Annual Report 2020
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Two Lincoln Center, 5420 Lyndon B Johnson Freeway, Suite 1100 | Dallas, Texas 75240
P (817) 348-1600 | www.hallmarkgrp.com
NASDAQ: HALL
Headquartered in Dallas, Texas, Hallmark Financial Services, Inc. is a publicly traded
holding company with wholly-owned subsidiaries engaged in property and casualty
insurance. Hallmark Financial operates as a diversified underwriter of niche property
and casualty insurance products, executed by wholly-owned business units, each with
a separate specialty product focus.
Corporate Information
BOARD OF DIRECTORS
Mark E. Schwarz
Executive Chairman
Scott T. Berlin
President
Mason Structural Steel, LLC
James H. Graves
Partner
Ervin, Graves & Jones, LP
Mark E. Pape
Chairman
H2Options, Inc. & U.S. Rain Group, Inc.
OFFICERS
Mark E. Schwarz
Executive Chairman, President &
Chief Executive Officer
Christopher Kenney
Senior Vice President &
Chief Accounting Officer
INDEPENDENT REGISTERED
PUBLIC ACCOUNTANTS
Baker Tilly U.S., LLP
Milwaukee, Wisconsin
STOCK SYMBOL
Hallmark Financial Services, Inc.
common stock is listed on the
NASDAQ Global Market under
the symbol “HALL.”
TRANSFER AGENT
Securities Transfer Corporation
2901 North Dallas Parkway
Suite 380
Plano, Texas 75093-5990
(469) 633-0101
LEGAL COUNSEL
McGuire, Craddock & Strother, P.C.
500 N. Akard
Suite 2200
Dallas, Texas 75201
STOCKHOLDER MEETING
The annual meeting of stockholders will be
held at 10:00 a.m. CDT on May 27, 2021, at
Two Lincoln Center, 5420 Lyndon B. Johnson
Freeway, Suite 1110, Dallas, Texas 75240.
CORPORATE HEADQUARTERS
Hallmark Financial Services, Inc.
Two Lincoln Center
5420 Lyndon B. Johnson Freeway, Suite 1110
Dallas, Texas 75240
(817) 348-1600
www.hallmarkgrp.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2020
OR
For the transition period from __________________ to __________________
Commission file number 001-11252
Hallmark Financial Services, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
87-0447375
(I.R.S. Employer Identification No.)
35420 Lyndon B. Johnson Freeway, Suite 1100,
Dallas, Texas
(Address of principal executive offices)
75240
(Zip Code)
Title of each class
Common Stock, $0.18 par value
(817) 348-1600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:1
Trading Symbol(s)
HALL
Name of each exchange on which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
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 definition of “accelerated filer”, “large 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 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter. $45.2 million
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 18,142,158 shares of
common stock, $.18 par value per share, outstanding as of March 15, 2021
Unless the context requires otherwise, in this Form 10-K the term “Hallmark” refers solely to Hallmark Financial Services, Inc. and the term “we,” “our,” “us,” and the
“Company” refer to Hallmark and its subsidiaries.
Risks Associated with Forward-Looking Statements Included in this Form 10-K
This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, which are intended to be covered by the safe harbors created thereby. Forward-looking
statements include statements which are predictive in nature, which depend upon or refer to future events or
conditions, or which include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or similar
expressions. These statements include the plans and objectives of management for future operations, including plans
and objectives relating to future business activities and availability of funds. Statements regarding the following
subjects are forward-looking by their nature:
our business and growth strategies;
our performance goals;
our projected financial condition and operating results;
our understanding of our competition;
industry and market trends;
the impact of technology on our products, operations and business; and
any other statements or assumptions that are not historical facts.
The forward-looking statements included in this Form 10-K are based on current expectations that involve numerous
risks and uncertainties. Assumptions relating to these forward-looking statements involve judgments with respect to,
among other things, future economic, competitive and market conditions, legislative initiatives, regulatory
framework, weather-related events, novel coronavirus (COVID-19) 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 these 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-K will prove
to be accurate. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of
such information should not be regarded as a representation that our objectives and plans will be achieved.
1
Item 1. Business.
Who We Are
PART I
We are a diversified property/casualty insurance group that serves businesses and individuals in specialty and niche
markets.
We offer specialty commercial insurance, standard commercial insurance and personal insurance in selected market
subcategories. We focus on marketing, distributing, underwriting and servicing property/casualty insurance products
that require specialized underwriting expertise or market knowledge. We believe this approach provides us the best
opportunity to achieve favorable policy terms and pricing. The insurance policies we produce are written by our six
insurance company subsidiaries as well as unaffiliated insurers.
We market, distribute, underwrite and service our property/casualty insurance products primarily through business
units organized by products and distribution channel. Our business units are supported by our insurance company
subsidiaries. Our Commercial Auto business unit offers primary and excess commercial vehicle insurance products
and services; our E&S Casualty business unit offers primary and excess liability, excess public entity liability, E&S
package and garage liability insurance products and services; our E&S Property business unit offers primary and
excess commercial property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability
business unit offers healthcare and financial lines professional liability insurance products and services primarily for
businesses, medical professionals, hospitals, medical facilities, and senior care facilities. Our Aerospace & Programs
business unit offers general aviation and satellite launch property/casualty insurance products and services, as well as
certain
specialty programs. Our Commercial Accounts business unit offers package and monoline
property/casualty and occupational accident insurance products. Effective June 1, 2016 we ceased marketing new or
renewal occupational accident policies. Our former Workers Compensation operating unit specialized in small and
middle market workers compensation business. Effective July 1, 2015, we no longer market or retain any risk on new
or renewal workers compensation policies. Our Specialty Personal Lines business unit offers non-standard personal
automobile and renters insurance products and services.
Each business unit has its own management team with significant experience in distributing products to its target
markets and proven success in achieving underwriting profitability. Each business unit is responsible for marketing,
distribution and underwriting while we provide capital management, claims management, reinsurance, actuarial,
investment, financial reporting, technology and legal services and other administrative support at the parent level. We
believe this approach optimizes our operating results by allowing us to effectively penetrate our selected specialty
and niche markets while maintaining operational controls, managing risks, controlling overhead and efficiently
allocating our capital across business units. We expect future growth to be derived from organic growth in the
premium production of our existing business units and selected opportunistic acquisitions that meet our criteria.
What We Do
We market commercial and personal lines property/casualty insurance products which are tailored to the risks and
coverages required by the insured. We believe that most of our target markets are underserved by larger
property/casualty insurers because of the specialized nature of the underwriting required. We expect to offer these
products profitably as a result of the expertise of our experienced underwriters. We also believe our long-standing
relationships with independent general agencies and retail agents and the service we provide differentiate us from
larger property/casualty insurers.
2
Our Commercial Auto business unit offers primary and excess commercial vehicle insurance products and services
in both the excess and surplus lines market and the admitted market. Excess and surplus lines insurance provides
coverage for difficult to place risks that do not fit the underwriting criteria of insurers operating in the standard market.
Most of the admitted risks are unique and hard to place in the standard admitted market but, for marketing and
regulatory reasons, they must remain with an admitted insurance company. Our Commercial Auto business unit
focuses on middle market commercial risks that do not meet the underwriting requirements of standard insurers due
to factors such as loss history, number of years in business, minimum premium size and types of business operation.
Our Commercial Auto business unit markets its products in 50 states plus the District of Columbia through 56
wholesale brokers and 65 general agency offices. The Commercial Auto business unit also writes primary commercial
automobile liability and physical damage risk on an admitted basis in 16 states through a program underwriter.
Our E&S Casualty business unit offers primary and excess liability, excess public entity liability, E&S package and
garage liability insurance products and services on both an admitted and non-admitted basis. The principal focus of
the primary and excess liability products, as well as the E&S package insurance products, are coverage for small to
midsize businesses in class categories such as contracting, manufacturing, hospitality and service (non-
transportation). Public entity excess coverage is offered on an insurance and reinsurance basis for cities, counties and
other public entities with populations up to 1,000,000. Garage liability targets non-franchised car dealers and service
and repair shops. Our E&S Casualty business unit markets its primary and excess liability and excess public entity
liability products through 46 wholesale brokers in 50 states plus the District of Columbia. Our E&S Casualty business
unit markets our E&S package and garage liability products through 162 general agents and three wholesale brokers
in 47 states.
The primary/excess commercial property coverages underwritten by our E&S Property business unit specialize in
shared and layered accounts on a non-admitted basis which target regional and national property programs. Our E&S
Property business unit markets these products through 17 wholesale brokers in 50 states.
The medical professional liability insurance underwritten on an excess and surplus lines basis by our Professional
Liability business unit focuses on physicians, mid-level providers, miscellaneous medical facilities, hospitals and
healthcare organizations. The physicians and mid-level providers are generally hard to place or non-standard
risks. These are individuals who do not meet the underwriting requirements of standard insurers due to factors such
as loss history, number of years in business, minimum premium size and types of business operation. In addition to
healthcare professionals, our Professional Liability business unit also underwrites medical professional liability for
standard medical facilities, hospitals and healthcare systems and senior care facilities. The medical facilities are
generally outpatient facilities such as surgery centers, imaging centers, laboratories, home health agencies and other
non-hospital facilities providing medical services. The hospitals and healthcare systems are generally stand-alone
acute care facilities, multi-hospital systems, integrated delivery systems, critical access hospitals and other specialty
hospitals and healthcare systems providing medical services. Until discontinued effective January 1, 2021, the
Professional Liability business unit also provided medical professional liability to senior care facilities through a
program where a managing general agent underwrote on our behalf risks that met specific underwriting criteria. Our
Professional Liability business unit markets these products through 70 wholesale and retail brokers in 49 states. The
financial professional liability insurance underwritten on an excess and surplus lines basis by our Professional
Liability business unit focuses on management and professional liability products that include directors and officers,
employment practices and retirement and benefit plan fiduciary services for private, public and non-profit entities, as
well as miscellaneous professional liability insurance for non-financial institution service industries. Our Professional
Liability business unit distributes its financial professional liability insurance products through 34 wholesale brokers
in 38 states.
3
The aircraft liability and hull insurance products underwritten by our Aerospace & Programs business unit target
standard general aviation aircraft risks. Airport liability insurance is marketed to smaller, regional airports. Our
Aerospace & Programs business unit markets these general aviation insurance products through 156 independent
specialty brokers in 48 states. Until discontinued during 2020, the satellite launch property/casualty policies produced
by our Aerospace & Programs business unit were marketed through underwriting agencies with technical knowledge
of space insurance. We retained up to $2.0 million per risk for satellite launches and in-orbit coverage for up to
12 months. The specialty programs business marketed by our Aerospace & Programs business unit presently consists
primarily of a fronting arrangement in Texas for a third party insurance company and a program underwriter writing
primarily commercial automobile coverage for risks specializing in daily rental operations.
Our Commercial Accounts business unit primarily underwrites
low-severity, short-tailed commercial
property/casualty insurance products in the standard market. These products include general liability, commercial
automobile, commercial property and umbrella coverages. Our Commercial Accounts business unit currently markets
its products through a network of 200 independent agency groups primarily serving businesses in the non-urban areas
of 16 states predominately in the southwest and northwest regions. In addition, our Commercial Accounts business
unit previously provided occupational accident coverage in Texas through an underwriting agency that specialized in
the occupational accident insurance market. Effective June 1, 2016, we ceased marketing new or renewal occupational
accident policies.
Our Specialty Personal Lines business unit primarily offers non-standard personal automobile policies, which
generally provide the minimum limits of liability coverage mandated by state law to drivers who find it difficult to
obtain insurance from standard carriers due to various factors including age, driving record, claims history or limited
financial resources. Our Specialty Personal Lines business unit also provides a renters insurance product that
complements our non-standard automobile offering and fits well in our distribution channel. Our Specialty Personal
Lines business unit markets and services these non-standard automobile and renters insurance policies in 10 and 12
states, respectively,through 4,446 independent retail agent locations.
Our insurance company subsidiaries 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”). AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement, pursuant to which AHIC retains
32% of the net premiums written by any of them, HIC retains 32% of the net premiums written by any of them, HSIC
retains 26% of the net premiums written by any of them and HNIC retains 10% of the net premiums written by any
of them. A.M. Best Company (“A.M. Best”), a nationally recognized insurance industry rating service and publisher,
has pooled its ratings of these four insurance company subsidiaries and assigned a financial strength rating of “A-”
(Excellent) and an issuer credit rating of “a-” to each of the insurance company subsidiaries comprising the pool.
Also, A.M. Best has assigned a financial strength rating of “A-” (Excellent) and an issuer credit rating of “a-” to
HCM. A.M. Best does not assign a financial strength rating or an issuer credit rating to TBIC.
These business units are segregated into three reportable industry segments for financial accounting purposes. The
Specialty Commercial Segment includes our Commercial Auto business unit, E&S Casualty business unit, E&S
Property business unit, Professional Liability business unit and our Aerospace & Programs business unit.
4
The Standard Commercial Segment consists of the Commercial Accounts business unit and the runoff from our
former Workers Compensation operating unit.
The Personal Segment consists solely of our Specialty Personal Lines business unit. The following table displays the
gross premiums written and net premiums written by these reportable segments for affiliated and unaffiliated insurers
for the years ended December 31, 2020 and 2019.
Gross Premiums Written:
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Total
Net Premiums Written:
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Total
Specialty Commercial Segment
Year Ended December 31,
2020
2019
(dollars in thousands)
$
$
$
$
560,301
98,048
85,019
743,368
295,173
68,396
75,404
438,973
$
$
$
$
651,913
92,645
99,273
843,831
350,047
62,892
83,613
496,552
The Specialty Commercial Segment of our business includes our Commercial Auto business unit, E&S Casualty
business unit, E&S Property business unit, Professional Liability business unit and Aerospace & Programs business
unit. The following table displays the gross premiums written and net premiums written for affiliated and unaffiliated
insurers by these business units reported in the Specialty Commercial Segment for the years ended December 31,
2020 and 2019.
Gross Premiums Written:
Commercial Auto business unit
E&S Casualty business unit
E&S Property business unit
Professional Liability business unit
Aerospace & Programs business unit
Total Specialty Commercial Segment
Net Premiums Written:
Commercial Auto business unit
E&S Casualty business unit
E&S Property business unit
Professional Liability business unit
Aerospace & Programs business unit
$
$
$
Total Specialty Commercial Segment
$
2020
Year Ended December 31,
% of Total 2020
2019
(dollars in thousands)
% of Total 2019
168,938
106,855
125,445
116,831
42,232
560,301
131,258
63,517
23,746
62,225
14,427
295,173
30.1% $
19.1%
22.4%
20.9%
7.5%
100.0% $
286,904
94,886
122,302
106,808
41,013
651,913
44.5% $
21.5%
8.0%
21.1%
4.9%
100.0% $
208,748
51,812
26,054
49,851
13,582
350,047
44.0%
14.5%
18.8%
16.4%
6.3%
100.0%
59.6%
14.8%
7.5%
14.2%
3.9%
100.0%
5
Commercial Auto business unit. Our Commercial Auto business unit provides commercial auto liability and
physical damage insurance to local, intermediate and long haul truckers, as well as other classes of commercial auto
transportation. Our Commercial Auto business unit focuses on middle market commercial risks that do not meet the
underwriting requirements of traditional standard insurers due to issues such as loss history, number of years in
business, minimum premium size and types of business operation. Target risks for commercial automobile insurance
are business automobile and trucking for hire fleets. The insurance products offered by our Commercial Auto business
unit include the following:
Commercial automobile. Commercial automobile insurance provides third-party bodily injury and property
damage coverage and first-party property damage coverage against losses resulting from the ownership,
maintenance or use of automobiles and trucks in connection with an insured’s business.
Commercial excess liability. Commercial excess liability insurance is designed to provide an extra layer of
protection for bodily injury losses above the underlying layers of commercial automobile insurance. The
excess insurance does not begin until the limits of liability in the underlying layer have been exhausted.
Our Commercial Auto business unit focuses its primary automobile policies on business automobile, local and long-
haul trucking, specialty automobile, truckers for hire and truckers not for hire. These primary automobile policies
consist of both contract binding policies distributed through 65 general agency locations in four states and brokerage
policies distributed in 27 states through 24 wholesale brokers. Coverages for both contract binding and brokerage
policies include commercial automobile liability up to $1,000,000 and physical damage. The vast majority of primary
automobile policies written by our Commercial Auto business unit are for a term of 12 months. Primary automobile
policies are paid in full up front or financed with various premium finance companies. During 2020, general agents
produced 41% and wholesale brokers produced 59% of the total primary automobile premiums produced by our
Commercial Auto business unit. During 2020, the top ten general agents produced 25%, and no general agent
produced more than 6%, of the total primary automobile premium volume of our Commercial Auto business unit.
During the same period, the top ten wholesale brokers produced 47%, and no wholesale broker produced more than
12%, of the total primary automobile premium volume of our Commercial Auto business unit.
Our Commercial Auto business unit focuses its excess automobile policies on transportation classes such as truckers
for hire, certain hazardous materials classes and specialty risks. These excess automobile policies are distributed
through 56 wholesale brokers in 50 states plus the District of Columbia. Limits of liability offered are from
$1,000,000 to $5,000,000 in coverage in excess of the underlying carrier’s limits of liability. The majority of the
excess automobile policies written by our Commercial Auto business unit are on an annual basis. However, exceptions
are common in an attempt to have policy effective dates coincide with those of the primary insurance policies. Policy
premiums are due in full 30 days from the inception date of the policy. During 2020, the top ten wholesale brokers
accounted for 93%, and no wholesale broker accounting for more than 38%, of the total excess automobile premium
volume of our Commercial Auto business unit.
6
In February, 2020, we made the strategic decision to exit the contract binding line of the primary automobile business
marketed by our Commercial Auto business unit as a result of increasing claim severity and limited opportunity for
meaningful rate increases. At that time, we began the process of non-renewing policies and placing in-force policies
in runoff in accordance with state regulatory guidelines. As a result, during 2020 the contract binding line of our
primary automobile business produced only $25.4 million of gross premiums written, which represented 15% of the
total primary automobile gross premiums written of our Commercial Auto business unit. During 2019, this contract
binding business produced $115.0 million in gross premiums written, which represented 56% of the total primary
automobile premium volume of our Commercial Auto business unit.
E&S Casualty business unit. Our E&S Casualty business unit offers primary and excess liability, excess public
entity liability, E&S package and garage liability insurance products and services on both an admitted and non-
admitted basis through wholesale brokers in 50 states plus the District of Columbia. Limits of liability offered are
from $1,000,000 to $10,000,000 in coverage in excess of the primary carrier’s limits of liability. During 2020, the top
ten wholesale brokers accounted for 73% of our primary and excess casualty premium volume, with no single
wholesale broker accounting for more than 28%.
The insurance products offered by our E&S Casualty business unit include the following:
Commercial excess liability. Commercial excess liability insurance is designed to provide an extra layer of
protection for bodily injury, personal and advertising injury, or property damage losses above the primary
layer of general liability and employer’s liability insurance. The excess insurance does not begin until the
limits of liability in the primary layer have been exhausted. The excess layer provides not only higher limits,
but catastrophic protection from large losses.
Commercial umbrella. Commercial umbrella insurance protects businesses for bodily injury, personal and
advertising injury, general liability and employer’s liability losses, and for some claims excluded by their
primary policies (subject to a deductible). Umbrella insurance provides not only higher limits, but
catastrophic protection for large losses.
Commercial general liability. General liability insurance provides coverage for third-party bodily injury and
property damage claims arising from accidents occurring on the insured’s premises or from their general
business operations.
Public entity excess liability. Public entity excess liability is designed to provide an extra layer of protection
for target classes of public entities for automobile liability, general liability, public officials’ liability,
wrongful acts, employment practices liability, law enforcement liability, educators’ legal liability and related
coverages.
E&S package. E&S package provides both commercial property and general liability in a single policy for
third-party bodily injury and property damage claims arising from accidents occurring on the insured’s
premises or from their general business operations.
Garage liability. Garage liability provides coverage for third party bodily injury and property damage claims
arising from accidents occurring on the insured’s premises or from their general business operations.
7
E&S Property business unit. Our E&S Property business unit markets primary/excess commercial property
coverages, on a non-admitted basis, for both catastrophe and non-catastrophe exposures. The primary/excess property
coverages offered by our E&S Property business unit are offered in conjunction with shared and layered accounts for
multiple specialty property classes. Targeted classes primarily include institutions, municipalities, religious
organizations and education. Our E&S Property business unit also markets inland marine property coverages included
with shared and layered accounts for specialty property risks. Targeted classes for our inland marine property
coverages include contractors equipment and builders risk. Our E&S Property business unit distributes its
primary/excess commercial property and inland marine insurance products through 17 wholesale brokers in 50 states.
During 2020, the top ten wholesale brokers accounted for 32% of our primary/excess commercial property and inland
marine premium volume, with no single wholesale broker accounting for more than 10%.
Professional Liability business unit. Our Professional Liability business unit markets medical professional liability
insurance on an excess and surplus lines basis. Medical professional liability insurance provides coverage for third-
party bodily injury claims resulting from professional services provided by physicians, surgeons, podiatrists and
medical entities, as well as outpatient medical facilities, hospitals and healthcare systems. Our Professional Liability
business unit distributes its medical professional liability insurance products through 70 wholesale and retail brokers
in 49 states. Until discontinued effective January 1, 2021, the Professional Liability business unit also provided
medical professional liability to senior care facilities through a program where a managing general agent underwrote
on our behalf risks that met specific underwriting criteria. During 2020, the top ten brokers accounted for 32% of our
medical professional liability premium volume, with no single broker accounting for more than 12%. During 2020
the program manager accounted for 62% of our medical professional liability premium volume.
Our Professional Liability business unit also markets financial professional liability insurance on an excess and
surplus lines basis. Financial professional liability insurance provides liability insurance for management liability and
professional liability on a claims-made basis. Our financial professional liability products target miscellaneous
professional liability classes. Our Professional Liability business unit distributes its financial professional liability
insurance products through 34 wholesale brokers in 38 states. During 2020, the top ten wholesale brokers accounted
for 90% of our financial professional liability premium volume, with no single wholesale broker accounting for more
than 29%.
Aerospace & Programs business unit. Our Aerospace & Programs business unit markets, underwrites and services
general aviation property/casualty insurance in 48 states, satellite launch property/casualty insurance products and
services, as well as certain specialty programs. The marketing strategy for our general aviation property/casualty
insurance is similar to only a few competitors in the U.S. and focuses on developing a well-defined niche centering
on transitional pilots, older aircraft and small airports and aviation-related businesses. In addition, until discontinued
during 2020 our Aerospace & Programs business unit offered satellite launch property/casualty policies marketed
through underwriting agencies with technical knowledge of space insurance. The general aviation and satellite launch
products offered by our Aerospace & Programs business unit include the following:
Aircraft. Aircraft insurance provides third-party bodily injury and property damage coverage and first-party
hull damage coverage against losses resulting from the ownership, maintenance or use of aircraft.
Airport liability. Airport liability insurance provides coverage for third-party bodily injury and property
damage claims arising from accidents occurring on airport premises or from their operations.
Satellite. We retained up to $2.0 million per risk for satellite launches and in-orbit coverage for up to
12 months.
8
Our Aerospace & Programs business unit distributes its general aviation insurance products through 156 aviation
specialty brokers. These specialty brokers submit requests for aviation insurance quotations received from the states
in which we operate and our Aerospace & Programs business unit selectively determines the risks fitting its target
niche for which it will prepare a quote. During 2020, the top ten independent specialty brokers produced 52%, and
no single broker produced more than 15%, of the total general aviation premium volume of our Aerospace & Programs
business unit. Our Aerospace & Programs business unit independently develops, underwrites and prices each general
aviation coverage written. We target standard general aviation risks for both commercial (non-airline) and non-
commercial uses. We do not accept aircraft that are used for hazardous purposes such as crop dusting or heli-skiing.
Liability limits are controlled, with 96% of the aircraft written in 2020 bearing per-occurrence limits of $1,000,000
and per-passenger limits of $100,000 or less. The average insured aircraft hull value for aircraft written in 2020 was
approximately $159,000.
The specialty programs within our Aerospace & Programs business unit consist of fronting and agency arrangements,
as well as a program underwriter. The specialty programs business presently consists primarily of a fronting
arrangement in Texas for a third party insurance company and a program underwriter writing primarily commercial
auto coverage for risks specializing in daily rental operations.
Standard Commercial Segment
The Standard Commercial Segment of our business includes the package and monoline property/casualty and
occupational accident insurance products and services handled by our Commercial Accounts business unit and the
runoff of workers compensation insurance products handled by our former Workers Compensation operating
unit. Effective June 1, 2016, we ceased marketing new or renewal occupational accident policies. Effective July 1,
2015, the former Workers Compensation operating unit ceased retaining any risk on new or renewal policies.
9
Commercial Accounts business unit. Our Commercial Accounts business unit markets, underwrites and services
standard commercial lines insurance primarily in the non-urban areas of 16 states predominately in the southwest and
northwest regions. Our Commercial Accounts business unit targets customers that are in low-severity classifications
in the standard commercial market, which as a group have relatively stable loss results. The typical customer is a
small to midsize business with a policy that covers property, general liability and automobile exposures. Our
Commercial Accounts business unit underwriting criteria exclude lines of business and classes of risks that are
considered to be high-severity or volatile, or which involve significant latent injury potential or other long-tailed
liability exposures. Products offered by our Commercial Accounts business unit include the following:
Commercial automobile. Commercial automobile insurance provides third-party bodily injury and property
damage coverage and first-party property damage coverage against losses resulting from the ownership,
maintenance or use of automobiles and trucks in connection with an insured’s business.
General liability. General liability insurance provides coverage for third-party bodily injury and property
damage claims arising from accidents occurring on the insured’s premises or from their general business
operations.
Umbrella. Umbrella insurance provides coverage for third-party liability claims where the loss amount
exceeds coverage limits provided by the insured’s underlying general liability and commercial automobile
policies.
Commercial property. Commercial property insurance provides first-party coverage for the insured’s real
property, business personal property, and business interruption losses caused by fire, wind, hail, water
damage, theft, vandalism and other insured perils.
Commercial multi-peril. Commercial multi-peril insurance provides a combination of property and liability
coverage that can include commercial automobile coverage on a single policy.
Business owner’s. Business owner’s insurance provides a package of coverage designed for small to midsize
businesses with homogeneous risk profiles. Coverage includes general liability, commercial property,
commercial automobile and umbrella coverage.
Our Commercial Accounts business unit markets its property/casualty insurance products through 200 independent
agency groups operating in its target markets. Our Commercial Accounts business unit strives to provide its
independent agents with convenient access to product information and personalized service. As a result, the
Commercial Accounts business unit has historically maintained excellent relationships with its producing agents, as
evidenced by the 17 year average tenure of the 24 agency groups that each produced more than $1.0 million in
premium during the year ended December 31, 2020. During 2020, the top ten agency groups produced 36%, and no
individual agency group produced more than 7%, of the total premium volume of our Commercial Accounts business
unit.
Our Commercial Accounts business unit writes most risks on a package basis using a commercial multi-peril policy
or a business owner’s policy. Umbrella policies are written only when our Commercial Accounts business unit also
writes the insured’s underlying general liability and commercial automobile coverage.
All of the commercial policies written by our Commercial Accounts business unit are for a term of 12 months. If the
insured is unable or unwilling to pay for the entire premium in advance, we provide an installment payment plan that
requires the insured to pay 20% or 25% down and the remaining payments over eight months. We charge installment
fees of up to $7.50 per payment for the installment payment plan.
10
Former Workers Compensation operating unit. Effective July 1, 2015, this operating unit ceased marketing or
retaining any risk on new or renewal policies. The run-off of existing policies issued by our former Workers
Compensation operating unit is being administered by an independent third party.
Personal Segment
The Personal Segment of our business consists solely of our Specialty Personal Lines business unit. Our Specialty
Personal Lines business unit markets and services non-standard personal automobile policies and renters insurance in
10 and 12 states, respectively. Our non-standard personal automobile insurance generally provides for the minimum
limits of liability coverage mandated by state laws to drivers who find it difficult to purchase automobile insurance
from standard carriers as a result of various factors, including driving record, vehicle, age, claims history, or limited
financial resources. Products offered by our Specialty Personal Lines business unit include the following:
Personal automobile. Personal automobile insurance is the primary product offered by our Specialty Personal
Lines business unit. Our policies typically provide third-party coverage to individuals for bodily injury and
property damage at the minimum limits required by law, and for physical damage to an insured’s own vehicle
from collision and various other perils. In addition, many states require policies to provide for first party
personal injury protection, frequently referred to as no-fault coverage.
Renters. Renters insurance provides coverage for the contents of a renter’s home or apartment and for
liability. Renter’s policies are similar to homeowners insurance, except they do not cover the structure.
Our Specialty Personal Lines business unit markets its products through 4,446 independent retail agent locations in
its target geographic markets. Non-standard automobile represented 97% of the premiums produced during 2020. Our
Specialty Personal Lines business unit qualifies new agent appointments in order to establish an efficient network of
independent agents to effectively penetrate its highly competitive markets. Our Specialty Personal Lines business unit
periodically evaluates its independent agents and discontinues the appointment of agents whose production history
does not satisfy certain standards. During 2020, the top ten independent agency locations produced 39%, and no
individual agency location produced more than 6%, of the total premium volume of our Specialty Personal Lines
business unit.
During 2020, personal automobile liability coverage accounted for 70% and personal automobile physical damage
coverage accounted for the remaining 30% of the total non-standard automobile premiums produced by our Specialty
Personal Lines business unit. Our most common policy term is a six month policy. We offer one-month policies on
a limited basis. Our typical non-standard personal automobile customer is unable or unwilling to pay a full or half year
premium in advance. Accordingly, we currently offer a direct bill program where the premiums are directly billed to
the insured on a monthly basis. We charge installment fees for each payment under the direct bill program.
11
Our Competitive Strengths
We believe that we enjoy the following competitive strengths:
Specialized market knowledge and underwriting expertise. All of our business units possess extensive
knowledge of the specialty and niche markets in which they operate, which we believe allows them to
effectively structure and market their property/casualty insurance products.
Tailored market strategies. Each of our business units has developed its own customized strategy for
penetrating the specialty or niche markets in which it operates. These strategies include distinctive product
structuring, marketing, distribution, underwriting and servicing approaches by each business unit. As a result,
we are able to structure our property/casualty insurance products to serve the unique risk and coverage needs
of our insureds. We believe these market-specific strategies enable us to provide policies tailored to the target
customer that are appropriately priced and fit our risk profile.
Superior agent and customer service. We believe performing the underwriting, billing, customer service and
claims management functions tailored to the needs of each business unit allows us to provide superior service
to both our agents and brokers, as well as our insured customers. The easy-to-use interfaces and
responsiveness of our business units enhance their relationships with the agents and brokers who sell our
policies. We also believe that consistently offering insurance products through hard and soft markets helps
to build and maintain the loyalty of agents and brokers. We value our strong relationships with our agents
and brokers and continue to enhance the value proposition to our agents, brokers and insureds by delivering
exceptional customer service.
Market diversification. We believe operating in various specialty and niche segments of the property/casualty
insurance market diversifies both our revenues and our risks. We also believe our business units generally
operate on different market cycles, producing more earnings stability than if we focused entirely on one
product. As a result of the pooling arrangement among four of our insurance company subsidiaries, we are
able to efficiently allocate our capital among these various specialty and niche markets in response to market
conditions and expansion opportunities. We believe this market diversification reduces our risk profile and
enhances our profitability.
Experienced management team. Our senior corporate management team has extensive insurance experience.
In addition, our business units have strong management and underwriting teams that also have extensive
insurance industry experience. Our management has significant experience in all aspects of property/casualty
insurance, including underwriting, claims management, actuarial analysis, reinsurance and regulatory
compliance. In addition, Hallmark’s senior management has a strong track record of acquiring businesses that
expand our product offerings and improve our profitability profile.
12
Our Strategy
We strive to become a “Best in Class” specialty insurance company offering products in specialty and niche markets
through the following strategies:
Focusing on underwriting discipline and operational efficiency. We seek to consistently generate an
underwriting profit on the business we write in hard and soft markets. Our business units have a strong track
record of underwriting discipline and operational efficiency, which we seek to continue. We believe that in
soft markets our competitors often offer policies at a low or negative underwriting profit in order to maintain
or increase their premium volume and market share. In contrast, we seek to write business based on its
profitability rather than focusing solely on premium production. To that end, we provide financial incentives
to many of our underwriters, agents and brokers based on underwriting profitability.
Achieving organic growth in our existing business lines. We believe we can achieve organic growth in our
existing business lines by consistently providing our insurance products through market cycles, expanding
geographically, expanding our product offerings, expanding our agency relationships and further penetrating
our existing customer base. We believe our extensive market knowledge and strong agency relationships
position us to compete effectively in our various specialty and niche markets. We also believe there is a
significant opportunity to expand some of our existing business lines into new geographical areas and through
new agency relationships while maintaining our underwriting discipline and operational efficiency. In
addition, we believe there is an opportunity for some of our business units to further penetrate their existing
customer bases with additional products offered by other business units.
Maintaining a strong balance sheet. We seek to maintain a strong balance sheet by employing conservative
investment, reinsurance and reserving practices and to measure our performance based on long-term growth
in book value per share.
Distribution
We market our property/casualty insurance products predominately through independent general agents, retail agents
and specialty brokers. Therefore, our relationships with our agents and brokers is critical to our ability to identify,
attract and retain profitable business. Each of our business units has developed its own tailored approach to
establishing and maintaining its relationships with these independent distributors of our products. These strategies
focus on providing excellent service to our agents and brokers, maintaining a consistent presence in our target niche
and specialty markets through hard and soft market cycles and fairly compensating the agents and brokers who market
our products. Our business units also regularly evaluate independent general and retail agents based on the
underwriting profitability of the business they produce and their performance in relation to our objectives.
13
Except for the products of our Specialty Commercial Segment, the distribution of property/casualty insurance
products by our business units is geographically concentrated. For the twelve months ended December 31, 2020, five
states accounted for approximately 48% of the gross premiums written by our insurance company subsidiaries. The
following table reflects the geographic distribution of our insured risks, as represented by direct and assumed
premiums written by our business segments for the twelve months ended December 31, 2020
State
Texas
California
Florida
Arizona
Georgia
All other states
Total gross premiums written
Percent of total
Underwriting
Specialty Standard
Commercial Commercial
Segment
Segment
$ 101,705
92,161
46,445
6,108
27,189
286,693
$ 560,301
$ 24,334
—
—
3,909
—
69,805
$ 98,048
Personal
Segment
(dollars in thousands)
$ 27,405
—
—
25,355
—
32,259
$ 85,019
Total
Percent of
Total
$ 153,444
92,161
46,445
35,372
27,189
388,757
$ 743,368
20.6 %
12.4 %
6.2 %
4.8 %
3.7 %
52.3 %
75.4 %
13.2 %
11.4 %
100.0 %
The underwriting process employed by our business units involves securing an adequate level of underwriting
information, identifying and evaluating risk exposures and then pricing the risks we choose to accept. Each of our
business units offering commercial, professional, aviation or public entity insurance products employs its own
underwriters with in-depth knowledge of the specific niche and specialty markets targeted by that business unit. We
employ a disciplined underwriting approach that seeks to provide policies appropriately tailored to the specified risks
and to adopt price structures that will be supported in the applicable market. Our experienced commercial, healthcare
professional, aviation and public entity underwriters have developed underwriting principles and processes
appropriate to the coverages offered by their respective business units.
We believe that managing the underwriting process through our business units capitalizes on the knowledge and
expertise of their personnel in specific markets and results in better underwriting decisions. All of our underwriters
have established limits of underwriting authority based on their level of experience. We also provide financial
incentives to many of our underwriters based on underwriting profitability.
To better diversify our revenue sources and manage our risk, we seek to maintain an appropriate business mix among
our business units. At the beginning of each year, we establish a target net loss ratio for each business unit. We
continually monitor actual net loss ratios against targets. If any line of business fails to meet its target net loss ratio,
we seek input from our underwriting, actuarial and claims management personnel to develop a corrective action plan.
Depending on the particular circumstances, that plan may involve tightening underwriting guidelines, increasing rates,
modifying product structure, re-evaluating independent agency relationships or discontinuing unprofitable coverages
or classes of risk.
14
An insurance company’s underwriting performance is traditionally measured by its statutory loss and loss adjustment
expense ratio, its statutory expense ratio and its statutory combined ratio. The statutory loss and loss adjustment
expense ratio, which is calculated as the ratio of net losses and loss adjustment expenses (“LAE”) incurred to net
premiums earned, helps to assess the adequacy of the insurer’s rates, the propriety of its underwriting guidelines and
the performance of its claims department. The statutory expense ratio, which is calculated as the ratio of underwriting
and operating expenses to net premiums written, assists in measuring the insurer’s cost of processing and managing
the business. The statutory combined ratio, which is the sum of the statutory loss and LAE ratio and the statutory
expense ratio, is indicative of the overall profitability of an insurer’s underwriting activities, with a combined ratio of
less than 100% indicating profitable underwriting results.
The following table shows, for the periods indicated, (i) our gross premiums written (in thousands); and (ii) our
underwriting results as measured by the net statutory loss and LAE ratio, the net statutory expense ratio, and the net
statutory combined ratio of our insurance company subsidiaries.
Gross premiums written
Net statutory loss & LAE ratio
Net statutory expense ratio
Net statutory combined ratio
$
2020
743,368
Year Ended December 31,
2019
843,831
$
78.9 %
30.4 %
109.3 %
$
81.5 %
25.9 %
107.4 %
2018
663,015
69.8 %
25.5 %
95.3 %
These statutory ratios do not reflect the deferral of policy acquisition costs, investment income, premium finance
revenues, or the elimination of inter-company transactions required by U.S. generally accepted accounting principles
(“GAAP”).
The premium-to-surplus percentage measures the relationship between net premiums written in a given period
(premiums written, less returned premiums and reinsurance ceded to other carriers) to policyholders surplus (admitted
assets less liabilities), determined on the basis of statutory accounting practices prescribed or permitted by insurance
regulatory authorities. State insurance department regulators expect insurance companies to maintain a premium-to-
surplus percentage of not more than 300%. For the years ended December 31, 2020, 2019 and 2018, our consolidated
premium-to-surplus ratios were 207%, 195% and 147%, respectively.
15
Claims Management and Administration
We believe that effective claims management is critical to our success and that our claims management process is
cost-effective, delivers the appropriate level of claims service and produces superior claims results. Our claims
management philosophy emphasizes the delivery of courteous, prompt and effective claims handling and embraces
responsiveness to policyholders and agents. Our claims strategy focuses on thorough investigation, timely evaluation
and fair settlement of covered claims while consistently maintaining appropriate case reserves. We seek to compress
the cycle time of claim resolution in order to control both loss and claim handling cost. We also strive to control legal
expenses by negotiating competitive rates with defense counsel and vendors, establishing litigation budgets and
monitoring invoices.
Each of our business units maintains its own dedicated staff of specialized claims personnel to manage and administer
claims arising under policies produced through their respective operations. The claims process is managed centrally
through a combination of experienced claims managers, seasoned claims supervisors, trained staff adjusters and
independent adjustment or appraisal services, when appropriate. All adjusters are licensed in those jurisdictions for
which they handle claims that require licensing. Limits on settlement authority are established for each claims
supervisor and staff adjuster based on their level of experience. Certain independent adjusters have limited authority
to settle claims. Claim exposures are periodically and systematically reviewed by claim supervisors and managers as
a method of quality and loss control. Large loss exposures are reviewed at least quarterly with senior management of
the business unit and monitored by Hallmark senior management.
Claims personnel receive in-house training and are required to attend various continuing education courses pertaining
to topics such as best practices, fraud awareness, legal environment, legislative changes and litigation management.
Depending on the criteria of each business unit, our claims adjusters are assigned a variety of claims to enhance their
knowledge and ensure their continued development in efficiently handling claims. As of December 31, 2020, we had
a total of 89 claims managers, supervisors and adjusters with an average experience of approximately 16 years.
Analysis of Losses and LAE
Our consolidated financial statements include an estimated reserve for unpaid losses and LAE. We estimate our
reserve for unpaid losses and LAE by using case-basis evaluations and statistical projections, which include inferences
from both losses paid and losses incurred. We also use recent historical cost data and periodic reviews of underwriting
standards and claims management practices to modify the statistical projections. We give consideration to the impact
of inflation in determining our loss reserves, but do not discount reserve balances.
The amount of reserves represents our estimate of the ultimate cost of all unpaid losses and LAE incurred. These
estimates are subject to the effect of trends in claim severity and frequency. We regularly review the estimates and
adjust them as claims experience develops and new information becomes known. Such adjustments are included in
current operations, including increases and decreases, net of reinsurance, in the estimate of ultimate liabilities for
insured events of prior years.
Changes in loss development patterns and claim payments can significantly affect the ability of insurers to estimate
reserves for unpaid losses and related expenses. We seek to continually improve our loss estimation process by
refining our ability to analyze loss development patterns, claim payments and other information within a legal and
regulatory environment that affects development of ultimate liabilities. Future changes in estimates of claim costs
may adversely affect future period operating results. However, such effects cannot be reasonably estimated currently.
Additional information relating to our loss reserve development is included under Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” and Note 6, “Reserves for Losses and Loss
Adjustment Expenses,” in the Notes to Consolidated Financial Statements.
16
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 December 31, 2020 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.
The following table presents our gross and net premiums written and earned and reinsurance recoveries for each of
the last two years (in thousands).
Gross premiums written
Ceded premiums written
Net premiums written
Gross premiums earned
Ceded premiums earned
Net premiums earned
Reinsurance recoveries
Year Ended December 31,
2020
743,368
(304,395)
438,973
811,488
(329,690)
481,798
260,826
$
$
$
$
$
2019
843,831
(347,279)
496,552
752,966
(316,089)
436,877
211,768
$
$
$
$
$
17
Investment Portfolio
Our investment objective is to maximize after-tax total return while assuming prudent levels of risk and maintaining
sufficient liquidity for ongoing insurance operations. We strive for a balance between current income generation and
after-tax total return that enhances long-term growth in book value. In general, we do not target allocations to
investment asset classes or security types and do not seek to match insurance asset and liability durations. We maintain
a diversified portfolio composed of fixed-income securities, equity securities and other investments. As of
December 31, 2020, we had total invested assets of $536.7 million. If market rates were to increase by 1%, the fair
value of our fixed-income securities as of December 31, 2020 would decrease by approximately $3.9 million. The
following table shows the fair values of various categories of fixed-income securities, the percentage of the total fair
value of our invested assets represented by each category and the tax equivalent book yield of each category of
invested assets as of December 31, 2020 and 2019.
Fair
Value
As of December 31, 2020
Percent of
Total
(in thousands)
Yield
Fair
Value
As of December 31, 2019
Percent of
Total
(in thousands)
Yield
Category:
Corporate bonds
Corporate bank loans
Municipal bonds
US Treasury securities and obligations
of U.S. Government
Mortgage backed
Total
$ 219,368
52,782
50,539
43.2 %
10.4 %
10.0 %
3.6 % $ 300,825
2.2 % 115,757
83,270
4.3 %
52.4 %
20.1 %
14.5 %
179,746
4,844
$ 507,279
35.4 %
1.0 %
100.0 %
66,600
0.5 %
2.9 %
7,827
2.7 % $ 574,279
11.6 %
1.4 %
100.0 %
2.7 %
4.0 %
4.8 %
1.8 %
2.8 %
3.2 %
The weighted average credit rating for our fixed-income portfolio was A at December 31, 2020. The following table
shows the distribution of our fixed-income portfolio by rating as a percentage of total fair value as of December 31,
2020 and 2019:
Rating:
"Aaa"
"Aa"
"A"
"Baa"
"Ba"
"B"
"Caa"
"Ca"
"C"
"NR"
Total
As of
December 31, 2020
As of
December 31, 2019
37.8 %
4.6 %
14.9 %
31.7 %
8.0 %
1.3 %
— %
— %
— %
1.7 %
100.0 %
15.0 %
7.0 %
13.9 %
44.8 %
15.7 %
0.7 %
— %
— %
— %
2.9 %
100.0 %
18
The following table shows the composition of our fixed-income portfolio by remaining time to maturity as of
December 31, 2020 and 2019.
Remaining time to maturity:
Less than one year
One to five years
Five to ten years
More than ten years
Mortgage-backed
Total
As of December 31, 2020
As of December 31, 2019
Percentage of
Total
Fair Value
Fair Value
Percentage of
Total
Fair Value
Fair Value
(in thousands)
(in thousands)
$
$
257,246
203,625
28,363
13,202
4,843
507,279
50.7 % $
40.1 %
5.6 %
2.6 %
1.0 %
100.0 % $
107,605
345,860
88,061
24,926
7,827
574,279
18.8 %
60.2 %
15.3 %
4.3 %
1.4 %
100.0 %
Our investment strategy is a value-based approach focused on individual security analysis and selection, directed
primarily toward publicly-traded fixed-income and equity securities.. This strategy includes an opportunistic element
which seeks to capture value resulting from market-related price dislocations, short-term orientation of market
participants and other sources of gain. Our investment portfolio is managed internally by our Chairman and other
experienced investment managers. As of December 31, 2020, 5.5% of our investment portfolio was invested in equity
securities. We regularly review our portfolio for declines in value. For fixed maturity investments that are considered
other-than-temporarily impaired and that we do not intend to sell and will not be required to sell, we separate the
amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all
other factors. The credit loss component is recognized in earnings and is the difference between the investment’s
amortized cost basis and the present value of its expected future cash flows. The remaining difference between the
investment’s fair value and the present value of future expected cash flows is recognized in other comprehensive
income.
The following table details the net unrealized gain balance by invested asset category as of December 31, 2020.
Net Unrealized Gain Balance
(in thousands)
Category
U.S. Treasury securities and obligations of U.S. Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Equity securities
Other investments
Total
$
$
487
4,702
(868)
706
85
2,400
—
7,512
As part of our overall investment strategy, we also maintain an integrated cash management system utilizing on-line
banking services and daily overnight investment accounts to maximize investment earnings on all available cash.
19
Technology
The majority of our technology systems are based on products licensed from insurance-specific technology vendors
that have been substantially customized to meet the unique needs of our various business units. Our technology
systems primarily consist of integrated central processing computers, a series of server-based computer networks and
communications systems that allow our various operations to share systems solutions and communicate to the
corporate office in a timely, secure and consistent manner. We maintain backup facilities and systems through a
contract with a leading provider of computer disaster recovery services. Each business unit bears the information
services expenses specific to its operations as well as a portion of the corporate services expenses. Increases to vendor
license and service fees are capped per annum.
We believe the implementation of our various technology systems has increased our efficiency in the processing of
our business, resulting in lower operating costs. Additionally, our systems enable us to provide a high level of service
to our agents and policyholders by processing our business in a timely and efficient manner, communicating and
sharing data with our agents and providing a variety of methods for the payment of premiums. We believe these
systems have also improved the accumulation and analysis of information for our management.
Our business is highly dependent upon the successful and uninterrupted functioning of our information technology
systems. Publicly reported cybersecurity intrusions have increased in recent years and the insurance sector as a whole
is more exposed than in the past. Cybersecurity threats extend from individual attempts to gain unauthorized access
to our information technology systems to coordinated, elaborate and targeted activity. We retain highly trained staff
committed to the development and maintenance of our information technology systems. We maintain and regularly
review recovery plans which are intended to enable us to restore critical systems with minimal disruption. We have
established an information security committee to oversee and steer risk management plans to manage these exposures
on an ongoing basis. We also employ comprehensive employee engagement and training programs to guard against
the potential for malicious attempts to extort sensitive information from our systems using social engineering
techniques (also known as “phishing”) and maintain cyber liability insurance to seek to minimize our post-event
financial impacts.
We recognize the potential for new risks arising alongside the benefits we derive from technological and digital
development. We employ technological security measures to prevent, detect and mitigate such threats, including
independent and in-house vulnerability assessments, access controls, data encryption, continuous monitoring of our
information technology networks and systems and maintenance of backup and protective systems. Nonetheless, the
infrastructure may be vulnerable to security incidents which could result in the disruption of business operations and
the corruption, unavailability, misappropriation or destruction of critical data and confidential information (both our
own and of third parties). The compromise of personal and confidential information could lead to legal liability or
regulatory action under evolving cybersecurity, data protection and privacy laws and regulations enacted in the
various jurisdictions in which we operate.
20
Ratings
Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other rating agencies to assist
them in assessing the financial strength and overall quality of the companies from which they are considering
purchasing insurance. A.M. Best has pooled its ratings of our AHIC, HIC, HSIC and HNIC subsidiaries and assigned
a financial strength rating of “A-” (Excellent) and an issuer credit rating of “a-” to each of the insurance company
subsidiaries comprising the pool. A.M. Best has also assigned a financial strength rating of “A-” (Excellent) and an
issuer credit rating of “a-” to HCM. A.M. Best does not assign a financial strength rating or an issuer credit rating to
TBIC. An “A-” rating is the fourth highest of 15 rating categories used by A.M. Best. In evaluating an insurer’s
financial and operating performance, A.M. Best reviews the company’s profitability, indebtedness and liquidity, as
well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated fair value of its
assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and
competence of its management and its market presence. A.M. Best’s ratings reflect its opinion of an insurer’s financial
strength, operating performance and ability to meet its obligations to policyholders and are not an evaluation directed
at investors or recommendations to buy, sell or hold an insurer’s stock.
Competition
The property/casualty insurance market, our primary source of revenue, is highly competitive and, except for
regulatory considerations, has very few barriers to entry. In many instances, we have less financial or other resources
than our competition and their affiliates. Generally, we compete on price, customer service, coverages offered, claims
handling, financial stability, agent commission and support, customer recognition and geographic coverage. We
compete with companies who use independent agents, captive agent networks, direct marketing channels or a
combination thereof.
The primary competition for our Commercial Auto business unit includes such carriers as American Millennium
Insurance Company, Canal Insurance Company, Clear Blue Insurance Company, Commercial Alliance Insurance
Company, Fairfax Financial, Hudson Insurance Company, National Casualty Company, National Liability & Fire
Insurance Company, Northland Insurance Company, Progressive County Mutual, Sompo International, State National
Insurance Company, Prime Insurance Company, Underwriters at Lloyds of London, Wilshire Insurance Company
and W.R. Berkley. Our E&S Casualty business unit considers its primary competition for our excess, umbrella and
general liability insurance products to include such carriers as American International Group, Inc., Axis Insurance
Company, Berkshire Hathaway Companies, Crum & Forster Insurance Group, Endurance American Specialty
Insurance Company, XL Specialty Insurance, Markel Insurance Company, Navigators Specialty Insurance Company,
and W.R. Berkley Corporation. The primary competition for our E&S Package products produced by our E&S
Casualty business unit includes such carriers as Nationwide E&S/Specialty, Markel Insurance Company, Colony
Specialty Insurance Company, Atlantic Casualty Insurance Company, Nautilus Insurance Company, Mesa
Underwriters Insurance Company, and Penn America Insurance Company. The primary competition for our E&S
Property business unit includes such carriers as Chubb Westchester, Aspen Insurance, Everest National Insurance
Company, RSUI Group, Navigators Specialty Insurance Company, Starr Surplus Lines, Ironshore Specialty Insurance
Company, Axis Insurance Company, and Markel Insurance Company. The primary competition for the medical
professional liability insurance products produced by our Professional Liability business unit includes such carriers
as Admiral Insurance Company, Aspen Specialty Insurance Company, Beazley Insurance Company, CNA Financial
Corporation, Iron Health, Kinsale Insurance Company, Markel Insurance Company, Medical Protective Insurance
Company, ProAssurance Corporation, RSUI Group and TDC Companies.
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The primary competition for the financial professional liability insurance products produced by our Professional
Liability business unit are Admiral Insurance Company, American International Group Companies, Argonaut
Insurance Company, Chubb Group of Insurance Companies, Euclid Executive Liability Managers, Berkley Insurance
Company, CNA Financial Corporation, Evanston Insurance Company, Kinsale Insurance Company, RSUI Group,
Hiscox USA, and XL Catlin Insurance Company. The primary competitors for our general aviation insurance products
produced by our Aerospace & Programs business unit are Old Republic Aviation Managers, Starr Aviation, American
International Group, Inc., United States Specialty Insurance Company, W. Brown & Company, United States Aircraft
Insurance Group, Global Aerospace and Allianz Aviation Managers. Our Commercial Accounts business unit
competes with a variety of large national standard commercial lines carriers such as Liberty Mutual Group, Travelers
Companies, Inc., Cincinnati Financial Corporation and The Hartford Financial Services Group, as well as numerous
smaller regional companies. Although our Specialty Personal Lines business unit competes with large national
insurers such as Allstate Corporation, GEICO Corporation and Progressive Insurance Company, as a participant in
the non-standard personal automobile marketplace its competition is most directly associated with numerous regional
companies and managing general agencies.
Insurance Regulation
AHIC, HCM and TBIC are domiciled in Texas, HIC and HNIC are domiciled in Arizona and HSIC is domiciled in
Oklahoma. Therefore, our insurance operations are regulated by the Texas Department of Insurance, the Arizona
Department of Insurance and the Oklahoma Insurance Department, as well as the applicable insurance department of
each state in which we issue policies. Our insurance company subsidiaries are required to file quarterly and annual
statements of their financial condition prepared in accordance with statutory accounting practices with the insurance
departments of their respective states of domicile and the applicable insurance department of each state in which they
write business. The financial conditions of our insurance company subsidiaries, including the adequacy of surplus,
loss reserves and investments, are subject to review by the insurance department of their respective states of domicile.
Periodic financial and market conduct examinations. The insurance departments of the states of domicile for our
insurance company subsidiaries have broad authority to enforce insurance laws and regulations through examinations,
administrative orders, civil and criminal enforcement proceedings, and suspension or revocation of an insurer’s
certificate of authority or an agent’s license. The state insurance departments that have jurisdiction over our insurance
company subsidiaries may conduct on-site visits and examinations of the insurance companies’ affairs, especially as
to their financial condition, ability to fulfill their obligations to policyholders, market conduct, claims practices and
compliance with other laws and applicable regulations. Typically, these examinations are conducted every three to
five years. In addition, if circumstances dictate, regulators are authorized to conduct special or target examinations of
insurance companies to address particular concerns or issues. The results of these examinations can give rise to
injunctive relief, regulatory orders requiring remedial or other corrective action on the part of the company that is the
subject of the examination, assessment of fines, or other penalties against that company. In extreme cases, including
actual or pending insolvency, the insurance department may take over, or appoint a receiver to take over, the
management or operations of an insurer or an agent’s business or assets.
Guaranty funds. All insurance companies are subject to assessments for state-administered funds that cover the
claims and expenses of insolvent or impaired insurers. The size of the assessment is determined each year by the total
claims on the fund that year. Each insurer is assessed a pro rata share based on its direct premiums written in that
state. Payments to the fund may generally be recovered by the insurer through deductions from its premium taxes
over a specified period of years.
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Transactions between insurance companies and their affiliates. Hallmark is also regulated as an insurance holding
company by the Texas Department of Insurance, the Arizona Department of Insurance and the Oklahoma Insurance
Department. Financial transactions between Hallmark or any of its affiliates and our insurance company subsidiaries
are subject to regulation. Transactions between our insurance company subsidiaries and their affiliates generally must
be disclosed to state regulators, and prior regulatory approval generally is required before any material or
extraordinary transaction may be consummated or any management agreement, services agreement, expense sharing
arrangement or other contract providing for the rendering of services on a regular, systematic basis is implemented.
State regulators may refuse to approve or may delay approval of such a transaction, which may impact our ability to
innovate or operate efficiently.
Dividends. Dividends and distributions to Hallmark by our insurance company subsidiaries are restricted by the
insurance regulations of the respective state in which each insurance company subsidiary is domiciled. As
property/casualty insurance companies domiciled in the state of Texas, AHIC and TBIC may only pay dividends from
unassigned surplus funds. In addition, AHIC and TBIC must obtain the approval of the Texas Department of Insurance
before the payment of extraordinary dividends, which are defined as dividends or distributions of cash or other
property the fair market value of which combined with the fair market value of each other dividend or distribution
made in the preceding 12 months exceeds the greater of: (1) statutory net income as of the prior December 31 or
(2) 10% of statutory policyholders’ surplus as of the prior December 31. HIC and HNIC, both domiciled in Arizona,
may pay dividends out of that part of their available surplus funds that is derived from realized net profits on their
business. Without prior written approval from the Arizona Department of Insurance, HIC and HNIC may not pay
extraordinary dividends, which are defined as dividends or distributions of cash or other property the fair market value
of which combined with the fair market value of each other dividend or distribution made in the preceding 12 months
exceeds the lesser of: (1) 10% of statutory policyholders’ surplus as of the prior December 31 or (2) net income as
of the prior December 31. HSIC, domiciled in Oklahoma, may only pay dividends out of that part of its available
surplus funds that is derived from realized net profits on its business. Without prior written approval from the
Oklahoma Insurance Department, HSIC may not pay extraordinary dividends, which are defined as dividends or
distributions of cash or other property the fair market value of which combined with the fair market value of each
other dividend or distribution made in the preceding 12 months exceeds the greater of: (1) 10% of statutory
policyholders’ surplus as of the prior December 31 or (2) statutory net income as of the prior December 31, not
including realized capital gains. As a county mutual, dividends from HCM are payable to policyholders.
Risk-based capital requirements. The National Association of Insurance Commissioners requires property/casualty
insurers to file a risk-based capital calculation according to a specified formula. The purpose of the formula is twofold:
(1) to assess the adequacy of an insurer’s statutory capital and surplus based upon a variety of factors such as potential
risks related to investment portfolio, ceded reinsurance and product mix; and (2) to assist state regulators under the
RBC for Insurers Model Act by providing thresholds at which a state commissioner is authorized and expected to
take regulatory action. As of December 31, 2020, the adjusted capital under the risk-based capital calculation of each
of our insurance company subsidiaries substantially exceeded the minimum requirements.
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Required licensing. Our non-insurance company subsidiaries are subject to and in compliance with the licensing
requirements of the department of insurance in each state in which they produce business. These licenses govern,
among other things, the types of insurance coverages, agency and claims services and products that we may offer
consumers in these states. Such licenses typically are issued only after we file an appropriate application and satisfy
prescribed criteria. Generally, each state requires one officer to maintain an agent license. Claims adjusters employed
by us are also subject to the licensing requirements of each state in which they conduct business. Each employed
claim adjuster either holds or has applied for the required licenses.
Regulation of insurance rates and approval of policy forms. The insurance laws of most states in which our
subsidiaries operate require insurance companies to file insurance rate schedules and insurance policy forms for
review and approval. State insurance regulators have broad discretion in judging whether our rates are adequate, not
excessive and not unfairly discriminatory and whether our policy forms comply with law. The speed at which we can
change our rates depends, in part, on the method by which the applicable state’s rating laws are administered.
Generally, state insurance regulators have the authority to disapprove our rates or request changes in our rates.
Restrictions on cancellation, non-renewal or withdrawal. Many states have laws and regulations that limit an
insurance company’s ability to exit a market. For example, certain states limit an automobile insurance company’s
ability to cancel or not renew policies. Some states prohibit an insurance company from withdrawing from one or
more lines of business in the state, except pursuant to a plan approved by the state insurance department. In some
states, this applies to significant reductions in the amount of insurance written, not just to a complete withdrawal.
State insurance departments may disapprove a plan that may lead to market disruption.
Investment restrictions. We are subject to state laws and regulations that require diversification of our investment
portfolios and that limit the amount of investments in certain categories. Failure to comply with these laws and
regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring
statutory surplus and, in some instances, would require divestiture.
Trade practices. The manner in which we conduct the business of insurance is regulated by state statutes in an effort
to prohibit practices that constitute unfair methods of competition or unfair or deceptive acts or practices. Prohibited
practices include disseminating false information or advertising; defamation; boycotting, coercion and intimidation;
false statements or entries; unfair discrimination; rebating; improper tie-ins with lenders and the extension of credit;
failure to maintain proper records; failure to maintain proper complaint handling procedures; and making false
statements in connection with insurance applications for the purpose of obtaining a fee, commission or other benefit.
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Unfair claims practices. Generally, insurance companies, adjusting companies and individual claims adjusters are
prohibited by state statutes from engaging in unfair claims practices on a flagrant basis or with such frequency to
indicate a general business practice. Examples of unfair claims practices include:
misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;
failing to acknowledge and act reasonably promptly upon communications with respect to claims arising
under insurance policies;
failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims
arising under insurance policies;
failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been
completed;
attempting to settle a claim for less than the amount to which a reasonable person would have believed such
person was entitled;
attempting to settle claims on the basis of an application that was altered without notice to, or knowledge and
consent of, the insured;
compelling insureds to institute suits to recover amounts due under policies by offering substantially less than
the amounts ultimately recovered in suits brought by them;
refusing to pay claims without conducting a reasonable investigation;
making claim payments to an insured without indicating the coverage under which each payment is being
made;
delaying the investigation or payment of claims by requiring an insured, claimant or the physician of either
to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss
forms, both of which submissions contain substantially the same information;
failing, in the case of claim denials or offers of compromise or settlement, to promptly provide a reasonable
and accurate explanation of the basis for such actions; and
not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability
has become reasonably clear.
Employees
As of December 31, 2020, we employed 424 people on a full-time basis. None of our employees are represented by
labor unions. We consider our employee relations to be good.
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Available Information
The Company’s executive offices are located at Two Lincoln Centre, 5420 Lyndon B. Johnson Freeway, Suite 1100
Dallas, Texas 75240. The Company’s mailing address is Two Lincoln Centre, 5420 Lyndon B. Johnson Freeway,
Suite 1100 Dallas, Texas 75240. Its telephone number is (817) 348-1600. The Company’s website address is
www.hallmarkgrp.com. The Company files annual, quarterly and current reports, proxy statements and other
information and documents with the U.S. Securities and Exchange Commission (the “SEC”), which are made
available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by contacting the SEC at 1-800-SEC-0330.
Reports filed with the SEC are also made available at www.sec.gov. The Company makes available free of charge on
its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed with or furnished to the SEC pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practical after it electronically files them with or
furnishes them to the SEC.
Item 1A. Risk Factors.
Insurance Operational Risks
Our success depends on our ability to price accurately the risks we underwrite.
Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately
for a wide variety of risks. Establishing adequate premium rates is necessary to generate sufficient revenues, together
with investment income, to pay losses, loss settlement expenses and underwriting expenses and to earn a profit. To
price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and
apply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both
severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully, and as
a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our
control, including:
the availability of sufficient reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
our selection and application of appropriate pricing techniques; and
changes in applicable legal liability standards and in the civil litigation system generally.
If we do not accurately assess the risks we underwrite, we may not charge adequate premiums to cover our losses and
expenses, which would adversely affect our results of operations. Alternatively, if we set our premiums too high, it
could reduce our sales volume and competitiveness. In either case, our profitability could be materially and adversely
affected.
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Estimating reserves is inherently uncertain. If our loss reserves are not adequate, it will have an unfavorable
impact on our financial condition and results of operations.
We maintain loss reserves to cover our estimated ultimate liability for unpaid losses and LAE for reported and
unreported claims incurred as of the end of each accounting period. Reserves represent management’s estimates of
what the ultimate settlement and administration of claims will cost and are not reviewed by an independent actuary.
These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and
circumstances then known, as well as estimates of future trends in claim severity and frequency, judicial theories of
liability, and other factors. These variables are affected by both internal and external events, such as changes in claims
handling procedures, inflation, judicial trends and legislative changes. Many of these factors are not quantifiable.
Additionally, there may be a significant lag between the occurrence of an event and the time it is reported to us. The
inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the
various considerations affecting the type of claim are subject to change and in which long periods of time may elapse
before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and
ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are
reflected in the results of the periods in which such estimates are changed. For example, a 1% change in December 31,
2020 unpaid losses and LAE would have produced a $7.9 million change to pretax earnings. Our gross loss and LAE
reserves totaled $789.8 million at December 31, 2020. Our loss and LAE reserves, net of reinsurance recoverable on
unpaid loss and LAE, were $440.2 million at that date. Because setting reserves is inherently uncertain, there can be
no assurance that the current reserves will prove adequate.
Catastrophic losses are unpredictable and may adversely affect our results of operations, liquidity and
financial condition.
Property/casualty insurance companies are subject to claims arising out of catastrophes that may have a significant
effect on their results of operations, liquidity and financial condition. Catastrophes can be caused by various events,
including hurricanes, windstorms, earthquakes, hail storms, explosions, severe winter weather and fires, and may
include man-made events, such as terrorist attacks. The incidence, frequency, and severity of catastrophes are
inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of the event.
Claims from catastrophic events could reduce our net income, cause substantial volatility in our financial results for
any fiscal quarter or year or otherwise adversely affect our financial condition, liquidity or results of operations.
Catastrophes may also negatively affect our ability to write new business. Increases in the value and geographic
concentration of insured property and the effects of inflation could increase the severity of claims from catastrophic
events in the future.
Our geographic concentration ties our performance to the business, economic and regulatory conditions of
certain states.
The following states accounted for approximately 48% of our gross written premiums for 2020: Texas (21%),
California (12%), Florida (6%) Arizona (5%) and Georgia (4%). Our revenues and profitability are subject to the
prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in the
principal states in which we do business. Changes in any of these conditions could make it less attractive for us to do
business in such states and would have a more pronounced effect on us compared to companies that are more
geographically diversified. In addition, our exposure to severe losses from localized natural perils, such as windstorms
or hailstorms, is increased in those areas where we have written significant numbers of property/casualty insurance
policies.
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Our failure to maintain favorable financial strength ratings could negatively impact our ability to compete
successfully.
Third-party rating agencies assess and rate the claims-paying ability of insurers based upon criteria established by the
agencies. AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement, pursuant to which AHIC retains
32% of the net premiums written by any of them, HIC retains 32% of the net premiums written by any of them, HSIC
retains 26% of the net premiums written by any of them and HNIC retains 10% of the net premiums written by any
of them. A.M. Best has pooled its ratings of these four insurance company subsidiaries and assigned a financial
strength rating of “A-” (Excellent) and an issuer credit rating of “a-” to the individual insurance company subsidiaries
comprising the pool. Also, A.M. Best has assigned HCM a financial strength rating of “A-” (Excellent) and an issuer
credit rating of “a-”. A.M. Best has indicated a negative outlook for each of the ratings assigned to our insurance
company subsidiaries. A.M. Best does not assign a financial strength rating or an issuer credit rating to TBIC.
These financial strength ratings are used by policyholders, insurers, reinsurers and insurance and reinsurance
intermediaries as an important means of assessing the financial strength and quality of insurers. These ratings are not
evaluations directed to potential purchasers of our common stock and are not recommendations to buy, sell or hold
our common stock. Our ratings are subject to change at any time and could be revised downward or revoked at the
sole discretion of the rating agencies. We believe that the ratings assigned by A.M. Best are an important factor in
marketing our products. Our ability to retain our existing business and to attract new business in our insurance
operations depends largely on these ratings. Our failure to maintain our ratings, or any other adverse development
with respect to our ratings, could cause our current and future independent agents and insureds to choose to transact
their business with more highly rated competitors. If A.M. Best downgrades our ratings or publicly indicates that our
ratings are under review, it is likely that we would not be able to compete as effectively with our competitors, and our
ability to sell insurance policies could decline. If that happened, our sales and earnings would decrease. For example,
many of our agencies and insureds have guidelines that require us to have an A.M. Best financial strength rating of
“A-” (Excellent) or higher. A reduction of our A.M. Best rating below “A-” would prevent us from issuing policies
to insureds or potential insureds with such ratings requirements.
Lenders and reinsurers also use our A.M. Best ratings as a factor in deciding whether to transact business with us.
The failure of our insurance company subsidiaries to maintain their current ratings could dissuade a lender or
reinsurance company from conducting business with us or might increase our interest or reinsurance costs. In addition,
a ratings downgrade by A.M. Best below “A-” would require us to post collateral in support of our obligations under
certain of our reinsurance agreements pursuant to which we assume business.
We rely on independent agents and specialty brokers to market our products and their failure to do so would
have a material adverse effect on our results of operations.
We market and distribute our insurance products exclusively through independent insurance agents and specialty
insurance brokers. As a result, our business depends in large part on the marketing efforts of these agents and brokers
and on our ability to offer insurance products and services that meet the requirements of the agents, the brokers and
their customers. However, these agents and brokers are not obligated to sell or promote our products and many sell
or promote competitors’ insurance products in addition to our products. Some of our competitors have higher financial
strength ratings, offer a larger variety of products, set lower prices for insurance coverage and/or offer higher
commissions than we do. Therefore, we may not be able to continue to attract and retain independent agents and
brokers to sell our insurance products. The failure or inability of independent agents and brokers to market our
insurance products successfully could have a material adverse impact on our business, financial condition and results
of operations.
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Our reliance on independent agents and specialty brokers exposes us to credit risk that could adversely affect
our results of operations and financial position.
Certain premiums produced by independent agents and specialty brokers are collected from policyholders by the
agents and brokers and forwarded to our insurance company subsidiaries. When the insured pays its policy premium
to its agent or broker, the premium may be considered to have been paid to us under applicable insurance laws and
regulations. Accordingly, the insured would no longer be liable to us for those amounts, whether or not we actually
received the premium from the agent or broker. Consequently, we assume a degree of credit risk associated with the
agents or brokers with whom we work. Where necessary, we review the financial condition of potential new agents
and brokers before we agree to transact business with them. Although the failure by any of our agents or brokers to
remit premiums to us has not been material to date, there may be instances where our agents or brokers collect
premiums but do not remit them to us and we may be required under applicable law to provide the coverage set forth
in the policy despite the absence of related premiums being paid to us.
Because the possibility of these events occurring depends in large part upon the financial condition and internal
operations of our agents and brokers, we monitor broker behavior and review financial information on an as-needed
basis. If we are unable to collect premiums from our agents and brokers in the future, our underwriting profits may
decline and our financial condition and results of operations could be materially and adversely affected.
Our results may be unfavorably impacted if we are unable to obtain adequate reinsurance.
As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of
risk, especially catastrophe risks that we and our insurance company subsidiaries underwrite. Our catastrophe and
non-catastrophe reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our
current reinsurance facilities or to obtain other reinsurance facilities in adequate amounts and at favorable rates. The
amount, availability and cost of reinsurance are subject to prevailing market conditions beyond our control, and may
affect our ability to write additional premiums as well as our profitability. If we are unable to obtain adequate
reinsurance protection for the risks we have underwritten, we will either be exposed to greater losses from these risks
or be required to reduce the level of business that we underwrite, which will reduce our revenue.
If the companies that provide our reinsurance do not pay our claims in a timely manner, we could incur
severe losses.
We purchase reinsurance by transferring, or ceding, part of the risk we have assumed to a reinsurance company in
exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer
liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us of our liability to our
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. It is not guaranteed that our reinsurers
will pay all of our reinsurance claims, or that they will pay our claims on a timely basis. At December 31, 2020, we
had a total of $629.1 million due us from reinsurers, including $490.2 million of recoverables from losses and $138.9
million in ceded unearned premiums. The largest amount due us from a single reinsurer as of December 31, 2020 was
$181.0 million reinsurance and premium recoverable from Swiss Reinsurance America Corporation. If any of our
reinsurers are unable or unwilling to pay amounts they owe us in a timely fashion, we could suffer a significant loss
or a shortage of liquidity, which would have a material adverse effect on our business and results of operations.
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Our failure to accurately and timely pay claims could materially and adversely affect our business, financial
condition and results of operations.
We must accurately and timely evaluate and pay claims that are made under our policies. Many factors affect our
ability to pay claims accurately and timely, including the training and experience of our claims representatives, our
claims organization’s culture, our ability to develop or select and implement appropriate procedures and systems to
support our claims functions and other factors. Our failure to pay claims accurately and timely could lead to regulatory
and administrative actions or material litigation, undermine our reputation in the marketplace and materially and
adversely affect our business, financial condition and results of operations.
Adverse securities market conditions can have a significant and negative impact on our investment portfolio.
Our results of operations depend in part on the performance of our invested assets. As of December 31, 2020, 95% of
our investment portfolio was invested in fixed-income securities. Certain risks are inherent in connection with fixed-
income securities, including loss upon default and price volatility in reaction to changes in interest rates and general
market factors. In general, the fair value of a portfolio of fixed-income securities increases or decreases inversely with
changes in the market interest rates, while net investment income realized from future investments in fixed-income
securities increases or decreases along with interest rates. In addition, 32% of our fixed-income securities have call
or prepayment options. This subjects us to reinvestment risk should interest rates fall and issuers call their securities.
Furthermore, actual net investment income and/or cash flows from investments that carry prepayment risk, such as
mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a
result of interest rate fluctuations. An investment has prepayment risk when there is a risk that cash flows from the
repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated
because of rising interest rates. The fair value of our fixed-income securities as of December 31, 2020 was $507.3
million. If market interest rates were to increase 1%, the fair value of our fixed-income securities would decrease by
approximately $3.9 million as of December 31, 2020. The calculated change in fair value was determined using
duration modeling assuming no prepayments.
In addition to the general risks described above, although 89% of our fixed-income portfolio is investment-grade, our
fixed-income securities are nonetheless subject to credit risk. If any of the issuers of our fixed-income securities suffer
financial setbacks, the ratings on the fixed-income securities could fall (with a concurrent fall in market value) and,
in a worst case scenario, the issuer could default on its obligations. As of December 31, 2020, Hallmark had $4.8
million total exposure in mortgage-backed securities.
Future changes in the fair value of our available-for-sale fixed income securities will be reflected in other
comprehensive income. Similar treatment is not available for liabilities. Therefore, interest rate fluctuations could
adversely affect our stockholders’ equity, total comprehensive income and/or cash flows.
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State statutes limit the aggregate amount of dividends that our subsidiaries may pay Hallmark, thereby
limiting its funds to pay expenses and dividends.
Hallmark is a holding company and a legal entity separate and distinct from its subsidiaries. As a holding company
without significant operations of its own, Hallmark’s principal sources of funds are dividends and other sources of
funds from its subsidiaries. State insurance laws limit the ability of Hallmark’s insurance company subsidiaries to pay
dividends and require our insurance company subsidiaries to maintain specified minimum levels of statutory capital
and surplus. The aggregate maximum amount of dividends permitted by law to be paid by an insurance company does
not necessarily define an insurance company’s actual ability to pay dividends. The actual ability to pay dividends may
be further constrained by business and regulatory considerations, such as the impact of dividends on surplus, by our
competitive position and by the amount of premiums that we can write. Without regulatory approval, the aggregate
maximum amount of dividends that could be paid to Hallmark in 2021 by our insurance company subsidiaries is $15.0
million. State insurance regulators have broad discretion to limit the payment of dividends by insurance companies
and Hallmark’s right to participate in any distribution of assets of any one of our insurance company subsidiaries is
subject to prior claims of policyholders and creditors except to the extent that its rights, if any, as a creditor are
recognized. Consequently, Hallmark’s ability to pay debts, expenses and cash dividends to our stockholders may be
limited.
Our insurance company subsidiaries are subject to minimum capital and surplus requirements. Failure to
meet these requirements could subject us to regulatory action.
Our insurance company subsidiaries are subject to minimum capital and surplus requirements imposed under the laws
of their respective states of domicile and each state in which they issue policies. Any failure by one of our insurance
company subsidiaries to meet minimum capital and surplus requirements imposed by applicable state law will subject
it to corrective action, which may include requiring adoption of a comprehensive financial plan, revocation of its
license to sell insurance products or placing the subsidiary under state regulatory control. Any new minimum capital
and surplus requirements adopted in the future may require us to increase the capital and surplus of our insurance
company subsidiaries, which we may not be able to do.
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Insurance Industry Risks
Our industry is very competitive, which may unfavorably impact our results of operations.
Our competitors include entities that have access to greater financial and other resources than us. Our competitors
may attempt to increase market share by lowering rates. In that case, we could experience reductions in our
underwriting margins, or sales of our insurance policies could decline as customers purchase lower-priced products
from our competitors. Losing business to competitors offering similar products at lower prices, or having other
competitive advantages, could adversely affect our results of operations.
In recent years, the insurance industry has undergone increasing consolidation, which may further increase
competition. In addition, an increase in capital-raising by companies in our lines of business could result in new
entrants to our markets and an excess of capital in the industry. Federal, rather than state, regulatory oversight of the
insurance industry has been proposed from time to time which, if adopted, could ease the entry of new competitors
into our markets. If we have difficulty competing as industry conditions change, our results of operations may be
adversely affected.
Our results may fluctuate as a result of cyclical changes in the property/casualty insurance industry.
Our revenue is primarily attributable to property/casualty insurance, which as an industry is cyclical in nature and has
historically been characterized by soft markets followed by hard markets. A soft market is a period of relatively high
levels of price competition, less restrictive underwriting standards and generally low premium rates. A hard market
is a period of capital shortages resulting in lack of insurance availability, relatively low levels of competition, more
selective underwriting of risks and relatively high premium rates. If we find it necessary to reduce premiums or limit
premium increases due to competitive pressures on pricing in a softening market, we may experience a reduction in
our premiums written and in our profit margins and revenues, which could adversely affect our financial results.
We are subject to comprehensive regulation, and our results may be unfavorably impacted by these
regulations.
We are subject to comprehensive governmental regulation and supervision. Most insurance regulations are designed
to protect the interests of policyholders rather than of the stockholders and other investors of the insurance companies.
These regulations, generally administered by the department of insurance in each state in which we do business, relate
to, among other things:
approval of policy forms and rates;
standards of solvency, including risk-based capital measurements, which are a measure developed by the
National Association of Insurance Commissioners and used by the state insurance regulators to identify
insurance companies that potentially are inadequately capitalized;
licensing of insurers and their agents;
restrictions on the nature, quality and concentration of investments;
restrictions on the ability of insurance company subsidiaries to pay dividends;
restrictions on transactions between insurance company subsidiaries and their affiliates;
requiring certain methods of accounting;
periodic examinations of operations and finances;
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the use of non-public consumer information and related privacy issues;
the use of credit history in underwriting and rating;
limitations on the ability to charge policy fees;
the acquisition or disposition of an insurance company or of any company controlling an insurance
company;
involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting
associations, assessments and other governmental charges;
restrictions on the cancellation or non-renewal of policies and, in certain jurisdictions, withdrawal from
writing certain lines of business;
prescribing the form and content of records of financial condition to be filed;
requiring reserves for unearned premium, losses and other purposes; and
with respect to premium finance business, the federal Truth-in-Lending Act and similar state statutes. In
states where specific statutes have not been enacted, premium finance is generally subject to state usury
laws that are applicable to consumer loans.
State insurance departments also conduct periodic examinations of the affairs of insurance companies and require
filing of annual and other reports relating to the financial condition of insurance companies, holding company issues
and other matters. Our business depends on compliance with applicable laws and regulations and our ability to
maintain valid licenses and approvals for our operations. Regulatory authorities may deny or revoke licenses for
various reasons, including violations of regulations. Changes in the level of regulation of the insurance industry or
changes in laws or regulations themselves or interpretations by regulatory authorities could have a material adverse
affect on our operations. In addition, we could face individual, group and class-action lawsuits by our policyholders
and others for alleged violations of certain state laws and regulations. Each of these regulatory risks could have an
adverse effect on our profitability.
33
The exclusions and limitations in our policies may not be enforceable.
Many of the policies we issue include exclusions or other conditions that define and limit coverage, which exclusions
and conditions are designed to manage our exposure to certain types of risks and expanding theories of legal liability.
In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy,
which period in many cases is shorter than the statutory period under which these claims can be brought by our
policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that
a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted
modifying or barring the use of these exclusions and limitations. This could result in higher than anticipated losses
and LAE by extending coverage beyond our underwriting intent or increasing the number or size of claims, which
could have a material adverse effect on our operating results. In some instances, these changes may not become
apparent until sometime after we have issued the insurance policies that are affected by the changes. As a result, the
full extent of liability under our insurance contracts may not be known for many years after a policy is issued.
Catastrophe models may not accurately predict future losses.
Along with other insurers in the industry, we use models developed by third-party vendors in assessing our exposure
to catastrophe losses that assume various conditions and probability scenarios. However, these models do not
necessarily accurately predict future losses or accurately measure losses currently incurred. Catastrophe models,
which have been evolving since the early 1990s, use historical information about various catastrophes and detailed
information about our in-force business. While we use this information in connection with our pricing and risk
management activities, there are limitations with respect to their usefulness in predicting losses in any reporting
period. Examples of these limitations are significant variations in estimates between models and modelers and
material increases and decreases in model results due to changes and refinements of the underlying data elements and
assumptions. Such limitations lead to questionable predictive capability and post-event measurements that have not
been well understood or proven to be sufficiently reliable. In addition, the models are not necessarily reflective of
company or state-specific policy language, demand surge for labor and materials or loss settlement expenses, all of
which are subject to wide variation by catastrophe. Because the occurrence and severity of catastrophes are inherently
unpredictable and may vary significantly from year to year, historical results of operations may not be indicative of
future results of operations.
The effects of litigation on our business are uncertain and could have an adverse effect on our business.
As is typical in our industry, we continually face risks associated with litigation of various types, including disputes
relating to insurance claims under our policies as well as other general commercial and corporate litigation. Although
we are not currently involved in any material litigation with our customers, other members of the insurance industry
are the target of class action lawsuits and other types of litigation, some of which involve claims for substantial or
indeterminate amounts, and the outcomes of which are unpredictable. This litigation is based on a variety of issues,
including insurance coverage and claim settlement practices. We cannot predict with any certainty whether we will
be involved in similar litigation in the future or what impact such litigation would have on our business.
34
We are subject to assessments and other surcharges from state guaranty funds, mandatory reinsurance
arrangements and state insurance facilities, which may reduce our profitability.
Virtually all states require insurers licensed to do business therein to bear a portion of the unfunded obligations of
impaired or insolvent insurance companies. These obligations are funded by assessments, which are levied by
guaranty associations within the state, up to prescribed limits, on all member insurers in the state on the basis of the
proportionate share of the premiums written by member insurers in the lines of business in which the impaired,
insolvent or failed insurer was engaged. Accordingly, the assessments levied on us by the states in which we are
licensed to write insurance may increase as we increase our premiums written. In addition, as a condition to the ability
to conduct business in certain states, insurance companies are required to participate in mandatory reinsurance funds.
The effect of these assessments and mandatory reinsurance arrangements, or changes in them, could reduce our
profitability in any given period or limit our ability to grow our business.
We monitor developments with respect to various state facilities, such as the Texas FAIR Plan and the Texas
Windstorm Insurance Association. The impact of any catastrophe experience on these facilities could result in the
facilities recognizing a financial deficit or a financial deficit greater than the level currently estimated. They may, in
turn, have the ability to assess participating insurers when financial deficits occur, adversely affecting our results of
operations. While these facilities are generally designed so that the ultimate cost is borne by policyholders, the
exposure to assessments and the availability of recoupments or premium rate increases from these facilities may not
offset each other in our financial statements. Moreover, even if they do offset each other, they may not offset each
other in financial statements for the same fiscal period due to the ultimate timing of the assessments and recoupments
or premium rate increases, as well as the possibility of policies not being renewed in subsequent years.
35
General Business Risks
The loss of key executives or the inability to attract and retain qualified personnel could disrupt our business.
Our success will depend in part upon the continued service of certain key executives. Our success will also depend
on our ability to attract and retain additional executives and personnel. The pool of talent from which we actively
recruit is limited and may fluctuate based on market dynamics specific to our industry and independent of overall
economic conditions. As such, higher demand for employees having the desired skills and expertise could lead to
increased compensation expectations for existing and prospective personnel, making it difficult for us to retain and
recruit key personnel and maintain labor costs at desired levels. The loss of key personnel, or our inability to recruit
and retain additional qualified personnel, could cause disruption in our business and could prevent us from fully
implementing our business strategies, which could materially and adversely affect our business, growth and
profitability.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service
obligations to increase significantly.
As of December 31, 2020, we had outstanding $55.9 million of trust preferred securities bearing interest at a weighted
average rate of 3.31% per annum. (See, “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources – Subordinated Debt Securities.”) Our trust preferred
securities bear interest at a variable rate which is adjusted quarterly. A 1% increase in the applicable interest rates
would result in a $0.6 million increase in interest expense attributable to the currently outstanding balance of the trust
preferred securities, which could adversely affect our operating results, cash flow and financial position.
In addition, the interest rates under our trust preferred securities are adjusted quarterly using LIBOR. On July 27,
2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop
compelling banks to submit rates for the calculation of LIBOR after 2021 and it is unclear whether new methods of
calculating LIBOR will be established. If LIBOR is unavailable on an interest calculation date, the trustee is
authorized to calculate the interest rate on the basis of quotations from certain major banks in London or New York.
If the trustee is unable to determine an interest rate in this manner, the immediately preceding interest rate remains in
effect. It is not possible to predict the effect of these changes. Uncertainty in the determination of the interest rate
applicable to our trust preferred securities could adversely affect our financial planning.
We may experience difficulty in integrating acquisitions into our operations.
The successful integration of any newly acquired business into our operations will require, among other things, the
retention and assimilation of their key management, sales and other personnel; the coordination of their lines of
insurance products and services; the adaptation of their technology, information systems and other processes; and the
retention and transition of their customers. Unexpected difficulties in integrating any acquisition could result in
increased expenses and the diversion of management time and resources. If we do not successfully integrate any
acquired business into our operations, we may not realize the anticipated benefits of the acquisition, which could have
a material adverse impact on our financial condition and results of operations. Further, any potential acquisition may
require significant capital outlay and, if we issue equity or convertible debt securities to pay for an acquisition, the
issuance may be dilutive to our existing stockholders.
36
Our internal controls over financial reporting are not fail-safe.
We continually enhance our operating procedures and internal controls over financial reporting (“ICFR”) to
effectively support our business and comply with our regulatory and financial reporting requirements. As a result of
the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control
objectives have been or will be met, and that every instance of error or fraud has been or will be detected. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. These inherent limitations include the realities that judgments in decision-
making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can
be circumvented by individual acts or by collusion of two or more persons. The design of any system of controls is
based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. ICFR may also become inadequate
because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Further,
the design of a control system must reflect resource constraints, and the benefits of controls must be considered
relative to their costs. As a result of the inherent limitations in a cost-effective control system, misstatement due to
error or fraud may occur and not be detected. Accordingly, our ICFR and procedures are designed to provide
reasonable, not absolute, assurance that the control objectives are met.
We rely on our information technology and telecommunications systems and the failure or disruption of
these systems could disrupt our operations and adversely affect our results of operations.
Our business is highly dependent upon the successful and uninterrupted functioning of our information technology
and telecommunications systems. We rely on these systems to perform accounting, policy administration, actuarial
and other modeling functions necessary for underwriting business, as well as to process and make claims and other
payments. Our systems could fail of their own accord or might be disrupted by factors such as natural disasters, power
disruptions or surges, cybersecurity intrusions or terrorist attacks. Failure or disruption of these systems for any reason
could interrupt our business and adversely affect our results of operations.
Cybersecurity risks in particular are evolving and include malicious software, unauthorized access to data and other
electronic security breaches. We have not experienced successful cybersecurity attacks in the past and believe that
we have adopted appropriate measures to mitigate potential risks to our information technology systems. However,
the timing, nature and scope of cybersecurity attacks are difficult to predict and prevent. Therefore, we could be
subject to operational delays, compromised confidential or proprietary information, destruction or corruption of data,
manipulation or improper use of our systems and networks, financial losses from remedial actions and/or damage to
our reputation from cybersecurity attacks. A cybersecurity attack on our information technology systems could disrupt
our business and adversely affect our results of operations and financial position.
37
The outcome of pending securities litigation is uncertain.
The Company and two of its former executive officers are defendants in a putative class action lawsuit alleging
violations of the federal securities laws. (See, “Item 3. Legal Proceedings.”). On December 4, 2020, the defendants
filed a motion to dismiss the lawsuit. The court has not yet ruled on that motion. The litigation is in its initial stages
and the ultimate outcome is uncertain. The Company’s current policy is to expense legal costs as incurred. Regardless
of the outcome, the lawsuit and related investigation could result in significant expenses and divert attention and
resources of the Company’s management and other key employees. Historically, the Company has not carried director
and officer liability insurance and does not currently hold such a policy. In addition, the Company has certain
indemnification obligations to its current and former directors and officers in connection with the defense of any
proceeding or liability arising out of their service in such capacity. The Company could be required to pay substantial
amounts with respect to the legal costs and expenses, as well as judgments, damages or other penalties, incurred by
the Company’s former executive officers in the class action lawsuit. As a result, protracted litigation or an adverse
disposition to the case could have a material adverse effect on our results of operations and financial position. In
addition, the Company may be the target of securities-related litigation in the future, both related and unrelated to the
existing class action lawsuit. Such litigation could divert management’s attention and resources, result in substantial
costs and have an adverse effect on the Company’s business, results of operations and financial condition.
Global climate change may have an adverse effect on our financial statements.
Although uncertainty remains as to the nature and effect of greenhouse gas emissions, we could suffer losses if global
climate change results in an increase in the frequency and severity of natural disasters. As with traditional natural
disasters, claims arising from these incidents could increase our exposure to losses and have a material adverse impact
on our business, results of operations, and/or financial condition.
The COVID-19 pandemic could disrupt our business operations and materially adversely impact our results
of operations and financial condition.
On March 11, 2020, the World Health Organization declared the outbreak of novel coronavirus (COVID-19) as a
pandemic, which continues to spread throughout the United States. There have been mandates from federal, state,
and local authorities requiring forced closures of non-essential business locations, including insurance carriers,
brokers and agents. As a result, our corporate offices, and the offices of most of our agents and brokers, have been
closed for a significant period. While our management and most employees have continued to effectively work
remotely, and our agents and brokers have continued to produce and service our insurance policies, an extension or
resumption of these restrictions could disrupt our business operations and the production of policies by our agents
and brokers. There is considerable uncertainty regarding how long the COVID-19 pandemic will persist and affect
economic conditions, as well as whether governmental and other measures implemented to try to slow the spread of
the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders, and
business and government shutdowns, will be renewed or extended or whether new measures will be imposed.
We do not write coverage for pandemics or specialty risks such as event cancellation, trip cancellation, trade credit
or political risk, and our customer base is concentrated in small and medium sized enterprises with less exposure than
larger organizations. Although we have received notice of property and liability losses related to COVID-19, we
believe that most of such claims will not be covered due to policy terms requiring occurrence of physical loss and/or
specific exclusions contained in most applicable policies. However, certain of our policies provide sublimits for
business interruption due to communicable disease which do not require physical loss.
38
Further, the relevant exclusions from business interruption coverage are likely to be a target of litigation, and
legislation could be enacted mandating retroactive coverage of business interruption claims stemming from COVID-
19. Similarly, exclusions from general liability policies covering the negligence or gross negligence of an insured
could also be challenged. In addition, vacant or converted facilities (e.g., a hotel into emergency housing or a
healthcare facility) could result in potential risk exposure that was not envisioned during underwriting. Claims could
also be made under our healthcare professional liability policies related to, among other things, negligent treatment
of COVID-19 patients, failure to prevent spread of the disease within a facility and/or inadequate protection of
healthcare workers. Despite typical bodily injury exclusions, claims could also be asserted under our financial
professional liability policies relating to issues such as employment practices, misrepresentations, incomplete
disclosures, and/or other business practices in response to COVID-19.
We continue to monitor developments relating to the COVID-19 pandemic and implement measures intended to
mitigate its impact on our business. Nonetheless, our results of operations and financial condition could be materially
adversely impacted by the COVID-19 pandemic.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our corporate headquarters, our Commercial Accounts business unit and certain employees of our Specialty
Commercial Segment are currently located at Two Lincoln Centre located at 5420 LBJ Freeway, Dallas, Texas. The
leased premises consist of 47,172 square feet of office space (“Suite 1100”) and approximately 3,000 square feet of
storage space (“Suite 380”). The initial term of the lease commenced June 1, 2019 and expires May 31, 2032, and
we have the right to renew the lease for up to ten years at market rental rates prevailing at the time of renewal. The
initial base rent for Suite 1100 of $121,861 per month was waived for the first 12 months of the lease and the initial
base rent for Suite 380 of $4,250 per month is waived for the first 48 months of the lease.
Our Specialty Commercial Segment also maintains a branch office in Atlanta, Georgia. The rent is currently $12,305
per month pursuant to a lease that expires November 30, 2026.
Our Specialty Personal Lines business unit is located at 6500 Pinecrest, Suite 100, Plano, Texas. The suite is located
in a one story office building and contains 23,941 square feet of space. The rent is currently $30,525 per month
pursuant to a lease that expires June 30, 2021.
Our Aerospace & Programs business unit, as well as certain employees of our Commercial Auto and E&S Casualty
business units, were previously located at 13727 Noel Road, Dallas, Texas. These leased premises consist of 15,072
square feet of office space. The rent is currently $30,458 per month pursuant to a lease that expires November 30,
2022. We have entered into sublease for this office space at a monthly rent of $18,840 over the remaining term of the
lease.
39
Item 3. Legal Proceedings.
On May 5, 2020, a lawsuit styled Schulze v. Hallmark Financial Services, Inc., et al. (Case No. 3:20-cv-01130) was
filed in the U.S. District Court for the Northern District of Texas, Dallas Division (the “Schulze Matter”). The
Company, its Chief Executive Officer and its former Chief Financial Officer are named defendants in the lawsuit
brought on behalf of a putative class of shareholders who acquired Hallmark securities between March 5, 2019 and
March 17, 2020. In general, the complaint alleges that the defendants violated the Securities Exchange Act of 1934
by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its
reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company
would be forced to report $63.8 million of prior year net adverse loss development, (d) the Company would exit the
contract binding line of its commercial automobile primary insurance business, and by making positive statements
about the Company’s business, operations and prospects that were allegedly materially misleading and/or lacked a
reasonable basis. On July 21, 2020, the court appointed Rajeev Yalamanchili as Lead Plaintiff. Lead Plaintiff filed
an Amended Complaint on September 30, 2020. The litigation is in its initial stages. The Company’s current policy
is to expense legal costs as incurred. Historically, the Company has not carried director and officer liability insurance
and does not currently hold such a policy.
We are engaged in various other legal proceedings that are routine in nature and incidental to our business. None of
these proceedings, either individually or in the aggregate, are believed, in our opinion, likely to have a material adverse
effect on our consolidated financial position or our results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
40
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market for Common Stock
Our common stock is currently traded on the Nasdaq Global Market under the symbol “HALL.” The following table
shows the high and low sales prices of our common stock on the Nasdaq Global Market for each quarter since
January 1, 2019.
Period
Year Ended December 31, 2020:
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2019:
First quarter
Second quarter
Third quarter
Fourth quarter
High Sale
Low Sale
$
18.94 $
6.65
4.44
3.87
$
10.96 $
14.99
20.30
20.13
2.35
2.28
2.57
2.57
9.48
9.80
13.26
15.79
Holders
As of March 1, 2021, there were 4,217 shareholders of record of our common stock.
Dividends
Hallmark has never paid dividends on its common stock. Our board of directors intends to continue this policy for the
foreseeable future in order to retain earnings for development of our business.
Hallmark is a holding company and a legal entity separate and distinct from its subsidiaries. As a holding company
without significant operations of its own, Hallmark’s principal sources of funds are dividends and management fees
from its subsidiaries. State insurance laws limit the ability of our insurance company subsidiaries to pay dividends
and require our insurance company subsidiaries to maintain specified minimum levels of statutory capital and surplus.
Our ability to pay dividends may be further constrained by business and regulatory considerations, by our competitive
position and by the amount of premiums that we can write. Without regulatory approval, the aggregate maximum
amount of dividends that could be paid to Hallmark in 2021 by our insurance company subsidiaries is $15.0 million.
Consequently, Hallmark’s ability to pay cash dividends to our stockholders may be limited. The amount of retained
earnings that is unrestricted for the payment of dividends by Hallmark to its shareholders was $16.8 million as of
December 31, 2020.
41
Equity Compensation Plan Information
The following table sets forth information regarding shares of our common stock authorized for issuance under our
equity compensation plans as of December 31, 2020.
Plan Category
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for future
issuance under equity
compensation plans
[excluding securities reflected
in column (a)](1)
(b)
(c)
Equity compensation plans approved by
security holders
Equity compensation plans not approved
by security holders
Total
14,157 $
—
14,157 $
6.99
—
6.99
1,469,764
—
1,469,764
(1) Securities remaining available for future issuance are net of a maximum of 530,236 shares of common stock
issuable pursuant to outstanding restricted stock units, subject to applicable vesting requirements and performance
criteria. See Note 14 to the audited consolidated financial statements included in this report.
Issuer Repurchases
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 December 31, 2020.
Item 6. Selected Financial Data
Not required for smaller reporting company.
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Item 7. 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-K” for a discussion of some of the uncertainties, risks and assumptions associated with these
statements.
Overview
Hallmark is an insurance holding company which, 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 pursue our business
activities primarily through subsidiaries whose operations are organized into business units and are supported by our
insurance carrier subsidiaries.
Our insurance activities are organized by business units into the following reportable segments:
Specialty Commercial Segment. Our Specialty Commercial Segment includes our Commercial Auto
business unit which offers primary and excess commercial vehicle insurance products and services; our E&S
Casualty business unit which offers primary and excess liability, excess public entity liability, E&S package
and garage liability insurance products and services; our E&S Property business unit which offers primary
and excess commercial property insurance for both catastrophe and non-catastrophe exposures; our
Professional Liability business unit which offers healthcare and financial lines professional liability insurance
products and services primarily for businesses, medical professionals, medical facilities and senior care
facilities; and our Aerospace & Programs business unit which offers general aviation and satellite launch
property/casualty insurance products and services, as well as certain specialty programs. Effective January 1,
2021, our Professional Liability business unit discontinued the program to offer medical professional liability
to senior care facilities. During 2020, our Aerospace & Programs business unit discontinued the programs to
offer satellite launch insurance products.
Standard Commercial Segment. Our Standard Commercial Segment includes the package and monoline
property/casualty and occupational accident insurance products and services handled by our Commercial
Accounts business unit and the runoff of workers compensation insurance products handled by our former
Workers Compensation operating unit. Effective June 1, 2016, we ceased marketing new or renewal
occupational accident policies. Effective July 1, 2015, the former Workers Compensation operating unit
ceased retaining any risk on new or renewal policies.
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.
43
The retained premium produced by these reportable segments is supported by our American Hallmark Insurance
Company of Texas, Hallmark Specialty Insurance Company, Hallmark Insurance Company, Hallmark National
Insurance Company and Texas Builders Insurance Company insurance subsidiaries. In addition, control and
management of Hallmark County Mutual (“HCM”) is maintained through our wholly owned subsidiary, CYR
Insurance Management Company (“CYR”). CYR has as its primary asset a management agreement with HCM which
provides for CYR to have management and control of HCM. HCM is used to front certain lines of business in our
Specialty Commercial and Personal Segments in Texas. HCM does not retain any business.
AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement pursuant to which AHIC retains 32% of the
net premiums written by any of them, HIC retains 32% of the net premiums written by any of them, HSIC retains
26% of the net premiums written by any of them and HNIC retains 10% of the net premiums written by any of them.
Neither HCM nor TBIC is a party to the intercompany pooling arrangement.
Critical Accounting Estimates and Judgments
Certain significant accounting policies requiring our estimates and judgments are discussed below. Such estimates
and judgments are based on historical experience, changes in laws and regulations, observation of industry trends and
information received from third parties. While the estimates and judgments associated with the application of these
accounting policies may be affected by different assumptions or conditions, we believe the estimates and judgments
associated with the reported consolidated financial statement amounts are appropriate in the circumstances. For
additional discussion of our accounting policies, see Note 1 to the audited consolidated financial statements included
in this report.
Impairment of investments. We complete a detailed analysis each quarter to assess whether any decline in the fair
value of any debt investment below cost is deemed other-than-temporary. All debt securities with an unrealized loss
are reviewed. We recognize an impairment loss when a debt investment’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.
Debt Investments: We assess whether we intend to sell, or it is more likely than not that we will be required to sell, a
fixed maturity investment before recovery of its amortized cost basis less any current period credit losses. For fixed
maturity investments that are considered other-than-temporarily impaired and that we do not intend to sell and will
not be required to sell, we separate the amount of the impairment into the amount that is credit related (credit loss
component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the
difference between the investment’s amortized cost basis and the present value of its expected future cash flows. The
remaining difference between the investment’s fair value and the present value of future expected cash flows is
recognized in other comprehensive income. The fair value at the time of impairment is the new cost basis for the
impaired security.
Equity Investments: ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”
requires equity investments that are not consolidated or accounted for under the equity method of accounting to be
measured at fair value with changes in fair value recognized in net income each reporting period. As a result of this
standard, equity securities with readily determinable fair values are not required to be evaluated for other-than-
temporary-impairment.
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Fair values of financial instruments. Accounting Standards Codification (“ASC”) 820 defines fair value, establishes
a consistent framework for measuring fair value and expands disclosure requirements 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 common stock, preferred stock and
the equity warrant classified as Other Investments.
Level 2 investment securities include corporate bonds, 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 a third party pricing service 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 service 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.
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.
45
Deferred policy acquisition costs. Policy acquisition costs (mainly commission, premium taxes, underwriting and
marketing expenses and ceding commissions) that vary with and are primarily related to the successful acquisition of
new and renewal insurance contracts are deferred and charged to operations over periods in which the related
premiums are earned. Ceding commissions from reinsurers, which include expense allowances, are deferred and
recognized over the period premiums are earned for the underlying policies reinsured.
The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their
estimated realizable value. A premium deficiency exists if the sum of expected claim costs and claim adjustment
expenses, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums and expected
investment income on those unearned premiums, as computed on a product line basis. We routinely evaluate the
realizability of deferred policy acquisition costs. At December 31, 2020 and 2019 there was no premium deficiency
related to deferred policy acquisition costs.
Goodwill. Under ASC 350, “Intangibles - Goodwill and Other,” goodwill is tested for impairment annually at the
reporting unit level (business unit or one level below a business unit) on an annual basis (October 1) and between
annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. For purposes of evaluating goodwill for impairment, we have determined that
our reporting units are the same as our business units except for the E&S Casualty and Aerospace & Programs
business units for which reporting units are at the component level (“one level below”). Our consolidated balance
sheet as of December 31, 2019 included goodwill of acquired businesses of $44.7 million that was assigned to our
business units as follows: Commercial Accounts business unit - $2.1 million; Commercial Auto business units - $21.3
million; E&S Casualty business unit - $6.3 million (comprised of $2.6 million for the primary/excess liability and
public entity component and $3.7 million for the E&S package component); Aerospace & Programs business unit-
$9.7 million (comprised entirely of the general aviation component); and Specialty Personal Lines business unit -
$5.3 million. This amount had been recorded as a result of prior business acquisitions accounted for under the
acquisition method of accounting. In connection with our normal process for evaluating impairment triggering events,
during the first quarter of 2020 we determined that a significant decline in our market capitalization below our
stockholders’ equity indicated the impairment of the goodwill and iindefinite-lived intangible assets included in our
balance sheet. As a result, we took a $44.7 million charge to goodwill and a $1.3 million charge to indefinite-lived
intangible assets during the first quarter of 2020. Consequently, as of December 31, 2020 , there was no goodwill
reported on our consolidated balance sheet.
Deferred income tax assets and liabilities. We file a consolidated federal income tax return. Deferred federal income
taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year end. Deferred taxes are recognized using the liability method, whereby tax rates are
applied to cumulative temporary differences based on when and how they are expected to affect the tax return.
Deferred tax assets and liabilities are adjusted for tax rate changes. A valuation allowance is provided against our
deferred tax assets to the extent that we do not believe it is more likely than not that future taxable income will be
adequate to realize these future tax benefits.
46
Reserves for unpaid losses and LAE. Reserves for unpaid losses and LAE are established for claims that have already
been incurred by the policyholder but which we have not yet paid. Unpaid losses and LAE represent the estimated
ultimate net cost of all reported and unreported losses incurred through each balance sheet date. The reserves for
unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses. These reserves
are revised periodically and are subject to the effects of trends in loss severity and frequency. (See “Item 1. Business –
Analysis of Losses and LAE” and Note 6 to the audited consolidated financial statements included in this report.)
Although considerable variability is inherent in such estimates, we believe that our reserves for unpaid losses and
LAE are adequate. Due to the inherent uncertainty in estimating unpaid losses and LAE, the actual ultimate amounts
may differ from the recorded amounts. A small percentage change could result in a material effect on reported
earnings. For example, a 1% change in December 31, 2020 reserves for unpaid losses and LAE would have produced
a $7.9 million change to pretax earnings. The estimates are continually reviewed and adjusted as experience develops
or new information becomes known. Such adjustments are included in current operations.
Our actuaries estimate claim liabilities by considering a variety of reserving methods, each of which reflects a level
of uncertainty. The estimated range derived from the various methods is used to assess the reasonableness of
management’s estimates. There is no exclusive method for determining this range, and judgment enters into the
process. The primary actuarial technique utilized is a loss development analysis in which ultimate losses are projected
based upon historical development patterns. The primary assumption underlying this loss development analysis is
that the historical development patterns will be a reasonable predictor of the future development of losses for
accident years which are less mature. An alternate actuarial technique, known as the Bornhuetter-Ferguson method,
combines an analysis of loss development patterns with an initial estimate of expected losses or loss ratios. This
approach is most useful for recent accident years. In addition to assuming the stability of loss development patterns,
this technique is heavily dependent on the accuracy of the initial estimate of expected losses or loss ratios.
Consequently, the Bornhuetter-Ferguson method is primarily used to confirm the results derived from the loss
development analysis.
The range of unpaid losses and LAE estimated by our actuary as of December 31, 2020 was $720.1 million to $917.9
million. Our best estimate of unpaid losses and LAE as of December 31, 2020 is $789.8 million. Our carried reserve
for unpaid losses and LAE as of December 31, 2020 is comprised of $387.6 million in case reserves and $402.2
million in incurred but not reported reserves. In setting this estimate of unpaid losses and LAE, we have assumed,
among other things, that current trends in loss frequency and severity will continue and that the actuarial analysis was
empirically valid. We have established a best estimate of unpaid losses and LAE which is $29.2 million below the
midpoint, or 86.0% of the high end, of the actuarial range at December 31, 2020 as compared to $32.7 million below
the midpoint, or 80.9% of the high end, of the actuarial range at December 31, 2019. We expect our best estimate to
move within the actuarial range from year to year due to changes in our operations and changes within the
marketplace. Due to the inherent uncertainty in reserve estimates, there can be no assurance that the actual losses
ultimately experienced will fall within the actuarial range. However, because of the breadth of the actuarial range, we
believe that it is reasonably likely that actual losses will fall within such range.
Our reserve requirements are also interrelated with product pricing and profitability. We must price our products at a
level sufficient to fund our policyholder benefits and still remain profitable. Because claim expenses represent the
single largest category of our expenses, inaccuracies in the assumptions used to estimate the amount of such benefits
can result in our failing to price our products appropriately and to generate sufficient premiums to fund our operations.
47
Results of Operations
Comparison of Years ended December 31, 2020 and December 31, 2019
Management overview. During fiscal 2020, our total revenues were $478.7 million, which was $7.7 million less than
the $486.4 million in total revenues for fiscal 2019. During the year ended December 31, 2020, we reported net loss
before tax of $114.2 million as compared to a net loss before tax of $1.0 million during the same period of 2019.
The decrease in revenue for the year ended December 31, 2020 was primarily due to net investment losses of $22.9
million as compared to net investment gains of $20.6 million during the same period of 2019, as well as a $7.7 million
decrease in net investment income for the year ended December 31, 2020 as compared to the same period of the prior
year. This decrease in revenue was partially offset by increased net premiums earned of $44.9 million for the year
ended December 31, 2020 compared to the same period of the prior year.
Further contributing to the increase in the pre-tax loss for the year ended December 31, 2020 were increased losses
and LAE of $50.7 million, due primarily to a $21.7 million charge for a loss portfolio transfer reinsurance contract,
increased net premiums earned as compared to the same period in 2019 and increased net catastrophe losses. Loss
and LAE for the year ended December 31, 2020 was impacted by a $17.7 million increase in catastrophe losses as
compared to the same period of the prior year, of which $5.0 million was attributable to reserves for COVID-19
claims. We reported $58.3 million of unfavorable net prior year loss reserve development during the year ended
December 31, 2020 as compared to $60.9 million of unfavorable net prior year loss reserve development during the
same period of 2019.
The pre-tax loss during the year ended December 31, 2020 was also impacted by a $44.7 million impairment charge
to goodwill and a $1.3 million charge to indefinite-lived intangible assets. In connection with its normal process for
evaluating impairment triggering events, the Company determined that a significant decline in its market
capitalization below its stockholders’ equity during the first quarter of 2020 indicated the impairment of the goodwill
and indefinite-lived intangible assets included in our balance sheet.
We reported a net loss of $91.7 million for the year ended December 31, 2020, as compared to a net loss of $0.6
million for the year ended December 31, 2019. On a diluted per share basis, net loss was $5.05 per share for fiscal
2020 as compared to net loss of $0.03 per share for fiscal 2019. Our effective tax rate was 20% for the year ended
December 31, 2020 as compared to 39% for the same period in 2019. The decrease in the effective tax rate for the
year ended December 31, 2020 was due in large part to the non-deductible impairment of goodwill and indefinite-
lived intangible assets.
48
Segment information
The following is additional business segment information for the years ended December 31, 2020 and 2019 (in
thousands):
Specialty Commercial
Segment
Standard Commercial
Segment
2020
Gross premiums written
Ceded premiums written
Net premiums written
Change in unearned premiums
Net premiums earned
$ 560,301
(265,128)
295,173
41,747
336,920
2019
$ 651,913
(301,866)
350,047
(57,459)
292,588
2020
$ 98,048
(29,652)
68,396
(1,842)
66,554
2019
$ 92,645
(29,753)
62,892
1,078
63,970
Personal Segment
2019
2020
$ 99,273
$ 85,019
(15,660)
(9,615)
83,613
75,404
(3,294)
2,920
80,319
78,324
Corporate
Consolidated
$
2020
2019
2020
— $
—
—
—
—
— $ 743,368
(304,395)
—
438,973
—
42,825
—
481,798
—
2019
$ 843,831
(347,279)
496,552
(59,675)
436,877
Year Ended December 31,
Total revenues
350,412
309,619
69,819
68,179
84,730
88,225
(26,216)
20,348
478,745
486,371
Losses and loss adjustment
expenses
291,938
248,781
52,478
50,036
68,435
63,348
—
—
412,851
362,165
Pre-tax (loss) income
$
(6,146)
$
(1,371)
$ (3,039)
$
(841)
$ (10,338)
$
427
$ (94,639) $
753 $ (114,162)
$
(1,032)
Net loss ratio (1)
Net expense ratio (1)
Net combined ratio (1)
86.6 %
19.4 %
106.0 %
85.0 %
21.8 %
106.8 %
78.9 %
31.1 %
110.0 %
78.2 %
30.0 %
108.2 %
87.4 %
27.5 %
114.9 %
78.9 %
22.7 %
101.6 %
85.7 %
25.0 %
110.7 %
82.9 %
25.1 %
108.0 %
Net Favorable (Unfavorable)
Prior Year Development
$
(45,808)
$
(60,138)
$ (3,357)
$
(726)
$ (9,123)
$
(36)
$
(58,288)
$
(60,900)
(1) The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated as
total underwriting expenses offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the
sum of the net loss ratio and the net expense ratio.
Specialty Commercial Segment
Gross premiums written for the Specialty Commercial Segment were $560.3 million for the year ended December
31, 2020, which was $91.6 million, or 14%, less than the $651.9 million reported for the same period of 2019. Net
premiums written were $295.2 million for the year ended December 31, 2020 as compared to $350.0 million for the
same period of 2019. The decrease in gross premiums written was primarily the result of lower premium production
in our Commercial Auto business unit, partially offset by increased premium production in our E&S Casualty,
Professional Liability, E&S Property and Aerospace & Programs business units. The decrease in net premiums
written was primarily the result of lower net premiums written in our Commercial Auto and E&S Property business
units, partially offset by increased net premiums written in our E&S Casualty, Professional Liability and Aerospace
& Programs business units. In February 2020, we made the strategic decision to exit the contract binding line of the
primary automobile business marketed by our Commercial Auto business unit as a result of increasing claim severity
and limited opportunity for meaningful rate increases. At that time, we began the process of non-renewing policies
and placing in-force policies in runoff in accordance with state regulatory guidelines. The exit of the contract binding
line of the primary commercial automobile business contributed $93.5 million and $69.4 million to the decline in
gross premiums written and net premiums written, respectively, for the year ended December 31, 2020 as compared
to the same period the prior year.
49
The $350.4 million of total revenue for the year ended December 31, 2020 was $40.8 million more than the $309.6
million reported by the Specialty Commercial Segment for the same period in 2019. This increase in revenue was
primarily due to higher net premiums earned of $44.3 million attributable to increased net premiums earned of $23.6
million from the Professional Liability business unit, $19.6 million from the E&S Casualty business unit, $7.2 million
from the E&S Property business unit and $2.2 million from the Aerospace & Programs business unit, partially offset
by lower net premiums earned of $8.3 million from the Commercial Auto business unit. The increase in net premiums
earned was partially offset by lower net investment income of $3.5 million for the year ended December 31, 2020 as
compared to the same period of 2019.
The Specialty Commercial Segment reported a pre-tax loss of $6.1 million during the year ended December 31, 2020
as compared to a pre-tax loss of $1.4 million reported for the same period in 2019. The increase in the pre-tax loss
was primarily the result of higher losses and LAE of $43.2 million and higher operating expenses of $2.3 million
during the year ended December 31, 2020 as compared to the same period during 2019, partially offset by higher
revenue as discussed above. The exit of the contract binding line of the primary commercial automobile business
contributed $56.6 million to the pre-tax loss for the fiscal year ended December 31, 2020 as compared to a pre-tax
loss of $28.5 million during the prior year. The $56.6 million pre-tax loss from the exited contract binding line of the
primary commercial automobile business includes the $21.7 million charge for the loss portfolio transfer reinsurance
contract that closed during the third quarter of 2020.
Our Specialty Commercial Segment reported higher losses and LAE as the combined result of (a) a $7.3 million
increase in losses and LAE in our Commercial Auto business unit due largely to a $21.7 million charge for the loss
portfolio transfer reinsurance contract that closed during the third quarter 2020 and higher current accident year net
loss trends, partially offset by $41.8 million of unfavorable prior year net loss reserve development recognized during
the year ended December 31, 2020 as compared to $47.5 million of unfavorable prior year net loss reserve
development during the same period of 2019, (b) a $3.5 million increase in losses and LAE in our E&S Casualty
business unit due primarily to increased net premiums earned, partially offset by $6.2 million of unfavorable prior year
net loss reserve development recognized during the year ended December 31, 2020 as compared to $13.6 million of
unfavorable prior year net loss reserve development during the same period of 2019, as well as lower current accident
year net loss trends, (c) a $13.1 million increase in losses and LAE in our E&S Property business unit due primarily
to higher net catastrophe losses of $13.1 million during the year ended December 31, 2020 as compared to net
catastrophe losses of $1.6 million during the same period of 2019 and higher net premiums earned, partially offset by
favorable net prior year loss reserve development of $1.9 million during the year ended December 31, 2020 as
compared to favorable net prior year loss reserve development of $0.3 million during the same period of 2019, (d) a
$17.5 million increase in losses and LAE attributable to our Professional Liability business unit due primarily to
increased net premiums earned, higher current accident year net loss trends as well as unfavorable net prior year loss
reserve development of $0.1 million during the year ended December 31, 2020 as compared to favorable net prior
year loss reserve development of $0.7 million during the same period the prior year, and (e) a $1.8 million increase
in losses and LAE in our Aerospace & Programs business unit due primarily to higher net premiums earned, higher
current accident year net loss trends, partially offset by $0.4 million of favorable prior year net loss reserve
development during the year ended December 31, 2020 compared to $0.1 million of unfavorable prior year net loss
reserve development during the same period of 2019. The exited contract binding line of the primary automobile
business contributed $32.8 million to the Commercial Auto business unit’s unfavorable prior year loss reserve
development during the fiscal year ended December 31, 2020 as compared to $39.8 million for the same period the
prior year.
50
Operating expenses increased $2.3 million primarily as the result of higher production related expenses of $1.8
million, increased professional services of $2.3 million and increased other operating expenses of $0.5 million,
partially offset by lower salary and related expenses of $1.3 million, due primarily to incentive compensation accrual
adjustments reported during the first quarter of 2020, lower occupancy and related expenses of $0.2 million and lower
travel and related expenses of $0.8 million.
The Specialty Commercial Segment reported a net loss ratio of 86.6% for the year ended December 31, 2020 as
compared to 85.0% for the same period in 2019. The gross loss ratio before reinsurance was 85.3% for the year ended
December 31, 2020 as compared to 75.9% for the same period in 2019. The increase in the net loss ratio was due in
large part to the $21.7 million charge for the loss portfolio transfer reinsurance contract that closed during the third
quarter of 2020 that was reported as ceded incurred losses. The increase in the gross and net loss ratios was also
impacted by catastrophe losses of $15.7 million for the year ended December 31, 2020 as compared to catastrophe
losses of $2.3 million during the same period of 2019, partially offset by lower unfavorable prior year net loss reserve
development and lower current accident year loss trends for the year ended December 31, 2020 as compared to the
same period of 2019. The Specialty Commercial Segment reported $45.8 million of unfavorable prior year net loss
reserve development for the year ended December 31, 2020 as compared to unfavorable prior year net loss reserve
development of $60.1 million for the same period of 2019. The Specialty Commercial Segment reported a net expense
ratio of 19.4% for the year ended December 31, 2020 as compared to 21.8% for the same period of 2019. The decrease
in the net expense ratio was due largely to the increase in net premiums earned partially offset by the increase in
operating expenses.
Standard Commercial Segment
Gross premiums written for the Standard Commercial Segment were $98.0 million for the year ended December 31,
2020, which was $5.4 million, or 6%, more than the $92.6 million reported for the same period in 2019. Net premiums
written were $68.4 million for the year ended December 31, 2020 as compared to $62.9 million for the same period
in 2019. The increase in gross and net premiums written was due to higher premium production in our Commercial
Accounts business unit.
Total revenue for the Standard Commercial Segment of $69.8 million for the year ended December 31, 2020, was
$1.6 million, or 2%, more than the $68.2 million reported for the same period in 2019. This increase in total revenue
was due to higher net premiums earned of $2.6 million, due primarily to the increased premiums written discussed
above, partially offset by lower net investment income of $0.8 million and lower finance charges of $0.2 million
during the year ended December 31, 2020 as compared to the same period during 2019.
Our Standard Commercial Segment reported a pre-tax loss of $3.0 million for the year ended December 31, 2020 as
compared to a pre-tax loss of $0.8 million for the same period of 2019. The pre-tax loss was the result of higher losses
and LAE of $2.4 million and higher operating expenses of $1.4 million, partially offset by the higher revenue
discussed above. The higher operating expenses were largely the result of higher production related expenses of $0.5
million, higher salary and related expenses of $0.9 million, higher professional service fees of $0.2 million and higher
other general expenses of $0.2 million, partially offset by lower occupancy and related expenses of $0.2 million and
lower travel and related expenses of $0.2 million.
51
The Standard Commercial Segment reported a net loss ratio of 78.9% for the year ended December 31, 2020 as
compared to 78.2% for the same period of 2019. The gross loss ratio before reinsurance for the year ended December
31, 2020 was 70.3% as compared to the 74.0% reported for the same period of 2019. The decrease in the gross loss
ratio was due primarily to lower current accident year loss trends. The increase in the net loss ratio was due to
unfavorable prior year reserve development and higher net catastrophe losses. During the year ended December 31,
2020, the Standard Commercial Segment reported unfavorable net loss reserve development of $3.4 million as
compared to unfavorable net loss reserve development of $0.7 million during the same period of 2019. The Standard
Commercial Segment reported $6.9 million of net catastrophe losses during the year ended December 31, 2020 as
compared to $1.5 million of net catastrophe losses during the same period of 2019. The Standard Commercial
Segment reported a net expense ratio of 31.1% for the year ended December 31, 2020 as compared to 30.0% for the
same period of 2019. The increase in the expense ratio was primarily due to the impact of the higher operating
expenses discussed above.
Personal Segment
Gross premiums written for the Personal Segment were $85.0 million for the year ended December 31, 2020 as
compared to $99.3 million for the same period in the prior year. Net premiums written for our Personal Segment were
$75.4 million for the year ended December 31, 2020, which was a decrease of $8.2 million from the $83.6 million
reported for the same period in 2019. The decrease in gross and net premiums written was primarily due to lower
premium production in our current geographical footprint.
Total revenue for the Personal Segment was $84.7 million for the year ended December 31, 2020 as compared to
$88.2 million for the same period in 2019. The decrease in revenue was due to a decrease in net premiums earned
of $2.0 million, lower net investment income of $0.3 million and lower finance charges of $1.2 million during the
year ended December 31, 2020 as compared to the same period during 2019.
Pre-tax loss for the Personal Segment was $10.3 million for the year ended December 31, 2020 as compared to pre-
tax income of $0.4 million for the same period of 2019. The decrease in pre-tax income was primarily the result of
the increased losses and LAE of $5.1 million, increased operating expenses of $2.1 million and the decreased revenue
discussed above for the year ended December 31, 2020 as compared to the same period during 2019.
The Personal Segment reported a net loss ratio of 87.4% for the year ended December 31, 2020 as compared to 78.9%
for the same period of 2019. The gross loss ratio before reinsurance was 83.0% for the year ended December 31, 2020
as compared to 81.1% for the same period in 2019. The higher gross and net loss ratios were primarily the result of
unfavorable prior year net loss reserve development of $9.1 million for the year ended December 31, 2020 as
compared to $36 thousand of unfavorable prior year net loss reserve development in 2019, partially offset by lower
gross current accident year loss trends and lower net catastrophe losses of $0.4 million for the year ended December
31, 2020 as compared to $1.5 million for the prior year. The Personal Segment reported a net expense ratio of 27.5%
for the year ended December 31, 2020 as compared to 22.7% for the same period of 2019. The increase in the expense
ratio was due primarily to higher operating expenses, as well as lower net premiums earned.
52
Corporate
Total revenue for Corporate decreased by $46.6 million for the year ended December 31, 2020 as compared to the
same period the prior year. This decrease in total revenue was due predominately to investment losses of $22.9 million
during the year ended December 31, 2020 as compared to investment gains of $20.6 million reported for the same
period of 2019 and lower net investment income of $3.1 million for the year ended December 31, 2020 as compared
to the same period during 2019.
Corporate pre-tax loss was $94.6 million for the year ended December 31, 2020 as compared to pre-tax income of
$0.8 million for the same period of 2019. The pre-tax loss was primarily due to a $44.7 million impairment charge
to goodwill and a $1.3 million charge to indefinite-lived intangible assets. In connection with its normal process for
evaluating impairment triggering events, the Company determined that a significant decline in its market
capitalization below its stockholders’equity during the first quarter of 2020 indicated the impairment of the goodwill
and indefinite-lived intangible assets included in our balance sheet. Further contributing to the pre-tax loss were
higher operating expenses of $2.9 million, as well as the lower revenue discussed above. The higher operating
expenses of $2.9 million were primarily a result of higher professional service expenses of $4.2 million and higher
occupancy and other general expenses of $1.2 million, partially offset by decreased salary and related expenses of
$2.4 million, largely due to incentive compensation accrual adjustments, and decreased travel and related expenses
of $0.1 million. The pre-tax loss was partially reduced by lower interest expense of $0.1 million.
Liquidity and Capital Resources
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 December 31, 2020,
we had $9.6 million in unrestricted cash and cash equivalents, including $6.7 million held in premium and claim trust
accounts, at the holding company and our non-insurance subsidiaries. As of that date, our insurance subsidiaries held
$93.0 million of unrestricted cash and cash equivalents as well as $507.3 million in debt securities with an average
modified duration of 0.8 years. Accordingly, we do not anticipate selling long-term debt instruments to meet any
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. 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 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. For all our insurance companies, dividends may only be paid from unassigned
surplus funds. During 2021, the aggregate ordinary dividend capacity of these subsidiaries is $22.5 million, of which
$15.0 million is available to Hallmark. As a county mutual, dividends from HCM are payable to policyholders. During
the years ended December 31, 2020 and 2019 our insurance company subsidiaries paid $12.0 million and $15.5
million, respectively, in dividends to Hallmark.
53
The state insurance departments also regulate financial transactions between our insurance subsidiaries and their
affiliated companies. Applicable regulations require approval of management fees, expense sharing contracts and
similar transactions. During 2020 our insurance subsidiaries paid $3.0 million in management fees to Hallmark and
our non-insurance company subsidiaries. During 2019 our insurance subsidiaries did not pay any management fees
to Hallmark or our non-insurance company subsidiaries.
Statutory capital and surplus is calculated as statutory assets less statutory liabilities. The various state insurance
departments that regulate our insurance company subsidiaries require us to maintain a minimum statutory capital and
surplus. As of December 31, 2020, our insurance company subsidiaries reported statutory capital and surplus of
$211.6 million, substantially greater than the minimum requirements for each state. Each of our insurance company
subsidiaries is also required to satisfy certain risk-based capital requirements. (See, “Item 1. Business – Insurance
Regulation – Risk-based Capital Requirements.”) As of December 31, 2020, the adjusted capital under the risk-based
capital calculation of each of our insurance company subsidiaries substantially exceeded the minimum requirements.
Our total statutory net premium-to-surplus percentage for the years ended December 31, 2020 and 2019 was 207%
and 195%, respectively.
Comparison of December 31, 2020 to December 31, 2019
On a consolidated basis, our cash and investments, excluding restricted cash and investments, at December 31, 2020
were $639.2 million compared to $729.0 million at December 31, 2019. The primary reasons for this decrease in
unrestricted cash and investments were decreases in investment fair values and cash used in operations.
Comparison of Years Ended December 31, 2020 and December 31, 2019
Net cash used by our consolidated operating activities was $69.3 million for the year ended December 31, 2020
compared to net cash flow provided by operations of $27.7 million for the year ended December 31, 2019. The cash
flow used by operations was driven by an increase in net paid claims (which includes $92.6 million net reinsurance
premium paid in connection with the loss portfolio transfer reinsurance agreement closed during the third quarter of
2020), decreased collected net premiums, increased paid operating expenses, lower collected investment income,
lower collected commission and fee income and higher interest paid, partially offset lower taxes paid during the year
ended December 31, 2020 as compared to the same period the prior year.
Net cash provided by investing activities during the year ended December 31, 2020 was $122.7 million as compared
to net cash used in investing activities of $32.4 million for the prior year. The increase in cash provided by investing
activities during the year ended December 31, 2020 was primarily comprised of an increase of $178.3 million in
maturities, sales and redemptions of investment securities and a $2.5 million decrease in purchases of fixed assets,
partially offset by an increase of $25.7 million in purchases of debt and equity securities.
The Company did not report any net cash from financing activities during the year ended December 31, 2020. Net
cash used in financing activities during the year ended December 31, 2019 was $19.2 million as a result of net
proceeds from our senior unsecured note offering of $49.0 million and proceeds from the exercise of employee stock
options of $1.5 million, partially offset by the $30.0 million repayment of the principal balance on our revolving credit
facility and $1.3 million in repurchases of our common stock.
54
Revolving Credit Facilities
Our Second Restated Credit Agreement with Frost Bank (“Frost”) dated June 30, 2015, as amended, provided a $15.0
million revolving credit facility (“Facility A”), with a $5.0 million letter of credit sub-facility. The outstanding balance
of the Facility A bore interest at a rate equal to the prime rate or LIBOR plus 2.5%, at our election. We paid an annual
fee of 0.25% of the average daily unused balance of Facility A and letter of credit fees at the rate of 1.00% per
annum. On August 19, 2019, we terminated Facility A.
The Second Restated Credit Agreement with Frost also provided a $30.0 million revolving credit facility (“Facility
B”), in addition to Facility A. We used Facility B loan proceeds solely for the purpose of making capital contributions
to AHIC and HIC. We paid a quarterly fee of 0.25% per annum of the average daily unused balance of Facility
B. Facility B bore interest at a rate equal to the prime rate or LIBOR plus 3.00%, at our election. On August 19,
2019, we repaid the $30.0 million principal balance and accrued interest on Facility B. Upon such repayment, we
terminated Facility B.
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 38% as of December 31, 2020.
55
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 subordinated debt securities from Hallmark. The debt
securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I. On
August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole
purpose of issuing $25.0 million in trust preferred securities. Trust II used the proceeds from the sale of these securities
and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark. The debt
securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II.
Each trust pays dividends on its preferred securities at the same rate each quarter as interest is paid on the junior
subordinated debt securities. Under the terms of the trust subordinated debt securities, we pay interest only each
quarter and the principal of each note at maturity. We may elect to defer payments of interest on the trust subordinated
debt securities by extending the interest payment period for up to 20 consecutive quarterly periods. During any such
extension period, interest continues to accrue on the trust subordinated debt securities, as well as interest on such
accrued interest. In order to maintain compliance with the terms of our senior unsecured Notes, we have elected to
defer payment of interest on the trust subordinated securities until our debt to capital ratio (as defined in the indenture
governing the Notes) is less than 35%. The subordinated debt securities of each trust are uncollateralized and do not
require maintenance of minimum financial covenants.
The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities:
Hallmark
Statutory
Trust I
Hallmark
Statutory
Trust II
Issue date
Principal amount of trust preferred securities
Principal amount of junior subordinated debt
securities
$
Maturity date of junior subordinated debt securities
$
Trust common stock
$
Interest rate, per annum
Three Month LIBOR + 3.25% Three Month LIBOR + 2.90%
Current interest rate at December 31, 2020
25,774
September 15, 2037
774
30,928
June 15, 2035
928
August 23, 2007
25,000
June 21, 2005
30,000
3.47%
3.12%
$
$
$
Effects of Inflation
We do not believe that inflation has a material effect on our results of operations, except for the effect that inflation
may have on interest rates and claim costs. The effects of inflation are considered in pricing and estimating reserves
for unpaid losses and LAE. The actual effects of inflation on results of operations are not known until claims are
ultimately settled. In addition to general price inflation, we are exposed to the upward trend in the judicial awards for
damages. We attempt to mitigate the effects of inflation in the pricing of policies and establishing reserves for losses
and LAE.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting company.
56
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of Hallmark and its subsidiaries are filed as part of this report.
Description
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020
and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements as of and for the years ended December 31, 2020 and
2019
Financial Statement Schedules
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Page Number
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-61
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.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as
such phrase is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Accounting Officer, an evaluation of the effectiveness
of our internal control over financial reporting was conducted based upon the framework in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework). Based upon that evaluation, management has concluded that our internal control over financial reporting
was effective as of December 31, 2020.
Item 9B. Other Information.
None.
57
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by Item 10 is incorporated by reference from the Registrant’s definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference from the Registrant’s definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information required by Item 12 is incorporated by reference from the Registrant’s definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 is incorporated by reference from the Registrant’s definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Item 14. Principal Accountant Fees and Services.
The information required by Item 14 is incorporated by reference from the Registrant’s definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
58
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
PART IV
The following consolidated financial statements, notes thereto and related information are included in
Item 8 of this report:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and
2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
The following financial statement schedules are included in this report:
Schedule II – Condensed Financial Information of Registrant (Parent Company Only)
Schedule III – Supplemental Insurance Information
Schedule IV – Reinsurance
Schedule VI – Supplemental Information Concerning Property-Casualty Insurance Operations
(a)(3) Exhibit Index
The following exhibits are either filed with this report or incorporated by reference:
Exhibit
Number
Description
3.1
Restated Articles of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to
Amendment No. 1 to the registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed September 8, 2006).
3.2
Amended and Restated By-Laws of the registrant (incorporated by reference to Exhibit 3.1 to the
registrant’s Current Report on Form 8-K filed March 28, 2017).
4.1
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
4.3
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).
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).
59
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
10.1
10.2
10.3
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).
Form of Junior Subordinated Debt Security Due 2035 (included in Exhibit 4.3 above).
Form of Capital Security Certificate (included in Exhibit 4.4 above).
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).
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).
Form of Junior Subordinated Debt Security Due 2037 (included in Exhibit 4.7 above).
Form of Capital Security Certificate (included in Exhibit 4.8 above).
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).
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).
Office Lease for 6500 Pinecrest, Plano, Texas, dated July 22, 2008, between Hallmark Financial
Services, Inc. and Legacy Tech IV Associates, Limited Partnership (incorporated by reference to
Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed July 29, 2008).
First Amendment to Lease Agreement between BRI 1849 Legacy, LLC and Hallmark Financial
Services, Inc. dated January 1, 2015 (incorporated by reference to Exhibit 10.1 to the registrant’s
Current Report on Form 8 K filed January 21, 2015).
Assignment and Assumption of Lease Agreement and Bill of Sale between Equitymetrix, LLC and
Hallmark Financial Services, Inc. dated March 1, 2016 (incorporated by reference to Exhibit 10.1 to
the registrant’s Current Report on Form 8 K filed March 2, 2016).
60
10.4
10.5
10.6*
Lease between Musref 13727 Noel, L.P. and Equitymetrix, LLC dated March 25, 2009, as amended by
First Amendment to Lease between Musref 13727 Noel, L.P. and Equitymetrix, LLC dated February
3, 2010, Second Amendment to Lease between Musref 13727 Noel, L.P. and Equitymetrix, LLC dated
July 2, 2013, and Third Amendment to Lease between Musref 13727 Noel, L.P. and Equitymetrix, LLC
dated February 25, 2014 (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report
on Form 8-K filed March 2, 2016).
Office Lease between Hallmark Financial Services, Inc. and Teachers Insurance and Annuity
Association of America dated August 6, 2018 (incorporated by reference to Exhibit 10.1 to the
registrant’s Current Report on Form 8-K filed August 8, 2018).
Form of Indemnification Agreement between Hallmark Financial Services, Inc. and its officers and
directors, adopted July 19, 2002 (incorporated by reference to Exhibit 10(c) to the registrant’s Quarterly
Report on Form 10-QSB for the quarter ended September 30, 2002).
10.7*
Hallmark Financial Services, Inc. Amended and Restated 2005 Long Term Incentive Plan (incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 3, 2013).
10.8*
Form of Incentive Stock Option Grant Agreement (incorporated by reference to Exhibit 10.2 to the
registrant’s Current Report on Form 8-K filed June 3, 2005).
10.9*
Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the
registrant’s Current Report on Form 8-K filed June 3, 2005).
10.10*
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.13 to the
registrant’s Form 10-K for the year ended December 31, 2013).
10.11*
Hallmark Financial Services, Inc. 2015 Long Term Incentive Plan (incorporated by reference to Exhibit
10.1 to the registrant’s Current Report on Form 8-K filed June 2, 2015).
10.12*
Form of Incentive Stock Option Grant Agreement (incorporated by reference to Exhibit 10.2 to the
registrant’s Current Report on Form 8-K filed June 2, 2015).
10.13*
Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the
registrant’s Current Report on Form 8-K filed June 2, 2015).
10.14*
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to the
registrant’s Form 8-K filed June 2, 2015).
10.15
10.16
Guarantee Agreement dated as of June 21, 2005, by Hallmark Financial Services, Inc. for the benefit
of the holders of trust preferred securities (incorporated by reference to Exhibit 10.1 to the registrant’s
Current Report on Form 8-K filed June 27, 2005).
Guarantee Agreement dated as of August 23, 2007, by Hallmark Financial Services, Inc. for the benefit
of the holders of trust preferred securities (incorporated by reference to Exhibit 10.1 to the registrant’s
Current Report on Form 8-K filed August 24, 2007).
10.17*
Form of Confidentiality and Non-Solicitation Agreement dated May 29, 2015, between Hallmark
Financial Services, Inc. and certain employees of the Company (incorporated by reference to Exhibit
10.23 to the registrant’s Form 10-K for the year ended December 31, 2015).
61
21+
List of subsidiaries of the registrant.
23 (a)+
Consent of Independent Registered Public Accounting Firm.
31(a)+
Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(b).
31(b)+
Certification of principal financial officer required by Rule 13a-14(a) or Rule 15d-14(b).
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+
Inline 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.
104
Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL
document)
* Management contract or compensatory plan or arrangement.
+ Filed herewith.
Item 16. Form 10–K Summary.
Not applicable.
62
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 15, 2021
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
By: /s/ Mark E. Schwarz
Mark E. Schwarz, Chief Executive Officer and
President
Date: March 15, 2021
By: /s/ Christopher J. Kenney
Christopher J. Kenney, Chief Accounting Officer and
Senior Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 15, 2021
Date: March 15, 2021
Date: March 15, 2021
Date: March 15, 2021
Date: March 15, 2021
Date: March 15, 2021
/s/ Mark E. Schwarz
Mark E. Schwarz, Chief Executive Officer and
President (principal executive officer)
/s/ Christopher J. Kenney
Christopher J. Kenney, Chief Accounting Officer and
Senior Vice President (principal financial officer and
principal accounting officer)
/s/ Mark E. Schwarz
Mark E. Schwarz, Executive Chairman
/s/ James H. Graves
James H. Graves, Director
/s/ Mark E. Pape
Mark E. Pape, Director
/s/ Scott T. Berlin
Scott T. Berlin, Director
63
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020
and 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Consolidated Balance Sheets at December 31, 2020 and 2019
Schedule II Statements of Operations at December 31, 2020 and 2019
Schedule II Statements of Cash Flows at December 31, 2020 and 2019
Financial Statement Schedules as of and for the years ended December 31, 2020 and 2019
Page
Number
F-2
F-4
F-5
F-6
F-7
F-58
F-59
F-60
F-61
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Hallmark Financial Services, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hallmark Financial Services, Inc. (the "Company")
as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income,
stockholders' equity, and cash flows, for the years ended December 31, 2020 and 2019, and the related notes and
financial statement schedules (collectively referred to as the "consolidated financial statements"). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2020 and 2019, and the results of its operations and its cash flows for the years ended December 31,
2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Reserves for unpaid losses and loss adjustment expenses
Critical Audit Matter Description
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s reserves for unpaid losses and
loss adjustment expenses reported on the balance sheet were $789.8 million at December 31, 2020. The Company
establishes reserves for unpaid losses and loss adjustment expenses on reported and unreported claims of insured
losses. Reserves for unpaid losses and loss adjustment expenses are estimated based on (i) claims reported, (ii) claims
incurred but not reported, and (iii) projections of claim payments to be made in the future. The estimate is based on
the Company’s historical claims experience and commonly used industry and actuarial practices.
Significant and complex judgments are required in estimating reserves given the subjectivity of incurred but not
reported and projections of claim payments to be made in the future. Auditing these complex judgments and
assumptions is especially challenging and requires significant auditor judgment and the use of specialized skill and
knowledge.
How We Addressed the Matter in Our Audit
The principal audit procedures related to the reserves for unpaid losses and loss adjustment expenses included the
following:
We tested the effectiveness of controls related to the reserves for unpaid losses and loss adjustment expenses,
including those over the Company’s estimates and projections and the completeness and accuracy of
historical claims data used by management’s actuary.
We evaluated the methods and assumptions used by the Company to estimate the reserves for unpaid losses
and loss adjustment expenses by:
o Testing the underlying claim data that served as the basis for the actuarial analysis, including
historical claims, by selecting a sample of claims and corroborating key attributes of claims
detail to ensure that the inputs to the actuarial estimate were complete and accurate
o Assessing the reasonableness of the aforementioned assumptions used as applicable and
comparing the Company’s prior year assumptions of expected development and ultimate loss
to actual losses incurred during the year to assess the reasonableness of those assumptions,
including consideration of potential bias, in the determination of the reserves for unpaid losses
and loss adjustment expenses.
o Engaging an actuarial specialist to evaluate past claims experience, current claim trends and
actuarial estimates, including the length of claims and cost trends associated with claims. With
the assistance of our actuarial specialist, we developed independent estimates for the reserves
for unpaid losses and loss adjustment expenses, utilizing loss data and industry claim
development factors, and compared our estimates to management’s estimates.
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since 2019.
Milwaukee, Wisconsin
March 15, 2021
F-3
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2020 and 2019
($ in thousands, except per share amounts)
Gross premiums written
Ceded premiums written
Net premiums written
Change in unearned premiums
Net premiums earned
Investment income, net of expenses
Investment (losses) gains, net
Finance charges
Commission and fees
Other income
Total revenues
Losses and loss adjustment expenses
Operating expenses
Interest expense
Impairment of goodwill and other intangible assets
Amortization of intangible assets
Total expenses
Loss before tax
Income tax expense
Net loss
Net loss per share:
Basic
Diluted
2020
743,368 $
$
2019
843,831
(347,279)
496,552
(59,675)
436,877
20,604
20,618
7,026
1,190
56
486,371
362,165
117,360
5,410
—
2,468
(304,395)
438,973
42,825
481,798
12,920
(22,894)
5,705
1,156
60
478,745
412,851
126,266
5,326
45,996
2,468
592,907
487,403
(114,162)
(22,507)
(91,655) $
$
(1,032)
(407)
(625)
$
$
(5.05) $
(5.05) $
(0.03)
(0.03)
The accompanying notes are an integral part of the consolidated financial statements
F-4
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the years ended December 31, 2020 and 2019
($ in thousands)
Net loss
Other comprehensive (loss) income:
Change in net actuarial (gain) loss
Tax effect on change in net actuarial gain (loss)
Unrealized holding gains arising during the period
Tax effect on unrealized holding gains arising during the period
Reclassification adjustment for gains included in net loss
Tax effect on reclassification adjustment for gains included in net loss
Other comprehensive (loss) income, net of tax
Comprehensive (loss) income
2020
$ (91,655) $
2019
(625)
(662)
139
709
(149)
(433)
91
(305)
120
(25)
13,645
(2,865)
(4,464)
937
7,348
6,723
$ (91,960) $
The accompanying notes are an integral part of the consolidated financial statements
F-5
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2020 and 2019
(In thousands)
Balance at January 1, 2019
Acquisition of treasury stock
Equity incentive plan activity
Shares issued under employee benefit
plans
Net loss
Other comprehensive income, net of tax
Number
of
Additional
Accumulated
Other
Number
Total
Paid-In Retained Comprehensive Treasury
Stockholders’
Shares Par Value Capital Earnings Income (loss) Stock
20,873 $
$ 123,168 $ 161,195 $
—
—
(6,660) $ (25,928)
(1,380)
—
3,757
—
—
—
887
—
—
—
—
of
Shares
2,846 $
134
—
—
—
—
—
—
—
(587)
—
—
—
(625)
—
—
—
7,348
2,107
—
—
(230)
—
—
Equity
255,532
(1,380)
887
1,520
(625)
7,348
Balance at December 31, 2019
20,873 $
3,757
$ 123,468 $ 160,570 $
688 $ (25,201)
2,750 $
263,282
Acquisition of treasury stock
Equity incentive plan activity
Shares issued under employee benefit
plans
Net loss
Other comprehensive loss, net of tax
—
—
—
—
—
—
—
—
—
—
—
(400)
—
—
(175)
—
—
—
(91,655)
—
—
—
—
—
(305)
—
—
175
—
—
—
—
(19)
—
—
—
(400)
—
(91,655)
(305)
Balance at December 31, 2020
20,873 $
3,757
$ 122,893 $ 68,915 $
383 $ (25,026)
2,731 $
170,922
The accompanying notes are an integral part of the consolidated financial statements
F-6
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2020 and 2019
($ in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to cash (used in) provided by operating
activities:
2020
2019
$
(91,655) $
(625)
Depreciation and amortization expense
Deferred federal income tax (benefit) expense
Investment losses (gains), net
Share-based payments expense
Impairment of goodwill and other intangibles
Change in ceded unearned premiums
Change in premiums receivable
Change in accounts receivable
Change in deferred policy acquisition costs
Change in reserves for losses and loss adjustment expenses
Change in unearned premiums
Change in reinsurance recoverable
Change in reinsurance payable
Change in federal income tax recoverable
Change in all other liabilities
Change in all other assets
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Purchases of investment securities
Maturities, sales and redemptions of investment securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from exercise of employee stock options
Payment of revolving credit facility
Payment of debt issuance costs
Proceeds from senior unsecured note offering
Purchase of treasury shares
Net cash provided by financing activities
Increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents and restricted cash at end of period
5,754
(6,513)
22,894
(400)
45,996
25,295
27,956
(1,681)
5,154
169,413
(68,120)
(174,765)
(12,574)
(16,647)
(4,452)
5,018
(69,327)
(1,667)
(285,507)
409,861
122,687
—
—
—
—
—
—
53,360
54,948
$
108,308 $
5,365
817
(20,618)
887
—
(31,190)
(28,510)
(2,667)
(8,703)
93,108
90,865
(63,437)
(8,054)
(8,999)
5,158
4,273
27,670
(4,188)
(259,769)
231,603
(32,354)
1,520
(30,000)
(979)
50,000
(1,380)
19,161
14,477
40,471
54,948
The accompanying notes are an integral part of the consolidated financial statements
F-7
1. Accounting Policies:
General
Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, the “Company,” “we,” “us” or “our”)
is an insurance holding company engaged 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 channel. Our business units are supported by our insurance company
subsidiaries. Our Commercial Auto business unit offers primary and excess commercial vehicle insurance products
and services; our E&S Casualty business unit offers primary and excess liability, excess public entity liability, E&S
package and garage liability insurance products and services; our E&S Property business unit offers primary and
excess commercial property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability
business unit offers healthcare and financial lines professional liability insurance products and services primarily for
businesses, medical professionals, medical facilities and senior care facilities; and our Aerospace & Programs
business unit offers general aviation and, until exited during 2020, satellite launch property/casualty insurance
products and services, as well as certain specialty programs. Our Commercial Accounts business unit offers package
and monoline property/casualty and occupational accident insurance products. Effective June 1, 2016 we ceased
marketing new or renewal occupational accident policies. Our former Workers Compensation operating unit
specialized in small and middle market workers compensation business. Effective July 1, 2015, we no longer market
or retain any risk on new or renewal workers compensation policies. Our Specialty Personal Lines business unit offers
non-standard personal automobile and renters insurance products and services. Our insurance company subsidiaries
supporting these business units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance
Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company
(“HCM”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”).
These business units are segregated into three reportable industry segments for financial accounting purposes. The
Specialty Commercial Segment includes our Commercial Auto business unit, E&S Casualty business unit, E&S
Property business unit, Professional Liability business unit and Aerospace & Programs business unit. The Standard
Commercial Segment consists of the Commercial Accounts business unit and the runoff from our former Workers
Compensation operating unit. The Personal Segment consists solely of our Specialty Personal Lines business unit.
Basis of Presentation
The accompanying consolidated financial statements include the accounts and operations of Hallmark and its
subsidiaries. Intercompany accounts and transactions have been eliminated. The accompanying consolidated financial
statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) which,
as to our insurance company subsidiaries, differ from statutory accounting practices prescribed or permitted for
insurance companies by insurance regulatory authorities.
F-8
Use of Estimates in the Preparation of Financial Statements
Our preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect our reported amounts of assets and liabilities at the dates of the financial statements and our
reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates and
assumptions on an ongoing basis using historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances. We adjust such estimates and
assumptions when facts and circumstances dictate. Since future events and their effects cannot be determined with
precision, actual results could differ significantly from these estimates. Changes in estimates resulting from
continuing changes in the economic environment may be reflected in the financial statements in future periods.
The liability for unpaid claims and claims adjustment expenses and related amounts recoverable from reinsurers
represents the most significant estimate in the accompanying financial statements, and any difference between such
estimate and actual results could be material. Significant estimates in the accompanying financial statements also
include the fair values of investments, deferred policy acquisition cost recoverability, deferred tax asset valuation,
and fair value of goodwill and intangible assets.
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 balance sheet for these instruments approximate
their fair values.
Restricted Cash: The carrying amount for restricted cash reported in the balance sheet approximates the fair value.
Subordinated debt securities: Our trust preferred securities are reported at carry value of $55.9 million and $55.9
million, and had a fair value of $26.6 million and $41.7 million, as of December 31, 2020 and 2019, respectively, and
would be included in Level 3 of the fair value hierarchy if they were reported at fair value.
Senior unsecured notes due 2029: Our senior unsecured notes payable due in 2029 had a carry value of $49.1 million
and $49.1 million and a fair value of $54.3 million and $49.8 million, as of December 31, 2020 and 2019,
respectively. Our senior unsecured notes payable would be included in Level 3 of the fair value hierarchy if they
were reported at fair value.
For reinsurance balances, premiums receivable, federal income tax recoverable/payable, other assets and other
liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments.
Investments
Debt securities available-for-sale are reported at fair value. Unrealized gains and losses are recorded as a component
of accumulated other comprehensive income (“AOCI”), net of related tax effects. Debt securities that are determined
to have other-than-temporary impairment are recognized as a loss on investments in the consolidated statements of
operations for the portion that is related to credit deterioration with the remaining portion recognized in other
comprehensive income. Debt security premiums and discounts are amortized into earnings using the effective interest
F-9
method. Maturities of debt securities and sales of equity securities are recorded in receivable for securities until the
cash is settled. Purchases of debt and equity securities are recorded in payable for securities until the cash is settled.
Equity securities are reported at fair value with changes in fair value recognized in net income. Equity securities with
readily determinable fair values are not required to be evaluated for other-than-temporary impairment.
Other investments as of December 31, 2019 consisted of an equity warrant which was reported at fair value.
Unrealized gains and losses are reported in the statement of operations as a component of net realized gains (losses).
Realized investment gains and losses are recognized in operations on the first in-first out method.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with an original maturity of three months or
less.
Restricted Cash
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.
Premiums Receivable
Premiums receivable represent amounts due from policyholders or independent agents for premiums written and
uncollected. These balances are carried at net realizable value.
Reinsurance
We are routinely involved in reinsurance transactions with other companies. Reinsurance premiums, losses and loss
adjustment expenses (“LAE”) are accounted for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. (See Note 7.)
F-10
Deferred Policy Acquisition Costs
Policy acquisition costs (mainly direct commission, premium taxes, underwriting, marketing expenses and ceding
commission) that are directly related to the successful acquisition of new and renewal insurance contracts are deferred
and recognized to operations over periods in which the related premiums are earned. The method followed in
computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable
value. In determining estimated realizable value, the computation gives effect to the premium to be earned, expected
investment income, losses and LAE and certain other costs expected to be incurred as the premiums are earned. If the
computation results in an estimated net realizable value less than zero, a liability will be accrued for the premium
deficiency. During 2020 and 2019, we deferred ($152.7) million and ($156.8) million of direct policy acquisition
costs and amortized $165.6 million and $141.0 million of deferred direct policy acquisition costs, respectively. During
2020 and 2019, we deferred $79.0 million and $160.8 million of ceding commission acquisition costs and amortized
($86.7) million and ($153.7) million of deferred ceding commission acquisition costs, respectively. Therefore, the net
amortization (deferrals) of policy acquisition costs were $5.2 million and ($8.7) million for 2020 and 2019,
respectively.
Goodwill and Intangible Assets, net
We account for our goodwill and intangible assets according to ASC 350, “Intangibles – Goodwill and Other.” Under
ASC 350, intangible assets with a finite life are amortized over the estimated useful life of the asset. Goodwill and
intangible assets with an indefinite useful life are not amortized. Goodwill and intangible assets are tested for
impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying
amount may not be recoverable. For goodwill, we may perform a qualitative test to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to perform the quantitative goodwill impairment test. The quantitative impairment test requires an
impairment loss be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the
total goodwill allocated to that reporting unit). We have elected to perform our goodwill impairment test on the first
day of the fourth quarter, October 1, of each year. In connection with our normal process for evaluating impairment
triggering events, during the first quarter of 2020 we determined that a significant decline in market capitalization
below the Company’s stockholders’ equity indicated the impairment of the goodwill and indefinite-lived intangible
assets included on the balance sheet. As a result, the Company took a $44.7 million charge to goodwill and a $1.3
million charge to indefinite-lived intangible assets during the first quarter of 2020. Consequently, as of December
31, 2020 there was no goodwill reported on our consolidated balance sheet.
Leases
We have several leases, primarily for office facilities and computer equipment, which expire in various years through
2032. Some of these leases include rent escalation provisions throughout the term of the lease. We expense the average
annual cost of the lease with the difference to the actual rent invoices recorded as a right of use asset and a lease
obligation. Right of use assets and lease obligations are classified in other assets and in accounts payable and other
accrued expenses, respectively, on our consolidated balance sheets. (see Note 21)
F-11
Property and Equipment
Property and equipment (including leasehold improvements), aggregating $36.3 million and $34.6 million, at
December 31, 2020 and 2019, respectively, which is included in other assets, is recorded at cost and is depreciated
using the straight-line method over the estimated useful lives of the assets (three to ten years) or the life of the lease,
whichever is shorter. Property and equipment includes $2.9million and $3.4 million of leasehold incentives at
December 31, 2020 and 2019, respectively, from the adoption of ASU 2016-02, “Leases (Topic 842)” effective
January 1, 2019. Depreciation expense for 2020 and 2019 was $3.3 million and $3.0 million, respectively.
Accumulated depreciation was $27.1 million and $23.8 million at December 31, 2020 and 2019, respectively. Under
ASC 360, “Impairment or disposal of long-lived assets,” property and equipment is tested for impairment annually
Variable Interest Entities
On June 21, 2005, we formed Hallmark Statutory Trust I (“Trust I”), an unconsolidated trust subsidiary, for the sole
purpose of issuing $30.0 million in trust preferred securities. Trust I used the proceeds from the sale of these securities
and our initial capital contribution to purchase $30.9 million of subordinated debt securities from Hallmark. The debt
securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I.
On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the
sole purpose of issuing $25.0 million in trust preferred securities. Trust II used the proceeds from the sale of these
securities and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark.
The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of
Trust II.
We evaluate on an ongoing basis our investments in Trust I and Trust II (collectively, the “Trusts”) and we do not
have variable interests in the Trusts. Therefore, the Trusts are not consolidated in our consolidated financial
statements.
We are also involved in the normal course of business with variable interest entities primarily as a passive investor in
mortgage-backed securities and certain corporate bank loans issued by third party variable interest entities. The
maximum exposure to loss with respect to these investments is limited to the investment carrying values included in
the consolidated balance sheets.
Losses and Loss Adjustment Expenses
Losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred through
December 31, 2020 and 2019. The reserves for unpaid losses and LAE are estimated using individual case-basis
valuations and statistical analyses. These estimates are subject to the effects of trends in loss severity and frequency.
Although considerable variability is inherent in such estimates, we believe that the reserves for unpaid losses and
LAE are adequate. The estimates are continually reviewed and adjusted as experience develops or new information
becomes known. Such adjustments are included in current operations.
Recognition of Premium Revenues
Insurance premiums are earned pro rata over the terms of the policies. Insurance policy fees are earned as of the
effective date of the policy. Upon cancellation, any unearned premium is refunded to the insured. Insurance
premiums written include gross policy fees of $7.2 million and $8.7 million for the years ended December 31, 2020
and 2019, respectively.
F-12
Finance Charges
We receive premium installment fees for each direct bill payment from policyholders. Installment fee income is
classified as finance charges on the consolidated statement of operations and is recognized as the fee is invoiced.
Agent Commissions
We pay monthly commissions to agents based on written premium produced, but generally recognize the expense pro
rata over the term of the policy. If the policy is cancelled prior to its expiration, the unearned portion of the agent
commission is refundable to us. The unearned portion of commissions paid to agents is included in deferred policy
acquisition costs. We annually pay a profit sharing commission to our independent agency force based upon the
results of the business produced by each agent. We estimate and accrue this liability to commission expense in
the year the business is produced.
Commission expense is classified as operating expenses in the consolidated statements of operations.
Income Taxes
We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences
of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end.
Deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary
differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are
adjusted for tax rate changes in effect for the year in which these temporary differences are expected to be recovered
or settled.
Earnings Per Share
The computation of earnings per share is based upon the weighted average number of common shares outstanding
during the period plus the effect of common shares potentially issuable (in periods in which they have a dilutive
effect), primarily from stock options. (See Notes 12 and 14.)
F-13
Adoption of New Accounting Pronouncements
On August 28, 2018, the FASB issued ASU 2018-13, “Fair Value Measurement: Disclosure Framework- Changes to
the Disclosure Requirements for Fair Value Measurement” (Topic 820), which amends ASC 820 to add, remove, and
modify fair value measurement disclosure requirements. The requirements to disclose the amount of and reasons for
transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels
and the valuation processes for Level 3 fair value measurements have all been removed. However, the changes in
unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements
held at the end of the reporting period must be disclosed along with the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements (or other quantitative information if it is more
reasonable). Finally, for investments measured at net asset value, the requirements have been modified so that the
timing of liquidation and the date when restrictions from redemption might lapse are only disclosed if the investee
has communicated the timing to the entity or announced the timing publicly. This ASU is effective for annual and
interim reporting periods beginning after December 15, 2019. Since the amendments were only disclosure related,
our financial statements were not materially impacted by this update.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (Topic 350). ASU
2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured
as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to
that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill
impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill. The ASU is effective
for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption
of this guidance did not have a material effect on the Company’s results of operations, financials position or liquidity.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 requires organizations that
lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those
leases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU 2016-02 is effective for
interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. During
2018, the FASB issued several amendments and targeted improvements to ease the application of the standard,
including the addition of a transition approach that gave the Company the option of applying the standard at either
the beginning of the earliest comparative period presented or the beginning of the period of adoption. We adopted the
standard on its effective date of January 1, 2019. We also elected certain practical expedients that allow us not to
reassess existing leases under the new guidance. As of December 31, 2020, $14.0 million of right-of-use assets and
$15.9 million of lease liabilities for operating leases were included in the other assets and other liabilities line items
of the balance sheet, respectively, as a result of the adoption of this update.
F-14
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 can be adopted as of March
12, 2020 and are effective through December 31, 2022. We do not currently have any contracts that have been changed
to a new reference rate, but we will continue to evaluate our contracts and the effects of this standard on our condensed
consolidated financial statements prior to adoption.
In December 2019, the FASB issued updated guidance for accounting for income taxes. The updated guidance is
intended to simplify the accounting for income taxes by removing several exceptions contained in the existing
guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated
guidance is effective for the quarter ending March 31, 2021. Early adoption is permitted. The adoption of this
guidance is not expected to have a material effect on the Company’s results of operations, financials 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, but do not anticipate that
any potential impact would be material.
F-15
2. Investments:
The cost or amortized cost and the estimated fair value of investments in debt and equity securities by category is as
follows (in thousands):
Cost/Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
As of December 31, 2020
U.S. Treasury securities and obligations of U.S.
Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Total debt securities
Total equity securities
Total other investments
Total investments
As of December 31, 2019
U.S. Treasury securities and obligations of U.S.
Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Total debt securities
Total equity securities
Total other investments
Total investments
$
$
$
$
179,259
214,666
53,650
49,833
4,759
502,167
26,988
—
529,155
66,441
297,601
115,669
81,787
8,000
569,498
71,895
3,763
645,156
$
487
5,086
3
756
114
6,446
5,648
—
$ 12,094
$
162
3,387
556
1,531
46
5,682
35,028
—
$ 40,710
Major categories of net investment income are summarized as follows (in thousands):
$
- $ 179,746
219,368
52,782
50,539
4,844
507,279
29,388
—
$ (4,582) $ 536,667
(384)
(871)
(50)
(29)
(1,334)
(3,248)
—
$
(3) $ 66,600
300,825
115,757
83,270
7,827
574,279
99,215
2,169
$ (10,203) $ 675,663
(163)
(468)
(48)
(219)
(901)
(7,708)
(1,594)
U.S. Treasury securities and obligations of U.S. Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Equity securities
Cash and cash equivalents
Investment expenses
Investment income, net of expenses
Twelve Months Ended December 31,
$
$
2020
885
7,223
1,688
2,347
192
1,369
—
13,704
(784)
12,920
2019
916
7,317
6,028
3,907
311
2,364
766
21,609
(1,005)
20,604
$
$
No investments in any entity or its affiliates exceeded 10% of stockholders’ equity at December 31, 2020 or 2019.
F-16
Major categories of net investment gains (losses) on investments are summarized as follows (in thousands):
U.S. Treasury securities and obligations of U.S. Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Equity securities
Other investments
Gain on investments
Other-than-temporary impairments
Unrealized (losses) gains on equity securities
Unrealized gains on other investments
Investment (losses) gains, net
Year Ended December 31,
2020
2019
(3) $
959
40
1,397
—
3,472
(3,740)
2,125
(1,692)
(24,921)
1,594
(22,894) $
—
235
(34)
4,270
—
(7)
—
4,464
—
15,133
1,021
20,618
$
$
We realized gross gains on investments of $22.8 million and $5.0 million during the years ended December 31, 2020
and 2019, respectively, of which $21.0 million and $4.1 million were from the sales of securities during the years
ended December 31, 2020 and 2019, respectively. We realized gross losses on investments of $20.7 million and $0.5
million during the years ended December 31, 2020 and 2019, respectively, of which $20.2 million and $0.1 million
was from the sale of securities during the years ended December 31, 2020 and 2019, respectively. We recorded
proceeds from the sale of investment securities of $155.0 million and $13.0 million during the years ended
December 31, 2020 and 2019, respectively. Realized investment gains and losses are recognized in operations on the
first in-first out method.
The following schedules summarize the gross unrealized losses showing the length of time that investments have
been continuously in an unrealized loss position as of December 31, 2020 and December 31, 2019 (in thousands):
12 months or less
As of December 31, 2020
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
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Total debt securities
Total equity securities
Total other investments
Total investments
$
— $
— $
— $
— $
— $
7,801
45,233
2,859
635
56,528
9,572
—
—
(384)
(871)
(50)
(29)
(1,334)
(3,248)
—
$ 66,100 $ (2,413) $ 10,716 $ (2,169) $ 76,816 $ (4,582)
11,357
49,377
4,013
649
65,396
11,420
—
(186)
(559)
(33)
(25)
(803)
(1,610)
—
(198)
(312)
(17)
(4)
(531)
(1,638)
—
3,556
4,144
1,154
14
8,868
1,848
—
F-17
U.S. Treasury securities and obligations of
U.S. Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Total debt securities
Total equity securities
Total other investments
Total investments
12 months or less
As of December 31, 2019
Longer than 12 months
Total
Unrealized
Unrealized
Unrealized
Fair Value Losses
Fair Value Losses
Fair Value Losses
— $
(3) $ 5,513 $
— $ 5,513 $
$
27,268
9,000
4,808
1,712
42,788
10,905
—
(3)
(163)
(468)
(48)
(219)
(901)
(7,708)
(1,594)
$ 53,693 $ (2,678) $ 27,333 $ (7,525) $ 81,026 $ (10,203)
1,150
10,228
1,618
562
19,071
6,093
2,169
28,418
19,228
6,426
2,274
61,859
16,998
2,169
(144)
(41)
(29)
(101)
(315)
(2,363)
—
(19)
(427)
(19)
(118)
(586)
(5,345)
(1,594)
We held a total of 81 debt securities with an unrealized loss, of which 64 were in an unrealized loss position for less
than one year and 17 were in an unrealized loss position for a period of one year or greater, as of December 31, 2020.
We held a total of 61 debt securities with an unrealized loss, of which 41 were in an unrealized loss position for less
than one year and 20 were in an unrealized loss position for a period of one year or greater, as of December 31, 2019.
We held a total of 13 equity securities with an unrealized loss, of which six were in an unrealized loss position for
less than one year and seven were in an unrealized loss position for a period of one year or greater, as of December
31, 2020. We held a total of nine equity securities with an unrealized loss, of which seven were in an unrealized loss
position for less than one year and two were in an unrealized loss position for a period of one year or greater, as of
December 31, 2019. 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 December 31, 2020 were due predominately to normal 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 recognized $1.7
million of other-than-temporary impairment on debt securities during 2020. We did not recognize an impairment loss
during 2019.
F-18
Debt Investments: We assess whether we intend to sell, or it is more likely than not that we will be required to sell, a
fixed maturity investment before recovery of its amortized cost basis less any current period credit losses. For fixed
maturity investments that are considered other-than-temporarily impaired and that we do not intend to sell and will
not be required to sell, we separate the amount of the impairment into the amount that is credit related (credit loss
component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the
difference between the investment’s amortized cost basis and the present value of its expected future cash flows. The
remaining difference between the investment’s fair value and the present value of future expected cash flows is
recognized in other comprehensive income. During 2020 we disposed of one previously impaired security and
recognized no gain or loss on disposal. During 2019 we disposed of six previously impaired securities and recognized
a realized gain of $4.1 million.
Equity Investments: Equity investments that are not consolidated or accounted for under the equity method of
accounting are measured at fair value with changes in fair value recognized in net income each reporting period.
Equity securities with readily determinable fair values are not required to be evaluated for other-than-temporary-
impairment.
Details regarding the carrying value of the other invested assets portfolio as of December 31, 2020 and 2019 were as
follows:
Investment Type
Equity warrant
Total other investments
December 31, December 31,
2020
2019
$
$
— $
— $
2,169
2,169
We acquired this equity warrant in an active market and disposed of it during the fourth quarter of 2020. It entitled us
to buy the underlying common stock of a publicly traded company at a fixed exercise price until the expiration date
of January 19, 2021.
The amortized cost and estimated fair value of debt securities at December 31, 2020 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.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed
Amortized Cost Fair Value
(in thousands)
255,768 $ 257,246
203,625
200,343
28,363
28,632
13,202
12,665
4,843
4,759
502,167 $ 507,279
$
$
We have certain of our securities pledged 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 $29.7 million at
December 31, 2020 and a carrying value of $28.9 million at December 31, 2019.
3. Fair Value:
ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure
requirements about fair value measurements. ASC 820, among other things, requires us to maximize the use of
F-19
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 common and preferred stock and the
equity warrant classified as Other Investments.
Level 2 investment securities include corporate bonds, 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 services.
There were no transfers between Level 1 and Level 2 securities during 2020 or 2019.
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.
F-20
The following table presents for each of the fair value hierarchy levels, our assets that are measured at fair value on a
recurring basis at December 31, 2020 and December 31, 2019 (in thousands).
U.S. Treasury securities and obligations of U.S.
Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Total debt securities
Total equity securities
Total other investments
Total investments
U.S. Treasury securities and obligations of U.S.
Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Total debt securities
Total equity securities
Total other investments
Total investments
Quoted Prices in
Active Markets for
As of December 31, 2020
Identical Assets Other Observable Unobservable
(Level 1)
Inputs (Level 2) Inputs (Level 3)
Total
$
$
— $
—
—
—
—
—
29,388
—
29,388 $
179,746 $
219,020
52,782
50,539
4,844
506,931
—
—
506,931 $
— $ 179,746
219,368
348
52,782
—
50,539
—
—
4,844
507,279
348
29,388
—
—
—
348 $ 536,667
Quoted Prices in
Active Markets for
As of December 31, 2019
Identical Assets Other Observable Unobservable
(Level 1)
Inputs (Level 2) Inputs (Level 3)
Total
$
$
— $
—
—
—
—
—
99,215
2,169
101,384 $
66,600 $
300,486
115,757
83,270
7,827
573,940
—
—
573,940 $
— $ 66,600
300,825
339
115,757
—
83,270
—
—
7,827
574,279
339
99,215
—
—
2,169
339 $ 675,663
Due to significant unobservable inputs into the valuation model for one corporate bond as of December 31, 2020 and
2019, we classified this investment as Level 3 in the fair value hierarchy. The corporate bond classified as level 3 in
2020 and 2019 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.
F-21
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 year ended December 31, 2020 and 2019 (in
thousands).
Beginning balance as of January 1
Sales
Settlements
Purchases
Issuances
Total realized/unrealized gains included in net income
Net gain included in other comprehensive income
Transfers into Level 3
Transfers out of Level 3
Ending balance as of December 31
2020
2019
$
$
339 $
—
—
—
—
9
—
—
—
348 $
291
—
—
—
—
48
—
—
—
339
There were no transfers into or out of Level 3 during the years ended December 31, 2020 or 2019. We account for
transfers as they occur.
4. Acquisitions, Goodwill and Intangible Assets:
Goodwill is tested for impairment at the reporting unit level (business unit or one level below a business unit) on an
annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying value. For purposes of evaluating goodwill for
impairment, we have determined that our reporting units are the same as our business units except for the E&S
Casualty and Aerospace & Programs business units for which reporting units are at the component level (“one level
below”). Our consolidated balance sheet as of December 31, 2019 included goodwill of acquired businesses of $44.7
million that was assigned to our business units as follows: Commercial Accounts business unit - $2.1 million;
Commercial Auto business units - $21.3 million; E&S Casualty business unit - $6.3 million (comprised of $2.6
million for the primary/excess liability and public entity component and $3.7 million for the E&S package
component); Aerospace & Programs business unit- $9.7 million (comprised entirely of the general aviation
component); and Specialty Personal Lines business unit - $5.3 million. This amount had been recorded as a result of
prior business acquisitions accounted for under the acquisition method of accounting. Under ASC 350, “Intangibles-
Goodwill and Other,” goodwill is tested for impairment annually. In connection with our normal process for
evaluating impairment triggering events, during the first quarter of 2020 we determined that a significant decline in
our market capitalization below our stockholders’ equity indicated the impairment of goodwill and indefinite-lived
intangible assets included in our balance sheet. As a result, we took a $44.7 million charge to goodwill and a $1.3
million charge to indefinite-lived intangible assets during the first quarter of 2020. As a result, as of December 31,
2020 there was no goodwill or indefinite-lived intangibles reported on our consolidated balance sheet.
During 2019, we completed the first step prescribed by ASC 350 for testing for impairment and determined that there
was no impairment.
F-22
We have obtained various intangible assets from several acquisitions. The table below details the gross and net
carrying amounts of these assets by major category (in thousands):
Gross Carrying Amount:
Customer/agent relationships
Tradename
Management agreement
Non-compete & employment agreements
Insurance licenses
Total gross carrying amount
Accumulated Amortization:
Customer/agent relationships
Tradename
Management agreement
Non-compete & employment agreements
Total accumulated amortization
Total net carrying amount
December 31
2020
2019
$ 32,177 $ 32,177
3,440
3,232
4,235
1,300
44,384
3,440
3,232
4,235
—
43,084
(28,752)
(30,990)
(3,078)
(3,305)
(3,232)
(3,232)
(4,235)
(4,235)
(41,762)
(39,297)
$ 1,322 $ 5,087
We amortize definite-lived intangible assets straight line over their respective lives. The estimated aggregate
amortization expense for definite-lived intangible assets for the next five years is as follows (in thousands):
2021
2022
2023
2024
2025
$
$
$
$
$
503
501
318
—
—
The weighted average amortization period for definite-lived intangible assets by major class is as follows:
Tradename
Customer/ agent relationships
Management agreement
Non-compete agreements
Years
15
15
4
5
The aggregate weighted average period to amortize these assets is approximately 13 years.
F-23
5. Other Assets:
The following table details our other assets as of December 31, 2020 and 2019 (in thousands):
2020
2019
Profit sharing commission receivable
Accrued investment income
Investment in unconsolidated trust subsidiaries
Fixed assets
Right of use asset
Other assets
$
26 $
26
4,483
1,702
10,843
16,044
164
$ 28,013 $ 33,262
2,928
1,702
9,222
13,986
149
6. Reserves for Losses and Loss Adjustment Expenses:
Activity in the consolidated reserves for unpaid losses and LAE is summarized as follows (in thousands):
Balance at January 1
Less reinsurance recoverable
Net balance at January 1
Incurred related to:
Current year
Loss portfolio transfer
Prior years
Total incurred
Paid related to:
Current year
Loss portfolio transfer
Prior years
Total paid
Net balance at December 31
Plus reinsurance recoverable
Balance at December 31
$
2020
620,355 $
272,604
347,751
2019
527,247
221,716
305,531
332,863
21,700
58,288
412,851
113,312
21,700
185,407
320,419
301,265
—
60,900
362,165
127,610
—
192,335
319,945
440,183
349,585
789,768 $
347,751
272,604
620,355
$
The $58.3 million unfavorable net development and $60.9 million unfavorable net development in prior
accident years recognized in 2020 and 2019, respectively, represent changes in our loss reserve estimates. In 2020
and 2019, the aggregate loss reserve estimates for prior years were increased to reflect unfavorable loss development
when the available information indicated a reasonable likelihood that the ultimate losses would be more than the
previous estimates. The unfavorable prior year reserve development during the twelve months ended December 31,
2020 was primarily driven by the continued emergence of increased frequency and severity trends in our primary
commercial automobile lines of business within our Commercial Auto business unit, which was representative of
industry trends, as well as unfavorable development in our general liability lines within our E&S Casualty business
unit and our Standard Commercial Segment, as well as our personal automobile liability line in our Specialty Personal
Lines business unit. The unfavorable prior year reserve development during the twelve months ended December 31,
2019 was primarily driven by increased frequency and severity trends in our primary commercial auto lines of
business within our Commercial Auto business unit, which was representative of industry trends, as well as
F-24
unfavorable development in our general liability lines within our E&S Casualty business unit. Generally, changes in
reserves are caused by variations between actual experience and previous expectations and by reduced emphasis on
the Bornhuetter-Ferguson method due to the aging of the accident years.
The impact from the unfavorable (favorable) net prior years’ loss development on each reporting segment is presented
below:
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Total unfavorable net prior year development
December 31,
2020
2019
$ 45,808 $ 60,138
726
36
—
$ 58,288 $ 60,900
3,357
9,123
—
The following describes the primary factors behind each segment’s prior accident year loss reserve development for
the years ended December 31, 2020 and 2019:
Year ended December 31, 2020:
Specialty Commercial Segment. Our Commercial Auto business unit experienced net unfavorable
development in the 2018 and prior accident years primarily in the commercial automobile liability line of
business, partially offset by favorable development primarily in the commercial automobile line of business
in the 2019 accident year. Our E&S Casualty business unit experienced net unfavorable development
primarily in our E&S package insurance products in the 2018 and prior accident years, partially offset by
favorable development in the 2019 accident year. We experienced net favorable development in our E&S
Property and Aerospace & Programs business units, partially offset by net unfavorable development in our
Professional Liability.
Standard Commercial Segment. Our Commercial Accounts business operating unit experienced net
unfavorable development in the 2018 and prior accident years primarily in the general liability line of
business, partially offset by net favorable development primarily in the commercial property and commercial
automobile liability lines of business in the 2019 accident year and net favorable development primarily in
the 2017 accident year in the occupational accident line of business. Our former Workers Compensation
operating unit experienced net favorable development primarily in the 2014 and prior accident years.
Personal Segment. Net unfavorable development in our Specialty Personal Lines business unit was mostly
attributable to the 2018, 2016, 2014 and 2012 and prior accidents years, partially offset by favorable
development in the 2017, 2015 and 2013 accident years.
F-25
Year ended December 31, 2019:
Specialty Commercial Segment. Our Commercial Auto business unit experienced net unfavorable
development in the 2017 and prior accident years primarily in the commercial automobile liability line of
business, partially offset by favorable development primarily in the commercial automobile line of business
in the 2018 accident year. Our E&S Casualty business unit experienced net unfavorable development
primarily in our E&S package insurance products in the 2018 and prior accident years. We experienced net
favorable development in our E&S Property and Professional Liability business units, partially offset by net
unfavorable development in our Aerospace & Programs business unit.
Standard Commercial Segment. Our Commercial Accounts business operating unit experienced net
unfavorable development in the 2017, 2016, 2015 and 2013 and prior accident years primarily in the general
liability line of business, partially offset by net favorable development primarily in the commercial property
line of business in the 2018 and 2014 accident years and net favorable development primarily in the 2015
accident year in the occupational accident line of business. Our former Workers Compensation operating unit
experienced net favorable development primarily in the 2015 accident year.
Personal Segment. Net unfavorable development in our Specialty Personal Lines business unit was mostly
attributable to the 2018, 2016, 2014 and 2012 and prior accidents years, partially offset by favorable
development in the 2017, 2015 and 2013 accident years.
Reserves for unpaid losses and LAE represent management’s best estimate of our ultimate liabilities, based on
currently known facts, current law, current technology and assumptions considered reasonable where facts are not
known. Due to the significant uncertainties and related management judgments, there can be no assurance that future
favorable or unfavorable loss development, which may be material, will not occur.
Short-Duration Contract Disclosures
ASU 2015-09, “Disclosures about Short-Duration Contracts (Topic 944)", requires insurers to make disclosures about
their liability for unpaid claims and claim adjustment expenses for short-duration insurance contracts. These
disclosures include tables showing incurred and paid claims development information (net of reinsurance and
excluding unallocated loss adjustment expenses) which are disaggregated based on the characteristics of the insurance
contracts that the insurer writes and other factors specific to the reporting entity. The information should be disclosed
by accident year for the number of years claims typically remain outstanding, but need not be more than 10 years,
including a reconciliation of the disaggregated information to the consolidated statement of financial position. We
have evaluated the disaggregation criteria and concluded that the basis for our disaggregation of this information is
the similar claim duration period of our primary lines of business (certain lines of business have short settlement
periods versus long settlement periods).
F-26
Reserves for Incurred But Not Reported (“IBNR”) Claims
Reserves for IBNR claims are based on the estimated ultimate cost of settling claims, including the effects of inflation
and other social and economic factors, using past experience adjusted for current trends and any other factors that
would modify past experience. We use a variety of statistical and actuarial techniques to analyze current claims costs,
including frequency and severity data and prevailing economic, social and legal factors. Each such method has its
own set of assumptions and outputs, and each has strengths and weaknesses in different areas. Since no single
estimation method is superior to another method in all situations, the methods and assumptions used to project loss
reserves will vary by coverage and product. We use what we believe to be the most appropriate set of actuarial
methods and assumptions for each product line grouping and coverage. While the loss projection methods may vary
by product line and coverage, the general approach for calculating IBNR remains the same: ultimate losses are
forecasted first, and that amount is reduced by the amount of cumulative paid claims and case reserves. Reserves
established in prior years are adjusted as loss experience develops and new information becomes available.
Adjustments to previously estimated reserves are reflected in the results of operations in the year in which they are
made.
As described above, various actuarial methods are utilized to determine the reserves for losses and LAE recorded in
our consolidated balance sheets. Weightings of methods at a detailed level may change from evaluation to evaluation
based on a number of observations, measures, and time elements.
Methodology for Determining Cumulative Number of Reported Claims
A claim file is created when the Company is notified of an actual demand for payment, notified of an event that may
lead to a demand for payment or it is determined that a demand for payment could possibly lead to a future demand
for payment on another coverage on the same policy or on another policy.The cumulative number of reported claims
is predominately measured at the claim level for our Commercial Accounts, Aviation, Personal, Primary Commercial
Auto Liability, and certain Programs lines of business and at a coverage level by occurrence for our other lines of
business. The Company does not generate claim counts for ceded business.
F-27
Incurred & Paid Claims Development Disclosures
The following tables provide information about incurred and cumulative paid losses and allocated loss adjustment
expenses (“ALAE”), net of reinsurance for our primary lines of business with similar claims duration periods. The
incurred and paid losses by accident year information presented for all lines of business with similar claim duration
periods in the below tables for calendar years prior to 2016 is required supplementary information and is unaudited.
The following tables also include IBNR reserves plus expected development on reported claims and the cumulative
number of reported claims as of December 31, 2020 ($ in thousands):
Commercial Auto Liability
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
As of December 31,
Cumulative
Number of
Reported
IBNR
2020
Claims
2020
3,299
3,645
4,694
5,258
5,919
6,118
6,265
5,257
3,886
2,645
2020
57,450
75,893
105,194
121,683
139,605
133,918
143,791
86,894
39,632
14,491
918,550
1,017
218,999
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
2011
2012
$ 49,933 $ 52,099 $ 55,934 $
60,844
2013
69,628
93,692
2014
55,853 $
68,225
86,902
102,053
2015
55,259 $
71,515
90,726
93,187
106,133
2016
53,587 $
73,153
96,974
99,280
106,608
111,913
2017
53,691 $
75,464
102,031
106,138
125,161
115,044
125,315
2018
55,775 $
75,657
103,379
113,357
133,574
121,714
119,583
119,070
2019
57,499 $
76,333
103,571
116,373
135,774
137,690
148,563
118,334
118,351
2020
57,502 $
75,907
105,448
120,417
141,197
140,794
154,993
110,052
128,652
101,568
Total $ 1,136,532
52
4
(132)
(1,657)
443
(47)
(437)
6,965
46,179
65,968
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Unaudited
For the Years Ended December 31,
2011
$
8,288
$
2012
27,773
12,859
$
2013
44,227
30,046
13,333
$
$
2014
49,793
46,510
40,670
17,145
2015
52,261
59,883
63,255
43,078
18,108
$
2016
52,928
69,026
83,184
67,410
48,239
19,788
$
2017
53,203
72,907
93,554
88,823
95,056
53,398
22,578
$
$
2018
53,276
75,190
101,146
107,912
123,668
106,707
77,884
26,101
$
2019
53,275
75,039
106,894
112,617
141,678
129,761
133,880
49,912
16,812
Total
$
All outstanding liabilities before 2011, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
F-28
Casualty
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
2011
2012
2013
2014
2015
2016
2017
2018
For the Years Ended December 31,
Unaudited
13,020
$ 14,331 $ 11,675 $ 12,942 $ 12,529 $ 11,855 $ 11,510 $ 11,407 $ 11,265 $ 11,660 $
12,230
12,384
14,007
17,362
13,098
12,002
15,590
11,301
13,379
13,330
12,792
12,034
16,746
16,039
12,390
12,874
11,663
15,046
16,513
17,845
11,852
12,205
11,676
15,266
16,927
15,751
23,056
2019
12,944
13,330
13,167
15,945
18,625
20,360
24,590
34,610
2020
11,542 $
13,400
13,274
13,140
16,931
17,508
18,023
23,856
43,426
62,464
Total $ 233,564
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Accident
Year
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Unaudited
For the Years Ended December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
2,340
$
4,292
1,337
$
$
6,007
2,666
1,331
$
8,334
6,096
3,190
1,829
$
9,292
8,037
5,461
4,196
1,420
$
9,642
10,255
9,212
5,499
4,133
1,753
$
9,868
10,938
11,134
8,075
8,258
5,672
2,900
$
11,149
11,357
11,866
11,327
13,553
11,269
5,884
2,708
As of December 31,
Cumulative
Number of
Reported
Claims
2020
IBNR
2020
103
(393)
(394)
(344)
(298)
(897)
(781)
766
10,666
40,788
2019
11,204
12,572
12,555
12,365
16,158
16,442
11,268
8,027
2,526
Total
720
655
629
708
741
757
1,208
1,827
2,693
6,752
$
2020
11,294
12,725
12,478
13,003
15,729
17,111
16,264
15,363
17,177
6,176
$ 137,320
1,059
97,302
All outstanding liabilities before 2011, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
F-29
Commercial Accounts
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$ 49,375 $ 46,540 $ 45,723 $ 41,721 $ 41,081 $ 40,745 $ 40,100 $ 38,585 $ 38,585 $ 38,492 $
For the Years Ended December 31,
Unaudited
47,194
48,085
46,413
44,625
47,385
46,280
42,632
46,990
46,470
40,966
41,451
43,917
43,806
42,580
43,327
40,350
42,822
43,806
41,429
43,449
40,943
38,669
39,567
43,673
38,385
41,983
42,704
42,898
38,669
40,211
42,463
39,287
43,111
43,579
41,290
37,984
39,462
40,141
42,503
39,206
45,267
44,732
44,590
34,616
40,356
Total $ 409,365
As of December 31,
Cumulative
Number of
Reported
IBNR
2020
145
228
216
411
931
1,662
1,971
4,879
4,149
19,332
Claims
2020
2,915
2,711
2,804
2,741
2,576
2,539
2,733
2,591
2,689
2,574
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Unaudited
For the Years Ended December 31,
2011
22,002
$
$
2012
30,811
22,264
$
2013
33,701
30,096
19,386
$
2014
35,333
32,378
29,586
21,322
$
2015
36,302
34,597
33,927
31,150
16,557
$
2016
37,214
35,943
36,225
33,544
28,501
19,776
$
2017
38,253
37,808
37,947
36,775
30,974
29,456
16,644
$
$
2018
38,311
38,044
38,892
39,185
35,238
35,035
28,813
19,233
$
2019
38,228
38,211
39,329
41,162
35,611
39,417
36,650
29,381
17,490
Total
$
All outstanding liabilities before 2011, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
2020
38,278
38,518
39,560
41,658
37,135
40,828
41,631
33,546
26,233
13,942
351,328
1,566
59,603
F-30
Aviation
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
2011
2012
$ 12,330 $ 11,299 $
2013
9,759 $
2014
9,729 $
2015
9,829 $
10,988
10,738
10,236
10,353
11,304
3,179
10,336
10,295
3,654
1,870
2016
9,884 $ 10,045 $ 10,028 $ 10,028 $ 10,028 $
2020
2017
2018
2019
10,024
9,563
3,627
1,709
2,330
10,021
10,057
3,558
1,643
2,241
2,325
9,941
10,649
3,566
1,631
2,119
2,082
2,382
9,941
10,252
3,567
1,630
2,219
2,079
1,990
5,246
9,446
10,297
3,567
1,635
2,220
2,178
2,565
4,525
3,487
Total $ 49,948
As of December 31,
Cumulative
Number of
Reported
Claims
2020
IBNR
2020
—
—
—
—
1
4
11
49
119
884
305
229
231
201
198
292
320
336
290
270
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2011
2012
2013
2014
Unaudited
$
6,313
$
8,894
5,641
$
$
8,924
8,486
6,537
$
9,311
9,672
9,493
2,779
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
2015
9,546
10,049
9,584
3,105
958
2016
2017
$
9,628
10,041
9,.356
3,259
1,405
1,469
$
10,028
10,041
9,944
3,327
1,520
1,907
1,260
$
2018
10,028
10,041
10,456
3,565
1,601
1,918
1,837
1,716
$
2019
10,028
9,941
10,242
3,567
1,630
2,082
2,021
2,237
2,911
Total
$
All outstanding liabilities before 2011, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
2020
10,028
9,446
10.281
3,567
1,634
2,216
2,054
2,368
3,787
2,120
47,501
—
2,448
F-31
Runoff
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2011
$ 10,861 $
2012
9,949 $
4,804
Unaudited
2013
9,433 $
4,469
9,069
2014
7,547 $
3,597
10,143
9,208
2015
6,185 $
3,358
9,713
9,338
8,605
2016
6,678 $
2,821
9,257
9,762
7,277
3,553
2017
6,741 $
2,636
9,257
10,076
8,624
4,733
450
2018
6,659 $
2,752
9,472
10,452
8,892
4,365
465
—
As of December 31,
Cumulative
Number of
Reported
IBNR
2020
Claims
2020
106
91
228
719
186
—
60
—
—
—
965
714
1,337
1,027
822
462
66
—
—
—
2019
6,637 $
2,752
9,486
10,463
8,420
4,416
415
—
—
2020
4,666 $
2,773
9,483
10,292
8,526
4,425
403
—
—
—
Total $ 40,568
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Unaudited
For the Years Ended December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
2,897
$
4,308
1,181
$
$
5,208
2,107
3,737
$
4,968
2,411
6,825
2,933
$
4,838
2,594
7,882
5,972
2,528
$
5,227
2,583
8,350
7,970
5,744
1,732
$
5,427
2,600
8,809
9,004
7,328
2,550
111
$
5,483
2,602
8,961
9,210
8,049
3,743
171
—
$
5,357
2,675
9,010
9,323
8,495
4,418
203
—
—
Total
$
All outstanding liabilities before 2011, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
5,630
2,675
9,050
9,487
8,512
4,425
282
—
—
—
40,062
1,720
2,226
F-32
Programs
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
317 $
196 $
196 $
196 $
196 $
196 $
196 $
196 $
196 $
196 $
For the Years Ended December 31,
Unaudited
3,001
2,045
1,595
2,045
2,543
1,623
3,885
1,561
666
1,683
2,045
2,076
2,039
1,629
478
2,045
2,302
1,575
752
1,200
955
2,045
2,302
1,575
752
1,178
1,775
3,598
2,045
2,302
1,575
752
1,178
1,801
4,368
5,407
2,045
2,302
1,575
752
1,178
1,982
4,222
9,150
6,737
Total $ 30,139
As of December 31,
Cumulative
Number of
Reported
Claims
2020
IBNR
2020
—
—
—
—
—
—
15
104
809
2,130
3
2
5
2
1
65
770
977
652
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Unaudited
For the Years Ended December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
196
$
196
2,045
$
$
196
2,045
1,489
$
196
2,045
1,561
758
$
196
2,045
1,561
1,502
1,515
$
196
2,045
2,076
1,575
1,629
1,139
$
196
2,045
2,302
1,575
752
1,139
36
$
196
2,045
2,302
1,575
752
1,178
1,556
911
$
196
2,045
2,302
1,575
752
1,178
1,551
1,290
4,501
Total
$
All outstanding liabilities before 2011, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
196
2,045
2,302
1,575
752
1,178
1,967
3,778
7,794
2,908
24,495
—
5,644
F-33
Personal Segment
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$ 75,746 $ 77,652 $ 87,810 $ 86,757 $ 86,804 $ 86,948 $ 86,853 $ 87,199 $ 87,198 $ 87,087 $
For the Years Ended December 31,
Unaudited
58,604
73,795
55,706
70,552
59,132
5,452
71,513
60,100
5,340
23,104
72,042
60,211
6,243
25,682
32,260
72,037
60,379
6,699
25,307
32,893
23,342
72,076
60,328
6,504
25,136
32,728
21,968
18,334
72,100
60,310
6,518
25,102
32,803
21,926
18,353
56,009
72,123
60,286
6,578
25,185
33,042
22,547
19,972
63,722
47,938
Total $ 438,481
As of December 31,
Cumulative
Number of
Reported
IBNR
2020
—
—
—
—
—
—
—
30
(1,025)
5,351
Claims
2020
31,615
23,940
23,472
19,293
23,376
23,757
16,810
15,321
25,627
17,510
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Unaudited
For the Years Ended December 31,
2011
46,416
$
$
2012
67,939
37,860
$
2013
83,497
64,278
45,901
$
2014
85,533
68,849
54,514
2,515
$
2015
86,217
70,807
58,047
4,418
11,570
$
2016
86,593
71,995
59,775
5,631
22,281
21,669
$
2017
86,660
72,055
60,277
6,428
24,262
30,646
15,776
$
$
2018
86,989
72,094
60,297
6,566
25,243
32,260
21,061
11,137
$
2019
87,045
72,124
60,279
6,580
25,098
32,777
21,972
18,009
41,524
Total
All outstanding liabilities before 2011, net of reinsurance
$
2020
87,042
72,138
60,279
6,583
25,169
32,991
22,488
19,628
60,870
32,746
419,934
50
Liabilities for claims and claim adjustment expenses, net of reinsurance $
18,597
F-34
Property
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
2011
2012
2013
2015
$ 11,768 $ 12,289 $ 12,228 $ 12,406 $ 12,598 $ 12,616 $ 12,494 $ 12,551 $ 12,549 $
17,743
22,264
21,950
20,256
18,119
22,363
22,551
17,541
21,644
18,518
2016
2014
2018
2017
17,768
22,578
21,862
19,919
20,734
18,005
22,914
21,793
20,014
22,838
24,182
17,974
22,936
21,852
20,091
22,632
23,003
22,822
2019
17,963
22,935
21,876
20,202
22,789
24,490
18,694
20,214
2020
12,549 $
17,963
22,935
21,932
20,107
22,781
24,287
19,611
20,984
41,487
Total $ 224,636
As of December 31,
Cumulative
Number of
Reported
Claims
2020
IBNR
2020
—
—
—
(81)
142
(0)
1
114
181
12,769
1,512
1,629
1,893
2,037
1,993
2,031
2,007
1,064
1,182
1,330
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Unaudited
For the Years Ended December 31,
2011
10,317
$
$
2012
12,354
15,773
$
2013
12,343
17,679
17,785
$
2014
12,370
17,743
21,452
19,586
$
2015
12,492
17,666
21,864
21,749
17,513
$
2016
12,541
17,693
22,197
21,778
19,500
17,248
$
2017
12,550
17,978
22,826
21,849
19,928
22,500
18,703
$
$
2018
12,551
17,974
22,936
21,911
20,134
22,613
22,059
10,923
$
2019
12,549
17,963
22,935
21,955
19,953
22,789
23,821
16,914
11,344
Total
All outstanding liabilities before 2011, net of reinsurance
$
2020
12,549
17,963
22,935
22,013
19,965
22,781
24,179
18,138
18,895
18,215
197,634
—
Liabilities for claims and claim adjustment expenses, net of reinsurance $
27,002
F-35
The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in our
consolidated balance sheets is as follows (in thousands):
Net outstanding liabilities for losses and LAE
Commercial Auto Liability
Casualty
Commercial Accounts
Aviation
Runoff
Programs
Personal Segment
Property
2020
2019
$ 218,999 $ 189,896
63,528
51,200
2,514
3,109
4,234
15,027
11,489
97,302
59,603
2,448
2,226
5,644
18,597
27,002
Liabilities for unpaid losses and allocated loss adjustment expenses,
net of reinsurance
431,821
340,997
Reinsurance recoverable on unpaid losses and LAE
Commercial Auto Liability
Casualty
Commercial Accounts
Aviation
Runoff
Programs
Personal Segment
Property
Total reinsurance recoverable on unpaid losses and LAE
Unallocated loss adjustment expenses
Commercial Auto Liability
Casualty
Commercial Accounts
Aviation
Runoff
Programs
Personal Segment
Property
Total unallocated loss adjustment expenses
Total reserves for unpaid losses and loss adjustment expenses
91,040
122,341
20,464
10,143
1,184
968
5,613
97,832
349,585
112,931
91,900
13,671
9,469
1,326
3,618
11,752
27,937
272,604
1,850
1,681
2,643
104
170
61
1,250
603
8,362
1,383
760
2,732
85
170
63
1,250
311
6,754
$ 789,768 $ 620,355
F-36
Claims Duration
The following table provides supplementary unaudited information about the annual percentage payout of incurred
losses and ALAE, net of reinsurance, as of December 31, 2020:
Commercial Auto Liability
Casualty
Commercial Accounts
Aviation
Runoff
Programs
Personal Segment
Property
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (1)
Unaudited
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
16.4 % 24.6 % 25.5 % 15.9 %
9.6 %
9.7 % 20.1 % 22.6 % 23.3 % 12.6 %
3.7 %
44.8 % 26.3 %
7.7 %
3.2 %
5.0 %
64.5 % 23.7 %
2.4 %
38.1 % 27.9 % 16.3 %
— %
5.7 %
58.5 % 35.8 %
0.9 %
8.9 %
56.0 % 28.8 %
7.1 %
3.8 %
8.5 %
— %
4.7 %
4.8 %
3.2 %
3.1 %
1.2 %
1.9 %
— %
0.3 %
1.6 %
3.0 %
2.6 %
0.6 %
1.4 %
— %
0.1 %
1.0 %
2.8 %
2.1 %
(2.0)%
1.4 %
— %
0.2 %
0.6 %
1.9 %
1.6 %
— %
1.2 %
— %
0.1 %
67.5 % 25.0 %
3.6 %
2.2 %
1.1 %
0.6 %
— %
— %
— %
— %
0.8 %
1.0 %
— %
0.9 %
— %
— %
— %
(1) The average annual percentage payout is calculated from a paid losses and ALAE development pattern based on
an actuarial analysis of the paid losses and ALAE movements by accident year for each disaggregation category.
The paid losses and ALAE development pattern provides the expected percentage of ultimate losses and ALAE
to be paid in each year. The pattern considers all accident years included in the claims development tables.
7. 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 December 31, 2020 and 2019 were 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.
F-37
The following table presents our gross and net premiums written and earned and reinsurance recoveries for the last
two years (in thousands):
Premium Written :
Direct
Assumed
Ceded
Net premiums written
Premium Earned:
Direct
Assumed
Ceded
Net premiums earned
Reinsurance recoveries
2020
2019
$ 734,800 $ 836,797
7,034
(347,279)
$ 438,973 $ 496,552
8,568
(304,395)
$ 803,034 $ 748,203
4,763
(316,089)
$ 481,798 $ 436,877
8,454
(329,690)
$ 260,826 $ 211,768
Included in reinsurance recoverable on the consolidated balance sheets are paid loss recoverables of $55.6 million
and $36.6 million as of December 31, 2020 and 2019, respectively.
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 Hallmark 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 December 31, 2020, the ultimate incurred losses were $177.6 million or $1.5 million in excess of the Hallmark
Insurers’ loss corridor. Our reinsurance recoverables of $490.2 million include $63.7 million related to the LPT as
of December 31, 2020.
F-38
8. Revolving Credit Facilities:
Our Second Restated Credit Agreement with Frost Bank (“Frost”) dated June 30, 2015, as amended, provided a $15.0
million revolving credit facility (“Facility A”), with a $5.0 million letter of credit sub-facility. The outstanding balance
of the Facility A bore interest at a rate equal to the prime rate or LIBOR plus 2.5%, at our election. We paid an annual
fee of 0.25% of the average daily unused balance of Facility A and letter of credit fees at the rate of 1.00% per
annum. On August 19, 2019, we terminated Facility A.
The Second Restated Credit Agreement with Frost also provided a $30.0 million revolving credit facility (“Facility
B”), in addition to Facility A. We used Facility B loan proceeds solely for the purpose of making capital contributions
to AHIC and HIC. We paid a quarterly fee of 0.25% per annum of the average daily unused balance of Facility
B. Facility B bore interest at a rate equal to the prime rate or LIBOR plus 3.00%, at our election. On August 19, 2019,
we repaid the $30 million principal balance and accrued interest on Facility B. Upon such repayment, we terminated
Facility B.
9. 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 38%
as of December 31, 2020.
F-39
10. Subordinated Debt Securities:
We issued trust preferred securities through Trust I and Trust II. These Delaware statutory trusts are sponsored and
wholly-owned by Hallmark and each was created solely for the purpose of issuing the trust preferred securities. Each
trust pays dividends on its preferred securities at the same rate each quarter as interest is paid on the junior
subordinated debt securities. Under the terms of the trust 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.
Each trust pays dividends on its preferred securities at the same rate each quarter as interest is paid on the junior
subordinated debt securities. Under the terms of the trust subordinated debt securities, we pay interest only each
quarter and the principal of each note at maturity. We may elect to defer payments of interest on the trust subordinated
debt securities by extending the interest payment period for up to 20 consecutive quarterly periods. During any such
extension period, interest continues to accrue on the trust subordinated debt securities, as well as interest on such
accrued interest. In order to maintain compliance with the terms of our senior unsecured Notes, we have elected to
defer payment of interest on the trust subordinated securities until our debt to capital ratio (as defined in the indenture
governing the Notes) is less than 35%. The subordinated debt securities of each trust are uncollateralized and do not
require maintenance of minimum financial covenants.
The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities:
Hallmark
Statutory
Trust I
Hallmark
Statutory
Trust II
Issue date
Principal amount of trust preferred securities
Principal amount of junior subordinated debt
securities
$
Maturity date of junior subordinated debt securities
$
$
Trust common stock
Interest rate, per annum
Three Month LIBOR + 3.25% Three Month LIBOR + 2.90%
Current interest rate at December 31, 2020
25,774
September 15, 2037
774
30,928
June 15, 2035
928
August 23, 2007
25,000
June 21, 2005
30,000
3.12%
3.47%
$
$
$
F-40
11. Segment Information:
We pursue our business activities primarily through subsidiaries whose operations are organized into business units
and are supported by our insurance carrier subsidiaries. Our non-carrier insurance activities are organized by business
units into the following reportable segments:
Specialty Commercial Segment. Our Specialty Commercial Segment includes our Commercial Auto
business unit which offers primary and excess commercial vehicle insurance products and services; our E&S
Casualty business unit which offers primary and excess liability, excess public entity liability, E&S package
and garage liability insurance products and services; our E&S Property business unit which offers primary
and excess commercial property insurance for both catastrophe and non-catastrophe exposures; our
Professional Liability business unit which offers healthcare and financial lines professional liability insurance
products and services primarily for businesses, medical professionals, medical facilities and senior care
facilities; and our Aerospace & Programs business unit which offers general aviation and, until discontinued
during 2020, satellite launch property/casualty insurance products and services, as well as certain specialty
programs.
Standard Commercial Segment. Our Standard Commercial Segment includes the package and monoline
property/casualty and occupational accident insurance products and services handled by our Commercial
Accounts business unit and the runoff of workers compensation insurance products handled by our former
Workers Compensation operating unit. Effective June 1, 2016, we ceased marketing new or renewal
occupational accident policies. Effective July 1, 2015, the former Workers Compensation operating unit
ceased retaining any risk on new or renewal policies.
Personal Segment. Our Personal Segment includes the non-standard personal automobile and renters
insurance products and services handled by our Specialty Personal Lines business unit.
The retained premium produced by these reportable segments is supported by our AHIC, HSIC, HIC, HNIC and
TBIC insurance company subsidiaries. In addition, control and management of HCM is maintained through our
wholly owned subsidiary, CYR Insurance Management Company (“CYR”). CYR has as its primary asset a
management agreement with HCM which provides for CYR to have management and control of HCM. HCM is used
to front certain lines of business in our Specialty Commercial and Personal Segments in Texas. HCM does not retain
any business.
AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement pursuant to which AHIC retains 32% of the
net premiums written by any of them, HIC retains 32% of the net premiums written by any of them, HSIC retains
26% of the net premiums written by any of them and HNIC retains 10% of the net premiums written by any of them.
Neither HCM nor TBIC is a party to the pooling arrangement.
F-41
The following is additional business segment information for the twelve months ended December 31, 2020 and 2019
(in thousands):
Revenues
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
Depreciation and Amortization Expense
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
Interest Expense
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
Tax (Benefit) Expense
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
Pre-tax (loss) income
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
2020
2019
$
350,412 $
69,819
84,730
(26,216)
478,745 $
3,287 $
611
1,024
832
5,754 $
— $
—
—
5,326
5,326 $
(1,212) $
(599)
(2,038)
(18,658)
(22,507) $
$
$
$
$
$
$
$
309,619
68,179
88,225
20,348
486,371
3,158
598
1,227
382
5,365
—
—
—
5,410
5,410
(540)
(331)
168
296
(407)
$
(6,146) $
(3,039)
(10,338)
(94,639)
$ (114,162) $
(1,371)
(841)
427
753
(1,032)
The following is additional business segment information as of the following dates (in thousands):
Assets:
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
$
December 31,
2020
1,104,953 $
183,689
133,310
63,581
December 31,
2019
1,082,804
193,710
164,685
54,075
$
1,485,533
$
1,495,274
F-42
12. Earnings Per Share:
We have adopted the provisions of ASC 260, “Earnings Per Share,” requiring presentation of both basic and diluted
earnings per share. A reconciliation of the numerators and denominators of the basic and diluted per share calculations
is presented below (in thousands, except per share amounts):
Numerator for both basic and diluted earnings per share:
Net (loss) income
Denominator, basic shares
Effect of dilutive securities:
Stock-based compensation awards
Denominator, diluted shares
Basic (loss) earnings per share:
Diluted (loss) earnings per share:
2020
2019
$ (91,655) $
(625)
18,137
18,107
—
18,137
—
18,107
$
(5.05) $
(0.03)
$
(5.05) $
(0.03)
We had 14,157 shares of common stock potentially issuable upon exercise of employee stock options for years ended
December 31, 2020 and 2019, that 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, expire in 2021.
13. Regulatory Capital Restrictions:
Hallmark, as a holding company, is dependent on dividend payments and management fees from its subsidiaries to
fund its operating expenses, debt obligations and capital needs, including the ability to pay dividends to its
stockholders. Hallmark has never paid dividends on its common stock. Hallmark intends to continue this policy for
the foreseeable future in order to retain earnings for development of its business. There are no regulatory or contractual
restrictions on the ability of Hallmark to pay dividends other than customary default provisions and the impact of any
dividend payment on financial ratio covenants. However, there are restrictions on the ability of Hallmark’s insurance
carrier subsidiaries to transfer funds to the holding company. The amount of retained earnings that is unrestricted for
the payment of dividends by Hallmark to its shareholders was $16.8 million as of December 31, 2020.
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. 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 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. For all our insurance companies, dividends may only be paid from unassigned
surplus funds. During 2021, the aggregate ordinary dividend capacity of these subsidiaries is $22.5 million, of which
$15.0 million is available to Hallmark.
F-43
As a county mutual, dividends from HCM are payable to policyholders. During the years ended December 31, 2020
and 2019 our insurance company subsidiaries paid $12.0 million and $15.5 million, respectively, in dividends to
Hallmark. The total restricted net assets of our insurance company subsidiaries as of December 31, 2020, was $154.2
million.
The state insurance departments also regulate financial transactions between our insurance subsidiaries and their
affiliated companies. Applicable regulations require approval of management fees, expense sharing contracts and
similar transactions. Our insurance subsidiaries paid $3.0 million in management fees to Hallmark and our non-
insurance subsidiaries during 2020. Our insurance subsidiaries did not pay management fees to Hallmark and our
non-insurance company subsidiaries during 2019.
Statutory capital and surplus is calculated as statutory assets less statutory liabilities. The various state insurance
departments that regulate our insurance company subsidiaries require us to maintain a minimum statutory capital and
surplus. As of December 31, 2020 and 2019, our insurance company subsidiaries reported statutory capital and
surplus of $211.6 million and $254.7 million, respectively, substantially greater than the minimum requirements for
each state. For the years ended December 31, 2020, and 2019, respectively, our insurance company subsidiaries
reported a statutory net loss of $10.1 million and $10.2 million, respectively.
The National Association of Insurance Commissioners requires property/casualty insurers to file a risk-based capital
calculation according to a specified formula. The purpose of the formula is twofold: (1) to assess the adequacy of an
insurer’s statutory capital and surplus based upon a variety of factors such as potential risks related to investment
portfolio, ceded reinsurance and product mix; and (2) to assist state regulators under the RBC for Insurers Model Act
by providing thresholds at which a state commissioner is authorized and expected to take regulatory action. As of
December 31, 2020, the adjusted capital under the risk-based capital calculation of each of our insurance company
subsidiaries substantially exceeded the minimum requirements.
14. Share-based Payment Arrangements:
Our 2005 Long Term Incentive Plan (“2005 LTIP”) is a stock compensation plan for key employees and non-
employee directors that was initially approved by the shareholders on May 26, 2005 and expired by its terms on May
27, 2015. As of December 31, 2020, there were no outstanding incentive stock options and outstanding non-qualified
stock options to purchase 14,157 shares of our common stock. The exercise price of all such outstanding stock options
is equal to the fair market value of our common stock on the date of grant.
Our 2015 Long Term Incentive Plan (“2015 LTIP”) was approved by shareholders on May 29, 2015. There are
2,000,000 shares authorized for issuance under the 2015 LTIP. As of December 31, 2020, restricted stock units
representing the right to receive up to 530,236 shares of our common stock were outstanding under the 2015 LTIP.
There were no outstanding stock option awards under the 2015 LTIP as of December 31, 2020.
F-44
Stock Options:
Non-qualified stock options outstanding under the 2005 LTIP vest 100% six months after the date of grant and
terminate ten years from the date of grant. The grant of 200,000 non-qualified stock options in 2009 vested in equal
annual increments on each of the first seven anniversary dates and was fully exercised prior to termination in 2019.
A summary of the status of our stock options as of December 31, 2020 and changes during the year then ended is
presented below:
Average
Remaining
Aggregate
Number of Weighted Average Contractual Intrinsic Value
Shares
Exercise Price
Term (Years)
($000)
Outstanding at January 1, 2020
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2020
Exercisable at December 31, 2020
14,157 $
—
— $
— $
14,157 $
14,157 $
6.99
—
—
—
6.99
6.99
1.0 $
1.0 $
—
—
The following table details the intrinsic value of options exercised, total cost of share-based payments charged against
income before income tax benefit and the amount of related income tax benefit recognized in income for the periods
indicated (in thousands):
Intrinsic value of options exercised
Cost of share-based payments (non-cash)
Income tax benefit of share-based payments recognized in income
2020
2019
$
$
$
— $
— $
— $
845
—
—
As of December 31, 2020, there was no unrecognized compensation cost related to non-vested stock options granted
under our plans which is expected to be recognized in the future.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing
model. Expected volatilities are based on the historical volatility of Hallmark’s and similar companies’ common stock
for a period equal to the expected term. The risk-free interest rates for periods within the contractual term of the
options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options expected lives on
the dates of grant. Expected term is determined based on the simplified method as we do not have sufficient historical
exercise data to provide a basis for estimating the expected term. There were no stock options granted during 2020 or
2019.
Restricted Stock Units:
Restricted stock units awarded under the 2015 LTIP represent the right to receive shares of common stock upon the
satisfaction of vesting requirements, performance criteria and other terms and conditions. Restricted stock units vest
and, if performance criteria have been satisfied, shares of common stock become issuable on March 31 of the third
calendar year following the year of grant.
F-45
The performance criteria for all restricted stock units require that we achieve certain compound average annual growth
rates in book value per share as well as certain average combined ratio percentages over the vesting period in order
to receive shares of common stock in amounts ranging from 50% to 150% of the number of restricted stock units
granted. 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,” 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 2017, 2018 and 2019 was $10.20, $10.87 and $18.10 per unit, respectively.
We incurred compensation expense (benefit) of ($400) thousand and $887 thousand related to restricted stock units
during the years ended December 31, 2020 and 2019. We recorded income tax benefit (expense) of ($84) thousand
and $186 thousand related to restricted stock units during the years ended December 31, 2020 and 2019.
The following table details the status of our restricted stock units as of and for the years ended December 31, 2020
and 2019:
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
Number of Restricted Stock Units
2020
353,491
—
(19,065)
(105,599)
228,827
2019
338,897
97,804
—
(83,210)
353,491
As of December 31, 2020, there was $1.0 million of unrecognized grant date compensation cost related to unvested
restricted stock units assuming compensation cost accrual at target achievement level. Based on the current
performance estimate, we expect to recognize $0.3 million of compensation cost related to unvested restricted stock
units, of which $0.2 million is expected to be recognized in 2021 and $0.1 million is expected to be recognized in
2022.
15. Retirement Plans:
Certain employees of the Standard Commercial Segment were participants in a defined cash balance plan covering
all full-time employees who had completed at least 1,000 hours of service.
This plan was frozen in March 2001 in anticipation of distribution of plan assets to members upon plan termination.
All participants were vested when the plan was frozen.
F-46
The following tables provide detail of the changes in benefit obligations, components of benefit costs, weighted-
average assumptions, and plan assets for the retirement plan as of and for the twelve months ending December 31,
2020 and 2019 (in thousands) using a measurement date of December 31.
Assumptions (end of period):
Discount rate used in determining benefit obligation
Rate of compensation increase
Reconciliation of funded status (end of period):
Accumulated benefit obligation
Projected benefit obligation
Fair value of plan assets
Funded status
Net actuarial loss
Accumulated other comprehensive loss
Prepaid pension cost
Net amount recognized as of December 31
Changes in projected benefit obligation:
Benefit obligation as of beginning of period
Interest cost
Actuarial liability loss
Benefits paid
Benefit obligation as of end of period
Change in plan assets:
Fair value of plan assets as of beginning of period
Actual return on plan assets (net of expenses)
Employer contributions
Benefits paid
Fair value of plan assets as of end of period
Net periodic pension cost:
Service cost - benefits earned during the period
Interest cost on projected benefit obligation
Expected return on plan assets
Recognized actuarial loss
Net periodic pension cost
Discount rate
Expected return on plan assets
Rate of compensation increase
F-47
2020
2019
2.12 %
N/A
2.98 %
N/A
$ (13,252)
$ (12,376)
$ (13,252)
11,393
(1,859)
$
$ (12,376)
10,988
$ (1,388)
$
$
$
$
$
$
$
(4,672)
(4,672)
2,813
(1,859)
(4,010)
(4,010)
2,622
$ (1,388)
12,376
355
1,352
(831)
13,252
$ 11,687
454
1,083
(848)
$ 12,376
10,988
1,236
—
(831)
11,393
$ 9,669
1,667
500
(848)
$ 10,988
—
355
(684)
138
(191)
$
$
—
454
(607)
143
(10)
2.98 %
6.50 %
N/A
4.05 %
6.50 %
N/A
Estimated future benefit payments by fiscal year (in thousands):
2021
2022
2023
2024
2025
2026-2030
$
$
$
$
$
$
887
880
865
857
836
3,830
As of December 31, 2020, the fair value of the plan assets was composed of cash and cash equivalents of $0.5 million,
debt securities of $2.9 million and equity securities of $8.0 million.
Our investment objectives are to preserve capital and to achieve long-term growth through a favorable rate of return
equal to or greater than 5% over the long-term (60 year) average inflation rate as measured by the consumer price
index. The objective of the equity portion of the portfolio is to achieve a return in excess of the Standard & Poor’s
500 index. The objective of the fixed income portion of the portfolio is to add stability, consistency, safety and total
return to the total fund portfolio.
We prohibit investments in options, futures, precious metals, short sales and purchase on margin. We also restrict the
investment in fixed income securities to “A” rated or better by Moody’s or Standard & Poor’s rating services and
restrict investments in common stocks to only those that are listed and actively traded on one or more of the major
United States stock exchanges, including NASDAQ. We manage to an asset allocation of 45% to 75% in equity
securities. An investment in any single stock issue is restricted to 5% of the total portfolio value and 90% of the
securities held in mutual or commingled funds must meet the criteria for common stocks.
To develop the expected long-term rate of return on assets assumption, we consider the historical returns and the
future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This
resulted in the selection of the 6.5% long-term rate of return on assets assumption. The expected return on plan assets
uses the fair market value as of December 31, 2020. To develop the discount rate used in determining the benefit
obligation we used the Findley AA Pension Discount Curve at the measurement date to match the timing and amounts
of projected future benefits. A corridor approach is used to amortize actuarial gains and losses. We are applying the
10% threshold set forth in ASC 715. In addition, since all accrued benefits under the plan are frozen, we are amortizing
the unrecognized gains and losses outside of the corridor by the average life expectancy of the plan participants.
We expect that we will not be required to make a contribution to the defined benefit cash balance plan during 2021.
We expect our 2021 periodic pension cost to be $(265) thousand, the components of which are interest cost of $271
thousand, expected return on plan assets of ($709) thousand and amortization of actuarial loss of $173 thousand.
The following table shows the weighted-average asset allocation for the defined benefit cash balance plan held as of
December 31, 2020 and 2019.
Asset Category:
Debt securities
Equity securities
Other
Total
December 31
2020
2019
25 %
70 %
5 %
100 %
31 %
64 %
5 %
100 %
We determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820.
(See Note 3.)
F-48
The following table presents, for each of the fair value hierarchy levels, our plan assets that are measured at fair value
on a recurring basis at December 31, 2020 and December 31, 2019 (in thousands).
As of December 31, 2020
Quoted Prices in Active Other Observable
Markets for Identical
Assets (Level 1)
Inputs
(Level 2)
Unobservable Inputs
(Level 3)
Total
Debt securities
Equity securities
Total
$
$
— $
7,978
7,978 $
2,875 $
—
2,875 $
— $ 2,875
—
7,978
— $ 10,853
Debt securities
Equity securities
Total
As of December 31, 2019
Quoted Prices in Active
Markets for Identical Other Observable Unobservable Inputs
Assets (Level 1)
Inputs (Level 2)
(Level 3)
Total
$
$
— $
6,977
6,977 $
3,410 $
—
3,410 $
— $ 3,410
—
6,977
— $ 10,387
Our plan assets also include cash and cash equivalents of $0.5 million and $0.6 million at December 31, 2020 and
2019, respectively, that are carried at cost which approximates fair value.
We also sponsor a defined contribution plan. Under this plan, employees may contribute a portion of their
compensation on a tax-deferred basis, and we may contribute a discretionary amount each year. We did not contribute
during the year ended December 31, 2020. We contributed $0.7 million for the year ended December 31, 2019.
F-49
16. Income Taxes:
The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2020 and 2019,
are as follows (in thousands):
Deferred tax liabilities:
Deferred policy acquisition costs
Net unrealized holding gain on investments
Agency relationship
Intangible assets
Goodwill
Bond amortization
Fixed assets
Other
Total deferred tax liabilities
Deferred tax assets:
Unearned premiums
Amortization of non-compete agreements
Intangible assets
Pension liability
Net operating loss carry-forward
Unpaid loss and loss adjustment expense
Rent reserve
Bonus accrual
Deferred social security tax
Investment impairments
Other
Total deferred tax assets
2020
2019
$ (3,746) $ (4,829)
(6,408)
(1,579)
(17)
(11)
(1,882)
—
(357)
—
(77)
—
(1,529)
(1,293)
(315)
(343)
(15,414)
(6,972)
7,639
—
308
981
118
4,688
45
671
356
336
554
15,696
9,438
36
—
842
2,154
3,284
18
722
—
489
616
17,599
Deferred federal income taxes, net
$ 8,724 $ 2,185
We concluded that no valuation allowance was necessary against our deferred tax assets as of December 31, 2020
and 2019.
F-50
A reconciliation of the income tax provisions based on the applicable statutory tax rate of 21% to the provisions
reflected in the consolidated financial statements for the years ended December 31, 2020 and 2019, respectively, is
as follows (in thousands):
Computed expected income tax (benefit) expense at statutory tax rate
Meals and entertainment
Tax exempt interest
Dividends received deduction
Goodwill
State taxes (net of federal benefit)
Rate differential on NOL
True up
Other
Income tax benefit
Current income tax benefit
Deferred tax (benefit) expense
Income tax benefit
2020
$ (23,974) $
28
(300)
(111)
7,410
223
(3,383)
(2,369)
(31)
$ (22,507) $
2019
(217)
102
(421)
(191)
—
414
—
—
(94)
(407)
$ (15,994) $ (1,224)
817
(407)
(6,513)
$ (22,507) $
We have available, for federal income tax purposes, unused net operating loss carryforwards of $0.6 million at
December 31, 2020. The Tax Cuts and Jobs Act of 2017 (“TCJA”) generally repealed the previous two year carry-
back and 20 year carry-forward provision for net operating losses and adopted an indefinite carry-forward of net
operating losses arising in tax years ending after December 31, 2017. However, the TCJA preserved present law for
net operating losses of property/casualty insurance companies. Thus, our net operating losses may be carried-back
two years and carried-forward 20 years. On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act
(“CARES Act”) was signed into law. The CARES Act grants taxpayers a five-year carry-back period for net operating
losses arising in tax years beginning after December 31, 2017 and before January 1, 2021 (i.e. calendar years 2018,
2019 and 2020).
F-51
The net operating losses will expire if unused, as follows (in thousands):
Year
2022
2028
2029
2031
2032
2033
2034
2035
2036
2037
2038
2039
Indefinite
$
—
2
25
45
77
73
59
33
50
29
—
—
168
561
$
We are no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for years
prior to 2017. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
There were no uncertain tax positions at December 31, 2020.
F-52
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:
As of December 31,
2020
2019
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash shown in the statement of cash flows $ 108,308 $
$ 102,580 $
5,728
53,336
1,612
54,948
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 years ended December 31, 2020 and 2019:
Interest paid
Income taxes paid
Supplemental schedule of non-cash investing activities:
Receivable for securities related to investment disposals
Payable for securities related to investment purchases
December 31,
2020
2019
$
4,860 $
4,289
$
653 $
7,775
$
$
913 $
12,581
- $
1,648
F-53
18. Commitments and Contingencies:
On May 5, 2020, a lawsuit styled Schulze v. Hallmark Financial Services, Inc., et al. (Case No. 3:20-cv-01130) was
filed in the U.S. District Court for the Northern District of Texas, Dallas Division (the “Schulze Matter”). The
Company, its Chief Executive Officer and its former Chief Financial Officer are named defendants in the lawsuit
brought on behalf of a putative class of shareholders who acquired Hallmark securities between March 5, 2019 and
March 17, 2020. In general, the complaint alleges that the defendants violated the Securities Exchange Act of 1934
by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its
reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company
would be forced to report $63.8 million of prior year net adverse loss development, (d) the Company would exit the
contract binding line of its commercial automobile primary insurance business, and by making positive statements
about the Company’s business, operations and prospects that were allegedly materially misleading and/or lacked a
reasonable basis. On July 21, 2020, the court appointed Rajeev Yalamanchili as Lead Plaintiff. Lead Plaintiff filed
an Amended Complaint on September 30, 2020. The litigation is in its initial stages. The Company’s current policy
is to expense legal costs as incurred. Historically, the Company has not carried director and officer liability insurance
and does not currently hold such a policy.
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 2020 and 2019.
As of December 31, 2020 we were engaged in various 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.
F-54
19. Changes in Accumulated Other Comprehensive Income Balances:
The changes in accumulated other comprehensive income balances as of December 31, 2020 and 2019 were as follows
(in thousands):
Pension Unrealized
Liability Gains (Loss)
$ (3,334) $ (3,326) $
Accumulated Other
Comprehensive
Income (Loss)
Balance at January 1, 2019
Other comprehensive income:
Change in net actuarial loss
Tax effect on change in net actuarial loss
Unrealized holding gains arising during the period
Tax effect on unrealized gains arising during the period
Reclassification adjustment for gains included in net realized gains
Tax effect on reclassification adjustment for gains included in income
tax expense
Other comprehensive income, net of tax
120
(25)
—
—
—
—
95
—
—
13,645
(2,865)
(4,464)
937
7,253
Balance at December 31, 2019
Other comprehensive loss:
Change in net actuarial gain
Tax effect on change in net actuarial gain
Unrealized holding gains arising during the period
Tax effect on unrealized gains arising during the period
Reclassification adjustment for gains included in net realized gains
Tax effect on reclassification adjustment for gains included in income
tax expense
Other comprehensive loss, net of tax
Balance at December 31, 2020
$ (3,239) $
3,927 $
(662)
139
—
—
—
—
—
709
(149)
(433)
—
(523)
$ (3,762) $
91
218
4,145 $
(6,660)
120
(25)
13,645
(2,865)
(4,464)
937
7,348
688
(662)
139
709
(149)
(433)
91
(305)
383
20. Concentrations of Credit Risk:
We maintain cash and cash equivalents in accounts with four financial institutions in excess of the amount insured by
the Federal Deposit Insurance Corporation. We monitor the financial stability of the depository institutions regularly
and do not believe excessive risk of depository institution failure existed at December 31, 2020 and 2019.
We are also subject to credit risk with respect to reinsurers to whom we have ceded underwriting risk. Although a
reinsurer is liable for losses to the extent of the coverage it assumes, we remain obligated to our policyholders in the
event that the reinsurers do not meet their obligations under the reinsurance agreements. In order to mitigate credit
risk to reinsurance companies, we monitor the financial condition of reinsurers on an ongoing basis and review our
reinsurance arrangements periodically. Most of our reinsurance recoverable balances as of December 31, 2020 and
2019 were 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.
21. Leases:
We adopted ASU 2016-02, “Leases, (Topic 842)” on January 1, 2019, which resulted in the recognition of operating
leases on the balance sheet in 2019 and going forward. See Note 1 for more information on the adoption of ASU
2016-02. 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 also elected certain practical expedients that allow us not to
F-55
reassess existing leases under the new guidance. 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 which have lease and non-lease components 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 13 years, some of which include options to extend the leases.
The components of lease expense and other lease information as of and during the periods ended December 31, 2020
and 2019 are as follows (in thousands):
Twelve Months Ended
December 31,
2020
2019
Operating lease cost
$
3,010 $
2,936
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for new operating lease liabilities
$
$
2,473 $
1,889
— $
—
We incurred $19 thousand and $26 thousand in short-term lease payments not included in our lease liability during
the years ended December 31, 2020 and 2019, respectively.
The components of lease expense and other lease information as of and during the twelve month periods ended
December 31, 2020 and 2019 are as follows (in thousands):
December 31,
2020
2019
Operating lease right-of-use assets
Operating lease liabilities
$
$
13,986
15,862
$
$
Weighted-average remaining lease term - operating leases
Weighted-average discount rate - operating leases
10.2
5.88%
16,044
17,347
10.6
5.88%
F-56
Future minimum lease payments under non-cancellable leases as of December 31, 2020 and December 31, 2019 are
as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease payments
Less imputed interest
Total operating lease liability
December 31,
2020
December 31,
2019
$
$
$
$
—
2,172
2,171
1,885
1,940
13,326
21,494
(5,632)
15,862
$
$
$
$
2,473
2,172
2,171
1,885
1,940
13,326
23,967
(6,620)
17,347
F-57
Schedule II – Condensed Financial Information of Registrant (Parent Company Only)
HALLMARK FINANCIAL SERVICES, INC.
BALANCE SHEETS
December 31, 2020 and 2019
(In thousands)
2020
2019
ASSETS
Debt securities, available-for-sale, at fair value (amortized cost; $ 0 in 2020 and $150 in
2019)
Cash and cash equivalents
Investment in subsidiaries
Deferred federal income taxes
Federal income tax recoverable
Other assets
Total assets
$
— $
1,024
19,637
358,436
1,053
5,904
21,278
$ 310,540 $ 407,332
30,066
247,839
285
12,506
19,844
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $844 in 2020
and $942 in 2019)
Subordinated debt securities (less unamortized debt issuance cost of $795 in 2020 and
$846 in 2019)
Accounts payable and other accrued expenses
Total liabilities
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831
shares in 2020 and in 2019
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock (2,730,673 shares in 2020 and 2,749,738 in 2019), at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
$ 49,156 $ 49,058
55,907
34,555
139,618
55,856
39,136
144,050
3,757
122,893
68,915
383
(25,026)
3,757
123,468
160,570
688
(25,201)
170,922
263,282
$ 310,540 $ 407,332
See accompanying report of independent registered public accounting firm.
F-58
Schedule II (Continued) – Condensed Financial Information of Registrant (Parent Company Only)
HALLMARK FINANCIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2020 and 2019
(In thousands)
Investment income, net of expenses
Dividend income from subsidiaries
Net realized gains
Management fee income
Total revenues
Operating expenses
Interest expense
Total expenses
2020
$
20 $
12,000
744
22,844
35,608
2019
47
15,500
830
16,044
32,421
17,101
5,326
14,185
5,410
22,427
19,595
Income before equity in undistributed earnings of subsidiaries and income tax benefit
13,181
12,826
Income tax expense
Income before equity in undistributed earnings of subsidiaries
Equity in undistributed share of loss in subsidiaries
Net loss
Comprehensive (loss) income
(5,592)
(732)
18,773
(110,428)
13,558
(14,183)
$ (91,655) $
(625)
$ (91,960) $
6,723
See accompanying report of independent registered public accounting firm.
F-59
Schedule II (Continued) – Condensed Financial Information of Registrant (Parent Company Only)
HALLMARK FINANCIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2020 and 2019
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense
Deferred income tax expense (benefit)
Net realized gains
Undistributed share of loss of subsidiaries
Change in current federal income tax (recoverable) payable
Change in all other liabilities
Change in all other assets
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Purchase of investment securities
Maturities, sales and redemptions of investment securities
Capital contribution to subsidiaries
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from exercise of employee stock options
Payment of revolving credit facility
Payment of debt issuance costs
Proceeds from senior unsecured note offering
Purchase of treasury shares
Net cash used provided by (used in) financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information:
Interest paid
Income taxes paid (recovered)
2020
2019
$
(91,655) $
(625)
835
768
(744)
110,428
(6,602)
(17,851)
14,368
9,547
381
(611)
(830)
14,183
229
994
(2,339)
11,382
(716)
—
1,598
—
882
(1,211)
(1,259)
1,405
(20,000)
(21,065)
—
—
—
—
—
—
1,520
(30,000)
(979)
50,000
(1,380)
19,161
9,478
10,429
10,159
19,637
30,066 $ 19,637
4,860 $ 4,289
204 $
(448)
$
$
$
See accompanying report of independent registered public accounting firm.
F-60
FINANCIAL STATEMENT SCHEDULES
Schedule III - Supplementary Insurance Information
(In thousands)
Column A
Column B Column C Column D Column E Column F Column G Column H Column I
Column J Column K
Future
Policy
Benefits,
Losses,
Deferred Claims, and
Policy
Loss
Other
Policy
Claims and
Benefits
Payable
Benefits, Amortization
of Deferred
Claims,
Policy
Losses and
Net
Other
Net
Segment
2020
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
2019
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
Acquisition Adjustment Unearned
Expenses Premiums
Costs
Premium Investment Settlement Acquisition Operating Premiums
Revenue
Expenses Written
Expenses
Income
Costs
$
$
$
$
9,070 $
4,872
3,898
—
17,840 $
678,017 $ 255,840 $
46,849
18,117
—
789,768 $ 320,806 $
86,291
25,460
—
— $ 336,920 $
66,554
—
78,324
—
—
—
— $ 481,798 $
12,338 $ 291,938 $
3,061
842
(3,321)
12,920 $ 412,851 $
52,478
68,435
—
49,162 $
12,910
16,744
—
57,449 $ 295,173
68,396
20,694
75,404
25,868
—
17,101
78,816 $ 121,112 $ 438,973
14,108 $
4,530
4,356
—
22,994 $
520,117 $ 321,047 $
44,032
23,847
—
620,355 $ 388,926 $
72,208
28,030
—
— $ 292,588 $
63,970
—
—
80,319
—
—
— $ 436,877 $
15,856 $ 248,781 $
3,879
1,139
(270)
50,036
63,348
—
20,604 $ 362,165 $
(38,274) $
9,730
15,858
—
68,545 $ 350,047
62,892
18,275
25,058
83,613
—
14,185
(12,686) $ 126,063 $ 496,552
See accompanying report of independent registered public accounting firm.
F-61
FINANCIAL STATEMENT SCHEDULES
Schedule IV – Reinsurance
(In thousands)
Year Ended December 31, 2020
Life insurance in force
Premiums
Life insurance
Accident and health insurance
Property and liability insurance
Title Insurance
Total premiums
Year Ended December 31, 2019
Life insurance in force
Premiums
Life insurance
Accident and health insurance
Property and liability insurance
Title Insurance
Total premiums
Column B
Gross Amount
Column C
Ceded to
Column D
Assumed from
Column E
Net Amount Percentage of Amount
Column F
Other Companies Other Companies
Assumed to Net
$
— $
— $
— $
—
$
— $
—
803,034
—
— $
—
(329,690)
—
$ 803,034 $
(329,690) $
— $
—
8,454
—
—
—
481,798
—
8,454 $ 481,798
$
— $
— $
— $
—
$
— $
—
748,203
—
— $
—
(316,089)
—
$ 748,203 $
(316,089) $
— $
—
4,763
—
—
—
436,877
—
4,763 $ 436,877
1.75 %
1.75 %
1.00 %
1.00 %
See accompanying report of independent registered public accounting firm.
F-62
FINANCIAL STATEMENT SCHEDULES
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations
(In thousands)
Column A
Column B Column C Column D Column E Column F Column G
Column H
Column I
Column J
Column K
Reserves for
Unpaid
Deferred Claims and Discount if
Claim
Policy
any,
Affiliation With Acquisition Adjustment Deducted In Unearned Earned
Costs
Registrant
(a) Consolidated
property-casualty
Entities
Expenses
Column C Premiums Premiums Income
Claims and Claim
Net
Investment
Adjustment Expenses
Incurred Related to
Amortization of Paid Claims
Deferred Policy and Claims
Net
(1) Current
Year
(2) Prior Acquisitions
Years
Costs
Adjustment Premiums
Expenses
Written
2020
2019
$
$
17,840 $
22,994 $
789,768 $
620,355 $
— $ 320,806 $ 481,798 $
— $ 388,926 $ 436,877 $
12,920 $
20,604 $
354,563 $
301,265 $
58,288 $
60,900 $
78,816 $
(12,686) $
320,419 $ 438,973
319,945 $ 496,522
See accompanying report of independent registered public accounting firm.
F-63
NASDAQ: HALL
Headquartered in Dallas, Texas, Hallmark Financial Services, Inc. is a publicly traded
holding company with wholly-owned subsidiaries engaged in property and casualty
insurance. Hallmark Financial operates as a diversified underwriter of niche property
and casualty insurance products, executed by wholly-owned business units, each with
a separate specialty product focus.
Corporate Information
BOARD OF DIRECTORS
Mark E. Schwarz
Executive Chairman
Scott T. Berlin
President
Mason Structural Steel, LLC
James H. Graves
Partner
Ervin, Graves & Jones, LP
Mark E. Pape
Chairman
H2Options, Inc. & U.S. Rain Group, Inc.
OFFICERS
Mark E. Schwarz
Executive Chairman, President &
Chief Executive Officer
Christopher Kenney
Senior Vice President &
Chief Accounting Officer
INDEPENDENT REGISTERED
PUBLIC ACCOUNTANTS
Baker Tilly U.S., LLP
Milwaukee, Wisconsin
STOCK SYMBOL
Hallmark Financial Services, Inc.
common stock is listed on the
NASDAQ Global Market under
the symbol “HALL.”
TRANSFER AGENT
Securities Transfer Corporation
2901 North Dallas Parkway
Suite 380
Plano, Texas 75093-5990
(469) 633-0101
LEGAL COUNSEL
McGuire, Craddock & Strother, P.C.
500 N. Akard
Suite 2200
Dallas, Texas 75201
STOCKHOLDER MEETING
The annual meeting of stockholders will be
held at 10:00 a.m. CDT on May 27, 2021, at
Two Lincoln Center, 5420 Lyndon B. Johnson
Freeway, Suite 1110, Dallas, Texas 75240.
CORPORATE HEADQUARTERS
Hallmark Financial Services, Inc.
Two Lincoln Center
5420 Lyndon B. Johnson Freeway, Suite 1110
Dallas, Texas 75240
(817) 348-1600
www.hallmarkgrp.com
Annual Report 2020
A
N
N
U
A
L
R
E
P
O
R
T
2
0
2
0
Two Lincoln Center, 5420 Lyndon B Johnson Freeway, Suite 1100 | Dallas, Texas 75240
P (817) 348-1600 | www.hallmarkgrp.com