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 March 31, 1996
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 May 14, 1996.
Number of pages in this report - 14
No Exhibit Index is filed with this report.
<PAGE> HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Debt securities, held-to-maturity $ 6,288,171 $ 6,409,544
Equity securities, available-for-sale 170,920 171,727
Short-term investments, at cost
which approximates market value 4,925,031 3,615,327
Total investments 11,384,122 10,196,598
Cash and cash equivalents 4,515,422 4,257,755
Prepaid reinsurance premiums 10,524,104 11,726,968
Premium receivable 3,554,938 5,342,507
Reinsurance recoverable 20,995,675 19,335,746
Deferred policy acquisition costs 2,744,017 2,999,541
Excess of cost over net assets
acquired, net of accumulated amortization 5,335,084 5,373,983
Other intangible assets 7,500 10,000
Deferred federal income taxes 561,194 567,969
Accrued investment income 64,960 55,765
Other assets 1,045,834 788,216
Total assets $ 60,732,850 $ 60,655,048
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 627,540 $ 639,162
Unpaid losses and loss adjustment expenses 24,030,809 22,323,090
Unearned premiums 14,041,385 15,659,897
Reinsurance balances payable 3,790,876 3,489,357
Deferred ceding commissions 3,157,382 3,518,227
Drafts outstanding 802,576 684,430
Accounts payable and other
accrued expenses 3,608,096 3,969,288
Total liabilities 50,058,664 50,283,451
Stockholders' equity:
Common stock, $.03 par value,
authorized 100,000,000 shares;
(issued 10,962,277 shares in 1996
and 10,917,277 in 1995) 328,868 328,868
Capital in excess of par value 10,349,665 10,349,665
Accumulated deficit 595,653 293,064
Treasury stock (600,000) (600,000)
Total stockholders' equity 10,674,186 10,371,597
$ 60,732,850 $ 60,655,048
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
<S> <C> <C>
Gross premiums written $10,458,399 $10,872,718
Ceded premiums written ( 7,845,566) ( 8,146,835)
Net premiums written $ 2,612,833 $ 2,725,883
Revenues:
Premiums earned $12,076,910 $ 8,911,463
Premiums ceded ( 9,048,429) ( 6,624,872)
Net premiums earned 3,028,481 2,286,591
Investment income,
net of expenses 214,489 101,365
Finance service charges 22,092 215,976
Processing fees 495,995 55,127
Other income 37,855 35,811
Total revenues 3,798,912 2,694,870
Benefits, losses and expenses:
Losses and loss
adjustment expenses 8,082,104 6,982,596
Reinsurance recoveries ( 6,073,637) (5,116,829)
Net losses and loss adjustment expenses 2,008,467 1,865,767
Amortization of acquisition costs (105,321) 62,719
Other acquisition, underwriting
and operating expenses 1,392,042 497,697
Interest expense 11,076 12,063
Amortization expense 41,399 51,726
Total benefits,losses and expenses 3,347,663 2,489,972
Income from operations before
federal income taxes 451,249 204,898
Federal income tax (benefit) (Note 3) 148,660 ( 31,635)
Net income $ 302,589 $ 236,533
Net income per share of common stock $ .03 $ .02
Weighted average shares outstanding 11,533,131 10,662,277
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE> HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $302,589 $236,533
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization expense 63,055 63,007
Change in deferred federal income taxes 6,775 (155,159)
Change in prepaid reinsurance premiums 1,202,864 (1,521,963)
Change in premium receivable 1,787,569 (659,441)
Change in deferred policy
acquisition costs 255,524 (393,885)
Change in ceding income (360,845) 456,604
Change in unpaid losses and
loss adjustment expenses 1,707,719 2,606,027
Change in unearned premiums (1,618,511) 1,961,255
Change in reinsurance recoverable (1,659,929) (2,405,127)
Change in reinsurance balances payable 301,519 1,056,674
Change in all other liabilities (243,046) 325,399
Change in all other assets (158,819) 133,587
Net cash provided by
operating activities 1,586,464 1,703,511
Cash flows from investing activities:
Purchases of property and equipment (129,651) (47,163)
Purchases of debt securities 121,374 (1,473,481)
Maturities and redemptions
of debt securities - 15,675
Maturities and redemptions
of common stock 807 1,311
Purchase of short-term investments (4,449,259) -
Maturities of short-term investments 3,139,554 -
Net cash used in investing activities (1,317,175) (1,503,658)
Cash flows from financing activities:
Repayment of short-term borrowings ( 11,622) ( 60,520)
Cash used in financing activities ( 11,622) ( 60,520)
Increase (decrease) in cash
and cash equivalents 257,667 139,333
Cash and cash equivalents
at beginning of period 4,257,755 1,800,749
Cash and cash equivalents
at end of period $4,515,422 $1,940,082
Supplemental cash flow information:
Cash paid during the
period for interest $ 11,076 $ 12,063
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
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 March 31,
1996 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, 1995 for a description of all other accounting policies.
Certain items in the 1995 interim financial statements have been reclassified
to conform to the 1996 presentation.
The results of operations for the period ended March 31, 1996 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 $6,288,171, which includes
special revenue bonds of $328,975. Short-term investments include
certificates of deposits and federal discount notes of $4,925,031. 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 March 31, 1996 is as follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Property and equipment basis $ 16,897
Unearned premiums 239,175
Loss reserve discounting 141,218
Deferred ceding commissions,
non-deductible for tax 140,544
Net operating loss carryforward 33,171
Accrued expenses 47,322
Allowance for doubtful accounts 8,628
Other 12,991
Total gross deferred tax assets $ 639,946
Valuation allowance 78,752
Net deferred tax asset $ 561,194
</TABLE>
<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 March 31, 1996 is as
follows:
<TABLE>
<S> <C>
Computed expected income tax expense
at statutory regulatory tax rate $ 147,924
Amortization of excess cost 13,226
Tax-exempt interest ( 328)
Change in valuation allowance ( 16,098)
Other 3,936
Deferred tax benefit ($148,660)
</TABLE>
The Company has available, for federal income tax purposes, unused net
operating losses of $97,562 at March 31, 1996, which may be used to offset
future taxable income. The net operating losses will expire, if unused, as
follows:
<TABLE>
<S> <C>
Year
2002 1,325
2003 96,237
$ 97,562
</TABLE>
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. In March
1996 the exercisability of the Guaranty Warrants was extended through October
1, 1998, 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 & County"). Under this arrangement, Hallmark
underwrites the risk and the Company's subsidiary, American Hallmark General
Agency, Inc. manages the issuance of State & County policies by Company-owned
and unaffiliated, independent agents. Hallmark assumes 100% of the risk from
State & County and retrocedes 75% to Vesta Fire Insurance Corporation 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 dominant 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 commercial excess and surplus lines
affiliated managing general agency, Hallmark Underwriters, Inc. ("HUI"); 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.
Hallmark 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. Under a supplementary quota-share reinsurance agreement,
Hallmark cedes 75% of its risks to Vesta. HFC, through a financing and
servicing arrangement with an unaffiliated premium finance company, offers
premium financing to Hallmark policyholders. Premium financing previously
provided by Hallmark through a direct-bill program is being phased out.
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 Agencies name, and through independent agents operating
under their own respective names.
HUI, formed to market and produce commercial excess and surplus lines
("E&S") insurance on behalf of unaffiliated E&S insurers, began operations in
late April 1996. HUI is expected to generate commission income by producing
E&S insurance business through the network of the Company's thirteen retail
agencies, certain agents from the Company's current independent agent group,
and other selected independent agents not currently representing the Company.
<PAGE>
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), external funding of premium
notes, ceding commissions, processing fees, premium finance service charges
and investment activities. Net cash flow provided from the Company's
consolidated operations for the three months ended March 31, 1996, was
$1,586,464 as compared to $1,703,511 for the same period in 1995. This
approximate 7% decrease was primarily due to disproportionately high first
quarter premium cancellations related to policies written in higher volume
months.
On a consolidated basis, the Company reported a steady improvement in
liquidity for the first quarter of 1996 as compared to the year ended
December 31, 1995, and a significant improvement in liquidity as compared to
the first quarter of 1995. At March 31, 1996, bonds, equities, short-term
investments and cash totaled $15,899,544, compared to $14,454,353 and
$8,233,761 at December 31, 1995 and March 31, 1995, respectively. The
approximate 10% increase in investments and cash for the first quarter of
1996 compared to the year ended December 31, 1995 is primarily due to more
timely funding of annual policy premiums under HFC's premium finance program
initiated in 1995, and expanded during 1996, than under Hallmark's direct-
bill program which is almost phased out. Significant increases in premium
volume and ceding commission income during 1995, which accounted for the
significant increase in cash and investments for the first quarter of 1996,
as well as throughout 1995, have moderated during the first quarter of 1996.
Thus, as previously noted, most of the increase in first-quarter 1996
liquidity is attributable to more timely funding under HFC's premium finance
program and to expansion of the program during the second quarter of 1995 to
include financing of premiums produced by the Company's independent agents.
Initially, HFC's premium finance program was only offered to the Hallmark
agencies. Under HFC's premium finance program, premiums for annual policies
due Hallmark are funded-in-full in approximately 30 days and immediately
invested. Any unfunded premium balances are recorded as premiums receivable.
Premiums receivable of $3,554,938 and $5,342,507 at March 31, 1996 and
December 31, 1995, respectively, include unfunded premium balances due of
$3,440,504 and $4,497,177 at March 31, 1996 and December 31, 1995,
respectively. Premiums receivable decreased at March 31, 1996 compared to
December 31, 1995 principally due to an increase in monthly policy mix in
1996 and to an increase in premium cancellations related to annual policies
written in high-volume months of 1995. As expected, balances due under the
direct bill program (which are included in premiums receivable) have
decreased from the $299,182 reported at December 31, 1995 to $51,592. During
the first respective quarters of 1996 and 1995, the Company received external
funds, net of cancellations, of $3,814,277 and $818,440 to fund premiums
generated by the Company.
<PAGE>
At March 31, 1996, the Company reported $627,540 in notes payable,
$416,841 of which is due before December 31, 1996. The Company expects to
repay these notes with cash from operations. However, the amount to be paid
in 1996 may be less than the $416,841 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.
A substantial portion of the Company's liquid assets are held by
Hallmark and are not available for general corporate purposes. Of the
Company's consolidated liquid assets at March 31, 1996, $1,233,481 represents
non-restricted cash (compared to $2,131,582 at December 31, 1995 and $781,602
at March 31, 1995). 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
latter part of 1993, the Company initiated measures to strengthen Hallmark's
surplus in order to insure its compliance with regulatory guidelines and to
provide surplus balances necessary to accommodate premium growth. Some of
the measures taken were a temporary abatement or reduction of the management
fee and a reduction of commissions payable by Hallmark to the Company and
AHGA, respectively. These measures have continued into subsequent years.
During the first quarter of 1996, Hallmark paid or accrued $250,000 in
management fees as compared to $150,000 for the first quarter of 1995. For
the year ended December 31, 1995, Hallmark paid or accrued only $600,000 in
management fees. While management fees for 1996 are anticipated to be higher
than the fees paid or accrued in 1995, they should be less than the amounts
authorized by TDI. Management fees from Hallmark should continue to be a
moderate source of unrestricted liquidity. However, management intends to
continue to restrict payment of management fees, as necessary, to insure the
surplus strength of Hallmark.
Commissions from the Company's annual policy program for independent
agents represent a source of unrestricted liquidity. 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
$3.0 million for the three months ended March 31, 1996. During the first
quarter of 1996, AHGA received $1.5 million in commissions related to this
program from Hallmark, and will pay earned commission of $1.4 million to
independent agents. During 1995, AHGA received approximately $4.4 million in
commissions related to this annual policy program from Hallmark, of which
approximately $1.5 million is being paid to independent agents during 1996 as
earned.
<PAGE>
Ceding commission income represents a significant source of funds to the
Company. During the first quarter of 1996, and during 1995, 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 three months ended March 31, 1996
remained approximately the same with a nominal decrease of $90,381 to
$2,353,669 as compared to the first quarter of 1995. In accordance with
GAAP, a portion of ceding commission income and policy acquisition costs is
deferred and recognized as income and expense, respectively, as related net
premiums are earned. Deferred ceding commission income also decreased to
$3,157,382 from $3,518,227 at December 31, 1995. This decrease is
principally due to lower annual premiums written during the first quarter of
1996 compared to the fourth quarter of 1995. In light of the decrease in
premium volume during the first quarter of 1996, deferred policy acquisition
costs of $2,744,017 as of March 31, 1996 was $255,524 less than at December
31, 1995. However, deferred policy acquisition costs were $413,365 less than
deferred ceding commission income at March 31, 1996. The Company is earning
more in ceding commission income than it is incurring in commission expense
primarily due to the practice of dealing directly with its independent
agents, thus eliminating additional commission expense associated with using
managing general agents as intermediaries.
At March 31, 1996, Hallmark reported statutory capital and surplus of
$4,936,650, which shows an increase of $918,963 over the $4,017,687 reported
at March 31, 1995, and an increase of $162,206 over the $4,774,444 reported
at December 31, 1995. On an annualized-premium basis, Hallmark's premium-to-
surplus ratio at March 31, 1996 was 2.12 to 1 as compared to 2.58 to 1 at
December 31, 1995, and 2.71 to 1 at March 31, 1995. It is management's
opinion that Hallmark should not require additional capital during 1996.
Management anticipates that Hallmark is positioned to maintain and strengthen
statutory surplus through increased earnings from insurance operations.
Management believes that 1996 first quarter loss ratios are beginning to
reflect results of steps taken to address an unfavorable loss trend reported
during 1995. For the three months ended March 31, 1996, the statutory loss
ratio was approximately 72.4% compared to 81.8% and 74.6% for the twelve
months ended December 31, 1995 and 1994, respectively. Hallmark implemented
rate increases for new business written in certain territories effective
September 15, 1995 and January 1, 1996, respectively, which is intended to
return loss ratios to desirable levels in 1996. However, increased 1995 loss
ratios may have a negative impact on terms under its principal reinsurance
treaty. In an effort to secure the most favorable reinsurance terms in the
marketplace and to access a variety of additional reinsurance markets,
Hallmark has entered into a relationship with a new reinsurance intermediary.
It is anticipated that Hallmark will restructure its reinsurance treaty with
Vesta, its current principal reinsurer, or enter into a restructured
agreement with additional reinsurers in which Vesta may participate.
Unearned premiums decreased approximately 10% as of March 31, 1996
compared to December 31, 1995. This decrease was principally due to higher
first quarter cancellations associated with annual premiums written during
high-volume months of 1995, as well as a decrease at March 31, 1996 in the
remaining unearned portion of annual premiums written during high-volume
months of 1995. As expected, prepaid reinsurance premiums decreased
proportionately.
<PAGE>
Unpaid losses and loss adjustment expenses increased approximately 8%
due to the combined effect of a change to a more conservative case reserving
methodology and a decrease in average claim payments during the first quarter
of 1996. Accordingly, reinsurance recoverable increased proportionately.
Effective January 1, 1995, the Company began financing premiums of the
Hallmark agencies through a premium finance program offered by its formerly
dormant premium finance subsidiary, HFC, and independent agents began
financing through HFC's premium finance program in May of 1995. The
financing of the premium notes is provided by an unaffiliated premium finance
company, Peregrine Premium Finance L.C. ("Peregrine"), on a secured basis.
Peregrine has obtained an external credit facility of $13,500,000 for the
purpose of financing State & County policies produced by AHGA (the "Notes").
At March 31, 1996, $1,685,226 was available under Peregrine's credit facility
to fund the Notes which should be sufficient to fund projected State & County
activity of this premium finance program during 1996. HFC's premium
financing program is expected to continue to positively impact external
liquidity during 1996.
During 1996, management expects that Company liquidity will continue to be
favorably impacted by a continued focus on strengthening the performance of
the Company's core State & County business with particular emphasis on
enhancement of HCS's procedures and staffing. The Company has increased its
claims staff and hired additional, experienced claims adjusters and
supervisory personnel that, in turn, should lower loss and LAE payments. This
focus, along with the Company's ongoing ability to identify and retain
quality independent agents and to respond on a timely basis to rate-change
indications arising from both loss experience and competitive market
considerations are expected to enhance earnings and liquidity during 1996.
Additionally, expansion of premium finance subsidiary operations to include,
at a minimum, financing of E&S premiums produced by HUI, should also
positively affect earnings and liquidity. Management further anticipates
that an integrated cash management system implemented in late-1995 will
positively impact 1996 liquidity.
The Company continues to pursue third party claims handling and
administrative contracts. During 1995, HCS entered into a small claims-
handling and consulting contract with an unaffiliated independent agent. The
unaffiliated agent is revising and expanding its program during 1996, which
will favorably impact fees. However, it is still not anticipated that fees
from this contract will have a significant impact on 1996 earnings. The
Company continues to earn fees for handling claims-related litigation of an
unaffiliated agency under a 1993 contract with Vesta. Although the Company
is actively pursuing additional third party claims handling business, it does
not have any other definitive agreements at this time.
Beginning late-April 1996, the Company began marketing E&S insurance
produced by HUI through the Company's marketing arm, AHGA. This business
will be produced by the Hallmark Agencies and a select group of independent
agents, and some portion of the premiums will be financed by HFC. No entity
within the Company will bear any underwriting risk. The E&S policies will be
written on behalf of A-rated (A.M. Best rating) unaffiliated insurance
companies. Management anticipates that the growth of this business will be
gradual, and does not expect a significant liquidity contribution in 1996.
HFC will offer premium financing for E&S business produced by HUI.
Management is currently in discussions with a bank regarding a secured line
of credit to fund HFC's E&S premium notes. The Company intends to provide
the funding until such time that bank financing is in place, and anticipates
<PAGE>
that internal funding could be used to sustain the E&S program during its
first year.
Management intends to continue to investigate opportunities for future
growth and expansion. However, the Company currently has no growth plans
which would require significant external funding during 1996.
Results of Operations
Gross premiums written (prior to reinsurance) and net premiums written
(after reinsurance) of $10,458,399 and $2,612,833, respectively, for the
quarter ended March 31, 1996 remained relatively constant (as planned) with
an approximate decrease of 4% in relation to gross premiums written and net
written premiums of $10,872,718 and $2,725,883, respectively, for the same
period last year. This approximate 4% decrease was primarily due to first
quarter cancellations of premiums associated with higher premiums written in
previous months.
Premiums earned (prior to reinsurance) of $12,076,910 were $3,165,447
higher than in 1995 representing a 36% increase for the period ended March
31, 1996 over the same period in 1995. Net premiums earned (after
reinsurance) of $3,028,481 for 1996 increased 32% over the 1995 quarter. The
increase in premiums earned, both prior to and after reinsurance, is
primarily the result of higher annual premium writings in prior months which
are being earned over twelve-months. The slightly disproportionate increase
in premiums earned before and after reinsurance is primarily the result of an
increase in the rate of reduction of Texas Automobile Insurance Plan
Association ("TAIPA") premium allocations assigned by TDI over the past
twelve months. Thus, 1995 earned premiums reflect a higher proportion of
TAIPA business which is retained 100% by the Company and is not subject to
reinsurance.
Net incurred loss ratios (computed on net premiums earned after
reinsurance) for the three months ended March 31, 1996 and 1995 were
approximately 66% and 82%, respectively. The decrease in the loss ratio
between the first quarter of 1996 and 1995, respectively, is the combined
result of improved losses on the company's core State & County business, and
lower TAIPA premium allocations during both 1996 and 1995 than in 1994 and to
more favorable loss development in 1996 of the TAIPA business written in
prior years. It should be noted that the impact of any change in TAIPA loss
experience is intensified because TAIPA losses are 100% retained by Hallmark
and are not included in Hallmark's quota-share reinsurance agreement.
Other underwriting and operating expenses increased $894,345, from
$497,697 during the quarter ended March 31, 1995 to $1,392,042 for the
quarter ended March 31, 1996. This increase is principally due to an almost
4% decrease in ceding commission income (as discussed under Financial
Condition and Liquidity), as well as higher operating costs related to
expanded premium finance operations in 1996 (which was a start-up operation
beginning January 1995); start-up costs of E&S operations; higher operating
costs related to increased staffing and professional development of claims
personnel; and increases in corporate rent, employee benefits, consulting and
professional fees and telephone expense related to a new telephone system.
<PAGE>
Investment income of $214,489 for the quarter ended March 31, 1996
increased by approximately 112% over the comparable 1995 quarter as a result
of an increase in funds available for investment and an increase in the
percentage of funds invested. Invested funds have increased principally due
to increased premium volumes during 1995, more timely funding of premiums
under HFC's premium finance program and enhanced utilization of funds due to
an improved cash management system implemented late-1995.
Processing fees of $495,990 for the 1996 quarter increased $440,868 in
relation to the same quarter in 1995. These fees represent income earned by
HFC pursuant to the commencement of its premium finance program January 1,
1995. The increase in 1996 is due to the program currently including
financing of independent agency business, as well as Hallmark agency
premiums.
For the 1996 quarter, other income of $37,855 is primarily composed of
service fees related to third party claims services while the comparable 1995
quarter was primarily composed of miscellaneous revenues.
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 March 31, 1996.
<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: May 15, 1996 /s/ Ramon D. Phillips
Ramon D. Phillips, President (Chief Executive
Officer)
Date: May 15, 1996 /s/ John J. DePuma
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 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>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 11,213,202
<DEBT-MARKET-VALUE> 11,244,875
<EQUITIES> 170,920
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 11,384,122
<CASH> 4,515,422
<RECOVER-REINSURE> 20,995,675
<DEFERRED-ACQUISITION> (413,365)
<TOTAL-ASSETS> 60,732,850
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 14,041,385
<POLICY-OTHER> 3,790,876
<POLICY-HOLDER-FUNDS> 4,268,787
<NOTES-PAYABLE> 627,540
0
0
<COMMON> 328,868
<OTHER-SE> 9,749,665
<TOTAL-LIABILITY-AND-EQUITY> 60,732,850
10,458,399
<INVESTMENT-INCOME> 214,489
<INVESTMENT-GAINS> 5,187
<OTHER-INCOME> 550,755
<BENEFITS> 2,008,467
<UNDERWRITING-AMORTIZATION> (105,321)
<UNDERWRITING-OTHER> 1,444,517
<INCOME-PRETAX> 451,249
<INCOME-TAX> 148,660
<INCOME-CONTINUING> 302,589
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302,589
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
<RESERVE-OPEN> 22,323,090
<PROVISION-CURRENT> 8,112,337
<PROVISION-PRIOR> (35,957)
<PAYMENTS-CURRENT> 2,102,804
<PAYMENTS-PRIOR> 4,265,857
<RESERVE-CLOSE> 24,030,809
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
