [Member]	Dec. 31, 2013 General Aviation and Satellite Component [Member]	Dec. 31, 2013 Personal Lines Business Unit [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Business acquisition, percentage of voting interests acquired											80.00%	20.00%
Business acquisition, total consideration											$ 15,000,000	$ 1,700,000
Business acquisition, cash paid					1,600,000	350,000
Potential cash payment following 16 full calendar quarters							3,000,000
Business acquisition, bargain purchase gain recorded					165,000
Goodwill	44,695,000	44,695,000		2,100,000				19,900,000	17,400,000	7,700,000			9,700,000	5,300,000
Impairment of goodwill	$ 0	$ 0	$ 0
Weighted average period to amortize acquired intangible assets	13 years

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Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Supplemental Information For Property, Casualty Insurance Underwriters [Abstract]
Deferred Policy Acquisition Costs	$ 22,586	$ 24,911	$ 22,554
Reserves for Unpaid Claims and Claim Adjustment Expenses	382,640	313,416	296,945
Unearned Premiums	185,303	162,502	146,104
Earned Premiums	360,541	319,436	293,041
Net Investment Income	12,884	15,293	15,880
Claims and Claim Adjustment Expenses Incurred Related to Current Year	251,391	230,089	222,869
Claims and Claim Adjustment Expenses Incurred Related to Prior Years	9,954	(3,675)	16,366
Amortization of Deferred Policy Acquisition Costs	57,277	59,805	47,775
Paid Claims and Claims Adjustment Expenses	212,709	217,483	206,873
Premiums Written	$ 360,765	$ 332,489	$ 303,876

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Goodwill and Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2013

Goodwill and Intangible Assets [Abstract]

Schedule of Acquired Intangible Assets by Major Category

We have obtained various intangible assets from several acquisitions since 2002. The table below details the gross and net carrying amounts of these assets by major category (in thousands):

	December 31,
	2013			2012
Gross Carrying Amount:
Customer/agent relationships	$	32,177		$	32,177
Tradename		3,440			3,440
Management agreement		3,232			3,232
Non-compete & employment agreements		4,235			4,235
Insurance licenses		1,300			1,300
Total gross carrying amount		44,384			44,384
Accumulated Amortization:
Customer/agent relationships		(15,322	)		(13,084	)
Tradename		(1,700	)		(1,471	)
Management agreement		(3,232	)		(2,895	)
Non-compete & employment agreements		(4,177	)		(3,866	)
Total accumulated amortization		(24,431	)		(21,316	)
Total net carrying amount	$	19,953		$	23,068

Schedule of Estimated Aggregate Amortization Expense for Definite-Lived Intangible Assets

The estimated aggregate amortization expense for definite-lived intangible assets for the next five years is as follows (in thousands):

2014	$	2,526
2015	$	2,468
2016	$	2,468
2017	$	2,468
2018	$	2,468

Schedule of Weighted Average Amortization Period for Definite Lived Intangible Assets by Major Cass

The weighted average amortization period for definite-lived intangible assets by major class is as follows:

	Years
Tradename	15
Customer relationships	15
Management agreement	4
Non-compete agreements	5

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Reserves for Unpaid Losses and Loss Adjustment Expenses (Activity in the Reserves for Unpaid Losses and Loss Adjustment Expense) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Reserves for Unpaid Losses and Loss Adjustment Expenses [Abstract]
Balance at January 1	$ 313,416	$ 296,945	$ 251,677
Less reinsurance recoverable	49,584	42,044	37,954
Net Balance at January 1	263,832	254,901	213,723
Acquisition of subsidiaries effective July 1			8,816
Incurred related to:
Current year	251,391	230,089	222,869
Prior years	9,954	(3,675)	16,366
Total incurred	261,345	226,414	239,235
Paid related to:
Current year	101,897	107,945	101,025
Prior years	110,812	109,538	105,848
Total paid	212,709	217,483	206,873
Net Balance at December 31	312,468	263,832	254,901
Plus reinsurance recoverable	70,172	49,584	42,044
Balance at December 31	$ 382,640	$ 313,416	$ 296,945

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Income Taxes

12 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

Income Taxes

          15.   Income Taxes:

The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2013 and 2012, are as follows (in thousands):

	2013			2012
Deferred tax liabilities:
Deferred policy acquisition costs	$	(7,905	)	$	(8,719	)
Net unrealized holding gain on investments		(9,730	)		(5,622	)
Agency relationship		(85	)		(94	)
Intangible assets		(6,129	)		(6,852	)
Goodwill		(325	)		(116	)
Fixed assets		(499	)		(685	)
Other		(263	)		(275	)
Total deferred tax liabilities		(24,936	)		(22,363	)
Deferred tax assets:
Unearned premiums		9,822			9,806
Alternative minimum tax		442			1,651
Amortization of non-compete agreements		417			476
Pension liability		797			1,591
Net operating loss carry-forward		611			702
Unpaid loss and loss adjustment expense		8,173			7,549
Rent reserve		366			363
Investment impairments		660			1,256
Other		823			909
Total deferred tax assets		22,111			24,303
Deferred federal income taxes, net	$	(2,825	)	$	1,940

A reconciliation of the income tax provisions based on the statutory tax rate to the provision reflected in the consolidated financial statements for the years ended December 31, 2013, 2012 and 2011, is as follows (in thousands):

	2013			2012			2011
Computed expected income tax expense (benefit) at statutory regulatory tax rate	$	3,878		$	1,181		$	(6,926	)
Meals and entertainment		25			28			44
Tax exempt interest		(1,314	)		(1,631	)		(1,835	)
Dividends received deduction		(101	)		(111	)		(99	)
State taxes (net of federal benefit)		276			298			84
Other		71			(239	)		(222	)
Income tax expense (benefit)	$	2,835		$	(474	)	$	(8,954	)
Current income tax expense (benefit)	$	3,092		$	2,377		$	(6,059	)
Deferred tax benefit		(257	)		(2,851	)		(2,895	)
Income tax expense (benefit)	$	2,835		$	(474	)	$	(8,954	)

We have available, for federal income tax purposes, unused net operating loss of approximately $1.7 million at December 31, 2013. The losses were acquired as part of the HIC and HCM acquisitions and may be used to offset future taxable income. Utilization of the losses is limited under Internal Revenue Code Section 382. The Internal Revenue Code provides that effective with tax years beginning September 1997, the carry-back and carry-forward periods are 2 years and 20 years, respectively, with respect to newly generated operating losses. The net operating losses will expire if unused, as follows (in thousands):

Year
2021	$	650
2022		878
2028		2
2030		25
2031		45
2032		77
2033		70
	$	1,747

We are no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for years prior to 2010. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions at December 31, 2013.

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Other Assets (Tables)

12 Months Ended

Dec. 31, 2013

Other Assets [Abstract]

Schedule of Other Assets

The following table details our other assets as of December 31, 2013 and 2012 (in thousands):

	2013		2012
Profit sharing commission receivable	$	641	$	2,083
Accrued investment income		3,030		3,568
Debt issuance costs		1,156		1,207
Investment in unconsolidated trust subsidiaries		1,702		1,702
Fixed assets		1,773		2,284
Other assets		110		141
	$	8,412	$	10,985

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Schedule IV - Reinsurance (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Reinsurance Premiums for Insurance Companies, by Product Segment [Line Items]
Gross Amount	$ 434,022	$ 369,735	$ 344,642
Ceded to Other Companies	76,685	54,413	57,039
Assumed From Other Companies	3,204	4,114	5,438
Net Amount	360,541	319,436	293,041
Percentage of Amount Assumed to Net	0.89%	1.29%	1.86%
Property, Liability and Casualty Insurance Segment [Member]
Reinsurance Premiums for Insurance Companies, by Product Segment [Line Items]
Gross Amount	434,022	369,735	344,642
Ceded to Other Companies	76,685	54,413	57,039
Assumed From Other Companies	3,204	4,114	5,438
Net Amount	$ 360,541	$ 319,436	$ 293,041
Percentage of Amount Assumed to Net	0.89%	1.29%	1.86%

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Changes in Accumulated Other Comprehensive Income Balances

12 Months Ended

Dec. 31, 2013

Changes in Accumulated Other Comprehensive Income Balances [Abstract]

Changes in Accumulated Other Comprehensive Income Balances

            17.       Changes in Accumulated Other Comprehensive Income Balances:

The changes in accumulated other comprehensive income balances as of December 31, 2013, 2012, and 2011 were as follows (in thousands):

							Accumulated Other
	Pension			Unrealized			Comprehensive
	Liability			Gains (Loss)			Income (Loss)
Balance at January 1, 2011	$	(2,024	)	$	11,661		$	9,637
Other comprehensive loss:
Change in net actuarial loss		(1,468	)		-			(1,468	)
Tax effect on change in net actuarial loss		514			-			514
Unrealized holding gains arising during the period		-			191			191
Tax effect on unrealized gains arising during the period		-			(67	)		(67	)
Reclassification adjustment for gains included in net realized gains		-			(3,633	)		(3,633	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			1,272			1,272
Other comprehensive loss, net of tax		(954	)		(2,237	)		(3,191	)
Balance at December 31, 2011	$	(2,978	)	$	9,424		$	6,446
Other comprehensive income:
Change in net actuarial gain		37			-			37
Tax effect on change in net actuarial gain		(13	)		-			(13	)
Unrealized holding gains arising during the period		-			4,388			4,388
Tax effect on unrealized gains arising during the period		-			(1,536	)		(1,536	)
Reclassification adjustment for gains included in net realized gains		-			(2,189	)		(2,189	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			766			766
Other comprehensive income, net of tax		24			1,429			1,453
Balance at December 31, 2012	$	(2,954	)	$	10,853		$	7,899
Other comprehensive income:
Change in net actuarial gain		2,268			-			2,268
Tax effect on change in net actuarial gain		(794	)		-			(794	)
Unrealized holding gains arising during the period		-			22,094			22,094
Tax effect on unrealized gains arising during the period		-			(7,733	)		(7,733	)
Reclassification adjustment for gains included in net realized gains		-			(10,540	)		(10,540	)
Tax effect on reclassification adjustment for gains included in income tax expense		-			3,689			3,689
Other comprehensive income, net of tax		1,474			7,510			8,984
Balance at December 31, 2013	$	(1,480	)	$	18,363		$	16,883

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Revolving Credit Facility and Notes Payable (Narrative) (Details) (USD $) In Millions, unless otherwise specified	0 Months Ended	12 Months Ended
	Jan. 27, 2006	Dec. 31, 2013	Dec. 31, 2012
Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Line of credit facility, maximum borrowing capacity	$ 15.0
Debt instrument, description of variable rate basis	prime rate or LIBOR plus 2.5%
Line of credit facility, unused capacity, commitment fee percentage	0.25%
Line of credit facility, amount outstanding		$ 1.5	$ 1.5
Line of credit facility, interest rate during period		2.75%
Letters of Credit [Member]
Line of Credit Facility [Line Items]
Line of credit facility, commitment fee percentage	1.00%
London Interbank Offered Rate (LIBOR) [Member] | Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate	2.50%

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Cash flows from operating activities:
Net income (loss)	$ 8,245	$ 3,848	$ (10,833)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization expense	4,300	4,421	5,064
Deferred federal income taxes	(257)	(2,851)	(2,895)
Net realized gains	(10,540)	(1,943)	(3,633)
Share-based payments expense	352	380	709
Change in ceded unearned premiums	(22,577)	(2,941)	6,034
Change in premiums receivable	(4,474)	(13,170)	(3,842)
Change in accounts receivable	728	836	2,347
Change in deferred policy acquisition costs	2,325	(2,357)	(1,621)
Change in unpaid losses and loss adjustment expenses	69,224	16,471	33,088
Change in unearned premiums	22,801	16,398	4,801
Change in reinsurance recoverable	(24,848)	(9,236)	227
Change in reinsurance balances payable	13,268	4,191	(246)
Change in current federal income tax (recoverable) payable	(799)	8,256	(2,470)
Change in all other liabilities	(6,551)	5,396	(5,707)
Change in all other assets	17,141	5,983	3,587
Net cash provided by operating activities	68,338	33,682	24,610
Cash flows from investing activities:
Purchases of property and equipment, net	(673)	(107)	(1,586)
Acquisitions of subsidiaries, net of cash received			(13,334)
Net transfers (into) from restricted cash	(3,483)	665	(4,095)
Purchases of investment securities	(222,399)	(167,626)	(265,684)
Maturities, sales and redemptions of investment securities	214,738	148,968	280,918
Net cash used in investing activities	(11,817)	(18,100)	(3,781)
Cash flows from financing activities:
Activity under revolving credit facility, net		(2,577)	1,250
Repayment of notes payable of acquired subsidiary			(1,660)
Redemption of non-controlling interest		(1,700)
Distribution to non-controlling interest		(281)	(165)
Payment of contingent consideration		(350)
Proceeds from exercise of employee stock options			99
Purchase of treasury shares			(6,401)
Net cash used in financing activities		(4,908)	(6,877)
Increase in cash and cash equivalents	56,521	10,674	13,952
Cash and cash equivalents at beginning of year	85,145	74,471	60,519
Cash and cash equivalents at end of year	141,666	85,145	74,471
Supplemental cash flow information:
Interest paid	(4,599)	(4,656)	(4,620)
Income taxes (paid) recovered	(3,891)	5,879	3,589
Supplemental schedule of non-cash activities:
Change in receivable for securities related to investment disposals that settled after the balance sheet date	(1,317)	2,614	(402)
Change in payable for securities related to investment purchases that settled after the balance sheet date	$ 206	$ (203)	$ (2,290)

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Consolidated Balance Sheets Parenthetical [Abstract]
Debt securities, available-for-sale, cost (in dollars)	$ 408,627	$ 397,800
Equity securities, available for sale, cost (in dollars)	$ 24,902	$ 31,502
Common stock, par value (in dollars per share)	$ 0.18	$ 0.18
Common stock, authorized shares	33,333,333	33,333,333
Common stock, issued shares	20,872,831	20,872,831
Treasury stock, shares	1,609,374	1,609,374

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Segment Information

12 Months Ended

Dec. 31, 2013

Segment Information [Abstract]

Segment Information

10. Segment Information:

We pursue our business activities primarily through subsidiaries whose operations are organized into producing units and are supported by our insurance carrier subsidiaries. Our non-carrier insurance activities are organized by business units into the following reportable segments:

 Standard Commercial Segment. The 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. Our Standard Commercial P&C business unit is comprised of our American Hallmark Insurance Services and ECM subsidiaries. Our Workers Compensation business unit is comprised of our TBIC Holdings, TBIC and TBICRM subsidiaries. The Workers Compensation business unit was acquired July 1, 2011.

 Specialty Commercial Segment. The Specialty Commercial Segment includes the excess and surplus lines commercial property/casualty insurance products and services handled by our E&S Commercial business unit and the general aviation, commercial umbrella and excess liability, medical professional liability and satellite launch insurance products and services handled by our Hallmark Select business unit, as well as certain Specialty Programs which are managed at the parent level. Our E&S Commercial business unit is comprised of our HSU, PAAC and TGASRI subsidiaries. Our Hallmark Select business unit is comprised of our Aerospace Insurance Managers, ASRI, ACMG, HXS and HDS subsidiaries.

 Personal Segment. The Personal Segment includes the non-standard personal automobile, low value dwelling/homeowners, renters and motorcycle insurance products and services handled by our Personal Lines business unit which is comprised of American Hallmark General Agency, Inc. and Hallmark Claims Services, Inc., both of which do business as Hallmark Insurance Company.

The retained premium produced by these reportable segments is supported by our AHIC, HSIC, HIC, HNIC and TBIC insurance company subsidiaries. In addition, control and management of 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 net premiums written by any of them, HIC retains 27% of the net premiums written by any of them, HSIC retains 30% of the net premiums written by any of them and HNIC retains 13% of the net premiums written by any of them. Neither HCM nor TBIC is a party to the intercompany pooling arrangement.

The following is additional business segment information for the twelve months ended December 31, 2013, 2012 and 2011 (in thousands):

	2013			2012			2011
Revenues
Standard Commercial Segment	$	83,306		$	73,119		$	72,830
Specialty Commercial Segment		229,734			178,917			142,838
Personal Segment		71,081			89,149			101,351
Corporate		5,307			615			5,752
Consolidated	$	389,428		$	341,800		$	322,771
Depreciation and Amortization Expense
Standard Commercial Segment	$	201		$	186		$	174
Specialty Commercial Segment		2,896			2,892			3,293
Personal Segment		1,111			1,230			1,431
Corporate		92			113			166
Consolidated	$	4,300		$	4,421		$	5,064
Interest Expense
Standard Commercial Segment	$	-		$	-		$	-
Specialty Commercial Segment		-			-			-
Personal Segment		-			-			-
Corporate		4,599			4,634			4,631
Consolidated	$	4,599		$	4,634		$	4,631
Tax Expense (Benefit)
Standard Commercial Segment	$	312		$	372		$	(376	)
Specialty Commercial Segment		3,613			1,875			4,454
Personal Segment		(398	)		(968	)		(13,991	)
Corporate		(692	)		(1,753	)		959
Consolidated	$	2,835		$	(474	)	$	(8,954	)
Pre-tax Income (Loss), net of non-controlling interest
Standard Commercial Segment	$	1,980		$	(2,486	)	$	1,335
Specialty Commercial Segment		19,527			25,932			14,348
Personal Segment		(3,416	)		(8,535	)		(29,647	)
Corporate		(7,011	)		(11,861	)		(5,881	)
Consolidated	$	11,080		$	3,050		$	(19,845	)

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

	December 31,
	2013		2012
Assets
Standard Commercial Segment	$	142,143	$	145,162
Specialty Commercial Segment		536,894		432,208
Personal Segment		210,825		200,356
Corporate		19,161		12,742
Consolidated	$	909,023	$	790,468

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Schedule II - Condensed Financial Information of Registrant (Parent Company Only) (Balance Sheet) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
ASSETS
Cash and cash equivalents	$ 141,666	$ 85,145	$ 74,471	$ 60,519
Investment in subsidiaries	1,702	1,702
Other assets	8,412	10,985
Total assets	909,023	790,468
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving credit facility payable	1,473	1,473
Subordinated debt securities	56,702	56,702
Accrued Income Taxes	719	1,518
Accounts payable and other accrued expenses	19,006	23,305
Total liabilities	670,905	569,931
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2013 and in 2012	3,757	3,757
Capital in excess of par value	122,827	122,475
Retained earnings	106,209	97,964
Accumulated other comprehensive income	16,883	7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost	(11,558)	(11,558)
Total stockholders equity	238,118	220,537	215,572	235,278
Total liabilities and stockholders' equity	909,023	790,468
Parent Company [Member]
ASSETS
Cash and cash equivalents	8,063	1,112	3,309	10,983
Investment in subsidiaries	316,295	296,258
Deferred federal income taxes	930	2,112
Other assets	3,729	3,416
Total assets	329,017	302,898
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving credit facility payable	1,473	1,473
Subordinated debt securities	56,702	56,702
Accrued Income Taxes	3,353	7,047
Accounts payable and other accrued expenses	29,371	17,139
Total liabilities	90,899	82,361
Stockholders' equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2013 and in 2012	3,757	3,757
Capital in excess of par value	122,827	122,475
Retained earnings	106,209	97,964
Accumulated other comprehensive income	16,883	7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost	(11,558)	(11,558)
Total stockholders equity	238,118	220,537
Total liabilities and stockholders' equity	$ 329,017	$ 302,898

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Changes in Accumulated Other Comprehensive Income Balances (Schedule of Accumulated Other Comprehensive Income (Loss)) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Accumulated Other Comprehensive Income Loss [Line Items]
Beginning Balance	$ 7,899
Other comprehensive income (loss):
Change in net actuarial loss	2,268	37	(1,468)
Tax effect on change in net actuarial loss	(794)	(13)	514
Unrealized holding gains arising during the period	22,094	4,388	191
Tax effect on unrealized gains arising during the period	(7,733)	(1,536)	(67)
Reclassification adjustment for gains included in net income (loss)	(10,540)	(2,189)	(3,633)
Tax effect on reclassification adjustment for gains included in net income (loss)	3,689	766	1,272
Other comprehensive income (loss), net of tax	8,984	1,453	(3,191)
Ending Balance	16,883	7,899
Pension Liability [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Beginning Balance	(2,954)	(2,978)	(2,024)
Other comprehensive income (loss):
Change in net actuarial loss	2,268	37	(1,468)
Tax effect on change in net actuarial loss	(794)	(13)	514
Other comprehensive income (loss), net of tax	1,474	24	(954)
Ending Balance	(1,480)	(2,954)	(2,978)
Unrealized Gains (Loss) [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Beginning Balance	10,853	9,424	11,661
Other comprehensive income (loss):
Unrealized holding gains arising during the period	22,094	4,388	191
Tax effect on unrealized gains arising during the period	(7,733)	(1,536)	(67)
Reclassification adjustment for gains included in net income (loss)	(10,540)	(2,189)	(3,633)
Tax effect on reclassification adjustment for gains included in net income (loss)	3,689	766	1,272
Other comprehensive income (loss), net of tax	7,510	1,429	(2,237)
Ending Balance	18,363	10,853	9,424
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Beginning Balance	7,899	6,446	9,637
Other comprehensive income (loss):
Change in net actuarial loss	2,268	37	(1,468)
Tax effect on change in net actuarial loss	(794)	(13)	514
Unrealized holding gains arising during the period	22,094	4,388	191
Tax effect on unrealized gains arising during the period	(7,733)	(1,536)	(67)
Reclassification adjustment for gains included in net income (loss)	(10,540)	(2,189)	(3,633)
Tax effect on reclassification adjustment for gains included in net income (loss)	3,689	766	1,272
Other comprehensive income (loss), net of tax	8,984	1,453	(3,191)
Ending Balance	16,883	7,899	6,446
Parent Company [Member]
Other comprehensive income (loss):
Ending Balance	$ 16,883	$ 7,899

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Document and Entity Information (USD $) In Millions, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Mar. 12, 2014	Jun. 30, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	HALLMARK FINANCIAL SERVICES INC
Entity Central Index Key	0000819913
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Trading Symbol	hall
Entity Common Stock, Shares Outstanding		19,263,457
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2013
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2013
Entity Well-Known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 129.9

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Earnings Per Share

12 Months Ended

Dec. 31, 2013

Earnings Per Share [Abstract]

Earnings Per Share

11. Earnings Per Share:

We have adopted the provisions of ASC 260, “Earnings Per Share,” requiring presentation of both basic and diluted earnings per share. A reconciliation of the numerators and denominators of the basic and diluted per share calculations is presented below (in thousands, except per share amounts):

)
	2013		2012			2011
Numerator for both basic and diluted earnings per share:
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	8,245		$	3,524		$	(10,891	)
Denominator, basic shares		19,263			19,263			19,673
Effect of dilutive securities:
Stock-based compensation awards		98			6			-
Denominator, diluted shares		19,361			19,269			19,673
Basic earnings per share:	$	0.43		$	0.18		$	(0.55	)
Diluted earnings per share:	$	0.43		$	0.18		$	(0.55	)

We had 779,999 shares, 794,999 shares and 809,999 shares of common stock potentially issuable upon exercise of employee stock options for years ended December 31, 2013, 2012 and 2011, respectively, that were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive. These instruments expire at varying times from 2016 to 2021.

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Retirement Plans (Narrative) (Details) (USD $)	12 Months Ended
	Dec. 31, 2013 item	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2014	Dec. 31, 2010
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets	$ 10,851,000	$ 9,754,000	$ 9,019,000		$ 9,217,000
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	10,528,000	9,341,000
Favorable rate of return equal to or greater than average inflation rate	5.00%
Investment objective achievement period	60 years
Single stock issue restricted among total portfolio value	5.00%
Securities held in mutual or commingled funds	90.00%
Expected return on plan assets	6.50%	6.50%	6.50%
Defined benefit plan, estimated future employer contributions in next fiscal year				700,000
Net periodic pension cost	385,000	462,000	306,000
Interest cost on projected benefit obligation	505,000	564,000	609,000
Defined benefit plan, expected return on plan assets	(615,000)	(584,000)	(590,000)
Defined contribution plan, number of separate plans	2
Defined contribution plan, employer discretionary contribution amount	300,000	100,000	200,000
Scenario, Forecast for 2014 [Member]
Defined Benefit Plan Disclosure [Line Items]
Net periodic pension cost	(4,000)
Interest cost on projected benefit obligation	500,000
Defined benefit plan, expected return on plan assets	(700,000)
Defined benefit plan, amortization of gains (losses)	200,000
Cash and Cash Equivalents [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets	300,000	400,000
Bonds and Notes [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets	3,500,000
Equity Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets	7,100,000
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	$ 7,080,000	$ 6,153,000
Defined benefit plan, target plan asset allocations range, minimum	45.00%
Defined benefit plan, target plan asset allocations range, maximum	75.00%
Standard Commercial P & C Business Unit [Member]
Defined Benefit Plan Disclosure [Line Items]
Minimum hours of service to participate within defined benefit plan	1000 hours

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Commitments and Contingencies (Schedule of Future Minimum Rental Payments for Operating Leases) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Commitments and Contingencies [Abstract]
2014	$ 1,987
2015	1,969
2016	1,641
2017	1,484
2018	1,193
2019 and thereafter	3,166
Total minimum lease payments	$ 11,440

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Consolidated Statements of Operations [Abstract]
Gross premiums written	$ 460,027	$ 389,842	$ 354,881
Ceded premiums written	(99,262)	(57,353)	(51,005)
Net premiums written	360,765	332,489	303,876
Change in unearned premiums	(224)	(13,053)	(10,835)
Net premiums earned	360,541	319,436	293,041
Investment income, net of expenses	12,884	15,293	15,880
Net realized gains	10,540	1,943	3,633
Finance charges	5,830	5,957	6,826
Commission and fees	(487)	(1,145)	3,175
Other income	120	316	216
Total revenues	389,428	341,800	322,771
Losses and loss adjustment expenses	261,345	226,414	239,235
Operating expenses	109,289	103,792	95,106
Interest expense	4,599	4,634	4,631
Amortization of intangible assets	3,115	3,586	3,586
Total expenses	378,348	338,426	342,558
Income (loss) before tax	11,080	3,374	(19,787)
Income tax expense (benefit)	2,835	(474)	(8,954)
Net income (loss)	8,245	3,848	(10,833)
Less: Net income attributable to non-controlling interest		324	58
Net income (loss) attributable to Hallmark Financial Services, Inc.	$ 8,245	$ 3,524	$ (10,891)
Net income (loss) per share attributable to Hallmark Financial Services, Inc. common stockholders:
Basic (in dollars per share)	$ 0.43	$ 0.18	$ (0.55)
Diluted (in dollars per share)	$ 0.43	$ 0.18	$ (0.55)

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Other Assets

12 Months Ended

Dec. 31, 2013

Other Assets [Abstract]

Other Assets

        5.         Other Assets:

The following table details our other assets as of December 31, 2013 and 2012 (in thousands):

	2013		2012
Profit sharing commission receivable	$	641	$	2,083
Accrued investment income		3,030		3,568
Debt issuance costs		1,156		1,207
Investment in unconsolidated trust subsidiaries		1,702		1,702
Fixed assets		1,773		2,284
Other assets		110		141
	$	8,412	$	10,985

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Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2013

Goodwill and Intangible Assets [Abstract]

Goodwill and Intangible Assets

4. Goodwill and Intangible Assets:

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

Effective July 1, 2011, we acquired all of the issued and outstanding capital stock of 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. We recorded a bargain purchase gain of $165 thousand on the acquisition which is reported in other income. The gain resulted from the difference in the estimated purchase price and the fair value of the net assets acquired and liabilities assumed as of July 1, 2011. TBIC is a Texas domiciled insurance company that writes workers compensation insurance through independent agents in Texas only.

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  For purposes of evaluating goodwill for impairment, we have determined that our reporting units are the same as our business units except for the Hallmark Select business unit for which reporting units are at the component level (“one level below”). Our consolidated balance sheet as of December 31, 2013 includes goodwill of acquired businesses of $44.7 million that is assigned to our business units as follows: Standard Commercial P&C business unit - $2.1 million; E&S Commercial business unit - $19.9 million; Hallmark Select business unit- $17.4 million (comprised of $7.7 million for the excess & umbrella component and $9.7 million for the general aviation and satellite component); and Personal Lines business unit - $5.3 million. This amount has been recorded as a result of prior business acquisitions accounted for under the acquisition method of accounting. Under ASC 350, “Intangibles- Goodwill and Other,” goodwill is tested for impairment annually. We completed our last annual test for impairment on the first day of the fourth quarter of 2013 and determined that there was no impairment.

The income approach to determining fair value computed the projections of the cash flows that the reporting unit was expected to generate converted into a present value equivalent through discounting. Significant assumptions in the income approach model included income projections, discount rates and terminal growth values. The income projections reflected an improved premium pricing environment across most of our lines of business that began in 2012 and continued throughout 2013. The income projections also included loss and LAE assumptions which reflected recent historical claim trends and the movement towards a more favorable pricing environment. The income projections also included assumptions for expense growth and investment yields which were based on business plans for each of our business units. The discount rate was based on a risk free rate plus a beta adjusted equity risk premium and specific company risk premium. The assumptions were based on historical experience, expectations of future performance, expected market conditions and other factors requiring judgment and estimates. While we believe the assumptions used in these models were reasonable, the inherent uncertainty in predicting future performance and market conditions may change over time and influence the outcome of future testing.

During 2013, 2012, and 2011, we completed the first step prescribed by ASC 350 for testing for impairment and determined that there was no impairment.

We have obtained various intangible assets from several acquisitions since 2002. The table below details the gross and net carrying amounts of these assets by major category (in thousands):

	December 31,
	2013			2012
Gross Carrying Amount:
Customer/agent relationships	$	32,177		$	32,177
Tradename		3,440			3,440
Management agreement		3,232			3,232
Non-compete & employment agreements		4,235			4,235
Insurance licenses		1,300			1,300
Total gross carrying amount		44,384			44,384
Accumulated Amortization:
Customer/agent relationships		(15,322	)		(13,084	)
Tradename		(1,700	)		(1,471	)
Management agreement		(3,232	)		(2,895	)
Non-compete & employment agreements		(4,177	)		(3,866	)
Total accumulated amortization		(24,431	)		(21,316	)
Total net carrying amount	$	19,953		$	23,068

Insurance licenses are not amortized because they have an indefinite life. We amortize definite-lived intangible assets straight line over their respective lives. The estimated aggregate amortization expense for definite-lived intangible assets for the next five years is as follows (in thousands):

2014	$	2,526
2015	$	2,468
2016	$	2,468
2017	$	2,468
2018	$	2,468

The weighted average amortization period for definite-lived intangible assets by major class is as follows:

	Years
Tradename	15
Customer relationships	15
Management agreement	4
Non-compete agreements	5

The aggregate weighted average period to amortize these assets is approximately 13 years.

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2013

Commitments and Contingencies [Abstract]

Commitments and Contingencies

        16.   Commitments and Contingencies:

We have several leases, primarily for office facilities and computer equipment, which expire in various years through 2022. Certain of these leases contain renewal options. Rental expense amounted to $2.2 million, $2.3 million and $2.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Future minimum lease payments under non-cancelable operating leases as of December 31, 2013 are as follows (in thousands):

4
Year
2014	$	1,987
2015		1,969
2016		1,641
2017		1,484
2018		1,193
2019 and thereafter		3,166
Total minimum lease payments	$	11,440

From time to time, assessments are levied on us by the guaranty association of the states where we offer our insurance products. Such assessments are made primarily to cover the losses of policyholders of insolvent or rehabilitated insurers. Since these assessments can generally be recovered through a reduction in future premium taxes paid, we capitalize the assessments that can be recovered as they are paid and amortize the capitalized balance against our premium tax expense. We paid an assessment of $29 thousand in 2013. We paid an assessment of $0.1 million in 2012 that was expensed. There were no assessments during 2011.

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

We disagree with the Comptroller and intend to vigorously fight their assertion that HSU is liable for the surplus lines premium taxes. During the past year we have been engaged in conversations with the Comptroller’s counsel.We are currently in negotiations with the Comptroller to settle the matter.  However, we are presently unable to reasonably estimate the possible loss or legal costs that are likely to arise out of the surplus lines tax audit or any future proceedings relating to this matter. Therefore we have not accrued any amount as of December 31, 2013 related to this matter.

We are engaged in 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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Regulatory Capital Restrictions

12 Months Ended

Dec. 31, 2013

Regulatory Capital Restrictions [Abstract]

Regulatory Capital Restrictions

            12.       Regulatory Capital Restrictions:

Hallmark, as a holding company, is dependent on dividend payments and management fees from its subsidiaries to fund its operating expenses, debt obligations and capital needs, including the ability to pay dividends to its stockholders. Hallmark has never paid dividends on its common stock. Hallmark intends to continue this policy for the foreseeable future in order to retain earnings for development of its business. There are no regulatory or contractual restrictions on the ability of Hallmark to pay dividends other than customary default provisions and the impact of any dividend payment on financial ratio covenants in certain credit agreements. However there are restrictions on the ability of Hallmark’s insurance carrier subsidiaries to transfer funds to the holding company. The amount of retained earnings that is unrestricted for the payment of dividends by Hallmark to its shareholders was $29.8 million as of December 31, 2013.

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. 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. For all our insurance companies, dividends may only be paid from unassigned surplus funds. 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. None of our insurance company subsidiaries paid a dividend during the years ended December 31, 2013 or 2012. The total restricted net assets of our insurance company subsidiaries as of December 31, 2013, was approximately $208.3 million.

The state insurance departments also regulate financial transactions between our insurance subsidiaries and their affiliated companies. Applicable regulations require approval of management fees, expense sharing contracts and similar transactions. The net amount paid in management fees by our insurance subsidiaries to Hallmark and our non-insurance company subsidiaries was $8.2 million, $9.0 million and $6.0 million during each of 2013, 2012 and 2011, respectively.

Statutory capital and surplus is calculated as statutory assets less statutory liabilities. The various state insurance departments that regulate our insurance company subsidiaries require us to maintain a minimum statutory capital and surplus. As of December 31, 2013 and 2012, our insurance company subsidiaries reported statutory capital and surplus of $196.3 million and $176.5 million, respectively, substantially greater than the minimum requirements for each state. For the years ended December 31, 2013, 2012, 2011, respectively, our insurance company subsidiaries reported statutory net income of $6.1 million, statutory net income of $3.1 million and statutory net loss of $17.2 million, respectively.

The National Association of Insurance Commissioners requires property/casualty insurers to file a risk-based capital calculation according to a specified formula. The purpose of the formula is twofold: (1) to assess the adequacy of an insurer’s statutory capital and surplus based upon a variety of factors such as potential risks related to investment portfolio, ceded reinsurance and product mix; and (2) to assist state regulators under the RBC for Insurers Model Act by providing thresholds at which a state commissioner is authorized and expected to take regulatory action. As of December 31, 2013, the adjusted capital under the risk-based capital calculation of each of our insurance company subsidiaries substantially exceeded the minimum requirements.

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Retirement Plans (Schedule of Fair Value, Assets Measured on Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	$ 10,528	$ 9,341
Debt Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	3,448	3,188
Equity Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	7,080	6,153
Fair Value, Inputs, Level 1 [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	7,080	6,153
Fair Value, Inputs, Level 1 [Member] | Equity Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	7,080	6,153
Fair Value, Inputs, Level 2 [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	3,448	3,188
Fair Value, Inputs, Level 2 [Member] | Debt Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents	3,448	3,188
Fair Value, Inputs, Level 3 [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents
Fair Value, Inputs, Level 3 [Member] | Debt Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents
Fair Value, Inputs, Level 3 [Member] | Equity Securities [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan, fair value of plan assets, excluding cash and cash equivalents

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Revolving Credit Facility and Notes Payable

12 Months Ended

Dec. 31, 2013

Revolving Credit Facility Payable And Notes Payable [Abstract]

Revolving Credit Facility and Notes Payable

8. Revolving Credit Facility and Notes 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. As of December 31, 2013, we were in compliance with all of our covenants. As of December 31, 2013 and 2012, the balance on the revolving note was $1.5 million and $1.5 million, respectively. The revolving note currently bears interest at 2.75% per annum.

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Goodwill and Intangible Assets (Schedule of Acquired Intangible Assets by Major Category) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Acquired Finite-Lived Intangible Assets [Line Items]
Total gross carrying amount	$ 44,384	$ 44,384
Total accumulated amortization	(24,431)	(21,316)
Total net carrying amount	19,953	23,068
Customer Relationships [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Total gross carrying amount	32,177	32,177
Total accumulated amortization	(15,322)	(13,084)
Trade Names [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Total gross carrying amount	3,440	3,440
Total accumulated amortization	(1,700)	(1,471)
Management Agreement [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Total gross carrying amount	3,232	3,232
Total accumulated amortization	(3,232)	(2,895)
Non-compete & Employment Agreements [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Total gross carrying amount	4,235	4,235
Total accumulated amortization	(4,177)	(3,866)
Insurance Licenses [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Total gross carrying amount	$ 1,300	$ 1,300

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Reserves for Unpaid Losses and Loss Adjustment Expenses

12 Months Ended

Dec. 31, 2013

Insurance Loss Reserves [Abstract]

Reserves for Unpaid Losses and Loss Adjustment Expenses

6. Reserves for Unpaid Losses and Loss Adjustment Expenses:

Activity in the reserves for unpaid losses and LAE is summarized as follows (in thousands):

	2013		2012			2011
Balance at January 1	$	313,416	$	296,945		$	251,677
Less reinsurance recoverable		49,584		42,044			37,954
Net Balance at January 1		263,832		254,901			213,723
Acquisition of subsidiaries effective July 1		-		-			8,816
Incurred related to:
Current year		251,391		230,089			222,869
Prior years		9,954		(3,675	)		16,366
Total incurred		261,345		226,414			239,235
Paid related to:
Current year		101,897		107,945			101,025
Prior years		110,812		109,538			105,848
Total paid		212,709		217,483			206,873
Net Balance at December 31		312,468		263,832			254,901
Plus reinsurance recoverable		70,172		49,584			42,044
Balance at December 31	$	382,640	$	313,416		$	296,945

The $10.0 million unfavorable development, $3.7 million favorable development and $16.4 million unfavorable development in prior accident years recognized in 2013, 2012 and 2011, respectively, represent normal changes in our loss reserve estimates. In 2013 and 2011, the aggregate loss reserve estimates for prior years were increased to reflect unfavorable loss development when the available information indicated a reasonable likelihood that the ultimate losses would be more than the previous estimates. In 2012, the aggregate loss reserve estimates for prior years were decreased to reflect favorable loss development when the available information indicated a reasonable likelihood that the ultimate losses would be less than the previous estimates. Generally, changes in reserves are caused by variations between actual experience and previous expectations and by reduced emphasis on the Bornhuetter-Ferguson method due to the aging of the accident years.

The $10.0 million increase in reserves for unpaid losses and LAE recognized in 2013 was attributable to $5.0 million unfavorable development on claims incurred in the 2012 accident year, $1.7 million unfavorable development on claims incurred in the 2011 accident year and $3.3 million unfavorable development on claims incurred in the 2010 and prior accident years.  Our E&S Commercial business unit and Personal Lines business unit accounted for $16.0 million and $1.8 million of the increase in reserves recognized during 2013.  The increase in reserves for our E&S Commercial business unit was primarily related to commercial auto liability line of business.  The increase in reserves for our Personal Lines business unit was primarily related to personal auto in the 2012 accident year.  These unfavorable developments were partially offset by favorable prior years’ loss development of $3.7 million in our Standard Commercial P&C business unit, $2.6 million in our Hallmark Select business unit and $1.5 million in our Workers Compensation business unit.  The decrease in reserves for our Standard Commercial P&C business unit was primarily related to commercial auto and general liability line of business.  The decrease in reserves for our Hallmark Select business unit was driven by $2.3 million of favorable claims development in the 2011 and prior accident years related to our aircraft liability lines of business, partially offset by $0.1 million unfavorable claims development in the 2012 accident year related to our aircraft hull coverage.  Further contributing to the decrease in reserves for our Hallmark Select business unit was $0.4 million of favorable claims development in our excess & umbrella lines of business. The decrease in reserves for our Workers Compensation business unit was related to the 2012 and 2011 accident years.

The $3.7 million decrease in reserves for unpaid losses and LAE recognized in 2012 was attributable to $0.4 million favorable development on claims incurred in the 2011 accident year, $0.8 million favorable development on claims incurred in the 2010 accident year and $2.5 million favorable development on claims incurred in the 2009 and prior accident years. Our Standard Commercial P&C business unit, Hallmark Select business unit and E&S Commercial business unit accounted for $3.7 million, $3.3 million and $0.3 million, respectively, of the decrease in reserves recognized during 2012. The decrease in reserves for our Standard Commercial P&C business unit was primarily related to commercial auto, commercial property and general liability lines of business. The decrease in reserves for our Hallmark Select business unit was primarily related to our aircraft liability lines of business. The decrease in reserves for our E&S Commercial business unit was primarily related to general liability. These favorable developments were partially offset by unfavorable prior years’ loss development of $3.6 million in our Personal Lines business unit related to auto liability claims spread throughout various states and our low value dwelling/homeowners line of business.

The $16.4 million increase in reserves for unpaid losses and LAE recognized in 2011 was attributable to $15.0 million unfavorable development on claims incurred in the 2010 accident year, $3.6 million unfavorable development on claims incurred in the 2009 accident year and $2.2 million favorable development on claims incurred in the 2008 and prior accident years. Our Personal Lines business unit and E&S Commercial business unit accounted for $19.6 million and $3.7 million, respectively, of the increase in reserves recognized during 2011. The $19.6 million increase in reserves during 2011 for our Personal Lines business unit includes $10.3 million, which was attributable to Florida developing much worse than expected due primarily to rapid growth in the claim volume from Florida, the complexity related to Florida personal injury protection coverage claims and the high incidence of fraudulent claims in that market. The remaining unfavorable prior years’ loss development for our Personal Lines business unit was primarily due to rapid geographic expansion. The increase in reserves for our E&S Commercial business unit was primarily related to commercial auto and physical damage and general liability lines of business. These unfavorable developments were partially offset by favorable prior years’ loss development of $6.1 million in our Hallmark Select business unit related to our aircraft liability lines of business and $0.8 million in our Standard Commercial P&C business unit primarily related to our commercial property lines of business.

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Reinsurance

12 Months Ended

Dec. 31, 2013

Reinsurance [Abstract]

Reinsurance

7. 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 December 31, 2013 was with reinsurers that had an A.M. Best rating of “A-” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

The following table presents our gross and net premiums written and earned and reinsurance recoveries for each of the last three years (in thousands):

	2013			2012			2011
Premium Written :
Direct	$	458,020		$	385,624		$	350,089
Assumed		2,007			4,218			4,792
Ceded		(99,262	)		(57,353	)		(51,005	)
	$	360,765		$	332,489		$	303,876
Premium Earned:
Direct	$	434,022		$	369,735		$	344,642
Assumed		3,204			4,114			5,438
Ceded		(76,685	)		(54,413	)		(57,039	)
	$	360,541		$	319,436		$	293,041
Reinsurance recoveries	$	45,456		$	29,014		$	32,941

Included in reinsurance recoverable on the consolidated balance sheets are paid loss recoverables of $6.1 million and $1.0 million as of December 31, 2013 and 2012, respectively.

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

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

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

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

 Commercial property. Our commercial property reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event or catastrophic loss may have on our results. Effective July 1, 2013 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. Effective July 1, 2013 the terms of our commercial casualty reinsurance are:

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

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

 Aviation. Effective July 1, 2013 we purchased 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 February 1, 2013 we purchased proportional reinsurance where we cede 60% of the risks to reinsurers on the low value dwelling/homeowners, renters and manufactured homes coverages produced in all states by our Personal Lines business unit.
	Personal Auto. Effective October 1, 2013 we purchased 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. In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty.

·	Professional Liability.  Effective June 1, 2013, we purchased proportional reinsurance on our medical professional liability risks produced by our Hallmark Select business unit where we retain 60% of each risk and cede the remaining 40% to reinsurers. In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty.
	E&S Commercial. We purchase facultative reinsurance on our commercial umbrella and excess liability risks produced by our E&S Commercial business unit where we retain 10% of the first $1.0 million of risk and cede the remaining 90% to reinsurers. We cede 100% of our commercial umbrella and excess liability risks in excess of $1.0 million.
	Hallmark County Mutual. HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas where we previously produced policies for third party county mutual insurance companies and reinsured 100% for a fronting fee. In addition, HCM is used to front business produced by unaffiliated third parties. HCM does not retain any business.

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

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Subordinated Debt Securities

12 Months Ended

Dec. 31, 2013

Subordinated Debt Securities [Abstract]

Subordinated Debt Securities

9. 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 December 31, 2013, the balance of our Trust I subordinated debt was $30.9 million.

On August 23, 2007, we entered into a trust preferred securities transaction pursuant to which we issued $25.8 million aggregate principal amount of subordinated debt securities due in 2037. To effect the transaction, we formed Trust II as a Delaware statutory trust. Trust II issued $25.0 million of preferred securities to investors and $0.8 million of common securities to us. Trust II used the proceeds from these issuances to purchase the subordinated debt securities. Our Trust II subordinated debt securities bear an initial interest rate of 8.28% until September 15, 2017, at which time interest will adjust quarterly to the three-month LIBOR rate plus 2.90 percentage points. Trust II pays dividends on its preferred

securities at the same rate. Under the terms of our Trust II subordinated debt securities, we pay interest only each quarter and the principal of the note at maturity. The subordinated debt securities are uncollaterized and do not require maintenance of minimum financial covenants. As of December 31, 2013, the balance of our Trust II subordinated debt was $25.8 million.

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Reserves for Unpaid Losses and Loss Adjustment Expenses (Narrative) (Details) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
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		$ 3.7
Unfavorable adjustment to prior years liability for unpaid claims and claims adjustment expense	10.0		16.4
Loss Adjustment Expenses Recognized In 2008 [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			2.2
Loss Adjustment Expenses Recognized In 2009 [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		2.5
Unfavorable adjustment to prior years liability for unpaid claims and claims adjustment expense			3.6
Loss Adjustment Expenses Recognized In 2010 [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable adjustment to prior years liability for unpaid claims and claims adjustment expense		0.8
Unfavorable adjustment to prior years liability for unpaid claims and claims adjustment expense	3.3		15.0
Loss Adjustment Expenses Recognized In 2011 [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		0.4
Unfavorable adjustment to prior years liability for unpaid claims and claims adjustment expense	1.7
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount			16.4
Loss Adjustment Expenses Recognized In 2012 [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable adjustment to prior years liability for unpaid claims and claims adjustment expense	5.0
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount		(3.7)
Loss Adjustment Expenses Recognized In 2013 [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount	10.0
Florida Personal Lines Claims [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount			10.3
Standard Commercial P & C 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	3.7		0.8
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount		(3.7)
Workers Compensation Business Unit [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Favorable adjustment to prior years liability for unpaid claims and claims adjustment expense	1.5
E & S Commercial Business Unit [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount		(0.3)	3.7
E & S Commercial Business Unit [Member] | Loss Adjustment Expenses Recognized In 2013 [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount	16.0
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	2.6
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount		(3.3)
Hallmark Select Business Unit [Member] | Loss Adjustment Expenses Recognized In 2011 [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	2.3
Aerospace Insurance Managers Inc [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			6.1
Personal Lines Business Unit [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable adjustment to prior years liability for unpaid claims and claims adjustment expense		3.6
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount			19.6
Personal Lines Business Unit [Member] | Loss Adjustment Expenses Recognized In 2011 [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount			19.6
Personal Lines Business Unit [Member] | Loss Adjustment Expenses Recognized In 2013 [Member]
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Causes of increase (decrease) in liability for unpaid claims and claims adjustment expense, amount	1.8
Excess and Umbrella 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	0.4
Aircraft Hull [Member] | Loss Adjustment Expenses Recognized In 2012 [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	$ 0.1

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Income Taxes (Narrative) (Details) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
Income Taxes [Abstract]
Operating loss carryforwards	$ 1.7
Income tax carryback period	2 years
Income tax carryforward period	20 years
Uncertain tax positions	$ 0

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Reinsurance (Narrative) (Details) (USD $) In Millions, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013 Hallmark County Mutual Insurance Company [Member]	Dec. 31, 2013 Catastrophe [Member]	Dec. 31, 2013 Commercial Property Risk [Member]	Jun. 01, 2013 Professional Liability [Member]	Dec. 31, 2013 Personal Property [Member]	Dec. 31, 2013 Workers Compensation Loss [Member]	Dec. 31, 2013 Commercial Liability Risk [Member]	Dec. 31, 2013 Occupational Accident [Member]	Dec. 31, 2013 Personal Auto [Member]	Dec. 31, 2013 Standard Commercial P & C Business Unit [Member]	Dec. 31, 2013 Excess and Umbrella [Member]	Dec. 31, 2013 E & S Commercial Business Unit [Member]	Dec. 31, 2013 E & S Commercial Business Unit [Member] Commercial Umbrella and Excess Liability Risks [Member]	Dec. 31, 2013 Hallmark Select Business Unit [Member]
Reinsurance Premiums for Insurance Companies, by Product Segment [Line Items]
Reinsurance receivables	$ 6.1	$ 1.0
Retention for reinsurance losses				6.0	1.0			1.0	1.0	1.0				1.0	1.0
Reinsurers reimbursement percentage				100.00%				100.00%
Reinsurers reimbursement retention maximum limit				29.0				10.0	5.0	5.0
Commerical property risk retention					6.0
Reinsurers reimbursement retention aggregate limit				58.0	30.0			28.0
Reinsurers reimbursement retention for each disaster occurrence					5.0			14.0
Reinsurers reimbursement retention for any one disaster occurrence					$ 10.0					$ 10.0
Proportional reinsurance cede risk percentage						40.00%	60.00%				90.00%	100.00%	80.00%
Proportional reinsurance retention percentage			100.00%			60.00%							20.00%	10.00%
Concentration of ceded credit risk percentage														90.00%	100.00%	80.00%

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Other Assets (Schedule of Other Assets) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Other Assets [Abstract]
Profit sharing commission receivable	$ 641	$ 2,083
Accrued investment income	3,030	3,568
Debt issuance costs	1,156	1,207
Investment in unconsolidated trust subsidiaries	1,702	1,702
Fixed assets	1,773	2,284
Other assets	110	141
Other Assets, Total	$ 8,412	$ 10,985

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Unaudited Selected Quarterly Financial Information (Schedule of Quarterly Financial Information) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Unaudited Selected Quarterly Financial Information [Abstract]
Total revenue	$ 88,375	$ 108,613	$ 99,299	$ 93,141	$ 88,623	$ 85,620	$ 84,571	$ 82,986	$ 389,428	$ 341,800	$ 322,771
Total expense	83,613	99,141	104,616	90,978	86,336	80,599	88,722	82,769	378,348	338,426	342,558
Income (loss) before tax	4,762	9,472	(5,317)	2,163	2,287	5,021	(4,151)	217	11,080	3,374	(19,787)
Income tax expense (benefit)	1,334	3,198	(2,166)	469	504	1,350	(2,351)	23	2,835	(474)	(8,954)
Net income (loss)	3,428	6,274	(3,151)	1,694	1,783	3,671	(1,800)	194	8,245	3,848	(10,833)
Net income attributable to non-controlling interest						258	43	23		324	58
Net income (loss) attributable to Hallmark Financial Services, Inc.	$ 3,428	$ 6,274	$ (3,151)	$ 1,694	$ 1,783	$ 3,413	$ (1,843)	$ 171	$ 8,245	$ 3,524	$ (10,891)
Basic earnings (loss) per share:	$ 0.18	$ 0.33	$ (0.16)	$ 0.09	$ 0.09	$ 0.18	$ (0.10)	$ 0.01	$ 0.43	$ 0.18	$ (0.55)
Diluted earnings (loss) per share:	$ 0.18	$ 0.32	$ (0.16)	$ 0.09	$ 0.09	$ 0.18	$ (0.10)	$ 0.01	$ 0.43	$ 0.18	$ (0.55)

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Fair Value (Tables)

12 Months Ended

Dec. 31, 2013

Fair Value [Abstract]

Fair Value of Assets Measured on a 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 December 31, 2013 and December 31, 2012 (in thousands).

	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

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

Fair Value, Assets Measured on Recurring Basis Using Significant Unobservable Inputs (Level 3)

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 year ended December 31, 2013 and 2012 (in thousands).

	2013			2012
Beginning balance as of January 1	$	19,668		$	20,608
Sales		(3,157	)		(429	)
Settlements		-			-
Purchases		-			-
Issuances		-			-
Total realized/unrealized gains included in net income		-			-
Net gains (losses) included in other comprehensive income		1,006			(511	)
Transfers into Level 3		-			-
Transfers out of Level 3		-			-
Ending balance as of December 31	$	17,517		$	19,668

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Investments (Amortized Cost and Estimated Fair Value of Investments in Debt and Equity Securities) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Investments, Amortized Cost	$ 433,529	$ 429,302
Investments, Gross Unrealized Gains	31,696	20,887
Investments, Gross Unrealized Losses	(3,900)	(4,829)
Total investments	461,325	445,360
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investments, Amortized Cost	24,902	31,502
Investments, Gross Unrealized Gains	26,642	12,938
Investments, Gross Unrealized Losses	(314)	(515)
Total investments	51,230	43,925
Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investments, Amortized Cost	408,627	397,800
Investments, Gross Unrealized Gains	5,054	7,949
Investments, Gross Unrealized Losses	(3,586)	(4,314)
Total investments	410,095	401,435
U.S. Treasury securities and obligations of U.S. Government [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investments, Amortized Cost	78,894	40,050
Investments, Gross Unrealized Gains	24	14
Investments, Gross Unrealized Losses	(165)	(3)
Total investments	78,753	40,061
Corporate Bonds [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investments, Amortized Cost	42,946	79,516
Investments, Gross Unrealized Gains	1,379	2,794
Investments, Gross Unrealized Losses	(450)	(763)
Total investments	43,875	81,547
Collateralized Corporate Bank Loans [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investments, Amortized Cost	102,053	106,093
Investments, Gross Unrealized Gains	614	1,021
Investments, Gross Unrealized Losses	(489)	(743)
Total investments	102,178	106,371
Municipal Bonds [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investments, Amortized Cost	156,950	162,479
Investments, Gross Unrealized Gains	2,577	4,023
Investments, Gross Unrealized Losses	(1,975)	(2,770)
Total investments	157,552	163,732
Collateralized Mortgage Backed Securities [Member] | Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investments, Amortized Cost	27,784	9,662
Investments, Gross Unrealized Gains	460	97
Investments, Gross Unrealized Losses	(507)	(35)
Total investments	$ 27,737	$ 9,724

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Retirement Plans

12 Months Ended

Dec. 31, 2013

Retirement Plans [Abstract]

Retirement Plans

          14.     Retirement Plans:

Certain employees of the Standard Commercial Segment were participants in a defined cash balance plan covering all full-time employees who had completed at least 1,000 hours of service. This plan was frozen in March 2001 in anticipation of distribution of plan assets to members upon plan termination. All participants were vested when the plan was frozen.

The following tables provide detail of the changes in benefit obligations, components of benefit costs, weighted-average assumptions, and plan assets for the retirement plan as of and for the twelve months ending December 31, 2013, 2012 and 2011 (in thousands) using a measurement date of December 31.

4
	2013			2012			2011
Assumptions (end of period):
Discount rate used in determining benefit obligation		4.49	%		3.89	%		4.50	%
Rate of compensation increase		N/A			N/A			N/A
Reconciliation of funded status (end of period):
Accumulated benefit obligation	$	(12,284	)	$	(13,439	)	$	(12,990	)
Projected benefit obligation	$	(12,284	)	$	(13,439	)	$	(12,990	)
Fair value of plan assets		10,851			9,754			9,019
Funded status	$	(1,433	)	$	(3,685	)	$	(3,971	)
Net actuarial loss		(2,277	)		(4,545	)		(4,582	)
Accumulated other comprehensive loss		(2,277	)		(4,545	)		(4,582	)
Prepaid pension cost		844			860			611
Net amount recognized as of December 31	$	(1,433	)	$	(3,685	)	$	(3,971	)
Changes in projected benefit obligation:
Benefit obligation as of beginning of period	$	13,439		$	12,990		$	12,050
Interest cost		505			564			609
Actuarial liability (gain)/loss		(824	)		700			1,160
Benefits paid		(836	)		(815	)		(829	)
Benefit obligation as of end of period	$	12,284		$	13,439		$	12,990
Change in plan assets:
Fair value of plan assets as of beginning of period	$	9,754		$	9,019		$	9,217
Actual return on plan assets (net of expenses)		1,565			839			(4	)
Employer contributions		368			711			635
Benefits paid		(836	)		(815	)		(829	)
Fair value of plan assets as of end of period	$	10,851		$	9,754		$	9,019
Net periodic pension cost:
Service cost - benefits earned during the period	$	-		$	-		$	-
Interest cost on projected benefit obligation		505			564			609
Expected return on plan assets		(615	)		(584	)		(590	)
Recognized actuarial loss		495			482			287
Net periodic pension cost	$	385		$	462		$	306
Discount rate		3.89	%		4.50	%		5.25	%
Expected return on plan assets		6.50	%		6.50	%		6.50	%
Rate of compensation increase		N/A			N/A			N/A

Estimated future benefit payments by fiscal year (in thousands):

4
2014	$	889
2015	$	897
2016	$	885
2017	$	884
2018	$	878
2019-2023	$	4,170

As of December 31, 2013, the fair value of the plan assets was composed of cash and cash equivalents of $0.3 million, bonds and notes of $3.5 million and equity securities of $7.1 million.

Our investment objectives are to preserve capital and to achieve long-term growth through a favorable rate of return equal to or greater than 5% over the long-term (60 year) average inflation rate as measured by the consumer price index. The objective of the equity portion of the portfolio is to achieve a return in excess of the Standard & Poor’s 500 index. The objective of the fixed income portion of the portfolio is to add stability, consistency, safety and total return to the total fund portfolio.

We prohibit investments in options, futures, precious metals, short sales and purchase on margin. We also restrict the investment in fixed income securities to “A” rated or better by Moody’s or Standard & Poor’s rating services and restrict investments in common stocks to only those that are listed and actively traded on one or more of the major United States stock exchanges, including NASDAQ. We manage to an asset allocation of 45% to 75% in equity securities. An investment in any single stock issue is restricted to 5% of the total portfolio value and 90% of the securities held in mutual or commingled funds must meet the criteria for common stocks.

To develop the expected long-term rate of return on assets assumption, we consider the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 6.5% long-term rate of return on assets assumption. To develop the discount rate used in determining the benefit obligation we used the Mercer Yield Curve at the measurement date to match the timing and amounts of projected future benefits.

We estimate contributing $0.7 million to the defined benefit cash balance plan during 2014. We expect our 2014 periodic pension cost to be $(4) thousand, the components of which are interest cost of $0.5 million, expected return on plan assets of ($0.7) million and amortization of actuarial loss of $0.2 million.

The following table shows the weighted-average asset allocation for the defined benefit cash balance plan held as of December 31, 2013 and 2012.

	12/31/13			12/31/12
Asset Category:
Fixed income securities		32	%		33	%
Equity securities		65	%		63	%
Other		3	%		4	%
Total		100	%		100	%

Effective January 1, 2008, we determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820. (See Note 3.)

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

	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
Debt securities	$	-	$	3,448	$	-	$	3,448
Equity securities		7,080		-		-		7,080
Total	$	7,080	$	3,448	$	-	$	10,528

	As of December 31, 2012
	Quoted Prices in		Other
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Debt securities	$	-	$	3,188	$	-	$	3,188
Equity securities		6,153		-		-		6,153
Total	$	6,153	$	3,188	$	-	$	9,341

Our plan assets also include cash and cash equivalents of $0.3 million and $0.4 million at December 31, 2013 and 2012, respectively, and are carried at cost which approximates fair value.

We sponsor two defined contribution plans. Under these plans, employees may contribute a portion of their compensation on a tax-deferred basis, and we may contribute a discretionary amount each year. We contributed $0.3 million, $0.1 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

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Unaudited Selected Quarterly Financial Information

12 Months Ended

Dec. 31, 2013

Unaudited Selected Quarterly Financial Information [Abstract]

Unaudited Selected Quarterly Financial Information

            19.     Unaudited Selected Quarterly Financial Information:

Following is a summary of the unaudited interim results of operations for the years ended December 31, 2013 and 2012 (in thousands, except per share data). In the opinion of management, all adjustments necessary to present fairly the results of operations for such periods have been made.

	2013									2012
	Q1		Q2			Q3		Q4		Q1		Q2			Q3		Q4
Total revenue	$	93,141	$	99,299		$	108,613	$	88,375	$	82,986	$	84,571		$	85,620	$	88,623
Total expense		90,978		104,616			99,141		83,613		82,769		88,722			80,599		86,336
Income (loss) before tax		2,163		(5,317	)		9,472		4,762		217		(4,151	)		5,021		2,287
Income tax expense (benefit)		469		(2,166	)		3,198		1,334		23		(2,351	)		1,350		504
Net income (loss)		1,694		(3,151	)		6,274		3,428		194		(1,800	)		3,671		1,783
Net income attributable to non-controlling interest		-		-			-		-		23		43			258		-
Net income (loss) attributable to Hallmark Financial Services, Inc.	$	1,694		(3,151	)	$	6,274	$	3,428	$	171	$	(1,843	)	$	3,413	$	1,783
Basic earnings (loss) per share:	$	0.09	$	(0.16	)	$	0.33	$	0.18	$	0.01	$	(0.10	)	$	0.18	$	0.09
Diluted earnings (loss) per share:	$	0.09	$	(0.16	)	$	0.32	$	0.18	$	0.01	$	(0.10	)	$	0.18	$	0.09

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Schedule II - Condensed Financial Information of Registrant (Parent Company Only) (Comprehensive (loss) Income) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Investment loss, net of expenses									$ 12,884	$ 15,293	$ 15,880
Management fee income									5,830	5,957	6,826
Total revenues	88,375	108,613	99,299	93,141	88,623	85,620	84,571	82,986	389,428	341,800	322,771
Interest expense									4,599	4,634	4,631
Amortization of intangible assets									3,115	3,586	3,586
Loss before equity in undistributed earnings (loss) of subsidiaries and income tax benefit	4,762	9,472	(5,317)	2,163	2,287	5,021	(4,151)	217	11,080	3,374	(19,787)
Income tax benefit	1,334	3,198	(2,166)	469	504	1,350	(2,351)	23	2,835	(474)	(8,954)
Net income (loss) attributable to Hallmark Financial Services, Inc.	3,428	6,274	(3,151)	1,694	1,783	3,413	(1,843)	171	8,245	3,524	(10,891)
Comprehensive income (loss)									17,229	4,977	(14,082)
Parent Company [Member]
Investment loss, net of expenses									(190)	(181)	(194)
Management fee income									8,518	8,485	7,288
Total revenues									8,328	8,304	7,094
Operating expenses									7,764	8,079	7,851
Interest expense									4,599	4,634	4,631
Amortization of intangible assets										17	42
Operating Costs and Expenses									12,363	12,730	12,524
Loss before equity in undistributed earnings (loss) of subsidiaries and income tax benefit									(4,035)	(4,426)	(5,430)
Income tax benefit									(1,227)	(1,627)	(1,669)
Income (Loss) from Continuing Operations, Including Portion Attributable to Noncontrolling Interest, Total									(2,808)	(2,799)	(3,761)
Equity in undistributed share of earnings (loss) in subsidiaries									11,053	6,323	(7,130)
Net income (loss) attributable to Hallmark Financial Services, Inc.									8,245	3,524	(10,891)
Comprehensive income (loss)									$ 17,229	$ 4,977	$ (14,082)

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Accounting Policies (Schedule of Profit Sharing Commission) (Details)	Jul. 01, 2004 Standard Commercial P & C Business Unit [Member]	Jul. 01, 2003 Standard Commercial P & C Business Unit [Member]	Jul. 01, 2002 Standard Commercial P & C Business Unit [Member]	Jul. 01, 2001 Standard Commercial P & C Business Unit [Member]	Jan. 01, 2008 E & S Commercial Business Unit [Member]	Jan. 01, 2007 E & S Commercial Business Unit [Member]	Jan. 01, 2006 E & S Commercial Business Unit [Member]
Provisional loss ratio	64.20%	59.00%	59.00%	60.00%	65.00%	65.00%	65.00%
Estimated ultimate loss ratio recorded to at December 31, 2013	63.70%	60.90%	64.50%	63.50%	59.00%	63.20%	58.60%

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Share-based Payment Arrangements (Tables)

12 Months Ended

Dec. 31, 2013

Share-based Payment Arrangements [Abstract]

Summary of the Status of Stock Options

A summary of the status of our stock options as of December 31, 2013 and changes during the year then ended is presented below:

				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Number of			Exercise		Term		Value
	Shares			Price		(Years)		($000)
Outstanding at January 1, 2013		1,404,989		$	9.63
Granted		-
Exercised		-
Forfeited or expired		(17,500	)	$	7.58
Outstanding at December 31, 2013		1,387,489		$	9.66		4.2	$	1,329
Exercisable at December 31, 2013		1,181,417		$	10.19		4.0	$	866

Schedule of Options, Grants in Period, 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):

	2013		2012		2011
Intrinsic value of options exercised	$	-	$	-	$	4
Cost of share-based payments (non-cash)	$	207	$	380	$	709
Income tax benefit of share-based payments recognized in income	$	30	$	38	$	30

Schedule of Nonvested Restricted Stock Units Activity

A summary of the status of our restricted stock units as of December 31, 2013 and changes during the year then ended is presented below:

	Number of
	Restricted
	Stock Units
Nonvested at January 1, 2013	-
Granted	243,006
Vested	-
Forfeited	(6,155)
Nonvested at December 31, 2013	236,851

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net income (loss)	$ 8,245	$ 3,848	$ (10,833)
Other comprehensive income (loss):
Change in net actuarial gain (loss)	2,268	37	(1,468)
Tax effect on change in net actuarial gain (loss)	(794)	(13)	514
Unrealized holding gains arising during the period	22,094	4,388	191
Tax effect on unrealized holding gains arising during the period	(7,733)	(1,536)	(67)
Reclassification adjustment for gains included in net income (loss)	(10,540)	(2,189)	(3,633)
Tax effect on reclassification adjustment for gains included in net income (loss)	3,689	766	1,272
Other comprehensive income (loss), net of tax	8,984	1,453	(3,191)
Comprehensive income (loss)	17,229	5,301	(14,024)
Less: comprehensive income attributable to non-controlling interest		324	58
Comprehensive income (loss) attributable to Hallmark Financial Services, Inc.	$ 17,229	$ 4,977	$ (14,082)

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Income Taxes (Summary of Operating Loss Carryforwards) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Unrecognized Tax Benefits Resulting in Net Operating Loss Carryforward	$ 1,747
Operating Loss Expires In 2021 [Member]
Unrecognized Tax Benefits Resulting in Net Operating Loss Carryforward	650
Operating Loss Expires In 2022 [Member]
Unrecognized Tax Benefits Resulting in Net Operating Loss Carryforward	878
Operating Loss Expires In 2028 [Member]
Unrecognized Tax Benefits Resulting in Net Operating Loss Carryforward	2
Operating Loss Expires In 2030 [Member]
Unrecognized Tax Benefits Resulting in Net Operating Loss Carryforward	25
Operating Loss Expires In 2031 [Member]
Unrecognized Tax Benefits Resulting in Net Operating Loss Carryforward	45
Operating Loss Expires In 2032 [Member]
Unrecognized Tax Benefits Resulting in Net Operating Loss Carryforward	$ 70

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Fair Value

12 Months Ended

Dec. 31, 2013

Fair Value [Abstract]

Fair Value

3. 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, U.S. Treasury securities, other obligations of the U.S. Government and mortgage-backed 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 third party pricing services. There were no transfers between Level 1 and Level 2 securities.

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.

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 December 31, 2013 and December 31, 2012 (in thousands).

	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

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

Due to significant unobservable inputs into the valuation model for certain municipal bonds and a collateralized corporate bank loan in illiquid markets, we classified these 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 9.3%, 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 year ended December 31, 2013 and 2012 (in thousands).

	2013			2012
Beginning balance as of January 1	$	19,668		$	20,608
Sales		(3,157	)		(429	)
Settlements		-			-
Purchases		-			-
Issuances		-			-
Total realized/unrealized gains included in net income		-			-
Net gains (losses) included in other comprehensive income		1,006			(511	)
Transfers into Level 3		-			-
Transfers out of Level 3		-			-
Ending balance as of December 31	$	17,517		$	19,668

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Fair Value (Fair Value, Assets Measured on Recurring Basis Using Significant Unobservable Inputs (Level 3)) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Fair Value [Abstract]
Beginning balance as of January 1	$ 19,668	$ 20,608
Sales	(3,157)	(429)
Net losses included in other comprehensive income	1,006	(511)
Ending balance as of December 31	$ 17,517	$ 19,668

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Retirement Plans (Estimated Future Benefit Payments) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Retirement Plans [Abstract]
2014	$ 889
2015	897
2016	885
2017	884
2018	878
2019-2023	$ 4,170

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Subordinated Debt Securities (Narrative) (Details) (Subordinated Debt [Member], USD $) In Millions, unless otherwise specified			0 Months Ended		0 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Jun. 21, 2005 Hallmark Statutory Trust I [Member]	Dec. 31, 2013 Hallmark Statutory Trust I [Member]	Aug. 23, 2007 Hallmark Statutory Trust I I [Member]	Dec. 31, 2013 Hallmark Statutory Trust I I [Member]	Jun. 21, 2005 London Interbank Offered Rate (LIBOR) [Member] Hallmark Statutory Trust I [Member]	Aug. 23, 2007 London Interbank Offered Rate (LIBOR) [Member] Hallmark Statutory Trust I I [Member]
Subordinated Borrowing [Line Items]
Long-term debt, gross	$ 56.7	$ 56.7	$ 30.9	$ 30.9	$ 25.8	$ 25.8
Debt instrument, maturity date			Jun. 15, 2035		Sep. 15, 2037
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, description of variable rate basis			interest will adjust quarterly to the three-month LIBOR rate plus 3.25 percentage points		three-month LIBOR rate plus 2.90 percentage points
Debt instrument, basis spread on variable rate							3.25%	2.90%

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Schedule II - Condensed Financial Information of Registrant (Parent Company Only)

12 Months Ended

Dec. 31, 2013

Condensed Financial Information Of Parent Company Only Disclosure [Abstract]

Condensed Financial Information of Parent Company Only Disclosure

Schedule II – Condensed Financial Information of Registrant (Parent Company Only)

HALLMARK FINANCIAL SERVICES, INC.

BALANCE SHEETS

December 31, 2013 and 2012

(In thousands)

	2013			2012
ASSETS
Cash and cash equivalents	$	8,063		$	1,112
Investment in subsidiaries		316,295			296,258
Deferred federal income taxes		930			2,112
Other assets		3,729			3,416
	$	329,017		$	302,898
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Revolving credit facility payable	$	1,473		$	1,473
Subordinated debt securities		56,702			56,702
Current federal income tax payable		3,353			7,047
Accounts payable and other accrued expenses		29,371			17,139
		90,899			82,361
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2013 and in 2012		3,757			3,757
Capital in excess of par value		122,827			122,475
Retained earnings		106,209			97,964
Accumulated other comprehensive income		16,883			7,899
Treasury stock (1,609,374 shares in 2013 and 2012), at cost		(11,558	)		(11,558	)
Total stockholders’ equity		238,118			220,537
Total liabilities and stockholders’ equity	$	329,017		$	302,898

See accompanying report of independent registered public accounting firm.

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF OPERATIONS

For the years ended December 31, 2013, 2012 and 2011

(In thousands)

	2013			2012			2011
Investment loss, net of expenses	$	(190	)	$	(181	)	$	(194	)
Management fee income		8,518			8,485			7,288
		8,328			8,304			7,094
Operating expenses		7,764			8,079			7,851
Interest expense		4,599			4,634			4,631
Amortization of intangible assets		-			17			42
		12,363			12,730			12,524
Loss before equity in undistributed earnings (loss) of subsidiaries and income tax benefit		(4,035	)		(4,426	)		(5,430	)
Income tax benefit		(1,227	)		(1,627	)		(1,669	)
Loss before equity in undistributed earnings (loss) of subsidiaries		(2,808	)		(2,799	)		(3,761	)
Equity in undistributed share of earnings (loss) in subsidiaries		11,053			6,323			(7,130	)
Net income (loss)	$	8,245		$	3,524		$	(10,891	)
Comprehensive income (loss)	$	17,229		$	4,977		$	(14,082	)

See accompanying report of independent registered public accounting firm.

FINANCIAL STATEMENT SCHEDULES

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2013, 2012 and 2011

(In thousands)

	2013			2012			2011
Cash flows from operating activities:
Net income (loss)	$	8,245		$	3,524		$	(10,891	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization expense		92			113			168
Deferred income tax expense (benefit)		1,182			(1,725	)		(215	) )	)
Undistributed share of (earnings) loss of subsidiaries		(11,053	)		(6,323	)		7,130		)
Change in current federal income tax (recoverable)payable		(3,694	)		4,030			(4,838	) )	)
Change in all other liabilities		12,232			357			5,155		)
Change in all other assets		63			450			1,074
Net cash provided by (used in) operating activities		7,067			426			(2,417	) )
Cash flows from investing activities:
Purchases of property and equipment, net		(116	)		(46	)		(205	) )	)
Net cash used in investing activities		(116	)		(46	)		(205	) )
Cash flows from financing activities:
Proceeds from exercise of employee stock options		-			-			99
Purchase of treasury shares		-			-			(6,401	) )
Activity under revolving credit facility, net		-			(2,577	)		1,250
Net cash used in financing activities		-			(2,577	)		(5,052	) )
Increase (decrease) in cash and cash equivalents		6,951			(2,197	)		(7,674	) )
Cash and cash equivalents at beginning of year		1,112			3,309			10,983
Cash and cash equivalents at end of year	$	8,063		$	1,112		$	3,309
Supplemental cash flow information:
Interest paid	$	(4,599	)	$	(4,656	)	$	(4,620	) )	)
Income taxes (paid) recovered	$	(1,285	)	$	3,932		$	(3,383	) )

See accompanying report of independent registered public accounting firm.

XML

Earnings Per Share (Schedule of Earnings Per Share, Basic and Diluted) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Numerator for both basic and diluted earnings per share:
Net income (loss) attributable to Hallmark Financial Services, Inc.	$ 3,428	$ 6,274	$ (3,151)	$ 1,694	$ 1,783	$ 3,413	$ (1,843)	$ 171	$ 8,245	$ 3,524	$ (10,891)
Denominator, basic shares									19,263	19,263	19,673
Effect of dilutive securities:
Stock-based compensation awards									98	6
Denominator, diluted shares									19,361	19,269	19,673
Basic earnings per share: (in dollars per share)	$ 0.18	$ 0.33	$ (0.16)	$ 0.09	$ 0.09	$ 0.18	$ (0.10)	$ 0.01	$ 0.43	$ 0.18	$ (0.55)
Diluted earnings per share: (in dollars per share)	$ 0.18	$ 0.32	$ (0.16)	$ 0.09	$ 0.09	$ 0.18	$ (0.10)	$ 0.01	$ 0.43	$ 0.18	$ (0.55)

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Reinsurance (Tables)

12 Months Ended

Dec. 31, 2013

Reinsurance [Abstract]

Schedule of Reinsurance Ceded and Recoveries

The following table presents our gross and net premiums written and earned and reinsurance recoveries for each of the last three years (in thousands):

	2013			2012			2011
Premium Written :
Direct	$	458,020		$	385,624		$	350,089
Assumed		2,007			4,218			4,792
Ceded		(99,262	)		(57,353	)		(51,005	)
	$	360,765		$	332,489		$	303,876
Premium Earned:
Direct	$	434,022		$	369,735		$	344,642
Assumed		3,204			4,114			5,438
Ceded		(76,685	)		(54,413	)		(57,039	)
	$	360,541		$	319,436		$	293,041
Reinsurance recoveries	$	45,456		$	29,014		$	32,941

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Share-based Payment Arrangements

12 Months Ended

Dec. 31, 2013

Share-based Payment Arrangements [Abstract]

Share-based Payment Arrangements

          13.     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 December 31, 2013, there were outstanding incentive stock options to purchase 1,083,332 shares of our common stock, non-qualified stock options to purchase 304,157 shares of our common stock and restricted stock units representing the right to receive up to 355,277 shares of our common stock. There are 241,401 shares reserved for future issuance under the 2005 LTIP.  The exercise price of all such outstanding stock options is equal to the fair market value of our common stock on the date of grant.

Stock Options:

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

A summary of the status of our stock options as of December 31, 2013 and changes during the year then ended is presented below:

				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Number of			Exercise		Term		Value
	Shares			Price		(Years)		($000)
Outstanding at January 1, 2013		1,404,989		$	9.63
Granted		-
Exercised		-
Forfeited or expired		(17,500	)	$	7.58
Outstanding at December 31, 2013		1,387,489		$	9.66		4.2	$	1,329
Exercisable at December 31, 2013		1,181,417		$	10.19		4.0	$	866

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):

	2013		2012		2011
Intrinsic value of options exercised	$	-	$	-	$	4
Cost of share-based payments (non-cash)	$	207	$	380	$	709
Income tax benefit of share-based payments recognized in income	$	30	$	38	$	30

As of December 31, 2013, there was $0.5 million of total unrecognized compensation cost related to non-vested stock options granted under our plans, of which $0.2 million is expected to be recognized each year in 2014 and 2015,  $54 thousand is expected to be recognized in 2016 and $3 thousand is expected to be recognized in 2017.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of Hallmark’s and similar companies’ common stock for a period equal to the expected

term. The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options’ expected lives on the dates of grant. Expected term is determined based on the simplified method as we do not have sufficient historical exercise data to provide a basis for estimating the expected term.

There were no stock options granted in 2013 or 2012.  Stock options granted in 2011 had a weighted average grant date fair value of $2.52, expected term of 5.8 years, expected volatility of 30.9% and risk free interest rate of 1.4%.

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. 

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

Compensation cost is measured as an amount equal to the fair value of the restricted stock units and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the Company’s best estimate of the ultimate achievement level.  The grant date fair value of the restricted stock units is $9.20 per unit.  The Company incurred $145 thousand of compensation expense related to the restricted stock units during the year ended December 31, 2013.

A summary of the status of our restricted stock units as of December 31, 2013 and changes during the year then ended is presented below:

	Number of
	Restricted
	Stock Units
Nonvested at January 1, 2013	-
Granted	243,006
Vested	-
Forfeited	(6,155)
Nonvested at December 31, 2013	236,851

As of December 31, 2013, there was $0.5 million of total unrecognized compensation cost related to non-vested restricted stock units granted under our 2005 LTIP, of which $0.2 million is expected to be recognized in 2014, $0.2 million is expected to be recognized in 2015 and $49 thousand is expected to be recognized in 2016.