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 September 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 November 14, 1995.
Number of pages in this report - 14
No Exhibit Index is filed with this report.
<PAGE>
<TABLE> PART I
FINANCIAL INFORMATION
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30 December 31
ASSETS 1995 1994
<S> <C> <C>
Investments:
Debt securities, held-to-maturity $ 5,354,468 $ 4,329,103
Equity securities, available-for-sale 172,208 174,709
Short-term investments, at cost which
approximates market value 5,779,803 320,000
Total investments 11,306,479 4,823,812
Cash and cash equivalents 3,114,777 1,800,762
Prepaid reinsurance premiums 12,378,620 7,304,284
Premium notes receivable 5,043,386 -
Installment premiums receivable
(net of allowance for doubtful accounts) 1,831,896 8,284,633
Reinsurance recoverable 15,922,592 10,382,311
Deferred policy acquisition costs 3,219,170 2,113,759
Excess of cost over net assets acquired,
net of accumulated amortization 5,408,053 5,529,936
Other intangible assets 17,500 40,000
Deferred federal income taxes 506,512 -
Accrued investment income 58,983 41,609
Other assets 793,658 363,810
Total assets $ 59,601,626 $ 40,684,916
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 700,499 $ 882,862
Unpaid losses and loss adjustment expenses 18,574,294 12,668,306
Unearned premiums 16,547,786 10,229,911
Reinsurance balances payable 5,279,098 2,719,039
Deferred ceding commissions 3,704,307 2,191,344
Drafts outstanding 655,961 777,585
Accounts payable and other accrued expenses 3,809,279 2,046,475
Current federal income taxes payable 278,964 22,245
Accrued interest and franchise taxes payable 30,307 30,309
Total liabilities 49,580,495 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 (57,402) (961,693)
Treasury stock (600,000) (600,000)
Total stockholders' equity 10,021,131 9,116,840
$ 59,601,626 $ 40,684,916
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
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Gross premiums written $14,755,421 $7,710,685 $37,713,656 $21,514,186
Ceded premiums written (11,057,747) (5,190,092) (28,249,846) (14,508,530)
Net premiums written $ 3,697,674 $ 2,520,593 $ 9,463,810 $ 7,005,656
Revenues:
Premiums earned $11,788,841 $7,208,513 $31,077,131 $19,922,861
Premiums ceded (8,811,801) (4,857,028) (23,175,509) (13,233,868)
Net premiums earned 2,977,040 2,351,485 7,901,622 6,688,993
Investment income,
net of expenses 148,778 60,650 363,662 141,766
Finance service charges 136,047 172,526 560,975 492,877
Processing fees 626,598 - 842,031 -
Service fees 8,003 417,618 70,173 1,244,773
Other income 20,581 14,194 71,360 94,819
Total revenues 3,917,047 3,016,473 9,809,823 8,663,228
Benefits, losses and expenses:
Losses and loss
adjustment expenses 6,845,301 3,826,714 23,297,876 13,327,848
Reinsurance recoveries(4,727,172) (2,457,906) (17,160,101) (8,594,068)
Net losses and loss
adjustment expenses 2,118,129 1,368,808 6,137,775 4,733,780
Amortization of acquisition
costs 178,950 51,581 407,552 151,249
Other acquisition, underwriting
and operating expenses 855,863 1,176,810 2,058,979 3,178,190
Interest expense 9,026 15,074 31,636 49,748
Amortization expense 46,328 48,254 144,383 139,761
Total benefits,
losses and expenses 3,208,296 2,660,527 8,780,325 8,252,728
Income from operations before
federal income taxes 708,751 355,946 1,029,498 410,500
Federal income tax benefit
(Note 3) (201,351) 7,245 (125,207) 7,245
Net income $507,400 $348,701 $904,291 $403,255
Net income per share
of common stock $ .05 $ .03 $ .08 $ .04
Weighted average
shares outstanding 10,662,277 10,650,935 10,662,277 10,650,935
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
1995 1994
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Cash flows from operating activities:
Net income $904,291 $403,255
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization expense 221,393 212,102
Change in deferred federal income taxes (506,512) -
Change in prepaid reinsurance premiums (5,074,336) (1,274,662)
Change in premium notes receivable (5,043,386) -
Change in installment premiums receivable 6,452,737 (1,146,549)
Change in deferred policy
acquisition costs (1,105,408) (528,570)
Change in ceding income 1,512,960 679,819
Change in unpaid losses and
loss adjustment expenses 5,905,988 914,575
Change in unearned premiums 6,317,875 1,591,324
Change in reinsurance recoverable (5,540,281) (1,080,456)
Change in reinsurance balances payable 2,560,058 847,872
Change in all other liabilities 1,641,167 452,890
Change in all other assets (372,338) 36,350
Change in federal income tax payable 256,717 -
Net cash provided by operating activities8,130,925 1,107,950
Cash flows from investing activities:
Purchases of property and equipment (151,880) (29,023)
Purchases of debt securities (2,932,347) (2,377,247)
Maturities and redemptions of
debt securities 1,906,982 1,598,070
Maturities and redemptions of common stock 2,501 -
Purchase of short-term investments (7,879,803) (100,000)
Maturities of short-term investments 2,420,000 -
Net cash used in investing activities (6,634,547) (908,200)
Cash flows from financing activities:
Repayment of short-term borrowings (182,363) (179,296)
Cash used in financing activities (182,363) (179,296)
Increase (decrease) in cash and
cash equivalents 1,314,015 20,454
Cash and cash equivalents at beginning
of period 1,800,762 1,111,893
Cash and cash equivalents at end of period $3,114,777 $1,132,347
Supplemental cash flow information:
Cash paid during the period for interest $31,637 $49,748
The accompanying notes are an integral part
</TABLE> of the consolidated financial statements.
<PAGE>
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 September 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 September 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 $5,354,468, which includes
the reinvestment of $1,906,982 in matured securities, and special revenue
bonds of $429,296. Net proceeds received are included in cash and cash
equivalents at September 30, 1995. Short-term investments include
certificates of deposits and federal discount notes of $5,779,803. 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 September 30, 1995 is as follows:
Deferred Tax Liabilities:
Deferred acquisition costs,
deductible for tax ($1,094,518)
Other (58)
Total deferred tax liabilities (1,094,576)
Deferred Tax Assets:
Property and equipment basis $ 7,117
Unearned premiums 283,503
Loss reserve discounting 127,924
Deferred ceding commissions,
non-deductible for tax 1,259,641
Net operating loss carryforward 49,655
AMT credit 6,200
Other 61,183
Total deferred tax assets $ 1,795,223
Net deferred tax assets $ 700,647
Valuation allowance 194,135
Net deferred tax asset $ 506,512
<PAGE>
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 September 30, 1995 is
as follows:
Computed expected income tax expense
at statutory regulatory tax rate $350,029
Amortization of excess cost 41,440
Tax-exempt interest (2,954)
Change in valuation allowance (273,065)
Other 9,757
Deferred tax benefit ($125,207)
The Company has available, for federal income tax purposes, unused net
operating losses of $146,044 at September 30, 1995, which may be used to
offset future taxable income. The net operating losses will expire, if
unused, as follows:
Year
2002 1,325
2003 96,237
2007 48,482
$ 146,044
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%.
<PAGE>
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., ("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 insurance
related operations. 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 nine months ended September 30, 1995, was
$8,130,925 as compared to $1,107,950 for the same period in 1994. As
described below, 1995 net cash flow increased significantly primarily due to
increased premium volumes.
<PAGE>
On a consolidated basis, the Company's liquidity improved significantly
during the nine months ended September 30, 1995, with bonds, equities, short-
term investments and cash totalling $14,421,256 at September 30, 1995,
compared to $6,624,574 at December 31, 1994 and $5,642,282 at September 30,
1994. The Company's increased liquidity during 1995 is primarily due to an
approximate 75% increase in Hallmark's gross premiums written of $37,713,656
during the first nine months of 1995 versus $21,514,186 during the same
period of 1994, an approximate 95% increase in ceding commission income to
$8,474,954 during the first nine months of 1995 versus $4,352,559 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 $1,831,896 at September 30, 1995 versus $8,284,633 at December
31, 1994, and premium notes receivable of $5,043,386 at September 30, 1995
versus -0- at December 31, 1994. During the first nine months of 1995, the
Company received external funds, net of cancellations, of $9,011,658 under
premium notes generated by the Company.
The Company's liquidity continued its improvement due to lower losses
during the third quarter, and despite weather-related catastrophe losses, as
well as higher than usual non-catastrophe losses during the first half of
1995. During 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,
approximately $900,000 (75%) was ceded under the Company's principal quota-
share agreement, and approximately $125,000 has been or will be recovered
under the Company's excess-of-loss catastrophe coverage agreement.
At September 30, 1995, the Company reported $700,499 in notes payable,
$441,525 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 $441,525 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 $278,964 at September
30, 1995 increased substantially over the $22,245 reported at December 31,
1994, and the $45,130 reported at June 30, 1995. The increases reflected
between these 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 increase reflected between the second and third quarters
of 1995 is primarily the result of increases in the accrual of FIT payable
related to the third quarter 1995 earnings, partially offset by a payment for
estimated FIT of $125,000 during the third quarter. 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.
<PAGE>
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 September 30, 1995, $1,720,760 represents non-restricted cash
(compared to $665,503 at December 31, 1994 and $231,400 at
September 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 nine months of 1995, Hallmark paid
or accrued $475,000 in management fees to the Company. For the year ended
December 31, 1994, Hallmark paid the Company $100,000 in management fees.
Management anticipates that Hallmark may pay additional management fees
during the fourth quarter of 1995, and thus, these fees could be a continued,
moderate source of unrestricted liquidity.
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 $19 million
for the nine months ended September 30, 1995. During the first nine months
of 1995, AHGA received $3,454,985 in commissions related to this program from
Hallmark, of which $2,591,239 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.
Ceding commission income represents a significant source of funds to the
Company. During the first nine 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 nine months ended September 30,
1995 increased $4,122,395 up to $8,474,954 representing a 95% increase when
compared to the first nine 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 $3,704,307 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 nine months of 1995,
deferred policy acquisition costs of $3,219,170 as of September 30, 1995 was
some 52% higher than at December 31, 1994. However, deferred policy
acquisition costs were $485,137 less than deferred ceding commission income
at September 30, 1995.
<PAGE>
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 September 30, 1995, Hallmark reported statutory capital and surplus
of $4,427,483, which shows an increase of $820,341 over the $3,607,142
reported at September 30, 1994, and an increase of $594,499 over the
$3,832,984 reported at December 31, 1994. On an annualized-premiums basis,
Hallmark's premium-to-surplus ratio at September 30, 1995 was 2.85 to 1 as
compared to 2.53 to 1 at December 31, 1994, and 2.59 to 1 at September 30,
1994. The narrowing of Hallmark's premium-to-surplus ratio in comparison to
December 31, 1994 and September 30, 1994, respectively, is principally due to
the combined effect of high catastrophic weather-related losses, higher than
usual non-catastrophic losses and increased premium volumes, particularly of
annual policies, during the nine months ended September 30, 1995. The impact
on surplus of high losses during the first half of the year was partially
offset by lower losses during the third quarter which is typically a strong
quarter for Hallmark. Management believes that Hallmark should not require
additional capital during 1995. Management anticipates that Hallmark is
positioned to maintain and strengthen statutory surplus through earnings from
insurance operations. Despite lower loss ratios during the third quarter,
the loss experience of the first half of year indicated the need for a rate
adjustment in certain territories. Hallmark imposed a rate increase for new
business written effective late-September 1995. In addition, based upon the
resumption of high losses in October, 1995, Hallmark is planning another rate
adjustment of selected coverages and territories to be effective January 1,
1996. Loss ratios during 1995 should be brought back to desirable levels
with the implemented and proposed rate revisions. However, increased 1995
loss ratios may have a negative impact on Hallmarks reinsurance treaties for
1996.
Management continues to believe 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 should continue to positively affect profitability during
1995.
Prepaid reinsurance premiums and reinsurance balances payable generally
increased as expected in relation to increased premium writings.
<PAGE>
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
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 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
September 30, 1995, $8,773,271 has been used under Peregrine's credit
facility to fund the Notes. Based upon projections of anticipated premium
finance activity, an increase in the lines of credit to fund premium finance
notes will be required by the end of 1995. As of October 31, 1995 Peregrine
has formally increased its funding commitment to $12,000,000, and has
verbally indicated that a formal commitment increasing the commitment to
$13,500,000 should be finalized during November 1995. In addition,
management is exploring other financing opportunities.
Management expects that Company liquidity will continued to be favorably
impacted by a continued focus on increasing and strengthening the performance
of the Company's core State & County business during the remainder of 1995.
This focus has included and will continue to 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 continues 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 nine 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 continues
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 any of these potential contracts will be effective during
1995.
In addition, the Company plans to enter into the commercial excess-and-
surplus-lines ("E & S") market during late-1995 or early 1996 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 $14,755,421 and
$37,713,656 for the three and nine months ended September 30, 1995 were
$7,044,736 (91%) and $16,199,470 (75%) higher than the same periods in 1994.
The increases in premiums written in both the third quarter and first nine
months of 1995, as compared to 1994, are due to increased production of the
Company's core State & County business by independent agents. These
significant increases are partially offset by decreases in assumed premiums
written of $699,181 and $1,932,708, respectively, in the quarter and nine
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 third quarter and first nine
months of 1995 were $3,697,674 and $9,463,810, respectively, which reflects
increases of 47% and 35% 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 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 $11,788,841 and $31,077,131
for the three and nine months ended September 30, 1995, respectively, were
$4,580,328 and $11,154,270 higher than for the comparable periods in 1994.
For the three and nine months ended September 30, 1995, net earned premiums
(after reinsurance) of $2,977,040 and $7,901,621, respectively, increased
$625,555 (27%) and $1,212,628 (18%) 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 nine months ended September 30, 1995 was
71.1% and 77.7% as compared to 58.2% and 70.8% 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, to
higher than normal non-catastrophic losses in the first six months, to
adverse runoff of the now-canceled 10% assumed treaty with Vesta and to lower
salvage and subrogation recoveries.
Investment income of $363,662 for the nine months ended September 30,
1995 increased over the same period in 1994 by approximately 157% 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 nine months of 1995 than in 1994. Processing fees of $842,031,
reported for the first time, represent fees earned by HFC pursuant to the
commencement of premium finance operations January 1, 1995. Service fees of
$70,173 decreased by approximately 94% 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 $855,862 and
$2,058,978 for the three and nine months ended September 30, 1995, decreased
27% and 35%, respectively, as compared to the prior year. As discussed in
the Financial Condition and Liquidity section, ceding commission income of
$8,474,974 during the first nine months of 1995 increased approximately 95%
over ceding commission income of $4,122,395 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.
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.
None
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 September 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)
(Signature)
Date: November 14, 1995 Ramon D. Phillips, President
(Chief Executive Officer)
Date: November 14, 1995 (Signature)
John J. DePuma, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Due to format constraints of this Financial Data Schedule (FDS) certain Balance
Sheet items where omitted: i.e. Prepaid reinsurance premiums, Premium notes
receivable, Installment premiums receivable, Excess of cost over net assets
acquired & Other assets. Refer to actual 10KSB submission.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 11,134,271
<DEBT-MARKET-VALUE> 0
<EQUITIES> 172,208
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 11,306,479
<CASH> 3,114,777
<RECOVER-REINSURE> 15,922,592
<DEFERRED-ACQUISITION> (485,137)
<TOTAL-ASSETS> 59,601,626
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 16,547,786
<POLICY-OTHER> 5,279,098
<POLICY-HOLDER-FUNDS> 4,428,446
<NOTES-PAYABLE> 700,499
<COMMON> 328,868
0
0
<OTHER-SE> 9,749,665
<TOTAL-LIABILITY-AND-EQUITY> 59,601,626
7,901,622
<INVESTMENT-INCOME> 361,562
<INVESTMENT-GAINS> 2,100
<OTHER-INCOME> 1,544,539
<BENEFITS> 6,137,775
<UNDERWRITING-AMORTIZATION> 407,552
<UNDERWRITING-OTHER> 2,234,998
<INCOME-PRETAX> 1,029,498
<INCOME-TAX> 125,207
<INCOME-CONTINUING> 904,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904,291
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<RESERVE-OPEN> 13,007,306
<PROVISION-CURRENT> 21,923,141
<PROVISION-PRIOR> 953,607
<PAYMENTS-CURRENT> 9,578,286
<PAYMENTS-PRIOR> 7,731,474
<RESERVE-CLOSE> 18,574,294
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
