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 SeptemberJune 30, 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 $0.18 per share – 18,172,467–18,184,824 shares outstanding as of NovemberAugust 15, 2021.2022.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
| Page |
| |
Consolidated Balance Sheets at | 3 |
4 | |
Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the three months and | 5 |
Consolidated Statements of Stockholders’ Equity (unaudited) for the three months and | 6 |
7 | |
8 |
2
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value)
| | | | | | |
| | | September 30, | | | December 31, |
| | 2021 | | 2020 | ||
| | | (unaudited) | | | |
ASSETS | | |
|
| |
|
Investments: | | |
|
| |
|
Debt securities, available-for-sale, at fair value (amortized cost; $315,029 in 2021 and $502,167 in 2020) | | $ | 317,916 | | $ | 507,279 |
Equity securities (cost; $39,129 in 2021 and $26,988 in 2020) | |
| 45,362 | |
| 29,388 |
Total investments | |
| 363,278 | |
| 536,667 |
| | | | | | |
Cash and cash equivalents | |
| 325,833 | |
| 102,580 |
Restricted cash | |
| 3,793 | |
| 5,728 |
Ceded unearned premiums | |
| 145,858 | |
| 143,446 |
Premiums receivable | |
| 85,177 | |
| 120,332 |
Accounts receivable | |
| 6,595 | |
| 5,967 |
Receivable for securities | |
| 5,613 | |
| 913 |
Reinsurance recoverable | |
| 515,088 | |
| 497,846 |
Deferred policy acquisition costs | |
| 10,494 | |
| 17,840 |
Intangible assets, net | |
| 944 | |
| 1,322 |
Federal income tax recoverable | | | 17,347 | | | 24,691 |
Deferred federal income taxes, net | |
| 9,326 | |
| 8,724 |
Prepaid expenses | |
| 4,683 | |
| 2,648 |
Other assets | |
| 26,179 | |
| 28,013 |
Total assets | | $ | 1,520,208 | | $ | 1,496,717 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Liabilities: | |
|
| |
|
|
Reserves for unpaid losses and loss adjustment expenses | | $ | 815,381 | | $ | 789,768 |
Unearned premiums | |
| 300,383 | |
| 320,806 |
Senior unsecured notes due 2029 (less unamortized debt issuance costs of $770 in 2021 and $844 in 2020) | |
| 49,230 | |
| 49,156 |
Subordinated debt securities (less unamortized debt issuance costs of $757 in 2021 and $795 in 2020) | |
| 55,946 | |
| 55,907 |
Reinsurance payable | |
| 71,183 | |
| 61,100 |
Pension liability | |
| 1,530 | |
| 1,859 |
Payable for securities | |
| 1,047 | |
| — |
Accounts payable and other accrued expenses | |
| 47,728 | |
| 50,415 |
Total liabilities | |
| 1,342,428 | |
| 1,329,011 |
Commitments and contingencies (Note 19) | |
| | |
|
|
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 |
Additional paid-in capital | |
| 122,773 | |
| 122,893 |
Retained earnings | |
| 77,270 | |
| 65,699 |
Accumulated other comprehensive (loss) income | |
| (1,272) | |
| 383 |
Treasury stock (2,700,364 shares in 2021 and 2,730,673 in 2020), at cost | |
| (24,748) | |
| (25,026) |
Total stockholders’ equity | |
| 177,780 | |
| 167,706 |
Total liabilities and stockholders’ equity | | $ | 1,520,208 | | $ | 1,496,717 |
| | | | | | |
| | | June 30, | | | December 31, |
| | 2022 | | 2021 | ||
| | | (unaudited) | | | |
ASSETS | | |
|
| |
|
Investments: | | |
|
| |
|
Debt securities, available-for-sale, at fair value (amortized cost; $442,218 in 2022 and $288,175 in 2021) | | $ | 435,266 | | $ | 290,073 |
Equity securities (cost; $42,856 in 2022 and $42,120 in 2021) | |
| 44,325 | |
| 48,695 |
Total investments | |
| 479,591 | |
| 338,768 |
| | | | | | |
Cash and cash equivalents | |
| 113,207 | |
| 352,867 |
Restricted cash | |
| 4,019 | |
| 3,810 |
Ceded unearned premiums | |
| 158,634 | |
| 146,433 |
Premiums receivable | |
| 99,994 | |
| 90,621 |
Accounts receivable | |
| 4,413 | |
| 6,914 |
Receivable from reinsurer | | | 38,645 | | | — |
Receivable for securities | |
| 3,970 | |
| 1,326 |
Reinsurance recoverable | |
| 522,957 | |
| 549,964 |
Deferred policy acquisition costs | |
| 5,318 | |
| 6,811 |
Intangible assets, net | |
| 567 | |
| 819 |
Federal income tax recoverable | | | 2,906 | | | 18,217 |
Deferred federal income taxes, net | |
| — | |
| 8,906 |
Prepaid pension | | | 57 | | | — |
Prepaid expenses | |
| 4,141 | |
| 2,389 |
Other assets | |
| 27,584 | |
| 25,753 |
Total assets | | $ | 1,466,003 | | $ | 1,553,598 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Liabilities: | |
|
| |
|
|
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $697 in 2022 and $746 in 2021) | | $ | 49,303 | | $ | 49,254 |
Subordinated debt securities (less unamortized debt issuance cost of $717 in 2022 and $744 in 2021) | |
| 55,985 | |
| 55,959 |
Reserves for unpaid losses and loss adjustment expenses | |
| 848,207 | |
| 816,681 |
Unearned premiums | |
| 296,662 | |
| 284,427 |
Reinsurance payable | |
| 64,466 | |
| 117,908 |
Pension liability | |
| — | |
| 174 |
Payable for securities | |
| 1,078 | |
| 3,280 |
Accounts payable and other liabilities | |
| 53,930 | |
| 50,394 |
Total liabilities | |
| 1,369,631 | |
| 1,378,077 |
Commitments and contingencies (Note 17) | |
| | |
|
|
Stockholders’ equity: | |
| | |
|
|
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 | |
| 123,166 | |
| 122,844 |
Retained earnings | |
| 2,067 | |
| 74,703 |
Accumulated other comprehensive loss | |
| (7,984) | |
| (1,035) |
Treasury stock (2,688,007 shares in 2022 and 2,700,364 in 2021), at cost | |
| (24,634) | |
| (24,748) |
Total stockholders’ equity | |
| 96,372 | |
| 175,521 |
Total liabilities and stockholders’ equity | | $ | 1,466,003 | | $ | 1,553,598 |
The accompanying notes are an integral part of the consolidated financial statements
3
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, | | Nine Months Ended September 30, | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||||||
Gross premiums written | | $ | 169,104 | | $ | 196,464 | | $ | 501,838 | | $ | 581,697 | | | $ | 182,066 | | $ | 169,716 | | $ | 333,025 | | $ | 332,734 | |
Ceded premiums written | |
| (78,140) | |
| (83,408) | |
| (231,891) | |
| (239,267) | | |
| (97,765) | |
| (82,230) | |
| (170,403) | |
| (153,751) | |
Net premiums written | |
| 90,964 | |
| 113,056 | |
| 269,947 | |
| 342,430 | | |
| 84,301 | |
| 87,486 | |
| 162,622 | |
| 178,983 | |
Change in unearned premiums | |
| 3,383 | |
| 3,664 | |
| 22,836 | |
| 19,587 | | |
| (4,188) | |
| 9,098 | |
| (33) | |
| 19,453 | |
Net premiums earned | |
| 94,347 | |
| 116,720 | |
| 292,783 | |
| 362,017 | | |
| 80,113 | |
| 96,584 | |
| 162,589 | |
| 198,436 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment income, net of expenses | |
| 2,213 | |
| 2,660 | |
| 7,576 | |
| 10,314 | | |
| 3,120 | |
| 2,353 | |
| 4,979 | |
| 5,363 | |
Investment (losses) gains, net | |
| (533) | |
| (627) | |
| 9,122 | |
| (27,899) | | |
| (3,994) | |
| 3,876 | |
| (3,943) | |
| 9,655 | |
Finance charges | |
| 1,076 | |
| 1,316 | |
| 3,318 | |
| 4,488 | | |
| 980 | |
| 1,109 | |
| 1,963 | |
| 2,242 | |
Commission and fees | |
| 232 | |
| 209 | |
| 742 | |
| 793 | | |
| 283 | |
| 250 | |
| 570 | |
| 510 | |
Other income | |
| 15 | |
| 15 | |
| 50 | |
| 48 | | |
| 12 | |
| 16 | |
| 28 | |
| 35 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | |
| 97,350 | |
| 120,293 | |
| 313,591 | |
| 349,761 | | |
| 80,514 | |
| 104,188 | |
| 166,186 | |
| 216,241 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | |
| 63,706 | |
| 122,555 | |
| 209,674 | |
| 308,278 | | |
| 111,933 | |
| 76,489 | |
| 175,957 | |
| 145,968 | |
Operating expenses | |
| 27,882 | |
| 33,640 | |
| 85,188 | |
| 92,059 | | |
| 24,639 | |
| 27,335 | |
| 49,016 | |
| 57,307 | |
Interest expense | |
| 1,245 | |
| 1,273 | |
| 3,743 | |
| 4,061 | | |
| 1,366 | |
| 1,249 | |
| 2,630 | |
| 2,498 | |
Impairment of goodwill and other intangible assets | | | — | | | — | | | — | | | 45,996 | | |||||||||||||
Amortization of intangible assets | |
| 126 | |
| 617 | |
| 378 | |
| 1,851 | | |
| 126 | |
| 126 | |
| 252 | |
| 252 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total expenses | |
| 92,959 | |
| 158,085 | |
| 298,983 | |
| 452,245 | | |
| 138,064 | |
| 105,199 | |
| 227,855 | |
| 206,025 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Pre-tax income (loss) | |
| 4,391 | |
| (37,792) | |
| 14,608 | |
| (102,484) | | |||||||||||||
(Loss) income before tax | |
| (57,550) | |
| (1,011) | |
| (61,669) | |
| 10,216 | | |||||||||||||
Income tax expense (benefit) | |
| 946 | |
| (9,404) | |
| 3,037 | |
| (15,943) | | |
| 11,867 | |
| (165) | |
| 10,967 | |
| 2,091 | |
Net income (loss) | | | 3,445 | | | (28,388) | | | 11,571 | | | (86,541) | | |||||||||||||
Net (loss) income | | $ | (69,417) | | $ | (846) | | $ | (72,636) | | $ | 8,125 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) per share: | |
|
| |
|
| |
|
| |
|
| | |||||||||||||
Net (loss) income per share: | |
|
| |
|
| |
|
| |
|
| | |||||||||||||
Basic | | $ | 0.19 | | $ | (1.56) | | $ | 0.64 | | $ | (4.77) | | | $ | (3.82) | | $ | (0.05) | | $ | (4.00) | | $ | 0.45 | |
Diluted | | $ | 0.19 | | $ | (1.56) | | $ | 0.64 | | $ | (4.77) | | | $ | (3.82) | | $ | (0.05) | | $ | (4.00) | | $ | 0.45 | |
The accompanying notes are an integral part of the consolidated financial statements
4
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
($ in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended | | Nine Months Ended | |
| Three Months Ended | | Six Months Ended | | ||||||||||||||||
| | September 30, | | September 30, | | | June 30, | | June 30, | | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||||||
Net (loss) income | | $ | 3,445 | | $ | (28,388) | | $ | 11,571 | | $ | (86,541) | | | $ | (69,417) | | $ | (846) | | $ | (72,636) | | $ | 8,125 | |
Other comprehensive (loss) income: | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
| |
Change in net actuarial gain | |
| 43 | |
| 35 | |
| 130 | |
| 104 | | |
| 27 | |
| 44 | |
| 54 | |
| 87 | |
Tax effect on change in net actuarial gain | |
| (9) | |
| (8) | |
| (27) | |
| (22) | | |
| (6) | |
| (9) | |
| (12) | |
| (18) | |
Unrealized holding gains arising during the period | |
| 276 | |
| 2,706 | |
| 3,063 | |
| 4,149 | | |||||||||||||
Tax effect on unrealized holding gains arising during the period | |
| (58) | |
| (568) | |
| (643) | |
| (872) | | |||||||||||||
Reclassification adjustment for losses included in net (loss) income | |
| (1,059) | |
| (390) | |
| (5,288) | |
| (5,612) | | |||||||||||||
Tax effect on reclassification adjustment for losses included in net (loss) income | |
| 222 | |
| 82 | |
| 1,110 | |
| 1,179 | | |||||||||||||
Other comprehensive (loss) gain, net of tax | |
| (585) | |
| 1,857 | |
| (1,655) | |
| (1,074) | | |||||||||||||
Comprehensive income (loss) | | $ | 2,860 | | $ | (26,531) | | $ | 9,916 | | $ | (87,615) | | |||||||||||||
Unrealized holding (losses) gains arising during the period | |
| (4,605) | |
| 2,202 | |
| (7,686) | |
| 2,787 | | |||||||||||||
Tax effect on unrealized holding losses (gains) arising during the period | |
| 967 | |
| (462) | |
| 1,614 | |
| (585) | | |||||||||||||
Reclassification adjustment for gains included in net (loss) income | |
| (1,017) | |
| (2,826) | |
| (1,163) | |
| (4,229) | | |||||||||||||
Tax effect on reclassification adjustment for gains included in net loss (income) | |
| 213 | |
| 593 | |
| 244 | |
| 888 | | |||||||||||||
Other comprehensive loss, net of tax | |
| (4,421) | |
| (458) | |
| (6,949) | |
| (1,070) | | |||||||||||||
Comprehensive (loss) income | | $ | (73,838) | | $ | (1,304) | | $ | (79,585) | | $ | 7,055 | |
The accompanying notes are an integral part of the consolidated financial statements
5
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Unaudited)
($ in thousands)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
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 | |
| 122,782 | |
| 122,729 | |
| 122,893 | |
| 123,468 |
Equity based compensation | |
| 4 | |
| 154 | |
| 158 | |
| (416) |
Shares issued under employee benefit plans | |
| (13) | |
| (6) | |
| (278) | |
| (175) |
Balance, end of period | |
| 122,773 | |
| 122,877 | |
| 122,773 | |
| 122,877 |
| | | | | | | | | | | | |
Retained Earnings | |
|
| |
|
| |
|
| |
|
|
Balance, beginning of period | |
| 73,825 | |
| 102,417 | |
| 65,699 | |
| 160,570 |
Net income (loss) | |
| 3,445 | |
| (28,388) | |
| 11,571 | |
| (86,541) |
Balance, end of period | |
| 77,270 | |
| 74,029 | |
| 77,270 | |
| 74,029 |
| | | | | | | | | | | | |
Accumulated Other Comprehensive Income | |
|
| |
|
| |
|
| |
|
|
Balance, beginning of period | |
| (687) | |
| (2,243) | |
| 383 | |
| 688 |
Change in net actuarial gain, net of tax | |
| 34 | |
| 27 | |
| 103 | |
| 82 |
Unrealized holding gains arising during period, net of tax | |
| 218 | |
| 2,138 | |
| 2,420 | |
| 3,277 |
Reclassification adjustment for losses included in net (loss) income, net of tax | |
| (837) | |
| (308) | |
| (4,178) | |
| (4,433) |
Balance, end of period | |
| (1,272) | |
| (386) | |
| (1,272) | |
| (386) |
| | | | | | | | | | | | |
Treasury Stock | |
|
| |
|
| |
|
| |
|
|
Balance, beginning of period | |
| (24,761) | |
| (25,032) | |
| (25,026) | |
| (25,201) |
Shares issued under employee benefit plans | |
| 13 | |
| 6 | |
| 278 | |
| 175 |
Balance, end of period | |
| (24,748) | |
| (25,026) | |
| (24,748) | |
| (25,026) |
| | | | | | | | | | | | |
Total Stockholders' Equity | | $ | 177,780 | | $ | 175,251 | | $ | 177,780 | | $ | 175,251 |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2022 |
| 2021 |
| 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 | |
| 122,741 | |
| 122,725 | |
| 122,844 | |
| 122,893 |
Equity based compensation | |
| 374 | |
| 57 | |
| 436 | |
| 154 |
Shares issued under employee benefit plans | |
| 51 | |
| — | |
| (114) | |
| (265) |
Balance, end of period | |
| 123,166 | |
| 122,782 | |
| 123,166 | |
| 122,782 |
| | | | | | | | | | | | |
Retained Earnings | |
|
| |
|
| |
|
| |
|
|
Balance, beginning of period | |
| 71,484 | |
| 74,671 | |
| 74,703 | |
| 65,700 |
Net (loss) income | |
| (69,417) | |
| (846) | |
| (72,636) | |
| 8,125 |
Balance, end of period | |
| 2,067 | |
| 73,825 | |
| 2,067 | |
| 73,825 |
| | | | | | | | | | | | |
Accumulated Other Comprehensive Income | |
|
| |
|
| |
|
| |
|
|
Balance, beginning of period | |
| (3,563) | |
| (229) | |
| (1,035) | |
| 383 |
Additional minimum pension liability, net of tax | |
| 21 | |
| 35 | |
| 42 | |
| 69 |
Unrealized holding (losses) gains arising during period, net of tax | |
| (3,638) | |
| 1,740 | |
| (6,072) | |
| 2,202 |
Reclassification adjustment for gains included in net (loss) income, net of tax | |
| (804) | |
| (2,233) | |
| (919) | |
| (3,341) |
Balance, end of period | |
| (7,984) | |
| (687) | |
| (7,984) | |
| (687) |
| | | | | | | | | | | | |
Treasury Stock | |
|
| |
|
| |
|
| |
|
|
Balance, beginning of period | |
| (24,583) | |
| (24,761) | |
| (24,748) | |
| (25,026) |
Shares issued under employee benefit plans | |
| (51) | |
| — | |
| 114 | |
| 265 |
Balance, end of period | |
| (24,634) | |
| (24,761) | |
| (24,634) | |
| (24,761) |
| | | | | | | | | | | | |
Total Stockholders' Equity | | $ | 96,372 | | $ | 174,916 | | $ | 96,372 | | $ | 174,916 |
The accompanying notes are an integral part of the consolidated financial statements
6
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
($ in thousands)
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Six Months Ended June 30, | | ||||||||
| | 2021 | | 2020 | | | 2022 | | 2021 | | ||||
Cash flows from operating activities: | | |
|
| |
|
| | |
|
| |
|
|
Net income (loss) | | $ | 11,571 | | $ | (86,541) | | |||||||
Net (loss) income | | $ | (72,636) | | $ | 8,125 | | |||||||
| | | | | | | | | | | | | | |
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | |
| | |
|
| | |||||||
Adjustments to reconcile net (loss) income to cash used in operating activities: | |
|
| |
|
| | |||||||
Depreciation and amortization expense | |
| 2,523 | |
| 4,257 | | |
| 1,492 | |
| 1,651 | |
Deferred federal income taxes benefit | |
| (163) | |
| (5,597) | | |||||||
Investment (gains) losses, net | |
| (9,122) | |
| 27,899 | | |||||||
Share-based payments expense (benefit) | |
| 158 | |
| (416) | | |||||||
Impairment of goodwill and other intangibles | | | — | | | 45,996 | | |||||||
Deferred federal income taxes expense | |
| 10,754 | |
| 818 | | |||||||
Investment losses (gains), net | |
| 3,943 | |
| (9,655) | | |||||||
Share-based payments expense | |
| 436 | |
| 154 | | |||||||
Change in ceded unearned premiums | |
| (2,412) | |
| 18,045 | | |
| (12,201) | |
| 411 | |
Change in premiums receivable | |
| 35,155 | |
| 35,921 | | |
| (9,373) | |
| 14,540 | |
Change in accounts receivable | |
| (628) | |
| (908) | | |
| 2,501 | |
| 1,443 | |
Change in receivable from reinsurer | | | (38,645) | | | — | | |||||||
Change in deferred policy acquisition costs | |
| 7,346 | |
| 629 | | |
| 1,493 | |
| 4,549 | |
Change in reserves for losses and loss adjustment expenses | |
| 25,613 | |
| 135,536 | | |
| 31,526 | |
| 20,981 | |
Change in unearned premiums | |
| (20,423) | |
| (37,632) | | |
| 12,235 | |
| (19,865) | |
Change in reinsurance recoverable | |
| (17,242) | |
| (193,259) | | |
| 27,007 | |
| (6,893) | |
Change in reinsurance payable | |
| 10,083 | |
| 15,601 | | |||||||
Change in federal income tax payable (recoverable) | |
| 7,344 | |
| (11,000) | | |||||||
Change in reinsurance balances payable | |
| (53,442) | |
| 7,731 | | |||||||
Change in federal income tax recoverable | |
| 15,311 | |
| 5,417 | | |||||||
Change in all other liabilities | |
| (2,903) | |
| (15,499) | | |
| 3,380 | |
| 1,088 | |
Change in all other assets | |
| 448 | |
| 4,073 | | |
| (2,087) | |
| (1,596) | |
Net cash provided by (used in) operating activities | |
| 47,348 | |
| (62,895) | | |||||||
Net cash (used in) provided by operating activities | |
| (78,306) | |
| 28,899 | | |||||||
Cash flows from investing activities: | |
|
| |
|
| | |
|
| |
|
| |
Purchases of property and equipment | |
| (1,632) | |
| (1,277) | | |
| (1,845) | |
| (1,328) | |
Purchases of investment securities | |
| (120,276) | |
| (160,410) | | |
| (270,217) | |
| (52,409) | |
Maturities, sales and redemptions of investment securities | |
| 295,878 | |
| 373,988 | | |
| 110,917 | |
| 248,562 | |
Net cash provided by investing activities | |
| 173,970 | |
| 212,301 | | |||||||
Increase in cash and cash equivalents and restricted cash | |
| 221,318 | |
| 149,406 | | |||||||
Net cash (used in) provided by investing activities | |
| (161,145) | |
| 194,825 | | |||||||
(Decrease) increase in cash and cash equivalents and restricted cash | |
| (239,451) | |
| 223,724 | | |||||||
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 | | $ | 329,626 | | $ | 204,354 | | | $ | 117,226 | | $ | 332,032 | |
The accompanying notes are an integral part of the consolidated financial statements
7
Hallmark Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. General
Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, 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 SeptemberJune 30, 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 periods ended SeptemberJune 30, 20212022 are not necessarily indicative of the operating results to be expected for the full year.
8
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 sheets for these instruments approximate their fair values.
Restricted Cash: The carrying amount for restricted cash reported in the consolidated balance sheets 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 $53.0$45.5 million as of SeptemberJune 30, 2021.2022. Our senior unsecured notes payable would be included in Level 3 of the fair value hierarchy if they were reported at fair valuevalue.
Subordinated Debt Securities: Our trust preferred securities had a carrying value of $55.9$56.0 million and a fair value of $29.0$33.7 million as of SeptemberJune 30, 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.
9
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. DeferredWe account for income taxes are recognized usingunder the asset and liability method, whereby tax rates are applied to cumulativewhich requires the recognition of deferred taxes for temporary differences based on whenbetween the financial statement and how they are expected to affecttax return basis of assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the tax return.benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred or expenditures for which we have already taken a deduction in our tax return but have not yet been recognized in our financial statements. Under GAAP we are required to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that future taxable income will be insufficient to realize the value of the deferred tax assets. We evaluate all significant available positive and negative evidence as part of our analysis. Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income and tax-planning strategies that would result in the realization of deferred tax assets. The underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. If actual experience differs from these estimates and assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in our results of operations.
As of June 30, 2022 the Company recognized a full valuation allowance of $23.9 million against its deferred tax assets because we determined that it is more likely than not that these assets will not be recoverable.
If, in the future, we determine we can support the recoverability of all or a portion of the deferred tax assets under the guidance, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense and result in an increase in equity. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities are adjusted forand our effective tax rate changes in effect for the year in which these temporary differences are expected to be recovered or settled. Net deferred tax assets are held at their net realizable value and an allowance is taken as needed. future.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions at SeptemberJune 30, 2021.2022.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB released ASU 2019-12, Simplifying the Accounting for Income Taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in the existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance became effective for the quarter ended 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.
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 could 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.
3. Revision of Previously Issued Consolidated Financial Statements
In connection with the preparation of our consolidated financial statements for the quarter ended September 30, 2021, we identified immaterial errors relating to certain reinsurance treaties and other items related to prior periods. We maintain various Quota Share and Excess of Loss reinsurance treaties for our casualty lines of business produced by our Specialty Commercial Segment. We incorrectly determined the gross premium subject to these reinsurance treaties from October 1, 2018 through June 30, 2021, which overstated our net earned premium and understated our net losses incurred and operating expenses. This error impacted only excess policies in our Commercial Auto, E&S Casualty and Professional Liability business units within our Specialty Commercial Segment.
In accordance with SEC Staff Accounting Bulletin Topics 1.M and 1.N, the Company evaluated the materiality of this error both quantitatively and qualitatively and determined that it was not material to our previously issued
10
consolidated financial statements. However, adjusting for the cumulative effect of this error in the consolidated financial statements of operations for 2021 would be material to the Company’s results for this period.
The accompanying financial statements and relevant footnotes to the consolidated financial statements in this Quarterly Report on Form 10-Q have been revised to correct for these immaterial prior period errors. The impact to the statements of comprehensive income and equity are captured within the tables below through the presentation of the impact to net income and retained earnings. The tables below provide reconciliations of our previously reported amounts to the revised amounts corrected for these immaterial errors in the prior periods indicated.
Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | |
|
| Three months ended September 30, | | Nine months ended September 30, | ||||||||||||||
| | 2020 | | 2020 | ||||||||||||||
| | As previously | | | | | | | | As previously | | | | | | | ||
|
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised | ||||||
Ceded premiums written | | $ | (80,353) | | $ | (3,055) | | $ | (83,408) | | $ | (230,094) | | $ | (9,173) | | $ | (239,267) |
Net premiums written | |
| 116,111 | |
| (3,055) | |
| 113,056 | |
| 351,603 | |
| (9,173) | |
| 342,430 |
Change in unearned premiums | | | 3,449 | | | 215 | | | 3,664 | | | 17,486 | | | 2,101 | | | 19,587 |
Net premiums earned | |
| 119,560 | |
| (2,840) | |
| 116,720 | |
| 369,089 | |
| (7,072) | |
| 362,017 |
Total revenues | |
| 123,133 | |
| (2,840) | |
| 120,293 | |
| 356,833 | |
| (7,072) | |
| 349,761 |
| |
| | |
| | |
| | |
| | |
| | |
| |
Losses and loss adjustment expenses | | | 124,253 | | | (1,698) | | | 122,555 | | | 312,531 | | | (4,253) | | | 308,278 |
Operating expenses | |
| 34,296 | |
| (656) | |
| 33,640 | |
| 93,703 | |
| (1,644) | |
| 92,059 |
| | | | | | | | | | | | | | | | | | |
(Loss) income before tax | | $ | (37,306) | | $ | (486) | | $ | (37,792) | | $ | (101,309) | | $ | (1,175) | | $ | (102,484) |
Income tax expense | |
| (9,302) | |
| (102) | |
| (9,404) | |
| (15,696) | |
| (247) | |
| (15,943) |
Net loss | | $ | (28,004) | | $ | (384) | | $ | (28,388) | | $ | (85,613) | | $ | (928) | | $ | (86,541) |
| |
| | |
| | |
| | | | | | | | | | |
Common stockholders net income per share: | | | | | | | | | | | | | | | | | | |
Basic | | $ | (1.54) | | $ | (0.02) | | $ | (1.56) | | $ | (4.72) | | $ | (0.05) | | $ | (4.77) |
Diluted | | $ | (1.54) | | $ | (0.02) | | $ | (1.56) | | $ | (4.72) | | $ | (0.05) | | $ | (4.77) |
11
| | | | | | | | | | | | | | | | | | |
|
| For the year ended December 31, | | For the year ended December 31, | ||||||||||||||
| | 2019 | | 2020 | ||||||||||||||
| | As previously | | | | | | | | As previously | | | | | | | ||
|
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised | ||||||
Ceded premiums written | | $ | (347,279) | | $ | (5,978) | | $ | (353,257) | | $ | (304,395) | | $ | (10,640) | | $ | (315,035) |
Net premiums written | |
| 496,552 | |
| (5,978) | |
| 490,574 | |
| 438,973 | |
| (10,640) | |
| 428,333 |
Change in unearned premiums | | | (59,675) | | | 3,393 | | | (56,282) | | | 42,825 | | | 743 | | | 43,568 |
Net premiums earned | |
| 436,877 | |
| (2,585) | |
| 434,292 | |
| 481,798 | |
| (9,897) | |
| 471,901 |
Total revenues | |
| 486,371 | |
| (2,585) | |
| 483,786 | |
| 478,745 | |
| (9,897) | |
| 468,848 |
| |
| | |
| | |
| | |
| | |
| | |
| |
Losses and loss adjustment expenses | | | 362,165 | | | (1,619) | | | 360,546 | | | 412,851 | | | (5,944) | | | 406,907 |
Operating expenses | |
| 117,357 | |
| (325) | |
| 117,032 | |
| 126,266 | |
| (2,347) | |
| 123,919 |
| | | | | | | | | | | | | | | | | | |
(Loss) income before tax | | $ | (1,032) | | $ | (642) | | $ | (1,674) | | $ | (114,162) | | $ | (1,606) | | $ | (115,768) |
Income tax expense | |
| (407) | |
| (135) | |
| (542) | |
| (22,507) | |
| 1,090 | |
| (21,417) |
Net loss | | $ | (625) | | $ | (507) | | $ | (1,132) | | $ | (91,655) | | $ | (2,696) | | $ | (94,351) |
| |
| | |
| | |
| | | | | | | | | | |
Common stockholders net income per share: | | | | | | | | | | | | | | | | | | |
Basic | | $ | (0.03) | | $ | (0.03) | | $ | (0.06) | | $ | (5.05) | | $ | (0.15) | | $ | (5.20) |
Diluted | | $ | (0.03) | | $ | (0.03) | | $ | (0.06) | | $ | (5.05) | | $ | (0.15) | | $ | (5.20) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three months ended March 31, | | Three months ended June 30, | | Six months ended June 30, | |||||||||||||||||||||
| | 2021 | | 2021 | | 2021 | |||||||||||||||||||||
| | As previously | | | | | | | | As previously | | | | | | | | As previously | | | | | | | |||
|
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised | |||||||||
Ceded premiums written | | $ | (69,871) | | $ | (1,650) | | $ | (71,521) | | $ | (80,582) | | $ | (1,648) | | $ | (82,230) | | $ | (150,453) | | $ | (3,298) | | $ | (153,751) |
Net premiums written | |
| 93,147 | |
| (1,650) | |
| 91,497 | |
| 89,134 | |
| (1,648) | |
| 87,486 | |
| 182,281 | |
| (3,298) | |
| 178,983 |
Change in unearned premiums | | | 11,071 | | | (716) | | | 10,355 | | | 9,477 | | | (379) | | | 9,098 | | | 20,548 | | | (1,095) | | | 19,453 |
Net premiums earned | |
| 104,218 | |
| (2,366) | |
| 101,852 | |
| 98,611 | |
| (2,027) | |
| 96,584 | |
| 202,829 | |
| (4,393) | |
| 198,436 |
Total revenues | |
| 114,419 | |
| (2,366) | |
| 112,053 | |
| 106,215 | |
| (2,027) | |
| 104,188 | |
| 220,634 | |
| (4,393) | |
| 216,241 |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Losses and loss adjustment expenses | | | 70,903 | | | (1,424) | | | 69,479 | | | 77,719 | | | (1,230) | | | 76,489 | | | 148,622 | | | (2,654) | | | 145,968 |
Operating expenses | |
| 30,441 | |
| (468) | |
| 29,973 | |
| 27,653 | |
| (319) | |
| 27,334 | |
| 58,094 | |
| (787) | |
| 57,307 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income before tax | | $ | 11,700 | | $ | (473) | | $ | 11,227 | | $ | (532) | | $ | (478) | | $ | (1,010) | | $ | 11,168 | | $ | (951) | | $ | 10,217 |
Income tax expense | |
| 2,355 | |
| (99) | |
| 2,256 | |
| (65) | |
| (100) | |
| (165) | |
| 2,290 | |
| (199) | |
| 2,091 |
Net loss | | $ | 9,345 | | $ | (374) | | $ | 8,971 | | $ | (467) | | $ | (378) | | $ | (845) | | $ | 8,878 | | $ | (752) | | $ | 8,126 |
| |
| | |
| | |
| | | | | | | | | | | | | | | | | | | |
Common stockholders net income per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.52 | | $ | (0.03) | | $ | 0.49 | | $ | (0.03) | | $ | (0.02) | | $ | (0.05) | | $ | 0.49 | | $ | (0.04) | | $ | 0.45 |
Diluted | | $ | 0.52 | | $ | (0.03) | | $ | 0.49 | | $ | (0.03) | | $ | (0.02) | | $ | (0.05) | | $ | 0.49 | | $ | (0.04) | | $ | 0.45 |
12
Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | |
| | December 31, | | December 31, | ||||||||||||||
|
| 2019 |
| 2020 | ||||||||||||||
| | As previously | | | | | | | | As previously | | | | | | | ||
|
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised | ||||||
Ceded unearned premiums | | $ | 164,221 | | $ | 3,777 | | $ | 167,998 | | $ | 138,926 | | $ | 4,520 | | $ | 143,446 |
Reinsurance recoverable | |
| 315,466 | | | 1,671 | | | 317,137 | |
| 490,231 | | | 7,615 | | | 497,846 |
Federal income tax recoverable | |
| 8,995 | | | 139 | | | 9,134 | |
| 25,642 | | | (951) | | | 24,691 |
Total assets | |
| 1,495,274 | | | 5,587 | | | 1,500,861 | |
| 1,485,533 | | | 11,184 | | | 1,496,717 |
Reinsurance payable | |
| 59,274 | | | 6,107 | | | 65,381 | |
| 46,700 | | | 14,400 | | | 61,100 |
Total liabilities | | | 1,231,992 | | | 6,107 | | | 1,238,099 | | | 1,314,611 | | | 14,400 | | | 1,329,011 |
Retained earnings | |
| 160,570 | | | (521) | | | 160,049 | |
| 68,915 | | | (3,216) | | | 65,699 |
Total stockholders' equity | | | 263,282 | | | (521) | | | 262,761 | | | 170,922 | | | (3,216) | | | 167,706 |
Total liabilities and stockhoders' equity | | | 1,495,274 | | | 5,586 | | | 1,500,860 | | | 1,485,533 | | | 11,184 | | | 1,496,717 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | March 31, | | June 30, | |||||||||||||||||||||
|
| 2020 |
| 2021 |
| 2021 | |||||||||||||||||||||
| | As previously | | | | | | | | As previously | | | | | | | | As previously | | | | | | | |||
|
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised | |||||||||
Ceded unearned premiums | | $ | 144,075 | | $ | 2,101 | | $ | 146,176 | | $ | 134,206 | | $ | 3,804 | | $ | 138,010 | | $ | 139,609 | | $ | 3,425 | | $ | 143,034 |
Reinsurance recoverable | |
| 504,472 | | | 4,253 | | | 508,725 | |
| 494,815 | | | 9,039 | | | 503,854 | |
| 494,473 | | | 10,269 | | | 504,742 |
Federal income tax recoverable | |
| 19,748 | | | 247 | | | 19,995 | |
| 23,855 | | | (852) | | | 23,003 | |
| 20,025 | | | (751) | | | 19,274 |
Total assets | |
| 1,497,507 | | | 6,601 | | | 1,504,108 | |
| 1,517,543 | | | 11,991 | | | 1,529,534 | |
| 1,506,694 | | | 12,943 | | | 1,519,637 |
Reinsurance payable | |
| 67,346 | | | 7,529 | | | 74,875 | |
| 51,673 | | | 15,582 | | | 67,255 | |
| 51,921 | | | 16,911 | | | 68,832 |
Total liabilities | | | 1,321,328 | | | 7,529 | | | 1,328,857 | | | 1,337,791 | | | 15,582 | | | 1,353,373 | | | 1,327,810 | | | 16,911 | | | 1,344,721 |
Retained earnings | |
| 74,957 | | | (928) | | | 74,029 | |
| 78,260 | | | (3,592) | | | 74,668 | |
| 77,793 | | | (3,968) | | | 73,825 |
Total stockholders' equity | | | 176,179 | | | (928) | | | 175,251 | | | 179,752 | | | (3,592) | | | 176,160 | | | 178,884 | | | (3,968) | | | 174,916 |
Total liabilities and stockhoders' equity | | | 1,497,507 | | | 6,601 | | | 1,504,108 | | | 1,517,543 | | | 11,990 | | | 1,529,533 | | | 1,506,694 | | | 12,943 | | | 1,519,637 |
Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| For the year ended December 31, | | For the year ended December 31, | | For the nine months ended September 30, | |||||||||||||||||||||
| | 2019 | | 2020 | | 2020 | |||||||||||||||||||||
| | As previously | | | | | | | | As previously | | | | | | | | As previously | | | | | | | |||
|
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised | |||||||||
Net income | | $ | (625) | | $ | (507) | | $ | (1,132) | | $ | (91,655) | | $ | (2,696) | | $ | (94,351) | | $ | (85,613) | | $ | (928) | | $ | (86,541) |
Change in reinsurance payable | |
| (8,054) | |
| 5,654 | |
| (2,400) | |
| (12,574) | |
| 8,293 | |
| (4,281) | |
| 8,072 | |
| 7,529 | |
| 15,601 |
Change in reinsurance recoverable | |
| (63,437) | |
| (1,619) | |
| (65,056) | |
| (174,765) | |
| (5,944) | |
| (180,709) | |
| (189,006) | |
| (4,253) | |
| (193,259) |
Change in ceded unearned premiums | |
| (31,190) | |
| (3,393) | |
| (34,583) | |
| 25,295 | |
| (743) | |
| 24,552 | |
| 20,146 | |
| (2,101) | |
| 18,045 |
Change in federal income tax recoverable | |
| (8,999) | |
| (135) | |
| (9,134) | |
| (16,647) | |
| 1,090 | |
| (15,557) | |
| (10,753) | |
| (247) | |
| (11,000) |
Net cash provided by (used in) operating activities | | $ | 27,670 | | $ | — | | $ | 27,670 | | $ | (69,327) | | $ | — | | $ | (69,327) | | $ | (62,895) | | $ | — | | $ | (62,895) |
| | | | | | | | | | | | | | | | | | |
|
| For the three months ended March 31, | | For the six months ended June 30, | ||||||||||||||
| | 2021 | | 2021 | ||||||||||||||
| | As previously | | | | | | | | As previously | | | | | | | ||
|
| reported |
| Revisions |
| As revised |
| reported |
| Revisions |
| As revised | ||||||
Net income | | $ | 9,345 | | $ | (374) | | $ | 8,971 | | $ | 8,878 | | $ | (752) | | $ | 8,126 |
Change in reinsurance payable | |
| 4,973 | |
| 1,182 | |
| 6,155 | |
| 5,221 | |
| 2,510 | |
| 7,731 |
Change in reinsurance recoverable | |
| (4,584) | |
| (1,424) | |
| (6,008) | |
| (4,242) | |
| (2,653) | |
| (6,895) |
Change in ceded unearned premiums | |
| 4,720 | |
| 716 | |
| 5,436 | |
| (683) | |
| 1,094 | |
| 411 |
Change in federal income tax payable (recoverable) | |
| 1,787 | |
| (100) | |
| 1,687 | |
| 5,617 | |
| (200) | |
| 5,417 |
Net cash provided by (used in) operating activities | | $ | 29,476 | | $ | — | | $ | 29,476 | | $ | 28,899 | | $ | — | | $ | 28,899 |
13
4. Acquisitions, Goodwill and Indefinite-Lived 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 September 30, 2021, there was 0 goodwill or indefinite-lived intangible assets reported on our consolidated balance sheet.
5.3. Fair Value
ASC 820 defines fair value, establishes a consistent framework for measuring fair value and requires disclosure about fair value measurements. ASC 820, among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In addition, ASC 820 precludes the use of block discounts when measuring the fair value of instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities.
We determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820. In accordance with ASC 820, we utilize the following fair value hierarchy:
● | Level 1: quoted prices in active markets for identical assets; |
● | Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, inputs of identical assets for less active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and |
● | Level 3: inputs to the valuation methodology that are unobservable for the asset or liability. |
This hierarchy requires the use of observable market data when available.
Under ASC 820, we determine fair value based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy described above. Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated based upon our pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other factors as appropriate. These estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability.
Where quoted prices are available on active exchanges for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include 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.
14
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.
11
The following table presents, for each of the fair value hierarchy levels, assets that are measured at fair value on a recurring basis at SeptemberJune 30, 20212022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2021 | | As of June 30, 2022 | ||||||||||||||||||||
|
| 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 | | $ | 66,496 | | $ | 0 | | $ | 66,496 | | $ | 0 | | $ | 41,246 | | $ | 0 | | $ | 41,246 |
Corporate bonds | |
| 0 | |
| 121,741 | |
| 356 | |
| 122,097 | |
| 0 | |
| 269,752 | |
| 0 | |
| 269,752 |
Corporate bank loans | |
| 0 | |
| 86,334 | |
| 0 | |
| 86,334 | |
| 0 | |
| 75,572 | |
| 0 | |
| 75,572 |
Municipal bonds | |
| 0 | |
| 40,971 | |
| 0 | |
| 40,971 | |
| 0 | |
| 47,108 | |
| 0 | |
| 47,108 |
Mortgage-backed | |
| 0 | |
| 2,018 | |
| 0 | |
| 2,018 | |
| 0 | |
| 1,588 | |
| 0 | |
| 1,588 |
Total debt securities | |
| 0 | |
| 317,560 | |
| 356 | |
| 317,916 | |
| 0 | |
| 435,266 | |
| 0 | |
| 435,266 |
Total equity securities | |
| 45,362 | |
| 0 | |
| 0 | |
| 45,362 | |
| 44,325 | |
| 0 | |
| 0 | |
| 44,325 |
Total investments | | $ | 45,362 | | $ | 317,560 | | $ | 356 | | $ | 363,278 | | $ | 44,325 | | $ | 435,266 | | $ | 0 | | $ | 479,591 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 September 30, 2021 and December 31, 2020,2021, 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.
15
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 ninesix months ended SeptemberJune 30, 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 | |
| 0 | |
| 0 |
Net gain included in other comprehensive income | |
| 8 | |
| 0 |
Transfers into Level 3 | |
| 0 | |
| 0 |
Transfers out of Level 3 | |
| 0 | |
| 0 |
Ending balance as of September 30, 2021 | | $ | 356 | |||
Ending balance as of June 30, 2022 | | $ | 0 |
| | | |
Beginning balance as of January 1, 2020 |
| $ | 339 |
Sales | |
| 0 |
Settlements | |
| 0 |
Purchases | |
| 0 |
Issuances | |
| 0 |
Total realized/unrealized gains included in net loss | |
| 0 |
Net gains included in other comprehensive loss | |
| (14) |
Transfers into Level 3 | |
| 0 |
Transfers out of Level 3 | |
| 0 |
Ending balance as of September 30, 2020 | | $ | 325 |
12
| | | |
Beginning balance as of January 1, 2021 |
| $ | 348 |
Sales | |
| 0 |
Settlements | |
| 0 |
Purchases | |
| 0 |
Issuances | |
| 0 |
Total realized/unrealized gains included in net loss | |
| 0 |
Net gains included in other comprehensive loss | |
| 10 |
Transfers into Level 3 | |
| 0 |
Transfers out of Level 3 | |
| 0 |
Ending balance as of June 30, 2021 | | $ | 358 |
4. Investments
The amortized cost/carrying value and estimated fair value of investments in debt and equity securities by category is as follows (in thousands):
| | | | | | | | | | | | |
|
| | |
| Gross |
| Gross |
| | | ||
| | | Amortized Cost/ | | Unrealized | | Unrealized | | | | ||
|
| Carrying Value |
| Gains |
| Losses |
| Fair Value | ||||
As of June 30, 2022 | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government | | $ | 42,115 | | $ | 0 | | $ | (869) | | $ | 41,246 |
Corporate bonds | |
| 272,198 | |
| 1,167 | |
| (3,613) | |
| 269,752 |
Corporate bank loans | |
| 78,949 | |
| 0 | |
| (3,377) | |
| 75,572 |
Municipal bonds | |
| 47,315 | |
| 114 | |
| (321) | |
| 47,108 |
Mortgage-backed | |
| 1,641 | |
| 8 | |
| (61) | |
| 1,588 |
Total debt securities | |
| 442,218 | |
| 1,289 | |
| (8,241) | |
| 435,266 |
Total equity securities | |
| 42,856 | |
| 6,355 | |
| (4,886) | |
| 44,325 |
Total investments | | $ | 485,074 | | $ | 7,644 | | $ | (13,127) | | $ | 479,591 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | |
| Gross | |
| Gross | |
| |
| | | Amortized Cost/ | | | Unrealized | | | Unrealized | | | |
As of December 31, 2021 | |
| Carrying Value | |
| Gains | |
| Losses | |
| Fair Value |
U.S. Treasury securities and obligations of U.S. Government | | $ | 63,098 | | $ | 56 | | $ | (170) | | $ | 62,984 |
Corporate bonds | |
| 103,515 | |
| 2,115 | |
| (49) | |
| 105,581 |
Corporate bank loans | |
| 81,570 | |
| 84 | |
| (465) | |
| 81,189 |
Municipal bonds | |
| 38,162 | |
| 372 | |
| (70) | |
| 38,464 |
Mortgage-backed | |
| 1,830 | |
| 29 | |
| (4) | |
| 1,855 |
Total debt securities | |
| 288,175 | |
| 2,656 | |
| (758) | |
| 290,073 |
Total equity securities | |
| 42,120 | |
| 9,355 | |
| (2,780) | |
| 48,695 |
Total investments | | $ | 330,295 | | $ | 12,011 | | $ | (3,538) | | $ | 338,768 |
1613
6. Investments
The amortized cost/carrying value and estimated fair value of investments in debt and equity securities by category is as follows (in thousands):
| | | | | | | | | | | | |
|
| | |
| Gross |
| Gross |
| | | ||
| | | Amortized Cost/ | | Unrealized | | Unrealized | | | | ||
|
| Carrying Value |
| Gains |
| Losses |
| Fair Value | ||||
As of September 30, 2021 | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government | | $ | 66,354 | | $ | 142 | | $ | 0 | | $ | 66,496 |
Corporate bonds | |
| 119,341 | |
| 2,829 | |
| (73) | |
| 122,097 |
Corporate bank loans | |
| 86,749 | |
| 117 | |
| (532) | |
| 86,334 |
Municipal bonds | |
| 40,618 | |
| 421 | |
| (68) | |
| 40,971 |
Mortgage-backed | |
| 1,967 | |
| 55 | |
| (4) | |
| 2,018 |
Total debt securities | |
| 315,029 | |
| 3,564 | |
| (677) | |
| 317,916 |
Total equity securities | |
| 39,129 | |
| 8,148 | |
| (1,915) | |
| 45,362 |
Total investments | | $ | 354,158 | | $ | 11,712 | | $ | (2,592) | | $ | 363,278 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | Gross | | Gross | |
| | ||
| | | Amortized Cost/ | | Unrealized | | Unrealized | | | | ||
As of December 31, 2020 | | Carrying Value | | Gains | | Losses | | Fair Value | ||||
U.S. Treasury securities and obligations of U.S. Government | | $ | 179,259 | | $ | 487 | | $ | 0 | | $ | 179,746 |
Corporate bonds | |
| 214,666 | |
| 5,086 | |
| (384) | |
| 219,368 |
Corporate bank loans | |
| 53,650 | |
| 3 | |
| (871) | |
| 52,782 |
Municipal bonds | |
| 49,833 | |
| 756 | |
| (50) | |
| 50,539 |
Mortgage-backed | |
| 4,759 | |
| 114 | |
| (29) | |
| 4,844 |
Total debt securities | |
| 502,167 | |
| 6,446 | |
| (1,334) | |
| 507,279 |
Total equity securities | |
| 26,988 | |
| 5,648 | |
| (3,248) | |
| 29,388 |
Total investments | | $ | 529,155 | | $ | 12,094 | | $ | (4,582) | | $ | 536,667 |
Major categories of net investment gains (losses) on investments are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
U.S. Treasury securities and obligations of U.S. Government | | $ | — | | $ | (3) | | $ | — | | $ | (3) | | ||||||||||||
Corporate bonds | |
| 133 | |
| 352 | |
| 494 | |
| 766 | | |
| 1 | |
| 164 | |
| 13 | |
| 361 |
Corporate bank loans | |
| 14 | |
| 66 | |
| 105 | |
| (19) | | |
| 21 | |
| 40 | |
| 26 | |
| 91 |
Municipal bonds | |
| (18) | |
| (25) | |
| (12) | |
| 1,397 | | |
| (7) | |
| 15 | |
| (7) | |
| 7 |
Mortgage Backed | | | (9) | | | — | | | (9) | | | — | |||||||||||||
Equity securities | |
| 930 | |
| — | |
| 4,701 | |
| 3,471 | | |
| 1,011 | |
| 2,607 | |
| 1,140 | |
| 3,770 |
Gain on investments | |
| 1,059 | |
| 390 | |
| 5,288 | |
| 5,612 | | |
| 1,017 | |
| 2,826 | |
| 1,163 | |
| 4,229 |
Other-than-temporary impairments | | | — | | | (1,692) | | | — | | | (1,692) | | ||||||||||||
Unrealized losses on other investments | |
| — | |
| (262) | |
| — | |
| (2,136) | | ||||||||||||
Unrealized (losses) gains on equity investments | | | (1,592) | | | 937 | | | 3,834 | | | (29,683) | | ||||||||||||
Investment (losses) gains, net | | $ | (533) | | $ | (627) | | $ | 9,122 | | $ | (27,899) | | ||||||||||||
Unrealized (losses) gain on equity investments | | | (5,011) | | | 1,050 | | | (5,106) | | | 5,426 | |||||||||||||
Investment gains, net | | $ | (3,994) | | $ | 3,876 | | $ | (3,943) | | $ | 9,655 |
We realized gross gains on investments of $1.1$1.0 million and $0.5$3.2 million during the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, and $5.8$1.2 million and $22.4$4.7 million for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively. We did 0t realize gross losses on investments for the three months ended September 30, 2021 and realized gross losses on investments of $0.1 million for the three months ended September 30, 2020. We realized gross losses on investments of $0.5 million$24 thousand and $16.8$0.4 million for the ninethree months ended SeptemberJune 30, 2022 and 2021, respectively and 2020,$31 thousand and $0.5 million for the six months ended June 30, 2022 and 2021, respectively. We recorded proceeds from the sale of investment securities of $1.1$3.9 million and $47.4$14.5 million during the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, and $16.9$4.5 million and $155.0 million$15.7 milion for the ninesix months
17
ended SeptemberJune 30, 20212022 and 2020,2021, 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 SeptemberJune 30, 20212022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2021 | | As of June 30, 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 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 41,246 | | $ | (869) | | $ | 0 | | $ | 0 | | $ | 41,246 | | $ | (869) |
Corporate bonds | |
| 0 | |
| 0 | |
| 2,592 | |
| (73) | |
| 2,592 | |
| (73) | |
| 260,529 | |
| (3,606) | |
| 292 | |
| (7) | |
| 260,821 | |
| (3,613) |
Corporate bank loans | |
| 27,235 | |
| (125) | |
| 20,443 | |
| (407) | |
| 47,678 | |
| (532) | |
| 40,291 | |
| (1,655) | |
| 34,040 | |
| (1,722) | |
| 74,331 | |
| (3,377) |
Municipal bonds | |
| 4,000 | |
| (57) | |
| 999 | |
| (11) | |
| 4,999 | |
| (68) | |
| 10,230 | |
| (301) | |
| 1,406 | |
| (20) | |
| 11,636 | |
| (321) |
Mortgage-backed | |
| 0 | |
| 0 | |
| 11 | |
| (4) | |
| 11 | |
| (4) | |
| 1,534 | |
| (56) | |
| 8 | |
| (5) | |
| 1,542 | |
| (61) |
Total debt securities | |
| 31,235 | |
| (182) | |
| 24,045 | |
| (495) | |
| 55,280 | |
| (677) | |
| 353,830 | |
| (6,487) | |
| 35,746 | |
| (1,754) | |
| 389,576 | |
| (8,241) |
Total equity securities | |
| 9,514 | |
| (335) | | | 4,143 | | | (1,580) | | | 13,657 | |
| (1,915) | |
| 14,320 | |
| (1,435) | | | 5,734 | | | (3,451) | | | 20,054 | |
| (4,886) |
Total investments with unrealized losses | | $ | 40,749 | | $ | (517) | | $ | 28,188 | | $ | (2,075) | | $ | 68,937 | | $ | (2,592) | ||||||||||||||||||
Total investments | | $ | 368,150 | | $ | (7,922) | | $ | 41,480 | | $ | (5,205) | | $ | 409,630 | | $ | (13,127) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 with unrealized losses | | $ | 66,100 | | $ | (2,413) | | $ | 10,716 | | $ | (2,169) | | $ | 76,816 | | $ | (4,582) | ||||||||||||||||||
Total investments | | $ | 95,071 | | $ | (1,115) | | $ | 25,111 | | $ | (2,423) | | $ | 120,182 | | $ | (3,538) |
We had a total of 86201 debt securities with an unrealized loss, of which 58167 were in an unrealized loss position for less than one year and 2834 were in an unrealized loss position for a period of one year or greater, as of SeptemberJune 30, 2021.2022. We
14
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 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 SeptemberJune 30, 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 ninesix months ended SeptemberJune 30, 2021. We recognized $1.7 million of other-than-temporary impairment on debt securities during the nine months ended September 30, 2020.2022 and 2021, respectively.
18
Debt Investments: We assess whether we intend to sell, or it is more likely than not that we will be required to sell, a fixed maturity investment before recovery of its amortized cost basis less any current period credit losses. For fixed maturity investments that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the investment’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the investment’s fair value and the present value of future expected cash flows is recognized in other comprehensive income. During the nine months ended September 30, 2021 we disposed of $0.6 million of previously impaired securities. During the nine months ended September 30, 2020, weWe did 0t dispose of any previously impaired securities.securities during the six months ended June 30, 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 SeptemberJune 30, 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 | | $ | 125,303 | | $ | 126,261 | | $ | 88,002 | | $ | 87,501 |
Due after one year through five years | |
| 114,399 | |
| 116,086 | |
| 287,111 | |
| 283,125 |
Due after five years through ten years | |
| 64,251 | |
| 64,191 | |
| 58,138 | |
| 55,924 |
Due after ten years | |
| 9,109 | |
| 9,360 | |
| 7,326 | |
| 7,128 |
Mortgage-backed | |
| 1,967 | |
| 2,018 | |
| 1,641 | |
| 1,588 |
| | $ | 315,029 | | $ | 317,916 | | $ | 442,218 | | $ | 435,266 |
7.5. 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 $30.8$21.3 million and $29.7$30.0 million at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
1915
8.6. 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):
| | | | | | | | | | | | | | |
| | September 30, | | September 30, | | | June 30, | | June 30, | | ||||
| | 2021 | | 2020 | | | 2022 | | 2021 | | ||||
Balance at January 1 | | $ | 789,768 | | $ | 620,355 | | | $ | 816,681 | | $ | 789,768 | |
Less reinsurance recoverable | |
| 357,200 | |
| 274,275 | | |
| 387,915 | |
| 357,200 | |
Net balance at January 1 | |
| 432,568 | |
| 346,080 | | |
| 428,766 | |
| 432,568 | |
| | | | | | | | | | | | | | |
Incurred related to: | |
|
| |
|
| | |
|
| |
|
| |
Current year | |
| 207,121 | |
| 253,319 | | |
| 112,683 | |
| 144,924 | |
Loss portfolio transfer | | | 0 | | | 21,700 | | |||||||
Prior years | |
| 2,553 | |
| 33,259 | | |
| 63,274 | |
| 1,044 | |
Total incurred | |
| 209,674 | |
| 308,278 | | |
| 175,957 | |
| 145,968 | |
| | | | | | | | | | | | | | |
Paid related to: | |
|
| |
|
| | |
|
| |
|
| |
Current year | |
| 64,292 | |
| 67,146 | | |
| 32,041 | |
| 37,041 | |
Loss portfolio transfer | | | 0 | | | 21,700 | | |||||||
Prior years | |
| 130,623 | |
| 177,325 | | |
| 101,888 | |
| 91,689 | |
Total paid | |
| 194,915 | |
| 266,171 | | |
| 133,929 | |
| 128,730 | |
| | | | | | | | | | | | | | |
Net balance at September 30 | |
| 447,327 | |
| 388,187 | | |||||||
Net balance at June 30 | |
| 470,794 | |
| 449,806 | | |||||||
Plus reinsurance recoverable | |
| 368,054 | |
| 367,704 | | |
| 377,413 | |
| 360,943 | |
Balance at September 30 | | $ | 815,381 | | $ | 755,891 | | |||||||
Balance at June 30 | | $ | 848,207 | | $ | 810,749 | |
The year to date impact from the unfavorable (favorable) net prior years’ loss development on each reporting segment is presented below:
| | | | | | | | | | | | |
| | September 30, | | June 30, | ||||||||
| | 2021 |
| 2020 | | 2022 |
| 2021 | ||||
Specialty Commercial Segment | | $ | 533 | | $ | 23,961 | | $ | 59,658 | | $ | (772) |
Standard Commercial Segment | |
| (2,336) | |
| 2,350 | |
| 208 | |
| (1,343) |
Personal Segment | |
| 4,356 | |
| 6,948 | |
| 3,408 | |
| 3,159 |
Corporate | |
| 0 | |
| 0 | ||||||
Total unfavorable net prior year development | | $ | 2,553 | | $ | 33,259 | ||||||
Total unfavorable (favorable) net prior year development | | $ | 63,274 | | $ | 1,044 |
The following describes the primary factors behind each segment’s prior accident year reserve development for the ninesix months ended SeptemberJune 30, 20212022 and 2020:2021:
NineSix months ended SeptemberJune 30, 2022:
● | Specialty Commercial Segment. Our Commercial Auto business unit experienced net unfavorable development in the 2020 and prior accidentyears primarily in the exited contract binding commercial automobile liability line of business due in part to exceeding the aggregate limit of the loss portfolio transfer agreement covering accident years 2019 and prior entered into during 2020, 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 unfavorable development in the general liability line of business in all accident years, partially offset by net favorable development in the property and commercial auto liability lines of business primarily in |
16
accident years 2021 and 2020. The run-off from our former Workers Compensation operating unit experienced net unfavorable 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. |
Six months ended June 30, 2021:
● | Specialty Commercial Segment. Our Commercial Auto business unit experienced net favorable development in the 2020 and 2019 accident years primarily in the excess |
20
● | 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 |
● | Personal Segment. Net unfavorable development in our Specialty Personal Lines business unit was driven predominately by unfavorable development attributable to the 2020 and 2019 accident years. |
Nine months ended September 30, 2020:
9.7. 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 September 30, 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 SeptemberJune 30, 2021,2022, restricted stock units representing the right to receive up to 84,744768,177 shares of our common stock were outstanding under the 2015 LTIP. There were 0 stock option awards grantedoptions outstanding under the 2015 LTIP as of SeptemberJune 30, 2021.2022.
21
Stock Options:
A summary of the status of ourThere were 0 stock options as of September 30, 2021 and changesoutstanding at any point during the ninesix 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 September 30, 2021 |
| 14,157 | | $ | 6.99 |
| 0.3 | | $ | 0 |
Exercisable at September 30, 2021 |
| 14,157 | | $ | 6.99 |
| 0.3 | | $ | 0 |
The following table detailsJune 30, 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 September 30, | | Nine Months Ended September 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | | ||||
Intrinsic value of options exercised | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Cost of share-based payments (non-cash) | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Income tax benefit of share-based payments recognized in income | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
three months ended June 30, 2022 or 2021, respectively. As of SeptemberJune 30, 2021,2022, 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 nine 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 and 2022 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.
17
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.
22
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, 2021and 2022 was $10.87, $18.10, $4.21 and 2019 was $10.20, $10.87 and $18.10$3.62 per unit, respectively. We incurred compensation expense of $4$374 thousand and $158$436 thousand related to restricted stock units during the three months and ninesix months ended SeptemberJune 30, 2021,2022, respectively. We incurred compensation expense (benefit) of $154$57 thousand and ($416)$154 thousand related to restricted stock units during the three months and ninesix months ended SeptemberJune 30, 2020,2021, respectively. We recorded income tax benefit of $1$79 thousand and $33$92 thousand related to restricted stock units during the three months and ninesix months ended SeptemberJune 30, 2021,2022, respectively. We recorded income tax benefit (expense) of $32$12 thousand and ($88)$32 thousand related to restricted stock units during the three months and ninesix months ended SeptemberJune 30, 2020,2021, respectively.
The following table details the status of our restricted stock units as of and for the ninesix months ended SeptemberJune 30, 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 |
| | 611,747 |
| 0 |
|
Vested | | (30,309) |
| (19,065) |
| | (12,357) |
| (28,874) |
|
Forfeited | | (142,022) |
| (92,563) |
| | (65,527) |
| (142,021) |
|
Nonvested at September 30 | | 56,496 |
| 241,863 |
| |||||
Nonvested at June 30 | | 1,115,552 |
| 57,932 |
|
As of SeptemberJune 30, 2021,2022, there was $0.2$4.0 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 $95 thousand$4.1 million of compensation cost related to unvested restricted stock units, of which $48 thousand$0.7 million is expected to be recognized during the remainder of 20212022, $1.5 million in 2023, $1.1 million in 2024, $0.5 million in 2025, $0.2 million in 2026 and $47$25 thousand is expected to be recognized in 2022.2027.
18
8. Segment Information
The following is business segment information for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Revenues |
| |
|
| |
| | |
|
| |
| |
Specialty Commercial Segment | | $ | 49,087 | | $ | 64,890 | | $ | 100,998 | | $ | 134,489 | |
Standard Commercial Segment | |
| 16,888 | |
| 17,240 | |
| 34,016 | |
| 34,928 | |
Personal Segment | |
| 17,048 | |
| 19,115 | |
| 33,867 | |
| 38,074 | |
Corporate | |
| (2,509) | |
| 2,943 | |
| (2,695) | |
| 8,750 | |
Consolidated | | $ | 80,514 | | $ | 104,188 | | $ | 166,186 | | $ | 216,241 | |
| | | | | | | | | | | | | |
Pre-tax (loss) income | |
|
| |
|
| |
|
| |
|
| |
Specialty Commercial Segment | | $ | (45,907) | | $ | 4,848 | | $ | (43,342) | | $ | 16,196 | |
Standard Commercial Segment | |
| (786) | |
| (1,976) | |
| (1,478) | |
| (1,610) | |
Personal Segment | |
| (2,819) | |
| (2,766) | |
| (3,845) | |
| (4,389) | |
Corporate | |
| (8,038) | |
| (1,117) | |
| (13,004) | |
| 19 | |
Consolidated | | $ | (57,550) | | $ | (1,011) | | $ | (61,669) | | $ | 10,216 | |
The following is additional business segment information as of the dates indicated (in thousands):
| | | | | | |
| | June 30, | | December 31, | ||
Assets: | | 2022 | | 2021 | ||
Specialty Commercial Segment | | $ | 1,099,819 | | $ | 1,163,947 |
Standard Commercial Segment | |
| 183,849 | |
| 194,594 |
Personal Segment | |
| 121,022 | |
| 128,165 |
Corporate | |
| 61,313 | |
| 66,892 |
Consolidated | | $ | 1,466,003 | | $ | 1,553,598 |
10. Segment Information
The following is business segment information for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | | ||||
Revenues |
| |
|
| |
| | |
|
| |
| |
Specialty Commercial Segment | | $ | 62,493 | | $ | 83,749 | | $ | 196,982 | | $ | 262,761 | |
Standard Commercial Segment | |
| 18,157 | |
| 17,398 | |
| 53,085 | |
| 52,130 | |
Personal Segment | |
| 18,316 | |
| 20,513 | |
| 56,390 | |
| 65,300 | |
Corporate | |
| (1,616) | |
| (1,367) | |
| 7,134 | |
| (30,430) | |
Consolidated | | $ | 97,350 | | $ | 120,293 | | $ | 313,591 | | $ | 349,761 | |
| | | | | | | | | | | | | |
Pre-tax income (loss) | |
|
| |
|
| |
| | |
|
| |
Specialty Commercial Segment | | $ | 12,620 | | $ | (27,237) | | $ | 28,816 | | $ | (5,752) | |
Standard Commercial Segment | |
| 1,957 | |
| (1,672) | |
| 347 | |
| (154) | |
Personal Segment | |
| (3,887) | |
| (2,065) | |
| (8,275) | |
| (5,836) | |
Corporate | |
| (6,299) | |
| (6,818) | |
| (6,280) | |
| (90,742) | |
Consolidated | | $ | 4,391 | | $ | (37,792) | | $ | 14,608 | | $ | (102,484) | |
23
The following is additional business segment information as of the dates indicated (in thousands):
| | | | | | |
| | September 30, | | December 31, | ||
Assets: | | 2021 | | 2020 | ||
Specialty Commercial Segment | | $ | 1,113,020 | | $ | 1,116,137 |
Standard Commercial Segment | |
| 199,999 | |
| 183,689 |
Personal Segment | |
| 139,530 | |
| 133,310 |
Corporate | |
| 67,659 | |
| 63,581 |
Consolidated | | $ | 1,520,208 | | $ | 1,496,717 |
11.9. 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 SeptemberJune 30, 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 | | Nine Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Ceded earned premiums |
| $ | 75,314 |
| $ | 83,287 |
| $ | 229,478 |
| $ | 257,312 |
| $ | 81,777 |
| $ | 77,206 |
| $ | 158,202 |
| $ | 154,163 |
Reinsurance recoveries |
| $ | 69,845 |
| $ | 66,395 |
| $ | 210,024 |
| $ | 222,067 |
| $ | 66,805 |
| $ | 75,820 |
| $ | 133,386 |
| $ | 134,961 |
19
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
24
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 submitted 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 17.) As of SeptemberJune 30, 2021,2022, our consolidated balance sheet included a $38.6 million account receivable from DARAG related to the Hallmark Insurers funding claim payments under the LPT contract pending resolution of the dispute.
As of June 30, 2022, the ultimate incurred losses from the subject business were $208.5$269.6 million or $32.4$29.6 million in excess of the Hallmark Insurers’ loss corridor.aggregate limit of $240.0 million. Our reinsurance recoverables of $515.1$523.0 million include $49.0$26.0 million related to the LPT Contract as of SeptemberJune 30, 2021.2022.
12.10. 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 | ||||||
Maturity date of junior subordinated debt securities | | | 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 September 30, 2021 | | | 3.37% | | | 3.02% |
20
Principal amount of junior subordinated debt securities | | $ | 30,928 | | $ | 25,774 |
Maturity date of junior subordinated debt securities | | | 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 June 30, 2022 | | | 5.08% | | | 4.73% |
13.
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 37.2%52.0% as of SeptemberJune 30, 2021.2022.
25
14.12. 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 | | Nine Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Deferred |
| $ | (8,163) |
| $ | (20,939) |
| $ | (29,327) |
| $ | (45,342) |
| $ | 8,231 |
| $ | (6,061) |
| $ | (16,094) |
| $ | (21,164) |
Amortized | | | 10,960 | | | 21,684 | | | 36,673 | | | 45,971 | | | (6,702) | | | 9,156 | | | 17,587 | | | 25,713 |
Net |
| $ | 2,797 |
| $ | 745 |
| $ | 7,346 |
| $ | 629 |
| $ | 1,529 |
| $ | 3,095 |
| $ | 1,493 |
| $ | 4,549 |
15.13. Earnings per Share
The following table sets forth basic and diluted weighted average shares outstanding for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | |||
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
|
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||
| | | | | | | | | | | | | | | | | | |||
Weighted average shares - basic | | 18,172 | | 18,142 | | 18,162 | | | 18,136 | | 18,186 | | 18,171 | | 18,179 | | 18,157 | |||
Effect of dilutive securities | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | | 0 | |||
Weighted average shares - assuming dilution | | 18,172 | | 18,142 | | 18,162 | | | 18,136 | | 18,186 | | 18,171 | | 18,179 | | 18,157 |
ForWe had 0 shares of common stock potentially issuable upon exercise of employee stock options for the three months and ninesix months ended SeptemberJune 30, 2022. For the three and six months months ended June 30, 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
21
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.
16.14. Net Periodic Pension Cost
The following table details the net periodic pension cost incurred by period (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
|
| September 30, |
|
| September 30, |
| June 30, |
|
| June 30, | ||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Interest cost |
| $ | 67 |
| $ | 89 |
| $ | 202 |
| $ | 266 |
| $ | 75 |
| $ | 67 |
| $ | 150 |
| $ | 135 |
Amortization of net loss | | | 43 | | | 34 | | | 130 | | | 104 | | | 27 | | | 44 | | | 54 | | | 87 |
Expected return on plan assets | | | (177) | | | (171) | | | (531) | | | (513) | | | (191) | | | (177) | | | (382) | | | (354) |
Net periodic pension cost |
| $ | (67) |
| $ | (48) |
| $ | (199) |
| $ | (143) |
| $ | (89) |
| $ | (66) |
| $ | (178) |
| $ | (132) |
Contributed amount |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | 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.
17.15. Income Taxes
Our effective income tax rate for the ninesix months ended SeptemberJune 30, 2022 and 2021 was -17.8% and 2020 was 20.8% and 15.6%20.5%, respectively. During the second quarter of 2022 we recorded a full valuation allowance of $23.9 million against our net deferred tax assets primarily due to recent net losses, including the current period net loss. The effective tax rate for the ninesix months ended SeptemberJune 30, 2021 varied from the statutory tax rates primarily due to tax exempt interest. The effective tax rate for the nine months ended September 30, 2020 varied from the statutory tax rates primarily due to the non-deductible impairment of goodwill and indefinite-lived intangible assets. Weinterest income.
26
concluded that 0 valuation allowance was necessary against our deferred tax assets as of September 30, 2021 and December 31, 2020.
18.16. 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 September 30, | | As of June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | | | | | | | | | | | |
Cash and cash equivalents |
| $ | 325,833 |
| $ | 186,683 |
| $ | 113,207 |
| $ | 326,558 |
Restricted cash | | | 3,793 | | | 17,671 | | | 4,019 | | | 5,474 |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows |
| $ | 329,626 |
| $ | 204,354 |
| $ | 117,226 |
| $ | 332,032 |
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.
22
The following table provides supplemental cash flow information for the ninesix months ended SeptemberJune 30, 20212022 and 2020:2021:
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Six Months Ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest paid |
| $ | 3,165 |
| $ | 4,845 |
| $ | 3,666 |
| $ | 1,590 |
| | | | | | | | | | | | |
Income taxes (recovered) paid | | $ | (4,147) | | $ | 654 | | $ | (15,098) | | $ | (4,145) |
| | | | | | | | | | | | |
Supplemental schedule of non-cash investing activities: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Receivable for securities related to investment disposals |
| $ | 5,613 |
| $ | 1,568 |
| $ | 3,970 |
| $ | 7,037 |
| | | | | | | | | | | | |
Payable for securities related to investment purchases |
| $ | 1,047 |
| $ | 507 |
| $ | 1,078 |
| $ | 5,774 |
19.17. Commitments and Contingencies
On May 5, 2020,The Reinsurers and the Hallmark Insurers have submitted 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 9.) Pending resolution of the dispute, the Hallmark Financial Services, Inc., et al. (Case No. 3:20-cv-01130) was filed inInsurers have agreed to fund the U.S. District Court forpayment of claims under the Northern District of Texas, Dallas Division (the “Schulze Matter”). The Company, its former Chief Executive Officer and its former Chief Financial Officer are named defendants in the lawsuit brought on behalf 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. On July 28, 2021, the court granted the defendants’ motion to dismiss the lawsuitLPT Contract without prejudice to their right to seek reimbursement and other relief in the plaintiff filingarbitration proceedings. The arbitration panel has been constituted and a second amended complaint within 28 days, and denied plaintiff’s request to submit supplemental evidencefinal hearing on the merits is anticipated in
27
support of his opposition to2023. In the motion to dismiss. Lead Plaintiff chose not to file a second amended complaint. On September 24, 2021, Lead Plaintiff and Defendants filed a Joint Stipulation seeking dismissalarbitration, the Reinsurers seek rescission of the case with prejudice, with each side bearing its own attorneys’ feesLPT Contract or, in the alternative, damages on the basis of alleged breach and costs. No considerationfraudulent inducement by the Hallmark Insurers. The Company believes any such claims are without factual basis or legal merit and intends to vigorously contest the matter. The Company is seeking an arbitration award enforcing the terms of the LPT Contract and requiring the Reinsurers to reimburse 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 has been given, offered, or promisedordered that the Reinsurers post security for any final award in the amount of the Minimum Funding Requirement (as defined in the LPT Contract). Because the dispute is at an initial stage, we are unable at this time to Lead Plaintiff or his counsel in connection with this dismissal. The Court terminatedprovide an evaluation of the case pursuant to the Joint Stipulation.likelihood of an adverse outcome.
As of SeptemberJune 30, 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.
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 ninesix months of 20212022 or 2020.2021.
23
20.18. Changes in Accumulated Other Comprehensive (Loss) Income Balances
The changes in accumulated other comprehensive (loss) income balances as of SeptemberJune 30, 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 | |
| 87 | |
| 0 | |
| 87 | |||||||||
Tax effect on change in net actuarial gain | |
| (18) | |
| 0 | |
| (18) | |||||||||
Unrealized holding gains arising during the period | |
| 0 | |
| 2,787 | |
| 2,787 | |||||||||
Tax effect on unrealized holdings gains arising during the period | |
| 0 | |
| (585) | |
| (585) | |||||||||
Reclassification adjustment for gains included in net income | |
| 0 | |
| (4,229) | |
| (4,229) | |||||||||
Tax effect on reclassification adjustment for gains included in net income | |
| 0 | |
| 888 | |
| 888 | |||||||||
Other comprehensive loss, net of tax | |
| 69 | |
| (1,139) | |
| (1,070) | |||||||||
| | | | | | | | | | |||||||||
Balance at June 30, 2021 | | $ | (3,693) | | $ | 3,006 | | $ | (687) | |||||||||
| | | | | | | | | | |||||||||
Balance at January 1, 2022 | | $ | (2,641) | | $ | 1,606 | | $ | (1,035) | |||||||||
Other comprehensive income: | |
|
| |
|
| |
|
| |||||||||
Change in net actuarial gain | |
| 104 | |
| 0 | |
| 104 | |
| 54 | |
| 0 | |
| 54 |
Tax effect on change in net actuarial gain | |
| (22) | |
| 0 | |
| (22) | |
| (12) | |
| 0 | |
| (12) |
Unrealized holding gains arising during the period | |
| 0 | |
| 4,149 | |
| 4,149 | |
| 0 | |
| (7,686) | |
| (7,686) |
Tax effect on unrealized holding gains arising during the period | |
| 0 | |
| (872) | |
| (872) | |
| 0 | |
| 1,614 | |
| 1,614 |
Reclassification adjustment for gains included in net income | |
| 0 | |
| (5,612) | |
| (5,612) | |
| 0 | |
| (1,163) | |
| (1,163) |
Tax effect on reclassification adjustment for gains included in net income | |
| 0 | |
| 1,179 | |
| 1,179 | |
| 0 | |
| 244 | |
| 244 |
Other comprehensive loss, net of tax | |
| 82 | |
| (1,156) | |
| (1,074) | |
| 42 | |
| (6,991) | |
| (6,949) |
| | | | | | | | | | | | | | | | | | |
Balance at September 30, 2020 | | $ | (3,157) | | $ | 2,771 | | $ | (386) | |||||||||
| | | | | | | | | | |||||||||
Balance at January 1, 2021 | | $ | (3,762) | | $ | 4,145 | | $ | 383 | |||||||||
Other comprehensive loss: | |
|
| |
|
| |
|
| |||||||||
Change in net actuarial gain | |
| 130 | |
| 0 | |
| 130 | |||||||||
Tax effect on change in net actuarial gain | |
| (27) | |
| 0 | |
| (27) | |||||||||
Unrealized holding gains arising during the period | |
| 0 | |
| 3,063 | |
| 3,063 | |||||||||
Tax effect on unrealized holding gains arising during the period | |
| 0 | |
| (643) | |
| (643) | |||||||||
Reclassification adjustment for gains included in net income | |
| 0 | |
| (5,288) | |
| (5,288) | |||||||||
Tax effect on reclassification adjustment for gains included in net income | |
| 0 | |
| 1,110 | |
| 1,110 | |||||||||
Other comprehensive loss, net of tax | |
| 103 | |
| (1,758) | |
| (1,655) | |||||||||
| | | | | | | | | | |||||||||
Balance at September 30, 2021 | | $ | (3,659) | | $ | 2,387 | | $ | (1,272) | |||||||||
Balance at June 30, 2022 | | $ | (2,599) | | $ | (5,385) | | $ | (7,984) |
28
21.19. 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 1one to 1312 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 and ninesix month periods ended SeptemberJune 30, 20212022 and 20202021 were as follows (in thousands):
| | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||
|
| 2021 |
| | 2020 |
|
| 2021 |
| | 2020 |
| ||||
| | | | | | | | | | | | | | | | |
Operating lease cost | | $ | 526 | | | $ | 750 | | | $ | 1,620 | | | $ | 2,291 | |
| | | | | | | | | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | | | | | | | | |
Operating cash flows from operating leases | | $ | 543 | | | $ | 758 | | | $ | 1,627 | | | $ | 1,749 | |
| | | | | | | | | | | | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 0 | | | $ | 0 | | | $ | 436 | | | $ | 0 | |
24
| | | | | | | | | | | | | | | | |
|
| Three Months Ended | | Six Months Ended | | |||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||
|
| 2022 |
| | 2021 |
| | 2022 |
| | 2021 |
| ||||
| | | | | | | | | | | | | | | | |
Operating lease cost | | $ | 707 | | | $ | 375 | | | $ | 1,380 | | | $ | 1,094 | |
| | | | | | | | | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | | | | | | | | |
Operating cash flows from operating leases | | $ | 598 | | | $ | 539 | | | $ | 1,145 | | | $ | 1,084 | |
| | | | | | | | | | | | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 0 | | | $ | 436 | | | $ | 0 | | | $ | 436 | |
Other lease information as of SeptemberJune 30, 20212022 and December 31, 20202021 are as follows (in thousands):
| | | | | | | | | | | | |
| | September 30, | | December 31, | | June 30, | | December 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | | | | | | | | | | | |
Operating lease right-of-use assets | | $ | 13,501 | | $ | 13,986 | | $ | 13,153 | | $ | 13,211 |
| | | | | | | | | | | | |
Operating lease liabilities | | $ | 15,369 | | $ | 15,862 | | $ | 15,220 | | $ | 15,062 |
| | | | | | | | | | | | |
Weighted-average remaining lease term - operating leases | | | 11.6 | | | 10.2 | | | 10.8 | | | 11.4 |
| | | | | | | | | | | | |
Weighted-average discount rate - operating leases | | | 6.22% | | 5.88% | | | 6.23% | | | 6.22% |
We incurred $0.2 million$13 thousand in short-term lease payments not included in our lease liability during the ninesix months ended SeptemberJune 30, 2021.2022.
2925
Future minimum lease payments under non-cancellable leases as of SeptemberJune 30, 20212022 and December 31, 20202021 were as follows (in thousands):
| | | | | | | | | | | | |
| | September 30, | | December 31, | | June 30, | | | December 31, | |||
|
| 2021 | | 2020 |
| 2022 | | | 2021 | |||
| | | | | | | | | | | | |
2021 | | $ | 544 | | $ | 2,172 | ||||||
2022 | | | 2,171 | | | 2,171 | | $ | 1,173 | | $ | 2,171 |
2023 | | | 2,023 | | | 1,885 | | | 2,224 | | | 2,023 |
2024 | | | 2,216 | | | 1,941 | | | 2,421 | | | 2,216 |
2025 | | | 2,450 | | | 1,975 | | | 2,537 | | | 2,450 |
2026 | | | 2,497 | | | 2,497 | ||||||
Thereafter | | | 18,264 | | | 11,350 | | | 15,767 | | | 15,767 |
Total future minimum lease payments | | $ | 27,668 | | $ | 21,494 | | $ | 26,619 | | $ | 27,124 |
| | | | | | | | | | | | |
Less imputed interest | | $ | (12,299) | | $ | (5,632) | | $ | (11,399) | | $ | (12,062) |
Total operating lease liability | | $ | 15,369 | | $ | 15,862 | | $ | 15,220 | | $ | 15,062 |
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 |
3026
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 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 SeptemberJune 30, 2021,2022, our total revenue was $97.4$80.5 million, representing a decrease of 19%23% from the $120.3$104.2 million in total revenue for the same period of 2020.2021. During the ninesix months ended SeptemberJune 30, 2021,2022, our total revenue was $313.6$166.2 million, representing a decrease of 10%23% from the $349.8$216.2 million in total revenue for the same period of 2020.2021. During the three months ended SeptemberJune 30, 2021,2022, we reported a pre-tax incomeloss of $4.4$57.6 million, as compared to a pre-tax loss of $37.8$1.0 million reported during the same period the prior year. During the ninesix months ended SeptemberJune 30, 2021,2022, we reported a pre-tax incomeloss of $14.6$61.7 million, as compared to a pre-tax lossincome of $102.5$10.2 million reported during the same period the prior year.
The decrease in revenue for the three months ended SeptemberJune 30, 20212022 compared to the same period of the prior year was primarily due to lower net premiums earned of $22.3$16.5 million, net investment losses of $4.0 million compared to investment gains of $3.9 million the prior year, and lower finance charges of $0.1 million, partially offset by higher net investment income of $0.5 million, lower finance charges of $0.2 million, partially offset by lower net investment losses of $0.1$0.8 million. The decrease in revenue for the ninesix months ended SeptemberJune 30, 20212022 compared to the same period of the prior year was primarily due to decreased net premiums earned of $69.2$35.8 million, net investment losses of $3.9 million compared to investment gains of $9.7 million the prior year, lower net investment income of $2.7 million, lower commission and fees of $0.1$0.4 million and lower finance charges of $1.2$0.3 million, partially offset by higher net investment gainscommission and fees of $37.0$0.1 million.
The improvementincrease in pre-tax resultsloss for the three months ended SeptemberJune 30, 20212022 compared to the same period of the prior year was primarily due to the decreased revenue discussed above as well as increased losses and loss adjustment expenses (“LAE”) of $58.8 million, lower operating expenses of $5.8 million and lower amortization of intangible assets of $0.5 million, partially offset by decreased revenue discussed above.$35.4 million. The decreaseincrease in losses and LAE was primarily due to lower current accident year loss trends and a $12.4$55.6 million improvement in unfavorable netof adverse prior year loss reserve development.development for the second quarter of 2022, $35.6 million of which was from the exited contract binding line of the primary commercial automobile business, as compared to $3.1 million of unfavorable prior year loss reserve development for the same period the prior year, partially offset by lower earned premium volume and lower net catastrophe losses. Losses and LAE for the thirdsecond quarter of 20212022 included $2.8$2.0 million of net catastrophe losses as compared to $3.7 million during the same period of the prior year. Lower operating expenses of $2.7 million partially offset the increase in pre-tax loss for the three months ended June 30, 2022 as compared to the same period of the prior year.
The deterioration of pre-tax results for the six months ended June 30, 2022 compared to the same period of the prior year was primarily due to the decreased revenue discussed above as well as by increased losses and loss adjustment expenses (“LAE”) of $30.0 million. The increase in losses and LAE was primarily due to $63.3 million of unfavorable prior year loss reserve development for the six months ended June 30, 2022, $44.4 million of which was from the exited
27
contract binding line of the primary commercial automobile business, as compared to $1.0 million of unfavorable prior year loss reserve development for the prior year period, partially offset by lower earned premium volume and lower net catastrophe losses. Losses and LAE for the six months ended June 30, 2022 included $3.1 million of net catastrophe losses as compared to $9.6 million during the same period of the prior year.
The improvementLower operating expenses of $8.3 million partially offset the increase in pre-tax resultsloss for the ninesix months ended SeptemberJune 30, 20212022 as compared to pre-tax income reported for the same period of the prior year was primarily due to the absence of $46.0 million of impairment charges to goodwill and indefinite-lived intangible assets taken during the first quarter of 2020, a $98.6 million decrease in losses and LAE, a $6.9 million decrease in operating expenses and a $1.4 million decrease in amortization of intangible assets, partially offset by the decreased revenue discussed above. 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 of
31
the goodwill and indefinite-lived intangible assets included in our balance sheet. The decrease in losses and LAE was primarily the result of exiting the contract binding line of the primary automobile business marketed by our Commercial Auto business unit commencing in February 2020, as well as a $30.7 million improvement in unfavorable net prior year loss reserve development.year.
We reported a net incomeloss of $3.4$69.4 million for the three months ended SeptemberJune 30, 20212022 as compared to a net loss of $28.4$0.8 million for the same period in 2020.2021. We reported net income of $11.6 million for the nine months ended September 30, 2021 as compared to a net loss of $86.5$72.6 million for the six months ended June 30, 2022 as compared to net income of $8.1 million for the same period in 2020.2021. On a diluted basis per share, we reported a net incomeloss of $0.19$3.82 per share for the three months ended SeptemberJune 30, 2021,2022, compared to a net loss of $1.56$0.05 per share for the same period in 2020.2021. On a diluted basis per share, we reported a net incomeloss of $0.64$4.00 per share for the ninesix months ended SeptemberJune 30, 2021,2022, as compared to a net lossincome of $4.77$0.45 per share for the same period in 2020.2021. Our effective tax rate was 20.8%-17.8% for the first ninesix months of 20212022 compared to 15.6%20.5% for the same period in 2020.2021. During the second quarter of 2022 we recorded a full valuation allowance of $23.9 million against our net deferred tax assets primarily due to recent net losses, including the current period net loss. The effective rate for the ninesix months ended SeptemberJune 30, 2021 varied from the statutory tax rates primarily due to tax-exempttax exempt interest income. The effective tax rate for the nine months ended September 30, 2020 varied from the statutory tax rates primarily due to the non-deductible impairment of goodwill and indefinite-lived intangible assets.
ThirdSecond Quarter 20212022 as Compared to ThirdSecond Quarter 20202021
The following is additional business segment information for the three months ended SeptemberJune 30, 20212022 and 20202021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | Three Months Ended June 30, |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | Specialty Commercial | | Standard Commercial | | | | | | | | | | | | | | | | | | |
| | Specialty Commercial | | Standard Commercial | | | | | | | | | | | | | | | | | | |
| ||||||||||||||||
| | Segment | | Segment | | Personal Segment | | Corporate | | Consolidated |
| | Segment | | Segment | | Personal Segment | | Corporate | | Consolidated |
| ||||||||||||||||||||||||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||||||||||||||||
Gross premiums written | | $ | 126,716 | | $ | 150,016 | | $ | 24,935 | | $ | 24,726 | | $ | 17,453 | | $ | 21,722 | | $ | — | | $ | — | | $ | 169,104 | | $ | 196,464 | | | $ | 138,379 | | $ | 126,190 | | $ | 28,569 | | $ | 27,712 | | $ | 15,118 | | $ | 15,814 | | $ | — | | $ | — | | $ | 182,066 | | $ | 169,716 | |
Ceded premiums written | |
| (69,424) | |
| (72,977) | |
| (8,644) | |
| (7,270) | |
| (72) | |
| (3,161) | |
| — | |
| — | |
| (78,140) | |
| (83,408) | | |
| (86,846) | |
| (71,805) | |
| (10,845) | |
| (10,330) | |
| (74) | |
| (95) | |
| — | |
| — | |
| (97,765) | |
| (82,230) | |
Net premiums written | |
| 57,292 | |
| 77,039 | |
| 16,291 | |
| 17,456 | |
| 17,381 | |
| 18,561 | |
| — | |
| — | |
| 90,964 | |
| 113,056 | | |
| 51,533 | |
| 54,385 | |
| 17,724 | |
| 17,382 | |
| 15,044 | |
| 15,719 | |
| — | |
| — | |
| 84,301 | |
| 87,486 | |
Change in unearned premiums | |
| 2,623 | |
| 3,979 | |
| 1,177 | |
| (744) | |
| (417) | |
| 429 | |
| — | |
| — | |
| 3,383 | |
| 3,664 | | |
| (3,838) | |
| 7,937 | |
| (1,160) | |
| (835) | |
| 810 | |
| 1,996 | |
| — | |
| — | |
| (4,188) | |
| 9,098 | |
Net premiums earned | |
| 59,915 | |
| 81,018 | |
| 17,468 | |
| 16,712 | |
| 16,964 | |
| 18,990 | |
| — | |
| — | |
| 94,347 | |
| 116,720 | | |
| 47,695 | |
| 62,322 | |
| 16,564 | |
| 16,547 | |
| 15,854 | |
| 17,715 | |
| — | |
| — | |
| 80,113 | |
| 96,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | |
| 62,493 | |
| 83,749 | |
| 18,157 | |
| 17,398 | |
| 18,316 | |
| 20,513 | |
| (1,616) | |
| (1,367) | |
| 97,350 | |
| 120,293 | | |
| 49,087 | |
| 64,890 | |
| 16,888 | |
| 17,240 | |
| 17,048 | |
| 19,115 | |
| (2,509) | |
| 2,943 | |
| 80,514 | |
| 104,188 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | |
| 36,560 | |
| 92,625 | |
| 10,411 | |
| 14,683 | |
| 16,735 | |
| 15,247 | |
| — | |
| — | |
| 63,706 | |
| 122,555 | | |
| 85,765 | |
| 46,112 | |
| 12,074 | |
| 14,138 | |
| 14,094 | |
| 16,239 | |
| — | |
| — | |
| 111,933 | |
| 76,489 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Pre-tax income (loss) | | $ | 12,620 | | $ | (27,237) | | $ | 1,957 | | $ | (1,672) | | $ | (3,887) | | $ | (2,065) | | $ | (6,299) | | $ | (6,818) | | $ | 4,391 | | $ | (37,792) | | |||||||||||||||||||||||||||||||
Pre-tax (loss) income | | $ | (45,907) | | $ | 4,848 | | $ | (786) | | $ | (1,976) | | $ | (2,819) | | $ | (2,766) | | $ | (8,038) | | $ | (1,117) | | $ | (57,550) | | $ | (1,011) | | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss ratio (1) | |
| 61.0 | % |
| 114.3 | % |
| 59.6 | % |
| 87.9 | % |
| 98.7 | % |
| 80.3 | % |
|
| |
|
| |
| 67.5 | % |
| 105.0 | % | |
| 179.8 | % |
| 74.0 | % |
| 72.9 | % |
| 85.4 | % |
| 88.9 | % |
| 91.7 | % |
|
| |
|
| |
| 139.7 | % |
| 79.2 | % |
Net expense ratio (1) | |
| 22.0 | % |
| 22.2 | % |
| 32.9 | % |
| 26.1 | % |
| 26.1 | % |
| 32.0 | % |
|
| |
|
| |
| 28.4 | % |
| 27.7 | % | |
| 19.2 | % |
| 23.8 | % |
| 34.5 | % |
| 31.7 | % |
| 31.6 | % |
| 27.2 | % |
|
| |
|
| |
| 29.5 | % |
| 27.2 | % |
Net combined ratio (1) | |
| 83.0 | % |
| 136.5 | % |
| 92.5 | % |
| 114.0 | % |
| 124.8 | % |
| 112.3 | % |
| | |
|
| |
| 95.9 | % |
| 132.7 | % | |
| 199.0 | % |
| 97.8 | % |
| 107.4 | % |
| 117.1 | % |
| 120.5 | % |
| 118.9 | % |
| | |
|
| |
| 169.2 | % |
| 106.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (Unfavorable) Favorable Prior Year Development | | $ | (1,305) | | $ | (11,493) | | $ | 993 | | $ | (1,431) | | $ | (1,197) | | $ | (987) | |
|
| |
|
| | $ | (1,509) | | $ | (13,911) | | |||||||||||||||||||||||||||||||
Net unfavorable (favorable) prior year development | | $ | 53,278 | | $ | 1,127 | | $ | 470 | | $ | 18 | | $ | 1,835 | | $ | 1,985 | |
|
| |
|
| | $ | 55,583 | | $ | 3,130 | |
(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 $126.7$138.4 million for the three months ended SeptemberJune 30, 2021,2022, which was $23.3$12.2 million, or 16%10%, lesshigher than the $150.0$126.2 million reported for the same period of 2020.2021. Net premiums written were $57.3$51.5 million for the three months ended SeptemberJune 30, 20212022 as compared to $77.0$54.4 million for the same period of 2020.2021. The decreaseincrease in gross and net premiums written was primarily the result of higher premium production in our E&S Property, E&S Casualty and Commercial Auto business units, partially offset by lower premium production in our Aerospace & Programs and Professional Liability business units. The decrease in net premiums written was primarily the
3228
result of higher ceded premiums in our E&S Property, E&S Casualty and Commercial Auto business units as well as lower premium production in our Aerospace & Programs and Professional Liability business units causing the net premiums written in all of our Specialty Commercial Segment’s business units except for our E&S Property business unit to be lower during the second quarter of 2022 as compared to the second quarter of 2021.
The $49.1 million of total revenue for the three months ended June 30, 2022 was $15.8 million less than the $64.9 million reported by the Specialty Commercial Segment for the same period in 2021. This decrease in revenue was primarily due to lower net premiums earned of $14.6 million, driven primarily by decreased net premiums earned in our Aerospace & Programs, Commercial Auto, Professional Liability and E&S Property business units, partially offset by increased premium productionhigher net premiums earned in our E&S Casualty and Aerospace & Programs business units.
The $62.5 million of total revenue for the three months ended September 30, 2021 was $21.2 million less than the $83.7 million reported by the Specialty Commercial Segment for the same period in 2020. This decrease in revenue was primarily due to lower net premiums earned of $21.1 million driven primarily by decreased net premiums earned in the Commercial Auto business unit and the Professional Liability business unit. Further contributing to the decrease in revenue was lower net investment income of $0.1$1.2 million for the three months ended SeptemberJune 30, 20212022 as compared to the same period of 2020.2021.
The Specialty Commercial Segment reported a pre-tax incomeloss of $12.6$45.9 million for the thirdsecond quarter of 20212022 as compared to pre-tax lossincome of $27.3$4.8 million reported for the same period in 2020.2021. The deterioration in pre-tax incomeresults was primarily the result of lowerhigher losses and LAE of $56.1$39.7 million, as well as the lower total revenue discussed above, partially offset by lower operating expenses of $4.6 million and lower amortization of intangible assets of $0.4$4.7 million during the three months ended SeptemberJune 30, 20212022 as compared to the same period during 2020, partially offset by the lower total revenue discussed above.2021.
Our Specialty Commercial Segment reported lowerhigher losses and LAE for the quarter ended SeptemberJune 30, 20212022 compared to the same period of the prior year as the combined result of (a) a $48.1$32.0 million decreaseincrease in losses and LAE in our Commercial Auto business unit, due largely to exit of the contract binding line of business as well as a $10.9 million improvement in unfavorable prior year net loss reserve development, (b) a $10.5$1.3 million decrease in losses and LAE in our E&S Property business unit, due primarily due to a $6.1 million improvement in net catastrophe losses, $0.6 million lower unfavorable net prior year loss reserve development and lower current accident year non-catastrophe losses, (c) a $6.5$9.0 million increase in losses and LAE in our E&S Casualty business unit, due primarily to a $3.0 million increase in unfavorable prior year net loss reserve development and higher current accident year loss trends, (d) a $0.7$5.1 million increasedecrease in losses and LAE in our Aerospace & Programs business unit, due primarily to higher current accident year net loss trends driven by higher satellite losses, partially offset by a $0.1 million lower unfavorable net loss reserve development, and (e) a $4.7$5.1 million decreaseincrease in losses and LAE attributable to our Professional Liability business unitunit. The Commercial Auto business unit’s increase in losses and LAE was primarily due primarily to lower current accident year loss trends and favorable net prior year loss reserve development of $1.1 million during the third quarter of 2021 as compared to unfavorable net prior year loss reserve development of $0.5$35.4 million for the second quarter of 2022 as compared to $0.3 million of unfavorable net prior year loss reserve development during the second quarter of 2021. The unfavorable development during the second quarter of 2022 included $35.6 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 decrease in losses and LAE was primarily due to $0.1 million unfavorable net prior year loss reserve development during the second quarter of 2022 as compared to $1.7 million unfavorable net prior year loss reserve development during the same period of 2021 as well as improved current accident year non-catastrophe loss trends, partially offset by $1.3 million of net catastrophe losses during the quarter compared to nominal catastrophe losses the same period the prior year.
The E&S Casualty business unit’s increase in losses and LAE was primarily due to $10.3 million of unfavorable prior year net loss reserve development during the second quarter of 2022 as compared to $2.8 million of unfavorable prior year net loss reserve development during the same period of 2021 as well as higher net premiums earned. The Aerospace & Programs business unit’s decrease in losses and LAE was primarily due to lower net premiums earned and lower current accident year net loss trends in its general aviation line of business partially offset by $2.2 million of unfavorable prior year net loss reserve development during the second quarter of 2022 as compared to $0.5 million of unfavorable prior year net loss reserve development during the same period of 2021. The Professional Liability business unit’s increase in losses and LAE was primarily due to unfavorable prior year net loss reserve development of $5.3 million during the second quarter of 2022 as compared to $4.1 million of favorable prior year net loss reserve development during the same period of 2021, partially offset by lower net premiums earned as well as improved current accident year loss trends. Operating expenses decreased $4.6$4.7 million primarily as the result of lower production related expenses of $0.9 million, lower occupancy and related expenses of $0.2 million, lower salary and related expenses of $3.1 million driven by decreased incentive compensation expense and lower professional services of $0.6 million, partially offset by higher other operating expenses of $0.2 million.expenses.
The Specialty Commercial Segment reported a net loss ratio of 61.0%179.8% for the three months ended SeptemberJune 30, 20212022 as compared to 114.3%74.0% for the same period in 2020.2021. The gross loss ratio before reinsurance was 81.5%124.6% for the three months ended SeptemberJune 30, 20212022 as compared to 100.4%89.8% for the same period in 20202021. The increase in the gross and net loss ratios was driven primarily by lower current accidentincreased unfavorable prior year loss trends and lowerdevelopment primarily in our exited contract binding line of business, as well as higher net catastrophe losses. The Specialty Commercial Segment reported $5.2 million of gross catastrophe losses during the third quarter of 2021 as compared to $40.5 million during the same period of 2020. The decrease in the net loss ratio was also impacted by $1.3 million of unfavorable prior year net loss reserve development for the three months ended September 30, 2021 as compared to unfavorable prior year net loss reserve development of $11.5$53.3 million forduring the three months ended June 30, 2022 as compared to prior year unfavorable net loss reserve development of $1.1 million during the same period of 2020. Net2021. The Specialty Commercial Segment reported $1.1 million of net catastrophe losses during the second quarter of $2.2 million for the three months ended September 30, 20212022 as compared to catastrophe losses of $8.1$0.1 million during the third quartersame period of 2020 also contributed to the decrease in the net loss ratio.2021. The Specialty Commercial Segment reported a net expense ratio of 22.0%19.2% for the thirdsecond quarter of 20212022 as compared to 22.2%23.8% for the same period of 20202021 driven primarily by lower operating expenses.
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Standard Commercial Segment
Gross premiums written for the Standard Commercial Segment were $24.9$28.6 million for the three months ended SeptemberJune 30, 2021,2022, which was $0.2$0.9 million more than the $24.7$27.7 million reported for the same period in 2020.2021. Net premiums written were $16.3$17.7 million for the three months ended SeptemberJune 30, 20212022 as compared to $17.5$17.4 million for the
33
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 tounit, partially offset by higher ceded catastrophe premiums during the thirdsecond quarter of 20212022.
Total revenue for the Standard Commercial Segment of $18.2$16.9 million for the three months ended SeptemberJune 30, 2021,2022, was $0.8$0.3 million moreless than the $17.4$17.2 million reported for the same period in 2020.2021. This increasedecrease in total revenue was primarily due to higherlower net premiums earnedinvestment income of $0.8$0.3 million due to higher premium production for the three months ended SeptemberJune 30, 20212022 as compared to the same period of 2020.2021.
OurThe Standard Commercial Segment reported a pre-tax incomeloss of $2.0$0.8 million for the three months ended SeptemberJune 30, 20212022 as compared to a pre-tax loss of $1.7$2.0 million reported for the same period of 2020.2021. The lower pre-tax incomeloss was primarily the result of lower losslosses and LAE of $4.3$2.1 million, and the higher revenue discussed above, partially offset by higher operating expenses of $1.4 million.$0.6 million and lower revenue as discussed above. Increased operating expenses were primarily the result of higher production related expenses of $1.1 million, higher other operating expenses of $0.1 million and higher salary and related expenses of $0.2 million.$0.6 million driven by higher incentive compensation accrued during the three months ended June 30, 2022 as compared to the same period the prior year.
The Standard Commercial Segment reported a net loss ratio of 59.6%72.9% for the three months ended SeptemberJune 30, 20212022 as compared to 87.9%85.4% for the same period of 2020.2021. The gross loss ratio before reinsurance for the three months ended SeptemberJune 30, 20212022 was 52.9%60.7% as compared to 72.0%83.5% reported for the same period of 2020.2021. The decrease in the gross and net loss ratio was due primarily to lower net catastrophe losses of $0.5$0.8 million during the thirdsecond quarter of 20212022 compared to $1.5$3.2 million for the same period of the prior year, and lower non-catastrophe current accident yearpartially offset by higher net loss trends.reserve development. The Standard Commercial Segment reported favorableunfavorable net loss reserve development of $1.0$0.5 million during the three months ended SeptemberJune 30, 20212022 as compared to unfavorable net loss reserve development of $1.4 million$18 thousand during the same period of 20202021. The Standard Commercial Segment reported a net expense ratio of 32.9%34.5% for the thirdsecond quarter of 20212022 as compared to 26.1%31.7% for the same period of 2020.2021. The increase in the net expense ratio was primarily due to higher production related expenses.
operating expenses discussed above.
Personal Segment
Gross premiums written for the Personal Segment were $17.5$15.1 million for the three months ended SeptemberJune 30, 20212022 as compared to $21.7$15.8 million for the same period in the prior year. Net premiums written for ourthe Personal Segment were $17.4$15.0 million in the thirdsecond quarter of 2021,2022, which was a decrease of $1.2$0.7 million from the $18.6$15.7 million reported for the thirdsecond 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 $18.3$17.0 million for the thirdsecond quarter of 20212022 as compared to $20.5$19.1 million for the same period in 2020.2021. The decrease in revenue was primarily due to lower net premiums earned of $2.0$1.9 million, and lower finance charges of $0.2$0.1 million and lower net investment income of $0.1 million during the thirdsecond quarter of 20212022 as compared to the same period during 2020.2021.
Pre-tax loss for the Personal Segment was $3.9$2.8 million for the three months ended SeptemberJune 30, 20212022 as compared to a pre-tax loss of $2.1$2.8 million for the same period of 2020. The pre-tax loss was primarily the result of higher2021. Lower losses and LAE of $1.5$2.1 million andwere offset by the decreased revenue as discussed above partially offset by decreased operating expenses of $1.8 million and decreased amortization of intangible assets of $0.1 million for the three months ended SeptemberJune 30, 20212022 as compared to the same period during 2020.2021. Rising inflationary trends, specifically loss costs, continue to impact the profitability of our Personal Segment.
The Personal Segment reported a net loss ratio of 98.7%88.9% for the three months ended SeptemberJune 30, 20212022 as compared to 80.3%91.7% for the same period of 2020.2021. The gross loss ratio before reinsurance was 99.5%89.1% for the three months ended SeptemberJune 30, 20212022 as compared to 80.3%91.9% for the same period in 2020.2021. The higherlower gross and net loss ratios were impacted by higher current accident year loss trends and $0.2 million higher net unfavorable prior year loss reserve development. The Personal Segment reported a net expense ratio of 26.1% for the third quarter of 2021 as compareddue mostly to 32.0% for the same period of 2020. The decrease in the expense ratio was due primarily to lower operating expenses.
3430
net catastrophe losses of $68 thousand for the second quarter of 2022 as compared to $0.4 million for the same period the prior year. The Personal Segment reported $1.8 million of unfavorable prior year loss reserve development for the second quarter of 2022 as compared to $2.0 million report for the same period the prior year. The Personal Segment reported a net expense ratio of 31.6% for the second quarter of 2022 as compared to 27.2% for the same period of 2021. The increase in the expense ratio was due primarily to lower net premiums earned.
Corporate
Total revenue for Corporate decreased by $0.2$5.5 million for the three months ended SeptemberJune 30, 20212022 as compared to the same period the prior year. This decrease in total revenue was due predominately to lower net investment incomea reduction in unrealized gains on equity securities of $0.3$5.0 million for the three months ended SeptemberJune 30, 20212022 as compared to an increase in unrealized gain on equity securities of $1.0 million for the same period during 2020, partially offset by2021, as well as a $0.1$1.8 million improvementreduction in investment lossesrealized gains on investments during the thirdsecond quarter of 20212022 as compared to the same period of 2020.
Corporate pre-tax loss was $6.3 million for2021, partially offset by increased net investment income during the three months ended September 30, 2021 as compared to pre-tax loss of $6.8 million for the same period of 2020. The improvement in pre-tax results for the thirdsecond quarter of 20212022 of $2.4 million as compared to the same period the prior yearyear.
Corporate pre-tax loss was $8.0 million for the three months ended June 30, 2022 as compared to a pre-tax loss of $1.1 million for the same period of 2021. The increased pre-tax loss for the second quarter of 2022 was primarily due to the lower revenue discussed above, higher operating expenses of $0.7$1.4 million and higher interest expense of $0.1 million. The higher operating expenses were driven primarily by lowera $0.9 million increase in salary and related expenses due to increased incentive compensation accruals and higher non-cash stock compensation expense for restricted stock units granted in the fourth quarter of 2021 and the second quarter of 2022. Increased professional servicesservice expense of $0.3 million, lower salary and relatedhigher travel expense of $0.5$0.1 million and higher other general expenses of $0.1 million partially offset by lower revenue discussed above.
Nine Months Ended September 30, 2021also contributed to the increase in operating expenses for the second quarter of 2022 as compared to Ninethe same period the prior year.
Six Months Ended SeptemberJune 30, 20202022 as compared to Six Months Ended June 30, 2021 (in thousands):
The following is additional business segment information for the six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
31
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| ||||||||||||||||||||||||||||
| | Specialty Commercial | | Standard Commercial | | | | | | | | | | | | | | | | | | |
| ||||||||
| | Segment | | Segment | | Personal Segment | | Corporate | | Consolidated |
| ||||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||||
Gross premiums written | | $ | 366,896 | | $ | 438,113 | | $ | 82,382 | | $ | 74,944 | | $ | 52,560 | | $ | 68,640 | | $ | — | | $ | — | | $ | 501,838 | | $ | 581,697 | |
Ceded premiums written | |
| (202,433) | |
| (207,699) | |
| (29,224) | |
| (21,770) | |
| (234) | |
| (9,798) | |
| — | |
| — | |
| (231,891) | |
| (239,267) | |
Net premiums written | |
| 164,463 | |
| 230,414 | |
| 53,158 | |
| 53,174 | |
| 52,326 | |
| 58,842 | |
| — | |
| — | |
| 269,947 | |
| 342,430 | |
Change in unearned premiums | |
| 24,985 | |
| 21,681 | |
| (2,077) | |
| (3,643) | |
| (72) | |
| 1,549 | |
| — | |
| — | |
| 22,836 | |
| 19,587 | |
Net premiums earned | |
| 189,448 | |
| 252,095 | |
| 51,081 | |
| 49,531 | |
| 52,254 | |
| 60,391 | |
| — | |
| — | |
| 292,783 | |
| 362,017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | |
| 196,982 | |
| 262,761 | |
| 53,085 | |
| 52,130 | |
| 56,390 | |
| 65,300 | |
| 7,134 | |
| (30,430) | |
| 313,591 | |
| 349,761 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | |
| 125,655 | |
| 220,215 | |
| 36,640 | |
| 37,313 | |
| 47,379 | |
| 50,750 | |
| — | |
| — | |
| 209,674 | |
| 308,278 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
|
| |
| | |
|
| |
| | |
Pre-tax income (loss) | |
| 28,816 | |
| (5,752) | |
| 347 | |
| (154) | |
| (8,275) | |
| (5,836) | |
| (6,280) | |
| (90,742) | |
| 14,608 | |
| (102,484) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss ratio (1) | |
| 66.3 | % |
| 87.4 | % |
| 71.7 | % |
| 75.3 | % |
| 90.7 | % |
| 84.0 | % |
|
| |
|
| |
| 71.6 | % |
| 85.2 | % |
Net expense ratio (1) | |
| 23.4 | % |
| 19.3 | % |
| 32.1 | % |
| 30.6 | % |
| 27.9 | % |
| 27.0 | % |
|
| |
|
| |
| 28.0 | % |
| 24.2 | % |
Net combined ratio (1) | |
| 89.7 | % |
| 106.7 | % |
| 103.8 | % |
| 105.9 | % |
| 118.6 | % |
| 111.0 | % |
|
| |
|
| |
| 99.6 | % |
| 109.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (Unfavorable) Favorable Prior Year Development | |
| (533) | |
| (23,961) | |
| 2,336 | |
| (2,350) | |
| (4,356) | |
| (6,948) | |
|
| |
|
| |
| (2,553) | |
| (33,259) | |
| | Specialty Commercial | | Standard Commercial | | | | | | | | | | | | | | | | | | | ||||||||
| | Segment | | Segment | | Personal Segment | | Corporate | | Consolidated | ||||||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||||
Gross premiums written | | $ | 242,229 | | $ | 240,180 | | $ | 58,846 | | $ | 57,447 | | $ | 31,950 | | $ | 35,107 | | $ | — | | $ | — | | $ | 333,025 | | $ | 332,734 |
Ceded premiums written | |
| (147,915) | |
| (133,009) | |
| (22,338) | |
| (20,580) | |
| (150) | |
| (162) | |
| — | |
| — | |
| (170,403) | |
| (153,751) |
Net premiums written | |
| 94,314 | |
| 107,171 | |
| 36,508 | |
| 36,867 | |
| 31,800 | |
| 34,945 | |
| — | |
| — | |
| 162,622 | |
| 178,983 |
Change in unearned premiums | |
| 3,591 | |
| 22,362 | |
| (3,237) | |
| (3,254) | |
| (387) | |
| 345 | |
| — | |
| — | |
| (33) | |
| 19,453 |
Net premiums earned | |
| 97,905 | |
| 129,533 | |
| 33,271 | |
| 33,613 | |
| 31,413 | |
| 35,290 | |
| — | |
| — | |
| 162,589 | |
| 198,436 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | |
| 100,998 | |
| 134,489 | |
| 34,016 | |
| 34,928 | |
| 33,867 | |
| 38,074 | |
| (2,695) | |
| 8,750 | |
| 166,186 | |
| 216,241 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | |
| 125,077 | |
| 89,095 | |
| 24,207 | |
| 26,229 | |
| 26,673 | |
| 30,644 | |
| — | |
| — | |
| 175,957 | |
| 145,968 |
| |
|
| |
| | |
| | |
| | |
| | |
| | |
|
| |
|
| |
| | |
| |
Pre-tax (loss) income | | $ | (43,342) | | $ | 16,196 | | $ | (1,478) | | $ | (1,610) | | $ | (3,845) | | $ | (4,389) | | $ | (13,004) | | $ | 19 | | $ | (61,669) | | $ | 10,216 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss ratio (1) | |
| 127.8 | % |
| 68.8 | % |
| 72.8 | % |
| 78.0 | % |
| 84.9 | % |
| 86.8 | % |
|
| |
|
| |
| 108.2 | % |
| 73.6 |
Net expense ratio (1) | |
| 20.7 | % |
| 24.0 | % |
| 34.6 | % |
| 31.7 | % |
| 30.3 | % |
| 28.8 | % |
|
| |
|
| |
| 28.9 | % |
| 27.7 |
Net combined ratio (1) | |
| 148.5 | % |
| 92.8 | % |
| 107.4 | % |
| 109.7 | % |
| 115.2 | % |
| 115.6 | % |
|
| |
|
| |
| 137.1 | % |
| 101.3 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net unfavorable (favorable) prior year development | | $ | 59,658 | | $ | (772) | | $ | 208 | | $ | (1,343) | | $ | 3,408 | | $ | 3,159 | |
|
| |
|
| | $ | 63,274 | | $ | 1,044 |
(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 $366.9$242.2 million for the ninesix months ended SeptemberJune 30, 20212022 which was $71.2$2.0 million, or 16%1%, lesshigher than the $438.1$240.2 million reported for the same period of 2020.2021. Net premiums written were $164.5$94.3 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to $230.4$107.2 million for the same period of 2020.2021. The increase in gross premiums written was primarily the result of higher premium production in our E&S Property and E&S Casualty business units, partially offset by lower premium production in our Aerospace & Programs, Professional Liability and Commercial Auto business units. The decrease in gross and net premiums written was primarily the result of higher ceded premiums in our E&S Property, E&S Casualty and Commercial Auto business units as well as lower premium production in our Aerospace & Programs, Professional Liability and Commercial Auto Professional Liability,business units causing the net premiums written in all of our Specialty Commercial Segment’s business units except for our E&S Property and Aerospace & Programs business units, partially offset by increased premium production in our E&S Casualty business unit.unit to be lower during the first six months of 2022 as compared to the same period the prior year.
The $197.0$101.0 million of total revenue for the ninesix months ended SeptemberJune 30, 20212022 was $65.8$33.5 million less than the $262.8$134.5 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 $62.6$31.6 million due primarily to the decreased premium production
35
discussed above, as well as lower net investment income of $3.2$1.9 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to the same period of 2020.2021.
Pre-tax income for theThe Specialty Commercial Segment was $28.8reported pre-tax loss of $43.3 million during the ninesix months ended SeptemberJune 30, 20212022 as compared to a pre-tax lossincome of $5.8$16.2 million reported for the same period in 2020.2021. The deterioration in pre-tax incomeresults was primarily the result of lowerthe decreased revenue discussed above as well as higher losses and LAE of $94.6$36.0 million, partially offset by lower operating expenses of $4.6 million and lower amortization of intangible assets of $1.2$9.9 million during the ninesix months ended SeptemberJune 30, 20212022 as compared to the same period during 2020, partially offset by the lower revenue discussed above.2021.
Our Specialty Commercial Segment reported lowerhigher losses and LAE for the ninesix months ended SeptemberJune 30, 20212022 compared to the same period of the prior year as the combined result of (a) a $91.7$31.0 million decreaseincrease in losses and LAE in our Commercial Auto business unit, due largely to exit of the contract binding line of business, as well as a $27.7 million improvement in prior year net loss reserve development, (b) a $12.2$3.1 million decreaseincrease in losses and LAE in our E&S Property business unit, (c) a $7.7 million increase in losses and LAE in our E&S Casualty business unit, (d) a $9.9 million decrease in losses and LAE in our Aerospace & Programs business unit, and (e) a $4.2 million increase in losses and LAE attributable to our Professional Liability business unit. The Commercial Auto business unit’s increase in losses and LAE was primarily due primarily to a $10.7 million improvement in net catastrophe losses, partially offset by unfavorable net prior year loss reserve development of $1.0$37.8 million for the first six months of 2022 as compared to
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$1.3 million of favorable net prior year loss reserve development during the same period of 2021, partially offset by lower net premiums earned. The unfavorable development during the the first six months of 2022 included $44.4 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 $3.2 million unfavorable net prior year loss reserve development during the first six months of 2022 as compared to $1.2 million unfavorable net prior year loss reserve development during the same period of 2021 as well as net catastrophe losses of $1.9 million during the ninefirst six months ended September 30, 2021of 2022 compared to $1.2 million of net catastrophe losses the same period the prior year and higher net current accident year non-catastrophe loss trends. The E&S Casualty business unit’s increase in losses and LAE was primarily due to $11.2 million of unfavorable prior year net loss reserve development during the first six months of 2022 as compared to $1.9$4.0 million of unfavorable prior year net loss reserve development during the same period of 2021 as well as higher net premiums earned. The Aerospace & Programs business unit’s decrease in losses and LAE was primarily due to lower net premiums earned and lower current accident year net loss trends in its general aviation line of business partially offset by $2.5 million of unfavorable prior year net loss reserve development during the first six months of 2022 as compared to $0.5 million of unfavorable prior year net loss reserve development during the same period of 2021. The Professional Liability business unit’s increase in losses and LAE was primarily due to unfavorable prior year net loss reserve development of $5.0 million during the first six months of 2022 as compared to $5.2 million of favorable prior year net loss reserve development during the same period of 2020 and higher current accident year non-catastrophe losses, (c) a $16.3 million increase in losses and LAE in our E&S Casualty business unit due primarily to higher unfavorable prior year net loss reserve development of $6.7 million and higher2021, partially offset by lower net premiums earned (d) a $1.6 million decrease in losses and LAE in our Aerospace & Programs business unit due primarily to lower current accident year net loss trends driven by lower satellite losses, and (e) a $5.4 million decrease in losses and LAE attributable to our Professional Liability business unit due primarily to $5.4 million higher favorable net prior year loss reserve development, partially offset by higheras well as improved current accident year loss trends.
Operating expenses decreased $4.6$9.9 million primarily as the result of lower production related expenses of $2.8 million, lower occupancy and related expenses of $0.7 million, lower professional services of $1.5 million, lower travel and related expenses of $0.1 million andas well as lower salary and related expenses of $0.5 million driven by decreased incentive compensation expense, partially offset by higher other operating expenses of $1.0 million.expenses.
The Specialty Commercial Segment reported a net loss ratio of 66.3%127.8% for the ninesix months ended SeptemberJune 30, 20212022 as compared to 87.4%68.8% for the same period in 2020.2021. The gross loss ratio before reinsurance was 82.2%106.4% for the ninesix months ended SeptemberJune 30, 20212022 as compared to 89.7%82.2% for the same period in 2020.2021. The decreaseincrease in the gross and net loss ratioratios was impacteddriven primarily by $0.5 million ofincreased unfavorable prior year net loss reserve development for the nine months ended September 30, 2021 as compared toprimarily in our exited contract binding line of business. The Specialty Commercial Segment reported unfavorable prior year net loss reserve development of $24.0$59.7 million forduring the same period of 2020. Net catastrophe losses of $5.9 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to favorable prior year net catastrophe lossesloss reserve development of $16.4$0.8 million during the same period of 2020 also contributed2021. The Specialty Commercial Segment reported $2.0 million of net catastrophe losses during the first six months of 2022 as compared to $3.7 million during the decrease in the loss ratio.same period of 2021. The Specialty Commercial Segment reported a net expense ratio of 23.4%20.7% for the ninefirst six months ended September 30, 2021of 2022 as compared to 19.3%24.0% 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 $82.4$58.8 million for the ninesix months ended SeptemberJune 30, 2021,2022, which was $7.5$1.4 million, or 10%2%, more than the $74.9$57.4 million reported for the same period in 2020.2021. Net premiums written were $53.2$36.5 million for the ninethree months ended both SeptemberJune 30, 2021 and 2020.2022 as compared to $36.9 million for the same period in 2021. The increase in the gross premiums written was due to higher premium production in our Commercial Accounts business unit. The decrease in the net premiums written was mostly due to higher ceded catastrophe premiums as compared to the same period the prior year.
Total revenue for the Standard Commercial Segment of $53.1$34.0 million for the ninesix months ended SeptemberJune 30, 2021,2022 was $1.0$0.9 million moreless than the $52.1$34.9 million reported for the same period in 2020.2021. This increasedecrease in total revenue was primarily due to higher net premiums earned of $1.6 million, partially offset by lower net investment income of $0.5$0.6 million and lower finance chargesnet premiums earned of $0.1$0.3 million for the ninethree months ended SeptemberJune 30, 20212022 as compared to the same period of 2020.2021.
Our Standard Commercial Segment reported a pre-tax loss of $1.5 million for the six months ended June 30, 2022 as compared to a pre-tax loss of $1.6 million reported for the same period of 2021. The lower pre-tax loss was the result of lower loss and LAE of $2.0 million, partially offset by higher operating expenses of $1.0 million and the decreased revenue discussed above. Increased operating expenses were primarily the result of higher salary and related expenses of $0.8 million, mostly due to increased incentive compensation accrual as compared to the prior year period, and higher other general expenses of $0.2 million.
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Our Standard Commercial Segment reported pre-tax income of $0.3 million for the nine months ended September 30, 2021 as compared to a pre-tax loss of $0.2 million reported for the same period of 2020. The pre-tax income was the result of lower loss and LAE of $0.7 million and the increased revenue discussed above, partially offset by higher operating expenses of $1.2 million. Increased operating expenses were primarily the result of higher production related expenses of $1.1 million, higher salary and related expenses of $0.1 million and higher other general expenses of $0.2 million, partially offset by lower professional services of $0.2 million.
The Standard Commercial Segment reported a net loss ratio of 71.7%72.8% for the ninesix months ended SeptemberJune 30, 20212022 as compared to 75.3%78.0% for the same period of 2020.2021. The gross loss ratio before reinsurance for the ninesix months ended SeptemberJune 30, 20212022 was 64.7%59.7% as compared to 68.9%70.8% reported for the same period of 2020.2021. The decrease in the gross and net loss ratios was due primarily to lower gross and net catastrophe losses of $1.0 million during the six months ended June 30, 2022 compared to $5.2 million for the same period of the prior year, development, partially offset by higher current accident year gross and net loss trends.trends as well as adverse prior year loss reserve development. The Standard Commercial Segment reported unfavorable net loss reserve development of $0.2 million during the six months ended June 30, 2022 as compared to favorable net loss reserve development of $2.3 million during the nine months ended September 30, 2021 as compared to unfavorable net loss reserve development of $2.4$1.3 million during the same period of 2020.2021. The Standard Commercial Segment reported a net expense ratio of 32.1%34.6% for the ninesix months ended SeptemberJune 30, 20212022 as compared to 30.6%31.7% for the same period of 2020.2021. The increase in the expense ratio was primarily due to higher operating expenses in our Commercial Accounts business unit.as discussed above.
Personal Segment
Gross premiums written for the Personal Segment were $52.6$32.0 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to $68.6$35.1 million for the same period in the prior year. Net premiums written for our Personal Segment were $52.3$31.8 million for the ninesix months ended SeptemberJune 30, 2021,2022, which was a decrease of $6.5$3.1 million from the $58.8$34.9 million reported for the same period 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 $56.4$33.9 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to $65.3$38.1 million for the same period in 2020.2021. The decrease in revenue was primarily due to a decrease in net premiums earned of $8.1$3.9 million and lower finance charges of $1.1 million, partially offset by higher investment income of $0.3 million during the ninesix months ended SeptemberJune 30, 20212022 as compared to the same period during 2020.2021.
Pre-tax loss for the Personal Segment was $8.3$3.8 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to a pre-tax loss of $5.8$4.4 million for the same period of 2020.2021. The increase inlower pre-tax loss was primarily the result of thelower losses and LAE of $4.0 million and lower operating expenses of $0.8 million, partially offset by decreased revenue discussed above partially offset by decreased losses and LAE of $3.4 million, decreased operating expenses of $2.8 million and lower amortization of intangible assets of $0.2 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to the same period during 2020.2021.
The Personal Segment reported a net loss ratio of 90.7%84.9% for the ninesix months ended SeptemberJune 30, 20212022 as compared to 84.0%86.8% for the same period of 2020.2021. The gross loss ratio before reinsurance was 91.8%85.1% for the ninesix months ended SeptemberJune 30, 20212022 as compared to 77.1%88.1% for the same period in 2020.2021. The higherlower gross and net loss ratios for the ninesix months ended SeptemberJune 30, 20212022 was primarily the result of higherlower net catastrophe losses of $89 thousand for the six months ended June 30, 2022 as compared to $0.8 million for the same period the prior year, as well as lower current accident year loss trends.trends, partially offset by higher unfavorable prior year loss reserve development. The Personal Segment reported $4.4$3.4 million net unfavorable prior year loss reserve development during the first ninesix months of 20212022 as compared to net unfavorable prior year loss reserve development of $6.9$3.2 million during the first ninesix months of 2020.2021. The Personal Segment had net catastrophe losses of $0.9 million during the nine months ended September 30, 2021 as compared to $0.4 million for the same period of 2020. The Personal Segment reported a net expense ratio of 27.9%30.3% during the ninesix months ended SeptemberJune 30, 20212022 as compared to 27.0%28.8% for the same period of 2020.2021. The increase in the expense ratio was due predominately to lower net premiums earned and lower finance charges.
Corporate
Total revenue for Corporate increaseddecreased by $37.6$11.5 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to the same period the prior year. This increasedecrease in total revenue was due predominately to investmenta decrease in unrealized gains on equity securities of $9.1$5.1 million during the ninesix months ended SeptemberJune 30, 20212022 as compared to investment lossesan increase in unrealized gains on equity securities of $27.9$5.4 million reported for the same period of 2020 and2021, as well as a decrease in realized gains on investment of $3.1 million, partially offset by higher net investment income of $0.6$2.1 million for the ninesix months ended SeptemberJune 30, 20212022 as compared to the same period during 2020.2021.
Corporate pre-tax loss was $13.0 million for the six months ended June 30, 2022 as compared to pre-tax income of $19 thousand for the same period of 2021. The pre-tax loss for the six months ended June 30, 2022 was primarily due to the lower revenue discussed above as well as higher operating expenses of $1.4 million and higher interest expense of $0.1 million. The higher operating expenses were driven by a $0.9 million increase in salary and related expenses due to
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Corporate pre-tax loss was $6.3increased incentive compensation accruals and higher non-cash stock compensation expense for restricted stock units granted in the fourth quarter of 2021 and the second quarter of 2022. Increased professional service expense of $0.2 million, higher travel expense of $0.1 million and higher other general expenses of $0.2 million also contributed to the increase in operating expenses for the ninesix months ended SeptemberJune 30, 20212022 as compared to pre-tax loss of $90.7 million for the same period of 2020. The improvement in the pre-tax result was primarily due to increased revenue discussed above and the absence of $46.0 million in impairment charges to goodwill and indefinite-lived intangible assets in 2020. 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 our balance sheet. Further contributing to the improved pre-tax result were lower operating expenses of $0.5 million and lower interest expense of $0.3 million. The lower operating expenses were primarily as a result of lower professional services, travel and related and occupancy and related expenses, partially offset increased salary and related expense.prior year.
Financial Condition and Liquidity
Sources and Uses of Funds
Our sources of funds are from insurance-related operations, financing activities and investing activities. Major sources of funds from operations include premiums collected (net of policy cancellations and premiums ceded), commissions, and processing and service fees. As a holding company, Hallmark is dependent on dividend payments and management fees from its subsidiaries to meet operating expenses and debt obligations. As of SeptemberJune 30, 2021,2022, Hallmark and its non-insurance company subsidiaries had $4.3$13.3 million in unrestricted cash and cash equivalents. As of that date, our insurance subsidiaries held $321.5$99.9 million of unrestricted cash and cash equivalents, as well as $317.9$435.3 million in debt securities with an average modified duration of 0.71.0 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 ninesix months of 2021both 2022 and 2020,2021, our insurance subsidiaries paid $3.0 million and $8.0 million in dividends to Hallmark, respectively.Hallmark. During the first ninesix months of 20212022 and 2020,2021, our insurance subsidiaries paid $9.0$6.5 million and $4.2$7.0 million in management fees to Hallmark, respectively.
Comparison of SeptemberJune 30, 20212022 to December 31, 20202021
On a consolidated basis, our cash (excluding restricted cash) and investments at SeptemberJune 30, 20212022 were $689.1$592.8 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 in investment fair values, net salescash used by operations and purchases of investment securities and cash provided by operations.securities.
Comparison of NineSix Months Ended SeptemberJune 30, 20212022 and SeptemberJune 30, 20202021
During the ninesix months ended SeptemberJune 30, 2021,2022, our cash flow used by operations was $78.3 million compared to cash flow provided by operations was $47.3 million compared to cash flow used by operations of $62.9$28.9 million during the same period the prior year. The cash flow provided byused in operations was driven primarily by a decreasehigher reinsurance balances paid (including $38.6 million paid to fund the payment of claims under the LPT Contract without prejudice on behalf of DARAG under the interim agreement), an increase in net paid claims and lower collected investment income, partially offset by decreased paid operating expenses higher collected commission and feefederal income lower interest paid, and income tax refunds received, partially offset by decreased collected net premiums, lower collected investment income and lower finance chargestaxes recovered during the ninesix months ended SeptemberJune 30, 20212022 as compared to the same period the prior year.
Net cash provided byused in investing activities during the first ninesix months of 20212022 was $174.0$161.1 million as compared to net cash provided by investing activities of $212.3$194.8 million during the first ninesix months of 2020.2021. The decreasenet cash used in cash
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provided by investing activities during the first ninesix months of 20212022 was primarily comprised of an increase of $217.8 million in purchases of debt and equity securities, a decrease of $78.1$137.6 million in maturities, sales and redemptions of investment securities and a $0.3$0.5 million increase in purchases of fixed assets, partially offset by a decrease of $40.1 million in purchases of debt and equity securities.assets.
The Company did not report any net cash from financing activities during the first ninesix months of 20212022 or 2020.2021.
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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 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 37.2%52.0% as of SeptemberJune 30, 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.
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 September 30, 2021 | | | 3.37% | | | 3.02% | ||||||
Current interest rate at June 30, 2022 | | | 5.08% | | | 4.73% |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting company.
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 submitted to binding arbitration a dispute that has arisen regarding the rights and obligations of Texas, Dallas Division (the “Schulze Matter”). The Company, its former Chief Executive Officer and its former Chief Financial Officer are named defendants in the lawsuit brought on behalfparties under the LPT Contract. (See Note 9.) Pending resolution of a putative classthe dispute, the Hallmark Insurers have agreed to fund the payment of shareholders who acquired Hallmark securities between March 5, 2019 and March 17, 2020. In general,claims under 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. On July 28, 2021, the court granted the defendants’ motion to dismiss the lawsuitLPT Contract without prejudice to their right to seek reimbursement and other relief in the plaintiff filingarbitration proceedings. The arbitration panel has been constituted and a second amended complaint within 28 days, and denied plaintiff’s request to submit supplemental evidencefinal hearing on the merits is anticipated in supportthe first quarter of his opposition to2023. In the motion to dismiss. Lead Plaintiff chose not to file a second amended complaint. On September 24, 2021, Lead Plaintiff and Defendants filed a Joint Stipulation seeking dismissalarbitration, the Reinsurers seek rescission of the case with prejudice, with each side bearing its own attorneys’ feesLPT Contract or, in the alternative, damages on the basis of alleged breach and costs. No considerationfraudulent inducement by the Hallmark Insurers. The Company believes any such claims are without factual basis or legal merit and intends to vigorously contest the matter. The Company is seeking an arbitration award enforcing the terms of the LPT Contract and requiring the Reinsurers to reimburse 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 has been given, offered, or promisedordered that the Reinsurers post security for any final award in the amount of the Minimum Funding Requirement (as defined in the LPT Contract). Because the dispute is at an initial stage, we are unable at this time to Lead Plaintiff or his counsel in connection with this dismissal. The Court terminatedprovide an evaluation of the case pursuant to the Joint Stipulation.likelihood of an adverse outcome.
As of SeptemberJune 30, 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 SeptemberJune 30, 2021.2022.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
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Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are filed herewith or incorporated herein by reference:
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4.11 | | |
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4.12 | | |
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31(a) | | Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a). |
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31(b) | | Certification of principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a). |
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32(a) | | Certification of principal executive officer Pursuant to 18 U.S.C. § 1350. |
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32(b) | | Certification of principal financial officer Pursuant to 18 U.S.C. § 1350. |
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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 |
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101 SCH+ | | XBRL Taxonomy Extension Schema Document. |
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101 CAL+ | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101 LAB+ | | XBRL Taxonomy Extension Label Linkbase Document. |
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101 PRE+ | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101 DEF+ | | XBRL Taxonomy Extension Definition Linkbase Document. |
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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 |
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+ | | 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 |
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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: | /s/ Mark E. Schwarz |
| Mark E. Schwarz, Executive Chairman and Chief Executive Officer |
| |
| |
Date: | /s/ Christopher J. Kenney |
| Christopher J. Kenney, President and Chief Financial Officer |
| |
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