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 ~~September~~June 30, ~~2021~~2022

☐ 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 ~~November~~August 15, ~~2021.~~2022.

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

INDEX TO FINANCIAL STATEMENTS

	Page Number

Consolidated Balance Sheets at ~~September~~June 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021	3
Consolidated Statements of Operations (unaudited) for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021	4
Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021	5
Consolidated Statements of Stockholders’ Equity (unaudited) for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021	6
Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021	7
Notes to Consolidated Financial Statements (unaudited)	8

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

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

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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

Table of Contents

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, ~~2020~~2021 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 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 ~~September~~June 30, ~~2021~~2022 are not necessarily indicative of the operating results to be expected for the full year.

Table of Contents

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, ~~2020~~2021 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 ~~September~~June 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 ~~value~~value.

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 ~~September~~June 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 ~~approximate~~are held at net realizable value which approximates fair value because of the short maturity of such financial instruments.

Variable Interest Entities

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.

Table of Contents

Income Taxes

We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. ~~Deferred~~We account for income taxes ~~are recognized using~~under the asset and liability method, ~~whereby tax rates are applied to cumulative~~which requires the recognition of deferred taxes for temporary differences ~~based on when~~between the financial statement and ~~how they are expected to affect~~tax 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 for~~and 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 ~~September~~June 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 ~~effects~~adoption of this ~~standard~~guidance to have a material effect on ~~our condensed consolidated~~the 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~~

~~Table of Contents~~

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)

~~Table of Contents~~

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

~~Table of Contents~~

~~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

Table of Contents

~~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.

~~Table of Contents~~

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.

Table of Contents

The following table presents, for each of the fair value hierarchy levels, assets that are measured at fair value on a recurring basis at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (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.

~~Table of Contents~~

The following table summarizes the changes in fair value for all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (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

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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

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~~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 ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$5.8~~$1.2 million and ~~$22.4~~$4.7 million for the ~~nine~~six months ended ~~September~~June 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 ~~nine~~three months ended ~~September~~June 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 ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$16.9~~$4.5 million and ~~$155.0 million~~$15.7 milion for the ~~nine~~six months

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ended ~~September~~June 30, ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (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 ~~September~~June 30, ~~2021.~~2022. We

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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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 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 ~~nine~~six months ended ~~September~~June 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.

~~Table of Contents~~

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, we~~We 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 ~~September~~June 30, ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020:~~2021:

~~Nine~~Six months ended ~~September~~June 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

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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 ~~and primary~~ commercial automobile liability lines of business, partially offset by net unfavorable development in both the primary and excess commercial automobile lines of business in the 2018 and prior accident years. Our E&S Casualty business unit experienced net unfavorable development primarily in our primary ~~and excess~~ liability line of business in the 2019 and prior accident years, partially offset by net favorable development in the 2020 accident year. We experienced net unfavorable development in our E&S Property and Aerospace & Programs business units. We experienced net favorable development in our Professional Liability business unit.

~~Table of Contents~~

●

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 ~~auto liability and~~ property lines of business in accident years 2020, 2016 and 2015, partially offset by net unfavorable development in the general liability lines of business in accident years 2019, 2018, 2017 and 2014 and prior accident years. The run-off from our former Workers Compensation operating unit experienced net favorable development in the 2015 and prior accident years.

●

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:~~

●

~~Specialty Commercial Segment.~~ Our Commercial Auto business unit experienced net unfavorable development in the 2018 and prior accident years both in the primary and excess commercial automobile liability lines of business, partially offset by net favorable development in the excess commercial automobile lines of business in the 2019 accident year. Our E&S Casualty business unit experienced net unfavorable development primarily in our primary liability line of business and our E&S package insurance products in the 2017, 2016, 2015 and 2013 and prior accident years, partially offset by net favorable development in the 2019, 2018 and 2014 accident years. We experienced net favorable development in our E&S Property and Professional Liability business units, partially offset by net unfavorable development in our Aerospace & Programs business unit.

●

~~Standard Commercial Segment.~~ Our Commercial Accounts business unit experienced net unfavorable development primarily in the general liability line of business in the 2018, 2017, 2016, 2015 and 2013 and prior accident years, partially offset by net favorable development in the 2019 and 2014 accident years primarily in the general liability line of business. Our Commercial Accounts business unit experienced net favorable development in the 2016 and 2015 accident years, partially offset by net unfavorable development in the 2017 and 2014 accident years in the occupational accident line of business. The run-off from our former Workers Compensation operating unit experienced net favorable development in the 2014 and prior accident years, partially offset by net unfavorable development in the 2015 accident year.

●

~~Personal Segment.~~ Net unfavorable development in our Specialty Personal Lines business unit was mostly attributable to the 2019, 2018, 2017 and 2016 accident years, partially offset by favorable development in the 2015 and prior accident years. The net development during the nine months ended September 30, 2020 was driven predominately by unfavorable development attributable to more recent treaty years where we retain a greater portion of the claims.

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 ~~September~~June 30, ~~2021,~~2022, restricted stock units representing the right to receive up to ~~84,744~~768,177 shares of our common stock were outstanding under the 2015 LTIP. There were 0 stock ~~option awards granted~~options outstanding under the 2015 LTIP as of ~~September~~June 30, ~~2021.~~2022.

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Stock Options:

~~A summary of the status of our~~There were 0 stock options ~~as of September 30, 2021 and changes~~outstanding at any point during the ~~nine~~six 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 details~~June 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 ~~September~~June 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. ~~Restricted~~For 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.

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

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Compensation cost is measured as an amount equal to the fair value of the restricted stock units on the date of grant and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on our best estimate of the ultimate achievement level. The grant date fair value of restricted stock units granted in ~~2017,~~ 2018, 2019, 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 ~~nine~~six months ended ~~September~~June 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 ~~nine~~six months ended ~~September~~June 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 ~~nine~~six months ended ~~September~~June 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 ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

The following table details the status of our restricted stock units as of and for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~September~~June 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 ~~2021~~2022, $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.

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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)

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~~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 ~~September~~June 30, ~~2021~~2022 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

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Loss Portfolio Transfer

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

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

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accounts with The Bank of New York Mellon, as trustee, to be held as security for the Reinsurers’ obligations to the Hallmark Insurers under the LPT Contract.

The Reinsurers and the Hallmark Insurers have 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 ~~September~~June 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 ~~September~~June 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%

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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 ~~September~~June 30, ~~2021.~~2022.

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~~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

~~For~~We had 0 shares of common stock potentially issuable upon exercise of employee stock options for the three months and ~~nine~~six months ended ~~September~~June 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

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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 ~~nine~~six months ended ~~September~~June 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 ~~nine~~six months ended ~~September~~June 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.

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~~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.

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The following table provides supplemental cash flow information for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 in~~Insurers have agreed to fund the ~~U.S. District Court for~~payment 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 lawsuit~~LPT Contract without prejudice to their right to seek reimbursement and other relief in the ~~plaintiff filing~~arbitration proceedings. The arbitration panel has been constituted and a ~~second amended complaint within 28 days, and denied plaintiff’s request to submit supplemental evidence~~final hearing on the merits is anticipated in

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~~support of his opposition to~~2023. 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 dismissal~~arbitration, the Reinsurers seek rescission of the ~~case with prejudice, with each side bearing its own attorneys’ fees~~LPT Contract or, in the alternative, damages on the basis of alleged breach and ~~costs. No consideration~~fraudulent 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 promised~~ordered 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 terminated~~provide an evaluation of the ~~case pursuant to the Joint Stipulation.~~likelihood of an adverse outcome.

As of ~~September~~June 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 ~~nine~~six months of ~~2021~~2022 or ~~2020.~~2021.

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~~20.~~18. Changes in Accumulated Other Comprehensive (Loss) Income Balances

The changes in accumulated other comprehensive (loss) income balances as of ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 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)

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~~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 nine~~six month periods ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 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

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	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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 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 ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

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Future minimum lease payments under non-cancellable leases as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 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

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handled by our Commercial Accounts business unit; and the runoff of workers compensation insurance products handled by our former Workers Compensation operating unit until discontinued during 2016.

●

Personal Segment. Our Personal Segment includes the non-standard personal automobile and renters insurance products and services handled by our Specialty Personal Lines business unit.

The retained premium produced by these reportable segments is supported by our American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark Insurance Company (“HIC”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”) insurance subsidiaries. In addition, control and management of Hallmark County Mutual Insurance Company (“HCM”) is maintained through our wholly owned subsidiary, CYR Insurance Management Company (“CYR”). CYR has as its primary asset a management agreement with HCM which provides for CYR to have management and control of HCM. HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas. HCM does not retain any business.

AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement pursuant to which AHIC retains 32% of the total net premiums written by any of them, HIC retains 32% of our total net premiums written by any of them, HSIC 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 ~~September~~June 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 ~~nine~~six months ended ~~September~~June 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 ~~September~~June 30, ~~2021,~~2022, we reported a pre-tax ~~income~~loss 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 ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we reported a pre-tax ~~income~~loss of ~~$14.6~~$61.7 million, as compared to a pre-tax ~~loss~~income of ~~$102.5~~$10.2 million reported during the same period the prior year.

The decrease in revenue for the three months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 gains~~commission and fees of ~~$37.0~~$0.1 million.

The ~~improvement~~increase in pre-tax ~~results~~loss for the three months ended ~~September~~June 30, ~~2021~~2022 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 ~~decrease~~increase in losses and LAE was primarily due to ~~lower current accident year loss trends and a $12.4~~$55.6 million ~~improvement in unfavorable net~~of 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 ~~third~~second quarter of ~~2021~~2022 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

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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 improvement~~Lower operating expenses of $8.3 million partially offset the increase in pre-tax ~~results~~loss for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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

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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 ~~income~~loss of ~~$3.4~~$69.4 million for the three months ended ~~September~~June 30, ~~2021~~2022 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 ~~income~~loss of ~~$0.19~~$3.82 per share for the three months ended ~~September~~June 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 ~~income~~loss of ~~$0.64~~$4.00 per share for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to a net ~~loss~~income 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 ~~nine~~six months of ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, 2021 varied from the statutory tax rates primarily due to ~~tax-exempt~~tax 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.

~~Third~~Second Quarter ~~2021~~2022 as Compared to ~~Third~~Second Quarter ~~2020~~2021

The following is additional business segment information for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (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 ~~September~~June 30, ~~2021,~~2022, which was ~~$23.3~~$12.2 million, or ~~16%~~10%, ~~less~~higher 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 ~~September~~June 30, ~~2021~~2022 as compared to ~~$77.0~~$54.4 million for the same period of ~~2020.~~2021. The ~~decrease~~increase 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

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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 production~~higher 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 ~~September~~June 30, ~~2021~~2022 as compared to the same period of ~~2020.~~2021.

The Specialty Commercial Segment reported a pre-tax ~~income~~loss of ~~$12.6~~$45.9 million for the ~~third~~second quarter of ~~2021~~2022 as compared to pre-tax ~~loss~~income of ~~$27.3~~$4.8 million reported for the same period in ~~2020.~~2021. The deterioration in pre-tax ~~income~~results was primarily the result of ~~lower~~higher 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 ~~September~~June 30, ~~2021~~2022 as compared to the same period during ~~2020, partially offset by the lower total revenue discussed above.~~2021.

Our Specialty Commercial Segment reported ~~lower~~higher losses and LAE for the quarter ended ~~September~~June 30, ~~2021~~2022 compared to the same period of the prior year as the combined result of (a) a ~~$48.1~~$32.0 million ~~decrease~~increase 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 ~~increase~~decrease 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 ~~decrease~~increase in losses and LAE attributable to our Professional Liability business ~~unit~~unit. 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 ~~September~~June 30, ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 as compared to ~~100.4%~~89.8% for the same period in ~~2020~~2021. The increase in the gross and net loss ratios was driven primarily by ~~lower current accident~~increased unfavorable prior year loss ~~trends and lower~~development 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 ~~for~~during 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. Net~~2021. 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, 2021~~2022 as compared to ~~catastrophe losses of $8.1~~$0.1 million during the ~~third quarter~~same 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 ~~third~~second quarter of ~~2021~~2022 as compared to ~~22.2%~~23.8% for the same period of ~~2020~~2021 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 ~~September~~June 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 ~~September~~June 30, ~~2021~~2022 as compared to ~~$17.5~~$17.4 million for the

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same period in ~~2020.~~2021. The increase in the gross and net premiums written was due to higher premium production in our Commercial Accounts business ~~unit. The decrease in net premiums written was due to~~unit, partially offset by higher ceded catastrophe premiums during the ~~third~~second quarter of ~~2021~~2022.

Total revenue for the Standard Commercial Segment of ~~$18.2~~$16.9 million for the three months ended ~~September~~June 30, ~~2021,~~2022, was ~~$0.8~~$0.3 million ~~more~~less than the ~~$17.4~~$17.2 million reported for the same period in ~~2020.~~2021. This ~~increase~~decrease in total revenue was primarily due to ~~higher~~lower net ~~premiums earned~~investment income of ~~$0.8~~$0.3 million ~~due to higher premium production~~ for the three months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period of ~~2020.~~2021.

~~Our~~The Standard Commercial Segment reported a pre-tax ~~income~~loss of ~~$2.0~~$0.8 million for the three months ended ~~September~~June 30, ~~2021~~2022 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 ~~income~~loss was primarily the result of lower ~~loss~~losses 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 ~~September~~June 30, ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 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 ~~third~~second quarter of ~~2021~~2022 compared to ~~$1.5~~$3.2 million for the same period of the prior year, ~~and lower non-catastrophe current accident year~~partially offset by higher net loss ~~trends.~~reserve development. The Standard Commercial Segment reported ~~favorable~~unfavorable net loss reserve development of ~~$1.0~~$0.5 million during the three months ended ~~September~~June 30, ~~2021~~2022 as compared to ~~unfavorable net loss reserve development of $1.4 million~~$18 thousand during the same period of ~~2020~~2021. The Standard Commercial Segment reported a net expense ratio of ~~32.9%~~34.5% for the ~~third~~second quarter of ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 as compared to ~~$21.7~~$15.8 million for the same period in the prior year. Net premiums written for ~~our~~the Personal Segment were ~~$17.4~~$15.0 million in the ~~third~~second quarter of ~~2021,~~2022, which was a decrease of ~~$1.2~~$0.7 million from the ~~$18.6~~$15.7 million reported for the ~~third~~second 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 ~~third~~second quarter of ~~2021~~2022 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 ~~third~~second quarter of ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 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 higher~~2021. Lower losses and LAE of ~~$1.5~~$2.1 million ~~and~~were 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 ~~September~~June 30, ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 as compared to ~~80.3%~~91.9% for the same period in ~~2020.~~2021. The ~~higher~~lower 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.~~

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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 ~~September~~June 30, ~~2021~~2022 as compared to the same period the prior year. This decrease in total revenue was due predominately to ~~lower net investment income~~a reduction in unrealized gains on equity securities of ~~$0.3~~$5.0 million for the three months ended ~~September~~June 30, ~~2021~~2022 as compared to an increase in unrealized gain on equity securities of $1.0 million for the same period during ~~2020, partially offset by~~2021, as well as a ~~$0.1~~$1.8 million ~~improvement~~reduction in ~~investment losses~~realized gains on investments during the ~~third~~second quarter of ~~2021~~2022 as compared to the same period of ~~2020.~~

~~Corporate pre-tax loss was $6.3 million for~~2021, 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 third~~second quarter of ~~2021~~2022 of $2.4 million as compared to the same period the prior ~~year~~year.

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 ~~lower~~a $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 ~~services~~service expense of $0.3 million, ~~lower salary and related~~higher 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, 2021~~also contributed to the increase in operating expenses for the second quarter of 2022 as compared to ~~Nine~~the same period the prior year.

Six Months Ended ~~September~~June 30, ~~2020~~2022 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,

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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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 which was ~~$71.2~~$2.0 million, or ~~16%~~1%, ~~less~~higher 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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

~~Table of Contents~~

discussed above, as well as lower net investment income of ~~$3.2~~$1.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period of ~~2020.~~2021.

~~Pre-tax income for the~~The Specialty Commercial Segment ~~was $28.8~~reported pre-tax loss of $43.3 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to a pre-tax ~~loss~~income of ~~$5.8~~$16.2 million reported for the same period in ~~2020.~~2021. The deterioration in pre-tax ~~income~~results was primarily the result of ~~lower~~the 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period during ~~2020, partially offset by the lower revenue discussed above.~~2021.

Our Specialty Commercial Segment reported ~~lower~~higher losses and LAE for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to the same period of the prior year as the combined result of (a) a ~~$91.7~~$31.0 million ~~decrease~~increase 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 ~~decrease~~increase 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

Table of Contents

$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 ~~nine~~first six months ~~ended September 30, 2021~~of 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 and~~as 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to ~~89.7%~~82.2% for the same period in ~~2020.~~2021. The ~~decrease~~increase in the gross and net loss ~~ratio~~ratios was ~~impacted~~driven primarily by ~~$0.5 million of~~increased unfavorable prior year ~~net~~ loss ~~reserve~~ development ~~for the nine months ended September 30, 2021 as compared to~~primarily 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 ~~for~~during the ~~same period of 2020. Net catastrophe losses of $5.9 million for the nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to favorable prior year net ~~catastrophe losses~~loss reserve development of ~~$16.4~~$0.8 million during the same period of ~~2020 also contributed~~2021. 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 ~~nine~~first six months ~~ended September 30, 2021~~of 2022 as compared to ~~19.3%~~24.0% for the same period of ~~2020~~2021 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 ~~nine~~six months ended ~~September~~June 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 ~~nine~~three months ended ~~both September~~June 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 ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022 was ~~$1.0~~$0.9 million ~~more~~less than the ~~$52.1~~$34.9 million reported for the same period in ~~2020.~~2021. This ~~increase~~decrease 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 charges~~net premiums earned of ~~$0.1~~$0.3 million for the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to ~~75.3%~~78.0% for the same period of ~~2020.~~2021. The gross loss ratio before reinsurance for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period during ~~2020.~~2021.

Pre-tax loss for the Personal Segment was ~~$8.3~~$3.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to a pre-tax loss of ~~$5.8~~$4.4 million for the same period of ~~2020.~~2021. The ~~increase in~~lower pre-tax loss was primarily the result of ~~the~~lower 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period during ~~2020.~~2021.

The Personal Segment reported a net loss ratio of ~~90.7%~~84.9% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to ~~77.1%~~88.1% for the same period in ~~2020.~~2021. The ~~higher~~lower gross and net loss ratios for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was primarily the result of ~~higher~~lower 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 ~~nine~~six months of ~~2021~~2022 as compared to net unfavorable prior year loss reserve development of ~~$6.9~~$3.2 million during the first ~~nine~~six 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~increased~~decreased by ~~$37.6~~$11.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period the prior year. This ~~increase~~decrease in total revenue was due predominately to ~~investment~~a decrease in unrealized gains on equity securities of ~~$9.1~~$5.1 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to ~~investment losses~~an increase in unrealized gains on equity securities of ~~$27.9~~$5.4 million reported for the same period of ~~2020 and~~2021, 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 $6.3~~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 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 ~~September~~June 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 ~~0.7~~1.0 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 ~~nine~~six months of ~~2021~~both 2022 and ~~2020,~~2021, our insurance subsidiaries paid $3.0 million ~~and $8.0 million~~ in dividends to ~~Hallmark, respectively.~~Hallmark. During the first ~~nine~~six months of ~~2021~~2022 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 ~~September~~June 30, ~~2021~~2022 to December 31, ~~2020~~2021
On a consolidated basis, our cash (excluding restricted cash) and investments at ~~September~~June 30, ~~2021~~2022 were ~~$689.1~~$592.8 million compared to ~~$639.2~~$691.6 million at December 31, ~~2020.~~2021. The primary reasons for this ~~increase~~decrease in unrestricted cash and investments were ~~increases in investment fair values, net sales~~cash used by operations and purchases of investment ~~securities and cash provided by operations.~~securities.
Comparison of ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021
During the ~~nine~~six months ended ~~September~~June 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 by~~used in operations was driven primarily by ~~a decrease~~higher 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 ~~fee~~federal income ~~lower interest paid, and income tax refunds received, partially offset by decreased collected net premiums, lower collected investment income and lower finance charges~~taxes recovered during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period the prior year.
Net cash ~~provided by~~used in investing activities during the first ~~nine~~six months of ~~2021~~2022 was ~~$174.0~~$161.1 million as compared to net cash provided by investing activities of ~~$212.3~~$194.8 million during the first ~~nine~~six months of ~~2020.~~2021. The ~~decrease~~net cash used in ~~cash~~

~~Table of Contents~~

~~provided by~~ investing activities during the first ~~nine~~six months of ~~2021~~2022 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 ~~nine~~six months of ~~2021~~2022 or ~~2020.~~2021.

Table of Contents

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 ~~September~~June 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 filed~~Loss 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 for~~Notes to Consolidated Financial Statements.)

The Reinsurers and the ~~Northern District~~Hallmark 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 behalf~~parties under the LPT Contract. (See Note 9.) Pending resolution of ~~a putative class~~the 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 lawsuit~~LPT Contract without prejudice to their right to seek reimbursement and other relief in the ~~plaintiff filing~~arbitration proceedings. The arbitration panel has been constituted and a ~~second amended complaint within 28 days, and denied plaintiff’s request to submit supplemental evidence~~final hearing on the merits is anticipated in ~~support~~the first quarter of ~~his opposition to~~2023. 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 dismissal~~arbitration, the Reinsurers seek rescission of the ~~case with prejudice, with each side bearing its own attorneys’ fees~~LPT Contract or, in the alternative, damages on the basis of alleged breach and ~~costs. No consideration~~fraudulent 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 promised~~ordered 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 terminated~~provide an evaluation of the ~~case pursuant to the Joint Stipulation.~~likelihood of an adverse outcome.

As of ~~September~~June 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 ~~September~~June 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:
Exhibit
Number

Description
3.1

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

3.2

Amended and Restated By-Laws of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed ~~March 28, 2017).~~January 12, 2022).

4

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

4.2

Specimen certificate for common stock, $0.18 par value, of the registrant (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the registrant’s Registration Statement on Form S-1 [Registration No. 333-136414] filed September 8, 2006).

4.3

Indenture dated June 21, 2005, between Hallmark Financial Services, Inc. and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed June 27, 2005).

4.4

Amended and Restated Declaration of Trust of Hallmark Statutory Trust I dated as of June 21, 2005, among Hallmark Financial Services, Inc., as sponsor, Chase Bank USA, National Association, as Delaware trustee, and JPMorgan Chase Bank, National Association, as institutional trustee, and Mark Schwarz and Mark Morrison, as administrators (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed June 27, 2005).

4.5

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

4.6

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

4.7

Indenture dated as of August 23, 2007, between Hallmark Financial Services, Inc. and The Bank of New York Trust Company, National Association (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed August 24, 2007).

4.8

Amended and Restated Declaration of Trust of Hallmark Statutory Trust II dated as of August 23, 2007, among Hallmark Financial Services, Inc., as sponsor, The Bank of New York (Delaware), as Delaware trustee, and The Bank of New York Trust Company, National Association, as institutional trustee, and Mark Schwarz and Mark Morrison, as administrators (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed August 24, 2007).

4.9

Form of Junior Subordinated Debt Security Due 2037 (included in Exhibit 4.7 above).

Table of Contents


4.10		Form of Capital Security Certificate (included in Exhibit 4.8 above).

~~Table of Contents~~

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

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

~~10.1~~		First Amendment to Office Lease between Hallmark Financial Services, Inc. and Teachers Insurance and Annuity Association of America dated June 30, 2021 (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K filed July 6, 2021).

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

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

32(a)		Certification of principal executive officer Pursuant to 18 U.S.C. § 1350.

32(b)		Certification of principal financial officer Pursuant to 18 U.S.C. § 1350.

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

101 SCH+		XBRL Taxonomy Extension Schema Document.

101 CAL+		XBRL Taxonomy Extension Calculation Linkbase Document.

101 LAB+		XBRL Taxonomy Extension Label Linkbase Document.

101 PRE+		XBRL Taxonomy Extension Presentation Linkbase Document.

101 DEF+		XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 104		Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

+		Filed with this Quarterly Report on Form 10-Q and included in Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, (ii) Consolidated Statements of Operations for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, (iii) Consolidated Statements of Comprehensive Income for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, (iv) Consolidated Statements of Stockholder’s Equity for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, (v) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 and (vi) related notes.

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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)

Date: ~~November~~August 15, ~~2021~~2022
/s/ Mark E. Schwarz

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

Date: ~~November~~August 15, ~~2021~~2022
/s/ Christopher J. Kenney

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

4441


	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


	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


	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


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


				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

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

3.2		Amended and Restated By-Laws of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed ~~March 28, 2017).~~January 12, 2022).

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

4.2		Specimen certificate for common stock, $0.18 par value, of the registrant (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the registrant’s Registration Statement on Form S-1 [Registration No. 333-136414] filed September 8, 2006).

4.3		Indenture dated June 21, 2005, between Hallmark Financial Services, Inc. and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed June 27, 2005).

4.4		Amended and Restated Declaration of Trust of Hallmark Statutory Trust I dated as of June 21, 2005, among Hallmark Financial Services, Inc., as sponsor, Chase Bank USA, National Association, as Delaware trustee, and JPMorgan Chase Bank, National Association, as institutional trustee, and Mark Schwarz and Mark Morrison, as administrators (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed June 27, 2005).

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

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

4.7		Indenture dated as of August 23, 2007, between Hallmark Financial Services, Inc. and The Bank of New York Trust Company, National Association (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed August 24, 2007).

4.8		Amended and Restated Declaration of Trust of Hallmark Statutory Trust II dated as of August 23, 2007, among Hallmark Financial Services, Inc., as sponsor, The Bank of New York (Delaware), as Delaware trustee, and The Bank of New York Trust Company, National Association, as institutional trustee, and Mark Schwarz and Mark Morrison, as administrators (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed August 24, 2007).

4.9		Form of Junior Subordinated Debt Security Due 2037 (included in Exhibit 4.7 above).



Date: ~~November~~August 15, ~~2021~~2022	/s/ Mark E. Schwarz
	Mark E. Schwarz, Executive Chairman and Chief Executive Officer ~~and President~~(principal executive officer)


Date: ~~November~~August 15, ~~2021~~2022	/s/ Christopher J. Kenney
	Christopher J. Kenney, President and Chief Financial Officer ~~and Senior Vice President~~(principal financial officer)