Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

(Mark One) Securities Exchange Act of 1934

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 20212022

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-11252

Hallmark Financial Services, Inc.

(Exact name of registrant as specified in its charter)

Nevada

87-0447375

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)

5420 Lyndon B. Johnson Freeway, Suite 1100, Dallas, Texas

75240

(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

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.18 par value

HALL

Nasdaq Global Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 15(a) of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, par value $0.18 per share – 18,171,032–18,190,418 shares outstanding as of  May 13, 2021.12, 2022.

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.   Financial Statements

INDEX TO FINANCIAL STATEMENTS

Page
Number

Consolidated Balance Sheets at March 31, 20212022 (unaudited) and December 31, 20202021

3

Consolidated Statements of Operations (unaudited) for the three months ended March 31, 20212022 and March 31, 20202021

4

Consolidated Statements of Comprehensive (Loss) Income (Loss) (unaudited) for the three months ended March 31, 20212022 and March 31, 20202021

5

Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended March 31, 20212022 and March 31, 20202021

6

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 20212022 and March 31, 20202021

7

Notes to Consolidated Financial Statements (unaudited)

8

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except par value)

March 31,

December 31,

March 31,

December 31,

2021

2020

2022

2021

(unaudited)

(unaudited)

ASSETS

  

 

  

  

 

  

Investments:

  

 

  

  

 

  

Debt securities, available-for-sale, at fair value (amortized cost; $344,232 in 2021 and $502,167 in 2020)

$

348,525

$

507,279

Equity securities (cost; $46,847 in 2021 and $26,988 in 2020)

 

53,621

 

29,388

Debt securities, available-for-sale, at fair value (amortized cost; $389,582 in 2022 and $288,175 in 2021)

$

388,254

$

290,073

Equity securities (cost; $46,125 in 2022 and $42,120 in 2021)

 

52,604

 

48,695

Total investments

 

402,146

 

536,667

 

440,858

 

338,768

Cash and cash equivalents

 

281,849

 

102,580

 

183,377

 

352,867

Restricted cash

 

5,434

 

5,728

 

4,239

 

3,810

Ceded unearned premiums

 

134,206

 

138,926

 

142,645

 

146,433

Premiums receivable

 

109,799

 

120,332

 

88,420

 

90,621

Accounts receivable

 

4,625

 

5,967

 

20,094

 

6,914

Receivable for securities

 

1,382

 

913

 

1,209

 

1,326

Reinsurance recoverable

 

494,815

 

490,231

 

545,266

 

549,964

Deferred policy acquisition costs

 

16,386

 

17,840

 

6,847

 

6,811

Intangible assets, net

 

1,196

 

1,322

 

693

 

819

Federal income tax recoverable

23,855

25,642

14,748

18,217

Deferred federal income taxes, net

 

8,319

 

8,724

 

9,412

 

8,906

Prepaid expenses

 

6,679

 

2,648

 

5,389

 

2,389

Other assets

 

26,852

 

28,013

 

26,666

 

25,753

Total assets

$

1,517,543

$

1,485,533

$

1,489,863

$

1,553,598

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

 

  

 

  

Liabilities:

 

  

 

  

 

  

 

  

Senior unsecured notes due 2029 (less unamortized debt issuance cost of $820 in 2021 and $844 in 2020)

$

49,180

$

49,156

Subordinated debt securities (less unamortized debt issuance cost of $782 in 2021 and $795 in 2020)

 

55,920

 

55,907

Senior unsecured notes due 2029 (less unamortized debt issuance cost of $721 in 2022 and $746 in 2021)

$

49,279

$

49,254

Subordinated debt securities (less unamortized debt issuance cost of $730 in 2022 and $744 in 2021)

 

55,972

 

55,959

Reserves for unpaid losses and loss adjustment expenses

 

812,272

 

789,768

 

798,338

 

816,681

Unearned premiums

 

305,015

 

320,806

 

276,485

 

284,427

Reinsurance payable

 

51,673

 

46,700

 

85,980

 

117,908

Pension liability

 

1,749

 

1,859

 

59

 

174

Payable for securities

 

10,979

 

 

2,374

 

3,280

Accounts payable and other accrued expenses

 

51,003

 

50,415

Accounts payable and other liabilities

 

51,540

 

50,394

Total liabilities

 

1,337,791

 

1,314,611

 

1,320,027

 

1,378,077

Commitments and contingencies (Note 18)

 

 

  

Commitments and contingencies (Note 17)

 

 

  

Stockholders’ equity:

 

 

  

 

 

  

Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2021 and 2020

 

3,757

 

3,757

Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2022 and 2021

 

3,757

 

3,757

Additional paid-in capital

 

122,725

 

122,893

 

122,741

 

122,844

Retained earnings

 

78,260

 

68,915

 

71,484

 

74,703

Accumulated other comprehensive (loss) income

 

(229)

 

383

Treasury stock (2,701,799 shares in 2021 and 2,730,673 in 2020), at cost

 

(24,761)

 

(25,026)

Accumulated other comprehensive loss

 

(3,563)

 

(1,035)

Treasury stock (2,682,413 shares in 2022 and 2,700,364 in 2021), at cost

 

(24,583)

 

(24,748)

Total stockholders’ equity

 

179,752

 

170,922

 

169,836

 

175,521

Total liabilities and stockholders’ equity

$

1,517,543

$

1,485,533

$

1,489,863

$

1,553,598

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

3

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

Three Months Ended March 31, 

Three Months Ended March 31, 

    

2021

    

2020

    

2022

    

2021

Gross premiums written

$

163,018

$

201,589

$

150,959

$

163,018

Ceded premiums written

 

(69,871)

 

(75,084)

 

(72,638)

 

(71,521)

Net premiums written

 

93,147

 

126,505

 

78,321

 

91,497

Change in unearned premiums

 

11,071

 

(2,572)

 

4,155

 

10,355

Net premiums earned

 

104,218

 

123,933

 

82,476

 

101,852

Investment income, net of expenses

 

3,010

 

4,458

 

1,859

 

3,010

Investment gains (losses), net

 

5,779

 

(29,330)

Investment gains, net

 

51

 

5,779

Finance charges

 

1,133

 

1,644

 

983

 

1,133

Commission and fees

 

260

 

324

 

287

 

260

Other income

 

19

 

19

 

16

 

19

Total revenues

 

114,419

 

101,048

 

85,672

 

112,053

Losses and loss adjustment expenses

 

70,903

 

93,405

 

64,024

 

69,479

Operating expenses

 

30,441

 

29,148

 

24,377

 

29,972

Interest expense

 

1,249

 

1,468

 

1,264

 

1,249

Impairment of goodwill and other intangible assets

45,996

Amortization of intangible assets

 

126

 

617

 

126

 

126

Total expenses

 

102,719

 

170,634

 

89,791

 

100,826

Income (loss) before tax

 

11,700

 

(69,586)

Income tax expense (benefit)

 

2,355

 

(5,276)

Net income (loss)

9,345

(64,310)

(Loss) income before tax

 

(4,119)

 

11,227

Income tax (benefit) expense

 

(900)

 

2,256

Net (loss) income

$

(3,219)

$

8,971

Net income (loss) per share:

 

  

 

  

Net (loss) income per share:

 

  

 

  

Basic

$

0.52

$

(3.55)

$

(0.18)

$

0.49

Diluted

$

0.52

$

(3.55)

$

(0.18)

$

0.49

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

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income (Loss)

(Unaudited)

($ in thousands)

Three Months Ended

Three Months Ended

March 31,

March 31,

    

2021

    

2020

    

2022

    

2021

Net income (loss)

$

9,345

$

(64,310)

Net (loss) income

$

(3,219)

$

8,971

Other comprehensive (loss) income:

 

  

 

  

 

  

 

  

Change in net actuarial gain

 

43

 

34

 

27

 

43

Tax effect on change in net actuarial gain

 

(9)

 

(7)

 

(6)

 

(9)

Unrealized holding gains (losses) arising during the period

 

585

 

(6,987)

Tax effect on unrealized holding (gains) losses arising during the period

��

 

(123)

 

1,467

Reclassification adjustment for gains included in net income (loss)

 

(1,403)

 

(5,636)

Tax effect on reclassification adjustment for gains included in net income (loss)

 

295

 

1,184

Unrealized holding (losses) gains arising during the period

 

(3,081)

 

585

Tax effect on unrealized holding losses (gains) arising during the period

 

647

 

(123)

Reclassification adjustment for gains included in net (loss) income

 

(146)

 

(1,403)

Tax effect on reclassification adjustment for gains included in net (loss) income

 

31

 

295

Other comprehensive loss, net of tax

 

(612)

 

(9,945)

 

(2,528)

 

(612)

Comprehensive income (loss)

$

8,733

$

(74,255)

Comprehensive (loss) income

$

(5,747)

$

8,359

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

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

($ in thousands)

Three Months Ended

Three Months Ended

March 31, 

March 31, 

    

2021

    

2020

    

2022

    

2021

Common Stock

    

  

    

  

    

  

    

  

Balance, beginning of period

$

3,757

$

3,757

$

3,757

$

3,757

Balance, end of period

 

3,757

 

3,757

 

3,757

 

3,757

Additional Paid-In Capital

 

 

  

 

 

  

Balance, beginning of period

 

122,893

 

123,468

 

122,844

 

122,893

Equity based compensation

 

97

 

(581)

 

62

 

97

Shares issued under employee benefit plans

 

(265)

 

(169)

 

(165)

 

(265)

Balance, end of period

 

122,725

 

122,718

 

122,741

 

122,725

Retained Earnings

 

  

 

  

 

  

 

  

Balance, beginning of period

 

68,915

 

160,570

 

74,703

 

65,697

Net income (loss)

 

9,345

 

(64,310)

 

(3,219)

 

8,971

Balance, end of period

 

78,260

 

96,260

 

71,484

 

74,668

Accumulated Other Comprehensive Income

 

  

 

  

 

  

 

  

Balance, beginning of period

 

383

 

688

 

(1,035)

 

383

Additional minimum pension liability, net of tax

 

34

 

27

 

21

 

34

Unrealized holding gains (losses) arising during period, net of tax

 

462

 

(5,520)

Reclassification adjustment for gains included in net income (loss), net of tax

 

(1,108)

 

(4,452)

Unrealized holding (losses) gains arising during period, net of tax

 

(2,434)

 

462

Reclassification adjustment for gains included in net (loss) income, net of tax

 

(115)

 

(1,108)

Balance, end of period

 

(229)

 

(9,257)

 

(3,563)

 

(229)

Treasury Stock

 

  

 

  

 

  

 

  

Balance, beginning of period

 

(25,026)

 

(25,201)

 

(24,748)

 

(25,026)

Shares issued under employee benefit plans

 

265

 

169

 

165

 

265

Balance, end of period

 

(24,761)

 

(25,032)

 

(24,583)

 

(24,761)

Total Stockholders' Equity

$

179,752

$

188,446

$

169,836

$

176,160

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

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

($ in thousands)

Three Months Ended March 31,

Three Months Ended March 31,

2021

2020

2022

2021

Cash flows from operating activities:

  

 

  

 

  

 

  

 

Net income (loss)

$

9,345

$

(64,310)

Net (loss) income

$

(3,219)

$

8,971

Adjustments to reconcile net income (loss) to cash used in operating activities:

 

  

 

  

Adjustments to reconcile net (loss) income to cash used in operating activities:

 

  

 

  

Depreciation and amortization expense

 

830

 

1,377

 

706

 

830

Deferred federal income taxes expense (benefit)

 

568

 

(4,804)

Deferred federal income taxes (benefit) expense

 

(339)

 

568

Investment (gains) losses , net

 

(5,779)

 

29,330

 

(51)

 

(5,779)

Share-based payments expense (benefit)

 

97

 

(581)

 

62

 

97

Impairment of goodwill and other intangibles

45,996

Change in ceded unearned premiums

 

4,720

 

12,925

 

3,788

 

5,436

Change in premiums receivable

 

10,533

 

8,068

 

2,201

 

10,533

Change in accounts receivable

 

1,342

 

474

 

(13,180)

 

1,342

Change in deferred policy acquisition costs

 

1,454

 

(2,593)

 

(36)

 

1,454

Change in reserves for losses and loss adjustment expenses

 

22,504

 

33,135

 

(18,343)

 

22,504

Change in unearned premiums

 

(15,791)

 

(10,353)

 

(7,942)

 

(15,791)

Change in reinsurance recoverable

 

(4,584)

 

(49,004)

 

4,698

 

(6,008)

Change in reinsurance balances

 

4,973

 

(1,321)

 

(31,928)

 

6,155

Change in federal income tax payable (recoverable)

 

1,787

 

(472)

 

3,469

 

1,687

Change in all other liabilities

 

515

 

(7,185)

 

1,069

 

515

Change in all other assets

 

(3,038)

 

(524)

 

(2,936)

 

(3,038)

Net cash provided by (used in) operating activities

 

29,476

 

(9,842)

Net cash (used in) provided by operating activities

 

(61,981)

 

29,476

Cash flows from investing activities:

 

  

 

  

 

  

 

  

Purchases of property and equipment

 

(64)

 

(433)

 

(631)

 

(64)

Purchases of investment securities

 

(27,829)

 

(144,398)

 

(166,832)

 

(27,829)

Maturities, sales and redemptions of investment securities

 

177,392

 

168,622

 

60,383

 

177,392

Net cash provided by investing activities

 

149,499

 

23,791

Increase in cash and cash equivalents and restricted cash

 

178,975

 

13,949

Net cash (used in) provided by investing activities

 

(107,080)

 

149,499

(Decrease) increase in cash and cash equivalents and restricted cash

 

(169,061)

 

178,975

Cash and cash equivalents and restricted cash at beginning of period

 

108,308

 

54,948

 

356,677

 

108,308

Cash and cash equivalents and restricted cash at end of period

$

287,283

$

68,897

$

187,616

$

287,283

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

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Hallmark Financial Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

1. General

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

We market, distribute, underwrite and service our property/casualty insurance products primarily through business units organized by products and distribution channels. Our business units are supported by our insurance company subsidiaries.  Our Commercial Auto business unit offers primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit offers primary and excess liability, excess public entity liability, E&S package and garage liability insurance products and services; our E&S Property business unit offers primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability business unit offers healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals, medical facilities and, , through 2020, senior care facilities; and our Aerospace & Programs business unit offers general aviation and, until exited during 2020, satellite launch property/casualty insurance products and services, as well as certain specialty programs.  Our Commercial Accounts business unit offers package and monoline property/casualty and, until exited in 2016, occupational accident insurance products. Our Specialty Personal Lines business unit offers non-standard personal automobile and renters insurance products and services.   Our former Workers Compensation operating unit specialized in small and middle market workers compensation business until discontinued during 2015. 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 Texas Builders Insurance Company (“TBIC”).

These business units are segregated into 3 reportable industry segments for financial accounting purposes. The Specialty Commercial Segment includes our Commercial Auto business unit, E&S Casualty business unit, E&S Property business unit, Professional Liability business unit and Aerospace & Programs business unit. The Standard Commercial Segment consists of the Commercial Accounts business unit and the runoff from our former Workers Compensation operating unit. The Personal Segment consists solely of our Specialty Personal Lines business unit.

 

2. Basis of Presentation

Our unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include our accounts and the accounts of our subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 20202021 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of March 31, 20212022 and 20202021 is unaudited. However, in the opinion of management, the interim financial data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the periodthree month periods ended March 31, 2022 and 2021, are not necessarily indicative of the operating results to be expected for the full year.

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Use of Estimates in the Preparation of the Financial Statements

Our preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting period. Refer to “Critical Accounting Estimates and Judgments” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20202021 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

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

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

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

Senior Unsecured Notes Due 2029:  Our senior unsecured notes payable due in 2029 had a carrying value of $49.2$49.3 million and a fair value of $52.2$48.3 million as of March 31, 2021.2022.   Our senior unsecured notes payable would be included in Level 3 of the fair value hierarchy if they were reported at fair value

Subordinated Debt Securities:  Our trust preferred securities had a carrying value of $55.9$56.0 million and a fair value of $30.3$30.6 million as of March 31, 2021.2022. Our trust preferred securities would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

For accounts receivable, reinsurance balances, premiums receivable, federal income tax recoverable other assets and other liabilities,assets, the carrying amounts approximateare held at net realizable value which approximates fair value because of the short maturity of such financial instruments.

Variable Interest Entities

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

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

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

We are also involved in the normal course of business with variable interest entities primarily as a passive investor in mortgage-backed securities and certain collateralized corporate bank loans issued by third-party variable interest

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entities. The maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the consolidated balance sheets.

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.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued updated guidance for the accounting for income taxes. Net deferred tax assets are held at their net realizable value and an allowance is taken as needed. The updated guidance is intendedCompany recognizes interest and penalties related to simplify the accounting for income taxes by removing several exceptions containeduncertain tax positions in the existing guidance and amending other existing guidance to simplify several other income tax accounting matters.  The updated guidance is effective for the quarter endingexpense. There were no uncertain tax positions at March 31, 2021.  The adoption of this guidance did not have a material effect on the Company’s results of operations, financials position or liquidity.2022.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform ("ASU 2020-04"). ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 cancould be adopted as of March 12, 2020 and are effective through December 31, 2022. We do not currently have any contracts that have been changed to a new reference rate but we will continue to evaluate our contracts and do not expect the effectsadoption of this standardguidance to have a material effect on our condensed consolidatedthe Company’s results of operations, financial statements prior to adoption.position or liquidity.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326). ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. As a smaller reporting company, ASU 2016-13 is effective for fiscal years of the Company beginning after December 15, 2022, including interim periods within those fiscal years.  ASU 2016-13 requires a modified retrospective transition method and early adoption is permitted. We are currently evaluating the impact that the adoption of this standard will have on our financial results and disclosures, but do not anticipate that any potential impact willwould be material.

3. Acquisitions, Goodwill and Intangible Assets

In connection with its normal process for evaluating impairment triggering events, the Company determined that a significant decline in its market capitalization below its stockholders’ equity during the first quarter of 2020  indicated the impairment of the goodwill and indefinite-lived intangible assets included in its balance sheet.  As a result, the Company took a $44.7 million charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets during the first quarter of 2020. As of March 31, 2021 there was 0 goodwill or indefinite-lived intangibles reported on our  consolidated balance sheet.

4.

3. Fair Value

ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expandsrequires disclosure requirements about fair value measurements. ASC 820, among other things, requires us to maximize the use of observable

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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.

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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 equity securities.

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. We have not adjusted any prices received from third-party pricing sources. There were 0no transfers betweenLevel 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, assets that are measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021 (in thousands):

As of March 31, 2022

    

Quoted Prices in

    

    

    

Active Markets for

Identical Assets

Other Observable

Unobservable

    

(Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

    

Total

U.S. Treasury securities and obligations of U.S. Government

$

0

$

42,483

$

0

$

42,483

Corporate bonds

 

0

 

222,120

 

0

 

222,120

Corporate bank loans

 

0

 

80,018

 

0

 

80,018

Municipal bonds

 

0

 

41,889

 

0

 

41,889

Mortgage-backed

 

0

 

1,744

 

0

 

1,744

Total debt securities

 

0

 

388,254

 

0

 

388,254

Total equity securities

 

52,604

 

0

 

0

 

52,604

Total investments

$

52,604

$

388,254

$

0

$

440,858

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The following table presents, for each of the fair value hierarchy levels, assets that are measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020 (in thousands):

As of March 31, 2021

    

Quoted Prices in

    

    

    

Active Markets for

Identical Assets

Other Observable

Unobservable

    

(Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

    

Total

U.S. Treasury securities and obligations of U.S. Government

$

$

45,407

$

$

45,407

Corporate bonds

 

 

191,186

 

354

 

191,540

Corporate bank loans

 

 

59,600

 

 

59,600

Municipal bonds

 

 

48,588

 

 

48,588

Mortgage-backed

 

 

3,390

 

 

3,390

Total debt securities

 

 

348,171

 

354

 

348,525

Total equity securities

 

53,621

 

 

 

53,621

Total investments

$

53,621

$

348,171

$

354

$

402,146

As of December 31, 2020

As of December 31, 2021

    

Quoted Prices in

    

    

    

    

Quoted Prices in

    

    

    

Active Markets for

Active Markets for

Identical Assets

Other Observable

Unobservable

Identical Assets

Other Observable

Unobservable

    

(Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

    

Total

    

(Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

    

Total

U.S. Treasury securities and obligations of U.S. Government

$

0

$

179,746

$

0

$

179,746

$

0

$

62,984

$

0

$

62,984

Corporate bonds

 

0

 

219,020

 

348

 

219,368

 

0

 

105,234

 

347

 

105,581

Corporate bank loans

 

0

 

52,782

 

0

 

52,782

 

0

 

81,189

 

0

 

81,189

Municipal bonds

 

0

 

50,539

 

0

 

50,539

 

0

 

38,464

 

0

 

38,464

Mortgage-backed

 

0

 

4,844

 

0

 

4,844

 

0

 

1,855

 

0

 

1,855

Total debt securities

 

0

 

506,931

 

348

 

507,279

 

0

 

289,726

 

347

 

290,073

Total equity securities

 

29,388

 

0

 

0

 

29,388

 

48,695

 

0

 

0

 

48,695

Total investments

$

29,388

$

506,931

$

348

$

536,667

$

48,695

$

289,726

$

347

$

338,768

Due to significant unobservable inputs into the valuation model for 1 corporate bond as of MarchDecember 31, 2021, and December 31, 2020, we classified this investment as Level 3 in the fair value hierarchy. The corporate bond is a convertible senior note and its fair value was estimated by the sum of the bond value using an income approach discounting the scheduled interest and principal payments and the conversion feature utilizing a binomial lattice model.

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 three months ended March 31, 20212022 and 20202021 (in thousands):

Beginning balance as of January 1, 2021

    

$

348

Beginning balance as of January 1, 2022

    

$

347

Sales

 

0

 

0

Settlements

 

0

 

(347)

Purchases

 

0

 

0

Issuances

 

0

 

0

Total realized/unrealized losses included in net income

 

6

 

0

Net gain included in other comprehensive income

 

0

 

0

Transfers into Level 3

 

0

 

0

Transfers out of Level 3

 

0

 

0

Ending balance as of March 31, 2021

$

354

Ending balance as of March 31, 2022

$

0

Beginning balance as of January 1, 2021

    

$

347

Sales

 

0

Settlements

 

0

Purchases

 

0

Issuances

 

0

Total realized/unrealized gains included in net loss

 

0

Net gains included in other comprehensive loss

 

7

Transfers into Level 3

 

0

Transfers out of Level 3

 

0

Ending balance as of March 31, 2021

$

354

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Beginning balance as of January 1, 2020

    

$

339

Sales

 

0

Settlements

 

0

Purchases

 

0

Issuances

 

0

Total realized/unrealized gains included in net loss

 

(61)

Net gains included in other comprehensive loss

 

0

Transfers into Level 3

 

0

Transfers out of Level 3

 

0

Ending balance as of March 31, 2020

$

278

5.4. Investments

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

    

    

Gross

    

Gross

    

    

    

Gross

    

Gross

    

Amortized Cost/

Unrealized

Unrealized

Amortized Cost/

Unrealized

Unrealized

    

Carrying Value

    

Gains

    

Losses

    

Fair Value

    

Carrying Value

    

Gains

    

Losses

    

Fair Value

As of March 31, 2021

As of March 31, 2022

U.S. Treasury securities and obligations of U.S. Government

$

45,088

$

320

$

(1)

$

45,407

$

43,175

$

0

$

(692)

$

42,483

Corporate bonds

 

187,405

 

4,258

 

(123)

 

191,540

 

221,775

 

1,454

 

(1,109)

 

222,120

Corporate bank loans

 

60,330

 

7

 

(737)

 

59,600

 

81,024

 

9

 

(1,015)

 

80,018

Municipal bonds

 

48,027

 

607

 

(46)

 

48,588

 

41,862

 

144

 

(117)

 

41,889

Mortgage-backed

 

3,382

 

70

 

(62)

 

3,390

 

1,746

 

11

 

(13)

 

1,744

Total debt securities

 

344,232

 

5,262

 

(969)

 

348,525

 

389,582

 

1,618

 

(2,946)

 

388,254

Total equity securities

 

46,847

 

8,974

 

(2,200)

 

53,621

 

46,125

 

9,833

 

(3,354)

 

52,604

Total investments

$

391,079

$

14,236

$

(3,169)

$

402,146

$

435,707

$

11,451

$

(6,300)

$

440,858

    

Gross

    

Gross

    

    

Gross

    

Gross

    

Amortized Cost/

Unrealized

Unrealized

Amortized Cost/

Unrealized

Unrealized

As of December 31, 2020

 

Carrying Value

    

Gains

    

Losses

    

Fair Value

As of December 31, 2021

 

Carrying Value

    

Gains

    

Losses

    

Fair Value

U.S. Treasury securities and obligations of U.S. Government

$

179,259

$

487

$

0

$

179,746

$

63,098

$

56

$

(170)

$

62,984

Corporate bonds

 

214,666

 

5,086

 

(384)

 

219,368

 

103,515

 

2,115

 

(49)

 

105,581

Corporate bank loans

 

53,650

 

3

 

(871)

 

52,782

 

81,570

 

84

 

(465)

 

81,189

Municipal bonds

 

49,833

 

756

 

(50)

 

50,539

 

38,162

 

372

 

(70)

 

38,464

Mortgage-backed

 

4,759

 

114

 

(29)

 

4,844

 

1,830

 

29

 

(4)

 

1,855

Total debt securities

 

502,167

 

6,446

 

(1,334)

 

507,279

 

288,175

 

2,656

 

(758)

 

290,073

Total equity securities

 

26,988

 

5,648

 

(3,248)

 

29,388

 

42,120

 

9,355

 

(2,780)

 

48,695

Total investments

$

529,155

$

12,094

$

(4,582)

$

536,667

$

330,295

$

12,011

$

(3,538)

$

338,768

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

Three Months Ended March 31, 

    

2022

    

2021

    

Corporate bonds

$

12

$

197

Corporate bank loans

 

5

 

51

Municipal bonds

 

0

 

(9)

Equity securities

 

129

 

1,164

Gain on investments

 

146

 

1,403

Unrealized (losses) gain on equity investments

(95)

4,376

Investment gains, net

$

51

$

5,779

We realized gross gains on investments of $152 thousand and $1.5 million during the three months ended March 31, 2022 and 2021, respectively. We realized gross losses on investments of $6 thousand and $0.1 million for the three months ended March 31, 2022 and 2021, respectively. We recorded proceeds from the sale of investment securities of $0.5 million and $1.2 million during the three months ended March 31, 2022 and 2021, respectively. Realized investment gains and losses are recognized in operations on the first in-first out method.

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

Three Months Ended March 31, 

    

2021

    

2020

    

Corporate bonds

$

197

$

55

Corporate bank loans

 

51

 

(148)

Municipal bonds

 

(9)

 

1,420

Equity securities

 

1,164

 

4,309

Gain on investments

 

1,403

 

5,636

Unrealized (losses) gains on other investments

 

0

 

(2,001)

Unrealized gain (losses) on equity investments

4,376

(32,965)

Investment gains (losses), net

$

5,779

$

(29,330)

We realized gross gains on investments of $1.5 million and $20.4 million during the three months ended March 31, 2021 and 2020, respectively. We realized gross losses on investments of $0.1 million and $14.8 million for the three months ended March 31, 2021 and 2020, respectively. We recorded proceeds from the sale of investment securities of $1.2 million and $100.8 million during the three months ended March 31, 2021 and 2020 respectively. Realized investment gains and losses are recognized in operations on the first in-first out 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 March 31, 20212022 and December 31, 20202021 (in thousands):

As of March 31, 2021

As of March 31, 2022

12 months or less

Longer than 12 months

Total

12 months or less

Longer than 12 months

Total

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

U.S. Treasury securities and obligations of U.S. Government

$

2,950

$

(1)

$

0

$

0

$

2,950

$

(1)

$

42,483

$

(692)

$

0

$

0

$

42,483

$

(692)

Corporate bonds

 

1,819

 

(5)

 

3,244

 

(118)

 

5,063

 

(123)

 

130,766

 

(1,089)

 

1,149

 

(20)

 

131,915

 

(1,109)

Corporate bank loans

 

22,011

 

(104)

 

25,118

 

(633)

 

47,129

 

(737)

 

45,991

 

(480)

 

28,458

 

(535)

 

74,449

 

(1,015)

Municipal bonds

 

2,720

 

(27)

 

1,464

 

(19)

 

4,184

 

(46)

 

9,149

 

(106)

 

838

 

(11)

 

9,987

 

(117)

Mortgage-backed

 

368

 

(57)

 

13

 

(5)

 

381

 

(62)

 

1,669

 

(8)

 

9

 

(5)

 

1,678

 

(13)

Total debt securities

 

29,868

 

(194)

 

29,839

 

(775)

 

59,707

 

(969)

 

230,058

 

(2,375)

 

30,454

 

(571)

 

260,512

 

(2,946)

Total equity securities

 

8,118

 

(635)

6,538

(1,565)

14,656

 

(2,200)

 

14,165

 

(1,484)

3,922

(1,870)

18,087

 

(3,354)

Total investments

$

37,986

$

(829)

$

36,377

$

(2,340)

$

74,363

$

(3,169)

$

244,223

$

(3,859)

$

34,376

$

(2,441)

$

278,599

$

(6,300)

As of December 31, 2020

As of December 31, 2021

12 months or less

Longer than 12 months

Total

12 months or less

Longer than 12 months

Total

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

U.S. Treasury securities and obligations of U.S. Government

$

0

$

0

$

0

$

0

$

0

$

0

$

43,273

$

(170)

$

0

$

0

$

43,273

$

(170)

Corporate bonds

 

7,801

 

(186)

 

3,556

 

(198)

 

11,357

 

(384)

 

0

 

0

 

2,245

 

(49)

 

2,245

 

(49)

Corporate bank loans

 

45,233

 

(559)

 

4,144

 

(312)

 

49,377

 

(871)

 

42,256

 

(177)

 

16,763

 

(288)

 

59,019

 

(465)

Municipal bonds

 

2,859

 

(33)

 

1,154

 

(17)

 

4,013

 

(50)

 

3,321

 

(58)

 

1,038

 

(12)

 

4,359

 

(70)

Mortgage-backed

 

635

 

(25)

 

14

 

(4)

 

649

 

(29)

 

0

 

0

 

10

 

(4)

 

10

 

(4)

Total debt securities

 

56,528

 

(803)

 

8,868

 

(531)

 

65,396

 

(1,334)

 

88,850

 

(405)

 

20,056

 

(353)

 

108,906

 

(758)

Total equity securities

 

9,572

 

(1,610)

 

1,848

 

(1,638)

 

11,420

 

(3,248)

 

6,221

 

(710)

 

5,055

 

(2,070)

 

11,276

 

(2,780)

Total investments

$

66,100

$

(2,413)

$

10,716

$

(2,169)

$

76,816

$

(4,582)

$

95,071

$

(1,115)

$

25,111

$

(2,423)

$

120,182

$

(3,538)

We had a total of 90197 debt securities with an unrealized loss, of which 49164 were in an unrealized loss position for less than one year and 4133 were in an unrealized loss position for a period of one year or greater, as of March 31, 2021.2022.  We held a total of 81100 debt securities with an unrealized loss, of which 6474 were in an unrealized loss position for less than one year and 1726 were in an unrealized loss position for a period of one year or greater, as of December 31, 2020.2021. We consider these losses as a temporary decline in value as they are predominately on securities that we do not intend to sell and do not

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believe we will be required to sell prior to recovery of our amortized cost basis. The gross unrealized losses on the debt security positions at March 31, 20212022 and December 31, 20202021 were due predominately to market and interest rate fluctuations and 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.

We complete a detailed analysis each quarter to assess whether any decline in the fair value of any debt security below cost is deemed other-than-temporary. All debt securities with an unrealized loss are reviewed. We recognize an impairment loss when a debt security’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 0t recognize any impairment loss on debt securities during the three months ended March 31, 2022 and 2021, or 2020.respectively.

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)

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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. During the three months ended March 31, 2021 or 2020 weWe did 0t dispose of any previously impaired securities.securities during the three months ended March 31, 2022 or 2021, respectively.  

Equity Investments: Equity investments that are not consolidated or accounted for under the equity method of accounting with readily determinable fair values are not required to be evaluated for other-than-temporary-impairment.

The amortized cost and estimated fair value of debt securities at March 31, 20212022 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 Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

(in thousands)

(in thousands)

Due in one year or less

$

150,383

$

151,762

$

98,318

$

98,804

Due after one year through five years

 

140,739

 

143,504

 

222,617

 

221,341

Due after five years through ten years

 

32,369

 

32,165

 

59,833

 

59,300

Due after ten years

 

17,359

 

17,704

 

7,068

 

7,065

Mortgage-backed

 

3,382

 

3,390

 

1,746

 

1,744

$

344,232

$

348,525

$

389,582

$

388,254

6.5. Pledged Investments

We have pledged certain of our securities for the benefit of various state insurance departments and reinsurers. These securities are included with our available-for-sale debt securities because we have the ability to trade these securities. We retain the interest earned on these securities. These securities had a carrying value of $20.9$25.9 million and $29.7$30.0 million at March 31, 20212022 and December 31, 2020,2021, respectively.

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7.6. Reserves for Unpaid Losses and Loss Adjustment Expenses

Year to-date activity in the consolidated reserves for unpaid losses and LAE is summarized as follows (in thousands):

March 31,

March 31,

March 31,

March 31,

2021

2020

2022

2021

Balance at January 1

$

789,768

$

620,355

$

816,681

$

789,768

Less reinsurance recoverable

 

349,585

 

272,604

 

387,915

 

357,200

Net balance at January 1

 

440,183

 

347,751

 

428,766

 

432,568

Incurred related to:

 

  

 

  

 

  

 

  

Current year

 

72,989

 

84,846

 

56,333

 

71,565

Prior years

 

(2,086)

 

8,559

 

7,691

 

(2,086)

Total incurred

 

70,903

 

93,405

 

64,024

 

69,479

Paid related to:

 

  

 

  

 

  

 

  

Current year

 

7,067

 

14,525

 

12,757

 

7,067

Prior years

 

52,360

 

80,888

 

62,213

 

52,360

Total paid

 

59,427

 

95,413

 

74,970

 

59,427

Net balance at March 31

 

451,659

 

345,743

 

417,820

 

442,620

Plus reinsurance recoverable

 

360,613

 

307,747

 

380,518

 

369,652

Balance at March 31

$

812,272

$

653,490

$

798,338

$

812,272

The year to date impact from the unfavorable (favorable) unfavorable net prior years’ loss development on each reporting segment is presented below:

March 31, 

March 31, 

2021

    

2020

2022

    

2021

Specialty Commercial Segment

$

(1,899)

$

3,153

$

6,380

$

(1,899)

Standard Commercial Segment

 

(1,361)

 

125

 

(262)

 

(1,361)

Personal Segment

 

1,174

 

5,281

 

1,573

 

1,174

Corporate

 

0

 

0

Total (favorable) unfavorable net prior year development

$

(2,086)

$

8,559

Total unfavorable (favorable) net prior year development

$

7,691

$

(2,086)

The following describes the primary factors behind each segment’s prior accident year reserve development for the three months ended March 31, 20212022 and 2020:2021:

Three months ended March 31, 2022:

Specialty Commercial Segment. Our Commercial Auto business unit experienced net unfavorable development in the 2020 and 2019 accidentyears primarily in the exited contract binding commercial automobile liability line of business, partially offset by net favorable development in both the primary and excess commercial automobile lines of business in the 2021 accidentyear. Our E&S Property business unit experienced net unfavorable development due to the development of catastrophe-related losses in the 2021 and 2020 accident years. We experienced net unfavorable development in our E&S Casualty and Professional Liability business units. We experienced net favorable development in our and Aerospace & Programs business unit..
Standard Commercial Segment. Our Commercial Accounts business unit experienced net favorable development in our commercial auto liability and property lines of business in accident years 2021 and 2020, partially offset by net unfavorable development in the general liability lines of business in accident

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years 2019 and 2016. The run-off from our former Workers Compensation operating unit experienced net favorable development in the 2015 and prior accidentyears.
Personal Segment. Net unfavorable development in our Specialty Personal Lines business unit was driven predominately by unfavorable development attributable to the 2021 and 2020 accident years due in part to rising inflationary trends, specifically loss costs, that the industry began experiencing in 2021.

Three months ended March 31, 2021:

Specialty Commercial Segment. Our Commercial Auto business unit experienced net favorable development in the 2020 and 2019 accident years both in the primary and excess commercial automobile liability lines of business, partially offset by net unfavorable development in the excess commercial automobile lines of business in the 2018, 2017 and 2016 accident years. Our E&S Casualty business unit experienced net unfavorable development primarily in our primary liability line of business in the 2018 and prior accident years, partially offset by net favorable development in the 2019 accident year. We experienced net favorable development in our E&S Property, Professional Liability and Aerospace & Programs business units.
Standard Commercial Segment. Our Commercial Accounts business unit experienced net favorable development for all lines of business in total, primarily due to net favorable development in our commercial property lines of business in accident year 2020, partially offset by net unfavorable

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development in the general liability lines of business in accident years 2020 and 2017. The run-off from our former Workers Compensation operating unit experienced net favorable development in the 2014 and prior accident years.
Personal Segment. Net unfavorable development in our Specialty Personal Lines business unit was attributable to the 2020 and prior accident years. The net development during the three months ended March 31, 2021 was driven predominately by unfavorable development attributable to the 2020, 2019 and 2017 accident years.

Three months ended March 31, 2020:

Specialty Commercial Segment. Our Commercial Auto business unit experienced net unfavorable development in the 2017 and prior accidentyears primarily in the primary commercial automobile liability line of business, partially offset by net favorable development in the primary and excess commercial automobile lines of business in the 2019 and 2018 accidentyears. Our E&S Casualty business unit experienced net unfavorable development primarily in our primary liability line of business and our E&S package insurance products in the 2017, 2016, 2015 and 2013 and prior accident years, partially offset by net favorable development in the 2019, 2018 and 2014 accident years. We experienced net favorable development in our E&S Property and Professional Liability business units, partially offset by net unfavorable development in our Aerospace & Programs business unit.
Standard Commercial Segment. Our Commercial Accounts business unit experienced net unfavorable development primarily in the general liability line of business in the 2018, 2016, 2015 and 2013 and prior accident years, partially offset by net favorable development in the 2019, 2017 and 2014 accidentyears primarily in the general liability line of business. Our Commercial Accounts business unit experienced net favorable development in the 2015 accident year, partially offset by net unfavorable development in the 2014 accidentyear in the occupational accident line of business. The run-off from our former Workers Compensation operating unit experienced net favorable development in the 2013 and prior accidentyears.
Personal Segment. Net unfavorable development in our Specialty Personal Lines business unit was mostly attributable to the 2019, 2018, 2017 and 2016 accidentyears, partially offset by favorable development in the 2015 and 2013 and prior accident years. The net development for the first quarter of 2020 was driven predominately by unfavorable development attributable to more recent treaty years where we retain a greater portion of the claims.2020, 2019 and 2017 accident years.

8.7. 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 and expired by its terms on May 27, 2015.  As of March 31, 2021, there were 0 outstanding incentive stock options and outstanding non-qualified stock options to purchase 14,157 shares of our common stock. 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.

Our 2015 Long Term Incentive Plan (“2015 LTIP”) was approved by shareholders on May 29, 2015.  There are 2,000,000 shares authorized for issuance under the 2015 LTIP.  As of March 31, 2021,2022, restricted stock units representing the right to receive up to 103,575768,177 shares of our common stock were outstanding under the 2015 LTIP.  There were 0 stock option awards granted under the 2015 LTIP as of March 31, 2021.2022.

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Stock Options:

A summary of the status of ourThere were 0 stock options as of March 31, 2021 and changesoutstanding at any point during the three months then ended is presented below:

    

    

    

Average

    

Remaining

Aggregate

Number of

Weighted Average

Contractual

Intrinsic Value

    

Shares

    

Exercise Price

    

Term (Years)

    

($000)

Outstanding at January 1, 2021

 

14,157

$

6.99

 

  

 

  

Granted

 

0

$

0

 

  

 

  

Exercised

 

0

$

0

 

  

 

  

Forfeited or expired

 

0

$

0

 

  

 

  

Outstanding at March 31, 2021

 

14,157

$

6.99

 

0.8

$

0

Exercisable at March 31, 2021

 

14,157

$

6.99

 

0.8

$

0

The following table detailsMarch 31, 2022.  There were no stock options granted, exercised or forfeited during the intrinsic value of options exercised, total cost of share-based payments charged against income before income tax benefit and the amount of related income tax benefit recognized in income for the periods indicated (in thousands):

Three Months Ended March 31,

2021

2020

Intrinsic value of options exercised

$

0

$

0

Cost of share-based payments (non-cash)

$

0

$

0

Income tax benefit of share-based payments recognized in income

$

0

$

0

three months ended March 31, 2022 or 2021, respectively.  As of March 31, 2021 and December 31, 2020,2022, there was 0 unrecognized compensation cost related to non-vested stock options granted under our plans which is expected to be recognized in the future.

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 0 stock options granted during the first three months of 2021 or 2020.options.

Restricted Stock Units:

Restricted stock units awarded under the 2015 LTIP represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions. RestrictedFor grants issued prior to 2021, restricted stock units vest and shares of common stock become issuable on March 31 of the third calendar year following the year of grant if performance criteria have been satisfied. Restricted stock units awarded under the 2015 LTIP during 2021 cumulatively vest up to 50%, 80% and 100%, and shares of common stock become issuable, on March 31 of the third, fourth and fifth calendar years, respectively, following the year of grant if performance criteria have been satisified.

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The performance criteria for all restricted stock units require that we achieve certain compound average annual growth rates in book value per share as well as certain average combined ratio percentages over the vesting period in order to receivevary based on grantee. The number of shares of common stock in amounts rangingto be received ranges from 50% to 150% of the number of restricted stock units granted.granted based on the level of achievement of the performance criteria. Grantees of restricted stock units do not have any rights of a stockholder, and do not participate in any distributions to our common stockholders, until the award fully vests upon satisfaction of the vesting schedule, performance criteria and other conditions set forth in their award agreement. Therefore, unvested restricted stock units are not considered participating securities under ASC 260, “Earnings Per Share” (Topic 260), and are not included in the calculation of basic or diluted earnings per share.

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Compensation cost is measured as an amount equal to the fair value of the restricted stock units on the date of grant 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 our best estimate of the ultimate achievement level.  The grant date fair value of restricted stock units granted in 2017, 2018, 2019 and 20192021 was $10.20, $10.87, $18.10 and $18.10$4.21 per unit, respectively.  We incurred compensation expense (benefit) of $97$62 thousand and ($581)$97 thousand related to restricted stock units during the three months ended March 31, 20212022 and 2020,2021, respectively.  We recorded income tax benefit (expense) of $20$13 thousand and ($122)$20 thousand related to restricted stock units during the three months ended March 31, 20212022 and 2020,2021, respectively.  

The following table details the status of our restricted stock units as of and for the three months ended March 31, 20212022 and 2020:2021.

Number of Restricted Stock Units

Number of Restricted Stock Units

2021

    

2020

    

2022

    

2021

    

Nonvested at January 1

228,827

 

353,491

 

581,689

 

228,827

 

Granted

0

 

0

 

8,313

 

0

 

Vested

(28,874)

 

(18,403)

 

(17,951)

 

(28,874)

 

Forfeited

(130,903)

 

(93,225)

 

(59,933)

 

(130,903)

 

Nonvested at March 31

69,050

 

241,863

 

512,118

 

69,050

 

As of March 31, 2021,2022, there was $0.5$1.9 million of unrecognized grant date compensation cost related to unvested restricted stock units assuming compensation cost accrual at target achievement level.  Based on the current performance estimate, we expect to recognize $0.2$1.7 million of compensation cost related to unvested restricted stock units, of which $0.1$0.5 million is expected to be recognized during the remainder of 2021 and2022, $0.7 million in 2023, $0.4 million in 2024, $0.1 million is expected to be recognized in 2022.

9. Segment Information

The following is business segment information for the three months ended March 31, 20212025 and 2020 (in thousands):$22 thousand in 2026.

Three Months Ended March 31,

2021

2020

Revenues

  

 

  

 

Specialty Commercial Segment

$

71,965

$

92,120

Standard Commercial Segment

 

17,688

 

17,636

Personal Segment

 

18,959

 

22,323

Corporate

 

5,807

 

(31,031)

Consolidated

$

114,419

$

101,048

Pre-tax income (loss)

 

  

 

  

Specialty Commercial Segment

$

11,821

$

16,292

Standard Commercial Segment

 

366

 

716

Personal Segment

 

(1,623)

 

(5,655)

Corporate

 

1,136

 

(80,939)

Consolidated

$

11,700

$

(69,586)

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8. Segment Information

The following is business segment information for the three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended March 31,

2022

2021

Revenues

  

 

  

 

Specialty Commercial Segment

$

51,911

$

69,599

Standard Commercial Segment

 

17,128

 

17,688

Personal Segment

 

16,819

 

18,959

Corporate

 

(186)

 

5,807

Consolidated

$

85,672

$

112,053

Pre-tax (loss) income

 

  

 

  

Specialty Commercial Segment

$

2,565

$

11,348

Standard Commercial Segment

 

(692)

 

366

Personal Segment

 

(1,026)

 

(1,623)

Corporate

 

(4,966)

 

1,136

Consolidated

$

(4,119)

$

11,227

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

March 31,

December 31,

March 31,

December 31,

Assets:

2021

2020

2022

2021

Specialty Commercial Segment

$

1,117,546

$

1,104,953

$

1,105,918

$

1,163,947

Standard Commercial Segment

 

198,785

 

183,689

 

193,088

 

194,594

Personal Segment

 

138,897

 

133,310

 

125,340

 

128,165

Corporate

 

62,315

 

63,581

 

65,517

 

66,892

Consolidated

$

1,517,543

$

1,485,533

$

1,489,863

$

1,553,598

10.9. 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 March 31, 20212022 was with reinsurers that had an A.M. Best rating of “A–“A-” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

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

Three Months Ended

Three Months Ended

 

March 31, 

 

March 31, 

    

2021

    

2020

    

2022

    

2021

Ceded earned premiums

 

$

74,591

 

$

88,009

 

$

76,425

 

$

76,957

Reinsurance recoveries

 

$

60,475

 

$

83,594

 

$

66,581

 

$

61,899

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Loss Portfolio Transfer

On July 16, 2020, AHIC, HIC, HSIC, HCM and HNIC (collectively, the “Hallmark Insurers”), entered into a Loss Portfolio Transfer Reinsurance Contract to be effective as of January 1, 2020 (the “LPT Contract”) with DARAG Bermuda Ltd. (“DARAG Bermuda”) and DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, the “Reinsurers”).  The LPT Contract was consummated on July 31, 2020. The Company recorded a $21.7 million pre-tax loss during the third quarter of 2020 attributable to the closing of the LPT Contract.

Pursuant to the LPT Contract, (a) the Hallmark Insurers ceded to the Reinsurers all existing and future claims for losses occurring on or prior to December 31, 2019 on the binding primary commercial automobile liability insurance policies and the brokerage primary commercial automobile liability insurance policies issued by the Hallmark Insurers (the “Subject Business”) up to an aggregate limit of $240.0 million, with (i) the first layer of $151.2 million in reinsurance provided by DARAG Bermuda, (ii) the Hallmark Insurers retaining a loss corridor of the next $24.9 million in losses on the Subject Business, (iii) DARAG Bermuda reinsuring a second layer of $27.8 million above the first layer and the Hallmark Insurers’ loss corridor, and (iv) DARAG Guernsey reinsuring the top layer of $36.1 million in losses on the Subject Business, in each case net of third-party reinsurance and other recoveries; (b) the Hallmark Insurers will continue to manage and retain the benefit of other third-party reinsurance on the Subject Business; and (c) the Hallmark Insurers paid the Reinsurers a net reinsurance premium of $92.6  million.  In connection with the closing, the parties also entered into a Services Agreement and a Trust Agreement. Pursuant to the Services Agreement, DARAG Bermuda assumed responsibility for certain administrative services, including claims handling, for the Subject Business.  Pursuant to the Trust Agreement, the Reinsurers made initial cash deposits in the aggregate amount of $96.7 million into collateral trust

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accounts with The Bank of New York Mellon, as trustee, to be held as security for the Reinsurers’ obligations to the Hallmark Insurers under the LPT Contract. The Reinsurers and the Hallmark Insurers have agreed to submit to binding arbitration a dispute that has arisen regarding the rights and obligations of the parties under the LPT Contract. Pending resolution of the dispute, the Hallmark Insurers have agreed to fund the payment of claims under the LPT contract without prejudice to their right to seek reimbursement and other relief in the arbitration proceedings. (See Note 18.) As of March 31, 2022, our consolidated balance sheet included a $13.5 million account receivable from DARAG related to the Hallmark Insurers funding claim payments under the LPT contract pending resolution of the dispute.

As of March 31, 2021,2022, the ultimate incurred losses from the subject business were $182.8$243.6 million or $6.7$3.6 million in excess of the Hallmark Insurers’ loss corridor.aggregate limit of $240.0 million.  Our reinsurance recoverables of $494.4$545.3 million include $54.7$52.4 million related to the LPT Contract as of March 31, 2021.

2022.

11.10. Subordinated Debt Securities

We issued trust preferred securities through Trust I and Trust II.  These Delaware statutory trusts are sponsored and wholly-owned by Hallmark and each was created solely for the purpose of issuing the trust preferred securities.  Each trust pays dividends on its preferred securities at the same rate each quarter as interest is paid on the junior subordinated debt securities.  Under the terms of the junior subordinated debt securities, we pay interest only each quarter and the principal of each note at maturity.  The subordinated debt securities of each trust are uncollateralized and do not require maintenance of minimum financial covenants.

The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities:

Hallmark

Hallmark

Hallmark

Hallmark

    

Statutory

Statutory

    

Statutory

Statutory

Trust I

Trust II

Trust I

Trust II

Issue date

June 21, 2005

August 23, 2007

June 21, 2005

August 23, 2007

Principal amount of trust preferred securities

$

30,000

$

25,000

$

30,000

$

25,000

Principal amount of junior subordinated debt securities

$

30,928

$

25,774

$

30,928

$

25,774

Maturity date of junior subordinated debt securities

June 15, 2035

September 15, 2037

June 15, 2035

September 15, 2037

Trust common stock

$

928

$

774

Interest rate, per annum

Three Month LIBOR + 3.25%

Three Month LIBOR + 2.90%

Current interest rate at March 31, 2021

3.43%

3.08%

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Trust common stock

$

928

$

774

Interest rate, per annum

Three Month LIBOR + 3.25%

Three Month LIBOR + 2.90%

Current interest rate at March 31, 2022

4.08%

3.73%

12.

11. Senior Unsecured Notes

On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029.  Interest on the Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020.  The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject to any sinking fund requirements.  At Hallmark’s option, the Notes are redeemable, in whole or in part, prior to the stated maturity subject to certain provisions intended to make the holders of the Notes whole on scheduled interest and principal payments.  The indenture governing the Notes contains covenants which, among other things, restrict Hallmark’s ability to incur additional indebtedness, make certain payments, create liens on the stock of certain subsidiaries, dispose of certain assets, or merge or consolidate with other entities.  The terms of the indenture prohibit payments or other distributions on any security of the Company that ranks junior to the Notes when the Company’s debt to capital ratio (as defined in the indenture) is greater than 35%.  The Company’s debt to capital ratio was 37%38.3% as of March 31, 2021.2022.

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13.12. Deferred Policy Acquisition Costs

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

Three Months Ended

Three Months Ended

 

March 31, 

 

March 31, 

 

2021

 

2020

 

2022

 

2021

Deferred

 

$

(15,103)

 

$

(15,981)

 

$

(24,325)

 

$

(15,103)

Amortized

16,557

13,388

24,289

16,557

Net

 

$

1,454

 

$

(2,593)

 

$

(36)

 

$

1,454

14.13. Earnings per Share

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

Three Months Ended

Three Months Ended

 

March 31, 

 

March 31, 

    

2021

  

2020

    

2022

  

2021

Weighted average shares - basic

18,142

18,123

18,172

18,142

Effect of dilutive securities

0

0

0

0

Weighted average shares - assuming dilution

18,142

18,123

18,172

18,142

We had 0 shares of common stock potentially issuable upon exercise of employee stock options for the three months ended March 31, 2022. For the three months ended March 31, 2021, and 2020,we had 14,157 shares of common stock potentially issuable upon the exercise of employee stock options which 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, to the extent not previously cancelled or exercised, expired in 2021.  

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15.14. Net Periodic Pension Cost

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

Three Months Ended

Three Months Ended

 

March 31, 

 

March 31, 

    

2021

    

2020

    

2022

    

2021

Interest cost

 

$

68

 

$

89

 

$

75

 

$

68

Amortization of net loss

43

35

27

43

Expected return on plan assets

(177)

(171)

(191)

(177)

Net periodic pension cost

 

$

(66)

 

$

(47)

 

$

(89)

 

$

(66)

Contributed amount

 

$

0

 

$

0

 

$

0

 

$

0

Refer to Note 15 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for more discussion of our retirement plans.

16.15. Income Taxes

Our effective income tax rate for the three months ended March 31, 2022 and 2021 was 21.8% and 2020 was 20.1% and 7.6%, respectively.  The effective ratetax rates for the three months ended March 31, 2022 and 2021 varied from the statutory tax rates primarily due to tax exempt interest income. The effective tax rate for the three months ended March 31, 2020 varied from the statutory tax rates primarily due to the non-deductible impairment of goodwill.interest.  We concluded that 0 valuation allowance was necessary against our deferred tax assets as of March 31, 20212022 and December 31, 2020.2021.

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17.16. Supplemental Cash Flow Information

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheet to the total of the same such amounts shown in the statement of cash flows (in thousands):

As of March 31,

As of March 31,

    

2021

    

2020

    

2022

    

2021

Cash and cash equivalents

 

$

281,849

 

$

67,165

 

$

183,377

 

$

281,849

Restricted cash

5,434

1,732

4,239

5,434

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

287,283

 

$

68,897

 

$

187,616

 

$

287,283

Restricted cash represents amounts required to be set aside by a contractual agreement with a third-party insurer and amounts pledged for the benefit of various state insurance departments.

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The following table provides supplemental cash flow information for the three months ended March 31, 20212022 and 2020:2021:

Three Months Ended March 31, 

Three Months Ended March 31, 

    

2021

    

2020

    

2022

    

2021

Interest paid

 

$

1,576

 

$

2,241

 

$

1,577

 

$

1,576

Supplemental schedule of non-cash investing activities:

Receivable for securities related to investment disposals

 

$

1,382

 

$

16,282

 

$

1,209

 

$

1,382

Payable for securities related to investment purchases

 

$

10,979

 

$

104

 

$

2,374

 

$

10,979

18.17. Commitments and Contingencies

On May 5, 2020,The Reinsurers and the Hallmark Insurers have agreed to submit to binding arbitration a lawsuit styled Schulze v.dispute that has arisen regarding the rights and obligations of the parties under the LPT Contract.  (See Note 10.)  Pending resolution of the dispute, the Hallmark Financial Services, Inc., et al. (Case No. 3:20-cv-01130) was filedInsurers have agreed to fund the payment of claims under the LPT Contract without prejudice to their right to seek reimbursement and other relief in the U.S. District Court forarbitration proceedings.  The arbitration panel has not yet been constituted and no pleadings have been submitted.  However, based on prior negotiations, the Northern DistrictCompany expects the Reinsurers to seek rescission of Texas, Dallas Division (the “Schulze Matter”).the LPT Contract on the basis of alleged breach and fraudulent inducement by the Hallmark Insurers.  The Company its former Chief Executive Officerbelieves any such claims are without factual basis or legal merit and its former Chief Financial Officerintends to vigorously contest the matter.  The Company also intends to pursue an arbitration award enforcing the terms of the LPT Contract and reimbursing the Hallmark Insurers for all claim amounts funded by them during the pendency of the arbitration, as well as all other damages sustained by the Hallmark Insurers. The arbitration panel is currently being constituted, and no pleadings have yet been submitted. Because the dispute is at an initial stage, we are named defendants inunable at this time to provide an evaluation of the lawsuit brought on behalflikelihood of a putative class of shareholders who acquired Hallmark securities between March 5, 2019 and March 17, 2020. In general, the complaint alleges that the defendants violated the Securities Exchange Act of 1934 by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company would be forced to report $63.8 million of prior year netan adverse loss development, (d) the Company would exit the contract binding line of its commercial automobile primary insurance business, and by making positive statements about the Company’s business, operations and prospects that were allegedly materially misleading and/or lacked a reasonable basis. On July 21, 2020, the court appointed Rajeev Yalamanchili as Lead Plaintiff.  Lead Plaintiff filed an Amended Complaint on September 30, 2020.  The litigation is in its initial stages. The Company’s current policy is to expense legal costs as incurred. Historically, the Company has not carried director and officer liability insurance and does not currently hold such a policy.outcome.

As of March 31, 2021,2022 we were engaged in various other legal proceedings in the ordinary course of business, none of which, either individually or in the aggregate, are believed likely to have a material adverse effect on our consolidated financial position or results of operations, in the opinion of management. The various other legal proceedings to which we were a party are routine in nature and incidental to our business.

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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 did 0t pay an assessment during the first three months of 20212022 or 2020.2021.

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19.18. Changes in Accumulated Other Comprehensive (Loss) Income Balances

The changes in accumulated other comprehensive (loss) income balances as of March 31, 20212022 and 20202021 were as follows (in thousands):

    

    

    

Accumulated Other

    

    

    

Accumulated Other

Pension

Unrealized

Comprehensive

Pension

Unrealized

Comprehensive

    

Liability

    

Gains (Loss)

    

Income (Loss)

    

Liability

    

Gains (Loss)

    

Income (Loss)

Balance at January 1, 2020

$

(3,239)

$

3,927

$

688

Balance at January 1, 2021

$

(3,762)

$

4,145

$

383

Other comprehensive loss:

 

 

Change in net actuarial gain

 

34

 

 

34

 

43

 

0

 

43

Tax effect on change in net actuarial gain

 

(7)

 

 

(7)

 

(9)

 

0

 

(9)

Unrealized holding losses arising during the period

 

 

(6,987)

 

(6,987)

 

0

 

585

 

585

Tax effect on unrealized holdings losses arising during the period

 

 

1,467

 

1,467

 

0

 

(123)

 

(123)

Reclassification adjustment for gains included in net income

 

 

(5,636)

 

(5,636)

 

0

 

(1,403)

 

(1,403)

Tax effect on reclassification adjustment for gains included in net income

 

 

1,184

 

1,184

 

0

 

295

 

295

Other comprehensive loss, net of tax

 

27

 

(9,972)

 

(9,945)

 

34

 

(646)

 

(612)

Balance at March 31, 2020

$

(3,212)

$

(6,045)

$

(9,257)

Balance at March 31, 2021

$

(3,728)

$

3,499

$

(229)

Balance at January 1, 2021

$

(3,762)

$

4,145

$

383

Balance at January 1, 2022

$

(2,641)

$

1,606

$

(1,035)

Other comprehensive income:

 

  

 

  

 

  

 

  

 

  

 

  

Change in net actuarial gain

 

43

 

 

43

 

27

 

0

 

27

Tax effect on change in net actuarial gain

 

(9)

 

 

(9)

 

(6)

 

0

 

(6)

Unrealized holding gains arising during the period

 

 

585

 

585

 

0

 

(3,081)

 

(3,081)

Tax effect on unrealized holding gains arising during the period

 

 

(123)

 

(123)

 

0

 

647

 

647

Reclassification adjustment for gains included in net income

 

 

(1,403)

 

(1,403)

 

0

 

(146)

 

(146)

Tax effect on reclassification adjustment for gains included in net income

 

 

295

 

295

 

0

 

31

 

31

Other comprehensive loss, net of tax

 

34

 

(646)

 

(612)

 

21

 

(2,549)

 

(2,528)

Balance at March 31, 2021

$

(3,728)

$

3,499

$

(229)

Balance at March 31, 2022

$

(2,620)

$

(943)

$

(3,563)

20.19. Leases

Right-of-use assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. Since our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.

The Company’s operating lease obligations predominately pertain to office leases utilized in the operation of our business. Our leases have remaining terms of one to 12 years, some of which include options to extend the leases. The components of lease expense and other lease information as of and during the three month periods ended March 31, 2022 and 2021 were as follows (in thousands):

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The Company’s operating lease obligations predominately pertain to office leases utilized in the operation of our business. Our leases have remaining terms of 1 to 13 years, some of which include options to extend the leases. The components of lease expense and other lease information as of and during the three-month period ended March 31, 2021 and 2020 were as follows (in thousands):

    

Three Months Ended

Three Months Ended

March 31, 

March 31, 

    

2022

    

2021

    

Operating lease cost

$

673

$

719

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$

547

$

545

Right-of-use assets obtained in exchange for new operating lease liabilities

$

0

$

0

    

Three Months Ended

Three Months Ended

March 31, 

March 31, 

    

2021

    

2020

    

Operating lease cost

$

719

$

790

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$

545

$

436

Right-of-use assets obtained in exchange for new operating lease liabilities

$

0

$

0

Other lease information as of March 31, 20212022 and December 31, 20202021 are as follows (in thousands):

March 31, 

December 31,

March 31, 

December 31,

    

2021

    

2020

    

2022

    

2021

Operating lease right-of-use assets

$

13,666

$

13,986

$

13,495

$

13,211

Operating lease liabilities

$

15,547

$

15,862

$

15,455

$

15,062

Weighted-average remaining lease term - operating leases

10.0

10.2

11.0

11.4

Weighted-average discount rate - operating leases

5.87%

5.88%

6.22%

6.22%

We incurred $0.1 million in short-term lease payments not included in our lease liability during the three months ended March 31, 2021.2022.

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Future minimum lease payments under non-cancellable leases as of March 31, 20212022 and December 31, 20202021 were as follows (in thousands):

March 31, 

December 31,

March 31, 

December 31,

    

2021

2020

    

2022

2021

2021

$

1,626

$

2,172

2022

2,171

2,171

$

1,772

$

2,171

2023

1,885

1,885

2,224

2,023

2024

1,941

1,941

2,421

2,216

2025

1,975

1,975

2,537

2,450

2026

2,497

2,497

Thereafter

11,350

11,350

15,767

15,767

Total future minimum lease payments

$

20,948

$

21,494

$

27,218

$

27,124

Less imputed interest

$

(5,401)

$

(5,632)

$

(11,763)

$

(12,062)

Total operating lease liability

$

15,547

$

15,862

$

15,455

$

15,062

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

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

Introduction

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

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

Specialty Commercial Segment. Our Specialty Commercial Segment includes our Commercial Auto business unit which offers primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit which offers primary and excess liability, excess public entity liability and E&S package and garage liability insurance products and services; our E&S Property business unit which offers primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability business unit which offers healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals, medical facilities and, through 2020, senior care facilities; and our Aerospace & Programs business unit which offers general aviation and, until exited during 2020, satellite launch property/casualty insurance products and services, as well as certain specialty programs.

Standard Commercial Segment. Our Standard Commercial Segment includes the package and monoline property/casualty and, until exited during 2016, occupational accident insurance products and services

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handled by our Commercial Accounts business unit; and the runoff of workers compensation insurance products handled by our former Workers Compensation operating unit  until discontinued during 2016.
Personal Segment. Our Personal Segment includes the non-standard personal automobile and renters insurance products and services handled by our Specialty Personal Lines business unit.

The retained premium produced by these reportable segments is supported by our American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark Insurance Company (“HIC”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”) insurance subsidiaries. In addition, control and management of Hallmark County Mutual Insurance Company (“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 32% of the total net premiums written by any of them, HIC retains 32% of our total net premiums written by any of them, HSIC

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retains 26% of our total net premiums written by any of them and HNIC retains 10% of our total net premiums written by any of them. Neither HCM nor TBIC is a party to the intercompany pooling arrangement.

Results of Operations

Management overview. During the three months ended March 31, 2021,2022, our total revenue was $114.4$85.7 million, representing an increasea decrease of 13%24% from the $101.0$112.1 million in total revenue for the same period of 2020.2021. During the three months ended March 31, 2021,2022, we reported a pre-tax incomeloss of $11.7$4.1 million, as compared to a pre-tax lossincome of $69.6$11.2 million reported during the same period the prior year.

The increasedecrease in revenue for the three months ended March 31, 2021 was primarily due to net investment gains of $5.8 million as compared to net investment losses of $29.3 million during the same period of 2020. This increase in revenue was partially offset by decreased net premiums earned of $19.7 million, a $1.4 million decrease in net investment income and a $0.5 million decrease in finance charges for the three months ended March 31, 20212022 compared to the same period of the prior year.year was primarily due to lower net premiums earned of $19.4 million, lower net investment income of $1.2 million, lower finance charges of $0.1 million, and lower net investment gains of $5.7 million.  

The improvementdeterioration in pre-tax resultsearnings for the first quarter of 20212022 compared to the same period of the prior year was primarily due to the increaseddecreased revenue discussed above, the absence of the $46.0 million of impairment charges to goodwill and indefinite-lived intangible assets taken during the first quarter of 2020, and a $22.5 million decrease inpartially offset by lower losses and loss adjustment expenses (“LAE”).  The impairment charges during the first quarter of 2020 resulted from our determination that a significant decline in market capitalization below stockholders’ equity indicated the impairment$5.5 million and lower operating expenses of the goodwill and indefinite-lived intangible assets included in our balance sheet.$5.6 million. The decrease in losses and LAE was primarily the result of exiting the contract binding line of the primary automobile business marketeddue to decreased net premiums earned and lower net catastrophe losses, partially offset by our Commercial Auto business unit commencing in February 2020, as well as $2.1 million of favorableunfavorable net prior year loss reserve development during the three months ended March 31, 2020first quarter of 2022 compared to favorable net prior year loss development during the same period of 2021. Losses and LAE for the first quarter of 2022 included $1.1 million of net catastrophe losses as compared to $8.6$5.9 million during the same period of the prior year.  During the first quarter of 2022, we experienced $7.7 million of unfavorable net prior year loss reserve development, driven primarily by our exited contract binding line of business, compared to $2.1 million of favorable net prior year loss development during the same period of 2019.2021.

We reported a net incomeloss of $9.3$3.2 million for the three months ended March 31, 20212022 as compared to net lossincome of $64.3$9.0 million for the same period in 2020.2021. On a fully diluted basis, per share, we reported a net incomeloss of $0.52$0.18 per share for the three months ended March 31, 2021,2022, compared to net lossincome of $3.55$0.49 per share for the same period in 2020.2021. Our effective tax rate was 20.1%21.8% for the first three months of 20212022 compared to 7.6%20.1% for the same period in 2020.2021.  The effective ratetax rates for the three months ended March 31, 2022 and 2021 varied from the statutory tax rates primarily due to tax exempttax-exempt interest income.  The effective tax rate for the three months ended March 31, 2020 varied from the statutory tax rates primarily due to the non-deductible impairment of goodwill.  

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Table of Contents

First Quarter 20212022 as Compared to First Quarter 20202021

The following is additional business segment information for the three months ended March 31, 20212022 and 20202021 (in thousands):

Three Months Ended March 31, 

 

Specialty Commercial

Standard Commercial

 

Segment

Segment

Personal Segment

Corporate

Consolidated

 

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

 

Gross premiums written

$

113,990

$

149,470

$

29,735

$

26,376

$

19,293

$

25,743

$

$

$

163,018

$

201,589

Ceded premiums written

 

(59,554)

 

(63,964)

 

(10,250)

 

(7,463)

 

(67)

 

(3,657)

 

 

 

(69,871)

 

(75,084)

Net premiums written

 

54,436

 

85,506

 

19,485

 

18,913

 

19,226

 

22,086

 

 

 

93,147

 

126,505

Change in unearned premiums

 

15,141

 

1,466

 

(2,419)

 

(2,495)

 

(1,651)

 

(1,543)

 

 

 

11,071

 

(2,572)

Net premiums earned

 

69,577

 

86,972

 

17,066

 

16,418

 

17,575

 

20,543

 

 

 

104,218

 

123,933

Total revenues

 

71,965

 

92,120

 

17,688

 

17,636

 

18,959

 

22,323

 

5,807

 

(31,031)

 

114,419

 

101,048

Losses and loss adjustment expenses

 

44,407

 

60,883

 

12,091

 

11,855

 

14,405

 

20,667

 

 

 

70,903

 

93,405

 

 

 

 

 

 

 

 

 

 

Pre-tax income (loss)

$

11,821

$

16,292

$

366

$

716

$

(1,623)

$

(5,655)

$

1,136

$

(80,939)

$

11,700

$

(69,586)

Net loss ratio (1)

 

63.8

%  

 

70.0

%  

 

70.8

%  

 

72.2

%  

 

82.0

%  

 

100.6

%  

 

  

 

  

 

68.0

%  

 

75.4

%

Net expense ratio (1)

 

24.0

%  

 

17.7

%  

 

31.6

%  

 

32.5

%  

 

30.4

%  

 

28.4

%  

 

  

 

  

 

28.1

%  

 

22.2

%

Net combined ratio (1)

 

87.8

%  

 

87.7

%  

 

102.4

%  

 

104.7

%  

 

112.4

%  

 

129.0

%  

 

 

  

 

96.1

%  

 

97.6

%

Net Favorable (Unfavorable) Prior Year Development

$

1,899

$

(3,153)

$

1,361

$

(125)

$

(1,174)

$

(5,281)

 

  

 

  

$

2,086

$

(8,559)

Three Months Ended March 31, 

 

Specialty Commercial

Standard Commercial

 

Segment

Segment

Personal Segment

Corporate

Consolidated

 

    

2022

    

2021

    

2022

    

2021

    

2022

    

2021

    

2022

    

2021

    

2022

    

2021

 

Gross premiums written

$

103,850

$

113,990

$

30,277

$

29,735

$

16,832

$

19,293

$

$

$

150,959

$

163,018

Ceded premiums written

 

(61,069)

 

(61,204)

 

(11,493)

 

(10,250)

 

(76)

 

(67)

 

 

 

(72,638)

 

(71,521)

Net premiums written

 

42,781

 

52,786

 

18,784

 

19,485

 

16,756

 

19,226

 

 

 

78,321

 

91,497

Change in unearned premiums

 

7,429

 

14,425

 

(2,077)

 

(2,419)

 

(1,197)

 

(1,651)

 

 

 

4,155

 

10,355

Net premiums earned

 

50,210

 

67,211

 

16,707

 

17,066

 

15,559

 

17,575

 

 

 

82,476

 

101,852

Total revenues

 

51,911

 

69,599

 

17,128

 

17,688

 

16,819

 

18,959

 

(186)

 

5,807

 

85,672

 

112,053

Losses and loss adjustment expenses

 

39,312

 

42,983

 

12,133

 

12,091

 

12,579

 

14,405

 

 

 

64,024

 

69,479

 

 

 

 

 

 

 

 

 

 

Pre-tax income (loss)

$

2,565

$

11,348

$

(692)

$

366

$

(1,026)

$

(1,623)

$

(4,966)

$

1,136

$

(4,119)

$

11,227

Net loss ratio (1)

 

78.3

%  

 

64.0

%  

 

72.6

%  

 

70.8

%  

 

80.8

%  

 

82.0

%  

 

  

 

  

 

77.6

%  

 

68.2

%

Net expense ratio (1)

 

22.1

%  

 

24.1

%  

 

34.7

%  

 

31.6

%  

 

29.0

%  

 

30.4

%  

 

  

 

  

 

28.4

%  

 

27.2

%

Net combined ratio (1)

 

100.4

%  

 

88.1

%  

 

107.3

%  

 

102.4

%  

 

109.8

%  

 

112.4

%  

 

 

  

 

106.0

%  

 

95.4

%

Net (unfavorable) favorable prior year development

$

(6,380)

$

1,899

$

262

$

1,361

$

(1,573)

$

(1,174)

 

  

 

  

$

(7,691)

$

2,086

(1)The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated as total underwriting expenses offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were $114.0$103.9 million for the three months ended March 31, 2021,2022, which was $35.5$10.1 million, or 24%9%, less than the $149.5$114.0 million reported for the same period of 2020.2021.  Net premiums written were $54.4$42.8 million for the three months ended March 31, 20212022 as compared to $85.5$52.8 million for the same period of 2020.2021.  The decrease in gross and net premiums written was primarily the result of lower premium production in our Commercial Auto, Professional Liability and E&S Property and Aerospace & ProgramsCasualty business units, partially offset by increased premium production in our E&S CasualtyProperty and Aerospace & Programs business unit.In February 2020, we made the strategic decision to exit the contract binding line of the primary automobile business marketed by our Commercial Auto business unit as a result of increasing claim severity and limited opportunity for meaningful rate increases.  At that time, we began the process of non-renewing policies and placing in-force policies in runoff in accordance with state regulatory guidelines.  The exit of the contract binding line of the primary commercial automobile business contributed $18.3 million and $14.3 million to the decline in gross premiums written and net premiums written, respectively, for the three months ended March 31, 2021 as compared to the same period the prior year.units.

The $72.0$51.9 million of total revenue for the three months ended March 31, 20212022 was $20.1$17.7 million less than the $92.1$69.6 million reported by the Specialty Commercial Segment for the same period in 2020.2021. This decrease in revenue was primarily due to lower net premiums earned of $17.4$17.0 million, driven mostlyprimarily by decreased net premiums earned of $21.7 million in theour Commercial Auto business unit, partially offset by an increase in net premiums earned of $2.4 million from the E&S Casualty business unit, $1.7 million from theand Professional Liability business unit and $0.2 million from the E&S Property business unit.units.  Further contributing to the decrease in revenue was lower net investment income of $2.6 million and lower commission and fees of $0.1$0.5 million for the three months ended March 31, 20212022 as compared to the same period of 2020.2021.

The Specialty Commercial Segment reported pre-tax income of $11.8$2.6 million for the first quarter of 20212022 as compared to pre-tax income of $16.3$11.3 million reported for the same period in 2020.2021.  The decrease in pre-tax income was primarily the result of the lower total revenue discussed above, partially offset by lower losses and LAE of $3.6 million and lower operating expenses of $5.4 million during the three months ended March 31, 2022 as compared to the same period during 2021.  

Our Specialty Commercial Segment reported lower losses and LAE for the quarter ended March 31, 2022 compared to the same period of the prior year as the combined result of (a) a $1.0 million decrease in losses and LAE in our Commercial Auto business unit, (b) a $4.5 million declineincrease in pre-taxlosses and LAE in our E&S Property business unit, (c) a $1.3 million decrease in losses and LAE in our E&S Casualty business unit, (d) a $4.8 million decrease in losses and

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income was primarily the result of the lower revenue discussed aboveLAE in our Aerospace & Programs business unit, and higher operating expenses of $1.3 million, partially offset by lower losses and LAE of $16.5 million and lower amortization of intangible assets of $0.4 million during the three months ended March 31, 2021 as compared to the same period during 2020.

Our Specialty Commercial Segment reported lower losses and LAE as the combined result of (a)(e) a $22.0$1.0 million decrease in losses and LAE inattributable to our Professional Liability business unit. The Commercial Auto business unitunit’s decrease in losses and LAE was primarily due largely to exitlower net premiums earned partially offset by $2.5 million of unfavorable net prior year loss reserve development for the first quarter of 2022 as compared to $1.3 million of favorable net prior year loss reserve development during the first quarter of 2021. The unfavorable development during the first quarter of 2022 included $8.9 million of unfavorable net prior year loss reserve development attributable to the exited contract binding line of business.  The E&S Property business unit’s increase in losses and LAE was primarily due to lower net premiums earned and $3.0 million unfavorable net prior year loss reserve development during the first quarter of 2022 as well as $1.6compared to $0.4 million favorable net prior year loss reserve development during the same period of 2021, partially offset by a $0.7 million improvement in net catastrophe losses and lower current accident year non-catastrophe losses. The E&S Casualty business unit’s decrease in losses and LAE was primarily due to lower current accident year loss trends and $1.0 million of favorableunfavorable prior year net loss reserve development recognized during the three months ended March 31, 2021first quarter of 2022 as compared to $6.6$1.3 million of unfavorable prior year net loss reserve development during the same period of 20202021. The Aerospace & Programs business unit’s decrease in losses and no catastrophe losses reportedLAE was primarily due to lower current accident year net loss trends in its general aviation line of business and $0.7 million of favorable prior year net loss reserve development during the first quarter of 20212022 as compared to $0.3 million in catastrophe loss reported during the same period of 2020,  (b) a $1.7 million decrease in losses and LAE in our E&S Property business unit due primarily to lower net catastrophe losses of $1.3 million during the first quarter of 2021 as compared to net catastrophe losses of $3.7 million during the same period of 2020 and lower current accident year non-catastrophe losses, partially offset by lower favorable net prior year loss reserve development of $0.4 million during the first quarter of 2021 as compared to $2.9 million of favorable prior year net loss reserve development during the same period of 2020, (c) a $5.2 million increase2021. The Professional Liability business unit’s decrease in losses and LAE in our E&S Casualty business unitwas primarily due primarily to net catastrophe losses of $2.3 million during the first quarter of 2021, compared to no catastrophe losses in the same period the priorlower current accident year increased net premiums earned, and $1.3loss trends partially offset by $0.2 million of unfavorable prior year net loss reserve development recognized during the first quarter of 2021 as compared to $0.3 million of unfavorablefavorable prior year net loss reserve development during the first quarter of 2020, (d) a $1.42022 as compared to $1.3 million increase in losses and LAE in our Aerospace & Programs business unit due primarily to higher current accidentof favorable prior year net loss trends driven by higher satellite losses partially offset by favorable net loss reserve development of $24 thousand during the first quarter of 2021 as compared to unfavorable development of $0.2 million during the first quarter of 2020.   and no catastrophe losses reported during the first quarter of 2021 as compared to $0.4 million of catastrophe related losses reported during the first quarter of 2020, and (e) a $0.6 million increase in losses and LAE attributable to our Professional Liability business unit due primarily to increased net premiums earned, higher current accident year net loss trends, partially offset by favorable net prior year loss reserve development of $1.1 million during the first quarter of 2021 as compared to favorable net prior year loss reserve development of $1.0 million during the same period the prior year.  of 2021.

Operating expenses increased $1.3decreased $5.4 million primarily as the result of higherlower production related expenses of $4.8 million, lower salary and related expenses of $2.2$0.7 million driven by increased incentive compensation expense and higherlower other operating expenses of $0.4$0.2 million, partially offset by lowerhigher professional services of $0.9 million, lower occupancy and related of $0.2 million and lowerhigher travel and related expenses of $0.2$0.1 million.

The Specialty Commercial Segment reported a net loss ratio of 63.8%78.3% for the three months ended March 31, 20212022 as compared to 70.0%64.0% for the same period in 2020.2021. The gross loss ratio before reinsurance was 75.2%86.9% for the three months ended March 31, 20212022 as compared to 86.8%74.9% for the same period in 2020.2021. The exit ofincrease in the gross and net loss ratios was driven primarily by increased unfavorable prior year loss development primarily in our exited contract binding line of the primary commercial automobile business, contributed 8.3% to the decline in thepartially offset by lower catastrophe losses. The Specialty Commercial Segment reported unfavorable net loss ratioreserve development of $6.4 million during the three months ended March 31, 20212022 as compared to same period during 2020. The decrease in the gross and net loss ratios were also impacted by $1.9 million of favorable prior year net loss reserve development for the three months ended March 31, 2021 as compared to unfavorable prior year net loss reserve development of $3.2$1.9 million forduring the same period of 2020.  Catastrophe2021. The Specialty Commercial Segment reported $3.5 million of gross catastrophe losses during the first quarter of $3.62022 as compared to $7.6 million during the same period of 2021. Net catastrophe losses were $1.1 million for the three months ended March 31, 20212022 as compared to catastrophe losses of $4.4$5.9 million during the first quarter of 2020 also contributed to the decrease in the loss ratios.2021.  The Specialty Commercial Segment reported a net expense ratio of 24.0%22.1% for the first quarter of 20212022 as compared to 17.7%24.1% for the same period of 20202021 driven primarily by lower net premiums earned.operating expenses.  

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $29.7$30.3 million for the three months ended March 31, 2021,2022, which was $3.3$0.6 million or 13%, more than the $26.4$29.7 million reported for the same period in 2020.2021.  Net premiums written were $19.5$18.8 million for the three months ended March 31, 20212022 as compared to $18.9$19.5 million for the same period in 2020.2021.  The increase in the gross and net premiums written was due to higher premium production in our Commercial Accounts business unit.  The decrease in net premiums written was due to higher ceded catastrophe premiums during the first quarter of 2022.

Total revenue for the Standard Commercial Segment of $17.1 million for the three months ended March 31, 2022, was $0.6 million less than the $17.7 million reported for the same period in 2021. This decrease in total revenue was due to lower net premiums earned of $0.4 million and lower net investment income of $0.2 million for the three months ended March 31, 2022 as compared to the same period of 2021.

The Standard Commercial Segment reported a pre-tax loss of $0.7 million for the three months ended March 31, 2022 as compared to pre-tax income of $0.4 million for the same period of 2021.  This deterioration in pre-tax earnings was primarily the result of lower revenue discussed above and higher operating expenses of $0.5 million. Increased

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Total revenue for the Standard Commercial Segment of $17.7 million for the three months ended March 31, 2021, was $0.1 million more than the $17.6 million reported for the same period in 2020. This increase in total revenue was due to higher net premiums earned of $0.6 million due to higher premium production, partially offset by lower net investment income of $0.5 million for the three months ended March 31, 2021 as compared to the same period of 2020.

Our Standard Commercial Segment reported pre-tax income of $0.4 million for the three months ended March 31, 2021 as compared to pre-tax income of $0.7 million reported for the same period of 2020.  This decline in pre-tax income was the result of higher loss and LAE of $0.2 million and higher operating expenses of $0.2 million, partially offset by the higher revenue discussed above.  Increased operating expenses were primarily the result of higher production related expenses of $0.4 million and lower salary and related expenses of $0.2 million, higher other operating expenses of $0.3 million and higher professional services of $0.1 million, andpartially offset by lower professional servicesproduction related expenses of $0.1 million.

The Standard Commercial Segment reported a net loss ratio of 70.8%72.6% for the three months ended March 31, 20212022 as compared to 72.2%70.8% for the same period of 2020.2021.  The gross loss ratio before reinsurance for the three months ended March 31, 20212022 was 57.7%58.6% as compared to 65.5%57.7% reported for the same period of 2020.2021.  The decreaseincrease in the gross and net loss ratiosratio was due primarily to higher current accident year loss trends and lower favorable net loss reserve development, of $1.4 million during the three months ended March 31, 2021 as compared to unfavorable net loss reserve development of $0.1 million during the same period of 2020, partially offset by lower net catastrophe losses of $2.0$0.2 million during the first quarter of 20212022 compared to $1.6$2.0 million for the same period of the prior year.  The Standard Commercial Segment reported favorable net loss reserve development of $0.3 million during the three months ended March 31, 2022 as compared to $1.4 million during the same period of 2021. The Standard Commercial Segment reported a net expense ratio of 31.6%34.7% for the first quarter of 20212022 as compared to 32.5%31.6% for the same period of 2020.  The decrease in the expense ratio was primarily due to increased net premiums earned.2021.  

Personal Segment

Gross premiums written for the Personal Segment were $19.3$16.8 million for the three months ended March 31, 20212022 as compared to $25.7$19.3 million for the same period in the prior year.  Net premiums written for ourthe Personal Segment were $19.2$16.8 million in the first quarter of 2021,2022, which was a decrease of $2.9$2.4 million from the $22.1$19.2 million reported for the first quarter of 2020.2021.  The decrease in gross and net written premiums was primarily due to lower premium production in our current geographical footprint.

Total revenue for the Personal Segment was $19.0$16.8 million for the first quarter of 20212022 as compared to $22.3$19.0 million for the same period in 2020.2021.  The decrease in revenue was primarily due to lower net premiums earned of $3.0$2.0 million and lower finance charges of $0.4 million, partially offset by higher investment income of $0.1$0.2 million during the first quarter of 20212022 as compared to the same period during 2020.2021.

Pre-tax loss for the Personal Segment was $1.6$1.0 million for the three months ended March 31, 20212022 as compared to a pre-tax loss of $5.7$1.6 million for the same period of 2020.2021.  The declinereduction in pre-tax loss was primarily the result of lower losses and LAE of $6.3$1.8 million as well asand decreased operating expenses of $1.1$1.0 million for the three months ended March 31, 2022 as compared to the same period during 2021, partially offset by the decreased revenue as discussed above forabove.  However, rising inflationary trends, specifically loss costs, continue to impact the three months ended March 31, 2021 as compared to the same period during 2020.  The decreased operating expenses were primarily the resultprofitability of lower production related expenses of $0.7 million, lower salary and related expenses of $0.2 million, lower professional services of $0.1 million and lower other general expenses of $0.1 million.our Personal Segment.  

The Personal Segment reported a net loss ratio of 82.0%80.8% for the three months ended March 31, 20212022 as compared to 100.6%82.0% for the same period of 2020.2021.  The gross loss ratio before reinsurance was 84.4%81.1% for the three months ended March 31, 20212022 as compared to 80.5%84.4% for the same period in 2020.2021.  The higher gross loss ratio was impacted by higher current accident year loss trends due in part to higher catastrophe losses during the first quarter of 2021 as compared to the same period during 2020. Thelower gross and net loss ratios for the three months ended March 31, 2021 were impacted by lower net unfavorable prior year loss reserve development.  The Personal Segment reported $1.2losses and LAE despite $0.4 million ofhigher net unfavorable prior year loss reserve development during the first quarter of 20212022 as compared to $5.3the same period of 2021. The Personal Segment reported a net expense ratio of 29.0% for the first quarter of 2022 as compared to 30.4% for the same period of 2021.  The decrease in the expense ratio was due primarily to lower operating expenses.

Corporate

Total revenue for Corporate decreased by $6.0 million for the three months ended March 31, 2022 as compared to the same period the prior year.  This decrease in total revenue was due predominately to lower net unfavorable prior year loss reserve developmentinvestment income of $0.4 million for the three months ended March 31, 2022 as compared to the same period during 2021, as well as a $5.6 million reduction in investment gains during the first quarter of 2020.The Personal Segment had $0.4 million of net catastrophe losses during the first quarter of 20212022 as compared to negligible catastrophe lossesthe same period of 2021.

Corporate pre-tax loss was $5.0 million for the three months ended March 31, 2022 as compared to pre-tax income of $1.1 million for the same period of 2021.  The pre-tax loss for the prior year.  Thefirst quarter of 2022 was primarily due to the lower revenue discussed above and higher operating expenses of $0.1 million.  

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Personal Segment reported a net expense ratio of 30.4% for the first quarter of 2021 as compared to 28.4% for the same period of 2020.  The increase in the expense ratio was due primarily to lower net premiums earned.

Corporate

Total revenue for Corporate increased by $36.8 million for the three months ended March 31, 2021 as compared to the same period the prior year.  This increase in total revenue was due predominately to investment gains of $5.8 million during the first quarter of 2021 as compared to investment losses of $29.3 million reported for the same period of 2020, and higher net investment income of $1.7 million for the three months ended March 31, 2021 as compared to the same period during 2020.

Corporate pre-tax income was $1.1 million for the three months ended March 31, 2021 as compared to pre-tax loss of $80.9 million for the same period of 2020.  The improvement in pre-tax results for the first quarter of 2021 as compared to the same period the prior year was primarily due to a $44.7 million impairment charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets during the first quarter of 2020. In connection with our normal process for evaluating impairment triggering events, we determined that a significant decline in market capitalization below stockholders’ equity during the first quarter of 2020 indicated the impairment of the goodwill and indefinite-lived intangible assets included in our balance sheet. Further contributing to the improvement in pre-tax results were the higher revenue discussed above as well as lower interest expense of $0.2 million, partially offset by higher operating expenses of $1.0 million, primarily as a result of increased salary and related expenses driven by increased incentive compensation expense.

Financial Condition and Liquidity

Sources and Uses of Funds

Our sources of funds are from insurance-related operations, financing activities and investing activities. Major sources of funds from operations include premiums collected (net of policy cancellations and premiums ceded), commissions, and processing and service fees. As a holding company, Hallmark is dependent on dividend payments and management fees from its subsidiaries to meet operating expenses and debt obligations. As of March 31, 2021,2022, Hallmark and its non-insurance company subsidiaries had $12.6$11.4 million in unrestricted cash and cash equivalents, including $9.2 million held in premium and claim trust accounts.equivalents. As of that date, our insurance subsidiaries held $269.2$172.0 million of unrestricted cash and cash equivalents, as well as $348.5$388.3 million in debt securities with an average modified duration of 0.91.0 years. Accordingly, we do not anticipate selling long-term debt instruments to meet liquidity needs.

AHIC and TBIC, domiciled in Texas, are limited in the payment of dividends to their stockholders in any 12-month period, without the prior written consent of the Texas Department of Insurance, to the greater of statutory net income for the prior calendar year or 10% of statutory policyholders’ surplus as of the prior year end. Dividends may only be paid from unassigned surplus funds. HIC and HNIC, both domiciled in Arizona, are limited in the payment of dividends to the lesser of 10% of prior year policyholders’ surplus or prior year’s statutory net 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. During 2021,2022, the aggregate ordinary dividend capacity of these subsidiaries is $22.5$32.0 million, of which $15.0$22.7 million is available to Hallmark. As a county mutual, dividends from HCM are payable to policyholders. During the first three months of 2022 and 2021, our insurance subsidiaries did not pay any dividends to Hallmark. During the first three months of 2020, our insurance company subsidiaries paid $4.0 million in dividends to Hallmark. During the first three months of2022 and 2021, and 2020, our insurance subsidiaries paid $4.5$3.0 million and $1.5$4.5 million in management fees to Hallmark, respectively.  

Comparison of March 31, 20212022 to December 31, 20202021

On a consolidated basis, our cash (excluding restricted cash) and investments at March 31, 20212022 were $684.0$624.2 million compared to $639.2$691.6 million at December 31, 2020.2021. The primary reasons for this increasedecrease in unrestricted cash and investments were increases incash used by operations and purchases of investment fair values and cash provided by operations.securities.

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Comparison of Three Months Ended March 31, 20212022 and March 31, 20202021

During the three months ended March 31, 2021,2022, our cash flow used by operations was $62.0 million compared to cash flow provided by operations wasof $29.5 million compared to cash flow used by operations of $9.8 million during the same period the prior year. The cash flow provided byused in operations was driven primarily by a decreasehigher reinsurance balances paid during the first quarter of 2022 of $50.0 mllion due primarily to the correction of immaterial errors relating to certain reinsurance treaties reported during the third quarter of 2021, an increase in net paid claims decreased paid operating expenses, higherand lower collected investment income, higher collected commission and fee income and lower interest paid, partially offset by decreased collected net premiums and finance chargespaid operating expenses during the three months ended March 31, 20212022 as compared to the same period the prior year.

Net cash provided byused in investing activities during the first three months of 20212022 was $149.5$107.1 million as compared to net cash provided by investing activities of $23.8$149.5 million during the first three months of 2020.2021. The increasenet cash used in cash provided by investing activities during the first three months of 20212022 was primarily comprised of a decreasean increase of $116.6$139.0 million in purchases of debt and equity securities, an increasea decrease of $8.8$117.0 million in maturities, sales and redemptions of investment securities and a $0.3$0.6 million decreaseincrease in purchases of fixed assets.

The Company did not report any net cash from financing activities during the first three months of 20212022 or 2020.2021.

Senior Unsecured Notes

On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029.  Interest on the Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020.  The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject

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to any sinking fund requirements.  At Hallmark’s option, the Notes are redeemable, in whole or in part, prior to the stated maturity subject to certain provisions intended to make the holders of the Notes whole on scheduled interest and principal payments.  The indenture governing the Notes contains certain covenants which, among other things, restrict Hallmark’s ability to incur additional indebtedness, make certain payments, create liens on the stock of certain subsidiaries, dispose of certain assets, or merge or consolidate with other entities. The terms of the indenture prohibits payments or other distributions on any security of the Company that ranks junior to the Notes when the Company’s debt to capital ratio (as defined in the indenture) is greater than 35%.  The Company’s debt to capital ratio was 37%38.3% as of March 31, 2021.2022.

Subordinated Debt Securities

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 junior 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.

Each trust pays dividends on its preferred securities at the same rate each quarter as interest is paid on the junior subordinated debt securities.  Under the terms of the trust subordinated debt securities, we pay interest only each quarter and the principal of each note at maturity.  We may elect to defer payments of interest on the trust subordinated debt securities by extending the interest payment period for up to 20 consecutive quarterly periods.  During any such extension period, interest continues to accrue on the trust subordinated debt securities, as well as interest on such accrued interest.  In order to maintain compliance with the terms of our senior unsecured Notes, we have elected to defer payment of interest on the trust subordinated securities until our debt to capital ratio (as defined in the indenture governing the Notes) is less than 35%. The subordinated debt securities of each trust are uncollateralized and do not require maintenance of minimum financial covenants.

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The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities:

Hallmark

Hallmark

Hallmark

Hallmark

    

Statutory

Statutory

    

Statutory

Statutory

Trust I

Trust II

Trust I

Trust II

Issue date

June 21, 2005

August 23, 2007

June 21, 2005

August 23, 2007

Principal amount of trust preferred securities

$

30,000

$

25,000

$

30,000

$

25,000

Principal amount of junior subordinated debt securities

$

30,928

$

25,774

$

30,928

$

25,774

Maturity date of junior subordinated debt securities

June 15, 2035

September 15, 2037

June 15, 2035

September 15, 2037

Trust common stock

$

928

$

774

$

928

$

774

Interest rate, per annum

Three Month LIBOR + 3.25%

Three Month LIBOR + 2.90%

Three Month LIBOR + 3.25%

Three Month LIBOR + 2.90%

Current interest rate at March 31, 2021

3.43%

3.08%

4.08%

3.73%

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting company.

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Item 4. Controls and Procedures.

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

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

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

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PART II

OTHER INFORMATION

Item 1.   Legal Proceedings.

On May 5, 2020,AHIC, HIC, HSIC, HCM and HNIC (collectively, the “Hallmark Insurers”) are parties to a lawsuit styled Schulze v. Hallmark Financial Services, Inc., et al. (Case No. 3:20-cv-01130) was filedLoss Portfolio Transfer Reinsurance Contract (the “LPT Contract”) and related agreements with DARAG Bermuda Ltd. (“DARAG Bermuda”) and DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, the “Reinsurers”).  (See Note 9, “Reinsurance – Loss Portfolio Transfer” in the U.S. District Court forNotes to Consolidated Financial Statements.)  

The Reinsurers and the Northern DistrictHallmark Insurers have agreed to submit to binding arbitration a dispute that has arisen regarding the rights and obligations of Texas, Dallas Division (the “Schulze Matter”the parties under the LPT Contract.  (See Note 10.).  Pending resolution of the dispute, the Hallmark Insurers have agreed to fund the payment of claims under the LPT Contract without prejudice to their right to seek reimbursement and other relief in the arbitration proceedings.  The arbitration panel has not yet been constituted and no pleadings have been submitted.  However, based on prior negotiations, the Company expects the Reinsurers to seek rescission of the LPT Contract on the basis of alleged breach and fraudulent inducement by the Hallmark Insurers.  The Company its former Chief Executive Officerbelieves any such claims are without factual basis or legal merit and its former Chief Financial Officerintends to vigorously contest the matter.  The Company also intends to pursue an arbitration award enforcing the terms of the LPT Contract and reimbursing the Hallmark Insurers for all claim amounts funded by them during the pendency of the arbitration, as well as all other damages sustained by the Hallmark Insurers. The arbitration panel is currently being constituted, and no pleadings have yet been submitted. Because the dispute is at an initial stage, we are named defendants inunable at this time to provide an evaluation of the lawsuit brought on behalflikelihood of a putative class of shareholders who acquired Hallmark securities between March 5, 2019 and March 17, 2020. In general, the complaint alleges that the defendants violated the Securities Exchange Act of 1934 by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company would be forced to report $63.8 million of prior year net adverse loss development, (d) the Company would exit the contract binding line of its commercial automobile primary insurance business, and by making positive statements about the Company’s business, operations and prospects that were allegedly materially misleading and/or lacked a reasonable basis. On July 21, 2020, the court appointed Rajeev Yalamanchili as Lead Plaintiff.  Lead Plaintiff filed an Amended Complaint on September 30, 2020.  The litigation is in its initial stages. The Company’s current policy is to expense legal costs as incurred. Historically, the Company has not carried director and officer liability insurance and does not currently hold such a policy.adverseoutcome.

As of March 31, 2021,2022 we were engaged in various other legal proceedings in the ordinary course of business, none of which, either individually or in the aggregate, are believed likely to have a material adverse effect on our consolidated financial position or results of operations, in the opinion of management. The various other legal proceedings to which we were a party are routine in nature and incidental to our business.

Item 1A.  Risk Factors.

There have been no material changes to the risk factors discussed in Item 1A to Part I of our Form 10-K for the fiscal year ended December 31, 2020.2021.

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

Our stock buyback program initially announced on April 18, 2008, authorized the repurchase of up to 1,000,000 shares of our common stock in the open market or in privately negotiated transactions (the “Stock Repurchase Plan”). On January 24, 2011, we announced an increased authorization to repurchase up to an additional 3,000,000 shares. The Stock Repurchase Plan does not have an expiration date. We did not repurchase any shares of our common stock during the three months ended March 31, 2021.2022.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures.

None.

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Item 5.  Other Information.

None.

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Item 6.  Exhibits.

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

Exhibit
Number

    

Description

3.1

Restated Articles of Incorporation of the registrant, as amended (incorporated by reference to Exhibit 3.1 to the registrant’s Registration Statement on Form S-1 [Registration No. 333-136414] filed September 8, 2006).

3.2

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 March 28, 2017).January 12, 2022).

4

Description of registrant’s securities (incorporated by reference to Exhibit 4.1 to the registrant’s Form 10-K for the year ended December 31, 2019).

4.2

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).

4.3

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).

4.4

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).

4.5

Form of Junior Subordinated Debt Security Due 2035 (included in Exhibit 4.3 above).

4.6

Form of Capital Security Certificate (included in Exhibit 4.4 above).

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).

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).

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4.11

Indenture between Hallmark Financial Services, Inc. and The Bank of New York Mellon Trust Company, N.A. dated August 19, 2019 (incorporated by reference to Exhibit 4.1 to the registrant’s Form 8-K filed August 21, 2019).

4.12

First Supplemental Indenture between Hallmark Financial Services, Inc. and The Bank of New York Mellon Trust Company, N.A. dated August 19, 2019 (incorporated by reference to Exhibit 4.2 to the registrant’s Form 8-K filed August 21, 2019).

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31(a)

Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).

31(b)

Certification of principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a).

32(a)

Certification of principal executive officer Pursuant to 18 U.S.C. § 1350.

32(b)

Certification of principal financial officer Pursuant to 18 U.S.C. § 1350.

101 INS+

XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101 SCH+

XBRL Taxonomy Extension Schema Document.

101 CAL+

XBRL Taxonomy Extension Calculation Linkbase Document.

101 LAB+

XBRL Taxonomy Extension Label Linkbase Document.

101 PRE+

XBRL Taxonomy Extension Presentation Linkbase Document.

101 DEF+

XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 104

Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

+

Filed with this Quarterly Report on Form 10-Q and included in Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 20212022 and December 31, 2020,2021, (ii) Consolidated Statements of Operations for the three months ended March 31, 20212022 and 2020,2021, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 20212022 and 2020,2021, (iv) Consolidated Statements of Stockholder’s Equity for the three months ended March 31, 20212022 and 2020,2021, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 20212022 and 20202021 and (vi) related notes.

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SIGNATURES

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

HALLMARK FINANCIAL SERVICES, INC.

(Registrant)

Date: May 13, 202112, 2022

/s/ Mark E. Schwarz

Mark E. Schwarz, Executive Chairman and Chief Executive Officer and President(principal executive officer)

Date: May 13, 202112, 2022

/s/ Christopher J. Kenney

Christopher J. Kenney, President and Chief AccountingFinancial Officer and Senior Vice President(principal financial officer)

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