SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
Commission file number 0-16090
Hallmark Financial Services, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0447375
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14651 Dallas Parkway, Suite 900
Dallas, Texas 75240
---------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (972) 404-1637
Check whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Common Stock, par value $.03 per share - 11,048,133 shares
outstanding as of November 10, 1999.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page Number
-----------
Consolidated Balance Sheets at September 30, 3
1999 (unaudited) and December 31, 1998
Consolidated Statements of Income (unaudited) 4
for the three and nine months ended September
Consolidated Statements of Cash Flows 5
(unaudited) for the nine months ended
Notes to Consolidated Financial Statements 6
(unaudited)
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------
<CAPTION>
September 30 December 31
1999 1998
(Unaudited)
----------- ----------
<S> <C> <C>
Investments:
Debt securities, held-to-maturity,
at amortized cost $ 4,336,102 $ 4,444,606
Equity securities, available-for-sale,
at market value 144,352 151,375
Short-term investments, at cost which
approximates market value 6,336,834 3,256,879
----------- ----------
Total investments 10,817,288 7,852,860
Cash and cash equivalents 5,436,651 6,776,274
Restricted cash 1,806,927 1,768,927
Prepaid reinsurance premiums 7,115,232 5,110,204
Premium finance notes receivable (net of
allowance for doubtful accounts of $78,326
in 1999 and $52,119 in 1998) 8,085,278 5,287,945
Premiums receivable 976,376 1,048,689
Reinsurance recoverable 14,832,334 13,900,496
Deferred policy acquisition costs 2,813,848 2,088,902
Excess of cost over net assets acquired (net
of accumulated amortization of $1,445,825
in 1999 and $1,328,065 in 1998) 4,784,388 4,902,149
Current federal income tax recoverable - 150,031
Deferred federal income taxes 127,569 43,636
Accrued investment income 35,843 68,042
Other assets 539,381 622,798
----------- ----------
$ 57,371,115 $49,620,953
=========== =========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 7,050,182 $ 7,098,383
Unpaid losses and loss adjustment expenses 16,905,487 16,014,569
Unearned premiums 11,124,889 7,733,624
Reinsurance balances payable 2,992,581 2,097,564
Deferred ceding commissions 1,912,323 1,349,142
Drafts outstanding 804,493 739,817
Accrued ceding commission refund 1,229,869 744,686
Current federal income taxes payable 153,990 -
Accounts payable and other accrued expenses 2,682,909 1,958,920
Accrued litigation costs 950,000 950,000
----------- ----------
Total liabilities 45,806,723 38,686,705
----------- ----------
Stockholders' equity
Common stock, $.03 par value, authorized
100,000,000 shares issued 11,854,610
shares in 1999 and 1998 355,638 355,638
Capital in excess of par value 10,875,212 10,875,212
Retained earnings 1,386,876 755,994
Accumulated other comprehensive income (10,167) (9,429)
Treasury stock, 806,477 shares, at cost (1,043,167) (1,043,167)
----------- ----------
Total stockholders' equity 11,564,392 10,934,248
----------- ----------
$ 57,371,115 $49,620,953
=========== ==========
The accompanying notes are an integral part
of the consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------- ------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross premiums written $ 9,631,847 $ 5,833,905 $ 28,039,106 $ 25,991,543
Ceded premiums written (5,797,482) (3,656,419) (16,491,216) (16,934,207)
------------ ----------- ----------- ------------
Net Premiums written $ 3,834,365 $ 2,177,486 $ 11,547,890 $ 9,057,336
============ =========== =========== ============
Revenues:
Gross premiums earned 8,628,631 8,465,140 24,647,840 28,809,541
Earned premiums ceded (4,996,583) (5,602,549) (14,486,188) (19,341,634)
------------ ----------- ----------- ------------
Net Premiums earned 3,632,048 2,862,591 10,161,652 9,467,907
Investment income, net
of expenses 212,356 203,614 564,832 593,212
Finance charges 521,974 266,504 1,488,262 1,390,560
Processing and service fee 499,973 442,288 1,506,597 1,186,030
Other income 93,784 129,484 287,116 358,341
------------ ------------ ----------- ------------
Total revenues 4,960,135 3,904,481 14,008,459 12,996,050
------------ ------------ ----------- ------------
Benefits, losses and expenses:
Losses and loss adjustment
expenses 7,355,814 6,349,007 18,894,337 19,863,677
Reinsurance recoveries (4,911,209) (4,208,418) (12,362,513) (13,611,002)
------------ ------------ ----------- ------------
Net losses and loss
adjustment expenses 2,444,605 2,140,589 6,531,824 6,252,675
Acquisition costs, net 226,777 (18,801) (161,766) (20,585)
Other acquisition and
underwriting expenses 1,096,832 1,285,739 3,606,015 3,925,461
Operating expenses 809,345 717,819 2,443,980 1,910,307
Interest expense 149,275 198,092 444,299 579,427
Amortization of intangible
assets 39,254 39,254 117,761 144,511
------------ ------------ ----------- ------------
Total benefits losses
and expenses 4,766,088 4,362,692 12,982,113 12,791,796
------------ ------------ ----------- ------------
Income (loss) from operations
before federal income taxes 194,047 (458,211) 1,026,346 204,254
Federal income tax expense 65,661 (136,979) 395,468 123,461
------------ ------------ ----------- ------------
Net income (loss) $ 128,386 $ (321,232) $ 630,878 80,793
============ ============ =========== ============
<PAGE>
Basic and diluted earnings
per share $ 0.01 $ (0.03) $ 0.06 0.01
============ ============ =========== ============
Common stock shares outstanding 11,048,133 10,668,277 11,048,133 10,668,277
============ ============ =========== ============
The accompanying notes are an integral part
of the consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 630,878 $ 80,793
Adjustments to reconcile net loss to cash
Depreciation and amortization expense 214,558 287,547
Change in deferred Federal income taxes (83,933) 64,924
Change in prepared reinsurance premiums (2,005,028) 2,475,311
Change in premiums receivable 72,313 (127,982)
Change in deferred policy acquisition costs (724,946) 803,150
Change in deferred ceding commissions 563,181 (823,640)
Change in unpaid losses and loss
adjustment expenses 890,918 (1,618,778)
Change in unearned premiums 3,391,265 (2,885,880)
Change in reinsurance recoverable (931,838) 1,972,417
Change in reinsurance balances payable 895,017 (1,271,541)
Change in current federal income
tax recoverable - 635,920
Change in current federal income payable 304,021 -
Change in accrued ceding commission refund 485,183 (1,393,985)
Change in all other liabilities 788,664 (307,042)
Change in all other assets 68,043 (243,954)
---------- ----------
Net cash provided by (used in)
operating activities 4,558,300 (2,352,740)
---------- ----------
<PAGE>
Cash flows from investing activities:
Purchases of property and equipment (48,292) (65,849)
Premium finance notes originated (18,734,555) (20,018,621)
Premium finance notes repaid 15,937,222 21,606,838
Repayment of note receivable - 1,149,280
Change in restricted cash (38,000) (46,800)
Purchase of debt securities (1,792,633) -
Maturities and redemptions of
investment securities 1,906,491 810,366
Purchase of short-term investments (12,301,156) (9,509,061)
Maturities of short-term investments 9,221,201 8,011,679
---------- ----------
Net cash (used in) provided by investing (5,849,722) 1,937,832
---------- ----------
Cash flows from financing activities:
Proceeds from common stock issued - 2,150
Repayment of short-term borrowings (48,201) (43,632)
Proceeds from bank credit line - 750,000
---------- ----------
Net cash (used in) provided by
financing activities (48,201) 708,518
---------- ----------
(Decrease) increase in cash and cash equivalents (1,339,623) 293,610
Cash and cash equivalents at beginning of period 6,776,274 5,814,127
---------- ----------
Cash and cash equivalents at end of period $ 5,436,651 $ 6,107,737
========= =========
The accompanying notes are an integral part
of the consolidated financial statements
</TABLE>
<PAGE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Item 1. Notes to Consolidated Financial Statements (Unaudited).
Note 1 - Summary of Accounting Policies
In the opinion of management, the accompanying consolidated
financial statements contain all adjustments, consisting primarily of
normal recurring adjustments, necessary to present fairly the financial
position of Hallmark Financial Services, Inc. and subsidiaries (the
"Company") as of September 30, 1999 and the consolidated results of
operations and cash flows for the periods presented. The accompanying
financial statements have been prepared by the Company without audit.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted. Reference is made
to the Company's annual consolidated financial statements for the year
ended December 31, 1998 for a description of accounting policies and
certain other disclosures. Certain items in the 1998 interim financial
statements have been reclassified to conform to the 1999 presentation.
The results of operations for the period ended September 30, 1999
are not necessarily indicative of the operating results to be expected
for the full year.
Note 2 - Reinsurance
The Company is involved in the assumption and cession of
reinsurance from/to other companies. The Company remains obligated to
its policyholders in the event that reinsurers do not meet their
obligations under the reinsurance agreements.
Effective March 1, 1992, the Company entered into a reinsurance
arrangement with State & County Mutual Fire Insurance Company ("State &
County"), an unaffiliated company, to assume 100% of the nonstandard
auto business produced by the Company and underwritten by State &
County. The arrangement is supplemented by a separate retrocession
agreement effective July 1, 1997 between the Company, GE Reinsurance
Corporation (GE Re) (formerly Kemper Reinsurance Company) and Dorinco
Reinsurance Company (Dorinco). From July 1, 1996 to June 30, 1997, the
Company supplemented this arrangement with a separate retrocession
agreement with GE Re, Dorinco and Odyssey Reinsurance Corporation.
Prior to July 1, 1996, the Company had a separate retrocession
agreement with Vesta Fire Insurance Corporation. Under each of the
agreements, the Company retains 25% and cedes 75% of the risk to the
reinsurers.
<PAGE>
Note 3 - Commitments and Contingencies
In March 1997, a jury returned a verdict against the Company and
in favor of a former director and officer of the Company in the amount
of approximately $517,000 on the basis of contractual and statutory
indemnification claims. The court subsequently granted the plaintiffs
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 of 1997, 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. The
amount on deposit (including interest) with the court of $1,355,457 as
of September 30, 1999 has been included as restricted cash in the
accompanying balance sheet.
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 established a reserve of $950,000 during the fourth quarter of
1997 for loss contingencies related to this case. This reserve remains
unchanged as of September 30, 1999. 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.
Item 2. Management's Discussion and Analysis or Plan of
Operation.
Introduction. Hallmark Financial Services, Inc. ("HFS") and its
wholly owned subsidiaries (collectively referred to herein as the
"Company") engage in the sale of property and casualty insurance
products. The Company's business primarily involves marketing,
underwriting and premium financing of non-standard automobile
insurance, as well as claims adjusting and other insurance related
services.
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
Finance Corporation ("HFC"); and a claims handling and adjustment firm,
Hallmark Claims Service, Inc. ("HCS"). The Company operates only in
Texas.
<PAGE>
Hallmark provides non-standard automobile liability and physical
damage insurance through reinsurance arrangements with several
unaffiliated companies. Through arrangements with State & County
Mutual Fire Insurance Company ("State & County"), Hallmark provides
insurance primarily for high risk drivers who do not qualify for
standard-rate insurance. Under supplementary quota-share reinsurance
agreements, Hallmark cedes a substantial portion of its risk and
retains the balance. The Company's principal reinsurers are GE
Reinsurance Corporation (GE Re) (formerly Kemper Reinsurance Company)
and Dorinco Reinsurance Company (Dorinco), and they collectively assume
75% of Hallmark's risk. HFC finances annual and six-month policy
premiums through its premium finance program. AHGA manages the
marketing of Hallmark policies through a network of retail insurance
agencies which operate under the Hallmark Agencies name, and through
independent agents operating under their own respective names.
Financial Condition and Liquidity
The Company's sources of funds are principally derived from
insurance related operations. Major sources of funds from operations
include premiums collected (net of policy cancellations and premiums
ceded), ceding commissions, premium finance service charges and service
fees. Other sources of funds are from financing and investment
activities.
Net cash provided by the Company's consolidated operating
activities was approximately $6.9 million greater during the first nine
months of 1999 than during the same period of 1998. This increase is
principally due to the increase in annual policy production during the
first nine months of 1999 as compared to 1998 as well as Hallmark's
increased retention of policy fees during 1999 (see further discussion
below). Cash used by investing activities increased approximately $7.8
million as the Company increased its purchase of debt securities and
short-term investments during the first nine months of 1999 to
capitalize on higher yields of bonds and discount notes as compared to
overnight investments. Additionally, during 1998, the Company received
approximately $1.1 million in proceeds from a note receivable. No such
proceeds were received during 1999 as the note was fully repaid during
1998. Cash provided by financing activities was approximately $0.8
million greater during the first nine months of 1998 as compared to
1999 primarily due to an advance of approximately $0.8 million from the
Company's bank credit line (see further discussions of bank credit line
below). No such advances were taken in 1999.
On a consolidated basis, the Company's liquidity increased $1.6
million during the first nine months of 1999. The Company's total cash,
cash equivalents and investments (excluding restricted cash of $1.8
million) at September 30, 1999 and December 31, 1998 were $16.3 million
and $14.6 million respectively. This increased liquidity is primarily
due to the combined effect of positive changes in reinsurance treaty
terms (as discussed below), and increased third party processing fees
and policy production relative to year-end 1998.
<PAGE>
A substantial portion of the Company's liquid assets are held by
Hallmark and are not available for general corporate purposes. Of the
Company's consolidated liquid assets of $16.3 million at September 30,
1999, approximately $1.7 million (as compared to approximately $2.8
million at December 31, 1998) represents non-restricted cash. During
1999, the Company is funding premium finance notes with internally
generated funds. These funds are transferred to Hallmark, and as such
are not available for general corporate purposes thus reducing 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. Furthermore, dividends and loans by Hallmark to the
Company are restricted and subject to Texas Department of Insurance
(TDI) approval. However, TDI has sanctioned the payment of management
fees, commissions and claims handling fees by Hallmark to HFS and
affiliates. During the first nine months of 1999 and 1998, Hallmark
paid or accrued $425,000 and $475,000, respectively, in management
fees. Management anticipates that Hallmark will continue to pay
management fees periodically during the remainder of 1999, and this
should continue to be a moderate source of unrestricted liquidity. The
Company has never received a dividend from Hallmark and there is no
immediate plan to pay a dividend.
Commissions from the Company's annual policy program for
independent agents represent a source of unrestricted liquidity when
annual policy production is level or increasing from the most recent
previous quarters. Under this program, AHGA offers independent agents
the ability to write annual policies and 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 $11.9 million during the first nine
months of 1999 as compared to $9.1 million during the first nine months
of 1998. During the first nine months of 1999, AHGA received
approximately $2.5 million in commissions related to this program from
Hallmark, and paid earned commissions of $1.4 million to independent
agents. This has resulted in increased unrestricted liquidity for the
Company during 1999. During the first nine months of 1998, AHGA
received $2.1 million in commissions related to this program from
Hallmark and paid earned commissions of $2.2 million to independent
agents.
Ceding commission income represents a significant source of funds
to the Company. 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 increased to $1.9 million at September 30, 1999 from
$1.3 million at December 31, 1998. Deferred policy acquisition costs
as of September 30, 1999 increased $0.7 million as compared to
December 31, 1998. The increase in deferred ceding commission income
and deferred policy acquisition costs is primarily due to the increase
in Hallmark's core premium volume, particularly with respect to annual
policy production, during the first nine months of 1999 as compared to
the last nine months of 1998.
<PAGE>
Premium finance notes receivable increased $2.8 million as of
September 30, 1999 compared to December 31, 1998 as a result of
increased annual policy production during the first nine months of
1999.
Prepaid reinsurance premiums and unearned premiums at September
30, 1999 increased as expected in relation to the balance at December
31, 1998 due to increased annual policy production during the first
nine months of 1999.
Accounts payable and other accrued expenses increased as a result
of increased commissions due to independent agents under the earned
commission program. As discussed above, annual policy production has
increased since year-end, thus generating more commission due to
agents.
At September 30, 1999, Hallmark's statutory capital and surplus
had increased slightly to approximately $5.5 million. Hallmark's
premium-to-surplus ratio on an annualized basis was 2.81 to 1 as of
September 30, 1999 as compared to 2.13 to 1 for the year ended December
31, 1998 and 2.24 to 1 at September 30, 1998. Management does not
presently expect Hallmark to require additional capital during 1999 to
fund existing operations. However, while programs currently in place
should provide sufficient capital for near-term growth, additional
capital or strategic alliances may be required to fund future expansion
of the Company.
Effective January 1, 1999, Hallmark amended its reinsurance
treaties with GE Re and Dorinco whereby the minimum commission rate was
increased by 1%, and Hallmark retains 100% of the policy fees as
compared to 62.5% previously. These changes have positively impacted
liquidity during the nine months of 1999.
Previously, the Company had a bank credit line which was used to
fund premium finance notes of HFC. The bank credit line was not
renewed upon its expiration on February 15, 1999. Assuming a modest
growth in annual/six month premium volumes, the Company intends to
funds its premium finance notes with internally generated funds during
1999. At September 30, 1999 and 1998, the Company had outstanding to
Dorinco a note payable of approximately $7.0 million. Provisions of
the Dorinco loan agreement, as amended, provide for interest only
payments through September 30, 1999. Dorinco and the Company have
agreed to further amend the loan agreement to provide for monthly
principal payments of $20,000 plus interest through January 31, 2000.
The remaining balance will be paid under the original note provisions
based upon a five year amortization.
<PAGE>
The Company continues to pursue third party claims handling and
administrative contracts. The Company provides program administration
for three unaffiliated managing general agencies (the unaffiliated
MGAs) and claims handling services for four unaffiliated MGAs. Under
these contracts, the Company, as program administrator, performs
certain administrative functions, including but not limited to, cash
management, underwriting and rate-setting reviews, underwriting and
policy processing (on two of the programs) and claims handling.
Hallmark assumes a pro-rata share of the business produced under each
of the unaffiliated MGAs programs (ranging from 15% to 25%) with the
remaining percentage of the business assumed by Hallmark's principal
reinsurers. The premium volume ceded from these programs is considered
a part of Hallmark's premium volume commitment to one of its principal
reinsurers.
Management is continuing to investigate opportunities for future
growth and expansion. Additional capital or strategic alliances may be
required to fund future expansion of the Company.
Results of Operations
Gross premiums written (prior to reinsurance) for the three and
nine months ended September 30, 1999 increased approximately 65% and
8%, respectively, in relation to gross premiums written during the same
respective periods in 1998. The increase in gross premiums written is
primarily due to the increase in the core State and County premium
volume during the third quarter and to increased volume from
unaffiliated MGAs as compared to the prior year. Net premiums written
(after reinsurance) for the three and nine months ended September 30,
1999 increased 76% and 28%, respectively, over the same respective
periods in 1998. The increase in net premiums written is due to the
combined effect of Hallmark's retention of 100% of policy fees
(effective January 1, 1999) and an increase in business written by four
unaffiliated MGAs, a portion of which is assumed by Hallmark. Since
this business is not reinsured, the impact on net premiums written is
intensified.
Gross premiums earned (prior to reinsurance) for the three months
ended September 30, 1999 increased approximately 2% over the same
period of 1998 while gross premiums earned for the nine months ended
September 30, 1999 decreased approximately 14% as compared to the same
period of 1998. For the three and nine months ended September 30,
1999, net premiums earned (after reinsurance) increased 27% and 7%,
respectively in relation to the same respective periods of 1998. The
disparate change in premiums earned prior to and after reinsurance is
due to the assumption of premiums produced by the unaffiliated MGAs,
and Hallmark's retention of the policy fees (effective January 1,
1999), both of which are fully retained by the Company, and thus have a
greater impact on net premiums earned.
Premiums earned (both prior to reinsurance and after reinsurance)
did not increase in the same proportion as premiums written. The
disproportionate changes are due to the combined effect of a
significant increase in premium volume during the third quarter of 1999
as compared to 1998, and an increase in the annual premium volume
during 1999 as compared to 1998. The earning of the annual premiums
written during the third quarter of 1999 will occur throughout the
remainder of 1999 and into the year 2000.
<PAGE>
Net incurred loss ratio (computed on net premiums earned after
reinsurance) for the three and nine months ended September 30, 1999
were 67% and 64%, respectively, compared to 75% and 66% for the same
respective periods of 1998. The decrease in the loss ratios between
1999 and 1998 is primarily due to the change in retention of policy
fees to 100% effective January 1, 1999 which has increased net earned
premium. This decrease is partially offset by (i) generally lower
premium rates in 1999, (ii) the increased assumption of third party
unaffiliated business (which has a higher overall loss ratio than the
core State & County business), and (iii) hail-related claims incurred
in May and June 1999.
Acquisition costs, net represents the amortization of acquisition
costs (and credits) deferred over the past twelve months and the
deferral of acquisition costs (and credits) incurred in the current
period. The increase in the credit balance of acquisition costs, net
for the nine months ended September 30, 1999 as compared to the same
respective period of 1998, is primarily due to an increase in the
deferral rate as the policy mix has shifted from more monthly to more
annual/six month policies during 1999. This increase is partially
offset by higher ceding commission income due to increased premium
volume and increased commission rate. The increase in acquisition
costs, net for the three months ended September 30, 1999 as compared to
the same respective period of 1998 is attributable to increased
commission expense recognition due to higher loss ratios on the
unaffiliated MGA business.
Other acquisition and underwriting expenses for the three and nine
months ended September 30, 1999 decreased approximately 15% and 8%,
respectively, over the same respective periods of 1998. The decrease
in expenses is primarily attributable to the combined effect of (1)
decreases in salaries and related expenses and reduced management
resources spent on insurance operations and (2) a 1% increase in the
minimum ceding commission. Management resources have been utilized to
build and manage the third party processing and program administration
business and are allocated to operating expenses rather than
acquisition and underwriting expenses. These decreases are partially
offset by an increase in commission expense related to assumption of
business written by unaffiliated MGAs and to the core State & County
premium during the third quarter of 1999.
Operating expenses include non-insurance operating expenses
related to premium finance operations, general corporate overhead, and
third party administrative and claims handling contracts. Related
revenues are derived from finance charges and service/consulting fees.
Operating expenses increased approximately 13% and 28% during the
three and nine month periods ended September 30, 1999 as compared to
the same respective periods of 1998. The increase in operating
expenses is primarily attributable to increased expenses related to the
processing of third party contracts.
Finance charges represent interest earned on premium notes issued
by HFC net of uncollected earned interest charge-offs. During the
three and nine months ended September 30, 1999, finance charges
increased approximately 96% and 7%, respectively, as compared to the
same respective periods of 1998. During 1999, charge-offs of
uncollectible interest have decreased in relation to 1998. This,
coupled with the increased core State & County annual premium volume,
resulted in a net increase in finance charges for 1999.
<PAGE>
Processing and service fees represent income earned on third party
processing and servicing contracts with unaffiliated MGAs. Processing
and service fees for the three and nine months ended September 30, 1999
increased 13% and 27%, respectively, as compared to the same respective
periods of 1998. The increased income is a result of increased year-
to-date premium volume of the third party MGAs during 1999 as compared
to 1998.
Year 2000 Compliance
General. The Year 2000 problem concerns the inability of some
computerized systems to properly recognize and process date-sensitive
information on and after January 1, 2000, due to the use of only the
last two digits to identify a year. During 1998, the Company
implemented a Year 2000 compliance program to assess and remedy Year
2000 issues affecting the Company. This Year 2000 compliance program
has been completed. As a result, the Company presently expects that
all of its material systems and equipment will be ready for the Year
2000 transition.
State of Readiness. The Company's primary information technology
systems may be classified in the following categories:
Insurance Systems: These systems consist of mainframe hardware and
the Company's proprietary software programs that support its day-to-day
insurance operations (including policy issuance, premiums collection
and claims handling) and periodic batch processing and regulatory
reporting.
Premium Finance Systems: These systems consist of personal
computer software programs from a third-party vendor which support
HFC's premium finance activities.
Investment Portfolio Systems: These systems consist of personal
computer software programs from a third-party vendor which support the
tracking and management of the Company's investment portfolio.
General Ledger Systems: These systems consist of personal computer
software programs from a third-party vendor which support the Company's
accounting and management information functions.
All of the Company's insurance systems have been modified to be
Year 2000 compliant. Year 2000 modifications and additional
enhancements to the programs supporting day-to-day insurance operations
have been written, tested and demonstrated to be fully operational. On
October 16, 1999, the Company conducted an extensive test of its
modified policy management system for Year 2000 compliance. After
advancing the system date beyond January 1, 2000, a series of tests
were performed on both the operating system and policy management
system. The results of the tests indicated that all insurance systems
were compliant with the Year 2000.
The Company's premium finance systems, investment portfolio
systems, and general ledger systems have been certified by the vendors
to be Year 2000 compliant and are fully implemented.
<PAGE>
In addition, the Company has tested all material equipment and
facilities known to contain embedded computer chips and believes them
to be Year 2000 compliant. The Company has also corresponded with all
of its major reinsurers and assured their Year 2000 readiness.
Costs to Address Year 2000 Issues. The Company has executed its
Year 2000 program primarily with existing internal resources. The
principal costs associated with these internal resources are payroll
and benefits of employees engaged in Year 2000 projects as part of
their normal duties. The Company does not separately track these
internal costs attributable to its Year 2000 program.
The Company has also incurred costs for outside consultants and
systems upgrades in connection with its Year 2000 program. As a result
of Year 2000 issues, the Company elected to upgrade its premium finance
systems and general ledger systems during 1998 and 1999, respectively.
No other significant projects have been accelerated or deferred due to
Year 2000 issues. The costs of these consultants and upgrades have not
been, and are not expected to be in the future, material to the results
of operations or financial condition of the Company. All costs of Year
2000 compliance have been recorded as an expense in the period
incurred.
Risks and Contingency Plans. The Company believes that its
information technology systems are presently Year 2000 compliant.
Therefore, any adverse consequences from Year 2000 issues will result
from presently unforeseen circumstances. As a result, the Company has
not made an assessment of worst case Year 2000 scenarios or developed
any contingency plans.
Although the Company believes that it is adequately addressing the
Year 2000 issue, there can be no assurance that Year 2000 problems will
not have a material adverse effect on its business, financial condition
or results of operations. In addition, disruptions in the economy
generally resulting from Year 2000 failures could have a material
adverse affect on the Company.
<PAGE>
Risks Associated with Forward-Looking Statements Included in this Form
10-QSB
This Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which are intended
to be covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future operations,
including plans and objectives relating to future growth of the
Company's business activities and availability of funds. The forward-
looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to
the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, regulatory
framework, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate and, therefore, there can be
no assurance that the forward-looking statements included in this Form
10-QSB will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives
and plans of the Company will be achieved.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Except for routine litigation incidental to the business
of the Company and as described in Note 3 to the
Consolidated Financial Statements of the Company, neither
the Company, nor any of the properties of the Company was
subject to any material pending or threatened legal
proceedings as of the date of this report.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Security Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits listed in the Exhibit Index appearing on page
14 are filed herewith.
(b) The Company did not file any Form 8-K Current Reports
during the third quarter of 1999.
<PAGE>
Exhibit Index
-------------
Exhibit Description
------- -----------
10(a) Addendum No. 1 to the Retrocession Contract effective
June 1, 1998 between Dorinco Re and American Hallmark
Insurance Company of Texas and Harold Loving, d/b/a
Texas Insurance Facilities.
10(b) Endorsement No. 1 to the Retrocession Contract effective
March 1, 1998 between Dorinco Re and American Hallmark
Insurance Company of Texas and Associated General
Agency, Inc.
10(c) Automobile Physical Damage Catastrophe Excess of Loss
Reinsurance Contract effective January 1, 1999 between
American Hallmark Insurance Company of Texas and GE
Reinsurance Corporation.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date: November 12, 1999 /s/ Ramon D. Phillips
----------------------------
Ramon D. Phillips, President
(Chief Executive Officer)
Date: November 12, 1999 /s/ John J. DePuma
---------------------------------------
John J. DePuma, Chief Financial Officer
EXHIBIT 10(a)
ADDENDUM NO. 1
to the
RETROCESSION CONTRACT
Effective: June 1, 1998
issued to
DORINCO REINSURANCE COMPANY
Midland, Michigan
by
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Dallas, Texas
IT IS HEREBY AGREED, effective March 1, 1999, that ARTICLE XIII shall
be deleted and the following substituted therefor:
"ARTICLE XIII
INTERMEDIARY
John B. Collins Associates, Inc. is hereby recognized as the
intermediary negotiating this Contract. All communications
(including but not limited to notices, statements, premiums,
return premiums, commissions, taxes, losses, loss adjustment
expenses, salvage and loss settlements) relating hereto shall be
transmitted to the Retrocedent and the Retrocessionaire through
John B. Collins Associates, Inc., 8300 Norman Center Drive,
Minneapolis, Minnesota 55437. Payments by the Retrocedent to John
B. Collins Associates, Inc. shall be deemed to constitute payment
to the Retrocessionaire. Payments by the Retrocessionaire to John
B. Collins Associates, Inc. shall be deemed only to constitute
payment to the Retrocedent to the extent that such payments are
actually received by the Retrocedent."
The provisions of this Contract shall remain other unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed by their duly authorized representatives at:
Midland, Michigan, this ______________ day of __________________, 1999.
_______________________________________________________________________
DORINCO REINSURANCE COMPANY
Dallas, Texas, this __________________ day of __________________, 1999.
_______________________________________________________________________
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
EXHIBIT 10(b)
ENDORSEMENT NO. 1
Attaching to and forming part of the RETROCESSION CONTRACT between
DORINCO REINSURANCE COMPANY, Midland, Michigan (hereafter referred to
as the "Retrocedant") AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS,
Dallas, Texas (hereinafter referred to as the "Retrocessionaire").
IT IS AGREED, effective 12:01 a.m., Central Standard Time, April 1,
1999 that the following changes are made to this Contract:
1. ARTICLE V shall read as follows and not as heretofore:
The term "Underwriting Year" as used in this Contract shall mean
those Policies with inception, renewal or anniversary date during
each 12-month period commencing with each April 1, except that the
first Underwriting Year shall be the period from inception to
April 1, 1999, and all premium attributable to, and loss arising
out of such Policies from such inception, renewal or anniversary
date until expiration, cancellation, or next anniversary,
whichever occurs first, will be ascribed to the Underwriting Year.
2. A copy of Endorsement No. 2 to the Underlying Agreement is
attached to and made a part of this Retrocession Contract.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have executed this Endorsement as of the following
dates:
In Midland, Michigan this _______________ day of ______________ , 1999.
DORINCO REINSURANCE COMPANY
By
(signature)
(name)
(title)
In Dallas, Texas this ___________________ day of ______________ , 1999.
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
By
(signature)
(name)
(title)
EXHIBIT 10(c)
AUTOMOBILE PHYSICAL DAMAGE CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT
issued to
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Dallas, Texas
(hereinafter referred to as the "Company")
by
GE REINSURANCE CORPORATION
Long Grove, Illinois
(hereinafter referred to as the "Reinsurer")
ARTICLE I - CLASSES OF BUSINESS REINSURED
By this Contract the Reinsurer agrees to reinsure the excess liability
which may accrue to the Company under its policies, contracts and
binders of insurance (hereinafter called "policies") in force at the
effective date hereof or issued or renewed on or after that date, and
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, Vaughn General Agency,
Inc., Tyler, Texas, Associated General Agency, Inc., Arlington, Texas,
or Harold Loving d/b/a Texas Insurance Facilities, Tyler, 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 Agreements titled
100% Quota Share Reinsurance Agreement, subject to the terms,
conditions and limitations hereinafter set forth.
ARTICLE II - TERM
A. This Contract shall become effective on January 1, 1999, with
respect to losses arising out of loss occurrences commencing on or
after that date, and shall remain in force until June 30, 2000,
both days inclusive.
B. If this Contract expires while a loss occurrence covered hereunder
is in progress, the Reinsurer's liability here- under shall,
subject to the other terms and conditions of this Contract, be
determined as if the entire loss occurrence had occurred prior to
the expiration of this Contract, provided that no part of such
loss occurrence is claimed against any renewal or replacement of
this Contract.
ARTICLE III - TERRITORY
The liability of the Reinsurer shall be limited to losses under
policies covering property located within the territorial limits of the
Company's original reinsurance contracts.
<PAGE>
ARTICLE IV - EXCLUSIONS
This Contract does not apply to and specifically excludes the
following:
1. Liability as a member, subscriber or reinsurer of any Pool,
Syndicate or Association; and any combination of insurers or
reinsurers formed for the purpose of covering specific
perils, specific classes of business or for the purpose of
insuring risks located in specific geographical areas; but
this exclusion shall not apply to FAIR Plans, Joint
Underwriting Associations or to Coastal Pools, Beach Plans or
similar plans, however styled. It is understood and agreed,
however, that this reinsurance does not include any increase
in liability to the Company resulting from (a) the inability
of any other participant in a FAIR Plan, Joint Under- writing
Association, Coastal Pool, Beach Plan or similar plan to meet
its liability, or (b) any claim against such a FAIR Plan,
Joint Underwriting Association, Coastal Pool, Beach Plan or
similar plan, or any participant therein, including the
Company, whether by way of subrogation or otherwise, brought
by or on behalf of any insolvency fund.
2. Nuclear risks as defined in the "Nuclear Incident Exclusion
Clause - Physical Damage - Reinsurance (U.S.A.)" attached to
and forming part of this Contract.
3. Loss or damage caused by or resulting from war, invasion,
hostilities, acts of foreign enemies, civil war, rebellion,
insurrection, military or usurped power, or martial law or
confiscation by order of any government or public authority,
but this exclusion shall not apply to loss or damage covered
under a standard policy with a standard War Exclusion Clause.
4. Financial guarantee and insolvency.
5. 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 damage 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 V - RETENTION AND LIMIT
A. The Company will aggregate the full amount of loss each and every
loss occurrence which is in excess of $25,000 (sustained by the
Company during the term of this Contract), and the Reinsurer shall
then be liable for 100% of the ultimate net loss for such
aggregate loss over and above an aggregate loss of $75,000, but
the Reinsurer will not be liable for more than $100,000 during the
term of this Contract.
B. This Contract shall not apply unless the Company's ultimate net
loss in a loss occurrence includes claims payable in respect of
three or more risks insured by the Issuing Carrier.
<PAGE>
ARTICLE VI - DEFINITIONS
A. "Ultimate net loss" as used herein is defined as the sum or sums
(including extra contractual obligations, interest on judgments,
litigation expenses and all other loss adjustment expenses, except
office expenses and salaries of the Company's regular employees)
paid or payable by the Company in settlement of claims and in
satisfaction of judgments rendered on account of such claims,
after deduction of all salvage, all recoveries and all claims on
inuring insurance or reinsurance, whether collectible or not.
Nothing herein shall be construed to mean that losses under this
Contract are not recoverable until the Company's ultimate net loss
has been ascertained.
B. "Extra contractual obligations" as used herein shall mean 90% of
any punitive, exemplary, compensatory or consequential damages
paid or payable by the Company as a result of an action against it
by its insured or its insured's assignee, which action alleges
negligence or bad faith on the part of the Company in handling a
claim under a policy subject to this Contract. An extra
contractual obligation shall be deemed to have occurred on the
same date as the loss covered or alleged to be covered under the
Company's policy. Notwithstanding anything stated herein, this
Con- tract shall not apply to any extra contractual obligation
incurred by the Company as a result of any fraudulent and/or
criminal act by any officer or director 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.
C. 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 and states 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 occasioned by the same event, except that the term
"loss occurrence" shall be further defined as follows:
1. As regards windstorm, hail, tornado, hurricane and cyclone,
including ensuing collapse and water damage, all individual
losses sustained by the Company occur- ring during any period
of 72 consecutive hours arising out of and directly
occasioned by the same event. How- ever, the event need not
be limited to one state or states contiguous thereto.
<PAGE>
2. As regards riot, riot attending a strike, civil com- motion,
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
assured's premises by strikers, provided such occupation
commenced during the aforesaid period.
3. As regards earthquake (the epicenter of which need not
necessarily be within the territorial confines referred to
above) 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 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 any "loss occurrences" referred to
in sub-paragraphs 1 and 2 above, where only one such period of 72
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.
ARTICLE VII - LOSS NOTICES AND SETTLEMENTS
A. The Company shall notify the Reinsurer whenever a loss is reserved
by the Company for an amount greater than its retention and/or
whenever a claim appears likely to result in a loss under this
Contract. The Reinsurer shall have the right to participate, at
its own expense, in the defense or control of any claim or suit or
proceeding involving this reinsurance.
B. All loss settlements made by the Company, provided they are within
the terms of this Contract, shall be binding upon the Reinsurer,
and the Reinsurer agrees to pay all amounts for which it may be
liable upon receipt of reasonable evidence of the amount paid (or
scheduled to be paid) by the Company.
<PAGE>
ARTICLE VIII - SALVAGE AND SUBROGATION
The Reinsurer shall be credited with salvage (i.e., reimbursement
obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company and sums
paid to attorneys as retainer, of obtaining such reimbursement or
making such recovery) on account of claims and settlements involving
reinsurance hereunder. Salvage thereon shall always be used to
reimburse the excess carriers in the reverse order of their priority
according to their participation before being used in any way to
reimburse the Company for its primary loss. The Company hereby agrees
to enforce its rights to salvage or subrogation relating to any loss, a
part of which loss was sustained by the Reinsurer, and to prosecute all
claims arising out of such rights.
ARTICLE IX - PREMIUM
A. As premium for the reinsurance coverage provided by this Contract,
the Company shall pay the Reinsurer the greater of $22,800 or
1.10% of its net earned premium for the term of this Contract.
B. The Company shall pay the Reinsurer an annual deposit premium of
$28,500 in four equal installments of $4,750 on January 1, April
1, July 1 and October 1 of 1999, and January 1 and April 1 of
2000.
C. Within 60 days after the date of expiration of this Contract, the
Company shall provide a report to the Rein- surer setting forth
the premium due hereunder, computed in accordance with paragraph
A, and any additional premium due the Reinsurer or return premium
due the Company shall be remitted promptly.
D. "Net earned premium" as used herein is defined as gross earned
premium of the Company for the classes of business reinsured
hereunder, less the earned portion of premiums ceded by the
Company for reinsurance which inures to the benefit of this
Contract.
ARTICLE X - OFFSET
The Company or the Reinsurer shall have, and may exercise at any time
and from time to time, the right to offset any balance or balances,
whether on account of premiums or on account of losses or otherwise,
due from one party to the other under the terms of this Contract.
However, in the event of the insolvency of any party hereto, offset
shall only be allowed in accordance with applicable law.
ARTICLE XI - ACCESS TO RECORDS
The Reinsurer, by its duly appointed representatives, shall have the
right at any reasonable time to examine all records of the Company
referring to business effected hereunder.
<PAGE>
ARTICLE XII - NET RETAINED LIABILITY
This Contract shall apply only to that portion of any insurance the
Company retains net for its own account (prior to deduction of any
underlying reinsurance specifically permitted in this Contract), and in
calculating the amount of any loss hereunder and the amount in excess
of which this Contract attaches, only loss or losses with respect to
that portion of any insurance the Company retains net for its own
account shall be included. It is understood and agreed, however, that
the Reinsurer's liability hereunder with respect to 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 be due from them, whether such inability arises from
the insolvency of such other reinsurers or otherwise.
ARTICLE XIII - ERRORS AND OMISSIONS
Inadvertent delays, errors or omissions made in connection with this
Contract or any transaction hereunder shall not relieve either party
from any liability which would have attached had such delay, error or
omission not occurred, provided always that such error or omission will
be rectified as soon as possible after discovery.
ARTICLE XIV - SERVICE OF SUIT (Applicable if the Reinsurer is not
domiciled in the United States of America, and/or is not authorized in
any State, Territory or District of the United States where
authorization is required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any
amount claimed to be due hereunder, the Reinsurer, at the request
of the Company, will submit to the jurisdiction of any court of
competent jurisdiction within the United States. Nothing in this
Article constitutes or should be understood to constitute a waiver
of the Reinsurer's rights to commence an action in any court of
competent jurisdiction in the United States, to remove an action
to a United States District Court, or to seek a transfer of a case
to another court as permitted by the laws of the United States or
of any state in the United States.
B. Further, pursuant to any statute of any state, territory or
district of the United States which makes provision therefor, the
Reinsurer hereby designates the Superintendent, Commissioner or
Director of Insurance or other officer specified for that purpose
in the statute, or his successor or successors in office, as its
true and lawful attorney upon whom may be served any lawful
process in any action, suit or proceeding instituted by or on
behalf of the Company or any beneficiary hereunder arising out of
this Contract.
<PAGE>
ARTICLE XV - INSOLVENCY
A. In the event of the insolvency of the reinsured Company, this
reinsurance shall be payable directly to the Company or to its
liquidator, receiver, conservator or statutory successor
immediately upon demand, with reasonable provision for
verification, on the basis of the liability of the Com- pany
without diminution because of the insolvency of the Company or
because the liquidator, receiver, conservator or statutory
successor of the Company has failed to pay all or a portion of any
claim. It is agreed, however, that the liquidator, receiver,
conservator or statutory successor of the Company shall give
written notice to the Reinsurer of the pendency of a claim against
the Company indicating the policy or bond reinsured which claim
would involve a pos- sible liability on the part of the Reinsurer
within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and
that during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its
liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Reinsurer shall be chargeable,
subject to the approval of the Court, against the Company as part
of the expense of conservation or liqui- dation to the extent of a
pro rata share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer.
B. It is further understood and agreed that, in the event of the
insolvency of the reinsured Company, the reinsurance under this
Contract shall be payable directly by the Rein- surer to the
Company or to its liquidator, receiver or statutory successor,
except as provided by Section 4118(a) of the New York Insurance
Law or except (a) where this Contract specifically provides
another payee of such reinsurance in the event of the insolvency
of the Company or (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.
ARTICLE XVI - ARBITRATION
A. As a condition precedent to any right of action hereunder, in the
event of any dispute or difference of opinion here- after arising
with respect to this Contract, it is hereby mutually agreed that
such dispute or difference of opinion shall be submitted to
arbitration. One Arbiter shall be chosen by the Company, the
other by the Reinsurer, and an Umpire shall be chosen by the two
Arbiters before they enter upon arbitration, all of whom shall be
active or retired disinterested executive officers of insurance
or reinsurance companies or Lloyd's London Underwriters. In the
event that either party should fail to choose an Arbiter within 30
days following a written request by the other party to do so, the
requesting party may choose two Arbiters who shall in turn choose
an Umpire before entering upon arbitration. If the two Arbiters
fail to agree upon the selection of an Umpire within 30 days
following their appointment, each Arbiter shall nominate three
candidates within 10 days thereafter, two of whom the other shall
decline, and the decision shall be made by drawing lots.
<PAGE>
B. Each party shall present its case to the Arbiters within 30 days
following the date of appointment of the Umpire. The Arbiters
shall consider this Contract as an honorable engagement rather
than merely as a legal obligation and they are relieved of all
judicial formalities and may abstain from following the strict
rules of law. The decision of the Arbiters shall be final and
binding on both parties; but failing to agree, they shall call in
the Umpire and the decision of the majority shall be final and
binding upon both parties. Judgment upon the final decision of
the Arbiters may be entered in any court of competent
jurisdiction.
C. Each party shall bear the expense of its own Arbiter, and shall
jointly and equally bear with the other the expense of the Umpire
and of the arbitration. In the event that the two Arbiters are
chosen by one party, as above provided, the expense of the
Arbiters, the Umpire and the arbitration shall be equally divided
between the two parties.
D. Any arbitration proceedings shall take place at a location
mutually agreed upon by the parties to this Contract, but
notwithstanding the location of the arbitration, all proceedings
pursuant hereto shall be governed by the law of the state in which
the Company has its principal office.
ARTICLE XVII - ENTIRE CONTRACT
A. This Contract constitutes the entire agreement between the parties
with respect to the business reinsured hereunder. There are no
understandings between the parties other than as expressed in this
Contract.
B. Any change to or modification of this Contract shall be null and
void unless made by an addendum signed by both parties.
ARTICLE XVIII - INTERMEDIARY
A. Effective for the period January 1, 1999 through February 29,
1999, both days inclusive, Sedgwick Re, Inc. is hereby recognized
as the intermediary negotiating this Contract 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 Sedgwick Re, Inc. shall be deemed
to constitute payment to the Reinsurer. Payments by the Reinsurer
to the Sedgwick Re, Inc. shall be deemed only to constitute
payment to the Company to the extent that such payments are
actually received by the Company.
<PAGE>
B. Effective March 1, 1999, John B. Collins Associates, Inc. is
hereby recognized as the intermediary negotiating this Contract.
All communications (including but not limited to notices,
statements, premiums, return premiums, commissions, taxes, losses,
loss adjustment expenses, salvage and loss settlements) relating
hereto shall be transmitted to the Company and the Reinsurer
through John B. Collins Associates, Inc., 8300 Norman Center
Drive, Minneapolis, Minnesota 55437. Payments by the Company to
John B. Collins Associates, Inc. shall be deemed to constitute
payment to the Reinsurer. Payments by the Reinsurer to John B.
Collins Associates, Inc. shall be deemed only to constitute
payment to the Company to the extent that such payments are
actually received by the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their duly authorized representatives at:
Dallas, Texas, this _________ day of _____________________, 1999.
_____________________________________________
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Long Grove, Illinois, this ______ day of _________________, 1999.
_____________________________________________
GE REINSURANCE CORPORATION
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 4,336,102
<DEBT-MARKET-VALUE> 6,336,834
<EQUITIES> 144,352
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,817,288
<CASH> 5,436,651
<RECOVER-REINSURE> 14,832,334
<DEFERRED-ACQUISITION> 901,525
<TOTAL-ASSETS> 57,371,115
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 11,124,889
<POLICY-OTHER> 2,992,581
<POLICY-HOLDER-FUNDS> 5,821,261
<NOTES-PAYABLE> 7,050,182
0
0
<COMMON> 355,638
<OTHER-SE> 11,208,754
<TOTAL-LIABILITY-AND-EQUITY> 57,371,115
10,161,652
<INVESTMENT-INCOME> 654,832
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 3,281,975
<BENEFITS> 6,531,824
<UNDERWRITING-AMORTIZATION> (161,766)
<UNDERWRITING-OTHER> 6,612,055
<INCOME-PRETAX> 1,026,346
<INCOME-TAX> 395,468
<INCOME-CONTINUING> 630,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 630,878
<EPS-BASIC> .06
<EPS-DILUTED> .06
<RESERVE-OPEN> 16,014,569
<PROVISION-CURRENT> 18,749,443
<PROVISION-PRIOR> 30,934
<PAYMENTS-CURRENT> (9,985,177)
<PAYMENTS-PRIOR> (7,904,282)
<RESERVE-CLOSE> 16,905,487
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
