CONFORMED COPY
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, 1997
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: (972) 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 13,
1997.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Sequential Page
Consolidated balance sheets at June 30, 1997
(unaudited) and December 31, 1996 3
Consolidated statements of income
(unaudited) for the three and six months
ended June 30, 1997 and June 30,1996 4
Consolidated statements of cash flows
(unaudited) for the six months ended
June 30, 1997 and June 30, 1996 5
Notes to consolidated financial statements
(unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30 December 31
ASSETS 1997 1996
(Unaudited)
<S> <C> <C>
Investments:
Debt securities, held-to-maturity $ 4,003,293 $ 5,160,137
Equity securities, available-for-sale 149,428 152,246
Short-term investments, at cost which
approximates market value 1,247,531 3,380,059
Total investments 5,400,252 8,692,442
Cash and cash equivalents 9,033,125 4,749,388
Prepaid reinsurance premiums 8,539,892 8,480,257
Premiums receivable 2,716,188 2,524,938
Note receivable 6,513,156 -
Reinsurance recoverable 17,201,095 20,058,062
Deferred policy acquisition costs 2,885,968 2,536,564
Excess of cost over net assets
acquired, net of accumulated
amortization 5,137,397 5,215,905
Deferred federal income taxes 197,356 330,718
Accrued investment income 25,479 46,606
Other assets 1,092,944 1,128,882
Total assets $58,742,852 $53,763,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 7,564,851 $ 590,853
Unpaid losses and loss adjustment
expenses 17,559,401 20,697,393
Unearned premiums 11,539,118 11,310,250
Reinsurance balances payable 2,981,711 2,946,034
Deferred ceding commissions 2,224,665 2,368,264
Drafts outstanding 1,093,014 838,007
Accounts payable and other accrued
expenses 3,929,246 3,591,597
Total liabilities $46,892,006 $42,342,398
Stockholders' equity:
Common stock, $.03 par value,
authorized 100,000,000 shares;
issued 10,962,277 shares in
1997 and 1996 328,868 328,868
Capital in excess of par value 10,349,665 10,349,665
Retained earnings 1,772,313 1,342,831
Treasury stock, 300,000 shares,
at cost (600,000) (600,000)
Total stockholders' equity 11,850,846 11,421,364
Total liabilities and stockholders'
equity $58,742,852 $53,763,762
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Gross premiums written $9,667,920 $11,796,531 $20,808,399 $22,254,930
Ceded premiums written (6,748,087)( 8,842,954) (14,594,550)(16,688,519)
Net premiums written $2,919,833 $ 2,953,577 $ 6,213,849 $ 5,566,411
Revenues:
Premiums earned $10,090,779 $12,504,832 $20,271,292 $24,581,742
Premiums ceded (7,025,705) (9,371,690) (14,226,676)(18,420,120)
Net premiums earned 3,065,074 3,133,142 6,044,616 6,161,622
Investment income,
net of expenses 214,725 232,595 399,280 447,084
Interest income -
note receivable 157,791 - 190,245 -
Processing fees 345,631 558,256 709,005 1,054,250
Service fees 136,929 15,792 187,262 45,295
Other income 118,891 19,103 184,970 49,548
Total revenues 4,039,041 3,958,888 7,715,378 7,757,799
Benefits, losses and
expenses:
Losses and loss
adjustment expenses 7,052,495 8,334,514 13,729,218 16,416,618
Reinsurance
recoveries (5,148,573) (6,292,650)(10,187,448)(12,366,288)
Net losses and loss
adjustment expenses 1,903,922 2,041,864 3,541,770 4,050,330
Acquisition costs,
net ( 213,692) ( 38,180) ( 493,003)( 143,501)
Other acquisition and
underwriting
expenses 1,492,607 960,922 2,837,620 1,918,315
Operating expenses 369,212 488,802 843,787 923,451
Interest expense 154,509 10,783 198,573 21,859
Amortization of
intangible assets 81,122 41,399 124,493 82,798
Total benefits, losses
and expenses 3,787,680 3,505,590 7,053,240 6,853,252
Income from operations
before federal income
taxes 251,361 453,298 662,138 904,547
Federal income tax 127,792 166,682 232,655 315,342
Net income $ 123,569 $ 286,616 $ 429,483 $ 589,205
Net income per share of
common stock $ .01 $ .02 $ .04 $ .05
Weighted average shares
outstanding 11,608,531 2,103,411 11,608,531 12,103,411
</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> Six Months Ended
June 30
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 429,483 $ 589,205
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization expense 190,502 138,949
Change in deferred federal income taxes 133,362 28,776
Change in prepaid reinsurance premiums ( 59,635) 1,731,600
Change in premium receivable (191,250) 2,613,927
Change in deferred policy acquisition
costs (349,404) 130,378
Change in deferred ceding commissions (143,599) (273,879)
Change in unpaid losses and loss
adjustment expenses (3,137,992) 3,068,239
Change in unearned premiums 228,868 (2,326,812)
Change in reinsurance recoverable 2,856,967 (3,206,066)
Change in reinsurance balances payable 35,677 244,985
Change in all other liabilities 592,656 125,573
Change in all other assets 80,309 169,886
Net cash provided by operating activities 665,944 3,034,761
Cash flows from investing activities:
Purchases of property and equipment ( 44,537) ( 264,723)
Purchase of note receivable (6,513,156) -
Purchases of debt securities - ( 520,182)
Maturities, redemptions and capital
distributions of investment securities 1,159,661 468,689
Purchase of short-term investments (3,013,345) (4,460,155)
Maturities of short-term investments 5,145,873 3,139,555
Net cash used in investing activities (3,265,504) (1,636,816)
Cash flows from financing activities:
Proceeds from note payable 7,000,000 -
Payment of borrowing cost ( 90,701) -
Repayment of short-term borrowings ( 26,002) ( 23,535)
Cash provided by (used in) financing
activities 6,883,297 ( 23,535)
Increase in cash and cash equivalents 4,283,737 1,374,410
Cash and cash equivalents at beginning
of period 4,749,388 4,257,755
Cash and cash equivalents at end of period $9,033,125 $5,632,165
Supplemental cash flow information:
Interest paid $ 143,144 $ 21,859
</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 primarily of
normal recurring adjustments, necessary to present fairly the financial
position of Hallmark Financial Services, Inc. and subsidiaries (the
"Company") as of June 30, 1997 and the consolidated results of
operations and cash flows for the 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 ("GAAP") have been condensed or omitted. Reference is made
to the Company's annual consolidated financial statements for the year
ended December 31, 1996 for a description of all other accounting
policies. Certain items in the 1996 interim financial statements have
been reclassified to conform to the 1997 presentation.
The results of operations for the period ended June 30, 1997 are
not necessarily indicative of the operating results to be expected for
the full year.
Recognition of Premium Revenues
Insurance premiums are earned pro rata over the terms of the
policies. Policy fees are recognized when received. Premiums written
include gross policy fees of $2,140,935 and $2,584,070 and policy fees
of $1,338,020 and $647,676, net of reinsurance, for the six months ended
June 30, 1997 and 1996, respectively.
New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128 is designed to improve the earnings per share
information provided in financial statements by simplifying the existing
computation guidelines provided for in APB Opinion No. 15, "Earnings Per
Share". SFAS No. 128 is effective for financial statement periods
ending after December 15, 1997. Management does not anticipate that
SFAS No. 128 will have any effect on the Company's consolidated
financial statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." SFAS 129 is applicable to all
entities and requires that disclosure about an entity's capital
structure include a brief discussion of rights and privileges for
securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS
<PAGE>
No. 130 is effective for financial statement periods ending after
December 15, 1997. Management does not anticipate that SFAS No. 130
will have any effect on the Company s consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for reporting information about operating segments
in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued
to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statement periods ending after
December 15, 1997. Management does not anticipate that SFAS No. 131
will have any effect on the Company s consolidated financial statements.
Note 2 - Investments
Debt securities, held-to-maturity, as of June 30, 1997 include
investments in U.S. Government securities of $1,935,096 and special
revenue bonds of $2,068,197. Short-term investments consist of U.S.
Government agency securities of $1,247,531. 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 - Notes Payable
A summary of the Company s notes payable as of June 30, 1997 is as
follows:
Note payable to Dorinco $ 7,000,000
Note payable to unaffiliated finance company 380,187
Note payable to individual 184,664
Total $ 7,564,851
Effective March 11, 1997, the Company entered into a loan agreement
with Dorinco Reinsurance Company ("Dorinco"), an unaffiliated company,
whereby the Company borrowed $7,000,000 to contribute to its premium
finance subsidiary, Hallmark Finance Corporation ("HFC"). Proceeds from
this loan are intended to be used by HFC to fund premium finance notes.
(See Notes 4 and 8.) The loan agreement provides for a seven-year term
at a fixed interest rate of 8.25%. Interest is payable monthly through
February 28, 1999, with principal and interest payments commencing March
31, 1999 through March 31, 2004. A penalty ranging from $80,000 to
$120,000 is charged for prepaying the loan prior to the fourth
anniversary date except that after the second anniversary date, up to
40% of the outstanding balance may be prepaid without penalty.
As long as certain financial covenants defined as "triggering
events" are maintained, collateral for the loan is limited to the stock
of HFC and a covenant by the Company not to pledge the stock of American
Hallmark Insurance Company of Texas ("Hallmark") and American Hallmark
General Agency, Inc. ("AHGA"). To avoid a triggering event, Hallmark
<PAGE>
must (1) maintain a combined ratio and loss ratio which do not exceed
107% and 83%, respectively; (2) maintain statutory surplus of $4,200,000
and experience no decreases to surplus in any one year that exceeds 15%
of the prior year surplus; and (3) cause HFC to maintain a certain
interest coverage ratio and stockholders equity levels as defined in
the agreement. If a triggering event should occur, the Company has ten
days to pledge the stock of AHGA and Hallmark as additional collateral
for the Dorinco loan. The loan agreement also contains covenants which
require the Company to satisfy certain financial ratios which are less
restrictive than the triggering event ratios and, among other things,
restrict capital expenditures, payment of dividends, and incurring of
additional debt. For the six month period ending June 30, 1997, the
Company is in compliance with the covenants of the loan.
The note payable to unaffiliated finance company with interest at
prime plus one percent was due March 31, 1993. The Company has not made
payments on the note since November 1992, and is in technical default.
The note provides for an interest rate after maturity of the maximum
statutory interest rate. The Company believes it has the right to
offset $240,000 which is on deposit with a subsidiary of the
unaffiliated finance company. The total principal and interest in
arrears aggregates $799,771, at June 30, 1997. Both the lender and its
subsidiary are currently in bankruptcy proceedings. Upon final
settlement, management believes the cost, if any, to the Company will
not exceed amounts accrued in these financial statements.
The note payable to an individual is collateralized by most assets
of AHGA and requires monthly principal and interest payments of $6,000
through May 1, 2000, with interest at 10%.
Note 4 - Note Receivable
Proceeds of $5,915,109 from the Dorinco loan (discussed in Note 3)
were loaned to Peregrine Premium Finance L.C. ("Peregrine") to repay
external borrowing incurred by Peregrine to fund premium finance notes
pursuant to the financing and servicing arrangement between HFC and
Peregrine. In addition, $598,047 of internally generated funds were
loaned to Peregrine to fund new premium finance notes. As a result, at
June 30, 1997, the Company had a $6,513,156 note receivable from
Peregrine. The Peregrine note principal varies in proportion to the
amount used by Peregrine to fund premium finance notes, but is not to
exceed $7,500,000. The note is collateralized by the premium finance
notes and bears interest at prime plus 1% (9.5% at June 30, 1997).
Note 5 - Federal Income Taxes
The composition of deferred tax assets and liabilities and the
related tax effects as of June 30, 1997 and December 31, 1996 is as
follows:
<PAGE>
<TABLE>
1997 1996
<S> <C> <C>
Deferred Tax Assets:
Property and equipment basis $ 28,203 $ 32,607
Unearned premiums 203,947 192,439
Loss reserve discounting 62,127 65,207
Deferred ceding commissions,
non-deductible for tax ( 224,843) ( 57,222)
Net operating loss carryforward 33,171 33,171
Other 127,922 97,694
Net deferred tax assets 230,527 363,896
Valuation allowance ( 33,171) ( 33,178)
Net deferred tax asset $ 197,356 $ 330,718
</TABLE>
A reconciliation of the income tax provisions based on the
prevailing corporate tax rate of thirty-four percent (34%) to the
provision reflected in the consolidated financial statements for the six
month period ended June 30, 1997 and 1996 is as follows:
<TABLE>
1997 1996
<S> <C> <C>
Computed expected income tax
expense at statutory regulatory
tax rate $ 203,027 $ 307,546
Amortization of excess cost 26,799 26,841
Tax-exempt interest ( 985) ( 985)
Change in valuation allowance - ( 26,827)
Other 3,814 8,767
Income tax expense $ 232,655 $ 315,342
</TABLE>
The Company has available, for federal income tax purposes, unused
net operating losses of $97,562 at June 30, 1997, which may be used to
offset future taxable income. The operating losses will expire, if
unused, as follows:
Year
2002 $ 1,325
2003 96,237
$ 97,562
Note 6 - Warrants Outstanding
The Company has two stock option plans for key employees, the 1991
Key Employee Stock Option Plan and the 1994 Key Employee Long Term
Incentive Plan, and a non-qualified plan for non-employee directors.
The number of shares reserved for future issuance under the 1991
employee plan, the 1994 employee plan and the non-employee director plan
are 500,000, 1,500,000 and 1,350,000, respectively. The option prices
under the plans are not to be less than the closing price of the common
stock on the day preceding the grant date. Pursuant to the stock option
plans, the Company has granted incentive stock options under Section 422
of the Internal Revenue Code of 1986. The stock options granted to
employees vest over a 3 year period on a graded schedule, 40% in the
first 6 months and 20% on each anniversary date of the grant date. The
<PAGE>
stock options granted to the directors vest over a 6 year period on a
graded schedule, 40% in the first 6 months and 10% on each anniversary
date of the grant date. In accordance with APB No. 25, the Company has
not recognized compensation expense for the stock options granted in
1996 and 1995.
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 was assigned to these warrants. The Guaranty Warrants were fully
exercisable between October 2, 1992 and October 1, 1996, at which time
they would have expired to the extent not exercised. On March 28, 1996,
the Board of Directors extended the exercisability of the Guaranty
Warrants through October 1, 1998. This resulted in a new exercise
period from October 1, 1996 (new measurement date) to October 1, 1998.
The value of the warrants of $107,000 is being amortized over the new
exercise period. 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 7 - Reinsurance
Hallmark is involved in the assumption and cession of reinsurance
from/to other companies. The Company remains obligated to its
policyholders in the event that reinsurers do not meet their obligations
under the reinsurance agreements.
Effective March 1, 1992, Hallmark entered into a reinsurance
arrangement with State & County Mutual Fire Insurance Company ("State &
County"), an unaffiliated company, to assume 100% of the nonstandard
auto business produced by AHGA and written on State & County policies.
The arrangement was supplemented by a separate retrocession agreement
between Hallmark and Vesta Fire Insurance Corporation ("Vesta").
Hallmark and Vesta shared the risk on the State & County policies with
Hallmark retaining 25%. This retrocession agreement with Vesta was
terminated on a run-off basis effective June 30, 1996.
Effective July 1, 1996, Hallmark renewed its reinsurance
arrangement with State & County and entered into a new retrocession
agreement with Kemper Reinsurance Company ("Kemper"), Dorinco and
Odyssey Reinsurance Corporation ("Odyssey"). Under the new retrocession
agreement, Hallmark continues to retain 25%.
Effective July 1, 1997, the retrocession agreement was renewed with
Kemper and Dorinco under substantially the same terms and conditions,
except that Kemper and Dorinco will each assume a 50% pro rata share of
the business under the retrocession agreement to replace Odyssey's
share.
<PAGE>
Note 8 - Commitments and Contingencies
Effective March 17, 1997, HFC entered into a loan agreement (Bank
Credit Line ) with a bank whereby the bank committed to provide a
revolving credit facility of $8,000,000 for funding of up to 60% of
premium finance notes outstanding for State and County policies.
Beginning late-June 1997, upon completion of the 90-day cancellation
notification period to Peregrine, HFC commenced funding all new notes
issued by HFC with proceeds from both the Dorinco loan as discussed in
Note 3 and the Bank Credit Line.
The Bank Credit Line provides for an eighteen-month term which
expires September 17,1998. Fundings under this line are limited to a
60% advance rate against a borrowing base of eligible premium finance
notes receivable as defined in the agreement. The agreement provides
for monthly interest payments with interest rate options of prime plus
three-eighths floating or the London Interbank Offered Rate ( LIBOR )
plus two and eight-tenths with fixed rate tranches of three, six and/or
twelve months in $250,000-minimum increments up to a total of twelve
tranches. A one-fourth of one percent per annum usage fee is payable on
any unused portion of the Bank Credit Line. To collateralize advances
under the line, HFC must grant the bank a security interest in the
premium finance notes and the Company must guarantee HFC s
indebtedness. The Bank Credit Line agreement also contains covenants
which, among other things, require the Company to satisfy the same
financial ratios as in the Dorinco loan agreement, and includes, but is
not limited to, restrictions on capital expenditures, payment of
dividends, and incurring of additional debt, and requires that the
Company be in compliance with all terms and covenants of the Dorinco
loan agreement.
In March 1997, a jury returned a verdict against the Company and in
favor of a former director and officer of Hallmark in the amount of
approximately $517,000 on the basis of contractual and statutory
indemnification claims. The court subsequently granted the plaintiff's
motion for attorneys' fees of approximately $271,000, court costs of
approximately $39,000 and pre-judgment and post-judgment interest, and
rendered final judgment on the verdict. The Company believes the
judgment in this case was both legally and factually incorrect and has
filed a motion for new trial. If the motion for new trial is denied,
the Company intends to appeal the judgment. However, the Company is
presently unable to determine the likelihood of an unfavorable outcome
to such motion or appeal.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Introduction. Hallmark Financial Services, Inc. ("HFS") and its
wholly owned subsidiaries (collectively referred to herein as the
"Company") engage in the sale of insurance products 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.
<PAGE>
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 provides non-standard automobile liability and physical
damage insurance through reinsurance arrangements with several
unaffiliated companies. Through arrangements with State & County Mutual
Fire Insurance Company ("State & County"), Hallmark provides insurance
primarily for high risk drivers who do not qualify for standard-rate
insurance. Under supplementary quota-share reinsurance agreements,
Hallmark cedes a substantial portion of its risk and retains the
balance. From March 1, 1992 through June 30, 1996, Hallmark ceded a
portion of its risk to Vesta Fire Insurance Corporation ("Vesta") (60%
between March 31, 1992 and July 31, 1993 and 75% between August 1, 1993
and June 30, 1996). Effective July 1, 1996, Hallmark entered into a new
reinsurance treaty with Kemper Reinsurance Company ("Kemper"), Dorinco
Reinsurance Company ("Dorinco)"), and Odyssey Reinsurance Corporation
("Odyssey"), ceding a total of 75% of its risk. Effective July 1, 1997,
the treaty was renewed with Kemper and Dorinco under substantially the
same terms and conditions except that the Company will be allowed to
retain 100% of the policy fees on a new six-month program commencing in
late-July 1997 (versus 62.5% for monthly and annual programs).
Additionally, effective July 1, 1997 Kemper and Dorinco will each assume
a 50% pro-rata share of the business under the treaty to replace
Odyssey's 25% share. HFC offers premium financing to Hallmark
policyholders through a financing and servicing arrangement with an
unaffiliated premium finance company. Beginning late-June 1997, HFC
began issuing its own premium finance notes funded by $15 million in
funds available pursuant to agreements executed in March 1997. (See
Notes 3 and 8 to the Consolidated Financial Statements.) AHGA manages
the marketing of Hallmark policies through a network of retail insurance
agencies which operate 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 generates commission income by
producing E&S insurance business through the network of the Company's
fourteen retail agencies, certain agents from the Company's current
independent agent group, and other selected independent agents.
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 from
the Company s consolidated operations for the six months ended June 30,
1997 and 1996 was $665,944 and $3,034,761, respectively. While premiums
<PAGE>
receivable at June 30, 1997 and 1996 are approximately the same, the
year-end premiums receivable balances preceding each respective quarter
varied significantly. Premiums receivable at December 31, 1996 were
almost 50% lower than at December 31, 1995 principally due to unusually
high annual premium volume during 1995. As a result, cash received
under the Company's premium finance program during the first six months
of 1997 was considerably less than cash received during the same period
of 1996.
On a consolidated basis, the Company s liquidity improved somewhat
as of June 30, 1997 as compared to December 31, 1996. The Company's
total cash and investments increased approximately 7% to $14,433,377 as
of June 30, 1997 from $13,441,830 as of December 31, 1996. This
increase is due primarily to the cumulative effect of increased cash
flow from the Company's premium finance program commenced during 1995.
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 at June 30, 1997 and December 31, 1996,
respectively, include unfunded premium balances due of $2,072,554 and
$2,437,024. Premiums receivable decreased at June 30, 1997 compared to
December 31, 1996 principally due to an 18% decrease in gross premiums
written during the second quarter of 1997 as compared to the prior year.
During the first six months of 1997 and 1996, respectively, the Company
received external funds, net of cancellations, of $7,442,845 and
$7,938,959 to fund premiums generated by the Company.
At June 30, 1997, the Company reported $7,564,851 in notes payable
as compared to $590,853 at December 31, 1996. Effective March 11, 1997,
the Company entered into a loan agreement with Dorinco ("Dorinco Loan
Agreement"), an unaffiliated company and principal reinsurer of
Hallmark, whereby the Company borrowed $7,000,000 to contribute to HFC.
(See Note 3 to the Consolidated Financial Statements.) Proceeds from
the Dorinco Loan Agreement were used to repay $5,915,109 off balance
sheet financing of premium notes and to fund additional premium notes
under HFC's financing and servicing arrangement with an unaffiliated
premium finance company. As a result, the Company recorded notes
receivable in the amount of $6,513,156 as of June 30, 1997. (See Note 4
to the Consolidated Financial Statements.) Of the outstanding notes
payable balance, $407,329 is due before December 31, 1997. The Company
expects to repay these notes with cash from operations. However, the
amount to be paid in 1997 may be less than the $407,329 reflected in the
notes payable balance. Included in this amount is a disputed obligation
of $380,000 to an unaffiliated finance company 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 to offset $240,000 which is on deposit with a subsidiary of
the unaffiliated finance company.
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 June 30, 1997, $1,251,648
represents non-restricted cash (compared to $991,095 at December 31,
1996 and $1,290,812 at June 30, 1996). Since state insurance
regulations restrict financial transactions between an insurance company
and its affiliates, the Company is limited in its ability to use
<PAGE>
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
first six months of 1997, Hallmark paid or accrued $400,000 in
management fees as compared to $475,000 for the first six months of
1996. For the year ended December 31, 1996, Hallmark paid or accrued
$1,050,000 in management fees. It is anticipated that paid or accrued
management fees for 1997 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 ensure
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 offers 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 $8.0 million for the six months ended
June 30, 1997. During the first six months of 1997, AHGA received $1.6
million in commissions related to this program from Hallmark, and will
pay earned commissions of $1.2 million to independent agents. During the
twelve months of 1996, AHGA received approximately $2.7 million in
commissions related to this annual policy program from Hallmark, of
which approximately $1.6 million was paid to independent agents in 1996
and approximately $1.1 million is being paid to independent agents
during 1997 as earned.
Ceding commission income represents a significant source of funds
to the Company. 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 annual premiums are earned.
Deferred ceding commission income decreased slightly to $2,224,665 at
June 30, 1997 from $2,368,264 at December 31, 1996. This decrease is
principally attributable to an approximate 19% decrease in ceding
commission income during the first half of 1997 as compared to the same
period of 1996 primarily due to a change in reinsurance treaty terms
effective July 1, 1996 and to a decrease in premium volume, particularly
in the second quarter of 1997. Deferred policy acquisition costs of
$2,885,968 as of June 30, 1997 were $349,404 greater than at December
31, 1996 primarily as a result of the change in reinsurance terms with
regard to front fees and premium taxes.
At June 30, 1997, Hallmark reported statutory capital and surplus
of $5,484,614, which shows an increase of $306,620 over the $5,177,994
reported at December 31, 1996. On an annualized-premium basis,
Hallmark's premium-to-surplus ratio at June 30, 1997 was 2.27 to 1 as
compared to 2.21 to 1 at December 31, 1996, and 2.24 to 1 at June 30,
1996. Management does not presently expect Hallmark to require
additional capital during 1997. Management anticipates that Hallmark is
positioned to maintain and strengthen statutory surplus through
increased earnings from insurance operations. For the six months ended
June 30, 1997, the statutory loss ratio was approximately 63.1% compared
to 64.1% and 81.8% for the twelve months ended December 31, 1996 and
<PAGE>
1995, respectively. See Results of Operations for discussion of loss
ratio improvement.
As previously mentioned, effective July 1, 1996, Hallmark entered
into new reinsurance treaties with Kemper, Dorinco, and Odyssey.
Certain provisions of the reinsurance treaty could impact the Company's
liquidity. Under the agreement between Hallmark and the reinsurers,
Hallmark retains 62.5% and cedes only 37.5% of the policy fees (rather
than ceding 75% of the policy fees as under the Vesta treaty), pays
premium taxes and front fees on 100% of the business produced (rather
than premium taxes and front fees on only its retained business under
the Vesta treaty), and receives a 30% provisional commission on the
portion of the business ceded (rather than a guaranteed 30% ceding
commission under the Vesta treaty). Policy fees are up-front, fully
earned fees that the Company is permitted by law to charge in addition
to premiums to cover or defray certain costs associated with producing
policies. Terms of the July 1, 1996 agreement include that the
provisional commission paid under the new treaty will be adjusted
annually over a three-year rating period on a sliding scale based on
annual loss ratios. Under the July 1, 1997 renewal, the first of the
three-year annual adjustment periods as defined under the original
agreement has been extended to two years. Based upon its loss
experience, Hallmark can earn a maximum commission of 33.5% and is
guaranteed a minimum commission of 26% regardless of loss experience.
Pursuant to the loan agreement dated March 11, 1997 between the Company
and Dorinco (as discussed above), effective January 1, 1997, the
commission structure of Dorinco s pro rata share of the July 1, 1996
reinsurance treaty was amended to include terms that allows Hallmark to
earn an additional 1% commission at a higher loss ratio than under the
previous structure and also increases the maximum ceding commission that
Hallmark may earn by 1% up to 34.5%, but reduces the minimum ceding
commission from 26% to 23%. Based on current loss experience, the
Company is currently recognizing ceding commission percentages of 30% on
business ceded to Dorinco and 29% on the cessions to Kemper and Odyssey.
In addition, the Dorinco Loan Agreement requires that effective July 1,
1997, Hallmark increase future volume of business ceded to Dorinco under
the July 1, 1996 reinsurance treaty and satisfy certain annual volume
levels ceded over the seven year term of the loan agreement.
Unpaid losses and loss adjustment expenses ("LAE") decreased
approximately 15% due to the combined effect of a continued decrease in
average claim payments during the first six months of 1997 as compared
to the first six months of 1996 as well as a decrease in the number of
days to process and pay new and pending claims. Accordingly,
reinsurance recoverable decreased proportionately.
During 1997, management expects that the Company's liquidity will
continue to be favorably impacted by a continued focus on the
performance of the Company's core State & County business with emphasis
on claims operations. The Company has increased its claims staff and
hired additional experienced claims adjusters and supervisory personnel
that, in turn, have contributed to lower loss and LAE payments and
favorably impacted the Company s profitability. However, changing
market conditions in the non-standard industry have adversely impacted
premium volumes during the second quarter of 1997. Although management
has taken steps to stimulate premium volumes, any decrease in premium
volume could negatively impact liquidity. Among other things, the
Company has expanded its contingent commission program to certain
<PAGE>
independent agents, has rolled out a new six-month program in late-July
1997, continues to appoint and retain quality independent agents and is
implementing a reduction in physical damage rates effective early-
September 1997. Additionally, revised reinsurance terms related to the
Dorinco financing, as well as reduced borrowing costs for the Company's
premium finance program from both the Dorinco financing and bank credit
line, should positively impact liquidity and earnings beginning late-
1997. Management also anticipates that an integrated cash management
system implemented in late-1995 will continue to positively impact 1997
liquidity.
The Company continues to pursue third party claims handling and
administrative contracts. Effective January 1, 1997, the Company entered
into a new agreement with an unaffiliated managing general agency (the
MGA ). Under this three-year contract, the Company, as program
administrator, performs certain administrative functions, including but
not limited to, cash management, underwriting and rate-setting reviews,
and claims handling. In addition, Hallmark assumes a 10% pro-rata share
of the business produced under the MGA s program. Effective July 1,
1997, Hallmark is increasing its pro-rata share of business assumed
under this contract to 20%. Effective July 1, 1997, the remaining 80%
share of this business is being reinsured by Hallmark's principal
reinsurers, Dorinco and Kemper. The related premium volume will be
considered as part of Hallmark's premium volume commitments to its
principal reinsurers. It is anticipated that fees under this contract
could positively impact liquidity increasingly throughout the year.
Beginning late-April 1996, the Company began marketing E&S
insurance through HUI. This business is produced by the Hallmark
Agencies and certain independent agents, and some portion of the
premiums are financed by HFC. No entity within the Company bears any
underwriting risk. The E&S policies are written on behalf of A-rated
(A.M. Best rating) unaffiliated insurance companies. HFC offers premium
financing for E&S business produced by HUI, and is currently financing
E&S premium notes with internally generated funds. As anticipated, the
growth of this business has been gradual due, in part, to increased
competition from the standard insurance market. Management remains
committed to the development of its E&S program, and HUI is increasing
its appointments of qualified independent agents. In addition, HUI
recently entered into a relationship with a London broker and has begun
producing business on behalf of two London-based carriers. HCS will
perform claims handling functions on a fee basis. Nonetheless, it is
not anticipated that the E&S program will significantly impact liquidity
during 1997.
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
1997.
Results of Operations
Gross premiums written (prior to reinsurance) for the three and six
months ended June 30, 1997 decreased 18% and 7%, respectively, in
relation to gross premiums written during the same period in 1996. The
respective decreases in gross premiums written were primarily due to
changing market conditions in the non-standard industry which have
adversely impacted premium volumes during the second quarter of 1997.
<PAGE>
Net written premiums (after reinsurance) for the three months ended June
30, 1997, remained relatively constant as the same period in 1996, while
net written premiums (after reinsurance) for the six months ended June
30, 1997, increased approximately 12% over the same period in 1996. The
increase in net written premiums for the six months ended June 30, 1997,
in relation to the same period of 1996, is due to (1) higher gross
premiums written during the first quarter of 1997 as compared to the
first quarter of 1996 and (2) higher retention of policy fees to 62.5%
during the first six months of 1997 as compared to 25% during the same
period of 1996.
Premiums earned (prior to reinsurance) for the three and six months
ended June 30, 1997 were $2,414,053 and $4,310,450, respectively, lower
than for the comparable periods in 1996 representing decreases of 19%
and 18%, respectively. For the three and six months ended June 30,
1997, net premiums earned (after reinsurance) of $3,065,074 and
$6,044,616, respectively, remained relatively the same as the same
periods in 1996. During the first six months of 1996, premiums earned
(prior to reinsurance) were high due to the 1996 earning of premium
written during high-volume months of late 1995 as well as the increase
in monthly policy production during 1996 from 39% in 1995 to 52% in
1996. Hallmark did not experience any unusually high-volume months
during 1996 and additionally, annual policy production has been on the
rise during the first six months of 1997 (52% for 1997 as compared to
48% for the same period of 1996). The disproportionate decrease between
premiums earned (prior to and after reinsurance) resulted from the
change discussed in the paragraph above.
Net incurred loss ratios (computed on net premiums earned after
reinsurance) for the three and six months ended June 30, 1997 were
approximately 62% and 59%, respectively, as compared to approximately
65% for both of the same 1996 periods. The decrease in the loss ratios
between 1997 and 1996 was primarily attributable to a continued emphasis
on effective claims handling procedures, adequate rates, responsive
rate-setting procedures and the increase in retention of policy fees.
Reinsurance recoveries decreased accordingly.
Acquisition costs, net represents the amortization of acquisition
costs (and credits) deferred over the past twelve months and the
deferral of acquisition costs (and credits) incurred in the current
period. The increase in the credit balance of acquisition costs, net is
primarily due to deferral of increased premium taxes and reduced ceding
commission income during the first half of 1997 as compared to the same
period in 1996.
Other acquisition and underwriting expenses increased $531,686 and
$919,307 for the three and six months ended June 30, 1997 as compared to
the same respective periods of 1996. This increase is primarily due to
an increase in the Company s share of premium taxes and front fees paid
under the July 1, 1996 reinsurance treaty as previously discussed, and a
decrease in ceding commission income (especially in the second quarter)
due to the combined effect of lower premium volumes during the first
half of 1997 and to a change in treaty terms effective July 1, 1996.
These adverse fluctuations are partially offset by decreases in bad debt
expense, commissions paid, salaries, contract labor and related costs,
as well as other underwriting expense categories.
<PAGE>
Operating expenses decreased during the three and six months ended
June 30, 1997 as compared to the same respective periods in 1996
primarily due to decreases in salary and related expenses, particularly
in the second quarter.
Interest expense for the three and six months ended June 30, 1997
increased in relation to the same periods in 1996 as a result of the
Dorinco loan which closed early-March to fund premium finance
operations. Previous premium financing was through an unaffiliated
premium finance company and thus did not result in interest expense on
the Company s financial statements. (See Note 3 to the Consolidated
Financial Statements.)
Investment income decreased approximately 8% and 11% for the three
and six months ended June 30, 1997 in relation to the comparable periods
of 1996 primarily as a result of a decrease in funds available for
investment (due to decreased premium volumes) and the maturity of some
higher-yielding long-term investments. Long-term invested funds have
decreased principally due to recent maturities and to changing market
conditions whereby long-term rates were less favorable for 1997 as
compared to 1996.
Interest income on note receivable represents income received from
Peregrine in connection with the Company's use of proceeds from the
Dorinco loan to lend funds to Peregrine to extinguish its premium
finance bank debt. Interest expense on the Dorinco loan accounts for
the significant increase in interest expense for the three and six
months ended June 30, 1997.
Processing fees decreased approximately 38% and 33% for the three
and six months ended June 30, 1997 over the same respective periods of
1996. These fees represent income earned by HFC pursuant to its premium
finance program. The decrease in processing fees is due, in part, to
the large volume of notes generated in connection with unusually high
premium volumes during the third quarter of 1995 (that, in turn,
generated notes that were still outstanding as of June 30, 1996). Lower
annual premiums written in 1997 than in 1996 also contributed to reduced
processing fees. At June 30, 1997, there were 26,417 premium notes
totaling $8,685,730, and at June 30, 1996, there were 33,166 notes
totaling $11,144,594.
Service and consulting fees for the three and six months ended June
30, 1997, increased by $121,137 and $141,967, respectively, in relation
to the comparable periods of 1996. These increases are primarily due to
fees earned in connection with the Company's contract to act as program
administrator for the MGA.
Other income for the three and six months ended June 30, 1997,
increased by $99,788 and $135,422, respectively, as compared to the same
periods of 1996 principally as a result of additional outside
commissions earned by the Hallmark Agencies and HUI, the Company's
excess and surplus lines agency.
Risks Associated with Forward-Looking Statements Included in this Form
10-QSB
This Form 10-QSB contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E
<PAGE>
of the Securities Exchange Act of 1934, which are intended to be covered
by the safe harbors created thereby. These statements include the plans
and objectives of management for future operations, including plans and
objectives relating to future growth of the Company's business
activities and availability of funds. The forward-looking statements
included herein are based on current expectations that involve numerous
risks and uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions, regulatory framework, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company.
Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could
be inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this Form 10-QSB will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be
achieved.
<PAGE>
PART II
OTHER INFORMATION
Item 1.Legal Proceedings.
In March 1997, a jury returned a verdict against the Company and in
favor of a former director and officer of Hallmark in the amount of
approximately $517,000 on the basis of contractual and statutory
indemnification claims. The court subsequently granted the plaintiff's
motion for attorneys' fees of approximately $271,000, court costs of
approximately $39,000 and pre-judgment and post-judgment interest, and
rendered final judgment on the verdict. The Company believes the
judgment in this case was both legally and factually incorrect and has
filed a motion for new trial. If the motion for new trial is denied,
the Company intends to appeal the judgment. However, the Company is
presently unable to determine the likelihood of an unfavorable outcome
to such motion or appeal.
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 other 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.<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Company's Annual Meeting of Shareholders was held on May 29,
1997. Of the 10,662,277 shares of common stock of the Company entitled
to vote at the meeting, 6,171,204 shares were present in person or by
proxy.
(b) The following individuals were elected to serve as directors for
the Company: Ramon D. Phillips, Linda H. Sleeper, 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.
(c) There was no other business to come before the meeting.
Item 5. Other Information.
None.
Item 6.Exhibits and Reports on Form 8-K.
(a) The exhibits listed in the Exhibit Index which appears on
sequential page 18 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, 1997.
<PAGE>
Sequential
Exhibit Description Page No.
10(a) Form of Endorsement No. 1, effective July 1, 1996, ______
to the 100% Quota Share Reinsurance Agreement between
State & County Mutual Fire Insurance Company and
American Hallmark Insurance Company of Texas,
effective July 1, 1996.
10(b) Form of Endorsement No. 1, effective July 1, 1997, to ______
the Guaranty of Performance and Hold Harmless Agreement
between Hallmark Financial Services, Inc. and Skandia
America Reinsurance Corporation, effective July 1, 1996.
10(c) Form of Endorsement No. 1, effective July 1, 1997, to ______
Guaranty Agreement provided by Skandia America
Reinsurance Corporation in favor of State & County
Mutual Fire Insurance Company, effective July 1, 1996.
10(d) Form of Endorsement No. 1, effective July 1, 1997, ______
to the Guaranty Agreement provided by Dorinco Rein-
surance Corporation in favor of State & County
Mutual Fire Insurance Company, effective July 1,
1996.
10(e) Form of Endorsement No. 1 - Termination, effective ______
January 1, 1997, to the Quota Share Retrocession
Agreement between American Hallmark Insurance
Company of Texas and the Reinsurers (Dorinco
Reinsurance Company and Odyssey Reinsurance
Corporation), effective July 1, 1996.
10(f) Form of Quota Share Retrocession Agreement between ______
American Hallmark Insurance Company of Texas and
Dorinco Reinsurance Company, effective January 1,
1997.
10(g) Form of Endorsement No. 1, effective January 1, 1997, ______
to the Quota Share Retrocession Agreement between
American Hallmark Insurance Company of Texas and
Dorinco Reinsurance Company, effective January 1,
1997.
10(h) Form of Endorsement No. 1, effective July 1, 1997, ______
to the Quota Share Retrocession Agreement between
American Hallmark Insurance Company of Texas and
the Reinsurer (Dorinco Reinsurance Company),
effective July 1, 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: August 13, 1997 /s/ Ramon D. Phillips
Ramon D. Phillips, President
(Chief Executive Officer)
Date: August 13, 1997 /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 10KSB submis-
sion.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 5,250,824
<DEBT-MARKET-VALUE> 5,241,001
<EQUITIES> 149,428
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,400,252
<CASH> 9,033,125
<RECOVER-REINSURE> 17,201,095
<DEFERRED-ACQUISITION> 661,303
<TOTAL-ASSETS> 58,742,852
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 11,539,118
<POLICY-OTHER> 2,981,711
<POLICY-HOLDER-FUNDS> 5,152,304
<NOTES-PAYABLE> 7,564,851
0
0
<COMMON> 328,868
<OTHER-SE> 11,521,978
<TOTAL-LIABILITY-AND-EQUITY> 58,742,852
6,044,616
<INVESTMENT-INCOME> 399,280
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 1,271,482
<BENEFITS> 3,541,770
<UNDERWRITING-AMORTIZATION> 493,003
<UNDERWRITING-OTHER> 3,681,407
<INCOME-PRETAX> 662,138
<INCOME-TAX> 232,655
<INCOME-CONTINUING> 429,483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 429,483
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<RESERVE-OPEN> 20,697,393
<PROVISION-CURRENT> 12,245,951
<PROVISION-PRIOR> 1,203,442
<PAYMENTS-CURRENT> (5,345,823)
<PAYMENTS-PRIOR> (11,241,562)
<RESERVE-CLOSE> 17,559,401
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
ENDORSEMENT NO. 1
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT between AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS, Dallas,
Texas (hereinafter called the "Reinsurer") and STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, Fort Worth, Texas (hereinafter called the
"Company").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on July 1,
1996 that the following changes are made to this Agreement:
1. ARTICLE V - COMMENCEMENT AND TERMINATION, Item B.8. is added as
follows:
B.8. Upon written notice by the REINSURER to the COMPANY to
coincide with the termination of the related Quota Share Retrocession
Agreement(s) ("RETROCESSION").
2. ARTICLE XVII - INSOLVENCY, paragraph C. will read as follows and
not as heretofore:
C. It is further understood and agreed that, in the event of the
insolvency of the COMPANY, the reinsurance under this AGREEMENT shall be
payable directly by the REINSURER to the COMPANY or to its liquidator,
receiver or statutory successor, except as provided by applicable state
law or except (a) where the AGREEMENT specifically provides another
payee of such reinsurance in the event of the insolvency of the COMPANY;
and (b) where the REINSURER with the consent of the direct insured or
insureds has assumed such policy obligations of the COMPANY as direct
obligations of the REINSURER to the payees under such policies and in
substitution for the obligations of the COMPANY to such payees.
3. ARTICLE XXVI - MISCELLANEOUS, Item C. will read as follows and not
as heretofore:
C. All acts and payments under this AGREEMENT are performable and
payable at the offices of the COMPANY in Dallas, Texas. The address of
the COMPANY, for the purpose of this AGREEMENT, is 8200 Anderson
Boulevard, Fort Worth, Texas 76120. The address of the REINSURER for
the purpose of this AGREEMENT is 14651 Dallas Parkway, Suite 900,
Dallas, Texas 75240.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto by their respective duly
authorized officers have executed this AGREEMENT in duplicate as of the
date undermentioned at:
Fort Worth, Texas, as of this_______ day of ____________________,
1997
STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY
By:_____________________________________
Its:____________________________________
<PAGE>
Dallas, Texas, as of this _______ day of ____________________, 1997
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS
By:_____________________________________
Its:____________________________________
ENDORSEMENT NO. 1
Attaching to and forming part of the GUARANTY OF PERFORMANCE AND HOLD
HARMLESS AGREEMENT by and between Hallmark Financial Services, Inc., a
Nevada corporation, (hereinafter referred to as Guarantor ), and
Skandia America Reinsurance Corporation, a Delaware corporation,
(hereinafter referred to as Skandia).
IT IS AGREED, effective 12:01 a.m., Central Standard Time, September 1,
1996 that the participation of Skandia America Reinsurance Corporation
will read as signed below and not as heretofore.
IT IS FURTHER AGREED, effective 12:01 a.m., Central Standard Time, July
1, 1997, that this Agreement is terminated and neither Guarantor nor
Skandia shall have obligations under this Agreement subsequent to that
date and time.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed in duplicate by:
Hallmark Financial Services, Inc.
By: _____________________________
Its: _____________________________
Date:_____________________________
Odyssey Reinsurance Corporation
By: _____________________________
Its: _____________________________
Date:_____________________________
ENDORSEMENT NO. 1
Attaching to and forming part of the GUARANTEE AGREEMENT by and among
SKANDIA AMERICA REINSURANCE CORPORATION, AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS, and AMERICAN HALLMARK GENERAL AGENCY, INC.
IT IS AGREED, effective 12:01 a.m., Central Standard Time, September 1,
1996 that the participation of SKANDIA AMERICA REINSURANCE CORPORATION
will read as signed below and not as heretofore.
IT IS FURTHER AGREED, effective 12:01 a.m., Central Standard Time, July
1, 1997, that this Agreement is terminated and ODYSSEY REINSURANCE
CORPORATION shall have no obligations under this Guaranty for any
policies produced after that date and time.
IN WITNESS WHEREOF, the Parties hereto by their respective duly
authorized representatives have executed this Guaranty as of the dates
first above mentioned.
ODYSSEY REINSURANCE CORPORATION
Attest:
By: ____________________________
Title: _________________________
Date: __________________________
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS
Attest:
By: ____________________________
Title: _________________________
Date: __________________________
AMERICAN HALLMARK GENERAL AGENCY, INC.
Attest:
By: ____________________________
Title: _________________________
Date: __________________________
ENDORSEMENT NO. 1
Attaching to and forming part of the GUARANTEE AGREEMENT by and among
DORINCO REINSURANCE COMPANY, AMERICAN HALLMARK INSURANCE COMPANY OF
TEXAS, and AMERICAN HALLMARK GENERAL AGENCY, INC.
IT IS AGREED, effective 12:01 a.m., Central Standard Time, July 1, 1997,
that the fifth, seventh, eleventh and nineteenth paragraphs under
PREAMBLE will read as follows and not as heretofore:
DORINCO has entered into a Quota Share Retrocession Agreement, effective
July 1, 1996, with AMERICAN HALLMARK ("Retrocession Agreement"),
pursuant to which AMERICAN HALLMARK has retroceded to DORINCO a 25%
share of the Interest and Liabilities under the Reinsurance Agreement.
As respects subject business of the REINSURANCE AGREEMENT written or
renewed on or after July 1, 1997, AMERICAN HALLMARK will retrocede to
DORINCO a 50% share of the Interest and Liabilities under the
Reinsurance Agreement.
NOW, THEREFORE, DORINCO hereby agrees, as respects subject business of
the REINSURANCE AGREEMENT written or renewed on or after July 1, 1997,
to guarantee a 50% share of the full and complete performance of all
terms, conditions and covenants by: (a) AMERICAN HALLMARK under the
REINSURANCE AGREEMENT (Exhibit "A"); (b) GENERAL AGENCY under the
GENERAL AGENCY AGREEMENT (Exhibit "B"); and (c) AMERICAN HALLMARK under
the ADMINISTRATIVE SERVICES AGREEMENT (Exhibit "C"). This GUARANTY
constitutes consideration by DORINCO to STATE AND COUNTY MUTUAL for
entering into the subject agreements with AMERICAN HALLMARK and GENERAL
AGENCY.
If, by action of a state insurance regulatory agency or court of
competent jurisdiction, AMERICAN HALLMARK is found to be insolvent or is
placed in supervision, conservation, receivership, rehabilitation or
liquidation, or has a receiver, supervisor or conservator appointed,
then DORINCO shall fully assume 50% of AMERICAN HALLMARK's obligations
owed to STATE AND COUNTY MUTUAL under the subject agreements, including
but not limited to making all payments that were required of AMERICAN
HALLMARK under the subject agreements. STATE AND COUNTY MUTUAL shall
assign to DORINCO its right to recover from AMERICAN HALLMARK any claims
payments or other payments made by DORINCO to STATE AND COUNTY MUTUAL by
reason of AMERICAN HALLMARK being found to be insolvent or placed in
supervision, conservation, receivership, rehabilitation or liquidation.
Notwithstanding DORINCO s agreement to fully assume AMERICAN HALLMARK's
obligations, if AMERICAN HALLMARK is found to be insolvent or is placed
in supervision, conservation, receivership, rehabilitation or
liquidation, STATE AND COUNTY MUTUAL shall not be required to pay to
DORINCO any amounts paid by STATE AND COUNTY MUTUAL to AMERICAN HALLMARK
as of that date and/or which STATE AND COUNTY MUTUAL is required to pay
in the future to AMERICAN HALLMARK and /or its supervisor, conservator,
rehabilitator or liquidator.
In the event that either (i) the Texas Department of Insurance requires
cancellation or disallows credit for reinsurance under the REINSURANCE
AGREEMENT or (ii) DORINCO s A.M. Best rating at any time is lower than
A-, DORINCO will immediately secure 50% of AMERICAN HALLMARK's
obligations under the REINSURANCE AGREEMENT via a security fund
agreement to be executed by DORINCO and STATE AND COUNTY MUTUAL, which
<PAGE>
security fund agreement shall be in form and content acceptable to STATE
AND COUNTY MUTUAL.
IN WITNESS WHEREOF, the Parties hereto by their respective duly
authorized representatives have executed this Guaranty as of the dates
first above mentioned.
DORINCO REINSURANCE COMPANY
Attest:
By: ____________________________
Title: _________________________
Date: __________________________
AMERICAN HALLMARK INSURANCE
COMPANY OF TEXAS
Attest:
By: ____________________________
Title: _________________________
Date: __________________________
AMERICAN HALLMARK GENERAL AGENCY, INC.
Attest:
By: ____________________________
Title: _________________________
Date: __________________________
ENDORSEMENT NO. 1 - TERMINATION
Attaching to and forming part of the QUOTA SHARE RETROCESSION AGREEMENT
between AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS, Dallas, Texas
(hereinafter called the "Company") and the Reinsurer specifically
identified below (hereinafter called the "Reinsurer").
IT IS AGREED, effective 12:01 a.m., Central Standard Time, January 1,
1997 that this Agreement is terminated and the Reinsurer have no
liability for losses occurring subsequent to that date and time. The
Reinsurer will return to the Company a portfolio representing the
unearned premium reserve under this Agreement.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto, by their authorized representatives,
have executed this Endorsement as of the following dates:
PARTICIPATING REINSURERS:
Dorinco Reinsurance Company 25.00%
Odyssey Reinsurance Corporation 25.00%
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Date____________________________________
By______________________________________
(signature)
________________________________________
(name)
________________________________________
(title)
QUOTA SHARE RETROCESSION AGREEMENT
issued to
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS<PAGE>
QUOTA SHARE RETROCESSION AGREEMENT
This Agreement is made and entered into by and between AMERICAN HALLMARK
INSURANCE COMPANY OF TEXAS, Dallas, Texas (hereinafter called the
"Company") and the Reinsurer specifically identified on the signature
page of this Agreement (hereinafter called the "Reinsurer").
ARTICLE 1
BUSINESS REINSURED
This Agreement is to share with the Reinsurer the interests and
liabilities of the Company under all Policies classified by the Company
as Private Passenger Automobile Business (including Motorist Bodily
Injury and Property Damage, Physical Damage, Uninsured/Underinsured
Motorist Bodily Injury and Property Damage and Personal Injury
Protection) in force, written or renewed by or through American Hallmark
General Agency, Inc., Dallas, Texas for and on behalf of State and
County Mutual Insurance Company, Ft. Worth, Texas (hereinafter called
the Issuing Carrier ) and assumed by the Company as reinsurance from
the Issuing Carrier, during the term of this Agreement, subject to the
terms and conditions herein contained.
It is understood that the business reinsured under this Agreement is
deemed to include coverages extended for non-resident drivers under the
Motor Vehicle Financial Responsibility Law or the Motor Vehicle
Compulsory Insurance Law, or any similar law of any state or province,
following the provisions of the Issuing Carrier s Policies when they
include or are deemed to include so called out of state insurance
provisions.
ARTICLE 2
COVER
The Company will cede, and the Reinsurer will accept as reinsurance, a
75% share of all business reinsured hereunder.
ARTICLE 3
COMMENCEMENT AND TERMINATION
This Agreement shall become effective at 12:01 a.m., Central Standard
Time, January 1, 1997, and shall remain in full force. However, in the
event that any Policy is required by law or regulation to be continued
in force, the Reinsurer will continue to remain liable with respect to
each such Policy until the Issuing Carrier may legally cancel, non-renew
or otherwise eliminate liability under such Policy or Policies. This
provision will include but is not limited to Policies which must be
issued or renewed because a producing agent, broker or managing general
agent cannot be canceled or has not been timely canceled, until the
expiration date of such Policies.
Upon termination, the Company, at its option, may elect to terminate the
Reinsurer's liability for all losses occurring subsequent to
termination.
<PAGE>
The Reinsurer will return to the Company a portfolio representing the
unearned premium reserve under this Agreement appropriate to the mode of
termination.
ARTICLE 4
TERRITORY
This Agreement will cover wherever the Issuing Carrier's Policies cover.
ARTICLE 5
WARRANTY
It is warranted for purposes of this Agreement that the maximum Policy
limits for which American Hallmark General Agency, Inc. shall have the
authorization to bind the Issuing Carrier for business ceded hereunder
shall be as follows or so deemed:
A. Bodily Injury, per person/per accident$ 20,014/$40,014
B. Property Damage, per accident $15,014
C. Physical Damage Actual Cash Value
(ACV) not to exceed
$40,014 per vehicle
D. Personal Injury Protection, per person/per
accident $2,514
E. Uninsured/Underinsured Motorist Bodily
Injury,per person/per accident 20,014/$40,014
F. Uninsured/Underinsured Motorist Property
Damage, per accident $15,014
In the event of a statutory increase in limits by the State of Texas, or
travel by an insured to a state with greater statutory requirements, the
maximum Policy limits shall be increased to statutory limits in effect.
ARTICLE 6
EXCLUSIONS
This Agreement does not cover:
A. All business not specifically described in the BUSINESS REINSURED
ARTICLE of this Agreement.
B. Garagekeepers legal liability.
C. Vendors single interest.
D. Vehicles principally used as ambulances, fire and police units.
E. Commercial vehicles rated as such, and all automobile fleets.
F. Mobile homes.
G. Automobile dealers.
<PAGE>
H. War risks as excluded in the attached North American War Exclusion
Clause (Reinsurance) No. 08-45.
I. Business excluded by the attached Nuclear Incident Exclusion
Clauses - Liability - Reinsurance - U.S.A., No. 08-31.1 and Canada,
No. 08-32.1.
J. Business excluded by the attached Nuclear Incident Exclusion
Clauses - Physical Damage - Reinsurance - U.S.A., No. 08-33 and Canada
No. 08-34.2.
K. Assumed reinsurance, except for reinsurance assumed by the Company
from State and County Mutual Insurance Company.
L. Vehicles used in racing or speed events.
M. Taxis, limos, buses and livery.
N. Pools, Associations and Syndicates, except losses from Assigned
Risk Plans or similar styled plans/pools are not excluded.
O. Loss or damage or costs or expenses arising from seepage and/or
pollution and/or contamination, other than contamination from smoke
damage. Nevertheless, this exclusion does not preclude any payment of
the cost of the removal of debris of property damaged by a loss
otherwise covered hereunder, but subject always to a limit of 25% of
the Company's Property Business loss under the original Policy.
Should the Issuing Carrier be assigned a risk under an Assigned Risk
Plan, or similar mandatory plan, which is otherwise excluded by the
foregoing exclusions list, the Reinsurer will waive such exclusions
(other than exclusions H., I. and J.) in respect of such assigned risks.
Errors and omissions notwithstanding, if without the knowledge and
contrary to the instructions of its supervisory personnel, the Issuing
Carrier is bound on a risk specifically excluded hereunder, other than
exclusions H., I., and J., or by an existing insured extending its
operations, such reinsurance as would have been afforded but for the
exclusion shall apply for a period of 30 days following receipt of said
underwriting personnel of knowledge thereof.
ARTICLE 7
ACCOUNTS AND REMITTANCES
A. Within 60 days following the end of each month, the Company will
render a net account to the Reinsurer for the current Agreement Year.
Prior Agreement Years having activity during the month will be accounted
for separately in a similar manner. Such account will contain the
following:
1. Net written premium accounted for during the period, being the
gross written premium (including 75% of 50% of the Company's Policy
fees) less returns and cancellations; less
2. The ceding commission as provided for in this Agreement; less
3. Loss and loss expense paid on losses occurring during the current
Agreement Year; plus
4. Subrogation, salvage, or other recoveries on losses occurring
during the current Agreement Year.
<PAGE>
Within 60 days following the end of the month the debtor party will
remit to the creditor party any balance due.
This account will also bear a notation advising of the following
information, separately for each Agreement Year:
1. Outstanding loss and loss expense reserve at the end of the period.
2. The unearned premium reserve at the end of the month.
3. Should loss attributable to an ISO catastrophe(s) be involved, the
account should bear a notation showing the ISO number(s) and the paid
loss and loss expense and the outstanding loss and loss expenses
applicable.
B. Within 60 days following the end of each Agreement Year, the
Company shall furnish to the Reinsurer for the Agreement Year any other
information which the Reinsurer may require for its Annual Convention
Statement which may be reasonably available to the Company.
ARTICLE 8
CEDING COMMISSION
The Reinsurer will allow the Company a provisional ceding commission of
30.0% of the written premiums ceded (including 75% of 50% of the
Company's Policy fees) hereunder. Return commission shall be allowed on
return premiums at the same rate.
ARTICLE 9
COMMISSION ADJUSTMENT
A. 1. The final ceding commission shall be determined by the loss
experience under this Agreement for each period comprising three
consecutive Agreement Years or lesser period should the Agreement be
terminated prior to the end of a three Agreement Year period. There
shall be provisional adjustments and a final adjustment for each period,
all in accordance with the other paragraphs of this Article.
2. Within 60 days following the end of each Agreement Year within
each three Agreement Year period, the Company will calculate an adjusted
ceding commission for the portion of the three Agreement Year period
then expired based on premiums earned and losses incurred. The ceding
commission paid to that date, whether provisional or prior adjustment,
shall be adjusted between the parties as appropriate. At the end of
each three Agreement Year period, adjustments will continue to be made
annually until all losses have been paid or closed, at which time the
ceding commission will become final.
3. Premium earned for the period shall mean all written premium
ceded to this Agreement during the period, including 75% of 50% of the
Company s Policy fees, (less cancellations and returns) plus the
unearned premium reserve at the beginning of the period and less the
unearned premium reserve at the end of the period.
<PAGE>
4. Losses incurred for the period shall mean the loss and loss
expense paid by the Reinsurer (less salvages and recoveries received) on
losses occurring during the period, plus loss and loss expense reserves
outstanding on losses occurring during the period and plus an amount for
incurred but not reported losses (IBNR) as provided by the Company.
B. 1. Should the ratio of losses incurred to premium earned be 73.0%
or higher, then the adjusted ceding commission shall be 23.0%.
2. Should the ratio of losses incurred to premium earned be less
than 73.0%, then the adjusted commission shall be determined by adding
one percent (1.0%) to the ceding commission for each one percent
reduction of loss ratio subject to a ceding commission of 30.0% at a
loss ratio of 66.0%.
3. Should the ratio of losses incurred to premium earned be less
than 66.0%, then the adjusted commission shall be determined by adding
one percent (1.0%) to the ceding commission for each one percent
reduction of loss ratio subject to a ceding commission of 32.0% at a
loss ratio of 64.0%.
4. Should the loss ratio be less than 64.0%, then the commission
shall be further adjusted by adding seven-tenths of one percent (.70%)
to the ceding commission for each one percent reduction in the loss
ratio below 64.0%, subject to a maximum ceding commission of 35.5% at a
loss ratio of 59.0% or less.
C. 1. Upon termination, any period of less than 12 months from
inception shall be considered as an Agreement Year for purposes of this
Article; any period of less than 12 months from anniversary will be
considered as part of the preceding Agreement Year.
2. Should this Agreement be terminated on a runoff basis wherein
the Reinsurer is liable for losses occurring after the date of
termination, then such runoff period shall be considered as part of the
last Agreement Year.<PAGE>
D. Should the Reinsurer's participation in this Agreement increase or
decrease within a multi-year adjustment period, the incremental
participation percentage increase or decrease shall be treated as a
separate new or terminated participation, respectively, for purposes of
calculating amounts due hereunder.
ARTICLE 10
DEFINITIONS
A. The term "Policy" as used in this Agreement shall mean any binder,
policy, or contract of insurance or reinsurance issued, accepted or held
covered provisionally or otherwise, by or through American Hallmark
General Agency, Inc., Dallas, Texas for and on behalf of the Issuing
Carrier.
B. The term "Agreement Year" as used in this Agreement shall mean the
12 consecutive months commencing with each July 1 except that the first
Agreement Year shall be the period from inception to July 1, 1997. In
the event of termination of this Agreement at other than the anniversary
date, the period from the anniversary date to the termination date will
<PAGE>
be considered as part of the last full Agreement Year. Any period
following termination of this Agreement in which the Reinsurer remains
liable for losses arising out of Policies in force at the date of
termination will be considered as part of the concluding Agreement Year.
ARTICLE 11
ORIGINAL CONDITIONS
All insurances falling under this Agreement shall be subject to the same
terms, rates, conditions and waivers, and to the same modifications,
alterations and cancellations as the respective Policies of the Issuing
Carrier (except that in the event of the insolvency of the Company the
provisions of the INSOLVENCY ARTICLE of this Agreement shall apply) and
the Reinsurer shall be credited with its exact proportion of the
original gross premiums received by the Company.
ARTICLE 12
CURRENCY
The currency to be used for all purposes of this Agreement shall be
United States of America currency.
ARTICLE 13
LOSS AND UNEARNED PREMIUM RESERVE FUNDING
With respect to loss and unearned premium reserves, funding will be in
accordance with the attached Loss Funding Clause No. 13-04.
ARTICLE 14
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on
premiums reported to the Reinsurer hereunder.
Federal Excise Tax applies only to those Reinsurers, excepting
Underwriters at Lloyd's, London and other Reinsurers exempt from the
Federal Excise Tax, who are domiciled outside the United States of
America.
The Reinsurer has agreed to allow for the purpose of paying the Federal
Excise Tax 1% of the premium payable hereon to the extent such premium
is subject to Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the
Reinsurer will deduct 1% from the amount of the return, and the Company
or its agent should take steps to recover the Tax from the U.S.
Government.
<PAGE>
ARTICLE 15
LOSS AND LOSS EXPENSE
Any loss settlement made by the Company, whether under strict Policy
conditions or by way of compromise, shall be unconditionally binding
upon the Reinsurer in proportion to its participation, and the Reinsurer
shall benefit proportionally in all salvages and recoveries.
The Reinsurer shall bear its proportionate share of all expenses
incurred by the Company in the investigation, adjustment, appraisal or
defense of all claims under Policies reinsured hereunder (excluding,
however, office expenses and salaries of officials of the Company) and
shall receive its proportionate share of any recoveries of such
expenses.
The Company will advise the Reinsurer by separate report, regardless of
any question on liability or coverage, any claim involving the
following:
1. Fatalities.
2. Bodily injuries involving:
a. Brain stem, quadriplegia, paraplegia or severe paralysis,
b. Serious burns,
c. Amputations of major limbs,
d. Serious impairment of vision.
3. Potential coverage disputes or bad faith situations which may give
rise to a payment for Excess of Policy Limits or Extra Contractual
Obligations.
4. Any claims that do not fall within these categories, but have a
potential of significant liability to the Reinsurer.
ARTICLE 16
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS OF POLICY LIMITS
This Agreement shall protect the Company, where the loss includes any
Extra Contractual Obligations for 100% of such Extra Contractual
Obligations. "Extra Contractual Obligations" are defined as those
liabilities not covered under any other provision of this Agreement and
which arise from handling of any claim on business covered hereunder,
such liabilities arising because of, but not limited to, the following:
failure by the Issuing Carrier or Company to settle within the Policy
limit, or by reason of alleged or actual negligence, fraud or bad faith
in rejecting an offer of settlement or in the preparation of the defense
or in the trial of any action against its insured or in the preparation
or prosecution of an appeal consequent upon such action.
The date on which any Extra Contractual Obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the
original loss.<PAGE>
In the event a loss includes an amount in excess of the Issuing
Carrier s Policy limit, 100% of such amount, in excess of the Issuing
Carrier's Policy limit shall be added to the amount of the Issuing
Carrier s Policy limit, and the sum thereof shall be covered.
<PAGE>
For the purpose of this Article, the word "loss" shall mean any amounts
for which the Issuing Carrier would have been contractually liable to
pay had it not been for the limit of the original Policy.
Notwithstanding the above, as respects any loss which includes either
Extra Contractual Obligations or Excess of Policy Limits or both, the
Reinsurer s limit of liability for Extra Contractual Obligations and/or
Excess of Policy Limits shall be limited to $2,000,000 each loss in
addition to the indemnity loss.
However, this Article shall not apply where the loss has been incurred
due to the fraud of a member of the Board of Directors or a corporate
officer of the Issuing Carrier or Company acting individually or
collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
ARTICLE 17
ASSESSMENTS AND ASSIGNMENTS
The Reinsurer hereby assumes liability for any and all assessments and
assignments imposed as a result of Policies reinsured hereunder (whether
before or after the termination of the Agreement) levied or made by a
guaranty fund, insolvency fund, plan, pool, association or other
arrangement created by statute or regulation including, but not limited
to, fees associated with the Auto Theft Prevention Pool. The Company
shall account to the Reinsurer for any recovery of such assessments, or
any credit allowed to and realized by the Company from the Issuing
Carrier, and return to the Reinsurer its share of any recovery or
credit.
ARTICLE 18
DELAY, OMISSION OR ERROR
Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it
hereunder if such delay, omission or error had not been made, providing
such delay, omission or error is rectified upon discovery.
ARTICLE 19
INSPECTION
The Company shall place at the disposal of the Reinsurer at all
reasonable times, and the Reinsurer shall have the right to inspect,
through its authorized representatives, all books, records and papers of
the Company in connection with any reinsurance hereunder or claims in
connection herewith.
<PAGE>
ARTICLE 20
ARBITRATION
Any irreconcilable dispute between the parties to this Agreement will be
arbitrated in Dallas, Texas in accordance with the attached Arbitration
Clause No. 22-01.1.
ARTICLE 21
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to
this Agreement.
ARTICLE 22
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency
Clause No. 21-01 - 1/1/86 will apply.
ARTICLE 23
ENTIRE AGREEMENT
This Agreement sets forth all of the duties and obligations between the
Company and the Reinsurer and supersedes any and all prior or
contemporaneous or written agreements with respect to matters referred
to in this Agreement. The Agreement may not be modified, amended or
changed except by an agreement in writing signed by both parties.
ARTICLE 24
INTERMEDIARY
Sedgwick Re, Inc. is hereby recognized as the Intermediary negotiating
this Agreement for all business hereunder. All communications,
including notices, premiums, return premiums, commissions, taxes,
losses, loss adjustment expenses, salvages and loss settlements relating
thereto shall be transmitted to the Reinsurer or the Company through
Sedgwick Re, Inc., 1501 Fourth Avenue, Suite 1400, Seattle, Washington
98101. Payments by the Company to the Intermediary shall be deemed to
constitute payment to the Reinsurer. Payments by the Reinsurer to the
Intermediary shall be deemed only to constitute payment to the Company
to the extent that such payments are actually received by the Company.
<PAGE>
ARTICLE 25
PARTICIPATION: QUOTA SHARE RETROCESSION AGREEMENT
EFFECTIVE: January 1, 1997
This Agreement obligates the Reinsurer for _______% of the interests and
liabilities set forth under this Agreement.
The participation of the Reinsurer in the interests and liabilities of
this Agreement shall be separate and apart from the participations of
other reinsurers and shall not be joint with those of other reinsurers,
and the Reinsurer shall in no event participate in the interests and
liabilities of other reinsurers.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
Dorinco Reinsurance Company 25.00%
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Date_______________________________________
By_________________________________________
(signature)
___________________________________________
(name)
___________________________________________
(title)
QUOTA SHARE RETROCESSION AGREEMENT
issued to
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
ENDORSEMENT NO. 1
Attaching to and forming part of the QUOTA SHARE RETROCESSION
REINSURANCE AGREEMENT between DORINCO REINSURANCE COMPANY, Midland,
Michigan (hereinafter called the "Company") and the Reinsurer
specifically identified below (hereinafter called the "Reinsurer").
IT IS AGREED, effective 12:01 a.m., Central Standard Time, July 1, 1997
that ARTICLE 2 - COVER, shall read as follows and not as heretofore:
The Company will cede, and the Reinsurer will accept as reinsurance, a
33.33% share of all business reinsured hereunder.
In addition, the Company will cede, and the Reinsurer will accept as
reinsurance, a 33.33% share of the Company's liability arising from
losses for Extra Contractual Obligations and/or loss in excess of the
Policy limit as described in the EXTRA CONTRACTUAL OBLIGATIONS and
EXCESS OF POLICY LIMITS ARTICLES, up to $2,000,000 each loss. Should
the loss for Extra Contractual Obligations and/or loss in excess of the
Policy limit exceed $2,000,000, the Company will cede, and the Reinsurer
will accept 100% of the liability for such loss in excess of $2,000,000.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Endorsement as of the following
dates:
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Date____________________________________
By______________________________________
(signature)
________________________________________
(name)
________________________________________
(title)
DORINCO REINSURANCE COMPANY
Date____________________________________
By______________________________________
(signature)
________________________________________
(name)
________________________________________
(title)
ENDORSEMENT NO. 1
Attaching to and forming part of the QUOTA SHARE RETROCESSION AGREEMENT
between AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS, Dallas, Texas
(hereinafter called the "Company") and the Reinsurer specifically
identified below (hereinafter called the "Reinsurer").
IT IS AGREED, effective 12:01 a.m., Central Standard Time, July 1, 1997
that ARTICLE 25 - PARTICIPATION, the first paragraph will read as
follows and not as heretofore:
This Agreement obligates the Reinsurer for _______% of the interests and
liabilities set forth under this Agreement.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Endorsement as of the following
dates:
PARTICIPATING REINSURERS
Dorinco Reinsurance Company 50%
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
By______________________________________
(signature)
________________________________________
(name)
________________________________________
(title)
QUOTA SHARE RETROCESSION AGREEMENT
issued to
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
