SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1995
Commission file number 0-16090
Hallmark Financial Services, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0447375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14651 Dallas Parkway, Suite 900
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (214) 404-1637
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock, par value
$.03 per share - 10,662,277 shares outstanding as of August 9, 1995.
No Exhibit Index is filed with this report.
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PART I
FINANCIAL INFORMATION
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31
ASSETS 1995 1994
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Investments:
Debt securities, held-to-maturity $ 5,295,731 $ 4,329,103
Equity securities, available-for-sale 173,052 174,709
Short-term investments, at cost
which approximates market value 320,000 320,000
Total investments 5,788,783 4,823,812
Cash and cash equivalents 2,293,699 1,800,749
Prepaid reinsurance premiums 10,132,674 7,304,284
Premium notes receivable 3,625,802 -
Installment premiums receivable
(net of allowance for
doubtful accounts) 5,568,538 8,284,633
Reinsurance recoverable 16,202,434 10,382,311
Deferred policy acquisition costs 2,733,250 2,113,759
Excess of cost over net assets
acquired, net of accumulated amortization 5,446,881 5,529,936
Other intangible assets 25,000 40,000
Deferred federal income taxes 349,029 -
Accrued investment income 52,452 41,609
Other assets 512,399 363,823
Total assets $ 52,730,941 $ 40,684,916
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 761,556 $ 882,862
Unpaid losses and loss adjustment expenses 17,459,819 12,668,306
Unearned premiums 13,899,856 10,229,911
Reinsurance balances payable 3,916,130 2,719,039
Deferred ceding commissions 3,039,437 2,191,344
Drafts outstanding 995,234 777,585
Accounts payable and other accrued expenses 3,068,542 2,046,475
Current federal income taxes payable 45,130 22,245
Accrued interest and franchise taxes payable 31,506 30,309
Total liabilities 43,217,210 31,568,076
Stockholders' equity:
Common stock, $.03 par value, authorized
100,000,000 shares; (issued 10,962,277 shares
in 1995 and 10,917,277 in 1994) 328,868 328,868
Capital in excess of par value 10,349,665 10,349,665
Accumulated deficit (564,802) (961,693)
Treasury stock (600,000) (600,000)
Total stockholders' equity 9,513,731 9,116,840
$52,730,941 $40,684,916
The accompanying notes are an integral part
of the consolidated financial statements.
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HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
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Gross premiums written $12,085,517 $6,826,310 $22,958,235 $13,803,500
Ceded premiums written (9,045,263) (4,541,630) (17,192,099) (9,318,437)
Net premiums written $ 3,040,254 $ 2,284,680 $ 5,766,136 $ 4,485,063
Revenues:
Premiums earned $10,376,827 $6,543,547 $19,288,290 $12,714,349
Premiums ceded (7,738,836) (4,316,590) (14,363,709) (8,376,841)
Net premiums earned 2,637,991 2,226,957 4,924,581 4,337,508
Investment income,
net of expenses 113,518 22,299 214,883 81,116
Finance service charges 208,953 165,854 424,929 320,352
Processing fees 160,306 - 215,433 -
Service fees 53,805 438,319 62,170 822,438
Other income 23,333 30,663 50,780 85,340
Total revenues 3,197,906 2,884,092 5,892,776 5,646,754
Benefits, losses and expenses:
Losses and loss
adjustment expenses 9,469,979 5,074,809 16,452,575 9,501,133
Reinsurance recoveries(7,316,100) (3,438,203) (12,432,929) (6,136,161)
Net losses and loss
adjustment expenses 2,153,879 1,636,606 4,019,646 3,364,972
Amortization of
acquisition costs 165,883 41,869 228,602 99,668
Other acquisition, underwriting
and operating expenses 705,419 1,138,270 1,203,116 2,001,379
Interest expense 10,548 16,570 22,611 34,674
Amortization expense 46,328 46,254 98,054 91,507
Total benefits,losses
and expenses 3,082,057 2,879,569 5,572,029 5,592,200
Income from operations before
federal income taxes 115,849 4,523 320,747 54,554
Federal income tax benefit
(Note 3) (44,509) - (76,144) -
Net income $ 160,358 $ 4,523 $ 396,891 $ 54,554
Net income per share of
common stock $ .02 $ .00 $ .04 $ .01
Weighted average shares
outstanding 10,662,277 10,639,592 10,662,277 10,639,592
The accompanying notes are an integral part
of the consolidated financial statements.
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HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
1995 1994
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Cash flows from operating activities:
Net income $396,891 $ 54,554
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization expense 147,816 138,242
Change in deferred federal income taxes (349,029) -
Change in prepaid reinsurance premiums (2,828,390) (941,597)
Change in premium notes receivable (3,625,802) -
Change in installment
premiums receivable 2,716,095 (912,135)
Change in deferred policy
acquisition costs (619,488) (906,779)
Change in ceding income 848,090 1,006,447
Change in unpaid losses and loss
adjustment expenses 4,791,513 866,048
Change in unearned premiums 3,669,945 1,089,152
Change in reinsurance recoverable (5,833,123) (1,135,741)
Change in reinsurance balances payable 1,197,090 451,465
Change in all other liabilities 1,240,901 321,109
Change in all other assets (112,374) ( 11,249)
Change in federal income tax payable 22,885 -
Net cash provided by
operating activities 1,663,020 19,516
Cash flows from investing activities:
Purchases of property and equipment (83,808) (24,870)
Purchases of debt securities (1,698,507) (210,318)
Maturities and redemptions of
debt securities 731,881 990,737
Maturities and redemptions
of common stock 1,657 -
Net cash used in investing activities (1,048,777) 755,549
Cash flows from financing activities:
Repayment of short-term borrowings (121,306) (119,286)
Cash used in financing activities (121,306) (119,286)
Increase (decrease) in cash and
cash equivalents 492,937 655,779
Cash and cash equivalents at
beginning of period 1,800,762 1,111,893
Cash and cash equivalents at
end of period $2,293,699 $1,767,672
Supplemental cash flow information:
Cash paid during the period for interest $ 22,611 $ 34,674
The accompanying notes are an integral part
of the consolidated financial statements.
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Item 1. Notes to Consolidated Financial Statements (Unaudited).
Note 1 - Summary of Accounting Policies
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of Hallmark
Financial Services, Inc. and subsidiaries (the "Company") as of June 30, 1995
and the consolidated results of operations and cash flows for all periods
presented. The accompanying financial statements have been prepared by the
Company without audit.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Reference is made to the
Company's annual consolidated financial statements for the year ended
December 31, 1994 for a description of all other accounting policies.
Certain items in the 1994 interim financial statements have been reclassified
to conform to the 1995 presentation.
The results of operations for the period ended June 30, 1995 are not
necessarily indicative of the operating results to be expected for the full
year.
Note 2 - Investments
Debt securities, held-to-maturity, for the reporting period include
investments in U.S. Government securities totaling $4,865,357, which includes
the reinvestment of $731,881 in matured securities, and special revenue bonds
of $430,374. Net proceeds received are included in cash and cash equivalents
at June 30, 1995. Short-term investments include certificates of deposits of
$320,000. Short-term investments mature within one year.
Realized investment gains and losses are recognized in operations on the
specific identification method. The Company has the ability and intent to
hold all investments to maturity. Provisions for possible losses are
recorded only on other-than-temporary declines in the value of an investment.
Note 3 - Federal Income Taxes
The composition of deferred tax assets and liabilities and the related
tax effects as of June 30, 1995 is as follows:
Deferred Tax Liabilities:
Deferred policy acquisition costs,
deductible for tax ($929,305)
Other (57)
Total deferred tax liabilities (929,362)
Deferred Tax Assets:
Property and equipment basis $ 2,395
Unearned premiums 256,168
Loss reserve discounting 122,146
Deferred ceding commissions,
non-deductible for tax 1,033,585
Net operating loss carryforward 55,622
AMT credit 11,531
Other 27,769
Total deferred tax assets $ 1,509,216
Net deferred tax assets 579,854
Valuation allowance 230,825
Net deferred tax asset $ 349,029
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A reconciliation of the income tax provisions based on the prevailing
corporate tax rate of 34 percent to the provision reflected in the
consolidated financial statements for the period ended June 30, 1995 is as
follows:
Computed expected income tax expense
at statutory regulatory tax rate $ 109,054
Amortization of excess cost 29,025
Tax-exempt interest (5,034)
Key-man life insurance 1,970
Change in valuation allowance (236,409)
Other 25,250
Deferred tax benefit ($ 76,144)
The Company has available, for federal income tax purposes, unused net
operating losses of $163,594 at June 30, 1995, which may be used to offset
future taxable income. The net operating losses will expire, if unused, as
follows:
Year
2003 64,547
2007 99,047
$ 163,594
Note 4 - Warrants Outstanding
In October 1992, the Company issued warrants to purchase 981,333 shares
of its Common Stock ("Guaranty Warrants") to executive officers and directors
in consideration for the recipients' agreement to pledge outstanding shares
of the Company's common stock they owned as security for a working capital
line of credit the Company proposed to obtain from a commercial bank. The
Company subsequently abandoned its efforts to obtain the working capital line
of credit. Each Guaranty Warrant covered the same number of shares the
recipient agreed to pledge. No value has been assigned to these warrants.
The Guaranty Warrants were initially exercisable between October 2, 1992 and
October 1, 1994, and were subsequently extended to October 1, 1996, at which
time they will expire to the extent not exercised. The exercise price is
$.50 per share, an amount equal to the last reported sale price of the Common
Stock on the American Stock Exchange's Emerging Company Marketplace prior to
October 2, 1992. The Guaranty Warrants are not transferrable, but may be
exercised only by their recipients (or by a recipient's estate in the event
of his/her death).
Note 5 - Reinsurance
The Company's insurance subsidiary, American Hallmark Insurance Company
of Texas ("Hallmark"), is involved in various reinsurance arrangements with
other companies. Most significant of these arrangements is Hallmark's
affiliation with a county mutual insurance company, State and County Mutual
Fire Insurance Company ("State and County"). Under this arrangement,
Hallmark underwrites the risk and the Company's subsidiary, American Hallmark
General Agency, Inc., formerly Brokers General, Inc., manages the issuance of
State and County policies by Company-owned and unaffiliated, independent
agents. Hallmark assumes 100% of the risk from State and County and
retrocedes 75% to Vesta Insurance Group, Inc., formerly known as Liberty
National Fire Insurance Company, under a quota share reinsurance agreement.
Hallmark's retained percentage is 25%.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
Introduction. Hallmark Financial Services, Inc. (HFS) engages in the
sale of consumer products and services on credit terms, primarily to lower
and middle income customers. Its target market encompasses the substantial
number of Americans who either are denied credit from banks, credit card
companies and other conventional credit sources, or have never established a
bank account or credit history. Currently, the Company's business primarily
involves marketing, underwriting and premium financing of non-standard
automobile insurance. Secondarily, the Company provides fee-based claims
adjusting and related services for affiliates and third parties. (HFS and
its wholly owned subsidiaries are collectively referred to herein as the
"Company").
The Company conducts these activities through an integrated insurance
group, the members of which are a property and casualty insurance company,
American Hallmark Insurance Company of Texas ("Hallmark"); a managing general
agent, American Hallmark General Agency, Inc. ("AHGA"); a network of
affiliated insurance agencies known as the American Hallmark Agencies
("Hallmark Agencies"); a premium finance company, Hallmark Finance
Corporation ("HFC"); and a claims handling and adjustment firm, Hallmark
Claims Service, Inc., formerly known as Citizens Adjustment and Reporting
Services, Inc. ("HCS"). The Company operates only in Texas.
The Company markets, underwrites and finances non-standard automobile
liability and physical damage insurance policies. Currently, Hallmark
provides insurance through reinsurance arrangements with two unaffiliated
companies, State & County Mutual Fire Insurance Company ("State & County")
and Vesta Fire Insurance Corporation ("Vesta"). Through State & County,
Hallmark provides insurance primarily for high risk drivers who do not
qualify for standard-rate insurance ("Hallmark policies"). Under a
supplementary quota-share reinsurance agreement, Hallmark cedes 75% of its
risks to Vesta. Premium financing to policyholders is provided through HFC's
premium finance program or Hallmark's direct-billing program. Effective
January 1, 1995, HFC resumed its premium finance operations (after being
dormant since early 1992), and currently finances most of the Company's
annual policy production. AHGA manages the marketing of Hallmark policies
through a network of retail insurance agencies which operates under the
American Hallmark Insurance Agencies of Texas name, and through independent
agents operating under their own respective names.
Financial Condition and Liquidity
The Company's sources of funds are principally derived from the
insurance operations. Hallmark's major sources of funds are from premiums
collected (net of policy cancellations and premiums ceded), ceding
commissions, premium finance service charges and investment activities.
Despite the January 1, 1995 cancellation of a significant third party
administrative and claims handling contract (through HCS), net cash flow
provided from the Company's consolidated operations for the six months ended
June 30, 1995, was $1,663,020 as compared to $19,516 for the same period in
1994. As described below, while 1995 net cash flow increased significantly,
comparative net cash flow for the first half of 1994 was unusually low due to
the combined effect of increased ceding of premiums beginning in late-1993
and an increase in annual policy writings during the first half of 1994.
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On a consolidated basis, the Company's liquidity improved significantly
during the first six months of 1995, with bonds, equities, short-term
investments and cash totalling $8,082,482 at June 30, 1995, compared to
$6,624,561 at December 31, 1994 and $4,618,011 at June 30, 1994. The
Company's increased liquidity during the first half of 1995 is primarily due
to an approximate 66% increase in Hallmark's gross premiums written of
$22,958,235 during the first six months of 1995 versus $13,803,500 during the
same period of 1994, an approximate 85% increase in ceding commission income
to $5,157,630 during the first six months of 1995 versus $2,795,531 in 1994,
and more timely funding of annual policy premiums under HFC's premium finance
program than under Hallmark's direct-bill program. Under HFC's premium
finance program, premiums for annual policies due Hallmark are funded-in-full
in approximately 30 days. However, under Hallmark's direct-bill program
which is being phased out, the Company generally receives a 10% to 20% down
payment and the remaining annual premium in ten monthly installments. As
expected, net installment premiums receivable decreased and premium notes
receivable increased in light of the commencement of HFC's premium finance
operations on January 1, 1995. The Company reported net installment premiums
receivable of $5,568,538 at June 30, 1995 versus $7,644,332 at June 30, 1994,
and premium notes receivable of $3,625,802 at June 30, 1995 versus -0- at
June 30, 1994. During the first six months of 1995, the Company received
external funds, net of cancellations, of $2,350,982 under premium notes
generated by the Company.
The Company's liquidity improved despite the adverse impact of
significant losses associated with severe weather primarily during the second
quarter of 1995. For the six months ended June 30, 1995, the Company
incurred approximately $1.2 million in weather-related losses which are
generally paid to the insureds shortly after the loss is reported. Of this
amount, $900,000 (75%) has been or will be ceded under the Company's
principal quota-share agreement, and approximately $100,000 has been or will
be recovered under the Company's excess-of-loss catastrophe coverage
agreement.
At June 30, 1995, the Company reported $761,556 in notes payable,
$502,580 of which is due before December 31, 1995. The Company expects to
repay these notes with cash from operations. However, the amount to be paid
in 1995 may be less than the $502,580 reflected in the notes payable balance.
Included in this amount is a disputed obligation of $380,000 in connection
with a financing transaction which occurred prior to the Company's
acquisition of the insurance group. Further, if any portion of the
approximately $380,000 is ultimately deemed owing, the Company believes that
it has the right of offset against a related receivable in the sum of
$240,000.
Current Federal income taxes ("FIT") payable of $45,130 at June 30, 1995
increased substantially over the $22,245 reported at December 31, 1994, but
decreased significantly in relation to the $145,769 reported at March 31,
1995. The increase reflected between the June 30, 1995 and 1994 periods is
principally due to the Company's increased profitability and the fact that
the Company has utilized most of its available operating loss carryforwards
in prior years (See Note 3 - Federal Income Taxes). The decrease reflected
between the first and second quarters of 1995 is primarily the result of the
payment of estimated FIT of $250,000 during June 1995, partially offset by an
increase in the accrual of FIT payable related to second quarter 1995
earnings. Since the Company currently has limited operating loss
carryforwards remaining to offset future FIT, liquidity generated by any
future earnings would be adversely affected by payment of FIT obligations.
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A substantial portion of the Company's liquid assets are held by
Hallmark and are not available for general corporate purposes; however, non-
restricted cash continues to increase. Of the Company's consolidated liquid
assets at June 30, 1995, $1,016,654 represents non-restricted cash (compared
to $665,503 at December 31, 1994 and $175,845 at June 30, 1994). Since state
insurance regulations restrict financial transactions between an insurance
company and its affiliates, the Company is limited in its ability to use
Hallmark funds for its own working capital purposes. Furthermore, dividends
and loans by Hallmark to the Company are restricted and subject to Texas
Department of Insurance ("TDI") approval. However, TDI has sanctioned the
payment of management fees, commissions and claims handling fees by Hallmark
to the Company and affiliates. During the third quarter of 1993, the Company
initiated measures to strengthen Hallmark's surplus. At that time,
Hallmark's premium-to-surplus ratios exceeded TDI's guidelines of 3 to 1.
These measures included, among other things, a temporary abatement of
management fees and a reduction in commissions payable by Hallmark to the
Company and AHGA, respectively. However, during the third quarter of 1994,
the Company reinstated a portion of the management fees. During the first
six months of 1995, Hallmark paid the Company $325,000 in management fees.
For the year ended December 31, 1994, Hallmark paid the Company $100,000 in
management fees. Management anticipates that Hallmark may continue to pay
management fees periodically during 1995, and thus, these fees could be a
moderate source of unrestricted liquidity in 1995.
Commissions from an annual policy program for independent agents
initiated during the first quarter of 1994 continue to represent a source of
unrestricted liquidity for the Company. Under this program, AHGA is offering
independent agents the ability to write annual policies, but commissions to
independent agents are paid monthly on an "earned" basis. However,
consistent with customary industry practice, Hallmark is paying total
commissions up-front to AHGA based on the entire annual premiums written.
Independent agent production of annual policies was approximately $11 million
for the six months ended June 30, 1995. During the first six months of 1995,
AHGA received $1,972,726 in commissions related to this program from
Hallmark, of which $1,468,542 will be paid to independent agents as earned.
During 1994, AHGA received $1,487,660 in annual policy commissions with
$1,115,745 to be paid to independent agents as earned.
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Ceding commission income represents a significant source of funds to the
Company. During the first six months of 1995, and during 1994, ceding
commission income exceeded agent commissions and other direct expenses
associated with the cost of producing new business (i.e., policy acquisition
costs). Ceding commission income for the six months ended June 30, 1995
increased $2,362,099 up to $5,157,630 representing an 85% increase when
compared to the first six months of 1994. In accordance with GAAP, a portion
of ceding commission income and policy acquisition costs is deferred and
recognized over future periods as income and expense, respectively, as
related net premiums are earned. Deferred ceding commission income also
increased to $3,039,437 from $2,191,344 at December 31, 1994. This increase
is principally due to an increase in the Company's premium volume (which
includes annual policies that are earned over a 12-month period). In light
of the growth in premium volume during the first six months of 1995, deferred
policy acquisition costs of $2,733,250 as of June 30, 1995 was some 29%
higher than at December 31, 1994. However, deferred policy acquisition costs
were $306,187 less than deferred ceding commission income at June 30, 1995.
The Company is earning more in ceding commission income than it is incurring
in agent commissions and other direct policy acquisition costs. Excess
earned ceding commission income over policy acquisition costs is
principally attributable to the combined effect of the 75% cession of
increased premium volumes during 1995 and the Company's practice of dealing
directly with its independent agents, thus eliminating additional commission
expense associated with using third-party managing general agents as
intermediaries.
At June 30, 1995, Hallmark reported statutory capital and surplus of
$4,085,784, which shows an increase of $954,457 over the $3,131,327 reported
at June 30, 1994, and an increase of $252,800 over the $3,832,984 reported at
December 31, 1994. On an annualized-premiums basis, Hallmark's premium-to-
surplus ratio at June 30, 1995 was 2.82 to 1 as compared to 2.53 to 1 at
December 31, 1994, and 2.86 to 1 at June 30, 1994. It is management's
opinion that Hallmark should not require additional capital during 1995.
Management anticipates that Hallmark is positioned to maintain and strengthen
statutory surplus through increased earnings from insurance operations.
Management believes that development of enhanced statistical data during the
last two years to further refine rate-setting procedures and to promptly
identify high-loss ratio books of business produced by independent agents, as
well as a continued emphasis on direct appointments of independent agents
without going through independent managing general agents, should continue to
positively affect profitability during 1995.
<PAGE>
Prepaid reinsurance premiums and reinsurance balances payable generally
increased as expected in relation to increased premium writings.
Management believes that the Company, absent any material adverse claims
experience, will not require additional capital to support its current
operations during 1995. However, external funding is required to finance
HFC's reactivation of its premium finance operations. Effective January 1,
1995, the Company, through HFC, began financing premiums produced by the
Hallmark Agencies and effective May 1, 1995, began offering its independent
agents this premium finance program. The program is designed to replace the
Company's direct-bill program currently provided by Hallmark. The finance
charges a premium finance company may impose under a premium finance note are
subject to state regulation, but the permissible rates are substantially
higher than those an insurance company may now charge (as set by the Texas
Department of Insurance) under a direct-bill program. To fund its premium
finance operations, HFC entered into a financing and servicing arrangement
with an unaffiliated premium finance company, Peregrine Premium Finance L.C.
("Peregrine"). Under the agreement, Peregrine has agreed to fund up to
$10,500,000 in premium finance notes (the "Notes") generated by the financing
of State & County policies produced by AHGA. Peregrine has obtained an
external credit facility for the purpose of funding such Notes. HFC, in
turn, processes and services the Notes on behalf of Peregrine for a fee
approximating the operating profit to Peregrine from the Notes, net of
imputed borrowing costs and after deducting certain expenses. As of June 30,
1995, $8,149,018 was available under Peregrine's credit facility to fund
Notes. Based upon projections of anticipated premium finance activity,
additional lines of credit to fund premium finance notes may be required by
the end of 1995. Management is seeking an increase in the current line of
credit, as well as exploring other financing opportunities.
During 1995, management expects that Company liquidity will be favorably
impacted by a continued focus on increasing and strengthening the performance
of the Company's core State & County business. This focus will include not
only an ongoing emphasis on systems, effective rate-setting procedures and a
close monitoring of agent performance (followed by corrective action, as
necessary), but also on marketing and expanding premium finance subsidiary
operations.
The Company will continue to pursue third party claims handling and
administrative contracts. HCS has recently entered into a claims-handling
and consulting contract with an unaffiliated independent agent. Fees from
this contract were not material during the first six months of 1995, and it
is not anticipated that this contract will have a significant impact on
liquidity during 1995. Effective January 1, 1995, the contract between the
Company, Vesta and an unaffiliated agency governing claims adjusting and
certain administrative services was canceled. However, the Company will
continue to earn fees for handling claims-related litigation. Although the
Company is actively pursuing additional third party claims handling business,
it is not anticipated that these potential contracts will significantly
impact 1995 liquidity.
In addition, the Company is evaluating possible entry into the
commercial excess-and-surplus-lines ("E & S") market during late-1995 through
its marketing arm, AHGA. Our investigation suggests that entry into the
commercial E & S market could be a future source of commission and premium
finance income.
<PAGE>
Results of Operations
Gross premiums written (prior to reinsurance) of $12,085,517 and
$22,958,235 for the three and six months ended June 30, 1995 were $5,259,207
(77%) and $9,154,735 (66%) higher than the same periods in 1994. The
increases in premiums written in both the second quarter and six months of
1995, as compared to 1994, are due to increased production of the Company's
core State and County business by independent agents. These significant
increases are partially offset by decreases in assumed premiums written of
$667,312 and $1,233,527, respectively, in the quarter and six months,
pursuant to the January 1, 1995 cancellation of an April 1, 1993 reinsurance
agreement with Vesta. Under this agreement, Hallmark assumed from Vesta 10%
of the premiums produced by an unaffiliated agency. Net written premiums
(after reinsurance) for the quarter and six months of 1995 were $3,040,254
and $5,766,136, respectively, which reflects increases of 33% and 29% over
the same 1994 periods. The smaller percentage increase in net written
premiums versus gross written premiums between periods is primarily due to
the inclusion in the 1994 periods of assumed premiums related to the April 1,
1993 reinsurance contract with Vesta. Comparable assumed premiums were not
recorded during the first and second quarters of 1995 due to the cancellation
of the contract effective January 1, 1995. Net written premiums for 1995
were more significantly impacted (than gross written premiums) by the
cancellation of this contract, since assumed premiums pursuant to the
contract were not subject to the Company's principal quota-share reinsurance
agreement.
Premiums earned (prior to reinsurance) of $10,376,827 and $19,288,290
for the three and six months ended June 30, 1995, respectively, were
$3,833,280 and $6,573,941 higher than for the comparable periods in 1994.
For the three and six months ended June 30, 1995, net earned premiums of
$2,637,991 and $4,924,581, respectively, increased $411,034 (19%) and
$587,073 (14%) in relation to the same respective periods of 1994. The
disproportionate increases in premiums earned before and after reinsurance in
relation to gross premiums written and net premiums written is primarily the
result of the absence of assumed premiums in 1995 under the April 1, 1993
reinsurance contract canceled January 1, 1995.
The net incurred loss ratio (computed on net premiums earned after
reinsurance) for both the three and six months ended June 30, 1995 was 81.6%
as compared to 73.5% and 77.6% for the same respective 1994 periods. The
increase in the 1995 loss ratio is principally due to significant 1995 hail
losses, particularly during the second quarter. Hail losses after
reinsurance recoveries represent approximately 7.6 and 4.1 percentage points
of the 1995 incurred loss ratios for the three and six months ended June 30,
1995.
Investment income of $214,883 for the six months ended June 30, 1995
increased over the same period in 1994 by approximately 164% principally due
to an increase in the company's funds available for investment, an increase
in the percentage of funds invested, and higher market rates during the first
half of 1995 than in 1994. Processing fees of $215,433, reported for the
first time, represent fees earned by HFC pursuant to the commencement of
premium finance operations January 1, 1995. Service fees of $62,170
decreased by approximately 93% primarily due to the January 1, 1995
cancellation of a claims adjustment and cash control services contract
pursuant to the April 1, 1993 reinsurance agreement with Vesta.
<PAGE>
Other acquisition, underwriting and operating expenses of $705,419 and
$1,203,116 for the three and six months ended June 30, 1995, decreased 38%
and 40%, respectively, as compared to the prior year. As discussed in the
Financial Condition and Liquidity section, ceding commission income of
$5,157,630 during the first half of 1995 increased approximately 85% over
ceding commission income of $2,795,531 for the same period in 1994. The
increase in ceding commission income during 1995, which was partially offset
by increases in volume-sensitive expenses such as agent commissions,
allowances for doubtful accounts, postage and salaries, is the principal
reason for the significant decrease in other acquisition, underwriting and
operating expenses.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Except for routine litigation incidental to the business of the Company,
neither the Company, nor any of the properties of the Company was subject to
any material pending or threatened legal proceedings as of the date of this
report.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Security Securities.
None
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Company's Annual Meeting of Shareholders was held on May 16,
1995. Of the 10,662,277 shares of common stock of the Company
entitled to vote at the meeting, 4,121,890 shares were represented
in person or by proxy.
(b) The following individuals were elected to serve as directors for
the Company: Ramon D. Phillips, Raymond A. Kilgore, Jack R.
Daugherty, Kenneth H. Jones, Jr., Samuel W. Rizzo, A.R. Dike, James
H. Graves, George R. Manser and C. Jeffrey Rogers. Each of the
nominees received 4,121,290 votes in favor of their election as
directors of the Company.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are filed herewith.
(b) The Company did not file a Current Report on Form 8-K to report any
events which occurred during the quarter ended June 30, 1995.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Hallmark Financial Services, Inc.
(Registrant)
Date: August 14, 1995 Ramon D. Phillips, President (Chief Executive
Officer)
(Signature)
Date: August 14, 1995 John J. DePuma, Chief Financial Officer
(Signature)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Due to format constraints of the Financial Data Schedule (FDS) certain Balance
Sheet items were omitted: i.e. Prepaid reinsurance premiums, Premium notes
receivable, Installment premiums receivable, Excess of cost over net assets
acquired & Other assets. Refer to actual 10-KSB submission.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 5,615,731
<DEBT-MARKET-VALUE> 0
<EQUITIES> 173,052
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,788,783
<CASH> 2,293,699
<RECOVER-REINSURE> 16,202,434
<DEFERRED-ACQUISITION> (306,187)
<TOTAL-ASSETS> 52,730,941
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 13,899,856
<POLICY-OTHER> 3,916,130
<POLICY-HOLDER-FUNDS> 4,063,776
<NOTES-PAYABLE> 761,556
<COMMON> 328,868
0
0
<OTHER-SE> 9,749,665
<TOTAL-LIABILITY-AND-EQUITY> 52,730,941
4,924,581
<INVESTMENT-INCOME> 212,883
<INVESTMENT-GAINS> 2,100
<OTHER-INCOME> 753,212
<BENEFITS> 4,054,708
<UNDERWRITING-AMORTIZATION> 228,602
<UNDERWRITING-OTHER> 1,168,054
<INCOME-PRETAX> 320,747
<INCOME-TAX> (76,144)
<INCOME-CONTINUING> 396,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 396,891
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<RESERVE-OPEN> 13,007,306
<PROVISION-CURRENT> 14,307,428
<PROVISION-PRIOR> 1,944,511
<PAYMENTS-CURRENT> 5,695,588
<PAYMENTS-PRIOR> 5,987,838
<RESERVE-CLOSE> 17,575,819
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
