CONFORMED COPY
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1997
Commission file number 0-16090
HALLMARK FINANCIAL SERVICES, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 87-0447375
(State or Other Jurisdiction of Incorporation (I.R.S. Employer I.D. No.)
or Organization) (I.R.S. Employer I.D. 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
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock American Stock Exchange
3 cents par value Emerging Company Marketplace
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 XX No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year - $15,827,105.
State the aggregate market value of the voting stock held by non-
affiliates - $11,924,337 as of March 20, 1998.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. Common Stock,
3 cents par value -10,662,277 shares outstanding as of March 20, 1998.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from
the Registrant's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Risks Associated with Forward-Looking Statements Included in this Form
10-KSB
This Form 10-KSB contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E
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-KSB 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.
Item 1. Description of Business.
Introduction
Hallmark Financial Services, Inc. ("HFS"), a Nevada corporation
formed in 1987, and its wholly owned subsidiaries (collectively, the
"Company") engage in the sale of insurance products on credit terms,
primarily to lower and middle income customers. The Company's 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.
Overview
The Company pursues its business activities through an integrated
insurance group (collectively, the "Insurance Group"), the members of
which are an authorized Texas property and casualty insurance company,
American Hallmark Insurance Company of Texas ("Hallmark"); a managing
general agent, American Hallmark General Agency, Inc. ("AHGA"); a
network of affiliated insurance agencies known as the American Hallmark
Agencies ("Hallmark Agencies"); a premium finance company, Hallmark
<PAGE>
Finance Corporation ("HFC"); a claims handling and adjusting firm,
Hallmark Claims Service, Inc. ("HCS"); and from April 1996 until
December 31, 1997, a commercial excess and surplus lines affiliated
managing general agency, Hallmark Underwriters, Inc. ("HUI"). The Company
operates only in Texas.
Hallmark writes non-standard automobile liability and physical
damage coverages. Hallmark provides insurance through a reinsurance
arrangement with an unaffiliated company, State & County Mutual Fire
Insurance Company ("State & County"). Through State & County, Hallmark
provides insurance primarily for high risk drivers who do not qualify
for standard-rate insurance.
AHGA, a managing general agency, holds an appointment from State &
County to manage the sale and servicing of State & County policies.
Hallmark reinsures 100% of the State & County policies produced by AHGA
under a related reinsurance agreement. AHGA markets the policies produced
by Hallmark through the Hallmark Agencies and through independent agents
operating under their own names.
HFC offers premium financing for policies sold by the Hallmark
Agencies and independent agents managed by AHGA. Beginning late-June
1997, HFC began offering its own premium finance notes funded by the
proceeds of loan agreements executed in March 1997. HFC's financing and
servicing arrangement with an unaffiliated premium finance company is
currently in run-off. (See Note 11 to the Consolidated Financial
Statements.)
HCS provides fee-based claims adjustment, salvage and subrogation
recovery, and litigation services to Hallmark and unaffiliated third
parties.
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. Due to highly competitive market conditions
principally as a result of an uncharacteristicaly strong presence of
standard commercial insurers in the Texas marketplace, HUI's operations
ceased as of December 31, 1997.
Insurance Group Operations
Formed in 1987, HFS commenced its current operations in 1990 when
it acquired, through several acquisitions, most of the companies now
referred to as the Insurance Group. HFS manages Hallmark, AHGA, the
Hallmark Agencies, HFC and HCS as an integrated Insurance Group that
shares common management, computer facilities and corporate offices.
AHGA manages the sale of State & County policies by the Hallmark Agencies
and by independent agents. HFC offers premium finance programs for
State & County policies marketed by the Hallmark Agencies and independent
agents managed by AHGA. HCS provides claims services to Hallmark and
unaffiliated third parties.
The Company offers both liability and physical damage (comprehensive
and collision) coverages. Hallmark's bodily injury liability coverage is
limited to $20,000 per person and $40,000 per accident, and property
damage liability coverage is limited to $15,000 per accident. Physical
damage coverage is limited to $40,000 and $30,000 for vehicles insured
under annual/six-month and monthly policies, respectively.
<PAGE>
Substantially all purchasers of Hallmark policies are individuals.
No single customer or group of related customers has accounted for more
than 1% of its net premiums written during any of the last three years.
The Company writes annual, monthly and since mid-1997, six-month
policies. The Company's net premium volume was composed of a policy mix
of 49% annual, 47% monthly and 4% six-month policies in 1997, and 52%
monthly and 48% annual policies in 1996. The Company's typical customer
is unable or unwilling to pay either a half- or full-year's premium in
advance, and thus a monthly policy, or an annual or six-month policy
on credit suits his/her budgetary needs.
The Company finances annual and six-month policy premiums produced
by AHGA through a premium finance program offered by HFC. During 1997,
approximately 91% of Hallmark's annual and six-month policyholders
financed their premiums through HFC's premium finance program. During
1996 and 1995, approximately 90% and 89%, respectively, of Hallmark's
annual policyholders financed their premiums through HFC's premium
finance program or Hallmark's direct-bill program (discontinued during
1995).
HCS provides claims adjustment and related litigation services to
both the Company and third parties. Fees are charged either on a per-file
basis, as a percentage of earned premiums or, in certain instances, a
combination of both methods. When the Company receives notice of a loss,
HCS personnel establish a claim file and an estimated loss reserve. HCS's
adjusters review, investigate and initiate claim payments, with the
Company utilizing a third-party claims service only in unusual
circumstances. The Company has an in-house legal staff and thus handles
much of its claims-related litigation in-house. Management believes
that the Company achieves optimal efficiency and cost effectiveness by
utilizing its own trained employee-adjusters and in-house litigation
staff in most instances.
Underwriting and Other Ratios
An insurance company's underwriting experience is traditionally
measured by the statutory combined ratio. The combined ratio under
statutory accounting practices ("SAP") is the sum of (1) the ratio of net
losses and loss adjustment expenses ("LAE") incurred to net premiums
earned (referred to as the statutory loss ratio), and (2) the ratio of
underwriting and operating expenses to net premiums written (referred to
as the "statutory expense ratio"). The approximate SAP underwriting profit
or loss is affected to the extent the combined ratio is less or more than
100%. During 1997, 1996 and 1995, Hallmark experienced statutory loss
ratios of 65.9%, 64.1% and 81.8%, respectively. During the same periods,
it experienced statutory expense ratios of 39.2 %, 31.9% and 11.2%,
respectively, and statutory combined ratios of 105%, 96% and 93%,
respectively. These statutory ratios do not reflect the deferral of
policy acquisition costs, investment income, premium finance revenues,
or the elimination of intercompany transactions required by generally
accepted accounting principles ("GAAP").
Hallmark's 1997 statutory loss ratio increased in relation to 1996
principally due to changes in the estimate of incurred but not reported
("IBNR") reserves based, in part, upon a faster-than-anticipated
development of 1996 accident-year losses. The decreases in the 1997 and
1996 calendar year statutory loss ratios in relation to 1995, were
<PAGE>
principally due to the combined result of an increase in retention of fully
earned policy origination fees included in premiums earned after July 1,
1996 and improved loss experience of the Company's core State & County
business. (See Management's Discussion and Analysis or Plan of
Operation - Results of Operations.)
Hallmark's 1995 statutory loss ratio was adversely affected by
unusually high catastrophe losses due to hail, as well as an increase in
non-catastrophic losses. To a lesser extent, adverse loss experience
associated with assumed business produced by an unaffiliated agency
pursuant to a 1993 reinsurance agreement also adversely affected the
1995 statutory loss ratio. Although this agreement was canceled effective
December 31, 1994, the runoff of business continued to negatively impact
Hallmark's 1995 statutory loss ratio.
The increase in the 1997 statutory expense ratio is primarily
attributable to decreased ceding commission income (recorded as an offset
to underwriting expenses) along with increased retention of premium taxes
and State & County ceding fees under reinsurance treaties effective
July 1, 1996. The change in reinsurance agreements, along with the
changes in the estimate of IBNR, had an impact on 1997 expenses by
reducing ceding commission income. While the statutory expense ratio for
1996 increased in relation to the 1995 statutory expense ratio, the full
impact was not realized until 1997. Hallmark's 1995 statutory expense
ratio was favorably impacted by high ceding commission income associated
with unusually high premium volumes during the third quarter of 1995.
Under the Texas Department of Insurance ("TDI") guidelines, casualty
insurance companies are expected to maintain a premium-to-surplus ratio
of not more than 3 to 1. The premium-to-surplus ratio measures the
relationship between net premiums written in a given period (premiums
written, less returned premiums and reinsurance ceded to other carriers)
to surplus (admitted assets less liabilities), all determined on the
basis of SAP. For 1997, 1996, and 1995, Hallmark's premium-to-surplus
ratios were 2.35 to 1, 2.21 to 1 and 2.58 to 1, respectively. Despite a
1997 statutory net loss, Hallmark had only a slightly unfavorable
increase in its 1997 premium-to-surplus ratio due to the combined effect
of only an 8% increase in net premiums written and a 2% increase in
1997 surplus over the previous year. Hallmark's surplus increased
(despite the 1997 statutory net loss) primarily due to a reduction in a
1996 charge to surplus permitted by TDI for 1997. (See Management's
Discussion and Analysis or Plan of Operation - Financial Condition and
Liquidity).
The strengthening of the 1996 premium-to-surplus ratio in relation
to 1995 is primarily attributable to the combined effect of the decrease
in 1996 premium volume in relation to 1995, and the statutory loss ratio
improvement in Hallmark's core State & County business.
Reinsurance Arrangements
Hallmark shares its claims risk with non-affiliated insurance
companies. Effective March 1, 1992, Hallmark and AHGA entered into a
reinsurance arrangement with an unaffiliated company, State & County.
Effective July 1, 1996, this arrangement was supplemented by separate
risk-sharing agreements between Hallmark and three unaffiliated
companies, all of which are rated A- or better by A.M. Best: Kemper
Reinsurance Company ("Kemper"), Dorinco Reinsurance Company ("Dorinco"),
<PAGE>
and Odyssey Reinsurance Corporation ("Odyssey"). Effective July 1, 1997,
the treaty was renewed with Kemper and Dorinco under substantially the
same terms and conditions. Between March 1, 1992 and July 1, 1996,
Hallmark's principal quota-share reinsurance was with Vesta Fire
Insurance Corporation ("Vesta"), an unaffiliated company with an A.M. Best
rating of A.
Under the Company's arrangement with State & County, AHGA is a
managing general agent appointed by State & County to issue State & County
policies, as well as appoint producing agents to sell these policies.
AHGA issues State & County policies in accordance with Hallmark's
underwriting standards and pursuant to rates approved by State & County.
Although State & County is required to file periodic rate adjustments
with the state, TDI approval is not required.
As compensation for acting as managing general agent, AHGA receives
commissions equal to a percentage of premiums written. It uses a portion
of these commissions to compensate its producing agents for selling State
& County policies. State & County receives ceding fees from Hallmark on
the State & County policies AHGA produces equal to a percentage of
premiums written assumed by Hallmark. The fee rate decreases as the
annual volume of premiums written exceeds specified levels. As permitted
by law, AHGA charges policy origination fees on behalf of Hallmark in
addition to premiums.
Pursuant to the reinsurance agreement, Hallmark reinsures 100% of
the State & County business produced by AHGA. Under related reinsurance
agreements effective July 1, 1997, Kemper and Dorinco, collectively,
assume 75% of the claims risk on State & County business produced by AHGA.
From July 1, 1996 through June 30, 1997, Kemper, Dorinco and Odyssey,
collectively, assumed 75% of the State & County business. In addition,
these reinsurers unconditionally guarantee Hallmark's and AHGA's
obligations to State & County. From August 1, 1993 through June 30, 1996,
Vesta assumed 75% of the State & County business.
Under the 1996 and 1997 reinsurance agreements between Hallmark and
the reinsurers, Hallmark retains 62.5% and cedes only 37.5% of the policy
origination fees (rather than ceding 75% of the policy origination 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 origination 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. The provisional commission paid under the new
treaties will be adjusted annually over a three year rating period on a
sliding scale based on annual loss ratios. Under the 1996 and 1997
reinsurance agreements, Hallmark can earn maximum commissions of 33.5%
and 34.5%, respectively, and is guaranteed minimum commissions of 26%
and 23%, respectively, regardless of loss experience.
Marketing
Customers for non-standard automobile insurance typically fall into
two groups. The first is drivers who have had standard auto insurance but
no longer qualify due to reasons such as driving record, claims history,
or residency status. The second group is drivers who either live in
<PAGE>
areas of Texas in which standard-rate insurers do not write insurance or
who are declined coverage because of the standard-rate insurers' limits
on the amount of coverage they write for new customers. Although these
drivers may qualify for the lower standard rates, they cannot obtain
standard coverage.
As managing general agent, AHGA manages the marketing of the
Company's non-standard automobile insurance program through a retail
network of affiliated and independent agencies. At December 31, 1997,
there were thirteen affiliated offices, operating under the American
Hallmark Agencies name in Amarillo, Austin, Corpus Christi, Houston,
Lubbock and the Dallas/Mid-Cities metroplex area. In addition, the
Company was represented by some 550 independent agents with offices
located throughout the State of Texas.
The Company is in the process of restructuring the American Hallmark
Agencies in order to concentrate management and advertising resources in
certain geographic areas. The restructure will, among other things,
include closure of seven existing offices and limited expansion in
selected areas.
Marketing efforts are twofold: one, direct advertising to the
insured for the benefit of the Hallmark Agencies; and two, marketing and
ongoing service to the Company's independent agents. The Hallmark
Agencies business is developed primarily through advertising in regional
and local publications, direct-mail, telephone solicitation and referrals
from standard agents and existing customers. Field marketing
representatives promote the Company's insurance program to prospective
independent agents and service existing agents. Both the Hallmark
Agencies and the independent agents represent other insurers and sell
other insurance products in addition to Hallmark policies. The Company's
appointed independent agents are located throughout Texas in major cities,
as well as suburban and some rural areas, with an emphasis in the central
and southern regions of Texas.
Competition
Information available from industry sources indicates that the
private passenger automobile insurance market in Texas is approximately
$8 billion in annual premium volume. Annual premium volume of the non-
standard automobile policies written in Texas exceeded $2.2 billion,
according to 1996 data. The Company's 1997 core State & County premium
volume was almost 2% of the total non-standard market. The Company's
gross premiums written were approximately $40 million in 1997, $43 million
in 1996 and $49 million in 1995. The Texas non-standard automobile
insurance market has become increasingly competitive in recent years as
evidenced by a significant number of new companies in the market place,
introduction of new programs by existing competitors and more competitive
pricing of existing programs. This has been caused predominately by
excess capital and surplus in major insurance and reinsurance companies.
However, management believes that the Company has effective tools for
increasing its market share. The Company relies on its ability to
promptly set rates that are directed toward the lower-risk segment of the
non-standard auto market and to compete on the basis of underwriting
criteria and superior service to its agents and insureds.
<PAGE>
Insurance Regulation
The operations of Hallmark, AHGA and HFC are regulated by TDI. HFC
is also subject to further regulation under the Texas Credit Code.
Hallmark is required to file quarterly and annual statements of its
financial condition with TDI, prepared in accordance with SAP. Hallmark's
financial condition, including the adequacy of its surplus, premium-to-
surplus ratio, loss reserves, deposits and investments, is subject to
review by TDI. Since Hallmark does not write its insurance directly, but
rather writes through a county mutual, its premium rates and underwriting
guidelines are not subject to the same degree of regulation imposed on
standard insurance companies. However, State & County must file rate
changes with TDI. AHGA, HUI, and the producing agents who staff the
Hallmark Agencies offices are subject to TDI's licensing requirements.
HFC is also subject to licensing, financial reporting and certain
financial requirements. In addition, interest rates, note forms and
disclosures, among other things used by HFC, are regulated by the Office
of Consumer Credit Commissioner.
TDI has broad authority to enforce its laws and regulations through
examinations, administrative orders, civil and criminal enforcement
proceedings, and suspension or revocation of an insurer's Certificate of
Authority or an agent's license. In extreme cases, including actual or
pending insolvency, TDI may take over, or appoint a receiver to take
over, the management or operations of an insurer or an agent's business
or assets. In addition, all insurance companies which write insurance
in the state of Texas are subject to assessments for a state administered
fund which covers the claims and expenses of insolvent or impaired
insurers. The size of the assessment is determined each year by the
total claims on the fund that year. Each insurer is assessed a pro-rata
share based on its direct premiums written. Payments to the fund may be
recovered by the insurer through deductions from its premium taxes at a
rate of 10% per year over ten years. There were no assessments during
1997 and 1996, and thus Hallmark made no payments to the fund during those
years.
HFS is also regulated as an insurance holding company under the
Texas Insurance Code. Financial transactions between HFS or any of its
affiliates and Hallmark are subject to regulation by TDI. Applicable
regulations require TDI's approval of management and expense sharing
contracts, intercompany loans and asset transactions, investments in the
Company's securities by Hallmark and similar transactions. Further,
dividends and distributions by Hallmark to HFS are restricted.
On May 13, 1996, TDI issued its formal report on the results of
TDI's regular, triennial examination of Hallmark's books and records as
of September 30, 1995. The report indicated that no significant items or
discrepancies were noted during the examination.
Effective December 31, 1994, the National Association of Insurance
Commissioners ("NAIC") requested property/casualty insurers to file a
risk-based capital ("RBC") calculation according to a specified formula.
The purpose of the NAIC-designed formula is twofold: (1) to assess the
adequacy of a company's statutory capital and surplus based upon a
variety of factors such as potential risks related to the company's
investment portfolio, ceded reinsurance and product mix; and (2) to assist
state regulators under the RBC for Insurers Model Act by providing
thresholds at which a state commissioner is authorized and expected to
<PAGE>
take regulatory action. Texas has not adopted the RBC for Insurers Model
Act formulated by the NAIC, and currently there are no TDI filing or
compliance requirements related to RBC.
Analysis of Hallmark's Losses and LAE
The Company's consolidated financial statements include an estimated
reserve for unpaid losses and LAE of the Company's non-standard automobile
insurance subsidiary, Hallmark. Hallmark estimates its reserve for
unpaid losses and LAE by using case-basis evaluations and statistical
projections, which include inferences from both losses paid and losses
incurred. Hallmark also uses recent historical cost data, periodic
reviews of underwriting standards and claims management to modify the
statistical projections. Hallmark gives consideration to the impact of
inflation in determining its loss reserves, but does not discount reserve
balances.
The amount of Hallmark's reserves represents management's estimates
of the ultimate net cost of all unpaid losses and LAE incurred through
December of each year. These estimates are subject to the effect of
trends in claim severity and frequency. Management continually reviews
the estimates and adjusts them as claims experience develops and new
information becomes known. Such adjustments are included in current
operations, including increases and decreases, net of reinsurance, in the
estimate of ultimate liabilities for insured events of prior years.
(See Note 1 to the Consolidated Financial Statements.)
The Company continually improves its loss estimation process by
refining its ability to analyze loss development patterns, claim payments,
and other information within a legal and regulatory environment which
affects development of ultimate liabilities. Beginning mid-1995, the
Company implemented significant changes and enhancements in its claims
operations. These changes have resulted in, among other things, (1)
faster payment of claims, (2) increased conservatism in case reserving
procedures to more promptly reflect estimated, ultimate claim-settlements
and LAE costs, and (3) more aggressive claims handling resulting in
significantly lowering average liability claim payments. During both 1996
and 1997, the number of liability claims closed consistently exceeded the
number received. The 1997 accident-year continues to be impacted by
these changes as well as other differences in the claims population.
There was a 50% reduction in policy limit claims included in 1997 reserves
compared to 1996, a 50% reduction of claims in litigation at the end of
1997 compared to 1996, and a 20% reduction in the number of liability
claims outstanding at December 31, 1997 compared to December 31, 1996.
Legal trends also affect ultimate claims settlement amounts. In recent
years, there has been an increase in court-ordered mediations. Beginning
mid-1996, the Company began to maximize its use of voluntary mediations
in addition to court-ordered mediations affecting not only the timeliness
with which claims in litigation settle, but also favorably impacting the
ultimate settlement amounts.
Changes in loss development patterns and claim payments can
significantly affect the ability of insurers to estimate reserves for
unpaid losses and related expenses. Re-estimation of the 1996 accident
year reserves at December 31, 1997, based on faster than expected
development of 1996 losses, resulted in a $1,131,000 increase to reserves.
Future changes in estimates of claim costs may adversely affect future
<PAGE>
period operating results; however, such effects cannot be reasonably
estimated currently.
Reconciliation of Reserve for Unpaid Losses and LAE. The following table
provides a 1997, 1996 and 1995 reconciliation of the beginning and ending
reserve balances, on a gross-of-reinsurance basis, to the gross amounts
reported in the Company's balance sheet.
<TABLE>
1997 1996
(Thousands of dollars)
<S> <C> <C>
Reserve for unpaid losses and $ 5,096 $ 5,924
LAE, net of reinsurance
recoverables, at beginning
of year
Provision for losses and LAE 7,568 8,575
for claims occurring in the
current period
Increase (decrease) in reserve 738 (535)
for unpaid losses and LAE for
claims occurring in prior periods
Payments for losses and LAE,
net of reinsurance:
Current period (4,408) (5,085)
Prior periods (4,326) (3,783)
(8,734) (8,868)
Reserve for unpaid losses and $ 4,668 $ 5,096
LAE, net of reinsurance
recoverables, at end of year
Reinsurance recoverables on 13,064 15,735
unpaid losses and LAE,
at end of year
Reserve for unpaid losses and $ 17,732 $ 20,831
LAE, gross of reinsurance
recoverables on unpaid losses,
at end of year
</TABLE>
SAP/GAAP Reserve Reconciliation. The differences between the reserves for
unpaid losses and LAE reported in the Company's consolidated financial
statements prepared in accordance with GAAP and those reported in the
annual statement filed with TDI in accordance with SAP for years 1997 and
1996 are summarized below:
<PAGE>
<TABLE>
1997 1996
(Thousands of Dollars)
<S> <C> <C>
Reserve for unpaid losses and LAE
on a SAP basis (net of reinsurance
recoverables on unpaid losses) $4,861 $5,617
Deduct estimated salvage and subro-
gation recoveries reported on a
cash basis for SAP purposes and on
an accrual basis for GAAP purposes (193) (521)
Reserve for unpaid losses and LAE
on GAAP basis (net of reinsurance
recoverables on unpaid losses) $4,668 $5,096
</TABLE>
Analysis of Loss and LAE Reserve Development
The following table shows the development of Hallmark's loss
reserves, net of reinsurance, for 1987 through 1997. Section A of the
table shows the estimated liability for unpaid losses and LAE, net of
reinsurance, recorded at the balance sheet date for each of the indicated
years. This liability represents the estimated amount of losses and LAE
for claims arising in prior years that are unpaid at the balance sheet
date, including losses that have been incurred but not yet reported to
Hallmark. Section B of the table shows the re-estimated amount of the
previously recorded liability, based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more
information becomes known about the frequency and severity of claims.
Cumulative Redundancy/Deficiency (Section C of the table) represents
the aggregate change in the estimates over all prior years. Thus, changes
in ultimate development estimates are included in operations over a
number of years, minimizing the significance of such changes in any one
year. The effects on income in the past three years of changes in
estimates of the liabilities for losses and LAE are shown in the table
under reconciliation of reserves for unpaid losses and LAE.
<PAGE>
<TABLE>
ANALYSIS OF LOSS AND LAE DEVELOPMENT
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97
A. Reserve for
Unpaid Losses
& LAE, Net of
Reinsurance
Recoverables 1380 2365 3039 2968 3353 4374 4321 4297 5924 5096 4668
B. Net Reserve
Re-estimated
as of:
One year
later 2257 4264 3186 3126 2815 3423 4626 5175 5910 6227
Two years
later 4231 4486 3353 3001 2885 3285 4499 5076 6086
Three years
later 4321 4556 3374 3090 2813 3147 4288 5029
Four years
later 4388 4606 3408 3052 2700 3095 4251
Five years
later 4374 4595 3384 2988 2699 3067
Six years
later 4372 4593 3363 2994 2685
Seven years
later 4373 4585 3359 2987
Eight years
later 4370 4582 3359
Nine years
later 4367 4582
Ten years
later 4367
C. Net Cumulative
Redundancy
(Deficiency) (2987)(2217)(320)( 19)668 1307 70 (732)(163)(1131)
D. Cumulative
Amount
of Claims
Paid, Net
of Reserve
Recoveries,
Through:
One year
later 1522 3490 1991 2100 1958 2109 3028 3313 3783 4326
Two years
later 4029 4155 2994 2760 2472 2768 3883 4442 5447
Three years
later 4211 4457 3285 2956 2654 2956 4147 4861
Four years
later 4334 4569 3363 2990 2668 3027 4207
Five years
later 4369 4587 3369 2983 2669 3054
<PAGE>
Six years
later 4372 4590 3361 2981 2685
Seven years
later 4370 4583 3359 2987
Eight years
later 4368 4582 3359
Nine years
later 4367 4582
Ten years
later 4367
Net Reserve - December 31 $ 5,096 $ 4,668
Reinsurance Recoverables 15,735 13,064
Gross Reserve - December 31 $20,831 $17,732
Net Re-estimated Reserve 6,227
Re-estimated Reinsurance Recoverable 17,055
Gross Re-estimated Reserve $23,282
Gross Cumulative Deficiency $(2,451)
</TABLE>
Investment Policy
Hallmark's investment objective is to maximize current yield while
maintaining safety of capital together with sufficient liquidity for
ongoing insurance operations. Accordingly, the investment portfolio is
composed of fixed income securities: U.S. Government and U.S. Government
agency debentures and agency mortgage-backed securities, municipal
securities and U.S. Government bond mutual funds. The average maturity
of the portfolio (after taking into account current assumptions regarding
anticipated principal prepayments on mortgage-backed securities and the
call dates of certain securities held), including short-term investments,
is approximately three years, which approximates Hallmark's claims payment
patterns. It is Hallmark's intent to hold investments until maturity.
The securities liquidated during 1997 were as a result of maturities,
bond calls and prepayments of mortgage-backed securities totaling
$2,235,862. In addition, as part of the Company's overall investment
strategy, the Company implemented an integrated cash management system
in late-1995 to maximize investment earnings on all available cash.
During 1997, the Company's investment income totaled $788,155 compared
to $863,863 for 1996.
Employees
On December 31, 1997, the Company employed 156 people on a full-time
basis. None of the Company's employees are represented by labor unions.
The Company considers its employee relations to be good.
Item 2. Description of Property.
The Company's corporate headquarters are located at 14651 Dallas
Parkway, Suite 900, Dallas, Texas. This suite also houses Hallmark's
operations, AHGA's administrative staff, HFC and HCS's operations, and
the Company's computer center. The suite is located in a high-rise
office building and contains approximately 23,641 square feet of space.
Effective January 1, 1995, the Company renegotiated its lease for a
period of 71 months to expire November 30, 2000. The rent is currently
$25,190 per month, and will increase 3% to 4% annually to a maximum of
$26,540 per month. The Hallmark Agencies' offices are located in seven
<PAGE>
Texas cities, including Dallas, Austin and Houston. These offices are
located in office buildings, shopping centers, store fronts and similar
commercial structures in low and middle income neighborhoods. They
contain an average of 900 square feet. All are leased, some on a
month-to-month basis and others for remaining terms ranging up to 36
months. The type of space the Hallmark Agencies occupy is generally
available at moderate rentals. The Company does not consider the
location of any particular agency office to be material to its insurance
marketing operations.
Item 3. Legal Proceedings.
Except for routine litigation incidental to the business of the
Company and as described in Note 11 of the Notes to Consolidated Financial
Statements, 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 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of 1997, the Company did not submit any
matter to a vote of its security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock has traded on the American Stock
Exchange's Emerging Company Marketplace under the symbol "HAF.EC" since
January 6, 1994. The following table shows the Common Stock's high and
low sales prices on the AMEX Emerging Company Marketplace for each quarter
since January 1, 1996.
<TABLE>
Period High Sale Low Sale
<S> <C> <C>
1996
First Quarter $ 1.38 $ 1.00
Second Quarter 1.25 .94
Third Quarter 1.63 1.06
Fourth Quarter 1.38 .88
1997
First Quarter $ .94 $ .63
Second Quarter .88 .56
Third Quarter .94 .56
Fourth Quarter 1.50 .75
1998
First Quarter (through March 11) 1.38 1.06
</TABLE>
On March 11, 1998 there were 178 record holders of the Company's
Common Stock.
<PAGE>
The Company has never paid dividends on its Common Stock. The Board
of Directors intends to continue this policy for the foreseeable future in
order to retain earnings for development of the Company's business.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion of the Company's financial condition and
the results of its operations should be read in conjunction with the
consolidated financial statements and related notes included in this
Report.
Financial Condition and Liquidity
The Company's sources of funds are principally derived from
insurance related operations. Major sources of funds from operations
include premiums collected (net of policy cancellations and premiums
ceded), ceding commissions, processing fees, premium finance service
charges and service fees. Other sources of funds are from financing
and investment activities.
Net cash flow provided by the Company s consolidated operations for
the year ended December 31, 1997 was $3,043,065, and net cash flow
utilized from the Company's consolidated operations for the year ended
December 31, 1996 was $624,691. The increase in 1997 operational cash
flow is primarily due to a decrease in reinsurance recoverable. This
decrease is a reflection of the impact of both decreased premium volume
and lower losses and LAE (in 1997 as compared to 1996), a pro-rata
portion of which is recoverable from reinsurers.
Net cash utilized by investing activities for 1997 was $9,825,642
as compared to net cash provided by investing activities for 1996 of
$1,164,633. The significant increase in 1997 investing cash usage is due
principally to a change in premium finance activities. HFC began issuing
its own premium finance notes in late-June 1997 and discontinued its
previous off-balance sheet premium finance program with an unaffiliated
premium finance company, Peregrine Premium Finance L.C. ( Peregrine ).
As a result, HFC issued $13,127,658 of premium finance notes during 1997
of which $5,248,900 has been repaid as of December 31, 1997. A
significant portion of these premium finance notes were funded with loan
proceeds from financing activities. Additionally, during October 1997, the
Company deposited $1,248,758 (as reflected in Restricted cash) into the
registry of the court in order to stay execution pending appeal of an
unfavorable judgment in certain litigation. (See Note 11 to the
Consolidated Financial Statements.)
On a consolidated basis, the Company's liquidity remained steady as of
December 31, 1997 as compared to December 31, 1996. The Company's total
cash, cash equivalents and investments (and excluding Restricted cash of
$1,340,937) at December 31, 1997 and 1996 were $13,903,465 and
$13,441,830, respectively.
A substantial portion of the Company's 1997 liquid assets are held by
Hallmark and are not available for general corporate purposes. Of the
Company's consolidated liquid assets of $13,903,465 at December 31, 1997,
$1,523,452 (as compared to $991,095 in 1996) represents non-restricted
cash. Since state insurance regulations restrict financial transactions
between an insurance company and its affiliates, HFS is limited in its
ability to use Hallmark funds for its own working capital purposes.
<PAGE>
Furthermore, dividends and loans by Hallmark to HFS are also restricted
and, in certain instances, subject to TDI approval. Based on surplus at
December 31, 1997, Hallmark could pay a dividend up to $681,000 to HFS
during 1998 without TDI approval. In addition, TDI has sanctioned the
payment of management fees, commissions and claims handling fees by
Hallmark to HFS and other affiliates. Accordingly, management fees of
$820,000 were paid or accrued in 1997, and management fees of $1,050,000
were paid or accrued in 1996. Management anticipates that Hallmark will
continue to pay management fees periodically during 1998, and this should
continue to be a moderate source of unrestricted liquidity. Management
is committed to maintaining the surplus strength of Hallmark and has no
current plans to pay any dividends from Hallmark to HFS.
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 and,
since mid-1997, six-month policies, but commissions to substantially all
independent agents are paid monthly on an earned basis. However,
consistent with customary industry practice, Hallmark pays total
commissions up-front to AHGA based on the entire annual/six-months premiums
written. Independent agent production of annual policies was approximately
$16.5 million in 1997 compared to $15 million in 1996. During 1997, AHGA
received $2,973,000 in commissions related to this annual policy program
from Hallmark, of which $1,076,000 will be paid to independent agents
during 1998 as earned.
Ceding commission income represents a significant source of funds to
the Company. Ceding commission income for 1997 decreased $1,778,823
(representing a 20% decrease) as compared to 1996. This decrease is
primarily due to the combined effect of a change in reinsurance treaty
terms and changes in the estimate of IBNR. 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
$2,256,669 at December 31, 1997, from $2,368,264 at December 31, 1996.
The reduction in deferred ceding commission income is principally due to
the combined effect of a decrease in the Company's core State & County
premium volume, the 1996 change in reinsurance treaty terms and a slightly
higher 1997 loss ratio which affects the rate at which the ceding
commission is earned. Deferred policy acquisition costs as of
December 31, 1997 increased in relation to the prior year. This increase
is attributable to higher premium taxes and front fees related to the
reinsurance treaties effective July 1, 1996, as Hallmark pays 100% of
these related expenses as compared to 25% during the first six months of
1996.
Prepaid reinsurance premiums and reinsurance recoverable generally
decreased as expected in relation to decreased premium writings. (See
Note 4 to the Consolidated Financial Statements.)
At December 31, 1997, the Company reported $8,157,297 in notes
payable as compared to $590,853 at December 31, 1996. In March 1997, the
Company entered into a loan agreement with Dorinco (the "Dorinco Loan
Agreement"), an unaffiliated company and principal reinsurer of Hallmark,
whereby HFS borrowed $7,000,000 to contribute to HFC. Also in March 1997,
HFC entered into a loan agreement with a bank (the "Bank Credit Line")
pursuant to which the bank committed to provide a revolving credit
facility of $8,000,000 for funding of up to 60% of premium finance notes
<PAGE>
for State & County policies. Proceeds from the Dorinco Loan Agreement
were loaned to Peregrine for its use in repaying $5,915,109 of
off-balance sheet financing of premium notes and to fund additional
premium notes under the Peregrine financing and servicing arrangement.
At December 31, 1997, the balance of the note receivable from Peregrine
had been reduced to $1,149,280. Additionally, as of December 31,
1997, the Company had drawn $1,000,000 against the Bank Credit Line
for use in financing HFC's premium finance activities. The Company
anticipates renewing the Bank Credit Line upon its expiration in
September 1998. (See Note 5 and Note 11 to the Consolidated Financial
Statements.)
The notes payable balance at December 31, 1996 included a note
payable, in dispute, in the amount of $380,187 which arose prior to HFS's
acquisition of the Insurance Group. During 1997 the Company wrote off
the note payable balance and related accrued interest of $442,532 based
on legal advice that the note was no longer enforceable. This write off
is disclosed as an extraordinary item in the Company's Consolidated
Financial Statements. (See Note 5 to the Consolidated Financial
Statements.)
Unpaid losses and loss adjustment expenses ("LAE) decreased
approximately 15% due to the combined effect of (1) faster payment of
claims which has resulted in an approximate 14% decrease in the number of
liability claims outstanding at December 31, 1997 compared to the previous
year, (2) a decrease in the current year average-payment-per-claim, which
serves as a basis for a lower average-reserve-per-claim, and (3) a
continuation of a trend begun in 1996 of settling more claims than
received, thus reducing not only the number of claims included in unpaid
losses and LAE, but the severity of the average outstanding claim amount.
This decrease is partially offset by changes in the estimate of IBNR
reserved at December 31, 1997 as compared to December 31, 1996.
Accrued litigation costs reported in 1997 reflects management's
current estimate of loss contingencies related to a lawsuit currently
being appealed. (See Note 11 to the Consolidated Financial Statements.)
At December 31, 1997, Hallmark reported statutory capital and surplus
of $5,287,785, which reflects an increase of $109,791 over the $5,177,994
reported at December 31, 1996. Although Hallmark reported a statutory net
loss of $76,191 for 1997, surplus did not decrease accordingly. This was
due to a change in the excess statutory reserves over statement reserves
for 1997 as compared to 1996. Under statutory accounting guidelines,
Hallmark was subject to a statutory penalty per the 1996 calculation and,
absent a permitted practice exception, would have been subject to a
penalty under the 1997 calculation. This statutory penalty is imposed to
recognize statutory reserves in excess of statement reserves utilizing a
defined calculation to detect significant reductions in recent partially
developed incurred losses as compared to historical more fully developed
incurred losses. Hallmark obtained from TDI a permitted practice
exception allowing the Company to limit the policy fees included in the
calculation to the extent that related underwriting risk is retained.
The computation of the excess statutory reserves over statement reserves
is based on the liability loss ratio for the most recent three years.
During 1997, TDI allowed Hallmark to only include 25% of fully earned
policy fees into the computation which mirrors Hallmark s retention of
related premiums and losses. This treatment was approved by TDI as a
permitted practice. Due to this permitted practice, the excess statutory
<PAGE>
reserves over statement reserves decreased by $174,640 during 1997.
At December 31, 1997, Hallmark showed a premium-to-surplus ratio of
2.35 to 1, as compared to 2.21 to 1 for the year ended December 31, 1996.
Management does not presently expect Hallmark to require additional
capital during 1998.
Certain provisions of the 1996 and 1997 reinsurance treaties could
impact the Company's future liquidity. Under the agreements between
Hallmark and its reinsurers, Hallmark retains 62.5% and cedes only 37.5%
of the policy fees, pays premium taxes and front fees on 100% of the
business produced, and receives a 30% provisional commission on the
portion of the business ceded. Policy fees are up-front, fully earned fees
that the Company is permitted by law to charge in addition to premiums to
cover and defray certain costs associated with producing policies. Terms
of the 1996 agreements include that the provisional commission paid under
the new treaties will be adjusted annually over a three-year rating period
on a sliding scale based on annual loss ratios. Under the 1996 and 1997
treaties, Hallmark can earn maximum commissions of 33.5% and 34.5%,
respectively, based on loss experience, and is guaranteed minimum
commissions of 26% and 23%, respectively, regardless of loss experience.
Under the July 1, 1997 renewal, the first annual settlement has been
extended to two years (with the exception of the percentage reinsured by
Odyssey). (See Note 4 to the Consolidated Financial Statements.)
The Company retains 100% of all policy fees related to a new
six-month program which began in late-July 1997. While this increased
retention of policy fees did not have a significant impact during 1997, it
is expected to positively impact 1998 and subsequent periods as the
volume related to this six-month program increases.
During 1998, management expects that Company 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,
marketing and product enhancements. During late 1995 and early 1996, the
Company increased its claims staff and hired additional experienced claims
adjusters and supervisory personnel that, in turn, have contributed to
lower loss and LAE payments. However, changing market conditions in the
non-standard industry adversely impacted premium volumes during 1997.
Although management has taken steps to stimulate premium volumes, any
further decrease in premium volume could negatively impact liquidity.
During 1997, the Company offered additional incentives to agents,
including expansion of its contingent commission program to additional
independent agents, rolled out a new six-month program in late-July 1997,
continued to appoint and retain quality independent agents and implemented
a reduction in physical damage rates effective in early-September 1997.
Additionally, reduced borrowing costs for the Company's premium finance
program from both the Dorinco financing and the Bank Credit Line, have
begun to positively impact liquidity. The Company has $7,000,000
available under the Bank Credit Line to fund premium finance notes.
Management also anticipates that the discontinuance of HUI's E&S
operation and restructure of the Company s retail agencies will positively
impact the Company directly, by reducing expenses, and indirectly, by
allowing management to focus greater attention on other operational areas.
The Company has accrued $315,000 of restructuring costs related to these
changes to cover severance, lease obligations, prepaid advertising,
abandonment of office equipment and return commissions. (See Item 1.
Description of Business-Marketing.)
<PAGE>
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
unaffiliated 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 assumed a
10% pro-rata share of the business produced under this unaffiliated MGA's
program. Effective July 1, 1997, Hallmark increased its pro-rata share of
business assumed under this contract to 20%. Also, 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. Fees under this contract have positively
impacted liquidity during 1997 and are expected to continue to do so into
1998. The Company has also entered into a three-year agreement with
another unaffiliated managing general agency to perform all underwriting,
claims handling and program administration functions to begin April 1998.
Management intends to continue to investigate opportunities for
future growth and expansion. However, the Company currently has no growth
plans which would require significant additional external funding during
1998.
Results of Operations
Gross premiums written (prior to reinsurance) of $40,457,427 for the
year ended December 31, 1997 were $2,045,129 lower than gross premiums
written of $42,502,556 in 1996, representing a decrease of approximately
5%. The decrease in gross premiums written during 1997 was primarily due
to changing market conditions in the Texas non-standard industry which
adversely impacted premium volumes. Net premiums written (after
reinsurance) increased approximately 8% during 1997 as compared to 1996
due to higher retention of fully earned policy fees to 62.5% since July 1,
1996, as compared to 25% during the first six months of 1996. Assumption
of business written by an unaffiliated general agency during 1997
impacted net premiums written (after reinsurance) more significantly than
gross premiums (prior to reinsurance) since only the Company's core State
& County business is ceded to reinsurers.
Premiums earned (prior to reinsurance) of $40,164,195 decreased
approximately 14% during 1997 as compared to 1996, and net premiums earned
(after reinsurance) decreased disproportionately by only 4%. During
1996, premiums earned (prior to reinsurance) were high due to the 1996
earning of premiums written during high-volume months of late 1995 as
well as an increase in monthly policy production to 52% during 1996.
Hallmark did not experience any unusually high-volume months during 1996
and additionally, annual/six-month policy production has been on the rise
during 1997 (53% for 1997 as compared to 48% in 1996). The
disproportionate decrease between premiums earned (prior to and after
reinsurance) resulted from the change in policy fee retention and the
assumption of business from an unaffiliated general agency as discussed
in the preceding paragraph.
Incurred loss ratios (computed on premiums earned both prior to and
after reinsurance), on a GAAP basis, for the year ended December 31, 1997,
were approximately 70% and 63%, respectively, as compared to 63% prior to
and 58% after reinsurance for 1996. The increase in the loss ratios is
<PAGE>
principally due to changes in the estimate of IBNR reserves which, in
turn, decreased ceding commission income recognized. The aggregate effect
of these changes resulted in a reduction of approximately $1,212,000
in operating income.
Investment income of $788,155 for the twelve months ended December
31, 1997 decreased 9% compared to the prior year. This decrease is
primarily due to 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 in 1997 as compared to 1996.
Finance charges represent interest earned on premium notes issued by
HFC. During 1996, HFC only directly financed premium notes for HUI.
Beginning late June 1997, HFC began financing premiums for Hallmark which
has resulted in increased finance interest income during 1997.
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 1997.
Processing fees represent income earned by HFC pursuant to its
financing and servicing arrangement with Peregrine. This arrangement was
terminated in June 1997 as HFC began issuing its own premium finance notes.
As expected, these fees have significantly decreased during 1997 as the
Peregrine premium finance notes continue to run-off. The decrease in
processing fees was also affected by lower annual premium volumes.
Service and consulting fees increased by $492,667 during 1997 as
compared to 1996. This increase is primarily due to an increase in fees
related to the Company's contract to act as program administrator for the
unaffiliated MGA.
Other income increased during 1997 as compared to 1996 principally
as a result of additional outside commissions earned by the Hallmark
Agencies and HUI.
Other acquisition and underwriting expenses of $6,403,312 increased
approximately 23% as compared to the prior year. The increase in other
acquisition and underwriting expenses is primarily due to an increase in
the Company s share of premium taxes and front fees, and a decrease in
ceding commission income due to the combined effect of lower premium
volumes during 1997 and changes 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.
Operating expenses decreased 12% in relation to the prior year
despite an increase in related service revenues. Management has focused
on containing expenses in all areas of the Company's operations, with the
most significant savings attributable to lower payroll and related
expenses due to not filling positions vacated by attrition. Partially
offsetting this decrease is an accrual of $315,000 for restructuring costs
related to the Company s retail agencies and cessation of the Company's
E&S operations. (See Note 11 to the Consolidated Financial Statements.)
<PAGE>
Net acquisition costs 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 net acquisition costs for 1997 is
primarily due to deferral of increased premium taxes and front fees and
reduced ceding commission income (due to different treaty terms) during
1997 as compared to the same period in 1996.
Year 2000 Compliance
The Company has made significant strides in its efforts to be Year
2000 compliant. The premiums and claims systems are internally processed
and maintained. Modifications to existing applications have been and
continue to be made, and testing of these modifications will commence
during June 1998. It is anticipated that these systems will be fully
Year 2000 compliant by the end of August 1998. The Company also uses
purchased software programs for a variety of functions including premium
finance and investments. The Company has received confirmation that these
systems are year 2000 compliant. The financial impact to the Company has
not been and is not anticipated to be material to its financial position
or results of operations in any given year.
New Accounting Pronouncements
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 No. 130 is effective
for financial statements periods beginning after December 15, 1997.
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 beginning after
December 15, 1997.
<PAGE>
Item 7. Financial Statements.
The following consolidated financial statements of the Company and
its subsidiaries are filed as part of this Report.
Description Page Number
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by Part III, Item 9 is incorporated by
reference from the Registrant's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 10. Executive Compensation.
The information required by Part III, Item 10 is incorporated by
reference from the Registrant's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by Part III, Item 11 is incorporated by
reference from the Registrant's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 12. Certain Relationships and Related Transactions.
The information required by Part III, Item 12 is incorporated by
reference from the Registrant's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits listed in the Exhibit Index
appearing at page 20 of this Report are filed with or incorporated by
reference in this Report.
(b) Reports on Form 8-K. The Company did not file any
Form 8-K Current Report during or with respect to the fiscal year ended
December 31, 1997.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date: March 25, 1998 /s/ Ramon D. Phillips
Ramon D. Phillips, President
(Chief Executive Officer)
Date: March 25, 1998 /s/ Johnny J. DePuma
Johnny J. DePuma, Vice President
(Chief Financial Officer/Principal
Accounting Officer)
<PAGE>
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: March 25, 1998 /s/ Ramon D. Phillips
Ramon D. Phillips, Director
Date: March 25, 1998 /s/ Linda H. Sleeper
Linda H. Sleeper, Director
Date: March 25, 1998 /s/ Raymond A. Kilgore
Raymond A. Kilgore, Director
Date: March 25, 1998 /s/ Jack R. Daugherty
Jack R. Daugherty, Director
Date: March 25, 1998 /s/ Kenneth H. Jones, Jr.
Kenneth H. Jones, Jr., Director
Date: March 25, 1998 /s/ Samuel W. Rizzo
Samuel W. Rizzo, Director
Date: March 25, 1998 /s/ A. R. Dike
A. R. Dike, Director
Date: March 25, 1998 /s/ James H. Graves
James H. Graves, Director
Date: March 25, 1998 /s/ C. Jeffrey Rogers
C. Jeffrey Rogers, Director
Date: March 25, 1998 /s/ George R. Manser
George R. Manser, Director
<PAGE>
EXHIBIT INDEX
The following exhibits are either filed with this report or
incorporated by reference.
Exhibit Sequential
Number Description Page #
3(a) Articles of Incorporation of the registrant, as amended
(incorporated by reference to Exhibit 3(a) to the
registrant s Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1993).
3(b) By-Laws of the registrant, as amended (incorporated by
reference to Exhibit 3(b) to the registrant's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1993).
4 Specimen certificate for Common Stock, 3 cents par value,
of the registrant (incorporated by reference to Exhibit 4
to the registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1991).
10(a) Office Lease for 14651 Dallas Parkway, Suite 900, dated
January 1, 1995, between American Hallmark Insurance
Company of Texas and Fults Management Company, as agent
for The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10(a) to the
registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994).
10(b) 100% Quota Share Reinsurance Agreement, as Restated,
between State & County Mutual Fire Insurance Company
and American Hallmark Insurance Company of Texas,
effective March 1, 1992 (incorporated by reference
to Exhibit 10(a) to Amendment No. 1 on Form 8 to the
registrant's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1992).
10(c) General Agency Agreement, effective March 1, 1992,
between State & County Mutual Fire Insurance Company
and Brokers General, Inc. (incorporated by reference
to Exhibit 10(b) to Amendment No. 1 on Form 8 to the
registrant's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1992).
10(d) Quota Share Retrocession Agreement, effective March 1,
1992, between American Hallmark Insurance Company of
Texas and Liberty National Fire Insurance Company
(incorporated by reference to Exhibit 10(c) to
Amendment No. 1 on Form 8 to the registrant's
Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1992).
<PAGE>
10(e) 1991 Key Employee Stock Option Plan of the registrant
(incorporated by reference to Exhibit C to the
definitive Proxy Statement relating to the registrant's
Annual Meeting of Shareholders held May 20, 1991).
10(f) 1994 Key Employee Long Term Incentive Plan (incorporated
by reference to Exhibit 10(f) to the registrant's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994).
10(g) 1994 Non-employee Director Stock Option Plan (incorporated
by reference to Exhibit 10(g) to the registrant's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1994).
10(h) Reverse Split-Dollar Agreement, dated April 12, 1991,
between the registrant and Ramon D. Phillips
(incorporated by reference to Exhibit 10(I) to the
registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1991).
10(i) Form of Common Stock Purchase Warrant representing
warrants issued to officers and directors of the
registrant on October 2, 1992 (incorporated by
reference to Exhibit 10(l) to the registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1992).
10(j) Form of Amendment to Common Stock Purchase Warrant
dated March 29, 1994, representing warrants issued
to officers and directors of the registrant on
October 2, 1992 (incorporated by reference to
Exhibit 10(l) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended
December 31, 1994).
10(k) Addendum No. 2 to the Quota Share Retrocession
Agreement, effective March 1, 1993, between
American Hallmark Insurance Company of Texas
and Liberty National Fire Insurance Company
(incorporated by reference to Exhibit 10(o)
to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1993).
10(l) Addendum No. 3 to the Quota Share Retrocession
Agreement, effective August 1, 1993, between
American Hallmark Insurance Company of Texas
and Liberty National Fire Insurance Company
(incorporated by reference to Exhibit 10(p)
to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1993).
10(m) Administrative Services and Consulting Agreement,
dated December 23, 1993, between American Southwest
Insurance Managers, Inc., Liberty National Fire
Insurance Company, Hallmark Financial Services, Inc.,
Brokers General, Inc. and Citizens Adjustment and
Reporting Service, Inc. (incorporated by reference
<PAGE>
to Exhibit 10(q) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended
December 31, 1993).
10(n) Form of Executive Compensation Agreement representing
respective agreements dated August 23, 1994, between
registrant and Ramon D. Phillips, Raymond A. Kilgore,
Linda H. Sleeper, and Johnny J. DePuma (incorporated
by reference to Exhibit 10(p) to the registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994).
10(o) Addendum No. 1 to the 100% Quota Share Reinsurance
Agreement, as restated between State & County Mutual
Fire Insurance Company and American Hallmark
Insurance Company of Texas effective November 22,
1994 (incorporated by reference to Exhibit 10(q)
to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994).
10(p) Processing Agreement, effective January 1, 1995,
between Peregrine Premium Finance L.C. and Hallmark
Finance Corporation (incorporated by reference to
Exhibit 10(r) to the registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994).
10(q) Amendment to Processing Agreement, effective January 1,
1995, between Peregrine Premium Finance L.C. and
Hallmark Finance Corporation (incorporated by
reference to Exhibit 10(s) to the registrant's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1994).
10(r) Guaranty of Processing Agreement, dated December 30,
1994, between Hallmark Financial Services, Inc.,
Peregrine Premium Finance L.C. and Bank One, Texas,
N.A. (incorporated by reference to Exhibit 10(t)
to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994).
10(s) Consent and Agreement, dated December 30, 1994,
between Hallmark Finance Corporation and Bank One,
Texas, N.A. (incorporated by reference to Exhibit
10(u) to the registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994).
10(t) Second, Third, Fourth and Fifth Amendments to
Office Lease for 14651 Dallas Parkway, Suite 900,
dated January 1, 1995, between American Hallmark
Insurance Company of Texas and Fults Management
Company, as agent for The Prudential Insurance
Company of America (incorporated by reference to
Exhibit 10(t) to the registrant s Annual Report
on Form 10-KSB for the fiscal year ended
December 31, 1995).
<PAGE>
10(u) Form of Shareholders Agreement dated January 1,
1996, between American Hallmark General Agency,
Inc., Robert D. Campbell, Margaret Jones and
American Hallmark Agencies, Inc. (incorporated
by reference to Exhibit 10(u) to the registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995).
10(v) Form of Facilities & Services Agreement dated
January 1, 1996, between American Hallmark General
Agency, Inc., Robert D. Campbell, Margaret Jones
and American Hallmark Agencies, Inc. (incorporated
by reference to Exhibit 10(v) to the registrant s
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995).
10(w) Form of Indemnification Agreement dated January 1,
1996, between American Hallmark General Agency,
Inc., Hallmark Financial Services, Inc., Robert D.
Campbell, Margaret Jones and American Hallmark
Agencies, Inc. (incorporated by reference to
Exhibit 10(w) to the registrant s Annual Report
on Form 10-KSB for the fiscal year ended
December 31, 1995).
10(x) Form of Shareholders Agreement dated January 3,
1996, between American Hallmark General Agency,
Inc., Robert D. Campbell, Richard Mason, Sr. and
Hallmark Underwriters, Inc. (incorporated by
reference to Exhibit 10(x) to the registrant s
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995).
10(y) Form of Facilities and Services Agreement dated
January 3 1996, between American Hallmark General
Agency, Inc., Robert D. Campbell, Richard Mason,
Sr. and Hallmark Underwriter, Inc. (incorporated
by reference to Exhibit 10(y) to the registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995).
10(z) Form of Indemnification Agreement dated January 3,
1996, between American Hallmark General Agency, Inc.,
Hallmark Financial Services, Inc., Robert D. Campbell,
Richard Mason, Sr. and Hallmark Underwriters, Inc.
(incorporated by reference to Exhibit 10(z) to
the registrant s Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995).
10(aa) Form of Second Amendment to Processing Agreement,
effective November 30, 1995, between Peregrine Premium
Finance L.C. and Hallmark Finance Corporation
(incorporated by reference to Exhibit 10(aa) to the
registrant s Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995).
<PAGE>
10(ab) Form of 100% Quota Share Reinsurance Agreement
between State & County Mutual Fire Insurance
Company and American Hallmark Insurance Company
of Texas effective July 1, 1996 (incorporated
by reference to Exhibit 10(a) to the registrant's
Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1996).
10(ac) Form of Quota Share Retrocession Agreement between
American Hallmark Insurance Company of Texas and
the Reinsurer (specifically identified as follows:
Dorinco, Kemper and Skandia), effective July 1,
1996 (incorporated by reference to Exhibit 10(b)
to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).
10(ad) Guaranty Agreement effective July 1, 1996 provided
by Dorinco Reinsurance Company in favor of State &
County Mutual Fire Insurance Company (incorporated
by reference to Exhibit 10(c) to the registrant's
Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1996).
10(ae) Guaranty Agreement effective July 1, 1996 provided
by Kemper Reinsurance Company in favor of State &
County Mutual Fire Insurance Company (incorporated
by reference to Exhibit 10(d) to the registrant's
Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1996).
10(af) Guaranty Agreement effective July 1, 1996 provided
by Skandia America Reinsurance Corporation in favor
of State & County Mutual Fire Insurance Company
(incorporated by reference to Exhibit 10(e) to
the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).
10(ag) Form of Guaranty of Performance and Hold Harmless
Agreement effective July 1, 1996 between Hallmark
Financial Services, Inc. and Dorinco America
Reinsurance Corporation (incorporated by reference
to Exhibit 10(f) to the registrant's Quarterly
Report on Form 10-QSB for the quarter ended
June 30, 1996).
10(ah) Form of Guaranty of Performance and Hold Harmless
Agreement effective July 1, 1996 between Hallmark
Financial Services, Inc. and Kemper Reinsurance
Company (incorporated by reference to Exhibit 10(g)
to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).
10(ai) Form of Guaranty of Performance and Hold Harmless
Agreement effective July 1, 1996 between Hallmark
Financial Services, Inc. and Skandia America
Reinsurance Corporation (incorporated by reference
to Exhibit 10(h) to the registrant's Quarterly
<PAGE>
Report on Form 10-QSB for the quarter ended
June 30, 1996).
10(aj) Form of Addendum No. 4 - Termination to Quota Share
Retrocession Agreement between American Hallmark
Insurance Company of Texas and Vesta Fire Insurance
Company (incorporated by reference to Exhibit 10(I)
to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996).
10(ak) Form of Addendum No. 3 - Termination to 100% Quota
Share Reinsurance Agreement between American Hallmark
Insurance Company and State & County Mutual Fire
Insurance Company (incorporated by reference to
Exhibit 10(j) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1996).
10(al) Automobile Physical Damage Catastrophe Excess of
Loss Reinsurance Agreement effective July 1, 1996
between American Hallmark Insurance Company of
Texas and Kemper Reinsurance Company (incorporated
by reference to Exhibit 10(a) to the registrant's
Quarterly Report on Form 10-QSB for the quarter and
ended September 30, 1996).
10(am) Form of 100% Quota Share Reinsurance Agreement,
effective January 1, 1997, between State and County
Mutual Fire Insurance Company, Vaughn General Agency,
Inc. and American Hallmark General Agency, Inc.
(incorporated by reference to Exhibit 10(am) to the
registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996).
10(an) Form of General Agency Agreement, effective
January 1, 1997, between Dorinco Reinsurance Company,
State and County Mutual Fire Insurance Company
and Vaughn General Agency, Inc. (incorporated by
reference to Exhibit 10(an) to the registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996).
10(ao) Form of Administrative Services Agreement between
State and County Mutual Fire Insurance Company,
Vaughn General Agency, Inc. and American Hallmark
General Agency, Inc. (incorporated by reference
to Exhibit 10(ao) to the registrant's Annual Report
on Form 10-KSB for the fiscal year ended
December 31, 1996).
10(ap) Form of Loan Agreement dated March 11, 1997,
between Hallmark Financial Services, Inc.
and Dorinco Reinsurance Company. (incorporated
by reference to Exhibit 10(ap) to the registrant's
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996).
<PAGE>
10(aq) Form of Promissory Note dated March 11, 1997,
with Hallmark Financial Services, Inc. as Maker
and Dorinco Reinsurance Company as Payee.
(incorporated by reference to Exhibit 10(aq)
to the registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1996).
10(ar) Stock Pledge and Security Agreement dated March 11,
1997, between ACO Holdings, Inc. and Dorinco
Reinsurance Company. (incorporated by reference
to Exhibit 10(ar) to the registrant s Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1996).
10(as) Form of Loan Agreement between Hallmark Finance
Corporation and NationsBank of Texas, N.A.,
dated March 17, 1997. (incorporated by reference
to Exhibit 10(as) to the registrant's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1996).
10(at) Form of Promissory Note, dated March 17, 1997,
with NationsBank of of Texas, N.A. as Bank and
Hallmark Finance Corporation as Borrower.
(incorporated by reference to Exhibit 10(at)
to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996).
10(au) Form of Security Agreement dated March 17, 1997,
between NationsBank of Texas, N.A. and Hallmark
Finance Corporation. (incorporated by reference
to Exhibit 10(au) to the registrant's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1996).
10(av) 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. (incorporated by reference
to Exhibit 10(a) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997).
10(aw) 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. (incorporated by reference
to Exhibit 10(b) to the registrant's Quarterly
Report on Form 10-QSB for the quarter ended
June 30, 1997).
10(ax) Form of Endorsement No. 1, effective July 1, 1997,
to the Guaranty Agreement provided by Skandia
America Reinsurance Corporation in favor of State &
County Mutual Fire Insurance Company, effective
July 1, 1996. (incorporated by reference to
Exhibit 10(c) to the registrant's Quarterly
<PAGE>
Report on Form 10-QSB for the quarter ended
June 30, 1997).
10(ay) Form of Endorsement No. 1, effective July 1, 1997,
to the Guaranty Agreement provided by Dorinco
Reinsurance Corporation in favor of State & County
Mutual Fire Insurance Company, effective July 1, 1996.
(incorporated by reference to Exhibit 10(d)
to the registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997).
10(az) 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. (incorporated
by reference to Exhibit 10(e) to the registrant's
Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1997).
10(ba) Form of Quota Share Retrocession Agreement
between American Hallmark Insurance Company
of Texas and Dorinco Reinsurance Company,
effective January 1, 1997. (incorporated by
reference to Exhibit 10(f) to the registrant's
Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997).
10(bb) 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. (incorporated by reference to
Exhibit 10(g) to the registrant's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997).
10(bc) 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. (incorporated by
reference to Exhibit 10(h) to the registrant's
Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1997).
10(bd) Form of First Amendment to Loan Agreement between
Hallmark Finance Corporation and NationsBank of
Texas, N.A., dated July 31, 1997. (incorporated
by reference to Exhibit 10(a) to the registrant's
Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1997).
10(be) Form of Second Amendment to Loan Agreement between
Hallmark Finance Corporation and NationsBank of
Texas, N.A., dated October 1, 1997. (incorporated
by reference to Exhibit 10(b) to the registrant's
<PAGE>
Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1997).
10(bf) Automobile Physical Damage Catastrophe Excess of _______
Loss Reinsurance Agreement effective July 1, 1997
between American Hallmark Insurance Company and
Kemper Reinsurance Company.
10(bg) Endorsement No. 1, effective July 1, 1997, to _______
the Quota Share Retrocession Agreement between
American Hallmark Insurance Company of Texas
and Kemper Reinsurance Company, effective
July 1, 1996.
10(bh) Endorsement No. 2, 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(bi) Endorsement No. 1, effective January 1, 1997, _______
to the 100% Quota Share Reinsurance Agreement
between State and County Mutual Fire Insurance
Company, Vaughn General Agency, Inc. and
American Hallmark General Agency, Inc.
10(bj) Form of Endorsement No. 2, effective July 1, _______
1997, to the 100% Quota Share Reinsurance
Agreement between State & County Mutual Fire
Insurance Company, Vaughn General Agency, Inc.,
American Hallmark General Agency, Inc. and the
Reinsurers (Dorinco Reinsurance Company and
Kemper Reinsurance Company) effective
July 1, 1997.
22 List of subsidiaries of the registrant
(incorporated by reference to Exhibit 22
to the registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31,
1991).
28 Schedule P of American Hallmark Insurance
Company of Texas as filed with the Texas
Department of Insurance for the year ended
December 31, 1997.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended F-4
December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the F-5
Years Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Years F-6
Ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements F-7
<PAGE>
Report of Independent Accountants
To the Board of Directors
Hallmark Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Hallmark
Financial Services, Inc. and Subsidiaries as of December 31, 1997, and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hallmark
Financial Services, Inc. and Subsidiaries as of December 31, 1997, and
1996, and the consolidated results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 20, 1998
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
ASSETS 1997 1996
<S> <C> <C>
Investments:
Debt securities, held-to-maturity,
at amortized cost $ 4,966,141 $ 5,160,137
Equity securities, available-for-
sale, at market value 152,359 152,246
Short-term investments, at cost
which approximates market value 2,970,838 3,380,059
Total investments 8,089,338 8,692,442
Cash and cash equivalents 5,814,127 4,749,388
Restricted cash 1,340,937 -
Prepaid reinsurance premiums 8,414,250 8,480,257
Premium finance notes receivable
(net of allowance for doubtful
accounts 7,878,758 -
of $83,788 in 1997)
Premiums receivable 844,140 2,524,938
Note receivable 1,149,280 -
Reinsurance recoverable 16,549,352 20,058,062
Deferred policy acquisition costs 3,143,378 2,536,564
Excess of cost over net assets
acquired (net of accumulated
amortization
of $1,171,050 in 1997 and
$1,014,309 in 1996) 5,059,164 5,215,905
Current federal income tax
recoverable 639,216 162,274
Deferred federal income taxes 67,539 330,718
Accrued investment income 42,780 46,606
Other assets 788,232 966,608
$ 59,820,491 $ 53,763,762
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 8,157,297 $ 590,853
Unpaid losses and loss
adjustment expenses 17,732,289 20,831,393
Unearned premiums 11,603,482 11,310,250
Reinsurance balances payable 2,960,040 2,946,034
Deferred ceding commissions 2,256,669 2,368,264
Drafts outstanding 721,413 838,007
Accrued ceding commission refund 1,623,395 411,811
Accounts payable and other accrued
expenses 2,934,793 3,045,786
Accrued litigation costs 950,000 -
Total liabilities 48,939,378 42,342,398
Commitments and contingencies
(Note 11)
<PAGE>
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 802,580 1,342,831
Treasury stock, 300,000 shares,
at cost (600,000) (600,000)
Total stockholders' equity 10,881,113 11,421,364
$ 59,820,491 $ 53,763,762
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Gross premiums written $ 40,457,427 $ 42,502,556
Ceded premiums written (28,035,956) (31,038,998)
Net premiums written $ 12,421,471 $ 11,463,558
Revenues:
Gross premiums earned $ 40,164,195 $ 46,852,203
Earned premiums ceded (28,101,962) (34,285,710)
Net premiums earned 12,062,233 12,566,493
Investment income, net of expenses 788,155 863,863
Finance charges 849,231 27,470
Interest income - note receivable 374,305 -
Processing fees 729,880 1,802,606
Service fees 581,106 88,439
Other income 442,195 86,591
Total revenues 15,827,105 15,435,462
Benefits, losses and expenses:
Losses and loss adjustment expenses 27,994,391 29,715,838
Reinsurance recoveries (20,380,355) (22,495,277)
Net losses and loss adjustment
expenses 7,614,036 7,220,561
Acquisition costs, net (718,409) (686,986)
Other acquisition and underwriting
expenses 6,403,312 5,208,456
Operating expenses 1,648,544 1,873,626
Interest expense 518,144 42,483
Amortization of intangible assets 289,333 168,078
Litigation cost 950,000 -
Restructuring costs 315,000 -
Total benefits, losses and
expenses 17,019,960 13,826,218
Income (loss) from operations before
federal income taxes (1,192,855) 1,609,244
Federal income tax (benefit) expense (360,533) 559,477
Operating (loss) income before
extraordinary item (832,322) 1,049,767
Extraordinary item, net of tax
effects 292,071 -
Net income (loss) $ (540,251) $1,049,767
Basic earnings per share
Operating (loss) income $ (0.08) $ 0.10
Extraordinary item 0.03 -
Net (loss) income $ (0.05) $ 0.10
Diluted earnings per share
Operating (loss) income $ (0.08) $ 0.09
Extraordinary Item 0.03 -
Net (loss) income $ (0.05) $ 0.09
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1997 and 1996
<TABLE>
Common Stock Capital Total
Number in Stock-
of Par Excess of Retained Treasury holders
Shares Value Par Value Earnings Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance
at
12/31/95 10,962,277 $328,868 $10,349,665 $ 293,064 ($600,000) $10,371,597
Net income - - - 1,049,767 - 1,049,767
Balance
at
12/31/96 10,962,277 $328,868 $10,349,665 $1,342,831 ($600,000) $11,421,364
Net loss - - - (540,251) - (540,251)
Balance
at
12/31/97 10,962,277 $328,868 $10,349,665 $ 802,580 ($600,000) $10,881,113
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($ 540,251) $ 1,049,767
Adjustments to reconcile net income
to cash provided by (used in)
operating activities:
Depreciation and amortization expense 424,704 282,178
Loss on sale of assets - (2,971)
Extraordinary item (380,187) -
Change in deferred Federal income
taxes 263,179 237,251
Change in prepaid reinsurance
premiums 66,007 3,246,711
Change in premiums receivable 1,680,798 2,672,872
Change in deferred policy acquisition
costs (606,814) 462,977
Change in deferred ceding commissions (111,595) (1,149,963)
Change in unpaid losses and loss
adjustment expenses (3,099,104) (1,625,697)
Change in unearned premiums 293,232 (4,349,647)
Change in reinsurance recoverable 3,508,710 (722,316)
Change in reinsurance balances payable 14,006 (543,323)
Change in current federal income tax
recoverable (476,942) (162,274)
Change in accrued ceding commission
refund 1,211,584 411,811
Change in accrued litigation costs 950,000 -
Change in all other liabilities (227,861) (491,228)
Change in all other assets 73,599 59,161
Net cash provided by (used in)
operating activities 3,043,065 (624,691)
Cash flows from investing activities:
Purchases of property and equipment (59,771) (339,523)
Premium finance notes originated (13,127,658) -
Premium finance notes repaid 5,248,900 -
Purchase of note receivable (6,513,156) -
Repayment of note receivable 5,363,876 -
Change in restricted cash (1,340,937) -
Purchases of debt securities (2,041,979) (530,422)
Maturities and redemptions of
investment securities 2,235,862 1,799,310
Purchase of short-term investments (8,988,673) (4,883,079)
Maturities of short-term investments 9,397,894 5,118,347
Net cash (used in) provided
by investing activities (9,825,642) 1,164,633
Cash flows from financing activities:
Proceeds from notes payable 8,000,000 -
Repayment of short-term borrowings (53,368) (48,309)
Payment of borrowing cost (99,316) -
<PAGE>
Cash provided by (used in)
financing activities 7,847,316 (48,309)
Increase in cash and cash equivalents 1,064,739 491,633
Cash and cash equivalents at beginning
of year 4,749,388 4,257,755
Cash and cash equivalents at end of year $ 5,814,127 $ 4,749,388
Supplemental cash flow information:
Interest paid $ 518,144 $ 42,483
Income taxes paid $ 200,000 $ 504,220
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies:
General
Hallmark Financial Services, Inc. ("HFS") and its subsidiaries
(collectively, the "Company"), are engaged primarily in (1) the marketing,
underwriting and premium financing of non-standard automobile insurance,
and (2) providing fee-based claims adjusting and administrative services
to third parties. The Company conducts these activities through its
wholly-owned subsidiaries (collectively, the "Insurance Group"): American
Hallmark Insurance Company of Texas ("Hallmark"), American Hallmark
General Agency, Inc. ("AHGA"), Hallmark Claims Service, Inc. ("HCS"), and
Hallmark Finance Corporation ("HFC"). Hallmark is a licensed insurer in
Texas and is regulated by the Texas Department of Insurance ("TDI").
AHGA is a managing general agency currently selling policies written by
an unaffiliated insurer which are reinsured by Hallmark; HFC offers
premium financing for annual and six month policies sold by AHGA; and HCS
provides claims adjusting services for Hallmark and third parties. Another
wholly-owned subsidiary, Hallmark Underwriters, Inc. ( HUI ), marketed
commercial excess and surplus lines of insurance on behalf of unaffiliated
insurers from April 1996 until it ceased operations on December 31, 1997.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts and operations of HFS and its wholly-owned subsidiaries.
Intercompany accounts and transactions have been eliminated.
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles
which, as to Hallmark, differ from statutory accounting practices
prescribed or permitted for insurance companies by insurance regulatory
authorities.
Investments
Debt securities are reported at amortized cost. The Company has the
intent and ability to hold all investments in debt securities to maturity.
Provisions for possible losses are recorded only on other-than-temporary
declines in the value of an investment.
Equity securities are reported at market value. Unrealized gains
and losses are recorded as a component of stockholder's equity.
Short-term investments are carried at cost which approximates market.
Short-term investments include U.S. Government securities maturing within
one year.
Realized investment gains and losses are recognized in operations on
the specific identification method.
Recognition of Premium Revenues
<PAGE>
Insurance premiums are earned pro rata over the terms of the
policies. Policy fees are recognized when received. Insurance premiums
written include gross policy fees of $4,054,879 and $4,874,897 and policy
fees, net of reinsurance, of $2,567,924 and $2,053,736 for the years ended
December 31, 1997 and 1996, respectively. Effective July 1, 1996, Hallmark
entered into retrocession reinsurance agreements (See Note 4) whereby
Hallmark retains 62.5% of written policy fees as compared to only 25% of
written policy fees prior to July 1, 1996.
Finance Charges
The majority of Hallmark's annual insurance premiums are financed
through the Company's premium finance program offered by its wholly owned
subsidiary, HFC. Under a discontinued servicing and financing arrangement
with an unaffiliated company, HFC receives a processing fee which is paid
and recognized on an earned basis.
Cash Equivalents
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment, aggregating $1,155,112 and $1,096,825, at
December 31, 1997 and 1996, respectively, included in other assets, is
recorded at cost and is depreciated using the straight-line method over
the estimated useful lives of the assets (five to ten years).
Depreciation expense for 1997 and 1996 was $135,371 and $114,099,
respectively. Accumulated depreciation was $746,980 and $611,609 at
December 31, 1997 and 1996, respectively.
Premium Finance Notes Receivable
Premium finance notes receivable is composed of notes receivables
from insureds for premiums on annual and six-month policies produced by
AHGA and financed by HFC.
Deferred Policy Acquisition Costs
Policy acquisition costs (mainly commissions, underwriting and
marketing expenses) that vary with, and are primarily related to, the
production of new and renewal business, are deferred and charged to
operations over periods in which the related premiums are earned. The
method followed in computing deferred acquisition costs limits the amount
of such deferred costs to their estimated realizable value. In determining
estimated realizable value, the computation gives effect to the premium
to be earned, related investment income, losses and loss expenses and
certain other costs expected to be incurred as the premiums are earned.
Ceding commissions from reinsurers, which include expense allowances, are
deferred and recognized over the period premiums are earned for the
underlying policies reinsured. The change in deferred ceding commission
income is netted against the change in deferred acquisition costs.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses represent the estimated ultimate
net cost of all reported and unreported losses incurred through December
<PAGE>
31, 1997 and 1996. The liabilities for unpaid losses and loss adjustment
expenses are estimated using individual case-basis valuations and
statistical analyses.
These estimates are subject to the effects of trends in loss
severity and frequency. Although considerable variability is inherent in
such estimates, management believes that the liabilities for unpaid losses
and loss adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current
operations. The liabilities for unpaid losses and loss adjustment
expenses at December 31, 1997 and 1996, are reported net of recoverables
for salvage and subrogation of approximately $193,000 and $521,000,
respectively.
Reinsurance
Hallmark is routinely involved in reinsurance transactions with other
companies. Reinsurance premiums, losses, and loss adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts.
(See Note 4 for further discussion.)
Income Taxes
The Company files a consolidated federal income tax return.
Deferred federal income taxes reflect the future tax consequences of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end. Deferred taxes are
recognized using the liability method, whereby tax rates are applied to
cumulative temporary differences based on when and how they are expected to
affect the tax return. Deferred tax assets and liabilities are adjusted
for tax rate changes.
Net Income Per Share
The computation of net income per share is based upon the weighted
average number of common shares outstanding during the period, plus (in
periods in which they have a dilutive effect) the effect of common shares
contingently issuable, primarily from stock options and exercise of
warrants. (See Note 7.)
Intangible Assets
When Hallmark, AHGA, HFC, and HCS were purchased by HFS, the excess
cost over the fair value of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over forty years.
Other intangible assets consist of a trade name, a managing general
agent's license, and 3 non-compete arrangements all of which were fully
amortized at December 31, 1997.
The Company continually re-evaluates the propriety of the carrying
amount of goodwill and other intangibles as well as the amortization
period to determine whether current events and circumstances warrant
adjustments to the carrying value and/or revised estimates of useful
lives. At this time, the Company believes that no significant impairment
of the goodwill has occurred and that no reduction of the estimated useful
life is warranted.
<PAGE>
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date(s) of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
Cash and Short-term Investments: The carrying amounts reported in
the balance sheet for these instruments approximate their fair values.
Investment Securities: Fair values are obtained from an independent
pricing service. (See Note 2.)
Premium Finance Notes Receivable: The carrying amounts reported in
the balance sheet for these instruments approximate their fair values as
the terms of the receivables are one year or less.
Notes Payable: The carrying amounts reported in the balance sheet for
these instruments approximate their fair values. (See Note 5.)
Stock-based Compensation
The Company recognizes its compensation expense for grants of stock,
stock options, and other equity instruments in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25"). (See Note 9.)
Recently Adopted Accounting Pronouncements
The Company adopted SFAS No. 128, Earnings per Share, effective for
the year ended December 31, 1997. This Statement, which replaces APB
Opinion No. 15, Earnings per Share, establishes simplified accounting
standards for computing earnings per share ("EPS") and makes the
computations comparable to international EPS standards. (See Note 7.)
The Company adopted the provisions of SFAS No. 129, Disclosures of
Information about Capital Structure, effective for the year ended December
31, 1997. This Statement consolidates existing pronouncements on required
disclosures about a company s capital structure including a brief
discussion of rights and privileges for securities outstanding. The
adoption of this Statement had no material effect on the Company's
consolidated financial statements.
New Accounting Pronouncements
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 No. 130 is effective
for financial statement periods beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
<PAGE>
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 beginning after
December 15, 1997.
Management does not anticipate that the above pronouncements will
have a material effect on the Company's consolidated financial condition
or results of operations.
Reclassification
Certain previously reported 1996 amounts have been reclassified to
conform to current year presentation. Such reclassification had no effect
on net income or stockholder s equity.
2. Investments:
Major categories of net investment income are summarized as follows:
<TABLE>
Years ended December 31,
1997 1996
<S> <C> <C>
Debt securities $ 287,766 $ 374,598
Equity securities 10,791 9,689
Short-term investments 288,678 355,084
Cash equivalents 180,117 122,644
Other 22,032 1,960
789,384 863,975
Investment expenses (1,229) (112)
Net investment income $ 788,155 $ 863,863
</TABLE>
No investment in any entity or its affiliates exceeded 10% of
stockholders' equity at December 31, 1997 and 1996, respectively.
The amortized cost and estimated market value of investments in debt
and equity securities by category is as follows:
<PAGE>
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
At December 31, 1997
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $3,131,395 $13,892 ($ 6,543) $3,138,744
Mortgage Backed
Securities 1,759,784 28,512 (14,968) 1,773,328
Obligations of state
and local governments 74,962 3,205 - 78,167
Total debt securities 4,966,141 45,609 (21,511) 4,990,239
Equity securities 167,290 - (14,931) 152,359
Total debt and equity
securities $5,133,431 $45,609 ($36,442) $5,142,598
At December 31, 1996
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $2,434,973 $32,775 ($11,221) $2,456,528
Mortgage Backed
Securities 2,399,635 21,250 (65,721) 2,355,163
Obligations of state
and local governments 325,529 6,452 (590) 331,391
Total debt securities 5,160,137 60,477 (77,532) $5,143,082
Equity securities 169,332 - (17,086) 152,246
Total debt and equity
securities $5,329,469 $60,477 ($94,618) $5,295,328
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturity, are as follows. Expected
maturities may differ from contractual maturities because certain borrowers
may have the right to call or prepay obligations with or without penalties.
<TABLE>
Amortized Market
Maturity Cost Value
<S> <C> <C>
1998 $ 500,675 $ 500,700
1999 - 2002 2,416,862 2,410,320
2003 - 2007 24,978 26,368
After 2007 263,842 279,523
Mortgage backed securities 1,759,784 1,773,328
$ 4,966,141 $ 4,990,239
</TABLE>
At December 31, 1997 and 1996, investments in debt securities, with
an approximate carrying value of $100,000 were on deposit with the TDI
as required by insurance regulations.
<PAGE>
Proceeds from investment securities of $2,235,862 and $1,775,414
during 1997 and 1996, respectively, were primarily from maturities and
bond calls.
3. Liability for Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment
expenses (in thousands) is summarized as follows:
<TABLE>
1997 1996
<S> <C> <C>
Balance at January 1 $ 20,831 $ 22,323
Less reinsurance recoverables 15,735 16,399
Net Balance at January 1 5,096 5,924
Incurred related to:
Current year 7,568 8,575
Prior years 738 (535)
Total incurred 8,306 8,040
Paid related to:
Current year 4,408 5,085
Prior years 4,326 3,783
Total paid 8,734 8,868
Net Balance at December 31 4,668 5,096
Plus reinsurance recoverables 13,064 15,735
Balance at December 31 $ 17,732 $ 20,831
</TABLE>
Incurred losses of $8,306,000 and $8,040,000 for 1997 and 1996,
respectively, include an increase of $738,000 for 1997 and a decrease of
$535,000 for 1996 due to respective changes made in reserve estimates for
losses and LAE incurred in prior years. During 1997, the Company changed
its estimate of incurred but not reported reserves based, in part, upon
a faster-than-anticipated development of 1996 accident year losses.
4. Reinsurance:
Hallmark is involved in the assumption and cession of reinsurance
from/to other companies. The Company remains obligated to its policy-
holders in the event that the reinsurers do not meet their obligations
under the reinsurance agreements.
Effective March 1, 1992, Hallmark entered into a reinsurance
arrangement with State and County Mutual Fire Insurance Company ("State
& County"), an unaffiliated company, to assume 100% of the nonstandard
auto business produced by AHGA and underwritten by State & County. The
earned premiums assumed under this agreement in 1997 and 1996 were
$39,541,555 and $46,827,628, respectively. Funds generated from business
produced under this agreement are maintained in accounts for the benefit
of State & County. At December 31, 1997 and 1996, Hallmark held for the
benefit of State & County, cash and cash equivalents of $2,855,841 and
$3,275,519, respectively, and investment securities at amortized cost of
$6,145,413 and $6,510,613, respectively.
<PAGE>
The arrangement is supplemented by a separate retrocession agreement
effective July 1, 1997 between Hallmark, Kemper Reinsurance Company
("Kemper") and Dorinco Reinsurance Company ("Dorinco"). From July 1,
1996 to June 30, 1997, Hallmark supplemented this arrangement with a
separate retrocession agreement with Kemper, Dorinco and Odyssey
Reinsurance Corporation ( Odyssey ). Prior to July 1, 1996, Hallmark had
a separate retrocession agreement with Vesta Fire Insurance Corporation
("Vesta"). Under each of the agreements, Hallmark retains 25% and cedes
75% of the risk to the reinsurers.
Under the retrocession agreement with Kemper and Dorinco, Hallmark
receives a provisional ceding commission of 30%. This provisional
commission is adjusted annually over a three year rating period on a
sliding scale based on annual loss ratios. Based upon its loss
experience, Hallmark can earn respective maximum commissions of 33.5%
and 34.5% and is guaranteed respective minimum commissions of 26% and 23%
regardless of loss experience on business reinsured by Kemper and Dorinco.
Under the July 1, 1997 renewal, the first annual settlement of the
provisional commission has been extended to two years (with the exception
of the percentage reinsured by Odyssey). As of December 31, 1997 and
1996, the accrued ceding commission refund was $1,623,395 and $411,811,
respectively. This accrual represents the difference between the
ceding commission received and the ceding commission earned based on
current loss ratios.
Effective July 1, 1997, Hallmark renewed its Excess of Loss
Reinsurance Agreement with Kemper whereby Kemper reinsures Hallmark for
physical damage catastrophe losses in excess of 95% of the ultimate net
loss over and above an initial ultimate net loss of $100,000 on each
and every loss occurrence, subject to a limit of liability to Kemper of
$142,500 on each and every loss occurrence. Prior to July 1996,
Hallmark's catastrophic occurrences were reinsured under an agreement
with Vesta. There were no catastrophic losses during 1997 and 1996.
5. Notes Payable:
A summary of the Company's notes payable is as follows:
<TABLE>
December 31,
1997 1996
<S> <C> <C>
Note payable to unaffiliated insurance company $7,000,000 $ -
Funds drawn on bank credit line 1,000,000 -
Note payable to individual 157,297 210,666
Note payable to unaffiliated finance company - 380,187
Total $8,157,297 $ 590,853
</TABLE>
<PAGE>
Scheduled annual principal payments on the foregoing borrowings are
as follows:
Year
1998 $ 58,915
1999 1,231,734
2000 1,433,302
2001 1,400,004
2002 1,400,004
2003 therewith 1,633,338
Total $7,157,297
Effective March 11, 1997, the Company entered into a loan agreement
with Dorinco, whereby the Company borrowed $7,000,000 (the "Dorinco Loan")
to contribute to HFC. Proceeds from this loan have been used by HFC
primarily to fund premium finance notes. (See Note 6.) 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 Dorinco Loan is limited to the stock of
HFC and a covenant by the Company not to pledge the stock of Hallmark or
AHGA. To avoid a triggering event, Hallmark 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 incurrence of additional debt.
For the year ended December 31, 1997, the Company is in compliance with
the covenants of the loan. In addition, the loan agreement requires that
Hallmark increase future volume of business ceded to Dorinco under its
reinsurance treaty and satisfy certain annual volume levels ceded over
the seven year term of the loan agreement.
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 & County policies. Beginning
late-June 1997, upon completion of a required 90-day cancellation
notification period to Peregrine Premium Finance L.C. ("Peregrine"), HFC
commenced funding all new notes issued by HFC with proceeds from both the
Dorinco loan 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
<PAGE>
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 insured's premium finance notes and HFS
and certain subsidiaries 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. The Company has drawn $1,000,000
under the Bank Credit Line and is in compliance with the covenants as of
December 31, 1997.
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%.
The note payable to the unaffiliated finance company has been in
dispute since before the Company acquired the Insurance Group. During
1997, the Company recorded the debt forgiveness of the note payable
balance and related accrued interest in a total amount of $442,532 based
on legal advice that the note was no longer enforceable. This write off,
less tax effect of $150,461, is treated as an extraordinary item on the
Company s Consolidated Statements of Operations.
6. Note Receivable:
Proceeds of $5,915,109 from the Dorinco loan (discussed in Note 5)
were loaned to Peregrine to repay external borrowing incurred by Peregrine
to fund premium finance notes pursuant to the financing and servicing
arrangement between HFC and Peregrine (See Note 11). In addition,
$598,047 of internally generated funds were loaned to Peregrine to fund
new premium finance notes. The Peregrine note principal varies in
proportion to the amount used by Peregrine to fund premium finance notes,
and is repaid from the Insured's payments on such premium finance notes.
As a result, the balance of the note receivable from Peregrine declined
to $1,149,280 at December 31, 1997. The note is collateralized by the
premium finance notes and bears interest at prime plus 1% (9.5% at
December 31, 1997).
7. Earnings per Share:
The Company adopted the provisions of SFAS No. 128, Earnings per
Share, effective for the year ended December 31, 1997. This statement
establishes new standards for computing and presenting earnings per
share and requires restatement of all prior period EPS data. The adoption
of this Statement resulted in the dual presentation of basic and diluted
EPS on the Company s Consolidated Statements of Operations. In accordance
with this Statement, the Company has applied the provisions on a
retroactive basis. As a result of the Company s loss position for the
year ended December 31, 1997, there is no difference between basic EPS and
diluted EPS under SFAS 128.
<PAGE>
A reconciliation of the numerators and denominators of the basic and
diluted per-share computations, as required by SFAS No. 128 is presented
below:
<TABLE>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the year ended
December 31, 1997:
Basic Earnings per Share
Income available to common
stockholders:
Operating loss ($832,322) 10,662,277 ($0.08)
Extraordinary item,
net of tax effects 292,071 10,662,277 0.03
Net loss ($540,251) 10,662,277 ($0.05)
Effect of Dilutive
Securities
Options and warrants - 0 -
Diluted Earnings per Share
Income available to common
stockholders + assumed
conversions:
Operating loss ($832,322) 10,662,277 ($0.08)
Extraordinary item,
net of tax effects 292,071 10,662,277 0.03
Net loss ($540,251) 10,662,277 ($0.05)
For the year ended
December 31, 1996:
Basic Earnings per Share
Income available to common
stockholders:
Operating income $1,049,767 10,662,277 $0.10
Extraordinary item,
net of tax effects - - -
Net income $1,049,767 10,662,277 $0.10
Effect of Dilutive
Securities
Options and warrants - 1,579,374 -
Diluted Earnings per Share
Income available to common
stockholders + assumed
conversions:
Operating income $1,049,767 12,241,651 $0.09
Extraordinary item,
net of tax ef - - -
Net income $1,049,767 12,241,651 $0.09
</TABLE>
8. Regulatory Capital Restrictions:
Hallmark's 1997 and 1996 net (loss) income and stockholders' equity
(capital and surplus), as determined in accordance with statutory
accounting practices, were ($76,191) and $908,593, and $5,287,785 and
<PAGE>
$5,177,994, respectively. During 1997, Hallmark obtained from the TDI
a permitted practice exception allowing Hallmark to limit the policy fees
included in the excess statutory over statement reserves computation to
the extent that related underwriting risk is retained. This exception
differs from prescribed accounting practices in that Hallmark was able to
exclude 37.5% of fully earned policy fees from the calculation. This
permitted practice exception resulted in excess statutory over statement
reserves of $334,560 instead of $1,353,090 as calculated per prescribed
accounting practices. The minimum statutory capital and surplus required
for Hallmark by the TDI is $2,000,000. Texas state law limits the
payment of dividends to stockholders by property and casualty insurance
companies. The maximum dividend that may be paid without prior approval
of the Commissioner of Insurance is limited to the greater of 10% of
statutory surplus as regards policyholders as of the preceding calendar
year end or the statutory net investment income of the preceding calendar
year. No dividends were declared or paid by Hallmark in 1997 or 1996.
9. Stock Option Plans:
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 is
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 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 25, the Company has not recognized
compensation expense for the stock options granted in 1997 and 1996.
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 the forfeiture and is deemed a re-grant
for accounting purposes of the Guaranty Warrants thus requiring a new
measurement date. 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).
<PAGE>
Pursuant to SFAS No. 123, Accounting for Stock-based Compensation, a
company may elect to continue expense recognition under APB 25, or to
recognize compensation expense for grants of stock, stock options, and
other equity instruments to employees based on fair value methodology
outlined in SFAS No. 123. The Company has elected to continue expense
recognition pursuant to APB 25.
A summary of the status of the Company's stock options and warrants
as of December 31, 1997 and December 31, 1996 and the changes during the
years ended on those dates is presented below:
<PAGE>
<TABLE>
1997 1996
Number Number
of Shares of Weighted of Shares of Weighted
Underlying Average Underlying Average
Options and Exercise Options and Exercise
Warrants Prices Warrants Prices
<S> <C> <C> <C> <C>
Outstanding at
beginning
of the year 2,846,333 $ .53 2,601,333 $ .51
Granted at
a discount - - 981,333 $ .50
Granted at
the money 16,000 $ .75 350,000 1.00
Granted at
a premium - - - -
Total Granted 16,000 $ .75 1,331,333 $ .63
Exercised - - - -
Forfeited - - (981,333) $ .50
Expired (5,000) $ .375 (105,000) $ 1.92
Outstanding at
end of year 2,857,333 $ .52 2,846,333 $ .52
Exercisable at
end of year 2,460,733 $ .49 2,332,333 $ .50
</TABLE>
<TABLE>
1997 1996
<S> <C> <C>
Weighted-average FV of options
granted at a discount $ - $ .11
Weighted-average FV of options
granted at the money $ .55 $ .95
Weighted-average FV of options
granted at a premium - -
Weighted-average FV of all options
granted during the year $ .55 $ .33
</TABLE>
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1997and 1996 respectively: no
dividend yield for both years; risk-free interest rates are different for
each grant and range from 5.54% to 7.82%; the expected lives of options
are 5 and 7 years for 1997 and 1996, respectively; and volatility of 92%
and 100% for 1997 and 1996, respectively, for all grants.
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
Options and Options and
Warrants Outstanding Warrants Exercisable
Weighted Avg. Weighted Weighted
Range of Remaining Avg. Exercis- Avg.
Exercise Outstanding Contr. Actual Exercise able at Exercise
Prices at 12/31/97 Life Price 12/31/97 Price
<C> <C> <C> <C> <C> <C>
$.25 to
$ .70 2,486,333 4.23 $ .45 2,275,333 $ .45
$.71 to
$1.188 371,000 8.07 $ .99 185,400 $1.00
$.25 to
$1.188 2,857,333 4.72 $ .52 2,460,733 $ .49
</TABLE>
The pro forma effects on net income and earnings per share for 1997 and
1996 from compensation expense computed pursuant to SFAS No. 123 is as
follows:
<TABLE>
December 31, 1997 December 31, 1996
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
SFAS No. 123
charge - $ 93,678 - $ 183,807
Net (loss)
income $ (540,251) $ (602,078) $ 1,049,767 $ 928,454
Net (loss)
income per
common share $ (0.05) $ (.06) $ .09 $ .08
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards
prior to 1995, and the Company anticipates making awards in the future
under its stock-based compensation plan.
10. Income Taxes:
The composition of deferred tax assets and liabilities and the related
tax effects as of December 31, 1997, and 1996, are as follows:
<PAGE>
<TABLE>
1997 1996
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs ($ 1,068,749) ($ 862,432)
Other (27,903) -
Total deferred tax liabilities (1,096,652) (862,432)
Deferred tax assets:
Unearned premiums 216,868 192,439
Loss reserve discounting,
net of salvage and subrogation 132,670 65,207
Deferred ceding commissions 767,267 805,210
Net operating loss carry forward 33,171 33,171
Other 47,393 130,301
Total deferred tax assets 1,197,369 1,226,328
Net deferred tax asset 100,717 363,896
Valuation allowance 33,178 33,178
Net deferred tax asset $ 67,539 $ 330,718
</TABLE>
A valuation allowance is provided against the Company's deferred tax
asset to the extent that management does not believe it is more likely than
not that future taxable income will be adequate to realize these future tax
benefits.
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 years ended December 31, 1997
and 1996, is as follows excluding the tax effect on the extraordinary item
in 1997:
<TABLE>
1997 1996
<S <C> <C>
Computed expected income tax expense
at statutory regulatory tax rate ($ 405,571) $ 547,143
Amortization of excess cost over
net assets acquired 53,385 53,959
Change in valuation allowance - (64,392)
Other (8,347) 22,767
Income tax (benefit) expense ($360,533) $ 559,477
</TABLE>
The change in the valuation allowance primarily results from the
utilization, based upon its recent operating history, of net operating loss
carry forwards for which a full valuation allowance had previously been
recorded.
The Company has available, for federal income tax purposes, unused
net operating losses of $97,562 at December 31, 1997, which may be used to
offset future taxable income. The net operating losses will expire, if
unused, as follows:
Year
2002 $ 1,325
2003 96,237
$ 97,562
<PAGE>
11. Commitments and Contingencies:
The Company has several leases, primarily for office facilities and
computer equipment, which expire in various years through 2002. Certain
of these leases contain renewal options. Rental expense amounted to
$728,466 and $681,326 for the years ended December 31, 1997 and 1996,
respectively.
Future minimum lease payments under noncancelable operating leases as
of December 31, 1997 are as follows:
Year
1998 $ 550,880
1999 494,754
2000 371,841
2001 17,308
2002 2,040
Total minimum lease payments $ 1,436,823
Prior to June 1997, premium finance for the State & County policies
produced by AHGA was funded by a credit facility provided by Peregrine
through a financing and servicing arrangement with HFC. HFC processed and
serviced the premium finance notes on behalf of Peregrine for a processing
fee approximating Peregrine s operating profit from the premium finance
notes, net of imputed borrowing costs on the credit facility and after
deducting certain expenses, including default costs. The notes issued
under this agreement are now in run-off (See Note 6). The Peregrine
agreement will terminate upon the later of the date on which (1) all
run-off is complete and (2) no outstanding principal or interest on the
notes is due. As of December 31, 1997 and 1996, Peregrine had issued
notes totaling $1,879,440 and $8,969,747, respectively, under the credit
facility. Neither the premium finance notes issued by Peregrine nor the
credit facility amount outstanding is recorded in the accompanying
financial statements.
As of December 31, 1997, the Company has accrued $315,000 of
restructuring costs related to the closure of seven of its thirteen agency
offices as well as the ceasing of the operations of its commercial excess
and surplus lines affiliated managing general agency, Hallmark
Underwriters, Inc. ( HUI ). Accrued restructuring costs include severance,
rent expense related to existing leases, prepaid advertising costs,
abandonment of office equipment and return commissions related to HUI.
At December 31, 1997, a standby letter of credit of $50,000 had been
issued by a financial institution under an agreement, expiring December 29,
1998, which is being maintained as collateral for performance and advances
received on a reinsurance contract. At December 31, 1997, no amounts were
outstanding under the letter of credit. The letter of credit requires an
annual commitment fee of $500 and is collateralized by a U.S. Government
security with a total par value of $50,000 held in Hallmark's name.
The Company has a 401(K) savings plan. Employees who have completed
three months of service are eligible to participate. Under this plan
employees may contribute a portion of their compensation, and the Company
may contribute a discretionary amount each year. The Company's
contribution for 1997 was $62,000 and for 1996 was $82,000.
<PAGE>
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 outcome
in this case was both legally and factually incorrect and has appealed the
judgment. During the fourth quarter, the Company deposited $1,248,758
into the registry of the court in order to stay execution on the
judgment pending the result of such appeal.
Although the Company intends to aggressively pursue its appeal, the
Company is presently unable to determine the likelihood of a favorable
result. Further, a favorable ruling on some portions of the appeal could
entail the necessity for a new trial. Therefore, the Company has
established a reserve of $950,000 for loss contingencies related to this
case. The possible range of loss in the event of an ultimately
unfavorable outcome to this case exceeds the amount presently reserved.
Conversely, in the event of a favorable resolution of the case, the
expenses incurred could be less than the reserve amount. Therefore,
future adjustments to the reserve may be required.
The Company is involved in other various claims and legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position or results of operations.
From time to time, assessments are levied on the Company by the
guaranty association of the State of Texas. Such assessments are made
primarily to cover the losses of policyholders of insolvent or
rehabilitated insurers. These assessments can be partially recovered
through a reduction in future premium taxes. There were no assessments
for 1997 and 1996.
12. Concentrations of Credit Risk:
The Company maintains cash equivalents in accounts with two financial
institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation.
All of the Company's business activity is with customers and
independent agents located within the State of Texas.
<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, Pre-
mium notes receivable, Installment premiums receivable, Excess of cost
over net assets acquired & Other assets. Refer to actual 10KSB submission.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 4,966,141
<DEBT-MARKET-VALUE> 7,933,730
<EQUITIES> 152,359
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,089,338
<CASH> 5,814,127
<RECOVER-REINSURE> 16,549,352
<DEFERRED-ACQUISITION> 886,709
<TOTAL-ASSETS> 59,820,491
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 11,603,482
<POLICY-OTHER> 2,960,040
<POLICY-HOLDER-FUNDS> 6,229,601
<NOTES-PAYABLE> 8,157,297
0
0
<COMMON> 328,868
<OTHER-SE> 10,552,245
<TOTAL-LIABILITY-AND-EQUITY> 59,820,491
12,062,233
<INVESTMENT-INCOME> 788,155
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 2,976,717
<BENEFITS> 7,614,036
<UNDERWRITING-AMORTIZATION> (718,409)
<UNDERWRITING-OTHER> 10,124,333
<INCOME-PRETAX> (750,323)
<INCOME-TAX> (210,072)
<INCOME-CONTINUING> (540,251)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (540,251)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
<RESERVE-OPEN> 20,697,393
<PROVISION-CURRENT> 21,493,713
<PROVISION-PRIOR> 5,280,227
<PAYMENTS-CURRENT> (9,860,609)
<PAYMENTS-PRIOR> (19,878,435)
<RESERVE-CLOSE> 17,732,289
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
AUTOMOBILE PHYSICAL DAMAGE CATASTROPHE EXCESS
OF LOSS REINSURANCE 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 indemnify the Company in respect of the net excess
liability as a result of any loss or losses which may occur during the
term of this Agreement under any Policies classified by the Company as
Private Passenger Automobile Physical Damage Business 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 under an
Agreement titled 100% Quota Share Reinsurance Agreement, subject to the
terms and conditions herein contained.
ARTICLE 2
COVER
The Reinsurer will be liable in respect of each and every Loss
Occurrence, for 95% of the Ultimate Net Loss over and above an initial
Ultimate Net Loss of $75,000 each and every Loss Occurrence, subject to
a limit of liability to the Reinsurer of $142,500 (being 95% of
$150,000) each and every Loss Occurrence.
ARTICLE 3
TERM
This Agreement shall become effective at 12:01 a.m., Central Standard
Time, July 1, 1997, and shall remain in full force and effect for one
year, expiring 12:01 a.m., Central Standard Time, July 1, 1998.
Should this Agreement expire while a loss covered hereunder is in
progress, the Reinsurer shall be responsible for the loss in progress in
the same manner and to the same extent it would have been responsible
had the Agreement expired the day following the conclusion of the loss
in progress.
ARTICLE 4
TERRITORY
This Agreement will cover wherever the Company s Policies cover.
<PAGE>
ARTICLE 5
WARRANTY
It is warranted for purposes of this Agreement that the Company will
retain net and unreinsured the remaining 5% of any loss covered
hereunder.<PAGE>
ARTICLE 6
EXCLUSIONS
This Agreement does not cover:
A. P o ols, Associations and Syndicates per the attached Pools,
Associations and Syndicates Exclusion Clause No. 08-02.5(A).
B. Business excluded by the attached Nuclear Incident Exclusion
Clauses - Physical Damage - Reinsurance - U.S.A., No. 08-33 and Canada
No. 08-34.2.
C. War risks as excluded in the attached North American War Exclusion
Clause (Reinsurance) No. 08-45.
D. Financial Guaranty and Insolvency.
E. 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.
ARTICLE 7
PREMIUM
A. The Company will pay the Reinsurer a minimum and deposit premium of
$28,500 for the term of this Agreement, to be paid in the amount of
$7,125 on the first day of each calendar quarter.
B. Within 60 days following the expiration of this Agreement, the
Company will calculate a premium at a rate of 1.12% multiplied by the
Company's Gross Net Earned Premium Income. Should the premium so
calculated exceed the minimum and deposit premium paid in accordance
with Paragraph A. above, the Company will immediately pay the Reinsurer
the difference.
ARTICLE 8
REINSTATEMENT
Loss payments under this Agreement will reduce the limit of coverage
afforded by the amounts paid, but the limit of coverage will be
reinstated from the time of the occurrence of the loss, and for each
amount so reinstated, the Company agrees to pay, simultaneously with the
Reinsurer s loss payment, an additional premium calculated at pro rata
of the Reinsurer's premium for the term of this Agreement, being pro
rata only as to the fraction of the face value of this Agreement (i.e.,
<PAGE>
the fraction of $142,500) so reinstated. Nevertheless, the Reinsurer's
liability hereunder shall never exceed $142,500 in respect of any one
Loss Occurrence and, subject to the limit in respect of any one Loss
Occurrence, shall be further limited to $285,000 during the term of this
Agreement by reason of any and all claims arising hereunder.
ARTICLE 9
REPORTS
Within 60 days following the expiration of this Agreement, the Company
will furnish the Reinsurer with:
A. Gross Net Earned Premium Income of the Company for the term of this
Agreement.
B. Any other information which the Reinsurer may require to prepare
its Annual Statement which is reasonably available to the Company.
ARTICLE 10
DEFINITIONS
A. The term "Ultimate Net Loss" as used in this Agreement shall mean
the actual loss paid by the Company or for which the Company becomes
liable to pay, such loss to include 90% of any Extra Contractual
Obligation (and expense) as defined in the EXTRA CONTRACTUAL OBLIGATIONS
ARTICLE, expenses of litigation and interest, and all other loss expense
of the Company including subrogation, salvage, and recovery expenses
(office expenses and salaries of officials and employees not classified
as loss adjusters are not chargeable as expenses for purposes of this
paragraph), but salvages and all recoveries, including recoveries under
all reinsurances which inure to the benefit of this Agreement (whether
recovered or not), shall be first deducted from such loss to arrive at
the amount of liability attaching hereunder.
A l l salvages, recoveries or payments recovered or received
subsequent to loss settlement hereunder shall be applied as if recovered
or received prior to the aforesaid settlement, and all necessary
adjustments shall be made by the parties hereto.
For purposes of this definition, the phrase "becomes liable to pay"
shall mean the existence of a judgment which the Company does not intend
to appeal, or a release has been obtained by the Company, or the Company
has accepted a proof of loss.
Nothing in this clause shall be construed to mean that losses are
not recoverable hereunder until the Company's Ultimate Net Loss has been
ascertained.
B. The term "Loss Occurrence" shall mean the sum of all individual
losses directly occasioned by any one disaster, accident or loss or
series of disasters, accidents or losses arising out of one event which
occurs within the area of one state of the United States or province of
Canada and states or provinces contiguous thereto and to one another.
However, the duration and extent of any one "Loss Occurrence" shall be
limited to all individual losses sustained by the Company occurring
during any period of 168 consecutive hours arising out of and directly
<PAGE>
occasioned by the same event, except that the term "Loss Occurrence"
shall be further defined as follows:
1. As regards windstorms, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained by
the Company occurring during any period of 72 consecutive hours arising
out of and directly occasioned by the same event. However, the event
need not be limited to one state or province or states or provinces
contiguous thereto.
2. As regards riot, riot attending a strike, civil commotion,
vandalism and malicious mischief, all individual losses sustained by the
Company occurring during any period of 72 consecutive hours within the
area of one municipality or county and the municipalities or counties
contiguous thereto arising out of and directly occasioned by the same
event. The maximum duration of 72 consecutive hours may be extended in
respect of individual losses which occur beyond such 72 consecutive
hours during the continued occupation of an insured's premises by
strikers, provided such occupation commenced during the aforementioned
period.
3. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening paragraph
of this definition) and fire following directly occasioned by the
earthquake, only those individual fire losses which commence during the
period of 168 consecutive hours may be included in the Company's "Loss
Occurrence."
4. As regards "freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Company's "Loss
Occurrence."
For all "Loss Occurrences" the Company may choose the date and time
when any such period of consecutive hours commences, provided that it is
not earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the Company arising out of that
disaster, accident or loss and provided that only one such period of 168
consecutive hours shall apply with respect to one event except for those
"Loss Occurrences" referred to in Paragraphs 1. and 2. above where only
one such period of 72 consecutive hours shall apply with respect to one
event, regardless of the duration of the event.
No individual losses occasioned by an event that would be covered
by 72 hours clauses may be included in any "Loss Occurrence" claimed
under the 168 hours provision.
C. The term "Gross Net Earned Premium Income" as used in this
Agreement shall mean gross earned premium income on business the subject
of this Agreement less earned premium income paid for reinsurances,
recoveries under which would inure to the benefit of this Agreement.
D. 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.
<PAGE>
ARTICLE 11
NET RETAINED LINES
This Agreement applies only to that portion of any reinsurances covered
by this Agreement which the Company retains net for its own account, and
in calculating the amount of any loss hereunder and also in computing
the amount in excess of which this Agreement attaches, only loss or
losses in respect of that portion of any reinsurances which the Company
retains net for its own account shall be included, it being understood
and agreed that the amount of the Reinsurer's liability hereunder in
respect of any loss or losses shall not be increased by reason of the
inability of the Company to collect from any other reinsurers, whether
specific or general, any amounts which may have become due from them
whether such inability arises from the insolvency of such other
reinsurers or otherwise.
ARTICLE 12
CURRENCY
The currency to be used for all purposes of this Agreement shall be
United States of America currency.
ARTICLE 13
LOSS FUNDING
With respect to losses, funding will be in accordance with the attached
Loss Funding Clause No. 13-01.2.
ARTICLE 14
TAXES
The Company will be liable for taxes (except Federal Excise Tax) on
premiums reported to the Reinsurer hereunder.
F e deral 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
NOTICE OF LOSS AND LOSS SETTLEMENTS
The Company will advise the Reinsurer promptly of all claims which in
the opinion of the Company may involve the Reinsurer and of all
subsequent developments on these claims which may materially affect the
position of the Reinsurer.
The Reinsurer agrees to abide by the loss settlements of the Company,
provided that retroactive extension of Policy terms or coverages made
voluntarily by the Company and not in response to court decisions
(whether such court decision is against the Company or other companies
affording the same or similar coverages) will not be covered under this
Agreement.
When so requested the Company will afford the Reinsurer an opportunity
to be associated with the Company, at the expense of the Reinsurer, in
the defense of any claim or suit or proceeding involving this
reinsurance and the Company will cooperate in every respect in the
defense of such claim, suit or proceeding.
The Reinsurer will pay its share of loss settlements immediately upon
receipt of proof of loss from the Company.
ARTICLE 16
EXTRA CONTRACTUAL OBLIGATIONS
Provided that the Ultimate Net Loss of the Company, exclusive of Extra
Contractual Obligations and related expense, exceeds the retention of
t h e Company's lowest layer of Property per occurrence excess
reinsurance, this Agreement shall protect the Company, subject to the
Reinsurer's limit of liability appearing in the COVER ARTICLE of this
Agreement, where the loss includes any Extra Contractual Obligations as
provided for in the definition of Ultimate Net Loss. "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 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 Occurrence.
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 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.
<PAGE>
ARTICLE 17
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 18
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.
ARTICLE 19
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 20
SERVICE OF SUIT
The attached Service of Suit Clause No. 20-01.5 - U.S.A. will apply to
this Agreement.
ARTICLE 21
INSOLVENCY
In the event of the insolvency of the Company, the attached Insolvency
Clause No. 21-01 - 1/1/86 will apply.
ARTICLE 22<PAGE>
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.
<PAGE>
ARTICLE 23
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.
ARTICLE 24
PARTICIPATION: AUTOMOBILE PHYSICAL DAMAGE CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT EFFECTIVE: July 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.
I N W I TNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Agreement as of the following dates:
PARTICIPATING REINSURERS
Kemper Reinsurance Company 100.00%
Upon completion of Reinsurers' signing, fully executed signature pages
will be forwarded to you for the completion of your file.
KEMPER REINSURANCE COMPANY
By_________________________________________
(signature)
___________________________________________
(name)
___________________________________________
(title)
and in Dallas, Texas, this day of , 1997.
<PAGE>
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
By_________________________________________
(signature)
___________________________________________
(name)
___________________________________________
(title)
AUTOMOBILE PHYSICAL DAMAGE CATASTROPHE
EXCESS OF LOSS REINSURANCE AGREEMENT
issued to
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
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. 2
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 ARTICLE 9 COMMISSION ADJUSTMENT, paragraph A.1. will read as
follows and not as heretofore:
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. However,
the first adjustment period will be the period July 1, 1996 to July 1,
1999 which includes this Agreement s predecessor Agreement. There shall
be provisional adjustments and a final adjustment for each period, all
in accordance with the other paragraphs of this Article.
IT IS FURTHER AGREED, effective 12:01 a.m., Central Standard Time, July
1, 1997 that the following changes are made to this Agreement:
ARTICLE 7 ACCOUNTS AND REMITTANCES, paragraph A.1. referencing net
written premium will read as follows and not as heretofore:
A.1. Net written premium accounted for during the period, being the
gross written premium (including 75% of 50% of the Company s Policy fees
for monthly and annual Policies; however, not to include Policy fees for
six month Policies) less returns and cancellations; less
2. ARTICLE 8 CEDING COMMISSION, will read as follows and not as
heretofore:
CEDING COMMISSION
T h e 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 for monthly and annual Policies;
however, not to include Policy fees for six month Policies)
hereunder. Return commission shall be allowed on return premiums
at the same rate.
3. ARTICLE 9 COMMISSION ADJUSTMENT, paragraph A.3. will read as
follows and not as heretofore:
A.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 for monthly and annual Policies; however, not to
include Policy fees for six month Policies), 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.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
<PAGE>
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Endorsement as of the following
dates:
PARTICIPATING REINSURERS
Dorinco Reinsurance Company 50.00%
In Midland, Michigan, this day of , 1997.
DORINCO REINSURANCE COMPANY
Midland, Michigan
By ____________________________________
(signature)
_______________________________________
(name)
_______________________________________
(title)
and in Dallas, Texas, this day of , 1997.
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
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 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
organized under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on January 1,
1997 ARTICLE V - COMMENCEMENT AND TERMINATION, Section 5.02, Item (j) is
added as follows:
(j) Upon written notice by the REINSURER to the COMPANY to
coincide with the termination of the related Quota Share
Retrocession Agreement ("Retrocession").
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the Parties hereto by their respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY
BY:____________________________
ITS:____________________________
ENDORSEMENT NO. 1
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
organized under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on January 1,
1997 ARTICLE V - COMMENCEMENT AND TERMINATION, Section 5.02, Item (j) is
added as follows:
(j) Upon written notice by the REINSURER to the COMPANY to
coincide with the termination of the related Quota Share
Retrocession Agreement ("Retrocession").
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto by their respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ VAUGHN GENERAL AGENCY, INC.
BY:____________________________
ITS:____________________________
ENDORSEMENT NO. 1
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
organized under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on January 1,
1997 ARTICLE V - COMMENCEMENT AND TERMINATION, Section 5.02, Item (j) is
added as follows:
(j) Upon written notice by the REINSURER to the COMPANY to
coincide with the termination of the related Quota Share
Retrocession Agreement ("Retrocession").
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the Parties hereto by their respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ AMERICAN HALLMARK
GENERAL AGENCY, INC.
BY:____________________________
ITS:____________________________
ENDORSEMENT NO. 1
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
<PAGE>
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
organized under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on January 1,
1997 ARTICLE V - COMMENCEMENT AND TERMINATION, Section 5.02, Item (j) is
added as follows:
(j) Upon written notice by the REINSURER to the COMPANY to
coincide with the termination of the related Quota Share
Retrocession Agreement ("Retrocession").
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Addendum as of the following dates:
DATED:__________________________ DORINCO REINSURANCE COMPANY
Midland, Michigan
BY:____________________________
(signature)
_______________________________
(name)
_______________________________
(title)
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
o r g a n i z ed under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on July 1,
1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will read as
follows and not as heretofore:
This Agreement obligates the Reinsurer for 60.00% 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 respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY
BY:____________________________
ITS:____________________________
<PAGE>
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
o r g a n i z ed under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on July 1,
1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will read as
follows and not as heretofore:
This Agreement obligates the Reinsurer for 60.00% 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 respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ VAUGHN GENERAL AGENCY, INC.
BY:____________________________
ITS:____________________________
<PAGE>
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
o r g a n i z ed under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on July 1,
1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will read as
follows and not as heretofore:
This Agreement obligates the Reinsurer for 60.00% 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 respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ AMERICAN HALLMARK
GENERAL AGENCY, INC.
BY:____________________________
ITS:____________________________
<PAGE>
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
o r g a n i z ed under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, effective 12:01 A.M., Central Standard Time on July 1,
1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will read as
follows and not as heretofore:
This Agreement obligates the Reinsurer for 60.00% 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 Addendum as of the following dates:
In Midland, Michigan, this day of , 1997.
DORINCO REINSURANCE COMPANY
Midland, Michigan
By________________________________
(signature)
__________________________________
(name)
__________________________________
(title)
<PAGE>
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
o r g a n i z ed under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, that the Reinsurer has received a copy of the Agreement
wording effective January 1, 1997 and Endorsement No. 1, and agrees to
t h e terms and conditions of this Agreement as respects their
participation effective July 1, 1997.
IT IS FURTHER AGREED, effective 12:01 A.M., Central Standard Time on
July 1, 1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will
read as follows and not as heretofore:
This Agreement obligates the Reinsurer for 40.00% 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 respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ STATE AND COUNTY MUTUAL FIRE
INSURANCE COMPANY
BY:____________________________
ITS:____________________________
<PAGE>
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
o r g a n i z ed under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, that the Reinsurer has received a copy of the Agreement
wording effective January 1, 1997 and Endorsement No. 1, and agrees to
t h e terms and conditions of this Agreement as respects their
participation effective July 1, 1997.
IT IS FURTHER AGREED, effective 12:01 A.M., Central Standard Time on
July 1, 1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will
read as follows and not as heretofore:
This Agreement obligates the Reinsurer for 40.00% 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 respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ VAUGHN GENERAL AGENCY, INC.
BY:____________________________
ITS:____________________________
<PAGE>
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
o r g a n i z ed under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, that the Reinsurer has received a copy of the Agreement
wording effective January 1, 1997 and Endorsement No. 1, and agrees to
t h e terms and conditions of this Agreement as respects their
participation effective July 1, 1997.
IT IS FURTHER AGREED, effective 12:01 A.M., Central Standard Time on
July 1, 1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will
read as follows and not as heretofore:
This Agreement obligates the Reinsurer for 40.00% 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 respective duly
authorized representatives have executed this Agreement as of the dates
first above mentioned.
DATED:__________________________ AMERICAN HALLMARK
GENERAL AGENCY, INC.
BY:____________________________
ITS:____________________________
<PAGE>
ENDORSEMENT NO. 2
Attaching to and forming part of the 100% QUOTA SHARE REINSURANCE
AGREEMENT by and among the Reinsurer specifically identified on the
signature page of this Agreement, ("Reinsurer"), STATE AND COUNTY MUTUAL
FIRE INSURANCE COMPANY, an insurance company organized under the laws of
the State of Texas ("Company"), VAUGHN GENERAL AGENCY, INC., a
corporation organized under the laws of the State of Texas ("General
Agent") and AMERICAN HALLMARK GENERAL AGENCY, INC., a corporation
o r g a n i z ed under the laws of the State of Texas ("Program
Administrator").
IT IS AGREED, that the Reinsurer has received a copy of the Agreement
wording effective January 1, 1997 and Endorsement No. 1, and agrees to
t h e terms and conditions of this Agreement as respects their
participation effective July 1, 1997.
IT IS FURTHER AGREED, effective 12:01 A.M., Central Standard Time on
July 1, 1997 that ARTICLE XXX - PARTICIPATION, the first paragraph will
read as follows and not as heretofore:
This Agreement obligates the Reinsurer for 40.00% of the interests and
liabilities set forth under this Agreement.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
I N W I TNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Addendum as of the following dates:
In Long Grove, Illinois, this day of , 1997.
KEMPER REINSURANCE COMPANY
Long Grove, Illinois
By_____________________________________
(signature)
_______________________________________
(name)
_______________________________________
(title)
