Annual Report 2021
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Two Lincoln Centre, 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.
BOARD OF DIRECTORS
INDEPENDENT REGISTERED
PUBLIC ACCOUNTANTS
Corporate Information
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 &
Chief Executive Officer
Christopher Kenney
President & Chief Financial Officer
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 3:00 p.m. CDT on June 10th, 2022, at
Two Lincoln Centre, 5420 Lyndon B. Johnson
Freeway, Suite 1100, Dallas, Texas 75240.
CORPORATE HEADQUARTERS
Hallmark Financial Services, Inc.
Two Lincoln Centre
5420 Lyndon B. Johnson Freeway, Suite 1100
Dallas, Texas 75240
(817) 348-1600
www.hallmarkgrp.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2021
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
5420 Lyndon B. Johnson Freeway, Suite 1100, Dallas, Texas
(Address of Principal Executive Offices)
87-0447375
(I.R.S. Employer Identification No.)
75240
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (817) 348-1600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.18 par value
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. $58.2 million
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 18,172,467 shares of
common stock, $.18 par value per share, outstanding as of March 16, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the registrant’s definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A within 120 days of the end of the fiscal year covered by this report.
Unless the context requires otherwise, in this Form 10-K the term “Hallmark” refers solely to Hallmark Financial
Services, Inc. and the terms “we,” “our,” “us” and the “Company” refer to Hallmark and its subsidiaries.
Part I
Page
Item 1.
Business ................................................................................................................................................................ 4
Item 1A. Risk Factors ........................................................................................................................................................ 22
Item 1B. Unresolved Staff Comments ............................................................................................................................... 32
Properties ............................................................................................................................................................ 32
Item 2.
Item 3.
Legal Proceedings ............................................................................................................................................... 32
Item 4. Mine Safety Disclosures ..................................................................................................................................... 33
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ............................................................................................................................................................. 33
Item 6.
Reserved .............................................................................................................................................................. 34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................. 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................................................ 44
Financial Statements and Supplementary Data ................................................................................................... 44
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................. 45
Item 9A. Controls and Procedures ..................................................................................................................................... 45
Item 9B. Other Information ............................................................................................................................................... 45
Part III
Item 10. Directors, Executive Officers and Corporate Governance .................................................................................. 45
Item 11. Executive Compensation ..................................................................................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........... 45
Item 13. Certain Relationships and Related Transactions, and Director Independence .................................................... 46
Item 14. Principal Accountant Fees and Services ............................................................................................................. 46
Part IV
Item 15. Exhibits, Financial Statement Schedules ............................................................................................................ 46
Item 16. Form 10-K Summary .......................................................................................................................................... 49
2
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.
3
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. 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. 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. 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.
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.
4
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 48 wholesale brokers. 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 41 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 160 general agents and two wholesale brokers in 48 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 22 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, and miscellaneous medical facilities. 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. Until discontinued during November
2021, the Professional Liability business unit also provided coverage for hospitals and healthcare systems, which were
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 40 wholesale brokers in 43 states.
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
5
of 196 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 4,331
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. 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, 2021 and 2020.
Gross Premiums Written:
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Total
Net Premiums Written:
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Total
Year Ended December 31,
2020
2021
(dollars in thousands)
$
$
$
480,981
105,560
67,213
653,754
205,304
67,710
66,910
$
$
$
560,301
98,048
85,019
743,368
284,532
68,396
75,404
$
339,924
$
428,332
6
Specialty Commercial Segment
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, 2021 and 2020.
thfff
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
Year Ended December 31,
2021
% of Total 2021
2020
(dollars in thousands)
% of Total 2020
$ 108,991
125,474
127,969
76,304
42,243
$ 480,981
$
55,965
69,165
22,777
42,237
15,160
22.7% $ 168,938
106,855
26.1%
125,445
26.5%
116,831
15.9%
42,232
8.8%
100.0% $ 560,301
27.3% $ 128,935
61,557
33.7%
23,746
11.1%
55,867
20.5%
14,427
7.4%
30.1%
19.1%
22.4%
20.9%
7.5%
100.0%
45.3%
21.6%
8.4%
19.6%
5.1%
Total Specialty Commercial Segment
$ 205,304
100.0% $ 284,532
100.0%
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 third-party 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 policies on business automobile, truckers for hire and truckers not
for hire. These primary automobile policies consist of fleet policies distributed in 38 states through 18 wholesale brokers.
Covered policies include commercial auto liability for up to $1,000,000 and physical damage. The vast majority of primary
automobile policies written by our Commerical Auto business unit are for a term of 12 months. Primary automobile policies
are paid in full up front or financed through various premium finance companies. During 2021, no single wholesale broker
produced more than 41% 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 48
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
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the inception date of the policy. During 2021, the top ten wholesale brokers accounted for 94%, and no wholesale broker
accounting for more than 35%, of the total excess 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 2021, the top ten wholesale brokers
accounted for 92% of our primary and excess casualty premium volume, with no single wholesale broker accounting for
more than 34%.
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.
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 22 wholesale brokers in 50 states. During 2021, the top ten wholesale brokers accounted for
62% of our primary/excess commercial property and inland marine premium volume, with no single wholesale broker
accounting for more than 19%.
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. 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
8
where a managing general agent underwrote on our behalf risks that met specific underwriting criteria. During 2021, the
top ten brokers accounted for 85% of our medical professional liability premium volume, with no single broker accounting
for more than 35%. During 2021 the program manager accounted for 5% 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 40
wholesale brokers in 43 states. During 2021, the top ten wholesale brokers accounted for 85% of our financial professional
liability premium volume, with no single wholesale broker accounting for more than 35%.
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.
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 2021, the top ten independent specialty brokers produced 51%, and no single broker produced more
than 14%, 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 88% of the aircraft
written in 2021 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 2021 was approximately $175,000.
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.
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
9
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 196 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 27 agency groups that each produced more than $1.0 million in premium during the year ended December 31, 2021.
During 2021, 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 per payment
for the installment payment plan.
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.
10
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 4,331 independent retail agent locations in its target
geographic markets. Non-standard automobile represented 96% of the premiums produced during 2021. 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 2021, the top ten independent agency locations produced 44%, and no individual agency location
produced more than 9%, of the total premium volume of our Specialty Personal Lines business unit.
During 2021, 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.
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.
11
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.
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.
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, 2021, five states accounted
for approximately 49% of the gross premiums written by our insurance company subsidiaries. The following table reflects
12
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, 2021.
State
Texas
California
Florida
Arizona
Oregon
All other states
Total gross premiums written
Percent of total
Underwriting
Specialty Standard
Commercial Commercial
Segment
Segment
Personal
Segment Total
Percent of
Total
$
$
$
76,851
88,018
46,037
6,638
7,717
255,720
480,981
$
73.6 %
(dollars in thousands)
25,590
—
—
5,415
20,436
54,119
105,560
$ 18,346
—
—
22,990
—
25,877
$ 67,213
$ 120,787
88,018
46,037
35,043
28,153
335,716
$ 653,754
16.1 %
10.3 %
100.0 %
18.5 %
13.5 %
7.0 %
5.4 %
4.3 %
51.3 %
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.
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.
13
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
$
Year Ended December 31,
2021
653,754
2020
743,368
$
70.4 %
31.9 %
102.3 %
78.9 %
30.4 %
109.3 %
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 accounting principles generally accepted in the United States
of America (“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, 2021 and 2020, our consolidated premium-to-surplus ratios were
139% and 207%, respectively.
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, 2021, we had a total of 94 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.
14
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.
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, 2021 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
Investment Portfolio
$
$
$
$
Year Ended December 31,
2021
653,754
(313,830)
339,924
2020
743,368
(315,036)
428,332
$
$
690,133
(310,843)
379,290
$
301,208
$
$
$
811,488
(339,587)
471,901
254,882
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, 2021, we had total
invested assets of $338.8 million. If market rates were to increase by 1%, the fair value of our fixed income securities as of
December 31, 2021 would decrease by approximately $1.7 million. The following table shows the fair values of various
15
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, 2021 and 2020.
Fair
Value
As of December 31, 2021
Percent of
Total
(in thousands)
As of December 31, 2020
Percent of
Fair
Total
Yield Value
(in thousands)
Yield
Category:
Corporate bonds
Corporate bank loans
Municipal bonds
US Treasury securities and obligations of
U.S. Government
Mortgage backed
$ 105,581
81,189
38,464
62,984
1,855
$ 290,073
36.4 %
28.0 %
13.3 %
2.6 % $ 219,368
52,782
2.3 %
50,539
4.1 %
43.2 %
10.4 %
10.0 %
3.6 %
2.2 %
4.3 %
21.7 %
0.6 %
100.0 %
0.7 % 179,746
3.3 %
4,844
2.4 % $ 507,279
35.4 %
1.0 %
100.0 %
0.5 %
2.9 %
2.7 %
Total
The weighted average credit rating for our fixed-income portfolio was Baa1 at December 31, 2021 as compared to A at
December 31, 2020. The change in the weighted average credit rating was due primarily to our cash balances increasing
244% during 2021. Our cash balances are primarily invested in U.S. Treasuries via overnight repurchase agreements (“Repo
sweeps”) which are not included in determining the weighted average credit rating. The following table shows the
distribution of our fixed-income portfolio by rating as a percentage of total fair value as of December 31, 2021 and 2020:
Rating:
"Aaa"
"Aa"
"A"
"Baa"
"Ba"
"B"
"Caa"
"Ca"
"C"
"NR"
Total
As of
As of
December 31, 2021 December 31, 2020
25.0 %
6.6 %
17.0 %
24.0 %
21.9 %
1.9 %
— %
— %
— %
3.6 %
100.0 %
37.8 %
4.6 %
14.9 %
31.7 %
8.0 %
1.3 %
— %
— %
— %
1.7 %
100.0 %
The following table shows the composition of our fixed-income portfolio by remaining time to maturity as of December 31,
2021 and 2020.
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, 2021
As of December 31, 2020
Percentage of
Total
Fair Value
Fair Value
Percentage of
Total
Fair Value
Fair Value
(in thousands)
(in thousands)
$
$
106,047
109,195
64,926
8,050
1,855
290,073
36.6 %
37.6 %
22.4 %
2.8 %
0.6 %
100.0 %
$ 257,245
203,625
28,363
13,202
4,844
$ 507,279
50.7 %
40.1 %
5.6 %
2.6 %
1.0 %
100.0 %
16
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 Executive Chairman and other internal, experienced
investment managers. As of December 31, 2021, 14.4% 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, 2021.
Category
U.S. Treasury securities and obligations of U.S. Government
Corporate bonds
Corporate bank loans
Municipal bonds
Mortgage-backed
Equity securities
Total
Net Unrealized Gain Balance
(in thousands)
$ (114)
2,066
(381)
302
25
6,575
$ 8,473
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.
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 through 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.
17
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.
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 (Sompo International), AXA XL
Specialty Insurance, Markel Insurance Company, Navigators Specialty Insurance Company (a brand of the Hartford), 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, 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. The primary competition for the
financial professional liability insurance products produced by our Professional Liability business unit are Orion, Starstone,
CannGen, Ascot and Admiral Insurance Companies, Euclid Executive Liability Managers, Berkley Insurance Company,
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Kinsale Insurance Company, Skyward Specialty, Hudson 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, CAN
Financial Corporation, The Hanover Insurance Group 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.
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
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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, 2021, the adjusted capital under the risk-based capital calculation of each of our insurance company
subsidiaries substantially exceeded the minimum requirements.
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
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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.
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, 2021, we employed 406 people on a full-time basis. None of our employees are represented by labor
unions. We consider our employee relations to be good.
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 the same as its executive office address. 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 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
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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;
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.
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. 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, 2021 unpaid
losses and LAE would have produced a $8.2 million change to pretax earnings. Our gross loss and LAE reserves totaled
$816.7 million at December 31, 2021. Our loss and LAE reserves, net of reinsurance recoverable on unpaid loss and LAE,
were $428.8 million at that date. Because setting reserves is inherently uncertain, there can be no assurance that the current
reserves will prove adequate.
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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 49% of our gross written premiums for 2021: Texas (19%), California
(14%), Florida (7%) Arizona (5%) and Oregon (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.
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.
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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.
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,
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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, 2021, we had a total of $696.4 million due us
from reinsurers, including $550.0 million of recoverables from losses and $146.4 million in ceded unearned premiums. The
largest amount due us from a single reinsurer as of December 31, 2021 was $175.4 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.
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, 2021, 86% 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, 24% 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, 2021 was $290.1 million. If market interest rates were to increase 1%, the fair value of our
fixed-income securities would decrease by approximately $1.7 million as of December 31, 2021. The calculated change in
fair value was determined using duration modeling assuming no prepayments.
In addition to the general risks described above, although 73% 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, 2021, Hallmark had $1.9 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.
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
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amount of premiums that we can write. Without regulatory approval, the aggregate maximum amount of dividends that
could be paid to Hallmark in 2022 by our insurance company subsidiaries is $22.7 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.
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;
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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;
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 effect 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.
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
27
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.
If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the estimated level of
claims and claim adjustment expense reserves are necessary, including as a result of, among other things, changes
in the legal, regulatory and economic environments in which the Company operates, our financial results could be
materially and adversely affected.
Unpaid loss and LAE reserves represent management estimates of what the ultimate settlement and administration of claims
will cost, generally utilizing actuarial expertise and projection techniques, at a given accounting date. The process of
estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be
affected by both internal and external events, such as: changes in claims handling procedures, including automation; adverse
changes in loss cost trends, including inflationary pressures, technology or other changes that may impact medical, auto and
home repair costs (e.g., more costly technology in vehicles resulting in increased severity of claims); economic conditions,
including general and wage inflation; legal trends, including adverse changes in the tort environment that have continued to
persist for a number of years (e.g., increased and more aggressive attorney involvement in insurance claims, increased
litigation, expanded theories of liability, higher jury awards, lawsuit abuse and third-party litigation finance, among others);
and legislative changes, among others. The impact of many of these items on ultimate costs for loss reserves could be
material and is difficult to estimate, particularly in light of the recent disruptions to the judicial system, supply chain and
labor market. Loss reserve estimation difficulties also differ significantly by product line due to differences in claim
complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a
claim and lags in reporting of events to insurers, among other factors.
The increase in inflation in recent periods has increased our loss costs in our auto and property businesses. It is possible
that, among other things, past or future steps taken by the federal government and the Federal Reserve to stimulate or support
the U.S. economy, including actions taken in response to COVID-19, supply chain issues and labor shortages, could lead to
higher and/or prolonged inflation, which could in turn lead to further increases in our loss costs. The impact of inflation on
loss costs could be more pronounced for those lines of business that are considered “long tail,” such as general liability, as
they require a relatively long period of time to finalize and settle claims for a given accident year or require payouts over a
long period of time. The estimation of loss reserves may also be more difficult during extreme events, such as a pandemic,
or during volatile or uncertain economic conditions, due to unexpected changes in behavior of claimants and policyholders,
including an increase in fraudulent reporting of exposures and/or losses, reduced maintenance of insured properties,
increased frequency of small claims or delays in the reporting or adjudication of claims.
We refine our loss reserve estimates as part of a regular, ongoing process as historical loss experience develops, additional
claims are reported and settled, and the legal, regulatory and economic environment evolves. Business judgment is applied
28
throughout the process, including the application of various individual experiences and expertise to multiple sets of data
and analyses. Different experts may apply different assumptions when faced with material uncertainty, based on their
individual backgrounds, professional experiences and areas of focus. As a result, these experts may at times produce
estimates materially different from each other. This risk may be exacerbated in the context of an extreme event or an
acquisition. Experts providing input to the various estimates and underlying assumptions include actuaries, underwriters,
claim personnel and lawyers, as well as other members of management. Therefore, management often considers varying
individual viewpoints as part of its estimation of loss reserves.
Due to the inherent uncertainty underlying loss reserve estimates, the final resolution of the estimated liability for claims
and claim adjustment expenses will likely be higher or lower than the related loss reserves at the reporting date. In addition,
our estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates,
could vary significantly from period to period and could materially and adversely affect our results of operations and/or our
financial position. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
- Critical Accounting Estimates - Reserves for unpaid losses and LAE.”)
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.
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.
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
29
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, 2021, we had outstanding $56.7 million of trust preferred securities bearing interest at a weighted
average rate of 3.29% 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 will formally cease publication in June 2023. 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.
U.S. and global economic and financial industry events and their consequences could harm our business, our
liquidity and financial condition, and our stock price.
The consequences of adverse global or regional market and economic conditions may affect (among other aspects of our
business) the demand for and claims made under our products, the ability of customers, counterparties, and others to
establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital
resources, the availability of reinsurance protection, the risks we assume under reinsurance programs covering variable
annuity guarantees, and our investment performance. Volatility in the U.S. and other securities markets may adversely affect
our stock price.
An increased inflation rate or a period of sustained inflation may adversely impact our results of operations.
Inflation may negatively impact both interest rates and the amount we pay to settle claims. We take into account the effects
of inflation when we set our prices; however, if we do not change our pricing to adequately account for inflation, our results
of operations may be negatively impacted. We also consider inflation when we estimate reserves for unpaid losses and
LAE, because of the increase on our claims costs that is caused by inflation. While we plan for the inflation we expect, 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.
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.
30
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.
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, were closed for a significant period. While our
management and most employees continued to effectively work remotely, and our agents and brokers have continued to
produce and service our insurance policies, a 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.
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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. 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, our Personal Lines 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 initial term of the lease commenced June 1, 2019 and on June 30, 2021, the office lease was amended
which expands the original lease to cover an additional 16,588 square feet of office space and extends the term of the original
lease for an additional two years to December 31, 2033. The average base rent for the 16,588 square feet of expansion office
space is $35,652 per month for the extended term of the lease. The average base rent for 47,172 square feet of initially
leased office space is $135,620 per month for the extended term of the lease and the average base rent for 3,000 square feet
of initially leased storage space is $4,813 per month for the extended term 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 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.
Item 3. Legal Proceedings.
AHIC, HIC, HSIC, HCM and HNIC (collectively, the “Hallmark Insurers”) are parties to a Loss Portfolio Transfer
Reinsurance Contract (the “LPT Contract”) and related agreements with DARAG Bermuda Ltd. (“DARAG Bermuda”) and
DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, the “Reinsurers”). (See Note 7,
“Reinsurance – Loss Portfolio Transfer” in the Notes to Consolidated Financial Statements.) The Reinsurers and the
Hallmark Insurers have agreed to submit to binding arbitration a dispute that has arisen regarding the rights and obligations
of the parties under the LPT Contract. Pending resolution of the dispute, the Hallmark Insurers have agreed to fund the
payment of claims under the LPT Contract without prejudice to their right to seek reimbursement and other relief in the
arbitration proceedings.The arbitration panel has not yet been constituted and no pleadings have been submitted. However,
based on prior negotiations, the Company expects the Reinsurers to seek rescission of the LPT Contract on the basis of
alleged breach and fraudulent inducement by the Hallmark Insurers. The Company believes any such claims are without
32
factual basis or legal merit and intends to vigorously contest the matter. The Company also intends to pursue an arbitration
award enforcing the terms of the LPT Contract and reimbursing the Hallmark Insurers for all claim amounts funded by them
during the pendency of the arbitration, as well as all other damages sustained by the Hallmark Insurers.
We are engaged in various 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.
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.”
Holders
As of March 1, 2022, there were 4,143 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 2022 by our insurance company subsidiaries is $22.7 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 $19.8 million as of December 31, 2021.
33
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, 2021.
Plan Category
Number of securities to be
issued upon exercise of
Weighted-average
exercise price of
outstanding options, warrants outstanding options,
warrants and rights
and rights
Number of securities
remaining available for future
issuance under equity
compensation plans
[excluding securities reflected
in column (a)](1)
(a)
(b)
(c)
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
Total
— $
—
— $
—
—
—
—
1,069,896
1,069,896
(1) Securities remaining available for future issuance are net of a maximum of 872,532 shares of common stock issuable
pursuant to outstanding restricted stock units, subject to applicable vesting requirements and performance criteria. See
Note 13 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, 2021.
Item 6. Reserved
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 and E&S package and garage liability
insurance products and services; our E&S Property business unit which offers primary and excess commercial
property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability business unit
which offers healthcare and financial lines professional liability insurance products and services primarily for
businesses, medical professionals, medical facilities and 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
34
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.
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 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.
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, 2021 reserves for unpaid losses and LAE would have produced a $8.2 million change to pretax
earnings. The estimates are reviewed as part of a regular, ongoing process, 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
35
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, 2021 was $747.3 million to $956.3
million. Our best estimate of unpaid losses and LAE as of December 31, 2021 is $816.7 million. Our carried reserve for
unpaid losses and LAE as of December 31, 2021 is comprised of $442.3 million in case reserves and $374.4 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 $35.1 million below the midpoint, or 85.4% of the high
end, of the actuarial range at December 31, 2021 as compared to $29.2 million below the midpoint, or 86.0% of the high
end, of the actuarial range at December 31, 2020. 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.
Our recorded reserves represent management’s best estimate of the provision for unpaid losses and LAE as of the balance
sheet date, and establishing them involves a process that includes collaboration with various relevant parties in the Company.
While we believe that our reserves for unpaid losses and LAE at December 31, 2021 are adequate, new information or
emerging trends that differ from our assumptions may lead to future development of losses and loss expenses that is
significantly greater or less than the recorded reserve, which could have a material effect on future operating results. Our
best estimate of required loss reserves for most of our lines of business is selected for each accident year using management’s
judgment, after considering the results from a number of reserving methods and is not a purely mechanical process.
Therefore, it is difficult to convey, in a simple and quantitative manner, the impact that a change to a single assumption will
have on our best estimate.
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. The realization of deferred tax assets depends upon the existence of sufficient
taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. At each
balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when
it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The determination of the
need for a valuation allowance is based on all available information including projections of future taxable income,
principally derived from business plans and where appropriate available tax planning strategies. Projections of future taxable
income incorporate assumptions of future business and operations that are apt to differ from actual experience. If our
assumptions and estimates that resulted in our forecast of future taxable income prove to be incorrect, an additional valuation
allowance could become necessary, which could have a material adverse effect on our financial condition, results of
operations, and liquidity.
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.
36
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.
The fair value of our fixed income securities as of December 31, 2021 was $290.1 million. If market interest rates were to
increase 1%, the fair value of our fixed-income securities would decrease by approximately $1.7 million as of December 31,
2021. The calculated change in fair value was determined using the duration modeling assuming no prepayments.
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.
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
37
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.
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, 2021 and 2020 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 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. Consequently, as of December 31, 2021 and 2020, there was no
goodwill or indefinite-lived assets reported on our consolidated balance sheet.
Results of Operations
Comparison of Years ended December 31, 2021 and December 31, 2020
Management overview. During fiscal 2021, our total revenues were $404.7 million, which was $64.1 million less than the
$468.8 million in total revenues for fiscal 2020. During the year ended December 31, 2021, we reported net income before
tax of $11.5 million as compared to a net loss before tax of $115.8 million during the same period of 2020.
The decrease in revenue for the year ended December 31, 2021 was primarily due to a decrease in net premiums earned of
$92.6 million and a decrease in finance charges of $1.4 million partially offset by net investment gains of $10.2 million for
the year ended December 31, 2021 as compared to investment losses of $22.9 million for the prior year.
Contributing to the improvement in the pre-tax results for the year ended December 31, 2021 were a decrease in losses and
LAE of $131.7 million, due primarily to a $21.7 million charge for a loss portfolio transfer reinsurance contract during
2020, decreased net catastrophe losses of $4.7 million and lower unfavorable prior year loss reserve development. We
38
reported $6.0 million of unfavorable net prior year loss reserve development during the year ended December 31, 2021 as
compared to $58.3 million of unfavorable net prior year loss reserve development during the same period of 2020.
The improved pre-tax results during the year ended December 31, 2021 as compared to the prior year was also impacted by
a $44.7 million impairment charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets during fiscal
2020. In connection with its normal process for evaluating impairment triggering events, the Company determined that a
significant decline in its market capitalization below its stockholders’ equity during the first quarter of 2020 indicated the
impairment of the goodwill and indefinite-lived intangible assets included in our balance sheet.
We reported net income of $9.0 million for the year ended December 31, 2021, as compared to a net loss of $94.4 million
for the year ended December 31, 2020. On a diluted per share basis, net income was $0.50 per share for fiscal 2021 as
compared to net loss of $5.20 per share for fiscal 2020. Our effective tax rate was 21.7% for the year ended December 31,
2021 as compared to 18.5% for the same period in 2020. The increase in the effective tax rate for the year ended December
31, 2021 was due in large part to the non-deductible impairment of goodwill and indefinite-lived intangible assets incurred
during fiscal 2020.
Segment information
The following is additional business segment information for the years ended December 31, 2021 and 2020 (in thousands):
Year Ended December 31,
Gross premiums written
Ceded premiums written
Net premiums written
Change in unearned
premiums
Net premiums earned
Specialty Commercial
Segment
Standard Commercial
Segment
2021
$ 480,981
(275,677)
205,304
2020
$ 560,301
(275,769)
284,532
2021
$ 105,560
(37,850)
67,710
2020
$ 98,048
(29,652)
68,396
2021
Personal Segment
2020
$ 85,019
(9,615)
75,404
$ 67,213
(303)
66,910
Corporate
Consolidated
2021
2020
2021
— $ 653,754
(313,830)
—
339,924
—
2020
$ 743,368
(315,036)
428,332
36,868
242,172
42,491
327,023
874
68,584
(1,842)
66,554
1,624
68,534
2,920
78,324
—
—
39,366
379,290
43,569
471,901
$
— $
—
—
—
—
Total revenues
252,368
340,515
71,295
69,819
73,969
84,730
7,071
(26,216)
404,703
468,848
Losses and loss
adjustment expenses
164,729
285,994
49,152
52,478
61,363
68,435
—
—
275,244
406,907
Pre-tax income (loss)
$ 32,915
$
(7,752)
$
(30)
$ (3,039)
$ (9,955)
$ (10,338)
$ (11,435) $ (94,639) $
11,495
$ (115,768)
Net loss ratio (1)
Net expense ratio (1)
Net combined ratio (1)
68.0 %
23.7 %
91.7 %
87.5 %
19.3 %
106.8 %
71.7 %
33.0 %
104.7 %
89.5 %
78.9 %
31.1 %
27.9 %
110 % 117.4 %
87.4 %
27.5 %
114.9 %
72.6 %
28.5 %
101.1 %
86.2 %
25.1 %
111.3 %
Net Favorable
(Unfavorable) Prior Year
Development
$ (2,670)
$ (45,808)
$ 1,521
$ (3,357)
$ (4,891)
$ (9,123)
$
(6,040)
$ (58,288)
(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 $481.0 million for the year ended December 31, 2021,
which was $79.3 million, or 14%, less than the $560.3 million reported for the same period of 2020. Net premiums written
were $205.3 million for the year ended December 31, 2021 as compared to $284.5 million for the same period of 2020. The
decrease in gross premiums written was primarily the result of lower premium production in our Commercial Auto and
Professional Liability business units, partially offset by increased premium production in our E&S Casualty and 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, Professional Liability and E&S Property business units, partially offset by
increased net premiums written in our E&S Casualty 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
39
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
$25.2 million and $22.7 million to the decline in gross premiums written and net premiums written, respectively, for the
year ended December 31, 2021 as compared to the same period the prior year.
The $252.4 million of total revenue for the year ended December 31, 2021 was $88.1 million less than the $340.5 million
reported by the Specialty Commercial Segment for the same period in 2020. This decrease in revenue was primarily due to
a decrease in net premiums earned of $84.9 million attributable to a decrease in net premiums earned of $90.9 million from
the Commercial Auto business unit and $2.6 million from the E&S Casualty business unit, partially offset by an increase in
net premiums earned of $7.8 million from the E&S Casualty business unit, $0.7 million from the Aerospace & Programs
business unit and $0.1 million from the Professional Liability business unit. A decrease in net investment income of $3.2
million for the year ended December 31, 2021 as compared to the same period of 2020 also contributed to the decrease in
revenue.
The Specialty Commercial Segment reported pre-tax income of $32.9 million during the year ended December 31, 2021 as
compared to a pre-tax loss of $7.8 million reported for the same period in 2020. The improvement in the pre-tax result was
primarily the result of a decrease in losses and LAE of $121.3 million and lower operating expenses of $5.9 million and
lower amortization of intangible assets of $1.6 million during the year ended December 31, 2021 as compared to the same
period during 2020, partially offset by lower revenue as discussed above. The exit of the contract binding line of the primary
commercial automobile business contributed $37 thousand to the pre-tax income for the fiscal year ended December 31,
2021 as compared to a pre-tax loss of $56.6 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 lower losses and LAE as the combined result of (a) a $125.0 million decrease
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 lower current accident year net loss trends as well as $2.1
million of favorable prior year net loss reserve development recognized during the year ended December 31, 2021 as
compared to $41.8 million of unfavorable prior year net loss reserve development during the same period of 2020, (b) a
$17.4 million increase in losses and LAE in our E&S Casualty business unit due primarily to increased net premiums earned
as well as $12.2 million of unfavorable prior year net loss reserve development recognized during the year ended December
31, 2021 as compared to $6.2 million of unfavorable prior year net loss reserve development during the same period of
2020, partially offset by lower current accident year net loss trends, (c) a $8.6 million decrease in losses and LAE in our
E&S Property business unit due primarily to lower net catastrophe losses of $8.5 million during the year ended December
31, 2021 as compared to net catastrophe losses of $13.1 million during the same period of 2020 and lower net premiums
earned, partially offset by unfavorable net prior year loss reserve development of $1.2 million during the year ended
December 31, 2021 as compared to favorable net prior year loss reserve development of $1.9 million during the same period
of 2020, (d) a $5.8 million decrease in losses and LAE attributable to our Professional Liability business unit due primarily
to favorable net prior year loss reserve development of $9.2 million during the year ended December 31, 2021 as compared
to unfavorable net prior year loss reserve development of $0.1 million during the same period the prior year, partially offset
by lower current accident year loss trends and (e) a $0.8 million increase in losses and LAE in our Aerospace & Programs
business unit due primarily to $0.6 million of unfavorable prior year net loss reserve development during the year ended
December 31, 2021 compared to $0.4 million of favorable prior year net loss reserve development during the same period
of 2020.
Operating expenses decreased $5.9 million primarily as the result of lower production related expenses of $3.5 million,
lower professional services of $1.4 million, lower salary and related expenses of $1.7 million and decreased occupancy and
related expenses of $0.8 million, partially offset by higher other operating expenses of $1.5 million.
The Specialty Commercial Segment reported a net loss ratio of 68.0% for the year ended December 31, 2021 as compared
to 87.5% for the same period in 2020. The gross loss ratio before reinsurance was 87.4% for the year ended December 31,
2021 as compared to 81.6% for the same period in 2020. The decrease 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 decrease in the gross and net loss ratios was also impacted by catastrophe losses of
40
$11.1 million for the year ended December 31, 2021 as compared to catastrophe losses of $15.7 million during the same
period of 2020 as well as lower unfavorable prior year net loss reserve development and lower current accident year loss
trends for the year ended December 31, 2021 as compared to the same period of 2020. The Specialty Commercial Segment
reported $2.1 million of unfavorable prior year net loss reserve development for the year ended December 31, 2021 as
compared to unfavorable prior year net loss reserve development of $45.8 million for the same period of 2020. The
Specialty Commercial Segment reported a net expense ratio of 23.7% for the year ended December 31, 2020 as compared
to 19.3% for the same period of 2020. The increase in the net expense ratio was due largely to the decrease in net premiums
earned partially offset by the decrease in operating expenses.
Standard Commercial Segment.
Gross premiums written for the Standard Commercial Segment were $105.6 million for the year ended December 31, 2021,
which was $7.6 million, or 8%, more than the $98.0 million reported for the same period in 2020. Net premiums written
were $67.7 million for the year ended December 31, 2021 as compared to $68.4 million for the same period in 2020. The
increase in gross premiums written was due to higher premium production in our Commercial Accounts business unit. The
decrease in net premiums written was due to higher ceded catastrophe premium as a result of reinstatement premiums in
fiscal 2021.
Total revenue for the Standard Commercial Segment of $71.3 million for the year ended December 31, 2021, was $1.5
million, or 2%, more than the $69.8 million reported for the same period in 2020. This increase in total revenue was due to
an increase in net premiums earned of $2.0 million, due primarily to the timing of earning the net premiums written of prior
periods as compared to the prior year, partially offset by lower net investment income of $0.4 million and lower finance
charges of $0.1 million during the year ended December 31, 2021 as compared to the same period during 2020.
Our Standard Commercial Segment reported a pre-tax loss of $30 thousand for the year ended December 31, 2021 as
compared to a pre-tax loss of $3.0 million for the same period of 2020. The lower pre-tax loss was the result of a decrease
in losses and LAE of $3.3 million and higher revenue discussed above, partially offset by higher operating expenses of $1.8
million. The higher operating expenses were largely the result of higher production related expenses of $1.6 million and
higher salary and related expenses of $0.2 million.
The Standard Commercial Segment reported a net loss ratio of 71.7% for the year ended December 31, 2021 as compared
to 78.9% for the same period of 2020. The gross loss ratio before reinsurance for the year ended December 31, 2021 was
65.3% as compared to the 70.3% reported for the same period of 2020. The decrease in the gross loss ratio was due primarily
to improved gross prior year loss reserve development. The decrease in the net loss ratio was due to improved prior year
reserve development and lower net catastrophe losses. During the year ended December 31, 2021, the Standard Commercial
Segment reported favorable net loss reserve development of $1.5 million as compared to unfavorable net loss reserve
development of $3.4 million during the same period of 2020. The Standard Commercial Segment reported $6.3 million of
net catastrophe losses during the year ended December 31, 2021 as compared to $6.9 million of net catastrophe losses during
the same period of 2020. The Standard Commercial Segment reported a net expense ratio of 33.0% for the year ended
December 31, 2021 as compared to 31.1% for the same period of 2020. 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 $67.2 million for the year ended December 31, 2021 as compared
to $85.0 million for the same period in the prior year. Net premiums written for the Personal Segment were $66.9 million
for the year ended December 31, 2021, which was a decrease of $8.5 million from the $75.4 million reported for the same
period in 2020. 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 $74.0 million for the year ended December 31, 2021 as compared to $84.7
million for the same period in 2020. The decrease in revenue was due to a decrease in net premiums earned of $9.8 million
and lower finance charges of $1.2 million partially offset by higher net investment income of $0.3 million during the year
ended December 31, 2021 as compared to the same period during 2020.
41
Pre-tax loss for the Personal Segment was $10.0 million for the year ended December 31, 2021 as compared to pre-tax loss
of $10.3 million for the same period of 2020. The decrease in pre-tax loss was primarily the result of the decreased revenue
discussed above partially offset by decreased losses and LAE of $7.1 million, decreased operating expenses of $3.7 million
and decreased amortization of intangible assets of $0.3 million for the year ended December 31, 2021 as compared to the
same period during 2020.
The Personal Segment reported a net loss ratio of 89.5% for the year ended December 31, 2021 as compared to 87.4% for
the same period of 2020. The gross loss ratio before reinsurance was 90.5% for the year ended December 31, 2021 as
compared to 83.0% for the same period in 2020. The higher gross and net loss ratios were primarily the result of higher
current accident year loss trends and higher net catastrophe losses of $0.9 million for the year ended December 31, 2021 as
compared to $0.4 million for the prior year partially offset by unfavorable prior year net loss reserve development of $4.9
million for the year ended December 31, 2021 as compared to $9.1 million of unfavorable prior year net loss reserve
development in 2020. The Personal Segment reported a net expense ratio of 27.9% for the year ended December 31, 2021
as compared to 27.5% for the same period of 2020. The increase in the expense ratio was due primarily to lower net
premiums earned.
Corporate
Total revenue for Corporate increased by $33.3 million for the year ended December 31, 2021 as compared to the same
period the prior year. This increase in total revenue was due predominately to investment gains of $10.2 million during the
year ended December 31, 2021 as compared to investment losses of $22.9 million reported for the same period of 2020 and
higher net investment income of $0.2 million for the year ended December 31, 2021 as compared to the same period during
2020.
Corporate pre-tax loss was $11.4 million for the year ended December 31, 2021 as compared to pre-tax loss of $94.6 million
for the same period of 2020. The lower 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 during fiscal 2020. In connection with its normal process for
evaluating impairment triggering events, the Company determined that a significant decline in its market capitalization
below its stockholders’ equity during the first quarter of 2020 indicated the impairment of the goodwill and indefinite-lived
intangible assets included in our balance sheet. Further contributing to the lower pre-tax loss were lower operating expenses
of $3.6 million, lower interest expense of $0.3 million, as well as the higher revenue discussed above. The lower operating
expenses of $3.6 million were primarily a result of lower professional service expenses of $2.1 million, decreased salary
and related expenses of $1.4 million, largely due to lower incentive compensation accruals and decreased travel and related
expenses 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, 2021, Hallmark and its non-
insurance company subsidiaries had $8.9 million in unrestricted cash and cash equivalents. As of that date, our insurance
subsidiaries held $344.0 million of unrestricted cash and cash equivalents as well as $290.1 million in debt securities with
an average modified duration of 0.6 years. Accordingly, we do not anticipate selling long-term debt instruments to meet
any short term or long term 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
42
insurance companies, dividends may only be paid from unassigned surplus funds. During 2021, the aggregate ordinary
dividend capacity of these subsidiaries is $32.0 million, of which $22.7 million is available to Hallmark. As a county mutual,
dividends from HCM are payable to policyholders. During the years ended December 31, 2021 and 2020 our insurance
company subsidiaries paid $3.0 million and $12.0 million, respectively, in dividends to Hallmark.
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 2021 our insurance subsidiaries paid $15.5 million in management fees to Hallmark and our non-insurance company
subsidiaries. During 2020 our insurance subsidiaries paid $4.2 million in management fees to Hallmark and 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, 2021, our insurance company subsidiaries reported statutory capital and surplus of $232.3 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, 2021, 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, 2021 and 2020 was 139% and 207%, respectively.
Comparison of December 31, 2021 to December 31, 2020
On a consolidated basis, our cash and investments, excluding restricted cash and investments, at December 31, 2021 were
$691.6 million compared to $639.2 million at December 31, 2020. The primary reason for this increase in unrestricted cash
and investments was cash provided by operations during 2021, as well as increases in market value of our investment
securities during the year.
Comparison of Years Ended December 31, 2021 and December 31, 2020
Net cash provided by our consolidated operating activities was $43.8 million for the year ended December 31, 2021
compared to net cash used by operations of $69.3 million for the year ended December 31, 2020. The cash flow provided
by operations was driven by a decrease in net paid claims, decreased paid operating expenses, lower interest paid, partially
offset by decreased collected net premiums, higher taxes paid and lower collected investment income during the year ended
December 31, 2021 as compared to the same period the prior year.
Net cash provided by investing activities during the year ended December 31, 2021 was $204.6 million as compared to net
cash provided by investing activities of $122.7 million for the prior year. The increase in cash provided by investing
activities during the year ended December 31, 2021 was primarily comprised of a decrease of $153.0 million in purchases
of debt and equity securities, partially offset by a decrease of $70.9 million in maturities, sales and redemptions of
investment securities, and a $0.2 million increase in purchases of fixed assets.
The Company did not report any net cash from financing activities during the year ended December 31, 2021 or December
31, 2020.
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 prohibit payments or other distributions on any
security of the Company that ranks junior to the Notes when the Company’s debt to capital ratio (as defined in the indenture)
is greater than 35%. The Company’s debt to capital ratio was 38% as of December 31, 2021.
43
Subordinated Debt Securities
On June 21, 2005, we formed Hallmark Statutory Trust I (“Trust I”), an unconsolidated trust subsidiary, for the sole purpose
of issuing $30.0 million in trust preferred securities. Trust I used the proceeds from the sale of these securities and our initial
capital contribution to purchase $30.9 million of junior subordinated debt securities from Hallmark. The debt securities are
the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I. On August 23, 2007,
we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0
million in trust preferred securities. Trust II used the proceeds from the sale of these securities and our initial capital
contribution to purchase $25.8 million of subordinated debt securities from Hallmark. The debt securities are the sole assets
of Trust II, and the payments under the junior 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:
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
Current interest rate at December 31, 2021
$
Hallmark
Statutory
Trust I
June 21, 2005
30,000
30,928
June 15, 2035
928
Three Month LIBOR + 3.25%
3.45%
Hallmark
Statutory
Trust II
August 23, 2007
25,000
25,774
September 15, 2037
774
Three Month LIBOR + 2.90%
3.10%
$
$
$
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting company.
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 (PCAOB ID 23)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2021 and
2020
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements as of and for the years ended December 31, 2021 and 2020
Financial Statement Schedules
Page Number
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-49
44
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
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 Financial 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, 2021.
Item 9B. Other Information.
None.
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.
45
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.
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, 2021 and 2020
Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020
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
3.1
Description
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
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).
46
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
10.1
10.2
10.3
10.4
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).
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).
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).
47
10.5
10.6
10.7*
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).
First Amendment to Office Lease between Hallmark Financial Services, Inc. and Teachers Insurance and
Annuity Association of America dated June 30, 2021 (incorporated by reference to Exhibit 10.1 to the
registrant’s Form 8-K files July 6, 2021).
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).
10.8*
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).
10.9*
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).
10.10*
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).
10.11*
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).
10.12*
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).
10.13*
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).
10.14*
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).
10.15*
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).
10.16
10.17
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).
10.18*
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).
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).
48
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.
49
SIGNATURES
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.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date:
March 16, 2022
By: /s/ Mark E. Schwarz
Mark E. Schwarz, Executive Chairman and Chief
Executive Officer, (principal executive officer)
Date:
March 16, 2022
By: /s/ Christopher J. Kenney
Christopher J. Kenney, President and Chief Financial
Officer (principal financial officer)
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 16, 2022
Date:
March 16, 2022
Date:
March 16, 2022
Date:
March 16, 2022
Date:
March 16, 2022
/s/ Mark E. Schwarz
Mark E. Schwarz, Executive Chairman and Chief
Executive Officer, Director (principal executive officer)
/s/ Christopher J. Kenney
Christopher J. Kenney, President and Chief Financial
Officer (principal financial officer)
/s/ James H. Graves
James H. Graves, Director
/s/ Mark E. Pape
Mark E. Pape, Director
/s/ Scott T. Berlin
Scott T. Berlin, Director
50
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2021 and
2020
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
Financial Statement Schedules as of and for the years ended December 31, 2021 and 2020
Page
Number
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-49
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, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders'
equity, and cash flows, for the years ended December 31, 2021 and 2020, 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, 2021 and 2020,
and the results of its operations and its cash flows for the years ended December 31, 2021 and 2020, 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 Matter
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.
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 $816.7 million at December 31, 2021. 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.
F-2
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 2020.
Milwaukee, Wisconsin
March 16, 2022
F-3
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2021 and 2020
($ in thousands)
December 31,
2021
December 31,
2020
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost; $288,175 in 2021
and $502,167 in 2020)
Equity securities (cost; $42,120 in 2021 and $26,988 in 2020)
$
Total investments
Cash and cash equivalents
Restricted cash
Ceded unearned premiums
Premiums receivable
Accounts receivable
Receivable for securities
Reinsurance recoverable
Deferred policy acquisition costs
Intangible assets, net
Federal income recoverable
Deferred federal income taxes, net
Prepaid expenses
Other assets
Total assets
$
290,073
48,695
338,768
352,867
3,810
146,433
90,621
6,914
1,326
549,964
6,811
819
18,217
8,906
2,389
25,753
1,553,598
$
$
507,279
29,388
536,667
102,580
5,728
143,446
120,332
5,967
913
497,846
17,840
1,322
24,691
8,724
2,648
28,013
1,496,717
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $746 in
2021 and $844 in 2020)
Subordinated debt securities (less unamortized debt issuance cost of $744 in 2021
and $795 in 2020)
Reserves for unpaid losses and loss adjustment expenses
Unearned premiums
Reinsurance payable
Pension liability
Payable for securities
Accounts payable and other accrued expenses
Total liabilities
Commitments and contingencies (Note 18)
Stockholders’ equity:
$
49,254
$
49,156
55,959
816,681
284,427
117,908
174
3,280
50,394
1,378,077
55,907
789,768
320,806
61,100
1,859
—
50,415
1,329,011
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831
shares in 2021 and 2020
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock (2,700,364 shares in 2021 and 2,730,673 in 2020), at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
3,757
122,844
74,703
(1,035)
(24,748)
175,521
1,553,598
$
3,757
122,893
65,699
383
(25,026)
167,706
1,496,717
$
The accompanying notes are an integral part of the consolidated financial statements
F-4
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2021 and 2020
($ 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 gains (losses), 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
Income (loss) before tax
Income tax expense (benefit)
Net income (loss)
Net income (loss) per share:
Basic
Diluted
$
2021
653,754 $
(313,830)
339,924
39,366
379,290
2020
743,368
(315,036)
428,332
43,569
471,901
9,715
10,222
4,344
1,069
63
404,703
275,244
112,467
4,993
—
504
393,208
12,920
(22,894)
5,705
1,156
60
468,848
406,907
123,919
5,326
45,996
2,468
584,616
11,495
2,491
9,004 $
(115,768)
(21,417)
(94,351)
0.50 $
0.50 $
(5.20)
(5.20)
$
$
$
The accompanying notes are an integral part of the consolidated financial statements
F-5
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the years ended December 31, 2021 and 2020
($ in thousands)
Net income (loss)
Other comprehensive (loss) income:
Change in net actuarial loss (gain)
Tax effect on change in net actuarial (loss) gain
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, net of tax
Comprehensive income (loss)
2021
9,004 $ (94,351)
2020
$
(662)
1,419
139
(298)
709
2,832
(149)
(595)
(433)
(6,046)
91
1,270
(1,418)
(305)
7,586 $ (94,656)
$
The accompanying notes are an integral part of the consolidated financial statements
F-6
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2021 and 2020
(In thousands)
Additional
Accumulated
Other
Number
of
Shares Par Value Capital Earnings Income (loss) Stock
Paid-In Retained Comprehensive Treasury
Stockholders’
Number
of
Shares
Total
Equity
Balance at January 1,
2020
Acquisition of
treasury stock
Equity incentive plan
activity
Shares issued under
employee benefit
plans
Net loss
Other comprehensive
loss, net of tax
Balance at
December 31, 2020
Acquisition of
treasury stock
Equity incentive plan
activity
Shares issued under
employee benefit
plans
Net income
Other comprehensive
loss, net of tax
Balance at
December 31, 2021
20,873 $
3,757 $ 123,468 $ 160,050 $
688 $ (25,201)
2,750 $
262,762
—
—
—
—
—
—
—
—
—
—
—
(400)
—
—
(175)
—
—
(94,351)
—
—
—
—
—
—
—
—
—
(400)
175
—
(19)
—
—
(94,351)
—
—
(305)
—
—
(305)
20,873 $
3,757 $ 122,893 $ 65,699 $
383 $ (25,026)
2,731 $
167,706
—
—
—
—
—
—
—
—
—
—
—
229
—
—
(278)
—
—
9,004
—
—
—
—
—
—
—
—
—
229
278
—
(31)
—
—
9,004
—
—
(1,418)
—
—
(1,418)
20,873 $
3,757 $ 122,844 $ 74,703 $
(1,035) $ (24,748)
2,700 $
175,521
The accompanying notes are an integral part of the consolidated financial statements
F-7
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2021 and 2020
($ in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating
activities:
Depreciation and amortization expense
Deferred federal income tax expense (benefit)
Investment (gains) losses, 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 provided by (used in) 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 investing 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
2021
2020
$
9,004
$
(94,351)
3,430
194
(10,222)
229
—
(2,987)
29,711
(947)
11,029
26,913
(36,379)
(52,118)
56,808
6,474
(1,556)
4,185
43,768
(1,910)
(132,461)
338,972
204,601
248,369
108,308
356,677
$
5,754
(6,513)
22,894
(400)
45,996
24,552
27,956
(1,681)
5,154
169,413
(68,120)
(180,709)
(4,281)
(15,557)
(4,452)
5,018
(69,327)
(1,667)
(285,507)
409,861
122,687
53,360
54,948
108,308
$
The accompanying notes are an integral part of the consolidated financial statements
F-8
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 accounting principles generally accepted in the United States of America (“GAAP”)
which, as to our insurance company subsidiaries, differ from statutory accounting practices prescribed or permitted for
insurance companies by insurance regulatory authorities.
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
F-9
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 consolidated balance sheets for these instruments
approximate their fair values.
Restricted Cash: The carrying amount for restricted cash reported in the consolidated balance sheets approximates the fair
value.
Subordinated debt securities: Our trust preferred securities are reported at a carrying value of $55.9 million and $55.9
million, and had a fair value of $29.4 million and $26.6. million, as of December 31, 2021 and 2020, 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 carrying value of $49.3 million
and $49.1 million and a fair value of $52.2 million and $54.3 million, as of December 31, 2021 and 2020, 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. The Company reviews its impaired securities
for possible other-than-temporary impairment ("OTTI") at each quarter end. A security has an impairment loss when its
fair value is less than its cost or amortized cost at the balance sheet date. The Company considers the following factors in
performing its review: (i) the amount by which the security’s fair value is less than its cost, (ii) length of time the security
has been impaired, (iii) whether management has the intent to sell the security, (iv) if it is more likely than not that
management will be required to sell the security before recovery of its amortized cost basis, (v) whether the impairment is
due to an issuer-specific event, credit issues or change in market interest rates, (vi) the security’s credit rating and any recent
downgrades or (vii) stress testing of expected cash flows under different scenarios. If the Company cannot assert these
conditions, an OTTI loss is recorded through the Consolidated Statements of Operations in the current period.
For all other impaired securities, the Company will assess whether the net present value of the cash flows expected to be
collected from the security is less than its amortized cost basis. Such a shortfall in cash flows is referred to as a “credit
loss.” For any such security, the Company separates the impairment loss into: (i) the credit loss and (ii) the non-credit loss,
which is the amount related to all other factors such as interest rate changes, fluctuations in exchange rates and market
conditions. The credit loss charge is recorded to the current period statements of operations and the non-credit loss is
recorded to accumulated other comprehensive income (loss), within shareholders’ equity, on an after-tax basis. A security’s
cost basis is permanently reduced by the amount of a credit loss. Income is accreted over the remaining life of a security
based on the interest rate necessary to discount the expected future cash flows to the new basis.
F-10
Debt security premiums and discounts are amortized into earnings using the effective interest 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.
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 reported net of an allowance for expected credit losses. The allowance is based upon the
Company’s review of amounts outstanding, including delinquencies and write-offs. Credit risk is partially mitigated by the
Company’s ability to cancel the policy if the policyholder does not pay for the premium.
Reinsurance
Reinsurance premiums, commissions, losses and loss adjustment expenses ("LAE") on reinsured business are accounted for
on a basis consistent with that used in accounting for the original policies issued and the terms of the reinsurance
contracts. The amounts reported as reinsurance recoverables include amounts billed to reinsurers on losses and LAE paid
as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid.
Reinsurance recoverables on unpaid losses and LAE are estimated based upon assumptions consistent with those used in
establishing the gross liabilities as they are applied to the underlying reinsured contracts. The Company records an
allowance for uncollectible reinsurance recoverables based on an assessment of the reinsurer’s creditworthiness and
collectability of the recorded amounts. Management believes an allowance for uncollectible recoverables from its reinsurers
was not necessary for the periods presented. The Company receives ceding commissions in connection with certain ceded
reinsurance. The ceding commissions are recorded as a reduction of policy acquisition costs. (See Note 7.)
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 2021 and 2020, we deferred
($97.7) million and ($152.7) million of direct policy acquisition costs and amortized $107.1 million and $165.6 million of
deferred direct policy acquisition costs, respectively. During 2021 and 2020, we deferred $73.5 million and $79.0 million
of ceding commission acquisition costs and amortized ($71.9) million and ($86.7) million of deferred ceding commission
acquisition costs, respectively. Therefore, the net amortization (deferrals) of policy acquisition costs were $11.0 million and
$5.2 million for 2021 and 2020, respectively.
F-11
Goodwill and Intangible Assets, net
We account for our goodwill and intangible assets according to ASC 350, “Intangibles – Goodwill and Other” (ASC 350).
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, 2021 there was no goodwill or indefinite lived intangible assets reported on our
consolidated balance sheet.
Leases
We have several leases, primarily for office facilities and computer equipment, which expire in various years through 2033.
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)
Property and Equipment
Property and equipment (including leasehold improvements), aggregating $38.2 million and $36.3 million, at December 31,
2021 and 2020, 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 $3.8 million and $2.9 million of leasehold incentives at December 31, 2021 and 2020, respectively,
from the adoption of ASU 2016-02, “Leases (Topic 842)” effective January 1, 2019. Depreciation expense for 2021 and
2020 was $2.9 million and $3.3 million, respectively. Accumulated depreciation was $30.0 million and $27.1 million at
December 31, 2021 and 2020, respectively. Under ASC 360, “Impairment or disposal of long-lived assets,” property and
equipment is tested for impairment annually. As of December 31, 2021, no impairment was considered necessary.
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.
F-12
Losses and Loss Adjustment Expenses
The liability for unpaid losses and LAE in the Consolidated Balance Sheets represents the Company’s estimate of the amount
it expects to pay for the ultimate cost of all losses and LAE incurred that remain unpaid at the balance sheet date. The
liability is recorded on an undiscounted basis, except for the liability for unpaid losses and LAE assumed related to acquired
companies which are initially recorded at fair value. The process of estimating the liability for unpaid losses and LAE is a
complex process that requires a high degree of judgment.
The liability for unpaid losses and LAE represents the accumulation of individual case estimates for reported losses and
LAE, and actuarially determined estimates for incurred but not reported losses and LAE. The liability for unpaid losses and
LAE is intended to include the ultimate net cost of all losses and LAE incurred but unpaid as of the balance sheet date. The
liability is stated net of anticipated deductibles, salvage and subrogation, and gross of reinsurance ceded. The estimate of
the unpaid losses and LAE liability is reviewed and updated on a regular, ongoing basis. Although management believes
the liability for losses and LAE is reasonable, the ultimate liability may be more or less than the current estimate.
The estimation of ultimate liability for unpaid losses and LAE is a complex, imprecise and inherently uncertain process,
and therefore involves a considerable degree of judgment and expertise. The Company utilizes various actuarially-accepted
reserving methodologies in deriving the continuum of expected outcomes and ultimately determining its estimated liability
amount. These methodologies utilize various inputs, including but not limited to written and earned premiums, paid and
reported losses and LAE, expected initial loss and LAE ratio, which is the ratio of incurred losses and LAE to earned
premiums, and expected claim reporting and payout patterns (including company-specific and industry data). The liability
for unpaid loss and LAE does not represent an exact measurement of liability, but is an estimate that is not directly or
precisely quantifiable, particularly on a prospective basis, and is subject to a significant degree of variability over time. In
addition, the establishment of the liability for unpaid losses and LAE makes no provision for the broadening of coverage by
legislative action or judicial interpretation or for the extraordinary future emergence of new types of losses not sufficiently
represented in the Company’s historical experience or which cannot yet be quantified. As a result, an integral component
of estimating the liability for unpaid losses and LAE is the use of informed subjective estimates and judgments about the
ultimate exposure to unpaid losses and LAE. The effects of changes in the estimated liability are included in the results of
operations in the period in which the estimates are revised.
The Company allocates the applicable portion of the unpaid losses and LAE to amounts recoverable from reinsurers under
reinsurance contracts and reports those amounts separately as assets on the consolidated balance sheets.
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 $6.1 million and $7.2 million for the years ended December 31, 2021 and 2020, respectively.
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.
F-13
Income Taxes
We file a consolidated federal income tax return. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
Deferred tax assets are recognized to the extent that there is sufficient positive evidence, as allowed under ASC 740, Income
Taxes, to support the recoverability of those deferred tax assets. The Company establishes a valuation allowance to the
extent that there is insufficient evidence to support the recoverability of the deferred tax asset under ASC 740. In making
such a determination, management considers all available positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent
operations. If it is determined that the deferred tax assets would be realizable in the future in excess of their net recorded
amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for
income taxes.
ASC 740 also addresses how a company reports uncertain tax positions on its financial statements under a "more-likely-
than-not" recognition threshold (formerly known as FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes or FIN 48). This standard requires specific uncertain tax position disclosures in the annual financial statements,
including a reconciliation of total unrecognized tax benefits, classification of income tax-related interest and penalties,
identification of years that remain open to examination, and unrecognized tax benefits expected to significantly change
within 12 months of the reporting period. There were no uncertain tax positions at December 31, 2021.
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 11 and 13.)
Adoption of New Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes ("ASU No. 2019-12"). The update is intended to simplify the current rules regarding the accounting for income taxes
and addresses several technical topics including accounting for franchise taxes, allocating income taxes between a loss in
continuing operations and in other categories such as discontinued operations, reporting income taxes for legal entities that
are not subject to income taxes, and interim accounting for enacted changes in tax laws. The new standard is effective for
fiscal years beginning after December 15, 2020; however, early adoption is permitted. The Company early adopted the
provisions of ASU No. 2019-12 on April 1, 2020, which did not have a material impact on its consolidated financial
statements and related disclosures.
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 and do
not expect the adoption of this guidance to have a material effect on the Company’s results of operations, financials position
or liquidity.
F-14
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):
Gross
Cost/Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair Value
As of December 31, 2021
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 investments
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 investments
$
63,098 $
56 $
$
$
103,515
81,570
38,162
1,830
288,175
42,120
2,115
84
372
29
2,656
9,355
330,295 $
12,011 $
179,259 $
214,666
53,650
49,833
4,759
502,167
26,988
487 $
5,086
3
756
114
6,446
5,648
$
529,155 $
12,094 $
62,984
(170) $
105,581
(49)
81,189
(465)
38,464
(70)
1,855
(4)
290,073
(758)
(2,780)
48,695
(3,538) $ 338,768
- $ 179,746
219,368
(384)
52,782
(871)
50,539
(50)
4,844
(29)
507,279
(1,334)
(3,248)
29,388
(4,582) $ 536,667
The Company’s sources of net investment income 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
Cash and cash equivalents
Investment expenses
Investment income, net of expenses
Twelve Months Ended December 31,
2021
2020
$
$
578
4,371
1,427
1,713
80
2,404
13
10,586
(871)
9,715
$
$
885
7,223
1,688
2,347
192
1,369
—
13,704
(784)
12,920
No investments in any entity or its affiliates exceeded 10% of stockholders’ equity at December 31, 2021 or 2020.
F-16
The Company’s sources 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 gains (losses) on equity securities
Unrealized gains on other investments
Investment gains (losses), net
Year Ended December 31,
2021
2020
$
$
—
494
124
(25)
—
5,453
—
6,046
—
4,176
—
10,222
$
$
(3)
959
40
1,397
—
3,472
(3,740)
2,125
(1,692)
(24,921)
1,594
(22,894)
We realized gross gains on investments of $6.7 million and $22.8 million during the years ended December 31, 2021 and
2020, respectively, of which $5.9 million and $21.0 million were from the sales of securities during the years ended
December 31, 2021 and 2020, respectively. We realized gross losses on investments of $0.7 million and $20.7 million
during the years ended December 31, 2021 and 2020, respectively, of which $0.5 million and $20.2 million was from the
sale of securities during the years ended December 31, 2021 and 2020, respectively. We recorded proceeds from the sale of
investment securities of $23.1 million and $155.0 million during the years ended December 31, 2021 and 2020, respectively.
Realized investment gains and losses are recognized in operations on the first in-first out method.
The following schedules summarize the gross unrealized losses showing the length of time that investments have been
continuously in an unrealized loss position as of December 31, 2021 and December 31, 2020 (in thousands):
12 months or less
As of December 31, 2021
Longer than 12 months
Total
Unrealized
Unrealized
Unrealized
Fair Value Losses
Fair Value Losses
Fair Value Losses
43,273 $
— $
(49)
(288)
(12)
(4)
(353)
(2,070)
(2,423) $ 120,182 $
2,245
59,019
4,359
10
108,906
11,276
(170)
(49)
(465)
(70)
(4)
(758)
(2,780)
(3,538)
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 investments
$
$
43,273 $
-
42,256
3,321
-
88,850
6,221
95,071 $
(170) $
-
(177)
(58)
-
(405)
(710)
(1,115) $
— $
2,245
16,763
1,038
10
20,056
5,055
25,111 $
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 investments
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
$
— $
— $
— $
— $
— $
7,801
45,233
2,859
635
56,528
9,572
66,100 $
(186)
(559)
(33)
(25)
(803)
(1,610)
(2,413) $
3,556
4,144
1,154
14
8,868
1,848
10,716 $
(198)
(312)
(17)
(4)
(531)
(1,638)
(2,169) $
11,357
49,377
4,013
649
65,396
11,420
76,816 $
$
—
(384)
(871)
(50)
(29)
(1,334)
(3,248)
(4,582)
We held a total of 100 debt securities with an unrealized loss, of which 74 were in an unrealized loss position for less than
one year and 26 were in an unrealized loss position for a period of one year or greater, as of December 31, 2021. We 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 14
equity securities with an unrealized loss, of which ten were in an unrealized loss position for less than one year and four
were in an unrealized loss position for a period of one year or greater, as of December 31, 2021. 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 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,
2021 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 did not recognize an impairment loss during
2021. We recognized $1.7 million of other-than-temporary impairment on debt securities during 2020.
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 2021 we did not dispose of any previously impaired securities. During 2020 we disposed of one previously impaired
security and recognized no gain or loss on disposal.
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.
F-18
The amortized cost and estimated fair value of debt securities at December 31, 2021 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)
$ 105,045 $ 106,047
109,195
64,926
8,050
1,855
$ 288,175 $ 290,073
108,438
65,005
7,857
1,830
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 $30.0 million at December 31, 2021
and a carrying value of $29.7 million at December 31, 2020.
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 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.
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
F-19
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 2021 or 2020.
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.
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, 2021 and December 31, 2020 (in thousands).
Quoted Prices in
Active Markets for
As of December 31, 2021
Identical Assets Other Observable Unobservable
(Level 1)
Inputs (Level 2) Inputs (Level 3) Total
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 investments
$
$
— $
—
—
—
—
—
48,695
48,695 $
62,984 $
105,234
81,189
38,464
1,855
289,726
—
289,726 $
— $ 62,984
105,581
347
81,189
—
38,464
—
1,855
—
290,073
347
—
48,695
347 $ 338,768
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
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 investments
$
$
— $
—
—
—
—
—
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
Due to significant unobservable inputs into the valuation model for one corporate bond as of December 31, 2021 and 2020,
we classified this investment as Level 3 in the fair value hierarchy. The corporate bond classified as level 3 in 2021 and
2020 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-20
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, 2021 and 2020 (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
2021
2020
$
$
348 $
—
—
—
—
—
(1)
—
—
347 $
339
—
—
—
—
—
9
—
—
348
There were no transfers into or out of Level 3 during the years ended December 31, 2021 or 2020. 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, 2021 there was no goodwill
or indefinite-lived intangibles reported on our consolidated balance sheets.
F-21
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
2021
2020
$ 32,177 $ 32,177
3,440
3,232
4,235
—
43,084
3,440
3,232
4,235
—
43,084
(31,443)
(3,355)
(3,232)
(4,235)
(42,265)
(30,990)
(3,305)
(3,232)
(4,235)
(41,762)
819 $ 1,322
$
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):
2022
2023
2024
2025
2026
$
$
$
$
$
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.
5. Other Assets:
The following table details our other assets as of December 31, 2021 and 2020 (in thousands):
2021
2020
Profit sharing commission receivable
Accrued investment income
Investment in unconsolidated trust subsidiaries
Fixed assets
Right of use asset
Other assets
F-22
$
467 $
26
2,928
1,702
9,222
13,986
149
$ 25,753 $ 28,013
1,790
1,702
8,299
13,211
284
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
Retroactive loss portfolio transfer
Prior years
Total incurred
Paid related to:
Current year
Retroactive loss portfolio transfer
Prior years
Total paid
Net balance at December 31
Plus reinsurance recoverable
Balance at December 31
2021
$ 789,768
357,200
432,568
269,204
—
6,040
275,244
101,475
—
177,571
279,046
428,766
387,915
$ 816,681
2020
$ 620,355
274,275
346,080
326,919
21,700
58,288
406,907
113,312
21,700
185,407
320,419
432,568
357,200
$ 789,768
The $6.0 million unfavorable net development and $58.3 million unfavorable net development in prior accident years
recognized in 2021 and 2020, respectively, represent changes in our loss reserve estimates. In 2021 and 2020, 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, 2021 was primarily driven by 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, 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. 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.
F-23
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
2020
December 31,
2021
2,670 $ 45,808
3,357
(1,521)
9,123
4,891
—
—
6,040 $ 58,288
$
$
The following describes the primary factors behind each segment’s prior accident year loss reserve development for
the years ended December 31, 2021 and 2020:
Year ended December 31, 2021:
Specialty Commercial Segment. Our Commercial Auto business unit experienced net favorable development in the
2020 and 2019 accident years primarily in the commercial automobile liability line of business, partially offset by
unfavorable development primarily in the commercial automobile line of business in the 2018 and prior accident
years. Our E&S Casualty business unit experienced net unfavorable development primarily in our general liability
line of business, in the 2019 and prior accident years, partially offset by favorable development in the 2020 accident
year. We experienced net unfavorable development in our E&S Property and Aerospace & Programs business units,
partially offset by net favorable development in our Professional Liability.
Standard Commercial Segment. Our Commercial Accounts business operating unit experienced net unfavorable
development in the 2019, 2018, 2017 and 2014 and prior accident years primarily in the general liability and
commercial auto lines of business, partially offset by net favorable development primarily in the commercial
property and commercial automobile liability lines of business in the 2020, 2016 and 2015 accident years and net
unfavorable development primarily in the 2014 and prior accident years 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 2020 and prior accidents years.
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-24
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).
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.
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 is presented for all lines of business with similar claim duration periods in the below
tables. The following tables also include IBNR reserves plus expected development on reported claims and the cumulative
number of reported claims as of December 31, 2021 ($ in thousands):
F-25
Commercial Auto Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
For the Years Ended December 31,
Unaudited
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
$ 60,844 $ 69,628 $ 68,225 $ 71,515 $ 73,153 $ 75,464 $ 75,657 $ 76,333 $ 75,907 $
93,692 86,902 90,726 96,974 102,031 103,379 103,571 105,448
102,053 93,187 99,280 106,138 113,357 116,373 120,417
106,133 106,608 125,161 133,574 135,774 141,197
111,913 115,044 121,714 137,690 140,794
125,315 119,583 148,563 154,993
119,070 118,334 110,052
118,351 128,652
101,568
As of December 31,
Cumulative
Number of
Reported
IBNR Claims
2021
2021
2021
(25)
75,910 $
105,402
(147)
120,705 (1,742)
141,222
376
(217)
141,739
156,528 (1,301)
114,281 9,449
125,815 17,576
100,430 29,443
45,927 32,756
3,646
4,695
5,259
5,923
6,126
6,276
5,299
3,972
3,064
2,075
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2012
2013
2014
2015
Unaudited
2016
2017
2018
2019
2020
2021
Total $ 1,127,961
13,333
40,670
17,145
63,255
43,078
18,108
83,184
67,410
48,239
19,788
$ 12,859 $ 30,046 $ 46,510 $ 59,883 $ 69,026 $ 72,907 $ 75,190 $ 75,039 $ 75,893 $ 75,763
105,194
121,964
139,681
135,247
141,545
101,502
78,955
37,308
1,663
Total $ 938,823
1,069
Liabilities for claims and claim adjustment expenses, net of reinsurance $ 190,207
105,194
121,683
139,605
133,918
143,791
86,894
61,332
14,491
106,894
112,617
141,678
129,761
133,880
49,912
16,812
101,146
107,912
123,668
106,707
77,884
26,101
All outstanding liabilities before 2012, net of reinsurance
93,554
88,823
95,056
53,398
22,578
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Casualty
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident
Year
2012
2013
2014
2015
Unaudited
2016
2017
2018
2019
2020
2021
For the Years Ended December 31,
As of December 31,
Cumulative
Number of
Reported
Claims
2021
2021
IBNR
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
$ 13,020 $ 11,301 $ 13,098 $ 12,230 $ 13,330 $ 12,390 $ 11,852 $ 12,944 $ 13,400 $ 13,145 $ (454)
(502)
13,370
(524)
12,989
18,542
157
16,819 (1,083)
21,362 1,113
23,055 (5,305)
47,496 3,220
60,706 16,107
54,385 26,649
13,379 12,002 12,384 12,792 12,874 12,205 13,330 13,274
15,590 14,007 12,034 11,663 11,676 13,167 13,140
17,362 16,746 15,046 15,266 15,945 16,931
16,039 16,513 16,927 18,625 17,508
17,845 15,751 20,360 18,023
23,056 24,590 23,856
34,610 43,426
62,464
752
810
950
1,033
1,061
1,656
2,251
2,938
7,503
6,195
Total $ 281,868
F-26
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
1,337 $
$
2013
2,666 $
1,331
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Commercial Accounts
2014
6,096 $
3,190
1,829
Unaudited
2016
2021
2018
2020
2019
2017
9,212
5,499
4,133
1,753
11,134
8,075
8,258
5,672
2,900
2015
8,037 $ 10,255 $ 10,938 $ 11,357 $ 12,572 $ 12,725 $ 13,038
12,972
5,461
13,189
4,196
16,573
1,420
17,848
19,633
22,898
32,705
24,029
6,892
Total $ 179,778
1,910
Liabilities for claims and claim adjustment expenses, net of reinsurance $ 104,001
12,255
12,365
16,158
16,442
11,268
8,027
2,526
12,478
13,003
15,729
17,111
16,264
15,363
17,177
6,176
11,866
11,327
13,553
11,269
5,884
2,708
All outstanding liabilities before 2012, net of reinsurance
As of December 31,
Cumulative
Number of
Reported
Claims
2021
IBNR
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Unaudited
2016
2013
2014
2015
2017
2018
2019
2012
$ 47,194 $ 48,085 $ 44,625 $ 42,632 $ 41,451 $ 40,350 $ 38,669 $ 38,669 $ 39,462 $ 39,626 $
208
40,562
46,413 47,385 46,990 43,917 42,822 39,567 40,211 40,141
178
42,645
46,280 46,470 43,806 43,806 43,673 42,463 42,503
201
38,677
40,966 42,580 41,429 38,385 39,287 39,206
512
795
43,883
43,327 43,449 41,983 43,111 45,267
45,815 1,259
40,943 42,704 43,579 44,732
47,007 2,920
42,898 41,290 44,590
36,044 2,867
37,984 34,616
35,879 8,597
40,356
46,529 21,462
2021
2020
2021
2,712
2,809
2,742
2,579
2,548
2,745
2,606
2,754
2,793
2,539
Total $ 416,667
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2012
2013
2014
2015
Unaudited
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
19,386
29,586
21,322
33,927
31,150
16,557
$ 22,264 $ 30,096 $ 32,378 $ 34,597 $ 35,943 $ 37,808 $ 38,044 $ 38,211 $ 38,518 $ 39,108
40,210
41,863
37,886
42,819
42,707
40,163
30,407
23,914
18,695
Total $ 357,772
39,329
41,162
35,611
39,417
36,650
29,381
17,490
39,560
41,658
37,135
40,828
41,631
33,546
26,233
13,942
38,892
39,185
35,238
35,035
28,813
19,233
37,947
36,775
30,974
29,456
16,644
36,225
33,544
28,501
19,776
1,616
Liabilities for claims and claim adjustment expenses, net of reinsurance $ 60,511
All outstanding liabilities before 2012, net of reinsurance
F-27
Aviation
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
$ 10,988 $ 10,738 $ 10,353 $ 10,336 $ 10,024 $ 10,021 $ 9,941 $ 9,941 $ 9,446 $ 10,040 $
2018
2015
2020
2019
2017
2021
2014
2013
Unaudited
2016
10,236
11,304
3,179
10,295
3,654
1,870
9,563
3,627
1,709
2,330
10,057
3,558
1,643
2,241
2,325
10,649
3,566
1,631
2,119
2,082
2,382
10,252
3,567
1,630
2,219
2,079
1,990
5,246
10,297
3,567
1,635
2,220
2,178
2,565
4,525
3,487
10,254
3,567
1,635
2,082
2,150
2,446
3,580
1,198
3,562
Total $ 40,514
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
5,641 $
$
2013
8,486 $
6,537
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Runoff
2015
2014
9,672 $ 10,049 $ 10,041 $ 10,041 $ 10,041 $
9,493
2,779
2018
2017
2019
9,941 $
Unaudited
2016
9,584
3,105
958
9,356
3,259
1,405
1,469
9,944
3,327
1,520
1,907
1,260
10,456
3,565
1,601
1,918
1,837
1,716
10,242
3,567
1,630
2,082
2,021
2,237
2,911
All outstanding liabilities before 2012, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Unaudited
2012
$ 4,804 $ 4,469 $ 3,597 $ 3,358 $ 2,821 $ 2,636 $ 2,752 $ 2,752 $ 2,773 $ 2,773 $
2021
2020
2017
2018
2014
2019
2016
2015
2013
9,069
10,143
9,208
9,713
9,338
8,605
9,257
9,762
7,277
3,553
9,257
10,076
8,624
4,733
450
9,472
10,452
8,892
4,365
465
—
9,486
10,463
8,420
4,416
415
—
—
9,483
10,292
8,526
4,425
403
—
—
—
9,470
10,127
8,508
4,425
368
—
—
—
—
Total $ 35,671
F-28
As of December 31,
Cumulative
Number of
Reported
Claims
2021
IBNR
2021
—
—
—
—
—
—
31
70
246
1,866
229
231
201
198
292
320
338
305
289
194
2021
2020
9,446 $ 10,040
10,239
10,281
3,567
3,567
1,633
1,634
2,082
2,216
2,149
2,054
2,282
2,368
3,139
3,787
693
2,120
1,414
Total $ 37,238
—
3,276
As of December 31,
Cumulative
Number of
Reported
Claims
2021
2021
IBNR
91
237
431
164
—
10
—
—
—
—
714
1,337
1,027
822
462
66
—
—
—
—
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Programs
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
1,181 $
$
2013
2,107 $
3,737
2014
2,411 $
6,825
2,933
2015
2,594 $
7,882
5,972
2,528
Unaudited
2016
2,583 $
8,350
7,970
5,744
1,732
2017
2,600 $
8,809
9,004
7,328
2,550
111
2018
2,602 $
8,961
9,210
8,049
3,743
171
—
2019
2,675 $
9,010
9,323
8,495
4,418
203
—
—
2020
2,675 $
9,050
9,487
8,512
4,425
282
—
—
—
2021
2,675
9,070
9,571
8,542
4,425
358
—
—
—
—
Total $ 34,641
723
1,753
As of December 31,
Cumulative
Number of
Reported
Claims
2021
2021
IBNR
—
—
—
—
—
7
42
673
848
3,322
3
2
5
2
1
66
795
1,060
880
593
All outstanding liabilities before 2012, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
$ 3,001 $ 2,045 $ 2,045 $ 3,885 $ 2,045 $ 2,045 $ 2,045 $ 2,045 $ 2,045 $ 2,045 $
2020
2014
2018
2015
2013
2019
2017
2021
Unaudited
2016
1,595
2,543
1,623
1,561
666
1,683
2,076
2,039
1,629
478
2,302
1,575
752
1,200
955
2,302
1,575
752
1,178
1,775
3,598
2,302
1,575
752
1,178
1,801
4,368
5,407
2,302
1,575
752
1,178
1,982
4,222
9,150
6,737
2,302
1,575
752
1,178
1,982
4,222
9,078
7,107
7,620
Total $ 37,861
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
2,045 $
$
2013
2,045 $
1,489
2014
2,045 $
1,561
758
2015
2,045 $
1,561
1,502
1,515
Unaudited
2016
2,045 $
2,076
1,575
1,629
1,139
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
2,045 $
2,302
1,575
752
1,139
36
2,045 $
2,302
1,575
752
1,178
1,556
911
2,045 $
2,302
1,575
752
1,178
1,551
1,290
4,501
2,045 $
2,302
1,575
752
1,178
1,967
3,778
7,794
2,908
2,045
2,302
1,575
752
1,178
1,967
4,030
8,174
5,563
2,867
30,453
—
7,408
Total $
All outstanding liabilities before 2012, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $
F-29
Personal Segment
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2012
$ 58,604 $ 73,795 $ 70,552 $ 71,513 $ 72,042 $ 72,037 $ 72,076 $ 72,100 $ 72,123 $ 72,128 $
2020
2018
2019
2017
2015
2014
2013
2021
Unaudited
2016
55,706 59,132 60,100 60,211 60,379 60,328 60,310 60,286
5,452 5,340 6,243 6,699 6,504 6,518 6,578
23,104 25,682 25,307 25,136 25,102 25,185
32,260 32,893 32,728 32,803 33,042
23,342 21,968 21,926 22,547
18,334 18,353 19,972
56,009 63,722
47,938
60,299
6,580
25,194
33,193
22,768
20,139
64,677
50,820
45,295
Total $ 401,093
IBNR
2021
As of December 31,
Cumulative
Number of
Reported
Claims
2021
23,940
23,472
19,293
23,376
23,759
16,818
15,332
25,728
18,429
14,671
—
—
—
—
—
—
18
(770)
404
7,690
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2012
2013
2014
2015
Unaudited
2016
2017
2018
2019
2020
2021
45,901
54,514
2,515
58,047
4,418
11,570
$ 37,860 $ 64,278 $ 68,849 $ 70,807 $ 71,995 $ 72,055 $ 72,094 $ 72,124 $ 72,138 $ 72,146
60,291
6,585
25,191
33,141
22,762
19,983
64,885
48,281
30,435
Total $ 383,700
—
60,279
6,580
25,098
32,777
21,972
18,009
41,524
60,279
6,583
25,169
32,991
22,488
19,628
60,870
32,746
60,297
6,566
25,243
32,260
21,061
11,137
60,277
6,428
24,262
30,646
15,776
59,775
5,631
22,281
21,669
All outstanding liabilities before 2012, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $ 17,393
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Property
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012
$ 18,518 $ 17,541 $ 18,119 $ 17,743 $ 17,768 $ 18,005 $ 17,974 $ 17,963 $ 17,963 $ 17,963 $
2020
2018
2019
2017
2015
2014
2013
2021
Unaudited
2016
21,644 22,363 22,264 22,578 22,914 22,936 22,935 22,935
22,551 21,950 21,862 21,793 21,852 21,876 21,932
20,256 19,919 20,014 20,091 20,202 20,107
20,734 22,838 22,632 22,789 22,781
24,182 23,003 24,490 24,287
22,822 18,694 19,611
20,214 20,984
41,487
22,935
21,932
20,107
22,786
24,369
19,680
20,924
38,472
34,626
Total $ 243,794
F-30
As of December 31,
Cumulative
Number of
Reported
Claims
2021
IBNR
2021
—
—
—
—
—
—
(98)
(23)
1,359
9,692
1,629
1,893
2,037
1,993
2,031
2,009
1,078
1,239
1,518
1,265
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2012
2013
2014
2015
Unaudited
2016
2017
2018
2019
2020
2021
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
17,785
21,452
19,586
21,864
21,749
17,513
22,197
21,778
19,500
17,248
$ 15,773 $ 17,679 $ 17,743 $ 17,666 $ 17,693 $ 17,978 $ 17,974 $ 17,963 $ 17,963 $ 17,963
22,933
22,000
19,960
22,786
24,187
19,006
19,658
29,003
12,790
Total $ 210,286
—
All outstanding liabilities before 2012, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance $ 33,508
22,935
21,955
19,953
22,789
23,821
16,914
11,344
22,935
22,013
19,965
22,781
24,179
18,138
18,895
18,215
22,936
21,911
20,134
22,613
22,059
10,923
22,826
21,849
19,928
22,500
18,703
F-31
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):
2021
2020
$
190,207
104,001
60,511
3,276
1,753
7,408
17,393
33,508
$ 218,999
97,302
59,603
2,448
2,226
5,644
18,597
27,002
418,057
431,821
85,398
141,746
27,464
13,385
1,155
236
1,707
116,824
387,915
1,589
3,694
2,448
99
170
91
1,625
993
10,709
816,681
91,040
122,341
20,464
10,143
1,184
968
5,613
97,832
349,585
1,850
1,681
2,643
104
170
61
1,250
603
8,362
$ 789,768
Net outstanding liabilities for losses and LAE
Commercial Auto Liability
Casualty
Commercial Accounts
Aviation
Runoff
Programs
Personal Segment
Property
Liabilities for unpaid losses and allocated loss adjustment
expenses, net of reinsurance
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
$
F-32
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, 2021:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (1)
Unaudited
Commercial Auto Liability
Casualty
Commercial Accounts
Aviation
Runoff
Programs
Personal Segment
Property
Year 1 Year 2 Year 3
25.5 %
20.5 %
10.2 %
2.7 %
16.1 %
13.9 %
7.4 %
4.1 %
25.7 %
17.8 %
23.8 %
8.3 %
31.1 %
36.9 %
25.5 %
27.5 %
15.3 %
9.4 %
41.0 %
77.9 %
33.5 %
44.6 %
62.1 %
64.7 %
Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
— %
0.8 %
1.0 %
— %
1.1 %
— %
— %
— %
16.6 %
23.1 %
8.2 %
4.5 %
9.0 %
4.6 %
3.7 %
2.1 %
9.0 %
14.9 %
6.0 %
3.0 %
3.3 %
— %
0.9 %
1.0 %
4.5 %
4.9 %
3.8 %
1.6 %
1.9 %
— %
0.4 %
0.5 %
0.8 %
3.0 %
2.0 %
0.7 %
1.3 %
— %
— %
— %
0.3 %
2.0 %
1.5 %
0.2 %
1.2 %
— %
— %
— %
2.3 %
3.6 %
2.5 %
1.1 %
1.5 %
— %
— %
0.1 %
(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, 2021 and 2020 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.
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
2021
2020
$
$
643,957 $
9,797
(313,830)
339,924 $
734,800
8,568
(315,036)
428,332
$
679,504 $
10,629
(310,843)
379,290 $
$
803,034
8,454
(339,587)
471,901
$
301,208 $
254,882
Included in reinsurance recoverable on the consolidated balance sheets are paid loss recoverables of $77.4 million and $55.6
million as of December 31, 2021 and 2020, respectively.
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Loss Portfolio Transfer
On July 16, 2020, AHIC, HIC, HSIC, HCM and HNIC (collectively, the “Hallmark Insurers”), entered into a Loss Portfolio
Transfer Reinsurance Contract to be effective as of January 1, 2020 (the “LPT Contract”) with DARAG Bermuda Ltd.
(“DARAG Bermuda”) and DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, the
“Reinsurers”). The 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. The Reinsurers and the Hallmark Insurers have agreed to submit to binding arbitration a dispute that has
arisen regarding the rights and obligations of the parties under the LPT Contract. Pending resolution of the dispute, the
Hallmark Insurers have agreed to fund the payment of claims under the LPT Contract without prejudice to their right to
seek reimbursement and other relief in the arbitration proceedings. (See Note 17.)
As of December 31, 2021, the ultimate incurred losses from the subject business were $220.1 million or $44.0.million in
excess of the Hallmark Insurers’ loss corridor. Our reinsurance recoverables of $550.0 million include $49.0 million related
to the LPT as of December 31, 2021.
8. 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, 2021.
9. 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
F-34
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:
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
Current interest rate at December 31, 2021
10. Segment Information:
Hallmark
Statutory
Trust I
June 21, 2005
30,000
30,928
June 15, 2035
$
928
Three Month LIBOR + 3.25%
3.45%
$
$
Hallmark
Statutory
Trust II
August 23, 2007
25,000
25,774
September 15, 2037
774
$
$
$
Three Month LIBOR + 2.90%
3.10%
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 and E&S package and garage liability
insurance products and services; our E&S Property business unit which offers primary and excess commercial
property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability business unit
which offers healthcare and financial lines professional liability insurance products and services primarily for
businesses, medical professionals, medical facilities and, through 2020, senior care facilities; and our Aerospace &
Programs business unit which offers general aviation and, until 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
F-35
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.
The following is additional business segment information for the twelve months ended December 31, 2021 and 2020 (in
thousands):
2021
2020
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 Expense (Benefit)
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
Pre-tax income (loss)
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
$
252,368 $
71,295
73,969
7,071
404,703 $
340,515
69,819
84,730
(26,216)
468,848
1,592 $
541
464
833
3,430 $
— $
—
—
4,993
4,993 $
3,287
611
1,024
832
5,754
—
—
—
5,326
5,326
7,133 $
(7)
(2,157)
(2,478)
2,491 $
(122)
(599)
(2,038)
(18,658)
(21,417)
(7,752)
32,915 $
(3,039)
(30)
(10,338)
(9,955)
(11,435)
(94,639)
11,495 $ (115,768)
$
$
$
$
$
$
$
$
$
F-36
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,
2021
$ 1,163,947
194,594
128,165
66,892
$ 1,553,598
December 31,
2020
$ 1,116,137
183,689
133,310
63,581
$ 1,496,717
11. 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 income (loss)
Denominator, basic shares
Effect of dilutive securities:
Stock-based compensation awards
Denominator, diluted shares
Basic earnings (loss) per share:
Diluted earnings (loss) per share:
2021
2020
$
9,004 $ (94,351)
18,164
18,137
—
18,164
—
18,137
$
0.50 $
(5.20)
$
0.50 $
(5.20)
We had no shares of common stock potentially issuable upon exercise of employee stock options for year ended
December 31, 2021. We had 14,157 shares of common stock potentially issuable upon exercise of employee stock options
for year ended December 31, 2020, 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, expired in 2021.
12. 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 $19.8 million as of December 31, 2021.
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
F-37
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 $32.0 million, of which $22.7 million is available to Hallmark. As a county mutual,
dividends from HCM are payable to policyholders. During the years ended December 31, 2021 and 2020 our insurance
company subsidiaries paid $3.0 million and $12.0 million, respectively, in dividends to Hallmark. The total restricted net
assets of our insurance company subsidiaries as of December 31, 2021, was $155.8 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 $15.5 million in management fees to Hallmark and our non-insurance subsidiaries during
2021. Our insurance subsidiaries paid $4.2 million in management fees to Hallmark and our non-insurance company
subsidiaries during 2020.
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, 2021 and 2020, our insurance company subsidiaries reported statutory capital and surplus of $232.3 million
and $211.6 million, respectively, substantially greater than the minimum requirements for each state. For the year ended
December 31, 2021, our insurance company subsidiaries reported statutory net income of $22.0 million. For the year ended
December 31, 2020, our insurance company subsidiaries reported a statutory net loss of ($10.1) million.
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, 2021, the adjusted
capital under the risk-based capital calculation of each of our insurance company subsidiaries substantially exceeded the
minimum requirements.
13. 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, 2021, 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, 2021, restricted stock units representing the right
to receive up to 872,532 shares of our common stock were outstanding under the 2015 LTIP. There were no stock option
awards granted under the 2015 LTIP as of December 31, 2021.
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.
F-38
A summary of the status of our stock options as of December 31, 2021 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, 2021
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2021
Exercisable at December 31, 2021
14,157 $
—
— $
(14,157) $
— $
— $
6.99
—
—
6.99
—
—
— $
— $
—
—
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
2021
2020
$
$
$
— $
— $
— $
—
—
—
As of December 31, 2021, 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 2021 or 2020.
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,
shares of common stock become issuable on March 31 of the third calendar year following the year of grant if performance
criteria have been satisfied for grants issued prior to 2021. Restricted stock units awarded under the 2015 LTIP granted
during 2021 cumulatively vest up to 50%, 80% and 100% and shares of common stock become issuable on March 31 of the
third, fourth and fifth calendar years, respectively, following the year of grant if performance criteria have been satisfied.
The performance criteria for the restricted stock units vary based on the grantee. The number of shares of common stock
to be received ranged from 50% to 150% of the number of restricted stock units granted based on achievement of the
performance criteria. Grantees of restricted stock units do not have any rights of a stockholder, and do not participate in
any distributions to our common stockholders, until the award fully vests upon satisfaction of the vesting schedule,
performance criteria and other conditions set forth in their award agreement. Therefore, unvested restricted stock units are
not considered participating securities under ASC 260, “Earnings Per Share,” 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, 2019 and 2021 was $10.20, $10.87, $18.10 and $4.21 per unit, respectively. We incurred
compensation expense (benefit) of $228 thousand and ($400) thousand related to restricted stock units during the years
F-39
ended December 31, 2021 and 2020. We recorded income tax benefit (expense) of $48 thousand and ($84) thousand related
to restricted stock units during the years ended December 31, 2021 and 2020.
The following table details the status of our restricted stock units as of and for the years ended December 31, 2021 and
2020:
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
Number of Restricted Stock Units
2021
228,827
523,757
(30,309)
(140,586)
581,689
2020
353,491
—
(19,065)
(105,599)
228,827
As of December 31, 2021, there was $2.3 million of unrecognized grant date compensation cost related to unvested restricted
stock units assuming compensation cost accrual at target achievement level. Based on the current performance estimate,
we expect to recognize $1.5 million of compensation cost related to unvested restricted stock units, of which $0.6 million
is expected to be recognized in 2022, $0.5 million in 2023, $0.3 million in 2024, $0.1 million in 2025 and $14 thousand is
expected to be recognized in 2026.
14. 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.
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 year ending December 31, 2021 and 2020 (in
thousands) using a measurement date of December 31.
F-40
2021
2020
2.52 %
N/A
2.12 %
N/A
$
(12,400)
$ (13,252)
$
$
(12,400)
12,226
(174)
$ (13,252)
11,393
$ (1,859)
$
$
$
$
$
$
$
(3,253)
(3,253)
3,079
(174)
(4,672)
(4,672)
2,813
$ (1,859)
13,252
271
(284)
(839)
12,400
$ 12,376
355
1,352
(831)
$ 13,252
11,393
1,672
—
(839)
12,226
$ 10,988
1,236
—
(831)
$ 11,393
—
271
(709)
173
(265)
$
$
—
355
(684)
138
(191)
2.12 %
6.50 %
N/A
2.98 %
6.50 %
N/A
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-41
Estimated future benefit payments by fiscal year (in thousands):
2022
2023
2024
2025
2026
2026-2030
884
$
872
$
869
$
849
$
$
835
$ 3,765
As of December 31, 2021, the fair value of the plan assets was composed of cash and cash equivalents of $0.4 million, debt
securities of $3.0 million and equity securities of $8.8 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, 2021. To develop the discount rate used in determining the benefit obligation we used the
USI Yield 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 2022. We
expect our 2022 periodic pension cost to be $(357) thousand, the components of which are interest cost of $300 thousand,
expected return on plan assets of ($764) thousand and amortization of actuarial loss of $107 thousand.
The following table shows the weighted-average asset allocation for the defined benefit cash balance plan held as of
December 31, 2021 and 2020.
Asset Category:
Debt securities
Equity securities
Other
Total
December 31
2021 2020
24 %
72 %
4 %
100 %
25 %
70 %
5 %
100 %
We determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820. (See
Note 3.)
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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, 2021 and December 31, 2020 (in thousands).
As of December 31, 2021
Quoted Prices in Active Other Observable
Markets for Identical
Assets (Level 1)
Inputs
(Level 2)
Unobservable Inputs
(Level 3)
Mutual funds
Equity securities
Total
$
$
2,991 $
8,779
11,770 $
— $
—
— $
Total
— $ 2,991
—
8,779
— $ 11,770
Quoted Prices in Active
Markets for Identical Other Observable Unobservable Inputs
As of December 31, 2020
Debt securities
Equity securities
Total
$
$
— $
7,978
7,978 $
2,875 $
—
2,875 $
Assets (Level 1)
Inputs (Level 2)
(Level 3)
Total
— $ 2,875
7,978
—
— $ 10,853
Our plan assets also include cash and cash equivalents of $0.4 million and $0.5 million at December 31, 2021 and 2020,
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 contributed $0.2 million for the year
ended December 31, 2021. We did not contribute during the year ended December 31, 2020.
F-43
15. Income Taxes:
The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2021 and 2020, 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
2021
2020
$ (1,431) $ (3,746)
(1,579)
(11)
—
—
—
(1,293)
(343)
(6,972)
(1,781)
(5)
—
—
—
(927)
(167)
(4,311)
5,796
—
192
683
124
5,375
3
312
178
217
337
13,217
7,639
—
308
981
118
4,688
45
671
356
336
554
15,696
Deferred federal income taxes, net
$ 8,906 $ 8,724
We concluded that no valuation allowance was necessary against our deferred tax assets as of December 31, 2021 and 2020.
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, 2021 and 2020, respectively, is as follows (in
thousands):
Computed expected income tax expense (benefit) 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 expense (benefit)
Current income tax expense (benefit)
Deferred tax expense (benefit)
Income tax expense (benefit)
F-44
$
$
$
$
2020
2021
2,414 $ (22,884)
28
(300)
(111)
7,410
223
(3,383)
(2,369)
(31)
2,491 $ (21,417)
34
(234)
(190)
—
208
—
—
259
2,297 $ (14,904)
(6,513)
2,491 $ (21,417)
194
We have available, for federal income tax purposes, unused net operating loss carryforwards of $589 thousand at
December 31, 2021. 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.
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
2040
2041
$ —
2
25
45
77
73
59
33
50
29
40
70
60
26
$ 589
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, 2021.
16. Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated
balance sheet to the total of the same such amounts shown in the statement of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash shown in the statement of cash
flows
As of December 31,
$
2021
352,867
3,810
$
2020
102,580
5,728
$
356,677
$
108,308
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.
F-45
The following table provides supplemental cash flow information for the years ended December 31, 2021 and 2020:
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
17. Commitments and Contingencies:
December 31,
2021
3,181
$
$
(4,177)
$
1,326
$
3,280
2020
4,860
653
913
-
$
$
$
$
The Reinsurers and the Hallmark Insurers have agreed to submit to binding arbitration a dispute that has arisen regarding
the rights and obligations of the parties under the LPT Contract. (See Note 7.) Pending resolution of the dispute, the
Hallmark Insurers have agreed to fund the payment of claims under the LPT Contract without prejudice to their right to
seek reimbursement and other relief in the arbitration proceedings. The arbitration panel has not yet been constituted and
no pleadings have been submitted. However, based on prior negotiations, the Company expects the Reinsurers to seek
rescission of the LPT Contract on the basis of alleged breach and fraudulent inducement by the Hallmark Insurers. The
Company believes any such claims are without factual basis or legal merit and intends to vigorously contest the matter. The
Company also intends to pursue an arbitration award enforcing the terms of the LPT Contract and reimbursing the Hallmark
Insurers for all claim amounts funded by them during the pendency of the arbitration, as well as all other damages sustained
by the Hallmark Insurers. Because the dispute is at an initial stage, we are unable at this time to provide an evaluation of
the likelihood of an adverse outcome.
As of December 31, 2021 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.
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 2021 and 2020.
F-46
18. Changes in Accumulated Other Comprehensive Income Balances:
The changes in accumulated other comprehensive income balances as of December 31, 2021 and 2020 were as follows (in
thousands):
Balance at January 1, 2020
Other comprehensive income:
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
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, 2021
19. Concentrations of Credit Risk:
Accumulated Other
Pension Unrealized
Liability Gains (Loss)
$ (3,239)
$ 3,927
Comprehensive
Income (Loss)
$
688
(662)
139
—
—
—
—
(523)
—
—
709
(149)
(433)
91
218
(662)
139
709
(149)
(433)
91
(305)
$ (3,762)
$ 4,145
$
383
1,419
(298)
—
—
—
—
—
2,832
(595)
(6,046)
—
1,121
$ (2,641)
1,270
(2,539)
$ 1,606
1,419
(298)
2,832
(595)
(6,046)
1,270
(1,418)
$ (1,035)
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, 2021 and 2020.
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, 2021 and 2020 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.
20. 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 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
F-47
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 12 years, some of which include options to extend the leases. The components
of lease expense and other lease information as of and during the periods ended December 31, 2021 and 2020 are as follows
(in thousands):
Operating lease cost
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
Twelve Months Ended
December 31,
2021
2020
$
2,147
$
3,010
$
$
2,171
436
$
$
2,473
—
We incurred $0.2 million and $19 thousand in short-term lease payments not included in our lease liability during the years
ended December 31, 2021 and 2020, respectively.
The components of lease expense and other lease information as of and during the twelve month periods ended December
31, 2021 and 2020 are as follows (in thousands):
Operating lease right-of-use assets
Operating lease liabilities
December 31,
2021
$ 13,211
2020
$ 13,986
$ 15,062
$ 15,862
Weighted-average remaining lease term - operating leases
11.4
10.2
Weighted-average discount rate - operating leases
6.22%
5.88%
Future minimum lease payments under non-cancellable leases as of December 31, 2021 and December 31, 2020 are as
follows (in thousands):
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less imputed interest
Total operating lease liability
December 31,
2021
December 31,
2020
$
$
$
$
—
2,171
2,023
2,216
2,450
18,264
27,124
(12,062)
15,062
$
$
$
$
2,172
2,171
1,885
1,940
1,975
11,351
21,494
(5,632)
15,862
F-48
Schedule II – Condensed Financial Information of Registrant (Parent Company Only)
HALLMARK FINANCIAL SERVICES, INC.
BALANCE SHEETS
December 31, 2021 and 2020
(In thousands)
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Deferred federal income taxes
Federal income tax recoverable
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $746 in 2021 and
$844 in 2020)
Subordinated debt securities (less unamortized debt issuance cost of $743 in 2021 and $795
in 2020)
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
2021 and in 2020
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock (2,700,364 shares in 2021 and 2,730,673 in 2020), at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
2021
2020
32,482
239,832
50
9,028
19,913
30,066
247,839
285
12,506
19,844
$ 301,305 $ 310,540
$
49,254 $
49,156
55,959
20,571
125,784
55,907
34,555
139,618
3,757
122,844
74,703
(1,035)
(24,748)
3,757
122,893
68,915
383
(25,026)
175,521
170,922
$ 301,305 $ 310,540
See accompanying report of independent registered public accounting firm.
F-49
Schedule II (Continued) – Condensed Financial Information of Registrant (Parent Company Only)
HALLMARK FINANCIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2021 and 2020
(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
Income before equity in undistributed earnings of subsidiaries and income tax benefit
Income tax expense (benefit)
Income before equity in undistributed earnings of subsidiaries
Equity in undistributed share of loss in subsidiaries
Net income (loss)
Comprehensive income (loss)
2021
2020
$
28 $
3,000
—
31,714
34,742
13,513
4,993
18,506
16,236
3,858
20
12,000
744
22,844
35,608
17,101
5,326
22,427
13,181
(5,592)
12,378
(3,374)
18,773
(113,124)
$
9,004 $
(94,351)
$
7,586 $
(94,656)
See accompanying report of independent registered public accounting firm.
F-50
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, 2021 and 2020
(In thousands)
Cash flows from operating activities:
Net income (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 payable (recoverable)
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 (used in) provided by investing 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
2021
2020
$
9,004
$ (94,351)
832
235
—
3,374
3,478
(27,254)
13,942
3,611
(1,195)
—
—
—
(1,195)
835
768
(744)
113,124
(6,602)
(17,851)
14,368
9,547
(716)
—
1,598
—
882
2,416
30,066
$ 32,482
10,429
19,637
$ 30,066
$
3,181
$
148
$
$
4,860
204
See accompanying report of independent registered public accounting firm.
F-51
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
Segment
2021
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
2020
Specialty Commercial Segment
Standard Commercial Segment
Personal Segment
Corporate
Consolidated
Future
Policy
Benefits,
Losses,
Claims, and
Loss
Deferred
Policy
Other
Policy
Claims and
Benefits
Payable
Benefits,
Claims,
Losses and
Amortization
of Deferred
Policy
Net
Other
Net
Acquisition Adjustment Unearned
Premiums
Expenses
Costs
Premium Investment Settlement Acquisition
Revenue
Expenses
Income
Costs
Operating Premiums
Expenses Written
$
$
$
$
3,585 $
4,652
(1,426)
—
6,811 $
702,375 $
93,497
20,809
—
816,681 $
220,622 $
48,011
15,794
—
284,427 $
— $ 242,173 $
68,584
—
68,533
—
—
—
— $ 379,290 $
9,130 $
2,582
1,153
(3,150)
9,715 $
164,729 $
49,152
61,363
—
275,244 $
7,191 $
12,678
15,319
—
43,751 $
21,927
22,247
13,513
35,188 $ 101,438 $
205,306
67,709
66,909
—
339,924
9,070 $
4,872
3,898
—
17,840 $
678,017 $
86,291
25,460
—
789,768 $
255,840 $
46,849
18,117
—
320,806 $
— $ 327,023 $
66,554
—
78,324
—
—
—
— $ 471,901 $
12,338 $
3,061
842
(3,321)
12,920 $
285,994 $
52,478
68,435
—
406,907 $
49,162 $
12,910
16,744
—
55,102 $
20,694
25,868
17,101
78,816 $ 118,765 $
284,532
68,396
75,404
—
428,332
See accompanying report of independent registered public accounting firm.
F-52
Schedule IV – Reinsurance
(In thousands)
Year Ended December 31, 2021
Life insurance in force
Premiums
Life insurance
Accident and health insurance
Property and liability insurance
Title Insurance
Total premiums
Year Ended December 31, 2020
Life insurance in force
Premiums
Life insurance
Accident and health insurance
Property and liability insurance
Title Insurance
Total premiums
FINANCIAL STATEMENT SCHEDULES
Column B
Gross Amount
Column C
Ceded to
Column D
Column E
Column F
Assumed from Net Amount Percentage of Amount
Other Companies Other Companies
Assumed to Net
$
— $
— $
— $
—
$
$
— $
—
679,504
—
679,504 $
— $
—
(310,843)
—
(310,843) $
— $
—
10,629
—
10,629 $
—
—
379,290
—
379,290
$
— $
— $
— $
—
$
$
— $
—
803,034
—
803,034 $
— $
—
(339,587)
—
(339,587) $
— $
—
8,454
—
8,454 $
—
—
471,901
—
471,901
2.80 %
2.80 %
1.79 %
1.79 %
See accompanying report of independent registered public accounting firm.
F-53
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations
FINANCIAL STATEMENT SCHEDULES
(In thousands)
8
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
Claims and Claim
Deferred Claims and Discount if
Claim
Policy
any,
Affiliation With Acquisition Adjustment Deducted In Unearned Earned
Net
Investment
Adjustment Expenses
Incurred Related to
Amortization of Paid Claims
Deferred Policy and Claims
Net
(1) Current (2) Prior Acquisitions
Adjustment Premiums
Expenses Written
Costs
Registrant
(a) Consolidated
property-casualty
Entities
Expenses
Column C Premiums Premiums Income
Year
Years
Costs
2021
2020
$
$
6,811 $
17,840 $
816,681 $
789,768 $
— $ 284,427 $ 379,290 $
— $ 320,806 $ 471,901 $
9,715 $
12,920 $
269,204 $
6,040 $
348,619 $ 58,288 $
35,188 $
78,816 $
279,046 $ 339,924
320,419 $ 438,973
See accompanying report of independent registered public accounting firm.
F-54
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 &
Chief Executive Officer
Christopher Kenney
President & Chief Financial 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 3:00 p.m. CDT on June 10th, 2022, at
Two Lincoln Centre, 5420 Lyndon B. Johnson
Freeway, Suite 1100, Dallas, Texas 75240.
CORPORATE HEADQUARTERS
Hallmark Financial Services, Inc.
Two Lincoln Centre
5420 Lyndon B. Johnson Freeway, Suite 1100
Dallas, Texas 75240
(817) 348-1600
www.hallmarkgrp.com
Annual Report 2021
A
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Two Lincoln Centre, 5420 Lyndon B Johnson Freeway, Suite 1100 | Dallas, Texas 75240
P (817) 348-1600 | www.hallmarkgrp.com