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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, 2022

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

Commission file number 001-11252

Hallmark Financial Services, Inc.

(Exact name of registrant as specified in its charter)


Nevada	87-0447375
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

5420 Lyndon B. Johnson Freeway, Suite 1100, Dallas, Texas	75240

(Address of principal executive offices)	(Zip Code)

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

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.18 par value	HALL	Nasdaq Global Market

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

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

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


Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☒	Smaller reporting company ☒	Emerging growth company ☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, par value $0.18 per share –18,184,824 shares outstanding as of November 14, 2022.

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

INDEX TO FINANCIAL STATEMENTS

	Page Number

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

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except par value)


		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

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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,
	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

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

($ in thousands)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net (loss) income	$	(28,153)	$	3,445	$	(100,789)	$	11,571
Other comprehensive (loss) income:
Change in net actuarial gain		25		43		78		130
Tax effect on change in net actuarial gain		(5)		(9)		(16)		(27)
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

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

($ in thousands)


	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

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

($ in thousands)


	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

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Hallmark Financial Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

1. General

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

Our Commercial 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 (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, were previously reported as part of our former Specialty Commercial 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”).

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

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financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of September 30, 2022 and 2021 is unaudited. However, in the opinion of management, the interim financial data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the periods ended September 30, 2022 are not necessarily indicative of the operating results to be expected for the full year.

Subsequent Event

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, 2021 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

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

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

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

Senior Unsecured Notes Due 2029: Our senior unsecured notes payable due in 2029 had a carrying value of $49.3 million and a fair value of $43.2 million as of September 30, 2022. Our senior unsecured notes payable would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

Subordinated Debt Securities: Our trust preferred securities had a carrying value of $56.0 million and a fair value of $35.6 million as of September 30, 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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For accounts receivable, reinsurance balances, premiums receivable, federal income tax recoverable and other assets, the carrying amounts are held at net realizable value which approximates fair value because of the short maturity of such financial instruments.

Variable Interest Entities

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

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

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. We account for income taxes under the asset and liability method, which requires the recognition of deferred taxes for temporary differences between the financial statement and tax return basis of assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the tax 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 and our effective tax rate in the 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, 2022.

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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, 2024. We do not currently have any contracts that have been changed to a new reference rate and do not expect the adoption of this guidance to have a material effect on the Company’s results of operations, financial 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

On October 7, 2022 the Company consummated the sale of substantially 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 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, 2022 the expected net liability amount recorded related to these future outflows are $209.5 million, which are included in reserves for unpaid losses and LAE and reinsurance recoverable in our Consolidated 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 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. This transaction met the criteria for held-for-sale and discontinued operations accounting. As a result, the results of operations for the affected excess and surplus lines are included in discontinued operations in our Consolidated Statement of Operations for all periods shown and the corresponding assets and liabilities are presented separately as single line items in the asset and liability sections of the Consolidated Balance Sheet at September 30, 2022.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Gross premiums written	$	113,502	$	113,976	$	331,190	$	316,100
Ceded premiums written		(70,088)		(56,552)		(203,861)		(170,882)
Net premiums written		43,414		57,424		127,329		145,218
Change in unearned premiums		(1,463)		(5,780)		859		(3,778)
Net premiums earned		41,951		51,644		128,188		141,440

Commission and fees		241		230		810		739

Total revenues		42,192		51,874		128,998		142,179

Losses and loss adjustment expenses		31,244		36,157		95,174		98,104
Operating expenses		8,028		9,324		22,894		26,074
Amortization of intangible assets		119		119		357		357

Total expenses		39,391		45,600		118,425		124,535

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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4. 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 no transfers between Level 1 and Level 2 securities.

In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Level 3 investments are valued based on the best available data in order to approximate fair value. This data may be internally developed and consider risk premiums that a market participant would require. Investment securities classified within Level 3 include other less liquid investment securities.

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The following table presents, for each of the fair value hierarchy levels, assets that are measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021 (in thousands):


	As of September 30, 2022
	Quoted Prices in
	Active Markets for
	Identical Assets		Other Observable		Unobservable
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	—	$	41,132	$	—	$	41,132
Corporate bonds		—		257,409		—		257,409
Corporate bank loans		—		75,011		—		75,011
Municipal bonds		—		42,024		—		42,024
Mortgage-backed		—		1,477		—		1,477
Total debt securities		—		417,053		—		417,053
Total equity securities		41,002		—		—		41,002
Total investments	$	41,002	$	417,053	$	—	$	458,055


	As of December 31, 2021
	Quoted Prices in
	Active Markets for
	Identical Assets		Other Observable		Unobservable
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	—	$	62,984	$	—	$	62,984
Corporate bonds		—		105,234		347		105,581
Corporate bank loans		—		81,189		—		81,189
Municipal bonds		—		38,464		—		38,464
Mortgage-backed		—		1,855		—		1,855
Total debt securities		—		289,726		347		290,073
Total equity securities		48,695		—		—		48,695
Total investments	$	48,695	$	289,726	$	347	$	338,768

Due to significant unobservable inputs into the valuation model for one corporate bond as of December 31, 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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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, 2022 and 2021 (in thousands):


Beginning balance as of January 1, 2022	$	347
Sales		—
Settlements		(347)
Purchases		—
Issuances		—
Total realized/unrealized losses included in net income		—
Net gain included in other comprehensive income		—
Transfers into Level 3		—
Transfers out of Level 3		—
Ending balance as of September 30, 2022	$	—


Beginning balance as of January 1, 2021	$	348
Sales		—
Settlements		—
Purchases		—
Issuances		—
Total realized/unrealized gains included in net loss		—
Net gains included in other comprehensive loss		8
Transfers into Level 3		—
Transfers out of Level 3		—
Ending balance as of September 30, 2021	$	356

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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
		Amortized Cost/	Unrealized		Unrealized
	Carrying Value		Gains		Losses		Fair Value
As of September 30, 2022
U.S. Treasury securities and obligations of U.S. Government	$	41,731	$	308	$	(907)	$	41,132
Corporate bonds		263,114		1,132		(6,837)		257,409
Corporate bank loans		77,895		5		(2,889)		75,011
Municipal bonds		42,575		59		(610)		42,024
Mortgage-backed		1,555		7		(85)		1,477
Total debt securities		426,870		1,511		(11,328)		417,053
Total equity securities		42,858		5,504		(7,360)		41,002
Total investments	$	469,728	$	7,015	$	(18,688)	$	458,055


				Gross		Gross
		Amortized Cost/		Unrealized		Unrealized
As of December 31, 2021		Carrying Value		Gains		Losses		Fair Value
U.S. Treasury securities and obligations of U.S. Government	$	63,098	$	56	$	(170)	$	62,984
Corporate bonds		103,515		2,115		(49)		105,581
Corporate bank loans		81,570		84		(465)		81,189
Municipal bonds		38,162		372		(70)		38,464
Mortgage-backed		1,830		29		(4)		1,855
Total debt securities		288,175		2,656		(758)		290,073
Total equity securities		42,120		9,355		(2,780)		48,695
Total investments	$	330,295	$	12,011	$	(3,538)	$	338,768

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,
	2022		2021		2022		2021
U.S. Treasury securities and obligations of U.S. Government		300		-		300		-
Corporate bonds		160		133		172		494
Corporate bank loans		39		14		66		105
Municipal bonds		(4)		(18)		(12)		(12)
Mortgage Backed		9		—		—		—
Equity securities		—		930		1,141		4,701
Gain on investments		504		1,059		1,667		5,288
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 $0.5 million and $1.1 million during the three months ended September 30, 2022 and 2021, respectively, and $1.7 million and $5.8 million for the nine months ended September 30, 2022 and 2021, respectively. We realized gross losses on investments of $5 thousand and $0.1 million for the three months ended September 30, 2022 and 2021, respectively and $26 thousand and $0.5 million for the nine months ended September 30, 2022 and 2021, respectively. We recorded proceeds from the sale of investment securities of $0.2 million and $1.1 million during the three months ended September 30, 2022 and 2021, respectively, and $4.7 million and $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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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, 2022 and December 31, 2021 (in thousands):


	As of September 30, 2022
	12 months or less				Longer than 12 months				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities and obligations of U.S. Government	$	40,824	$	(907)	$	—	$	—	$	40,824	$	(907)
Corporate bonds		253,177		(6,831)		195		(6)		253,372		(6,837)
Corporate bank loans		39,488		(1,577)		34,279		(1,312)		73,767		(2,889)
Municipal bonds		13,216		(579)		1,767		(31)		14,983		(610)
Mortgage-backed		1,452		(79)		7		(6)		1,459		(85)
Total debt securities		348,157		(9,973)		36,248		(1,355)		384,405		(11,328)
Total equity securities		8,579		(727)		11,565		(6,633)		20,144		(7,360)
Total investments	$	356,736	$	(10,700)	$	47,813	$	(7,988)	$	404,549	$	(18,688)


	As of December 31, 2021
	12 months or less				Longer than 12 months				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities and obligations of U.S. Government	$	43,273	$	(170)	$	—	$	—	$	43,273	$	(170)
Corporate bonds		-		-		2,245		(49)		2,245		(49)
Corporate bank loans		42,256		(177)		16,763		(288)		59,019		(465)
Municipal bonds		3,321		(58)		1,038		(12)		4,359		(70)
Mortgage-backed		-		-		10		(4)		10		(4)
Total debt securities		88,850		(405)		20,056		(353)		108,906		(758)
Total equity securities		6,221		(710)		5,055		(2,070)		11,276		(2,780)
Total investments	$	95,071	$	(1,115)	$	25,111	$	(2,423)	$	120,182	$	(3,538)

We had a total of 249 debt securities with an unrealized loss, of which 211 were in an unrealized loss position for less than one year and 38 were in an unrealized loss position for a period of one year or greater, as of September 30, 2022. We held a total of 100 debt securities with an unrealized loss, of which 74 were in an unrealized loss position for less than one year and 26 were in an unrealized loss position for a period of one year or greater, as of December 31, 2021. We consider these losses as a temporary decline in value as they are 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, 2022 and December 31, 2021 were due predominately to market and interest rate fluctuations and we see no other indications that the decline in values of these securities is other-than-temporary.

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

We complete a detailed analysis each quarter to assess whether any decline in the fair value of any debt security below cost is deemed other-than-temporary. All debt securities with an unrealized loss are reviewed. We recognize an impairment loss when a debt security’s value declines below cost, adjusted for accretion, amortization and previous other-than-temporary impairments and it is determined that the decline is other-than-temporary. We did not recognize any impairment loss on debt securities during the nine months ended September 30, 2022. During the nine months ended September 30, 2021, we disposed of $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

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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.

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, 2022 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.


	Amortized Cost		Fair Value

	(in thousands)
Due in one year or less	$	114,153	$	112,798
Due after one year through five years		249,384		243,358
Due after five years through ten years		55,046		53,097
Due after ten years		6,732		6,323
Mortgage-backed		1,555		1,477
	$	426,870	$	417,053

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 $19.8 million and $30.0 million at September 30, 2022 and December 31, 2021, respectively.

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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,
	2022		2021
Balance at January 1	$	816,681	$	789,768
Less reinsurance recoverable		387,915		357,200
Net balance at January 1		428,766		432,568

Incurred related to:
Current year		168,164		207,121
Prior years		88,178		2,553
Total incurred		256,342		209,674

Paid related to:
Current year		13,740		64,292
Prior years		186,868		130,623
Total paid		200,608		194,915

Net balance at September 30		484,500		447,327
Plus reinsurance recoverable		374,388		368,054
Balance at September 30	$	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,
	2022		2021
Standard Commercial Segment	$	250	$	(2,371)
Personal Segment		5,218		4,356
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	$	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, 2022 and 2021:

Nine months ended September 30, 2022:

●

Standard Commercial Segment. Our Commercial Accounts business unit experienced net unfavorable development in the general liability line of business in all accident years, partially offset by net favorable development in the property and commercial auto liability lines of business primarily in accident years 2021, 2020 and 2019. Our Aviation business unit experienced net favorable development in the 2021 accident year, 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 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 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 accident years 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.

●

Runoff Segment. We experienced net favorable development in our binding commercial automobile line of business in the 2018 and prior accident years, as well as in our senior care facilities line of business. We experienced net unfavorable development in our satellite launch business and specialty programs.

8. Share-Based Payment Arrangements

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, 2022, restricted stock units representing the right to receive up to 1,071,060 shares of our common stock were outstanding under the 2015 LTIP. There were no stock options outstanding under the 2015 LTIP as of September 30, 2022.

Stock Options:

There were no stock options outstanding at any point during the nine months ended September 30, 2022. There were no stock options granted, exercised or forfeited during the nine months ended September 30, 2022 or 2021, respectively. As of September 30, 2022, there was no unrecognized compensation cost related to non-vested stock 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. For grants issued prior to 2021, restricted stock units vest and shares of common stock become issuable on March 31 of the third calendar year following the year of grant if performance criteria have been satisfied. Restricted stock units awarded under the 2015 LTIP during 2021 and 2022 cumulatively vest up to 50%, 80% and 100%, and shares of common stock become issuable, on March 31 of the third, fourth and fifth calendar years, respectively, following the year of grant if performance criteria have been satisified.

The performance criteria for restricted stock units vary based on grantee. The number of shares of common stock to be received ranges from 50% to 150% of the number of restricted stock units 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.

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 2018, 2019, 2021and 2022 was $10.87, $18.10, $4.21 and $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 recorded income tax (expense) benefit of ($43) thousand and $49 thousand related to restricted stock units during the three months and nine months ended September 30, 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.

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



	Number of Restricted Stock Units
	2022	2021
Nonvested at January 1	581,689	228,827
Granted	611,747	—
Vested	(12,357)	(30,309)
Forfeited	(467,039)	(142,022)
Nonvested at September 30	714,040	56,496

As of September 30, 2022, there was $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 $1.4 million of compensation cost related to unvested restricted stock units, of which $0.1 million is expected to be recognized during the remainder of 2022, $0.6 million in 2023, $0.4 million in 2024, $0.2 million in 2025 and $0.1 million in 2026.

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9. Segment Information

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


		Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues
Standard Commercial Segment	$	18,950	$	19,693	$	56,183	$	57,536
Personal Segment		16,754		18,316		50,621		56,390
Runoff Segment		2,477		7,315		11,554		45,306
Corporate		51		152		(745)		12,180
Consolidated	$	38,232	$	45,476	$	117,613	$	171,412

Pre-tax (loss) income
Standard Commercial Segment	$	(2,386)	$	2,192	$	(3,143)	$	1,261
Personal Segment		(3,412)		(3,887)		(7,257)		(8,275)
Runoff Segment		(19,364)		4,343		(73,099)		5,212
Corporate		(5,098)		(4,531)		(16,202)		(1,234)
Consolidated	$	(30,260)	$	(1,883)	$	(99,701)	$	(3,036)

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


	September 30,		December 31,
Assets:	2022		2021
Standard Commercial Segment	$	229,657	$	237,844
Personal Segment		116,733		128,165
Runoff Segment		344,027		382,484
Corporate		659,145		687,029
Assets held-for-sale		132,444		118,076
Consolidated	$	1,482,006	$	1,553,598

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, 2022 was with reinsurers that had an A.M. Best rating of “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
	September 30,				September 30,
	2022		2021		2022		2021

Ceded earned premiums	$	16,866	$	16,181	$	51,265	$	60,651
Reinsurance recoveries	$	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 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.

As of September 30, 2022, the ultimate incurred losses from the subject business were $282.8 million or $42.8 million in excess of the aggregate limit of $240.0 million. Our reinsurance recoverables of $542.8 million include a $12.5 million payable related to the LPT Contract as of September 30, 2022.

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
		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%

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 62.0% as of September 30, 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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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,
	2022		2021

Cash and cash equivalents	$	129,468	$	325,833
Restricted cash		8,845		3,793
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	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, 2022 and 2021:


	Nine Months Ended September 30,
	2022		2021


Interest paid	$	5,138	$	3,165

Income taxes (recovered) paid	$	(15,529)	$	(4,147)

Supplemental schedule of non-cash investing activities:

Receivable for securities related to investment disposals	$	883	$	5,613

Payable for securities related to investment purchases	$	—	$	1,047

18. Commitments and Contingencies

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. (See Note 10.) Pending resolution of the dispute, the Hallmark Insurers have agreed to fund the payment of claims under the LPT Contract without prejudice to their right to seek reimbursement and other relief in the arbitration proceedings. The arbitration panel has been constituted and a final hearing on the merits is anticipated in the first quarter of 2023. In the arbitration, the Reinsurers seek rescission of the LPT Contract or, in the alternative, damages on the basis of alleged breach and fraudulent inducement by the Hallmark Insurers. The Company believes any such claims are without factual basis or legal merit and intends to vigorously contest the matter. The Company is seeking an arbitration award enforcing the terms of the LPT Contract and requiring the Reinsurers to reimburse the Hallmark Insurers for all claim amounts funded by them during the pendency of the arbitration, as well as all other damages sustained by the Hallmark Insurers. The arbitration panel has 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 range of possible loss in such event.

As of September 30, 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 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 not pay an assessment during the first nine months of 2022 or 2021.

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

The changes in accumulated other comprehensive (loss) income balances as of September 30, 2022 and 2021 were as follows (in thousands):


					Accumulated Other
	Pension		Unrealized		Comprehensive
	Liability		Gains (Loss)		Income (Loss)
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		78		—		78
Tax effect on change in net actuarial gain		(16)		—		(16)
Unrealized holding gains arising during the period		—		(10,048)		(10,048)
Tax effect on unrealized holding gains arising during the period		—		2,110		2,110
Reclassification adjustment for gains included in net income		—		(1,667)		(1,667)
Tax effect on reclassification adjustment for gains included in net income		—		350		350
Other comprehensive loss, net of tax		62		(9,255)		(9,193)

Balance at September 30, 2022	$	(2,579)	$	(7,649)	$	(10,228)

220. Leases

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

The Company’s operating lease obligations predominately pertain to office leases utilized in the operation of our business. Our leases have remaining terms of one to 12 years, some of which include options to extend the leases. The components of lease expense and other lease information as of and during the nine month periods ended September 30, 2022 and 2021 were as follows (in thousands):

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	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021

Operating lease cost	$	706	$	526	$	2,086	$	1,620

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	602	$	543	$	1,747	$	1,627

Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	—	$	—	$	436

Other lease information as of September 30, 2022 and December 31, 2021 are as follows (in thousands):


	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 $18 thousand in short-term lease payments not included in our lease liability during the nine months ended September 30, 2022.

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Future minimum lease payments under non-cancellable leases as of September 30, 2022 and December 31, 2021 were as follows (in thousands):


	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

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

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

Introduction

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

●

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 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 28% of the total net premiums written by any of them, HIC retains 38% of our total net premiums written by any of them, HSIC retains 21% of our total net premiums written by any of them and HNIC retains 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, 2022, our total revenue from continuing operations was $38.2 million, representing a decrease of 16% from the $45.5 million in total revenue from continuing operations for the same period of 2021. During the nine months ended September 30, 2022, our total revenue from continuing operations was $117.6 million, representing a decrease of 31% from the $171.4 million in total revenue from continuing operations for the same period of 2021. During the three months ended September 30, 2022, we reported a pre-tax loss from continuing operations of $30.3 million, as compared to a pre-tax loss from continuing operations of $1.9 million reported during the same period the prior year. During the nine months ended September 30, 2022, we reported a pre-tax loss from continuing operations of $99.7 million, as compared to a pre-tax loss from continuing operations of $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, 2022 compared to the same period of the prior year was primarily due to lower net premiums earned of $6.3 million, higher net investment losses of $2.3 million, and lower finance charges of $0.1 million, partially offset by $1.5 million higher net investment income. The decrease in revenue from continuing operations for the nine months ended September 30, 2022 compared to the same period of the prior year was primarily due to decreased net premiums earned of $38.6 million, net investment losses of $6.8 million compared to net investment gains of $9.1 million the prior year, and lower finance charges of $0.4 million, partially offset by higher net investment income of $1.1 million.

The increase in pre-tax loss from continuing operations for the three months ended September 30, 2022 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 $21.6 million, partially offset by lower operating expenses from continuing operations of $0.7 million. The increase in losses and LAE from continuing operations was

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primarily due to $20.6 million of adverse prior year loss reserve development for the third quarter of 2022, $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 $1.8 million of net catastrophe losses as compared to $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.

We reported a net loss from continuing operations of $29.3 million for the three months ended September 30, 2022 as compared to a net loss from continuing operations of $2.0 million for the same period in 2021. We reported a net loss from continuing operations of $104.9 million for the nine months ended September 30, 2022 as compared to net loss from continuing operations of $3.9 million for the same period in 2021. On a diluted basis per share, we reported net loss from continuing operations of $1.61 per share for the three months ended September 30, 2022, compared to a net loss from continuing operations of $0.11 per share for the same period in 2021. On a diluted basis per share, we reported a net loss from continuing operations of $5.77 per share for the nine months ended September 30, 2022, as compared to a net loss from continuing operations of $0.21 per share for the same period in 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 (13.1)% for the first nine months of 2022 compared to 20.8% for the same period in 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 exempt interest income.

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Third Quarter 2022 as Compared to Third Quarter 2021

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


	Three Months Ended September 30,
	Standard Commercial
	Segment						Personal Segment						Runoff Segment						Corporate				Consolidated
	2022			2021			2022			2021			2022			2021			2022		2021		2022			2021
Gross premiums written	$	34,556		$	34,274		$	15,638		$	17,453		$	2,326		$	3,401		$	—	$	—	$	52,520		$	55,128
Ceded premiums written		(15,801)			(16,245)			(76)			(72)			(25)			(5,271)			—		—		(15,902)			(21,588)
Net premiums written		18,755			18,029			15,562			17,381			2,301			(1,870)			—		—		36,618			33,540
Change in unearned premiums		(206)			959			38			(417)			(70)			8,621			—		—		(238)			9,163
Net premiums earned		18,549			18,988			15,600			16,964			2,231			6,751			—		—		36,380			42,703

Total revenues		18,950			19,693			16,754			18,316			2,477			7,315			51		152		38,232			45,476

Losses and loss adjustment expenses		14,484			11,553			14,735			16,735			19,922			(739)			—		—		49,141			27,549

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)		78.1	%		60.8	%		94.5	%		98.7	%		893.0	%		(10.9)	%						135.1	%		64.5	%
Net expense ratio (1)		37.9	%		31.2	%		30.3	%		26.1	%		45.1	%		36.0	%						42.0	%		41.0	%
Net combined ratio (1)		116.0	%		92.0	%		124.8	%		124.8	%		938.1	%		25.1	%						177.1	%		105.5	%

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.

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $34.6 million for the three months ended September 30, 2022, which was $0.3 million more than the $34.3 million reported for the same period in 2021. Net premiums written were $18.8 million for the three months ended September 30, 2022 as compared to $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 2021. The deteriorated 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 revenue 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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during the three months ended September 30, 2022 as compared to $1.0 million favorable net loss reserved development during the same period of 2021. The Standard Commercial Segment reported a net expense ratio of 37.9% for the third quarter of 2022 as compared to 31.2% for the same period of 2021. The increase in the net expense ratio was due to higher operating expenses discussed above.

Personal Segment

Gross premiums written for the Personal Segment were $15.6 million for the three months ended September 30, 2022 as compared to $17.5 million for the same period in the prior year. Net premiums written for the Personal Segment were $15.6 million in the third quarter of 2022, which was a decrease of $1.8 million from the $17.4 million reported for the third quarter of 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 $16.8 million for the third quarter of 2022 as compared to $18.3 million for the same period in 2021. The decrease in revenue was primarily due to lower net premiums earned of $1.4 million and lower finance charges of $0.1 million during the third quarter of 2022 as compared to the same period during 2021.

Pre-tax loss for the Personal Segment was $3.4 million for the three months ended September 30, 2022 as compared to a pre-tax loss of $3.9 million for the same period of 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 $20.6 million and the lower total revenue discussed above, partially offset by lower operating expenses of $1.7 million during the three months ended September 30, 2022 as compared to the same period during 2021. The Runoff Segment reported higher losses and LAE for the quarter ended September 30, 2022 compared to the same period of the prior year primarily as the result of unfavorable net prior year development of $18.5 million, of which $14.0 million was from the binding auto business, $0.7 million was from the senior care facilities business and $3.8 million was

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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 $0.1 million for the three months ended September 30, 2022 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 the decreased revenue discussed above, higher operating expenses of $0.2 million and higher interest expense of $0.3 million.

Nine Months Ended September 30, 2022 as compared to Nine Months Ended September 30, 2021 :

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


	Nine Months Ended September 30,
	Standard Commercial
	Segment						Personal Segment						Runoff Segment						Corporate				Consolidated
	2022			2021			2022			2021			2022			2021			2022		2021		2022			2021
Gross premiums written	$	110,013		$	107,516		$	47,589		$	52,560		$	10,255		$	25,662		$	—	$	—	$	167,857		$	185,738
Ceded premiums written		(51,434)			(49,694)			(226)			(234)			(872)			(11,081)			—		—		(52,532)			(61,009)
Net premiums written		58,579			57,822			47,363			52,326			9,383			14,581			—		—		115,325			124,729
Change in unearned premiums		(3,584)			(2,326)			(350)			(72)			1,341			29,012			—		—		(2,593)			26,614
Net premiums earned		54,995			55,496			47,013			52,254			10,724			43,593			—		—		112,732			151,343

Total revenues		56,183			57,536			50,621			56,390			11,554			45,306			(745)		12,180		117,613			171,412

Losses and loss adjustment expenses		40,398			39,769			41,408			47,379			79,362			24,422			—		—		161,168			111,570

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)		73.5	%		71.7	%		88.1	%		90.7	%		740.0	%		56.0	%						143.0	%		73.7
Net expense ratio (1)		35.7	%		30.8	%		30.3	%		27.9	%		40.3	%		34.2	%						41.1	%		35.1
Net combined ratio (1)		109.2	%		102.5	%		118.4	%		118.6	%		780.3	%		90.2	%						184.1	%		108.8

Net unfavorable (favorable) prior year development	$	250		$	(2,371)		$	5,218		$	4,356		$	70,365		$	(6,543)						$	75,833		$	(4,558)

(1)

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $110.0 million for the nine months ended September 30, 2022, which was $2.5 million, or 2%, more than the $107.5 million reported for the same period in 2021. Net premiums written were $58.6 million for the three months ended September 30, 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 $56.2 million for the nine months ended September 30, 2022 was $1.3 million less than the $57.5 million reported for the same period in 2021. This decrease in total revenue was primarily due to lower net investment income of $0.8 million and lower net premiums earned of $0.5 million for the nine months ended September 30, 2022 as compared to the same period of 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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results were the result of higher loss and LAE of $0.6 million and higher operating expenses of $2.5 million and the decreased revenue discussed above. Increased operating expenses were primarily the result of higher salary and related expenses and higher professional service expenses.

The Standard Commercial Segment reported a net loss ratio of 73.5% for the nine months ended September 30, 2022 as compared to 71.7% for the same period of 2021. The gross loss ratio before reinsurance for the nine months ended September 30, 2022 was 58.4% as compared to 64.3% reported for the same period of 2021. The decrease in the gross loss ratios was due primarily to lower 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 unfavorable net loss reserve development of $0.3 million during the nine months ended September 30, 2022 as compared to favorable net loss reserve development of $2.4 million during the same period of 2021. The Standard Commercial Segment reported a net expense ratio of 35.7% for the nine months ended September 30, 2022 as compared to 30.8% for the same period of 2021. The increase in the expense ratio was primarily due to higher operating expenses as discussed above.

Personal Segment

Gross premiums written for the Personal Segment were $47.6 million for the nine months ended September 30, 2022 as compared to $52.6 million for the same period in the prior year. Net premiums written for our Personal Segment were $47.4 million for the nine months ended September 30, 2022, which was a decrease of $4.9 million from the $52.3 million reported for the same period of 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 $50.6 million for the nine months ended September 30, 2022 as compared to $56.4 million for the same period in 2021. The decrease in revenue was primarily due to a decrease in net premiums earned of $5.2 million, lower finance charges of $0.4 million and lower net investment income of $0.2 million during the nine months ended September 30, 2022 as compared to the same period during 2021.

Pre-tax loss for the Personal Segment was $7.3 million for the nine months ended September 30, 2022 as compared to a pre-tax loss of $8.3 million for the same period of 2021. The lower pre-tax loss was primarily the result of lower losses and LAE of $6.0 million and lower operating expenses of $0.8 million, partially offset by decreased revenue discussed above for the nine months ended September 30, 2022 as compared to the same period during 2021.

The Personal Segment reported a net loss ratio of 88.1% for the nine months ended September 30, 2022 as compared to 90.7% for the same period of 2021. The gross loss ratio before reinsurance was 88.3% for the nine months ended September 30, 2022 as compared to 91.8% for the same period in 2021. The lower gross and net loss ratios for the nine months ended September 30, 2022 was primarily the result of lower 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, partially offset by higher unfavorable prior year loss reserve development. The Personal Segment reported $5.2 million net unfavorable prior year loss reserve development during the first nine months of 2022 as compared to net unfavorable prior year loss reserve development of $4.4 million during the first nine months of 2021. The Personal Segment reported a net expense ratio of 30.3% during the nine months ended September 30, 2022 as compared to 27.9% for the same period of 2021. The increase in the expense ratio was due predominately to lower net premiums earned and lower finance charges.

Runoff Segment

Gross premiums written for the Runoff Segment were $10.3 million for the nine months ended September 30, 2022, which was $15.4 million, or 60%, less than the $25.7 million reported for the same period of 2021. Net premiums written were $9.4 million for the nine months ended September 30, 2022 as compared to $14.6 million for the same period 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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The $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 of $73.1 million for the nine months ended September 30, 2022 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 $6.5 million for the same period of 2021.

Corporate

Total revenue for Corporate decreased by $12.9 million for the nine months ended September 30, 2022 as compared to the same 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 revenue discussed above, as well as higher operating expenses of $1.6 million and higher interest expense of $0.4 million. The higher operating expenses were driven by a $1.1 million increase in salary and related expenses due to increased incentive compensation accruals and higher 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, 2022, Hallmark and its non-insurance company subsidiaries had $10.0 million in unrestricted cash and cash equivalents. As of that date, our insurance subsidiaries held $119.5 million of unrestricted cash and cash equivalents, as well as $417.1 million in debt securities with an average modified duration of 1.0 years. Accordingly, we do not anticipate selling long-term debt instruments to meet liquidity needs.

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

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Comparison of September 30, 2022 to December 31, 2021

On a consolidated basis, our cash (excluding restricted cash) and investments at September 30, 2022 were $587.5 million compared to $691.6 million at December 31, 2021. The primary reasons for this decrease in unrestricted cash and investments were cash used by operations and purchases of investment securities.

Comparison of Nine Months Ended September 30, 2022 and September 30, 2021

During the nine months ended September 30, 2022, our cash flow used by operations was $74.2 million compared to cash flow provided by operations of $47.3 million during the same period the prior year. The cash flow used in operations was driven primarily by higher 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 and federal income taxes recovered during the nine months ended September 30, 2022.

Net cash used in investing activities during the first nine months of 2022 was $144.2 million as compared to net cash provided by investing activities of $174.0 million during the first nine months of 2021. The net cash used in investing activities during the first nine months of 2022 was primarily comprised of an increase of $153.6 million in purchases of debt and equity securities, a decrease of $164.1 million in maturities, sales and redemptions of investment securities and a $0.5 million increase in purchases of fixed assets.

The Company did not report any net cash from financing activities during the first nine months of 2022 or 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 62% as of September 30, 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, 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.

AHIC, HIC, HSIC, HCM and HNIC (collectively, the “Hallmark Insurers”) are parties to a Loss Portfolio Transfer Reinsurance Contract (the “LPT Contract”) and related agreements with DARAG Bermuda Ltd. (“DARAG Bermuda”) and DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, the “Reinsurers”). (See Note 10, “Reinsurance – Loss Portfolio Transfer” in the Notes to Consolidated Financial Statements.)

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. The arbitration panel has been constituted and a final hearing on the merits is anticipated in the first quarter of 2023. In the arbitration, the Reinsurers seek rescission of the LPT Contract or, in the alternative, damages on the basis of alleged breach and fraudulent inducement by the Hallmark Insurers. The Company believes any such claims are without factual basis or legal merit and intends to vigorously contest the matter. The Company is seeking an arbitration award enforcing the terms of the LPT Contract and requiring the Reinsurers to reimburse the Hallmark Insurers for all claim amounts funded by them during the pendency of the arbitration, as well as all other damages sustained by the Hallmark Insurers. The arbitration panel has 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 range of possible loss in such event.

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, 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, 2022.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

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

3.2		Amended and Restated By-Laws of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed 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).

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).



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, 2022 and December 31, 2021, (ii) Consolidated Statements of Operations for the three months and nine months ended September 30, 2022 and 2021, (iii) Consolidated

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Statements of Comprehensive Income for the three months and nine months ended September 30, 2022 and 2021, (iv) Consolidated Statements of Stockholder’s Equity for the three months and nine months ended September 30, 2022 and 2021, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 and (vi) related notes.

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SIGNATURES

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

HALLMARK FINANCIAL SERVICES, INC.

(Registrant)



Date: November 14, 2022	/s/ Mark E. Schwarz
	Mark E. Schwarz, Executive Chairman and Chief Executive Officer (principal executive officer)


Date: November 14, 2022	/s/ Christopher J. Kenney
	Christopher J. Kenney, President and Chief Financial Officer (principal financial officer)