August 29, 2006
VIA EDGAR
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Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
Washington, D.C. 20549
RE: Hallmark Financial Services, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2005
Filed March 23, 2006
File No. 001-11252
Dear Mr. Rosenberg:
By letter dated June 20, 2006, the Staff of the Securities and Exchange
Commission ("SEC") provided written comments to Hallmark Financial Services,
Inc. (the "Company") regarding the above-referenced filing. The Company
responded to such comments by letter filed via EDGAR on July 3, 2006. On
August 25, 2006, Ms. Dana Hart of the SEC Staff orally provided three
comments to the Company's response. This letter is intended to respond to
these additional comments. For your convenience, we have set forth each of
the additional comments given to us by Ms. Hart (referenced to the numbered
paragraph in the Staff's original comment letter to which it relates) and
have followed each such comment with the Company's response.
* * * * *
COMMENT TO RESPONSE #2:
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Please tell us whether you intend to include similar disclosure of changes
in prior year estimates in the MD&A sections of future filings.
RESPONSE:
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Yes, the Company intends to include similar disclosure of changes
in prior year estimates in the MD&A sections of future filings, as
appropriate.
COMMENT TO RESPONSE #4:
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Please confirm that you will disclose in future filings that the 0.5%
sensitivity analysis on ultimate loss ratios reflects reasonably likely
changes in loss ratio assumptions.
RESPONSE:
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Yes, the Company will disclose in future filings that the 0.5%
sensitivity analysis on ultimate loss ratios reflects reasonably
likely changes in loss ratio estimates.
COMMENT TO RESPONSE #5:
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Please provide additional information regarding the production of commercial
policies by Hallmark General Agency for third party insurance carriers.
Specifically address the following:
a. Whether transactions are accounted for as insurance contracts or
brokerage transactions;
b. All parties involved in these transactions;
c. When you started to retain 100% of these policies and began reflecting
the related unearned premiums and losses for these policies in your
financial statements;
d. The cash inflows and outflows related to these transactions; and
e. Who the prepaid commission was paid to and why.
RESPONSE:
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a. These transactions are insurance contracts on third party paper
accounted for under agency accounting.
b. The parties involved in these contracts prior to July 1, 2005 were
the policyholder, the retail agent, Hallmark General Agency, Inc.
("HGA"), and Clarendon National Insurance Company ("CNIC").
c. We began assuming 50% of this business on American Hallmark
Insurance Company ("AHIC") on July 1, 2005. Thereafter, we began
assuming less from CNIC and direct writing more of this business
as we received our licenses over the next six months. By
December 31, 2005 we were direct writing 100% of HGA new and
renewal business on AHIC.
d. The flow of cash from these transactions with CNIC occurred as
follows:
1. Premiums paid by the policyholder were either remitted
directly by the policyholder or through the retail agent
to a CNIC premium trust account.
2. Monthly, ceding commissions were paid to HGA out of the
CNIC premium trust account.
3. HGA paid retail agent commissions monthly to various
agents based on written premium.
The flow of cash from the insurance contracts written on AHIC are
the same as any direct business written on an insurance company.
e. The prepaid commission was paid by HGA to the retail agents.
These commissions were refundable by the retail agents. HGA paid
the commission based on written premium but incurred the cost
as the underlying premium was earned. It is common industry
practice to pay the retail agents based on written premium.
* * * * *
In connection with our response to the Staff's comments, the Company
acknowledges that (i) the Company is responsible for the adequacy and
accuracy of the disclosure in the filing; (ii) Staff comments or changes
to disclosure in response to Staff comments do not foreclose the commission
from taking any action with respect to the filing; and (iii) the Company may
not assert Staff comments as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the United
States.
We trust that the foregoing responds sufficiently to the Staff's
additional comments. If you have any questions concerning the Company's
responses, please do not hesitate to contact our Chief Accounting Officer,
Jeffrey R. Passmore, or the undersigned at 817-348-1600.
Very truly yours,
/s/ Mark J. Morrison
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Mark J. Morrison
President and Chief Executive Officer
cc: Mark E. Schwarz, Executive Chairman
Jeffrey R. Passmore, Chief Accounting Officer
Cecil R. Wise, General Counsel
Steven D. Davidson, Esq.
Anne M. Mascarenhas, CPA