Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

(Mark One) Securities Exchange Act of 1934

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

For the quarterly period ended September 30, 20212022

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

Commission file number 001-11252

Hallmark Financial Services, Inc.

(Exact name of registrant as specified in its charter)

Nevada

87-0447375

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)

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

75240

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (817) 348-1600

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.18 par value

HALL

Nasdaq Global Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company  

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, par value $0.18 per share – 18,172,467–18,184,824 shares outstanding as of November 15, 2021.14, 2022.

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.   Financial Statements

INDEX TO FINANCIAL STATEMENTS

Page
Number

Consolidated Balance Sheets at September 30, 20212022 (unaudited) and December 31, 20202021

3

Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 30, 20212022 and September 30, 20202021

4

Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the three months and nine months ended September 30, 20212022 and September 30, 20202021

5

Consolidated Statements of Stockholders’ Equity (unaudited) for the three months and nine months ended September 30, 20212022 and September 30, 20202021

6

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 20212022 and September 30, 20202021

7

Notes to Consolidated Financial Statements (unaudited)

8

2

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except par value)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

September 30,

December 31,

2022

2021

(unaudited)

ASSETS

  

 

  

Investments:

  

 

  

Debt securities, available-for-sale, at fair value (amortized cost; $426,870 in 2022 and $288,175 in 2021)

$

417,053

$

290,073

Equity securities (cost; $42,858 in 2022 and $42,120 in 2021)

 

41,002

 

48,695

Total investments

 

458,055

 

338,768

Cash and cash equivalents

 

129,468

 

352,867

Restricted cash

 

8,845

 

3,810

Ceded unearned premiums

 

30,473

 

29,207

Premiums receivable

 

74,920

 

90,621

Accounts receivable

 

5,749

 

6,914

Receivable from reinsurer

62,028

Receivable for securities

 

883

 

1,326

Reinsurance recoverable

 

542,818

 

549,964

Deferred policy acquisition costs

 

5,341

 

6,811

Intangible assets, net

 

441

 

819

Federal income tax recoverable

2,378

18,217

Deferred federal income taxes, net

 

 

8,906

Prepaid pension

172

Prepaid expenses

 

2,320

 

2,173

Other assets

 

25,671

 

25,119

Assets held-for-sale

132,444

118,076

Total assets

$

1,482,006

$

1,553,598

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Senior unsecured notes due 2029 (less unamortized debt issuance cost of $672 in 2022 and $746 in 2021)

$

49,328

$

49,254

Subordinated debt securities (less unamortized debt issuance cost of $704 in 2022 and $744 in 2021)

 

55,998

 

55,959

Reserves for unpaid losses and loss adjustment expenses

 

858,888

 

816,681

Unearned premiums

 

86,595

 

82,736

Reinsurance payable

 

97,065

 

117,908

Pension liability

 

 

174

Payable for securities

 

 

3,280

Accounts payable and other liabilities

 

52,836

 

49,442

Liabilities held-for-sale

215,528

202,643

Total liabilities

 

1,416,238

 

1,378,077

Commitments and contingencies (Note 18)

 

 

  

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

 

122,959

 

122,844

(Accumulated deficit) retained earnings

 

(26,086)

 

74,703

Accumulated other comprehensive loss

 

(10,228)

 

(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

 

65,768

 

175,521

Total liabilities and stockholders’ equity

$

1,482,006

$

1,553,598

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

3

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Gross premiums written

$

169,104

$

196,464

$

501,838

$

581,697

Ceded premiums written

 

(78,140)

 

(83,408)

 

(231,891)

 

(239,267)

Net premiums written

 

90,964

 

113,056

 

269,947

 

342,430

Change in unearned premiums

 

3,383

 

3,664

 

22,836

 

19,587

Net premiums earned

 

94,347

 

116,720

 

292,783

 

362,017

Investment income, net of expenses

 

2,213

 

2,660

 

7,576

 

10,314

Investment (losses) gains, net

 

(533)

 

(627)

 

9,122

 

(27,899)

Finance charges

 

1,076

 

1,316

 

3,318

 

4,488

Commission and fees

 

232

 

209

 

742

 

793

Other income

 

15

 

15

 

50

 

48

Total revenues

 

97,350

 

120,293

 

313,591

 

349,761

Losses and loss adjustment expenses

 

63,706

 

122,555

 

209,674

 

308,278

Operating expenses

 

27,882

 

33,640

 

85,188

 

92,059

Interest expense

 

1,245

 

1,273

 

3,743

 

4,061

Impairment of goodwill and other intangible assets

45,996

Amortization of intangible assets

 

126

 

617

 

378

 

1,851

Total expenses

 

92,959

 

158,085

 

298,983

 

452,245

Pre-tax income (loss)

 

4,391

 

(37,792)

 

14,608

 

(102,484)

Income tax expense (benefit)

 

946

 

(9,404)

 

3,037

 

(15,943)

Net income (loss)

3,445

(28,388)

11,571

(86,541)

Net income (loss) per share:

 

  

 

  

 

  

 

  

Basic

$

0.19

$

(1.56)

$

0.64

$

(4.77)

Diluted

$

0.19

$

(1.56)

$

0.64

$

(4.77)

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2022

    

2021

    

2022

    

2021

Gross premiums written

$

52,520

$

55,128

$

167,857

$

185,738

Ceded premiums written

 

(15,902)

 

(21,588)

 

(52,532)

 

(61,009)

Net premiums written

 

36,618

 

33,540

 

115,325

 

124,729

Change in unearned premiums

 

(238)

 

9,163

 

(2,593)

 

26,614

Net premiums earned

 

36,380

 

42,703

 

112,732

 

151,343

Investment income, net of expenses

 

3,721

 

2,213

 

8,700

 

7,576

Investment (losses) gains, net

 

(2,821)

 

(533)

 

(6,764)

 

9,122

Finance charges

 

937

 

1,076

 

2,900

 

3,318

Commission and fees

 

1

 

2

 

3

 

3

Other income

 

14

 

15

 

42

 

50

Total revenues

 

38,232

 

45,476

 

117,613

 

171,412

Losses and loss adjustment expenses

 

49,141

 

27,549

 

161,168

 

111,570

Operating expenses

 

17,816

 

18,558

 

51,967

 

59,114

Interest expense

 

1,528

 

1,245

 

4,158

 

3,743

Amortization of intangible assets

 

7

 

7

 

21

 

21

Total expenses

 

68,492

 

47,359

 

217,314

 

174,448

(Loss) income from continuing operations before tax

 

(30,260)

 

(1,883)

 

(99,701)

 

(3,036)

Income tax (benefit) expense from continuing operations

 

(1,007)

 

161

 

5,242

 

828

Net (loss) income from continuing operations

$

(29,253)

$

(2,044)

$

(104,943)

$

(3,864)

Discontinued operations:

Total pretax income from discontinued operations

$

2,801

$

6,274

$

10,573

$

17,644

Income tax expense on discontinued operations

1,701

785

6,419

2,209

Income from discontinued operations, net of tax

$

1,100

$

5,489

$

4,154

$

15,435

Net (loss) income

$

(28,153)

$

3,445

$

(100,789)

$

11,571

Net (loss) income per share basic:

 

  

 

  

 

  

 

  

Net loss from continuing operations

$

(1.61)

$

(0.11)

$

(5.77)

$

(0.21)

Net income from discontinued operations

0.06

0.30

0.23

0.85

Basic net (loss) income per share

$

(1.55)

$

0.19

$

(5.54)

$

0.64

Net (loss) income per share diluted:

Net loss from continuing operations

$

(1.61)

$

(0.11)

$

(5.77)

$

(0.21)

Net income from discontinued operations

0.06

0.30

0.23

0.85

Diluted net (loss) income per share

$

(1.55)

$

0.19

$

(5.54)

$

0.64

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

4

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

Nine Months Ended

September 30, 

September 30, 

September 30,

September 30,

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

Net (loss) income

$

3,445

$

(28,388)

$

11,571

$

(86,541)

$

(28,153)

$

3,445

$

(100,789)

$

11,571

Other comprehensive (loss) income:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Change in net actuarial gain

 

43

 

35

 

130

 

104

 

25

 

43

 

78

 

130

Tax effect on change in net actuarial gain

 

(9)

 

(8)

 

(27)

 

(22)

 

(5)

 

(9)

 

(16)

 

(27)

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

 

(2,362)

 

276

 

(10,048)

 

3,063

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

 

496

 

(58)

 

2,110

 

(643)

Reclassification adjustment for gains included in net (loss) income

 

(504)

 

(1,059)

 

(1,667)

 

(5,288)

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

 

106

 

222

 

350

 

1,110

Other comprehensive loss, net of tax

 

(2,244)

 

(585)

 

(9,193)

 

(1,655)

Comprehensive (loss) income

$

(30,397)

$

2,860

$

(109,982)

$

9,916

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

5

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

Nine Months Ended

September 30, 

September 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

 

123,166

 

122,782

 

122,844

 

122,893

Equity based compensation

 

(203)

 

4

 

233

 

158

Shares issued under employee benefit plans

 

(4)

 

(13)

 

(118)

 

(278)

Balance, end of period

 

122,959

 

122,773

 

122,959

 

122,773

Retained Earnings

 

  

 

  

 

  

 

  

Balance, beginning of period

 

2,067

 

73,825

 

74,703

 

65,699

Net (loss) income

 

(28,153)

 

3,445

 

(100,789)

 

11,571

Balance, end of period

 

(26,086)

 

77,270

 

(26,086)

 

77,270

Accumulated Other Comprehensive Income

 

  

 

  

 

  

 

  

Balance, beginning of period

 

(7,984)

 

(687)

 

(1,035)

 

383

Additional minimum pension liability, net of tax

 

20

 

34

 

62

 

103

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

 

(1,866)

 

218

 

(7,938)

 

2,420

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

 

(398)

 

(837)

 

(1,317)

 

(4,178)

Balance, end of period

 

(10,228)

 

(1,272)

 

(10,228)

 

(1,272)

Treasury Stock

 

  

 

  

 

  

 

  

Balance, beginning of period

 

(24,634)

 

(24,761)

 

(24,748)

 

(25,026)

Shares issued under employee benefit plans

 

 

13

 

114

 

278

Balance, end of period

 

(24,634)

 

(24,748)

 

(24,634)

 

(24,748)

Total Stockholders' Equity

$

65,768

$

177,780

$

65,768

$

177,780

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

6

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

($ in thousands)

Nine Months Ended September 30, 

2021

2020

Cash flows from operating activities:

  

 

  

 

Net income (loss)

$

11,571

$

(86,541)

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

 

 

  

Depreciation and amortization expense

 

2,523

 

4,257

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

Change in ceded unearned premiums

 

(2,412)

 

18,045

Change in premiums receivable

 

35,155

 

35,921

Change in accounts receivable

 

(628)

 

(908)

Change in deferred policy acquisition costs

 

7,346

 

629

Change in reserves for losses and loss adjustment expenses

 

25,613

 

135,536

Change in unearned premiums

 

(20,423)

 

(37,632)

Change in reinsurance recoverable

 

(17,242)

 

(193,259)

Change in reinsurance payable

 

10,083

 

15,601

Change in federal income tax payable (recoverable)

 

7,344

 

(11,000)

Change in all other liabilities

 

(2,903)

 

(15,499)

Change in all other assets

 

448

 

4,073

Net cash provided by (used in) operating activities

 

47,348

 

(62,895)

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(1,632)

 

(1,277)

Purchases of investment securities

 

(120,276)

 

(160,410)

Maturities, sales and redemptions of investment securities

 

295,878

 

373,988

Net cash provided by investing activities

 

173,970

 

212,301

Increase in cash and cash equivalents and restricted cash

 

221,318

 

149,406

Cash and cash equivalents and restricted cash at beginning of period

 

108,308

 

54,948

Cash and cash equivalents and restricted cash at end of period

$

329,626

$

204,354

Nine Months Ended September 30,

2022

2021

Cash flows from operating activities:

  

 

  

 

Net (loss) income

$

(100,789)

$

11,571

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

 

 

  

Income from discontinued operations, net of tax

(4,154)

(15,435)

Depreciation and amortization expense

 

2,323

 

2,523

Deferred federal income taxes expense

 

11,350

 

(163)

Investment losses (gains), net

 

6,764

 

(9,122)

Share-based payments expense

 

233

 

158

Change in ceded unearned premiums

 

(1,266)

 

11,714

Change in premiums receivable

 

15,701

 

35,155

Change in accounts receivable

 

1,165

 

(628)

Change in receivable from reinsurer

(62,028)

Change in deferred policy acquisition costs

 

1,470

 

7,346

Change in reserves for losses and loss adjustment expenses

 

42,207

 

25,613

Change in unearned premiums

 

3,859

 

(32,876)

Change in reinsurance recoverable

 

7,146

 

(17,242)

Change in reinsurance balances payable

 

(20,843)

 

10,083

Change in federal income tax recoverable

 

15,839

 

7,344

Change in all other liabilities

 

3,161

 

(2,157)

Change in all other assets

 

1,035

 

996

Net cash (used in) provided by operating activities- continuing operations

 

(76,827)

 

34,880

Net cash provided by (used in) operating activities- discontinued operations

2,671

12,468

Net cash (used in) provided by operating activities

(74,156)

47,348

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(2,148)

 

(1,632)

Purchases of investment securities

 

(273,828)

 

(120,276)

Maturities, sales and redemptions of investment securities

 

131,768

 

295,878

Net cash (used in) provided by investing activities

 

(144,208)

 

173,970

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

 

(218,364)

 

221,318

Cash and cash equivalents and restricted cash at beginning of period

 

356,677

 

108,308

Cash and cash equivalents and restricted cash at end of period

$

138,313

$

329,626

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

7

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 Accounts business unit offers package and monoline property/casualty and, until exited in 2016, occupational accident insurance products and services.  Our Aviation business unit offers general aviation insurance. Our former Workers Compensation operating unit specialized in small and middle market workers compensation business until discontinued during 2015. Our Specialty Personal Lines business unit offers non-standard personal automobile and renters insurance products and services.  Our Specialty Runoff business unit consists of the senior care facilities professional liability insurance and services previously reported as part of our Professional Liability business unit; the contract binding line of the primary automobile insurance products and services previously reported as part of our Commercial Auto business unit; and the satellite launch property/casualty insurance products and services, as well as certain specialty programs, previously reported as part of our Aerospace & Programs business unit.  The lines of business comprising the Specialty Runoff business unit were discontinued at various times during 2020 through 2022 and are presently in runoff.

These business units are segregated into three reportable industry segments for financial accounting purposes. The Standard Commercial Segment consists of the Commercial Accounts business unit, the Aviation business unit, and the runoff from our former Workers Compensation operating unit. The Personal Segment consists solely of our Specialty Personal Lines business unit and the Runoff Segment consists solely of the Specialty Runoff business unit.  The Runoff Segment was previously reported as part of our former Specialty Commercial Segment.

Our discontinued operations consist of our Commercial Auto business unit offers(excluding the exited contract binding line) which offered primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit offerswhich offered primary and excess liability, excess public entity liability, E&S package and garage liability insurance products and services; our E&S Property business unit offerswhich offered primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; and our Professional Liability business unit offers(excluding the exited senior care facilities line) which offered healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals and medical facilities and, through 2020, senior care facilities; andfacilities.  Our Discontinued Operations business units, which were sold in October 2022, were previously reported as part of 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.  Ourformer Specialty 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. Segment.  (See, Note 3.)  

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

8

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financial statements for the year ended December 31, 20202021 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of September 30, 20212022 and 20202021 is unaudited. However, in the opinion of management, the interim financial data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the periods ended September 30, 20212022 are not necessarily indicative of the operating results to be expected for the full year.

8Subsequent Event

TableOn October 7, 2022 the Company consummated the sale of Contentssubstantially all of its excess and surplus  lines operations to Core Specialty Insurance Holdings, Inc. (“Core Specialty”), a specialty property and casualty insurer, for $40.0 million cash consideration, plus an estimated $19.2 million consideration for the acquisition costs associated with certain net unearned premium reserves.  The transaction was comprised of all or portions of nine business units within the Company’s former Specialty Commercial  Segment, certain related assets and liabilities, and the immediate transition to Core Specialty of approximately 200 employees who produce and support these lines of businesses. Core Specialty’s acquisition and assumption of the Company’s excess and surplus lines of business and the related assets and liabilities was made  effective as of September 30, 2022.

Use of Estimates in the Preparation of the Financial Statements

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

Fair Value of Financial Instruments

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

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

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

Senior Unsecured Notes Due 2029:  Our senior unsecured notes payable due in 2029 had a carrying value of $49.2$49.3 million and a fair value of $53.0$43.2 million as of September 30, 2021.2022.   Our senior unsecured notes payable would be included in Level 3 of the fair value hierarchy if they were reported at fair valuevalue.

Subordinated Debt Securities:  Our trust preferred securities had a carrying value of $55.9$56.0 million and a fair value of $29.0$35.6 million as of September 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.

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Table of Contents

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

Variable Interest Entities

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

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

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

9

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. DeferredWe account for income taxes are recognized usingunder the asset and liability method, whereby tax rates are applied to cumulativewhich requires the recognition of deferred taxes for temporary differences based on whenbetween the financial statement and how they are expected to affecttax return basis of assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the tax return.benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred or expenditures for which we have already taken a deduction in our tax return but have not yet been recognized in our financial statements.

Under GAAP, we are required to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances.  We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that future taxable income will be insufficient to realize the value of the deferred tax assets. We evaluate all significant available positive and negative evidence as part of our analysis. Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income and tax-planning strategies that would result in the realization of deferred tax assets. The underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. If actual experience differs from these estimates and assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in our results of operations.  

As of September 30, 2022, the Company maintained  a full valuation allowance of $30.4 million against its deferred tax assets because we determined that it is more likely than not that these assets will not be recoverable. If, in the future, we determine we can support the recoverability of all or a portion of the deferred tax assets under the guidance, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense and result in an increase in equity.  Changes in tax laws and rates may affect recorded deferred tax assets and liabilities are adjusted forand our effective tax rate changes in effect for the year in which these temporary differences are expected to be recovered or settled. Net deferred tax assets are held at their net realizable value and an allowance is taken as needed. future.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions at September 30, 2021.2022.

Recently Adopted Accounting Pronouncements

10

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 adoptionTable of this guidance did not have a material effect on the Company’s results of operations, financials position or liquidity.Contents

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, 2022.2024. We do not currently have any contracts that have been changed to a new reference rate but we will continue to evaluate our contracts and do not expect the effectsadoption of this standardguidance to have a material effect on our condensed consolidatedthe Company’s results of operations, financial statements prior to adoption.position or liquidity.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326). ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. As a smaller reporting company, ASU 2016-13 is effective for fiscal years of the Company beginning after December 15, 2022, including interim periods within those fiscal years.  ASU 2016-13 requires a modified retrospective transition method and early adoption is permitted. We are currently evaluating the impact that the adoption of this standard will have on our financial results and disclosures.

3. Discontinued Operations and Held for Sale Classification

3. RevisionOn October 7, 2022 the Company consummated the sale of Previously Issued Consolidated Financial Statements

In connection with the preparationsubstantially all of our consolidated financial statementsits excess and surplus  lines operations to Core Specialty Insurance Holdings, Inc. (“Core Specialty”), a specialty property and casualty insurer, for $40.0 million cash consideration, plus an estimated $19.2 million consideration for the quarter endedacquisition costs associated with certain net unearned premium reserves.  The Company retained the related loss and loss adjustment expenses (“LAE”) reserves of its excess and surplus lines businesses and will experience future cash outflows and change in estimates for these reserves until all claims have been settled. As of September 30, 2021, we identified immaterial errors relating to certain reinsurance treaties and other items2022 the expected net liability amount recorded related to prior periods. We maintain various Quota Sharethese future outflows are  $209.5 million, which are included in reserves for unpaid losses and Excess of LossLAE and 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 policiesrecoverable in our Commercial Auto, E&S Casualty and Professional LiabilityConsolidated Balance Sheets. At this time, a date in which all claims will be settled is not known. The transaction was comprised of substantially all of nine business units within ourthe Company’s former Specialty Commercial Segment.

In accordance with SEC Staff Accounting Bulletin Topics 1.MSegment, certain related assets and 1.N,liabilities, and the Company evaluatedimmediate transition to Core Specialty of approximately 200 employees who produce and support these lines of businesses. This transaction met the materiality of this error both quantitativelycriteria for held-for-sale and qualitatively and determined that it was not material to our previously issued

10

Table of Contents

consolidated financial statements. However, adjusting fordiscontinued operations accounting. As a result, the  cumulative effect of this error in the consolidated financial statementsresults of operations for 2021 would be material to the Company’s resultsaffected excess and surplus lines are included in discontinued operations in our Consolidated Statement of Operations for this period.

The accompanying financial statementsall periods shown and relevant footnotes to the consolidated financial statementscorresponding assets and liabilities are presented separately as single line items 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 incomeasset and equity are captured within the tables below through the presentationliability sections 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 Balance Sheet at September 30, 2022.

Consolidated Statements of Operations:

    

Three months ended September 30,

Nine months ended September 30,

2020

2020

As previously

As previously

    

reported

    

Revisions

    

As revised

    

reported

    

Revisions

    

As revised

Ceded premiums written

$

(80,353)

$

(3,055)

$

(83,408)

$

(230,094)

$

(9,173)

$

(239,267)

Net premiums written

 

116,111

 

(3,055)

 

113,056

 

351,603

 

(9,173)

 

342,430

Change in unearned premiums

3,449

215

3,664

17,486

2,101

19,587

Net premiums earned

 

119,560

 

(2,840)

 

116,720

 

369,089

 

(7,072)

 

362,017

Total revenues

 

123,133

 

(2,840)

 

120,293

 

356,833

 

(7,072)

 

349,761

 

 

 

 

 

 

Losses and loss adjustment expenses

124,253

(1,698)

122,555

312,531

(4,253)

308,278

Operating expenses

 

34,296

 

(656)

 

33,640

 

93,703

 

(1,644)

 

92,059

(Loss) income before tax

$

(37,306)

$

(486)

$

(37,792)

$

(101,309)

$

(1,175)

$

(102,484)

Income tax expense

 

(9,302)

 

(102)

 

(9,404)

 

(15,696)

 

(247)

 

(15,943)

Net loss

$

(28,004)

$

(384)

$

(28,388)

$

(85,613)

$

(928)

$

(86,541)

 

 

 

Common stockholders net income per share:

Basic

$

(1.54)

$

(0.02)

$

(1.56)

$

(4.72)

$

(0.05)

$

(4.77)

Diluted

$

(1.54)

$

(0.02)

$

(1.56)

$

(4.72)

$

(0.05)

$

(4.77)

11

Table of Contents

The following table summarizes income (loss) from discontinued operations (in thousands):

    

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,

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

2021

2021

2021

    

2022

    

2021

    

2022

    

2021

As previously

As previously

As previously

    

reported

    

Revisions

    

As revised

    

reported

    

Revisions

    

As revised

    

reported

    

Revisions

    

As revised

Gross premiums written

$

113,502

$

113,976

$

331,190

$

316,100

Ceded premiums written

$

(69,871)

$

(1,650)

$

(71,521)

$

(80,582)

$

(1,648)

$

(82,230)

$

(150,453)

$

(3,298)

$

(153,751)

 

(70,088)

 

(56,552)

 

(203,861)

 

(170,882)

Net premiums written

 

93,147

 

(1,650)

 

91,497

 

89,134

 

(1,648)

 

87,486

 

182,281

 

(3,298)

 

178,983

 

43,414

 

57,424

 

127,329

 

145,218

Change in unearned premiums

11,071

(716)

10,355

9,477

(379)

9,098

20,548

(1,095)

19,453

 

(1,463)

 

(5,780)

 

859

 

(3,778)

Net premiums earned

 

104,218

 

(2,366)

 

101,852

 

98,611

 

(2,027)

 

96,584

 

202,829

 

(4,393)

 

198,436

 

41,951

 

51,644

 

128,188

 

141,440

Commission and fees

 

241

 

230

 

810

 

739

Total revenues

 

114,419

 

(2,366)

 

112,053

 

106,215

 

(2,027)

 

104,188

 

220,634

 

(4,393)

 

216,241

 

42,192

 

51,874

 

128,998

 

142,179

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

70,903

(1,424)

69,479

77,719

(1,230)

76,489

148,622

(2,654)

145,968

 

31,244

 

36,157

 

95,174

 

98,104

Operating expenses

 

30,441

 

(468)

 

29,973

 

27,653

 

(319)

 

27,334

 

58,094

 

(787)

 

57,307

 

8,028

 

9,324

 

22,894

 

26,074

Amortization of intangible assets

 

119

 

119

 

357

 

357

(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

Total expenses

 

39,391

 

45,600

 

118,425

 

124,535

 

 

 

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

Income (loss) from discontinued operations before tax

 

2,801

 

6,274

 

10,573

 

17,644

Income tax expense (benefit) from discontinued operations

 

1,701

 

785

 

6,419

 

2,209

Net income (loss) from discontinued operations

$

1,100

$

5,489

$

4,154

$

15,435

The following table summarizes assets and liabilities held for sale (in thousands):

September 30,

December 31,

2022

2021

(unaudited)

(unaudited)

ASSETS

Ceded unearned premiums

$

130,608

$

117,226

Prepaid expenses

985

216

Other assets

851

634

Total assets held-for-sale

$

132,444

$

118,076

LIABILITIES

Unearned premiums

$

214,216

$

201,691

Accounts payable and other liabilities

1,312

952

Total liabilities held-for-sale

$

215,528

$

202,643

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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

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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. 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.

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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.

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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 30, 20212022 and December 31, 20202021 (in thousands):

As of September 30, 2021

As of September 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

$

$

41,132

$

$

41,132

Corporate bonds

 

0

 

121,741

 

356

 

122,097

 

 

257,409

 

 

257,409

Corporate bank loans

 

0

 

86,334

 

0

 

86,334

 

 

75,011

 

 

75,011

Municipal bonds

 

0

 

40,971

 

0

 

40,971

 

 

42,024

 

 

42,024

Mortgage-backed

 

0

 

2,018

 

0

 

2,018

 

 

1,477

 

 

1,477

Total debt securities

 

0

 

317,560

 

356

 

317,916

 

 

417,053

 

 

417,053

Total equity securities

 

45,362

 

0

 

0

 

45,362

 

41,002

 

 

 

41,002

Total investments

$

45,362

$

317,560

$

356

$

363,278

$

41,002

$

417,053

$

$

458,055

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

$

$

62,984

$

$

62,984

Corporate bonds

 

0

 

219,020

 

348

 

219,368

 

 

105,234

 

347

 

105,581

Corporate bank loans

 

0

 

52,782

 

0

 

52,782

 

 

81,189

 

 

81,189

Municipal bonds

 

0

 

50,539

 

0

 

50,539

 

 

38,464

 

 

38,464

Mortgage-backed

 

0

 

4,844

 

0

 

4,844

 

 

1,855

 

 

1,855

Total debt securities

 

0

 

506,931

 

348

 

507,279

 

 

289,726

 

347

 

290,073

Total equity securities

 

29,388

 

0

 

0

 

29,388

 

48,695

 

 

 

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 1one 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.

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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 months ended September 30, 20212022 and 20202021 (in thousands):

Beginning balance as of January 1, 2021

    

$

348

Beginning balance as of January 1, 2022

    

$

347

Sales

 

0

 

Settlements

 

0

 

(347)

Purchases

 

0

 

Issuances

 

0

 

Total realized/unrealized losses included in net income

 

0

 

Net gain included in other comprehensive income

 

8

 

Transfers into Level 3

 

0

 

Transfers out of Level 3

 

0

 

Ending balance as of September 30, 2021

$

356

Ending balance as of September 30, 2022

$

Beginning balance as of January 1, 2020

    

$

339

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

 

(14)

 

8

Transfers into Level 3

 

0

 

Transfers out of Level 3

 

0

 

Ending balance as of September 30, 2020

$

325

Ending balance as of September 30, 2021

$

356

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Table of Contents

6.5. 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

    

    

    

Gross

    

Gross

    

Amortized Cost/

Unrealized

Unrealized

Amortized Cost/

Unrealized

Unrealized

    

Carrying Value

    

Gains

    

Losses

    

Fair Value

    

Carrying Value

    

Gains

    

Losses

    

Fair Value

As of September 30, 2021

As of September 30, 2022

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

$

66,354

$

142

$

0

$

66,496

$

41,731

$

308

$

(907)

$

41,132

Corporate bonds

 

119,341

 

2,829

 

(73)

 

122,097

 

263,114

 

1,132

(6,837)

 

257,409

Corporate bank loans

 

86,749

 

117

 

(532)

 

86,334

 

77,895

 

5

(2,889)

 

75,011

Municipal bonds

 

40,618

 

421

 

(68)

 

40,971

 

42,575

 

59

(610)

 

42,024

Mortgage-backed

 

1,967

 

55

 

(4)

 

2,018

 

1,555

 

7

(85)

 

1,477

Total debt securities

 

315,029

 

3,564

 

(677)

 

317,916

 

426,870

 

1,511

 

(11,328)

 

417,053

Total equity securities

 

39,129

 

8,148

 

(1,915)

 

45,362

 

42,858

 

5,504

(7,360)

 

41,002

Total investments

$

354,158

$

11,712

$

(2,592)

$

363,278

$

469,728

$

7,015

$

(18,688)

$

458,055

Gross

Gross

    

    

Gross

    

Gross

    

Amortized Cost/

Unrealized

Unrealized

Amortized Cost/

Unrealized

Unrealized

As of December 31, 2020

Carrying Value

Gains

Losses

Fair Value

As of December 31, 2021

 

Carrying Value

    

Gains

    

Losses

    

Fair Value

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

$

179,259

$

487

$

0

$

179,746

$

63,098

$

56

$

(170)

$

62,984

Corporate bonds

 

214,666

 

5,086

 

(384)

 

219,368

 

103,515

 

2,115

 

(49)

 

105,581

Corporate bank loans

 

53,650

 

3

 

(871)

 

52,782

 

81,570

 

84

 

(465)

 

81,189

Municipal bonds

 

49,833

 

756

 

(50)

 

50,539

 

38,162

 

372

 

(70)

 

38,464

Mortgage-backed

 

4,759

 

114

 

(29)

 

4,844

 

1,830

 

29

 

(4)

 

1,855

Total debt securities

 

502,167

 

6,446

 

(1,334)

 

507,279

 

288,175

 

2,656

 

(758)

 

290,073

Total equity securities

 

26,988

 

5,648

 

(3,248)

 

29,388

 

42,120

 

9,355

 

(2,780)

 

48,695

Total investments

$

529,155

$

12,094

$

(4,582)

$

536,667

$

330,295

$

12,011

$

(3,538)

$

338,768

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

    

    

2022

    

2021

    

2022

    

2021

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

$

$

(3)

$

$

(3)

300

-

300

-

Corporate bonds

 

133

 

352

 

494

 

766

 

160

 

133

 

172

 

494

Corporate bank loans

 

14

 

66

 

105

 

(19)

 

39

 

14

 

66

 

105

Municipal bonds

 

(18)

 

(25)

 

(12)

 

1,397

 

(4)

 

(18)

 

(12)

 

(12)

Mortgage Backed

9

Equity securities

 

930

 

 

4,701

 

3,471

 

 

930

 

1,141

 

4,701

Gain on investments

 

1,059

 

390

 

5,288

 

5,612

 

504

 

1,059

 

1,667

 

5,288

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

(3,325)

(1,592)

(8,431)

3,834

Investment gains, net

$

(2,821)

$

(533)

$

(6,764)

$

9,122

We realized gross gains on investments of $1.1$0.5 million and $0.5$1.1 million during the three months ended September 30, 20212022 and 2020,2021, respectively, and $5.8$1.7 million and $22.4$5.8 million for the nine months ended September 30, 20212022 and 2020,2021, respectively. We did 0t realize gross losses on investments for the three months ended September 30, 2021 and realized gross losses on investments of $5 thousand and $0.1 million for the three months ended September 30, 2020. We realized gross losses on investments of2022 and 2021, respectively and $26 thousand and $0.5 million and $16.8 million for the nine months ended September 30, 20212022 and 2020,2021, respectively. We recorded proceeds from the sale of investment securities of $1.1$0.2 million and $47.4$1.1 million during the three months ended September 30, 20212022 and 2020,2021, respectively, and $16.9$4.7 million and $155.0$16.9 million for the nine months ended September 30, 2022 and 2021, respectively. Realized investment gains and losses are recognized in operations on the first in-first out method.

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Table of Contents

ended September 30, 2021 and 2020, respectively. Realized investment gains and losses are recognized in operations on the first in-first out method.

The following schedules summarize the gross unrealized losses showing the length of time that investments have been continuously in an unrealized loss position as of September 30, 20212022 and December 31, 20202021 (in thousands):

As of September 30, 2021

As of September 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

$

40,824

$

(907)

$

$

$

40,824

$

(907)

Corporate bonds

 

0

 

0

 

2,592

 

(73)

 

2,592

 

(73)

 

253,177

 

(6,831)

 

195

 

(6)

 

253,372

 

(6,837)

Corporate bank loans

 

27,235

 

(125)

 

20,443

 

(407)

 

47,678

 

(532)

 

39,488

 

(1,577)

 

34,279

 

(1,312)

 

73,767

 

(2,889)

Municipal bonds

 

4,000

 

(57)

 

999

 

(11)

 

4,999

 

(68)

 

13,216

 

(579)

 

1,767

 

(31)

 

14,983

 

(610)

Mortgage-backed

 

0

 

0

 

11

 

(4)

 

11

 

(4)

 

1,452

 

(79)

 

7

 

(6)

 

1,459

 

(85)

Total debt securities

 

31,235

 

(182)

 

24,045

 

(495)

 

55,280

 

(677)

 

348,157

 

(9,973)

 

36,248

 

(1,355)

 

384,405

 

(11,328)

Total equity securities

 

9,514

 

(335)

4,143

(1,580)

13,657

 

(1,915)

 

8,579

 

(727)

11,565

(6,633)

20,144

 

(7,360)

Total investments with unrealized losses

$

40,749

$

(517)

$

28,188

$

(2,075)

$

68,937

$

(2,592)

Total investments

$

356,736

$

(10,700)

$

47,813

$

(7,988)

$

404,549

$

(18,688)

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)

$

$

$

43,273

$

(170)

Corporate bonds

 

7,801

 

(186)

 

3,556

 

(198)

 

11,357

 

(384)

 

-

 

-

 

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)

 

-

 

-

 

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 86249 debt securities with an unrealized loss, of which 58211 were in an unrealized loss position for less than one year and 2838 were in an unrealized loss position for a period of one year or greater, as of September 30, 2021.2022.  We held a total of 81100 debt securities with an unrealized loss, of which 6474 were in an unrealized loss position for less than one year and 1726 were in an unrealized loss position for a period of one year or greater, as of December 31, 2020.2021. We consider these losses as a temporary decline in value as they are predominately on securities that we do not intend to sell and do not 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 30, 20212022 and December 31, 20202021 were due predominately to market and interest rate fluctuations and we see no other indications that the decline in values of these securities is other-than-temporary.

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

We complete a detailed analysis each quarter to assess whether any decline in the fair value of any debt security below cost is deemed other-than-temporary. All debt securities with an unrealized loss are reviewed. We recognize an impairment loss when a debt security’s value declines below cost, adjusted for accretion, amortization and previous other-than-temporary impairments and it is determined that the decline is other-than-temporary.  We did 0tnot recognize any impairment loss on debt securities during the nine months ended September 30, 2021. We recognized $1.7 million of other-than-temporary impairment on debt securities during2022.  During the nine months ended September 30, 2020.

18

Table2021, we disposed of Contents$0.6 million of previously impaired securities.

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

17

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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 did 0t dispose of any previously impaired securities.  

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 30, 20212022 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

(in thousands)

(in thousands)

Due in one year or less

$

125,303

$

126,261

$

114,153

$

112,798

Due after one year through five years

 

114,399

 

116,086

 

249,384

243,358

Due after five years through ten years

 

64,251

 

64,191

 

55,046

53,097

Due after ten years

 

9,109

 

9,360

 

6,732

6,323

Mortgage-backed

 

1,967

 

2,018

 

1,555

1,477

$

315,029

$

317,916

$

426,870

$

417,053

7.6. 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$19.8 million and $29.7$30.0 million at September 30, 20212022 and December 31, 2020,2021, respectively.

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8.7. 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, 

September 30,

September 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

 

168,164

 

207,121

Loss portfolio transfer

0

21,700

Prior years

 

2,553

 

33,259

 

88,178

 

2,553

Total incurred

 

209,674

 

308,278

 

256,342

 

209,674

Paid related to:

 

  

 

  

Current year

 

64,292

 

67,146

13,740

 

64,292

Loss portfolio transfer

0

21,700

Prior years

 

130,623

 

177,325

186,868

 

130,623

Total paid

 

194,915

 

266,171

200,608

 

194,915

Net balance at September 30

 

447,327

 

388,187

 

484,500

 

447,327

Plus reinsurance recoverable

 

368,054

 

367,704

 

374,388

 

368,054

Balance at September 30

$

815,381

$

755,891

$

858,888

$

815,381

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

September 30, 

September 30, 

2021

    

2020

2022

    

2021

Specialty Commercial Segment

$

533

$

23,961

Standard Commercial Segment

 

(2,336)

 

2,350

$

250

$

(2,371)

Personal Segment

 

4,356

 

6,948

 

5,218

 

4,356

Corporate

 

0

 

0

Runoff Segment

 

70,365

 

(6,543)

Unfavorable (favorable) net prior year development from continuing operations

$

75,833

$

(4,558)

Unfavorable net prior year development from discontinued operations

12,345

7,111

Total unfavorable net prior year development

$

2,553

$

33,259

$

88,178

$

2,553

The following describes the primary factors behind each segment’s prior accident year reserve development for the nine months ended September 30, 20212022 and 2020:2021:

Nine months ended September 30, 2021:2022:

SpecialtyStandard Commercial Segment.Our Commercial Auto business unit experienced net favorable development in the 2020 and 2019 accidentyears 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 accidentyears. Our E&S CasualtyAccounts business unit experienced net unfavorable development primarily in our primary and excessthe general liability line of business  in the 2019 and priorall accident years,  partially offset by net favorable development in the property and commercial auto liability lines of business primarily in accident years 2021, 2020 and 2019. Our Aviation business unit experienced net favorable development in the 2021 accident year. Weyear, partially offset by net unfavorable development in the 2020 and 2019 accident years. The run-off from our former Workers Compensation operating unit experienced net unfavorable development in our E&S Propertythe 2015 and Aerospace & Programs business units. We experienced net favorableprior accidentyears.
Personal Segment. Net unfavorable development in our Professional LiabilitySpecialty Personal Lines business unit.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.

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Runoff Segment. Our binding commercial automobile liability line of business   experienced net unfavorable development in the 2020 and prior accidentyears due in part to exceeding the aggregate limit of the loss portfolio transfer agreement covering accident years 2019 and prior entered into during 2020 We experienced net unfavorable development in our senior care facilities and satellite launch business, as well a commercial automobile liability program.

Nine months ended September 30, 2021:

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. We experienced net unfavorable development in our Aviation business unit. 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 CommercialRunoff  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 liabilitybinding commercial automobile line of business in the 2018 2017, 2016, 2015 and 2013 and prior accidentyears, partially offset by net favorable developmentas well as in the 2019 and 2014 accident years primarily in the general liabilityour senior care facilities line of business. Our Commercial Accounts business unitWe experienced net favorable development in the 2016 and 2015 accident years, partially offset by net unfavorable development in the 2017our satellite launch business 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.specialty programs.
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.

8. 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 30, 2021,2022, restricted stock units representing the right to receive up to 84,7441,071,060 shares of our common stock were outstanding under the 2015 LTIP.  There were 0no stock option awards grantedoptions outstanding under the 2015 LTIP as of September 30, 2021.2022.

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Stock Options:

A summary of the status of ourThere were no stock options as of September 30, 2021 and changesoutstanding at any point during the nine 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 detailsSeptember 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

nine months ended September 30, 2022 or 2021, respectively.  As of September 30, 2021,2022, there was 0no unrecognized compensation cost related to non-vested stock options granted under our plans which is expected to be recognized in the future.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of Hallmark’s and similar companies’ common stock for a period equal to the expected term. The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options expected lives on the dates of grant. Expected term is determined based on the simplified method as we do not have sufficient historical exercise data to provide a basis for estimating the expected term. There were 0 stock options granted during the first nine months of 2021 or 2020.options.

Restricted Stock Units:

Restricted stock units awarded under the 2015 LTIP represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions. RestrictedFor grants issued prior to 2021, restricted stock units vest and shares of common stock become issuable on March 31 of the third calendar year following the year of grant if performance criteria have been satisfied. Restricted stock units awarded under the 2015 LTIP during 2021 and 2022 cumulatively vest up to 50%, 80% and 100%, and shares of common stock become issuable, on March 31 of the third, fourth and fifth calendar years, respectively, following the year of grant if performance criteria have been satisified.

The performance criteria for all restricted stock units require that we achieve certain compound average annual growth rates in book value per share as well as certain average combined ratio percentages over the vesting period in order to receivevary based on grantee. The number of shares of common stock in amounts rangingto be received ranges from 50% to 150% of the number of restricted stock units granted.granted based on the level of achievement

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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 (benefit) of ($203) thousand and $233 thousand related to restricted stock units during the three months and nine months ended September 30, 2022, respectively.   We incurred compensation expense of $4 thousand and $158 thousand related to restricted stock units during the three months and nine months ended September 30, 2021, respectively.  We incurred compensation expense (benefit)recorded income tax (expense) benefit of $154($43) thousand and ($416)$49 thousand related to restricted stock units during the three months and nine months ended September 30, 2020,2022, respectively.  We recorded income tax benefit of $1 thousand and $33 thousand related to restricted stock units during the three months and nine months ended September 30, 2021, respectively.  We recorded income tax benefit (expense) of $32 thousand and ($88) thousand related to restricted stock units during the three months and nine months ended September 30, 2020, respectively.  

The following table details the status of our restricted stock units as of and for the nine months ended September 30, 20212022 and 2020:2021.

Number of Restricted Stock Units

Number of Restricted Stock Units

2021

    

2020

    

2022

    

2021

    

Nonvested at January 1

228,827

 

353,491

 

581,689

 

228,827

 

Granted

0

 

0

 

611,747

 

 

Vested

(30,309)

 

(19,065)

 

(12,357)

 

(30,309)

 

Forfeited

(142,022)

 

(92,563)

 

(467,039)

 

(142,022)

 

Nonvested at September 30

56,496

 

241,863

 

714,040

 

56,496

 

As of September 30, 2021,2022, there was $0.2$2.1 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$1.4 million of compensation cost related to unvested restricted stock units, of which $48 thousand$0.1 million is expected to be recognized during the remainder of 20212022, $0.6 million in 2023, $0.4 million in 2024, $0.2 million in 2025 and $47 thousand is expected to be recognized$0.1 million in 2022.2026.

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10.9. Segment Information

The following is business segment information for the three and nine months ended September 30, 20212022 and 20202021 (in thousands):

Three Months Ended

Nine Months Ended

Three Months Ended September 30,

Nine Months Ended September 30,

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

Revenues

 

  

 

  

  

 

  

 

  

 

  

  

 

  

Specialty Commercial Segment

$

62,493

$

83,749

$

196,982

$

262,761

Standard Commercial Segment

 

18,157

 

17,398

 

53,085

 

52,130

$

18,950

$

19,693

$

56,183

$

57,536

Personal Segment

 

18,316

 

20,513

 

56,390

 

65,300

 

16,754

 

18,316

 

50,621

 

56,390

Runoff Segment

 

2,477

 

7,315

 

11,554

 

45,306

Corporate

 

(1,616)

 

(1,367)

 

7,134

 

(30,430)

 

51

 

152

 

(745)

 

12,180

Consolidated

$

97,350

$

120,293

$

313,591

$

349,761

$

38,232

$

45,476

$

117,613

$

171,412

Pre-tax income (loss)

 

  

 

  

 

 

  

Specialty Commercial Segment

$

12,620

$

(27,237)

$

28,816

$

(5,752)

Pre-tax (loss) income

 

  

 

  

 

  

 

  

Standard Commercial Segment

 

1,957

 

(1,672)

 

347

 

(154)

$

(2,386)

$

2,192

$

(3,143)

$

1,261

Personal Segment

 

(3,887)

 

(2,065)

 

(8,275)

 

(5,836)

 

(3,412)

 

(3,887)

 

(7,257)

 

(8,275)

Runoff Segment

 

(19,364)

 

4,343

 

(73,099)

 

5,212

Corporate

 

(6,299)

 

(6,818)

 

(6,280)

 

(90,742)

 

(5,098)

 

(4,531)

 

(16,202)

 

(1,234)

Consolidated

$

4,391

$

(37,792)

$

14,608

$

(102,484)

$

(30,260)

$

(1,883)

$

(99,701)

$

(3,036)

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The following is additional business segment information and assets held-for-sale as of the dates indicated (in thousands):

September 30,

December 31,

September 30,

December 31,

Assets:

2021

2020

2022

2021

Specialty Commercial Segment

$

1,113,020

$

1,116,137

Standard Commercial Segment

 

199,999

 

183,689

$

229,657

$

237,844

Personal Segment

 

139,530

 

133,310

 

116,733

 

128,165

Runoff Segment

 

344,027

 

382,484

Corporate

 

67,659

 

63,581

 

659,145

 

687,029

Assets held-for-sale

132,444

118,076

Consolidated

$

1,520,208

$

1,496,717

$

1,482,006

$

1,553,598

11.10. 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 30, 20212022 was with reinsurers that had an A.M. Best rating of “A–“A-” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

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

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

 

September 30, 

 

September 30, 

 

September 30, 

 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

Ceded earned premiums

 

$

75,314

 

$

83,287

 

$

229,478

 

$

257,312

 

$

16,866

 

$

16,181

 

$

51,265

 

$

60,651

Reinsurance recoveries

 

$

69,845

 

$

66,395

 

$

210,024

 

$

222,067

 

$

21,092

 

$

32,405

 

$

75,395

 

$

84,913

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 18.) As of September 30, 2021,2022, our consolidated balance sheet included a $62.0 million account receivable from DARAG related to the Hallmark Insurers funding claim payments under the LPT contract pending resolution of the dispute.

As of September 30, 2022, the ultimate incurred losses from the subject business were $208.5$282.8 million or $32.4$42.8 million in excess of the Hallmark Insurers’ loss corridor.aggregate limit of $240.0 million.  Our reinsurance recoverables of $515.1$542.8 million include $49.0a $12.5 million payable related to the LPT Contract as of September 30, 2021.2022.

12.11. 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.

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

Hallmark

Hallmark

Hallmark

Hallmark

    

Statutory

Statutory

    

Statutory

Statutory

Trust I

Trust II

Trust I

Trust II

Issue date

June 21, 2005

August 23, 2007

June 21, 2005

August 23, 2007

Principal amount of trust preferred securities

$

30,000

$

25,000

$

30,000

$

25,000

Principal amount of junior subordinated debt securities

$

30,928

$

25,774

$

30,928

$

25,774

Maturity date of junior subordinated debt securities

June 15, 2035

September 15, 2037

June 15, 2035

September 15, 2037

Trust common stock

$

928

$

774

$

928

$

774

Interest rate, per annum

Three Month LIBOR + 3.25%

Three Month LIBOR + 2.90%

Three Month LIBOR + 3.25%

Three Month LIBOR + 2.90%

Current interest rate at September 30, 2021

3.37%

3.02%

Current interest rate at September 30, 2022

6.54%

6.19%

13.

12. 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%62.0% as of September 30, 2021.2022.

13. Deferred Policy Acquisition Costs

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

Three Months Ended

Nine Months Ended

 

September 30, 

 

September 30, 

 

2022

 

2021

 

2022

 

2021

Deferred

 

$

(22,856)

 

$

370

 

$

(32,290)

 

$

(18,658)

Amortized

22,674

1,823

32,081

24,826

Net

 

$

(182)

 

$

2,193

 

$

(209)

 

$

6,168

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14. 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

 

September 30, 

 

September 30, 

    

2022

  

  

2021

    

2022

  

  

2021

Weighted average shares - basic

18,185

18,172

18,181

18,162

Effect of dilutive securities

Weighted average shares - assuming dilution

18,185

18,172

18,181

18,162

We had no shares of common stock potentially issuable upon exercise of employee stock options for the three months and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021, we had 14,157 shares of common stock potentially issuable upon the exercise of employee stock options which were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive.  These instruments, to the extent not previously cancelled or exercised, expired in 2021.  

15. Net Periodic Pension Cost

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

Three Months Ended

Nine Months Ended

 

September 30, 

 

 

September 30, 

    

2022

    

2021

    

2022

    

2021

Interest cost

 

$

75

 

$

67

 

$

225

 

$

202

Amortization of net loss

27

43

81

130

Expected return on plan assets

(191)

(177)

(573)

(531)

Net periodic pension cost

 

$

(89)

 

$

(67)

 

$

(267)

 

$

(199)

Contributed amount

 

$

 

$

 

$

 

$

16. Income Taxes

Our effective income tax rate for the nine months ended September 30, 2022 and 2021 was (13.1)% and 20.8%, respectively.  During the nine months ended September 30, 2022 we recorded a full valuation allowance of $30.4 million against our net deferred tax assets primarily due to recent net losses, including the current period net loss. (See Note 2).   The effective rate for the nine months ended September  30, 2021 varied from the statutory tax rates primarily due to tax exempt interest income.  

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14. 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

 

September 30, 

 

September 30, 

 

2021

 

2020

 

2021

 

2020

Deferred

 

$

(8,163)

 

$

(20,939)

 

$

(29,327)

 

$

(45,342)

Amortized

10,960

21,684

36,673

45,971

Net

 

$

2,797

 

$

745

 

$

7,346

 

$

629

15. 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

 

September 30, 

 

September 30, 

    

2021

  

  

2020

    

2021

  

  

2020

Weighted average shares - basic

18,172

18,142

18,162

18,136

Effect of dilutive securities

0

0

0

0

Weighted average shares - assuming dilution

18,172

18,142

18,162

18,136

For the three months and nine months ended September 30, 2021 and 2020, 14,157 shares of common stock potentially issuable upon the exercise of employee stock options were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive.    

16. Net Periodic Pension Cost

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

Three Months Ended

Nine Months Ended

 

September 30, 

 

 

September 30, 

    

2021

    

2020

    

2021

    

2020

Interest cost

 

$

67

 

$

89

 

$

202

 

$

266

Amortization of net loss

43

34

130

104

Expected return on plan assets

(177)

(171)

(531)

(513)

Net periodic pension cost

 

$

(67)

 

$

(48)

 

$

(199)

 

$

(143)

Contributed amount

 

$

0

 

$

0

 

$

0

 

$

0

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

17. Income Taxes

Our effective income tax rate for the nine months ended September 30, 2021 and 2020 was 20.8% and 15.6%, respectively.  The effective tax rate for the nine months ended September 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.  We

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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.

18.17. 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 September 30,

    

2021

    

2020

    

2022

    

2021

Cash and cash equivalents

 

$

325,833

 

$

186,683

 

$

129,468

 

$

325,833

Restricted cash

3,793

17,671

8,845

3,793

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

 

$

329,626

 

$

204,354

 

$

138,313

 

$

329,626

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.

The following table provides supplemental cash flow information for the nine months ended September 30, 20212022 and 2020:2021:

Nine Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2022

    

2021

Interest paid

 

$

3,165

 

$

4,845

 

$

5,138

 

$

3,165

Income taxes (recovered) paid

$

(4,147)

$

654

$

(15,529)

$

(4,147)

Supplemental schedule of non-cash investing activities:

Receivable for securities related to investment disposals

 

$

5,613

 

$

1,568

 

$

883

 

$

5,613

Payable for securities related to investment purchases

 

$

1,047

 

$

507

 

$

 

$

1,047

19.18. 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 10.)  Pending resolution of the dispute, the Hallmark Financial Services, Inc., et al. (Case No. 3:20-cv-01130) was filed inInsurers have agreed to fund the U.S. District Court forpayment of claims under the Northern District of Texas, Dallas Division (the “Schulze Matter”). The Company, its former Chief Executive Officer and its former Chief Financial Officer are named defendants in the lawsuit brought on behalf of a putative class of shareholders who acquired Hallmark securities between March 5, 2019 and March 17, 2020. In general, the complaint alleges that the defendants violated the Securities Exchange Act of 1934 by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company would be forced to report $63.8 million of prior year net adverse loss development, (d) the Company would exit the contract binding line of its commercial automobile primary insurance business, and by making positive statements about the Company’s business, operations and prospects that were allegedly materially misleading and/or lacked a reasonable basis. On July 21, 2020, the court appointed Rajeev Yalamanchili as Lead Plaintiff.  Lead Plaintiff filed an Amended Complaint on September 30, 2020.  On July 28, 2021, the court granted the defendants’ motion to dismiss the lawsuitLPT Contract without prejudice to their right to seek reimbursement and other relief in the plaintiff filingarbitration proceedings.  The arbitration panel has been constituted and a second amended complaint within 28 days, and denied plaintiff’s request to submit supplemental evidencefinal hearing on the merits is anticipated in

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support of his opposition to2023.  In the motion to dismiss. Lead Plaintiff chose not to file a second amended complaint. On September 24, 2021, Lead Plaintiff and Defendants filed a Joint Stipulation seeking dismissalarbitration, the Reinsurers seek rescission of the case with prejudice, with each side bearing its own attorneys’ feesLPT Contract or, in the alternative, damages on the basis of alleged breach and costs. No considerationfraudulent inducement by the Hallmark Insurers.  The Company believes any such claims are without factual basis or legal merit and intends to vigorously contest the matter.  The Company is seeking an arbitration award enforcing the terms of the LPT Contract and requiring the Reinsurers to reimburse the Hallmark Insurers for all claim amounts funded by them during the pendency of the arbitration, as well as all other damages sustained by the Hallmark Insurers.  The arbitration panel has been given, offered,ordered that the Reinsurers  post security for any final award in the amount of the Minimum Funding Requirement (as defined in the LPT Contract).  Although an adverse arbitration outcome is at least reasonably possible,  we are unable at this time to reasonably estimate the amount or promised to Lead Plaintiff or his counselrange of possible loss in connection with this dismissal. The Court terminated the case pursuant to the Joint Stipulation.such event.

As of September 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.

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From time to time, assessments are levied on us by the guaranty association of the states where we offer our insurance products. Such assessments are made primarily to cover the losses of policyholders of insolvent or rehabilitated insurers. Since these assessments can generally be recovered through a reduction in future premium taxes paid, we capitalize the assessments that can be recovered as they are paid and amortize the capitalized balance against our premium tax expense. We did 0tnot pay an assessment during the first nine months of 20212022 or 2020.2021.

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

The changes in accumulated other comprehensive (loss) income balances as of September 30, 20212022 and 20202021 were as follows (in thousands):

    

    

    

Accumulated Other

    

    

    

Accumulated Other

Pension

Unrealized

Comprehensive

Pension

Unrealized

Comprehensive

    

Liability

    

Gains (Loss)

    

Income (Loss)

    

Liability

    

Gains (Loss)

    

Income (Loss)

Balance at January 1, 2020

$

(3,239)

$

3,927

$

688

Balance at January 1, 2021

$

(3,762)

$

4,145

$

383

Other comprehensive loss:

 

 

Change in net actuarial gain

 

130

 

 

130

Tax effect on change in net actuarial gain

 

(27)

 

 

(27)

Unrealized holding gains arising during the period

 

 

3,063

 

3,063

Tax effect on unrealized holdings gains arising during the period

 

 

(643)

 

(643)

Reclassification adjustment for gains included in net income

 

 

(5,288)

 

(5,288)

Tax effect on reclassification adjustment for gains included in net income

 

 

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 January 1, 2022

$

(2,641)

$

1,606

$

(1,035)

Other comprehensive income:

 

 

 

Change in net actuarial gain

 

104

 

0

 

104

 

78

 

 

78

Tax effect on change in net actuarial gain

 

(22)

 

0

 

(22)

 

(16)

 

 

(16)

Unrealized holding gains arising during the period

 

0

 

4,149

 

4,149

 

 

(10,048)

 

(10,048)

Tax effect on unrealized holding gains arising during the period

 

0

 

(872)

 

(872)

 

 

2,110

 

2,110

Reclassification adjustment for gains included in net income

 

0

 

(5,612)

 

(5,612)

 

 

(1,667)

 

(1,667)

Tax effect on reclassification adjustment for gains included in net income

 

0

 

1,179

 

1,179

 

 

350

 

350

Other comprehensive loss, net of tax

 

82

 

(1,156)

 

(1,074)

 

62

 

(9,255)

 

(9,193)

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 September 30, 2022

$

(2,579)

$

(7,649)

$

(10,228)

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221.20. 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 month periods ended September 30, 20212022 and 20202021 were as follows (in thousands):

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Three Months Ended

    

Nine Months Ended

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

    

2021

    

2020

    

    

2022

    

2021

    

2022

    

2021

    

Operating lease cost

$

526

$

750

$

1,620

$

2,291

$

706

$

526

$

2,086

$

1,620

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$

543

$

758

$

1,627

$

1,749

$

602

$

543

$

1,747

$

1,627

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

$

0

$

0

$

436

$

0

$

$

$

$

436

Other lease information as of September 30, 20212022 and December 31, 20202021 are as follows (in thousands):

September 30, 

December 31,

    

2021

    

2020

Operating lease right-of-use assets

$

13,501

$

13,986

Operating lease liabilities

$

15,369

$

15,862

Weighted-average remaining lease term - operating leases

11.6

10.2

Weighted-average discount rate - operating leases

6.22%

5.88%

September 30, 

December 31,

    

2022

    

2021

Operating lease right-of-use assets

$

12,805

$

13,211

Operating lease liabilities

$

14,977

$

15,062

Weighted-average remaining lease term - operating leases

11.1

11.4

Weighted-average discount rate - operating leases

6.22%

6.22%

We incurred $0.2 million$18 thousand in short-term lease payments not included in our lease liability during the nine months ended September 30, 2021.2022.

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Future minimum lease payments under non-cancellable leases as of September 30, 20212022 and December 31, 20202021 were as follows (in thousands):

September 30, 

December 31, 

    

2021

2020

2021

$

544

$

2,172

2022

2,171

2,171

2023

2,023

1,885

2024

2,216

1,941

2025

2,450

1,975

Thereafter

18,264

11,350

Total future minimum lease payments

$

27,668

$

21,494

Less imputed interest

$

(12,299)

$

(5,632)

Total operating lease liability

$

15,369

$

15,862

September 30, 

December 31,

    

2022

2021

2022

$

570

$

2,171

2023

2,224

2,023

2024

2,421

2,216

2025

2,537

2,450

2026

2,497

2,497

Thereafter

15,767

15,767

Total future minimum lease payments

$

26,016

$

27,124

Less imputed interest

$

(11,039)

$

(12,062)

Total operating lease liability

$

14,977

$

15,062

ItemItem 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.States. 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; the Aviation business unit which offers general aviation property/casualty insurance products and services; 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.
Runoff Segment. Our Runoff Segment consists solely of our Specialty Runoff business unit which is comprised of the senior care facilities liability insurance business previously reported as part of our Professional Liability business unit; the contract binding line of the primary automobile insurance previously reported as part of our Commercial Auto business unit; and the satellite launch property/casualty insurance products, as well as certain specialty programs, previously reported as part

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of our Aerospace & Programs business unit.  The lines of business comprising the Runoff Segment were discontinued at various times during 2020 through 2022 and are presently in runoff.  The Runoff Segment, together with our discontinued operations, were previously reported as our former Specialty Commercial Segment.

In addition to these reportable segments, our discontinued operations consist of our Commercial Auto business unit (excluding the exited contract binding line) which offered primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit which offered primary and excess liability, excess public entity liability, E&S package and garage liability insurance products and services; our E&S Property business unit which offered primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; and our Professional Liability business unit (excluding the exited senior care facilities line) which offered healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals and medical facilities.  Our discontinued operations business units, which were sold in October 2022, and our Runoff Segment were together previously reported as our former Specialty Commercial Segment.  

The retained premium produced by these reportable segments and discontinued operations 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%28% of the total net premiums written by any of them, HIC retains 32%38% of our total net premiums written by any of them, HSIC retains 26%21% of our total net premiums written by any of them and HNIC retains 10%13% 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 30, 2021,2022, our total revenue from continuing operations was $97.4$38.2 million, representing a decrease of 19%16% from the $120.3$45.5 million in total revenue from continuing operations for the same period of 2020.2021.  During the nine months ended September 30, 2021,2022, our total revenue from continuing operations was $313.6$117.6 million, representing a decrease of 10%31% from the $349.8$171.4 million in total revenue from continuing operations for the same period of 2020.2021.  During the three months ended September 30, 2021,2022, we reported a pre-tax incomeloss from continuing operations of $4.4$30.3 million, as compared to a pre-tax loss from continuing operations of $37.8$1.9 million reported during the same period the prior year.  During the nine months ended September 30, 2021,2022, we reported a pre-tax incomeloss from continuing operations of $14.6$99.7 million, as compared to a pre-tax loss from continuing operations of $102.5$3.0 million reported during the same period the prior year.

The decrease in revenue from continuing operations for the three months ended September 30, 20212022 compared to the same period of the prior year was primarily due to lower net premiums earned of $22.3$6.3 million, lowerhigher net investment incomelosses of $0.5$2.3 million, and lower finance charges of $0.2$0.1 million, partially offset by lower$1.5 million higher net investment losses of $0.1 million.income. The decrease in revenue from continuing operations for the nine months ended September 30, 20212022 compared to the same period of the prior year was primarily due to decreased net premiums earned of $69.2$38.6 million, lower net investment incomelosses of $2.7$6.8 million lower commission and feescompared to net investment gains of $0.1$9.1 million the prior year, and lower finance charges of $1.2$0.4 million, partially offset by higher net investment gainsincome of $37.0$1.1 million.  

The improvementincrease in pre-tax resultsloss from continuing operations for the three months ended September 30, 20212022 compared to the same period of the prior year was primarily due to the decreased revenue discussed above and increased losses and loss adjustment expenses (“LAE”) from continuing operations of $58.8 million, lower operating expenses of $5.8 million and lower amortization of intangible assets of $0.5$21.6 million, partially offset by decreased revenue discussed above.lower operating expenses from continuing operations of $0.7 million.  The decreaseincrease in losses and LAE from continuing operations was

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primarily due to lower current accident year loss trends and a $12.4$20.6 million improvement in unfavorable netof adverse prior year loss reserve development. Losses and LAEdevelopment for the third quarter of 20212022, $18.5 million of which was from the Runoff Segment, as compared to $2.9 million of favorable prior year loss reserve development for the same period the prior year.  Losses and LAE from continuing operations for the third quarter of 2022 included $2.8$1.8 million of net catastrophe losses as compared to $9.6$0.6 million during the same period of the prior year.  

The deterioration of pre-tax results from continuing operations for the nine months ended September 30, 2022 compared to the same period of the prior year was primarily due to the decreased revenue from continuing operations discussed above and increased losses and LAE of $49.6 million, partially offset by lower operating expenses from continuing operations of $7.1 million.  The increase in losses and LAE from continuing operations was primarily due to $75.8 million of unfavorable prior year loss reserve development for the nine months ended September 30, 2022, $70.4 million of which was from the Runoff Segment, as compared to $4.6 million of favorable prior year loss reserve development for the prior year period, partially offset by lower net catastrophe losses of $3.2 million compared to $6.6 million during the same period of the prior year.

The improvement in pre-tax results for the nine months ended September 30, 2021 as compared to the same period 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.

We reported a net incomeloss from continuing operations of $3.4$29.3 million for the three months ended September 30, 20212022 as compared to a net loss from continuing operations of $28.4$2.0 million for the same period in 2020.2021.  We reported a net incomeloss from continuing operations of $11.6$104.9 million for the nine months ended September 30, 20212022 as compared to a net loss from continuing operations of $86.5$3.9 million for the same period in 2020.2021.  On a diluted basis per share, we reported net incomeloss from continuing operations of $0.19$1.61 per share for the three months ended September 30, 2021,2022, compared to a net loss from continuing operations of $1.56$0.11 per share for the same period in 2020.2021.  On a diluted basis per share, we reported a net incomeloss from continuing operations of $0.64$5.77 per share for the nine months ended September 30, 2021,2022, as compared to a net loss from continuing operations  of $4.77$0.21 per share for the same period in 2020.  2021.

We reported a net loss of $28.2 million for the three months ended September 30, 2022 as compared to net income of $3.4 million for the same period in 2021.  The net loss/income for the three months ended September 30, 2022 and 2021 was the result of the net loss from continuing operations partially or wholly offset by net income from discontinued operations of $1.1 million and $5.5 million, respectively.  We reported a net loss of $100.8 million for the nine months ended September 30, 2022 as compared to net income of $11.6 million for the same period in 2021.  The net loss/income for the nine months ended September 30, 2022 and 2021 was the result of the net loss from continuing operations partially or wholly offset by net income from discontinued operations of $4.2 million and $15.4 million, respectively.  On a diluted basis per share, we reported a net loss of $1.55 per share for the three months ended September 30, 2022, compared to net income of $0.19 per share for the same period in 2021.  On a diluted basis per share, we reported a net loss of $5.54 per share for the nine months ended September 30, 2022, as compared to net income of $0.64 per share for the same period in 2021.

Our effective tax rate was 20.8%(13.1)% for the first nine months of 20212022 compared to 15.6%20.8% for the same period in 2020.2021.  During the first nine months of 2022 we recorded a full valuation allowance of $30.4 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 months ended September 30, 2021 varied from the statutory tax rates primarily due to tax-exempttax exempt interest income.  The effective tax rate for the nine months ended September 30, 2020 varied from the statutory tax rates primarily due to the non-deductible impairment of goodwill and indefinite-lived intangible assets.  

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Third Quarter 20212022 as Compared to Third Quarter 20202021

The following is additional business segment information for the three months ended September 30, 20212022 and 20202021 (in thousands):

Three Months Ended September 30, 

 

Three Months Ended September 30, 

 

Specialty Commercial

Standard Commercial

 

Standard Commercial

 

Segment

Segment

Personal Segment

Corporate

Consolidated

 

Segment

Personal Segment

Runoff 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

$

34,556

$

34,274

$

15,638

$

17,453

$

2,326

$

3,401

$

$

$

52,520

$

55,128

Ceded premiums written

 

(69,424)

 

(72,977)

 

(8,644)

 

(7,270)

 

(72)

 

(3,161)

 

 

 

(78,140)

 

(83,408)

 

(15,801)

 

(16,245)

 

(76)

 

(72)

 

(25)

 

(5,271)

 

 

 

(15,902)

 

(21,588)

Net premiums written

 

57,292

 

77,039

 

16,291

 

17,456

 

17,381

 

18,561

 

 

 

90,964

 

113,056

 

18,755

 

18,029

 

15,562

 

17,381

 

2,301

 

(1,870)

 

 

 

36,618

 

33,540

Change in unearned premiums

 

2,623

 

3,979

 

1,177

 

(744)

 

(417)

 

429

 

 

 

3,383

 

3,664

 

(206)

 

959

 

38

 

(417)

 

(70)

 

8,621

 

 

 

(238)

 

9,163

Net premiums earned

 

59,915

 

81,018

 

17,468

 

16,712

 

16,964

 

18,990

 

 

 

94,347

 

116,720

 

18,549

 

18,988

 

15,600

 

16,964

 

2,231

 

6,751

 

 

 

36,380

 

42,703

Total revenues

 

62,493

 

83,749

 

18,157

 

17,398

 

18,316

 

20,513

 

(1,616)

 

(1,367)

 

97,350

 

120,293

 

18,950

 

19,693

 

16,754

 

18,316

 

2,477

 

7,315

 

51

 

152

 

38,232

 

45,476

Losses and loss adjustment expenses

 

36,560

 

92,625

 

10,411

 

14,683

 

16,735

 

15,247

 

 

 

63,706

 

122,555

 

14,484

 

11,553

 

14,735

 

16,735

 

19,922

 

(739)

 

 

 

49,141

 

27,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

(2,386)

$

2,192

$

(3,412)

$

(3,887)

$

(19,364)

$

4,343

$

(5,098)

$

(4,531)

$

(30,260)

$

(1,883)

Net loss ratio (1)

 

61.0

%  

 

114.3

%  

 

59.6

%  

 

87.9

%  

 

98.7

%  

 

80.3

%  

 

  

 

  

 

67.5

%  

 

105.0

%

 

78.1

%  

 

60.8

%  

 

94.5

%  

 

98.7

%  

 

893.0

%  

 

(10.9)

%  

 

  

 

  

 

135.1

%  

 

64.5

%

Net expense ratio (1)

 

22.0

%  

 

22.2

%  

 

32.9

%  

 

26.1

%  

 

26.1

%  

 

32.0

%  

 

  

 

  

 

28.4

%  

 

27.7

%

 

37.9

%  

 

31.2

%  

 

30.3

%  

 

26.1

%  

 

45.1

%  

 

36.0

%  

 

  

 

  

 

42.0

%  

 

41.0

%

Net combined ratio (1)

 

83.0

%  

 

136.5

%  

 

92.5

%  

 

114.0

%  

 

124.8

%  

 

112.3

%  

 

 

  

 

95.9

%  

 

132.7

%

 

116.0

%  

 

92.0

%  

 

124.8

%  

 

124.8

%  

 

938.1

%  

 

25.1

%  

 

 

  

 

177.1

%  

 

105.5

%

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

$

300

$

(973)

$

1,810

$

1,197

$

18,528

$

(3,088)

 

  

 

  

$

20,638

$

(2,864)

(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.

SpecialtyStandard Commercial Segment

Gross premiums written for the SpecialtyStandard Commercial Segment were $126.7$34.6 million for the three months ended September 30, 2021,2022, which was $23.3$0.3 million or 16%, lessmore than the $150.0$34.3 million reported for the same period of 2020.in 2021.  Net premiums written were $57.3$18.8 million for the three months ended September 30, 20212022 as compared to $77.0$18.0 million for the same period in 2021.  The increase in the gross and net premiums written was due to higher premium production in both our Commercial Accounts business unit and Aviation business unit.  

Total revenue for the Standard Commercial Segment of $19.0 million for the three months ended September 30, 2022, was $0.7 million less than the $19.7 million reported for the same period in 2021. This decrease in total revenue was primarily due to lower net premiums earned of $0.4 million and lower net investment income of $0.3 million for the three months ended September 30, 2022 as compared to the same period of 2021.

The Standard Commercial Segment reported a pre-tax loss of $2.4 million for the three months ended September 30, 2022 as compared to a pre-tax income of $2.2 million for the same period of 2020.  2021.The decrease in gross and net premiums writtendeteriorated pre-tax result was primarily the result of higher losses and LAE of $2.9 million and higher operating expenses of $1.0 million and lower premiumrevenue as discussed above. Increased operating expenses were primarily the result of higher salary and related expenses and higher professional services during the three months ended September 30, 2022 as compared to the same period the prior year.

The Standard Commercial Segment reported a net loss ratio of 78.1% for the three months ended September 30, 2022 as compared to 60.8% for the same period of 2021.  The gross loss ratio before reinsurance for the three months ended September 30, 2022 was 61.0% as compared to 52.9% reported for the same period of 2021.  The increase in the gross  loss ratio was due primarily to unfavorable net loss reserve development during the three months ended September 30, 2022 as compared to favorable net prior year development during the same period the prior year. The higher net loss ratio was due to lower ceded losses during the three months ended September 30, 02202 as compared to the same period the prior year. The Standard Commercial Segment reported unfavorable net loss reserve development of $0.3 million

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production in our Commercial Auto, Professional Liability and E&S Property business units, partially offset by increased premium production 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 million for the three months ended September 30, 2021 as compared to the same period of 2020.

The Specialty Commercial Segment reported pre-tax income of $12.6 million for the third quarter of 2021 as compared to pre-tax loss of $27.3 million reported for the same period in 2020.  The pre-tax income was primarily the result of lower losses and LAE of $56.1 million, lower operating expenses of $4.6 million and lower amortization of intangible assets of $0.4 million during the three months ended September 30, 20212022 as compared to the same period during 2020, partially offset by the lower total revenue discussed above.

Our Specialty Commercial Segment reported lower losses and LAE for the quarter ended September 30, 2021 compared to the same period of the prior year as the combined result of (a) a $48.1$1.0 million decrease 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 yearfavorable net loss reservereserved development (b) a $10.5 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 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 million increase 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 million decrease in losses and LAE attributable to our Professional Liability business unit 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 million during the same period the prior year.

Operating expenses decreased $4.6 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.

The Specialty Commercial Segment reported a net loss ratio of 61.0% for the three months ended September 30, 2021 as compared to 114.3% for the same period in 2020. The gross loss ratio before reinsurance was 81.5% for the three months ended September 30, 2021 as compared to 100.4% for the same period in 2020 driven primarily by lower current accident year loss trends and lower 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 million for the same period of 2020.  Net catastrophe losses of $2.2 million for the three months ended September 30, 2021 as compared to catastrophe losses of $8.1 million during the third quarter of 2020 also contributed to the decrease in the net loss ratio.The Specialty Commercial Segment reported a net expense ratio of 22.0% for the third quarter of 2021 as compared to 22.2% for the same period of 2020 driven primarily by lower operating expenses.  

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $24.9 million for the three months ended September 30, 2021, which was $0.2 million more than the $24.7 million reported for the same period in 2020.  Net premiums written were $16.3 million for the three months ended September 30, 2021 as compared to $17.5 million for the

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same period in 2020.  The increase in the gross premiums written was due to higher premium production in our Commercial Accounts business unit.  The decrease in net premiums written was due to higher ceded catastrophe premiums during the third quarter of 2021

Total revenue for the Standard Commercial Segment of $18.2 million for the three months ended September 30, 2021, was $0.8 million more than the $17.4 million reported for the same period in 2020. This increase in total revenue was due to higher net premiums earned of $0.8 million due to higher premium production for the three months ended September 30, 2021 as compared to the same period of 2020.

Our Standard Commercial Segment reported pre-tax income of $2.0 million for the three months ended September 30, 2021 as compared to a pre-tax loss of $1.7 million reported for the same period of 2020.  The pre-tax income was the result of lower loss and LAE of $4.3 million and the higher revenue discussed above, partially offset by higher operating expenses of $1.4 million. 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.

The Standard Commercial Segment reported a net loss ratio of 59.6% for the three months ended September 30, 2021 as compared to 87.9% for the same period of 2020.  The gross loss ratio before reinsurance for the three months ended September 30, 2021 was 52.9% as compared to 72.0% reported for the same period of 2020.  The decrease in the net loss ratio was due primarily to net catastrophe losses of $0.5 million during the third quarter of 2021 compared to $1.5 million for the same period of the prior year and lower non-catastrophe current accident year loss trends.  The Standard Commercial Segment reported favorable net loss reserve development of $1.0 million during the three months ended September 30, 2021 as compared to unfavorable net loss reserve development of $1.4 million during the same period of 20202021. The Standard Commercial Segment reported a net expense ratio of 32.9%37.9% for the third quarter of 20212022 as compared to 26.1%31.2% 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$15.6 million for the three months ended September 30, 20212022 as compared to $21.7$17.5 million for the same period in the prior year.  Net premiums written for ourthe Personal Segment were $17.4$15.6 million in the third quarter of 2021,2022, which was a decrease of $1.2$1.8 million from the $18.6$17.4 million reported for the third 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$16.8 million for the third quarter of 20212022 as compared to $20.5$18.3 million for the same period in 2020.2021.  The decrease in revenue was primarily due to lower net premiums earned of $2.0$1.4 million and lower finance charges of $0.2$0.1 million during the third quarter of 20212022 as compared to the same period during 2020.2021.

Pre-tax loss for the Personal Segment was $3.9$3.4 million for the three months ended September 30, 20212022 as compared to a pre-tax loss of $2.1$3.9 million for the same period of 2020.  2021.  Lower losses and LAE of $2.0 million were partially offset by the decreased revenue discussed above for the three months ended September 30, 2022 as compared to the same period during 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 94.5% for the three months ended September 30, 2022 as compared to 98.7% for the same period of 2021.  The gross loss ratio before reinsurance was 94.7% for the three months ended September 30, 2022 as compared to 99.5% for the same period in 2021.  The Personal Segment reported $1.8 million of unfavorable prior year loss reserve development for the third quarter of 2022 as compared to $1.2 million report for the same period the prior year.  The Personal Segment reported a net expense ratio of 30.3% for the third quarter of 2022 as compared to 26.1% for the same period of 2021.  The increase in the expense ratio was due primarily to lower net premiums earned.

Runoff Segment

Gross premiums written for the Runoff Segment were $2.3 million for the three months ended September 30, 2022, which was $1.1 million, or 32%, less than the $3.4 million reported for the same period of 2021.  Net premiums written were $2.3 million for the three months ended September 30, 2022 as compared to ($1.9) million for the same period of 2021.  The decrease in gross premiums written was primarily the result of the runoff of the senior care facilities business as well as certain  specialty programs. The increase in net premiums written was primarily the result of the revision of the third quarter 2021 financials statements due to immaterial errors relating to the certain reinsurance treaties.

The $2.5 million of total revenue for the three months ended September 30, 2022 was $4.8 million less than the $7.3 million reported by the Runoff Segment for the same period in 2021.  This decrease in revenue was primarily due to lower net premiums earned of $4.5 million, driven primarily by runoff of the senior care facilities business and certain specialty programs, as well as lower net investment income of $0.3 million.

The Runoff Segment reported a pre-tax loss of $19.4 million for the third quarter of 2022 as compared to pre-tax income of $4.3 million reported for the same period in 2021.  The deterioration in pre-tax results was primarily the result of higher losses and LAE of $1.5$20.6 million and the decreasedlower total revenue as discussed above, partially offset by decreasedlower operating expenses of $1.8$1.7 million and decreased amortization of intangible assets of $0.1 million forduring the three months ended September 30, 20212022 as compared to the same period during 2020.  

2021.  The PersonalRunoff Segment reported a net loss ratio of 98.7%higher losses and LAE for the three monthsquarter ended September 30, 2021 as2022 compared to 80.3% for the same period of 2020.  The gross loss ratio before reinsurance was 99.5% for the three months ended September 30, 2021 as compared to 80.3% for the same period in 2020.  The higher 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 aprimarily as the result of unfavorable net expense ratioprior year development of 26.1% for$18.5 million, of which $14.0 million was from the third quarter of 2021 as compared to 32.0% forbinding auto business, $0.7 million was from the same period of 2020.  The decrease in the expense ratiosenior care facilities business and $3.8 million was due primarily to lower operating expenses.

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from certain specialty programs , as compared to favorable prior year loss development of $3.1 million for the same period of 2021.

Corporate

Total revenue for Corporate decreased by $0.2$0.1 million for the three months ended September 30, 2021 as compared to the same period the prior year.  This decrease in total revenue was due predominately to lower net investment income of $0.3 million for the three months ended September 30, 2021 as compared to the same period during 2020, partially offset by a $0.1 million improvement in investment losses during the third quarter of 2021 as compared to the same period of 2020.

Corporate pre-tax loss was $6.3 million for 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 quarter of 20212022 as compared to the same period the prior year primarily as a result of a $1.7 million increase in unrealized losses on equity securities and a $0.5 million decrease in realized gains on investments, partially offset by increased net investment income of $2.1 million.  Corporate pre-tax loss was $5.1 million for the three months ended September 30, 2022 as compared to a pre-tax loss of $4.5 million for the same period of 2021.  The deterioration in pre-tax results for the third quarter of 2022 was primarily due to lowerthe decreased revenue discussed above, higher operating expenses of $0.7 million driven primarily by lower professional services of $0.3 million, lower salary and related expense of $0.5$0.2 million and higher general expensesinterest expense of $0.1 million, partially offset by lower revenue discussed above.  $0.3 million.

Nine Months Ended September 30, 20212022 as compared to Nine Months Ended September 30, 20202021 :

The following is additional business segment information for the nine months ended September 30, 2022 and 2021 (in thousands):

Nine Months Ended September 30, 

 

Nine Months Ended September 30,

Specialty Commercial

Standard Commercial

 

Standard Commercial

Segment

Segment

Personal Segment

Corporate

Consolidated

 

Segment

Personal Segment

Runoff 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

$

366,896

$

438,113

$

82,382

$

74,944

$

52,560

$

68,640

$

$

$

501,838

$

581,697

$

110,013

$

107,516

$

47,589

$

52,560

$

10,255

$

25,662

$

$

$

167,857

$

185,738

Ceded premiums written

 

(202,433)

 

(207,699)

 

(29,224)

 

(21,770)

 

(234)

 

(9,798)

 

 

 

(231,891)

 

(239,267)

 

(51,434)

 

(49,694)

 

(226)

 

(234)

 

(872)

 

(11,081)

 

 

 

(52,532)

 

(61,009)

Net premiums written

 

164,463

 

230,414

 

53,158

 

53,174

 

52,326

 

58,842

 

 

 

269,947

 

342,430

 

58,579

 

57,822

 

47,363

 

52,326

 

9,383

 

14,581

 

 

 

115,325

 

124,729

Change in unearned premiums

 

24,985

 

21,681

 

(2,077)

 

(3,643)

 

(72)

 

1,549

 

 

 

22,836

 

19,587

 

(3,584)

 

(2,326)

 

(350)

 

(72)

 

1,341

 

29,012

 

 

 

(2,593)

 

26,614

Net premiums earned

 

189,448

 

252,095

 

51,081

 

49,531

 

52,254

 

60,391

 

 

 

292,783

 

362,017

 

54,995

 

55,496

 

47,013

 

52,254

 

10,724

 

43,593

 

 

 

112,732

 

151,343

Total revenues

 

196,982

 

262,761

 

53,085

 

52,130

 

56,390

 

65,300

 

7,134

 

(30,430)

 

313,591

 

349,761

 

56,183

 

57,536

 

50,621

 

56,390

 

11,554

 

45,306

 

(745)

 

12,180

 

117,613

 

171,412

Losses and loss adjustment expenses

 

125,655

 

220,215

 

36,640

 

37,313

 

47,379

 

50,750

 

 

 

209,674

 

308,278

 

40,398

 

39,769

 

41,408

 

47,379

 

79,362

 

24,422

 

 

 

161,168

 

111,570

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

Pre-tax income (loss)

 

28,816

 

(5,752)

 

347

 

(154)

 

(8,275)

 

(5,836)

 

(6,280)

 

(90,742)

 

14,608

 

(102,484)

Pre-tax (loss) income

$

(3,143)

$

1,261

$

(7,257)

$

(8,275)

$

(73,099)

$

5,212

$

(16,202)

$

(1,234)

$

(99,701)

$

(3,036)

Net loss ratio (1)

 

66.3

%  

 

87.4

%  

 

71.7

%  

 

75.3

%  

 

90.7

%  

 

84.0

%  

 

  

 

  

 

71.6

%  

 

85.2

%

 

73.5

%  

 

71.7

%  

 

88.1

%  

 

90.7

%  

 

740.0

%  

 

56.0

%  

 

  

 

  

 

143.0

%  

 

73.7

Net expense ratio (1)

 

23.4

%  

 

19.3

%  

 

32.1

%  

 

30.6

%  

 

27.9

%  

 

27.0

%  

 

  

 

  

 

28.0

%  

 

24.2

%

 

35.7

%  

 

30.8

%  

 

30.3

%  

 

27.9

%  

 

40.3

%  

 

34.2

%  

 

  

 

  

 

41.1

%  

 

35.1

Net combined ratio (1)

 

89.7

%  

 

106.7

%  

 

103.8

%  

 

105.9

%  

 

118.6

%  

 

111.0

%  

 

  

 

  

 

99.6

%  

 

109.4

%

 

109.2

%  

 

102.5

%  

 

118.4

%  

 

118.6

%  

 

780.3

%  

 

90.2

%  

 

  

 

  

 

184.1

%  

 

108.8

Net (Unfavorable) Favorable Prior Year Development

 

(533)

 

(23,961)

 

2,336

 

(2,350)

 

(4,356)

 

(6,948)

 

  

 

  

 

(2,553)

 

(33,259)

Net unfavorable (favorable) prior year development

$

250

$

(2,371)

$

5,218

$

4,356

$

70,365

$

(6,543)

 

  

 

  

$

75,833

$

(4,558)

(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 million for the nine months ended September 30, 2021 which was $71.2 million, or 16%, less than the $438.1 million reported for the same period of 2020. Net premiums written were $164.5 million for the nine months ended September 30, 2021 as compared to $230.4 million for the same period of 2020. The decrease in gross and net premiums written was primarily the result of lower premium production in our Commercial Auto, Professional Liability, E&S Property and Aerospace & Programs business units, partially offset by increased premium production in our E&S Casualty business unit.

The $197.0 million of total revenue for the nine months ended September 30, 2021 was $65.8 million less than the $262.8 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 $62.6 million due primarily to the decreased premium production

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

Pre-tax income for the Specialty Commercial Segment was $28.8 million during the nine months ended September 30, 2021 as compared to a pre-tax loss of $5.8 million for the same period in 2020. The pre-tax income was primarily the result of lower losses and LAE of $94.6 million, lower operating expenses of $4.6 million and lower amortization of intangible assets of $1.2 million during the nine months ended September 30, 2021 as compared to the same period during 2020, partially offset by the lower revenue discussed above.

Our Specialty Commercial Segment reported lower losses and LAE for the nine months ended September 30, 2021 compared to the same period of the prior year as the combined result of (a) a $91.7 million decrease 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 million decrease in losses and LAE in our E&S Property business unit 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 million during the nine months ended September 30, 2021 as compared to $1.9 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 higher 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 higher current accident year loss trends.

Operating expenses decreased $4.6 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 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.

The Specialty Commercial Segment reported a net loss ratio of 66.3% for the nine months ended September 30, 2021 as compared to 87.4% for the same period in 2020. The gross loss ratio before reinsurance was 82.2% for the nine months ended September 30, 2021 as compared to 89.7% for the same period in 2020. The decrease in the net loss ratio was impacted by $0.5 million of unfavorable prior year net loss reserve development for the nine months ended September 30, 2021 as compared to unfavorable prior year net loss reserve development of $24.0 million for the same period of 2020.  Net catastrophe losses of $5.9 million for the nine months ended September 30, 2021 as compared to net catastrophe losses of $16.4 million during the same period of 2020 also contributed to the decrease in the loss ratio.The Specialty Commercial Segment reported a net expense ratio of 23.4% for the nine months ended September 30, 2021 as compared to 19.3% for the same period of 2020 driven primarily by lower net premiums earned.

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $82.4$110.0 million for the nine months ended September 30, 2021,2022, which was $7.5$2.5 million, or 10%2%, more than the $74.9$107.5 million reported for the same period in 2020.2021. Net premiums written were $53.2$58.6 million for the ninethree months ended both September 30, 2021 and 2020.2022 as compared to $57.8 million for the same period in 2021.  The increase in the gross and net premiums written was due to higher premium production in both  our Commercial Accounts business unit and Aviation business unit.

Total revenue for the Standard Commercial Segment of $53.1$56.2 million for the nine months ended September 30, 2021,2022 was $1.0$1.3 million moreless than the $52.1$57.5 million reported for the same period in 2020.2021.  This increasedecrease in total revenue was primarily due to higher net premiums earned of $1.6 million, partially offset by lower net investment income of $0.5$0.8 million and lower finance chargesnet premiums earned of $0.1$0.5 million for the nine months ended September 30, 20212022 as compared to the same period of 2020.2021.

Our Standard Commercial Segment reported a pre-tax loss of $3.1 million for the nine months ended September 30, 2022 as compared to pre-tax income of $1.3 million reported for the same period of 2021.  The deteriorated pre-tax

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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 wasresults were the result of lowerhigher loss and LAE of $0.7$0.6 million and the increased revenue discussed above, partially offset by higher operating expenses of $1.2 million.$2.5 million and the decreased revenue discussed above.  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.service expenses.

The Standard Commercial Segment reported a net loss ratio of 71.7%73.5% for the nine months ended September 30, 20212022 as compared to 75.3%71.7% for the same period of 2020.2021.  The gross loss ratio before reinsurance for the nine months ended September 30, 20212022 was 64.7%58.4% as compared to 68.9%64.3% 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 prior year development, partially offset by higher current accident year gross loss trends.  The increase in the net loss ratios was due to lower ceded losses during the nine months ended September 30, 2022 as compared to the same period of 2021.  The Standard Commercial Segment reported favorableunfavorable net loss reserve development of $2.3$0.3 million during the nine months ended September 30, 20212022 as compared to unfavorablefavorable net loss reserve development of $2.4 million during the same period of 2020.2021.  The Standard Commercial Segment reported a net expense ratio of 32.1%35.7% for the nine months ended September 30, 20212022 as compared to 30.6%30.8% 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$47.6 million for the nine months ended September 30, 20212022 as compared to $68.6$52.6 million for the same period in the prior year.  Net premiums written for our Personal Segment were $52.3$47.4 million for the nine months ended September 30, 2021,2022, which was a decrease of $6.5$4.9 million from the $58.8$52.3 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$50.6 million for the nine months ended September 30, 20212022 as compared to $65.3$56.4 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$5.2 million, and lower finance charges of $1.1$0.4 million partially offset by higherand lower net investment income of $0.3$0.2 million during the nine months ended September 30, 20212022 as compared to the same period during 2020.2021.

Pre-tax loss for the Personal Segment was $8.3$7.3 million for the nine months ended September 30, 20212022 as compared to a pre-tax loss of $5.8$8.3 million for the same period of 2020.2021.  The increase inlower pre-tax loss was primarily the result of thelower losses and LAE of $6.0 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 months ended September 30, 20212022 as compared to the same period during 2020.2021.

The Personal Segment reported a net loss ratio of 90.7%88.1% for the nine months ended September 30, 20212022 as compared to 84.0%90.7% for the same period of 2020.2021.  The gross loss ratio before reinsurance was 91.8%88.3% for the nine months ended September 30, 20212022 as compared to 77.1%91.8% for the same period in 2020.2021.  The higherlower gross and net loss ratios for the nine months ended September 30, 20212022 was primarily the result of higherlower net catastrophe losses of $0.2 million for the nine months ended September 30, 2022 as compared to $0.9 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$5.2 million net unfavorable prior year loss reserve development during the first nine months of 20212022 as compared to net unfavorable prior year loss reserve development of $6.9$4.4 million during the first nine 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 months ended September 30, 20212022 as compared to 27.0%27.9% 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.

CorporateRunoff Segment

Total revenueGross premiums written for Corporate increased by $37.6the Runoff Segment were $10.3 million for the nine months ended September 30, 2021 as compared to2022, which was $15.4 million, or 60%, less than the same period the prior year. This increase in total revenue was due predominately to investment gains of $9.1 million during the nine months ended September 30, 2021 as compared to investment losses of $27.9$25.7 million reported for the same period of 2020 and higher net investment income of $0.62021.  Net premiums written were $9.4 million for the nine months ended September 30, 20212022 as compared to $14.6 million for the same period during 2020.of 2021.  The decrease in gross and net premiums written was primarily the result of the runoff of the senior care facilities business and  certain  specialty programs.

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CorporateThe $11.5 million of total revenue for the nine months ended September 30, 2022 was $33.8 million less than the $45.3 million reported by the Runoff Segment for the same period in 2021.  This decrease in revenue was primarily due to lower net premiums earned of $32.9 million, driven primarily by runoff of the senior care facilities business and certain specialty programs, as well as lower net investment income of $0.9 million.

The Runoff Segment reported a pre-tax loss was $6.3of $73.1 million for the nine months ended September 30, 20212022 as compared to pre-tax income of $5.2 million reported for the same period in 2021.  The deterioration in pre-tax results was primarily the result of higher losses and LAE of  $54.9 million and  the lower total revenue discussed above, partially offset by lower operating expenses of $10.4 million during the nine months ended September 30, 2022 as compared to the same period during 2021. Our Runoff Segment reported higher losses and LAE for the quarter ended September 30, 2022 compared to the same period of the prior year as the result of unfavorable net prior year development of $70.4 million, of which $58.4 million was from the binding auto business, $8.6 million was from the senior care facilities  business and $3.4 million was from certain specialty programs,  as compared to favorable prior year loss development of $90.7$6.5 million for the same period of 2020. The improvement in2021.

Corporate

Total revenue for Corporate decreased by $12.9 million for 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 contributingnine months ended September 30, 2022 as compared 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 weresame period the prior year primarily as a result of a $12.2 million decrease in unrealized gains on equity securities and a $3.6 million decrease in realized gains on investments, partially offset by a $2.9 million increase in net investment income. Corporate pre-tax loss was $16.2 million for the nine months ended September 30, 2022 as compared to a pre-tax loss of $1.2 million for the same period of 2021.  The pre-tax loss for the nine months ended September 30, 2022 was primarily due to the lower professional services, travelrevenue discussed above, as well as higher operating expenses of $1.6 million and related and occupancyhigher interest expense of $0.4 million.  The higher operating expenses were driven by a $1.1 million increase in salary and related expenses partially offsetdue to increased salaryincentive compensation accruals and relatedhigher non-cash stock compensation expense.  increased professional service expense of $0.1 million, higher travel expense of $0.2 million and higher other general expenses of $0.2 million.

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 30, 2021,2022, Hallmark and its non-insurance company subsidiaries had $4.3$10.0 million in unrestricted cash and cash equivalents. As of that date, our insurance subsidiaries held $321.5$119.5 million of unrestricted cash and cash equivalents, as well as $317.9$417.1 million in debt securities with an average modified duration of 0.71.0 years. Accordingly, we do not anticipate selling long-term debt instruments to meet liquidity needs.

AHIC and TBIC, domiciled in Texas, are limited in the payment of dividends to their stockholders in any 12-month period, without the prior written consent of the Texas Department of Insurance, to the greater of statutory net income for the prior calendar year or 10% of statutory policyholders’ surplus as of the prior year end. Dividends may only be paid from unassigned surplus funds. HIC and HNIC, both domiciled in Arizona, are limited in the payment of dividends to the lesser of 10% of prior year policyholders’ surplus or prior year’s statutory net income, without prior written approval from the Arizona Department of Insurance. HSIC, domiciled in Oklahoma, is limited in the payment of dividends to the greater of 10% of prior year policyholders’ surplus or prior year’s statutory net income, not including realized capital gains, without prior written approval from the Oklahoma Insurance Department. During 2021,2022, the aggregate ordinary dividend capacity of these subsidiaries is $22.5$32.0 million, of which $15.0$22.7 million is available to Hallmark. As a county mutual, dividends from HCM are payable to policyholders. During the first nine months of 20212022 and 2020,2021, our insurance subsidiaries paid $6.0 million and $3.0 million, and $8.0 millionrespectively, in dividends to Hallmark, respectively.Hallmark. During the first nine months of 20212022 and 2020,2021, our insurance subsidiaries paid $6.5 million and $9.0 million, and $4.2 millionrespectively, in management fees to Hallmark, respectively.Hallmark.  

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Comparison of September 30, 20212022 to December 31, 20202021

On a consolidated basis, our cash (excluding restricted cash) and investments at September 30, 20212022 were $689.1$587.5 million compared to $639.2$691.6 million at December 31, 2020.2021. The primary reasons for this increasedecrease in unrestricted cash and investments were increases in investment fair values, net salescash used by operations and purchases of investment securities and cash provided by operations.securities.

Comparison of Nine Months Ended September 30, 20212022 and September 30, 20202021

During the nine months ended September 30, 2021,2022, our cash flow used by operations was $74.2 million compared to cash flow provided by operations wasof $47.3 million compared to cash flow used by operations of $62.9 million during the same period the prior year. The cash flow provided byused in operations was driven primarily by a decreasehigher reinsurance balances paid (including $62.0 million paid to fund the payment of claims under the LPT Contract without prejudice on behalf of DARAG under the interim agreement), an increase in net paid claims and lower collected investment income, partially offset by decreased paid operating expenses higher collected commission and feefederal income lower interest paid, and income tax refunds received, partially offset by decreased collected net premiums, lower collected investment income and lower finance chargestaxes recovered during the nine months ended September 30, 2021 as compared to the same period the prior year.2022.

Net cash provided byused in investing activities during the first nine months of 20212022 was $174.0$144.2 million as compared to net cash provided by investing activities of $212.3$174.0 million during the first nine months of 2020.2021. The decreasenet cash used in cash

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provided by investing activities during the first nine months of 20212022 was primarily comprised of an increase of $153.6 million in purchases of debt and equity securities, a decrease of $78.1$164.1 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 months of 20212022 or 2020.2021.

Senior Unsecured Notes

On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029.  Interest on the Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020.  The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject 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%62% as of September 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

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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

    

Statutory

Statutory

Trust I

Trust II

Issue date

June 21, 2005

August 23, 2007

Principal amount of trust preferred securities

$

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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Hallmark

Hallmark

    

Statutory

Statutory

Trust I

Trust II

Issue date

June 21, 2005

August 23, 2007

Principal amount of trust preferred securities

$

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, 2022

6.54%

6.19%

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting company.

Item 4. Controls and Procedures.

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

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

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

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PART II

OTHER INFORMATION

Item 1.   Legal Proceedings.

On May 5, 2020,AHIC, HIC, HSIC, HCM and HNIC (collectively, the “Hallmark Insurers”) are parties to a lawsuit styled Schulze v. Hallmark Financial Services, Inc., et al. (Case No. 3:20-cv-01130) was filedLoss Portfolio Transfer Reinsurance Contract (the “LPT Contract”) and related agreements with DARAG Bermuda Ltd. (“DARAG Bermuda”) and DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, the “Reinsurers”).  (See Note 10, “Reinsurance – Loss Portfolio Transfer” in the U.S. District Court forNotes to Consolidated Financial Statements.)  

The Reinsurers and the Northern DistrictHallmark Insurers have submitted to binding arbitration a dispute that has arisen regarding the rights and obligations of Texas, Dallas Division (the “Schulze Matter”). The Company, its former Chief Executive Officer and its former Chief Financial Officer are named defendants in the lawsuit brought on behalfparties under the LPT Contract.  Pending resolution of a putative classthe dispute, the Hallmark Insurers have agreed to fund the payment of shareholders who acquired Hallmark securities between March 5, 2019 and March 17, 2020. In general,claims under the complaint alleges that the defendants violated the Securities Exchange Act of 1934 by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company would be forced to report $63.8 million of prior year net adverse loss development, (d) the Company would exit the contract binding line of its commercial automobile primary insurance business, and by making positive statements about the Company’s business, operations and prospects that were allegedly materially misleading and/or lacked a reasonable basis. On July 21, 2020, the court appointed Rajeev Yalamanchili as Lead Plaintiff.  Lead Plaintiff filed an Amended Complaint on September 30, 2020.  On July 28, 2021, the court granted the defendants’ motion to dismiss the lawsuitLPT Contract without prejudice to their right to seek reimbursement and other relief in the plaintiff filingarbitration proceedings.  The arbitration panel has been constituted and a second amended complaint within 28 days, and denied plaintiff’s request to submit supplemental evidencefinal hearing on the merits is anticipated in supportthe first quarter of his opposition to2023.  In the motion to dismiss. Lead Plaintiff chose not to file a second amended complaint. On September 24, 2021, Lead Plaintiff and Defendants filed a Joint Stipulation seeking dismissalarbitration, the Reinsurers seek rescission of the case with prejudice, with each side bearing its own attorneys’ feesLPT Contract or, in the alternative, damages on the basis of alleged breach and costs. No considerationfraudulent inducement by the Hallmark Insurers.  The Company believes any such claims are without factual basis or legal merit and intends to vigorously contest the matter.  The Company is seeking an arbitration award enforcing the terms of the LPT Contract and requiring the Reinsurers to reimburse the Hallmark Insurers for all claim amounts funded by them during the pendency of the arbitration, as well as all other damages sustained by the Hallmark Insurers.  The arbitration panel has been given, offered,ordered that the Reinsurers  post security for any final award in the amount of the Minimum Funding Requirement (as defined in the LPT Contract).  Although an adverse arbitration outcome is at least reasonably possible,  we are unable at this time to reasonably estimate the amount or promised to Lead Plaintiff or his counselrange of possible loss in connection with this dismissal. The Court terminated the case pursuant to the Joint Stipulation.such event.

As of September 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.

Following the announcement of the transaction with Core Specialty, A.M. Best placed under review with negative implications the financial strength ratings of A- (Excellent) and the issuer credit ratings of a- (Excellent) of each of AHIC, HIC, HSIC, HNIC and HCM, as well as the pool comprised of AHIC, HIC, HSIC and HNIC.  While acknowledging the mitigating impact of the transaction with Core Specialty, A.M. Best expressed concern over the uncertainty of the arbitration proceedings with the Reinsurers under the LPT Contract, potential additional unfavorable prior year loss development in excess of the aggregate limit under the LPT Contract, and the Company’s ability to restore profitability to its continuing operations.  (See Note 10, “Reinsurance – Loss Portfolio Transfer” in the Notes to Consolidated Financial Statements and Item 1. “Legal Proceedings” above.)  A.M. Best indicated that these ratings will remain under review until they can fully assess the impacts of the Core Specialty transaction, in addition to the effects of initiatives to improve operating performance and stem further material adverse reserve development. Critical to this assessment will be Hallmark’s operating results for the remainder of 2022.

There have been no other 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.

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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 30, 2021.2022.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures.

None.

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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).

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4.7

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

4.8

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

4.9

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

4.10

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

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4.11

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

4.12

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

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 30, 20212022 and December 31, 2020,2021, (ii) Consolidated Statements of Operations for the three months and nine months ended September 30, 20212022 and 2020,2021, (iii) Consolidated

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Statements of Comprehensive Income for the three months and nine months ended September 30, 20212022 and 2020,2021, (iv) Consolidated Statements of Stockholder’s Equity for the three months and nine months ended September 30, 20212022 and 2020,2021, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 20212022 and 20202021 and (vi) related notes.

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SIGNATURES

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

HALLMARK FINANCIAL SERVICES, INC.

(Registrant)

Date: November 15, 202114, 2022

/s/ Mark E. Schwarz

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

Date: November 15, 202114, 2022

/s/ Christopher J. Kenney

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

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