CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
Commission file number 0-16090
Hallmark Financial Services, Inc.
---------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 87-0447375
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
14651 Dallas Parkway, Suite 900 Dallas, Texas 75240
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(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 May 12, 2000.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page Number
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Consolidated Balance Sheets at March 31, 2000 3
(unaudited) and December 31, 1999
Consolidated Statements of Income (unaudited) 4
for the three months
Consolidated Statements of Cash Flows 5
(unaudited) for the three months ended March
Notes to Consolidated Financial Statements 6
(unaudited)
<PAGE>
<TABLE>
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
March 31 December 31
ASSETS 2000 1999
(Unaudited)
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<S> <C> <C>
Investments:
Debt securities, held-to-maturity, at
amortized cost $ 2,937,181 $ 3,831,657
Equity securities, available-for-sale,
at market value 142,417 142,901
Short-term investments, at cost which
approximates market value 10,352,829 6,373,491
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Total investments 13,432,427 10,348,049
Cash and cash equivalents 5,446,697 5,786,069
Restricted cash 3,431,297 3,422,297
Prepaid reinsurance premiums 9,311,018 7,673,196
Premiums receivable from lender (net of
allowance for doubtful accounts of
$59,434 in 2000 and $68,287 in 1999) 10,931,926 9,058,958
Premiums receivable 1,652,448 741,613
Reinsurance recoverable 17,007,486 15,673,241
Deferred policy acquisition costs 3,297,535 2,741,076
Excess of cost over net assets acquired
(net of accumulated amortization of
$1,524,333 in 2000 and $1,485,080 in 1999) 4,705,880 4,745,134
Deferred federal income taxes 257,982 212,059
Accrued investment income 13,610 52,721
Other assets 630,974 547,820
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$ 70,119,280 $ 61,002,233
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<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 11,377,225 $ 9,288,366
Unpaid losses and loss adjustment expenses 18,796,135 17,804,254
Unearned premiums 14,341,822 11,761,723
Reinsurance balances payable 4,041,176 2,623,603
Deferred ceding commissions 2,632,541 2,142,097
Drafts outstanding 1,087,584 901,471
Current federal income taxes payable 190,644 46,124
Accrued ceding commission refund 1,408,571 1,251,614
Accounts payable and other accrued expenses 3,223,227 2,516,222
Accrued litigation costs 950,000 950,000
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Total liabilities 58,048,925 49,285,474
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Stockholders' equity
Common stock, $.03 par value, authorized
100,000,000 shares issued 11,854,610
shares in 2000 and 1999 355,638 355,638
Capital in excess of par value 10,875,212 10,875,212
Retained earnings 1,897,150 1,543,304
Accumulated other comprehensive income (14,478) (14,228)
Treasury stock, 806,477 shares, at cost (1,043,167) (1,043,167)
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Total stockholders' equity 12,070,355 11,716,759
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- -
$ 70,119,280 $ 61,002,233
========== ===========
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
Three Months Ended
March 31
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2000 1999
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<S> <C> <C>
Gross premiums written $ 13,227,847 $ 10,165,693
Ceded premiums written (7,739,191) (5,970,307)
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Net Premiums written $ 5,488,656 $ 4,195,386
=========== ===========
Revenues:
Gross premiums earned 10,647,748 7,759,732
Earned premiums ceded (6,101,370) (4,666,676)
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Net Premiums earned 4,546,378 3,093,056
Investment income, net of expenses 225,797 173,557
Finance charges - 437,721
Processing and service fees 1,371,992 463,950
Other income 84,727 101,963
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Total revenues 6,228,894 4,270,247
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Benefits, losses and expenses:
Losses and loss adjustment expenses 9,546,333 5,256,731
Reinsurance recoveries (6,389,826) (3,436,200)
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Net losses and loss adjustment expenses 3,156,507 1,820,531
Acquisition costs, net (66,015) (274,466)
Other acquisition and underwriting expenses 1,165,148 1,332,601
Operating expenses 1,144,955 709,492
Interest expense 231,474 146,947
Amortization of intangible assets 39,253 39,255
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Total benefits losses and expenses 5,671,322 3,774,360
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Income from operations before federal
income taxes 557,572 495,887
Federal income tax expense 203,726 190,165
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Net income $ 353,846 $ 305,722
=========== ===========
Basic and diluted earnings per share $ 0.03 $ 0.03
=========== ===========
Common stock shares outstanding 11,048,133 11,048,133
=========== ===========
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)
Three Months Ended
March 31
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2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 353,846 $ 305,722
Adjustments to reconcile net loss to cash
Depreciation and amortization expense 100,923 79,807
Change in deferred Federal income taxes (45,923) (13,650)
Change in prepaid reinsurance premiums (1,637,822) (1,303,632)
Change in premiums receivable (910,835) (109,753)
Change in deferred policy acquisition (556,459) (628,669)
Change in deferred ceding commissions 490,444 354,204
Change in unpaid losses and loss 991,881 (316,090)
Change in unearned premiums 2,580,099 2,405,960
Change in reinsurance recoverable (1,334,245) 371,973
Change in reinsurance balances payable 1,417,573 1,038,828
Change in current federal income tax - 150,031
Change in current federal income tax 144,520 153,405
Change in accrued ceding commission refund 156,957 216,717
Change in all other liabilities 892,868 279,633
Change in all other assets (74,466) (52,792)
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Net cash provided by operating 2,569,361 2,931,694
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Cash flows from investing activities:
Purchases of property and equipment (31,247) (5,883)
Premium finance notes originated (9,101,758) (6,756,533)
Premium finance notes repaid 7,228,790 5,188,928
Change in restricted cash (9,000) (14,000)
Maturities and redemptions of investment 894,960 1,181,473
Purchase of short-term investments (6,479,337) (5,425,562)
Maturities of short-term investments 2,500,000 1,700,000
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Net cash used in investing activities (4,997,592) (4,131,577)
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Cash flows from financing activities:
Repayment of short-term borrowings (17,309) (43,632)
Net advances from lender 2,106,168 -
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Net cash provided by (used in) financing 2,088,859 (43,632)
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Decrease in cash and cash equivalents (339,372) (1,243,515)
Cash and cash equivalents at beginning of period 5,786,069 6,776,274
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Cash and cash equivalents at end of period $ 5,446,697 $ 5,532,759
========= ========
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 March 31,
2000 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 accounting principles generally
accepted in the United States ("GAAP") have been condensed or omitted.
Reference is made to the Company's annual consolidated financial statements
for the year ended December 31, 1999 for a description of accounting
policies and certain other disclosures. Certain items in the 1999 interim
financial statements have been reclassified to conform to the 2000
presentation.
The results of operations for the period ended March 31, 2000 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 Company ("GE RE") and
Dorinco Reinsurance Company ("Dorinco"). Under the agreement, 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 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 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 $1,382,006 as of March 31, 2000 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 March 31, 2000.
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.
[This space left blank intentionally]
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, GE Reinsurance Company ("GE RE") and Dorinco
Reinsurance Company ("Dorinco"), 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 American
Hallmark Agencies name, and through independent agents operating under their
own respective names. Additionally, AHGA provides premium processing,
underwriting, reinsurance accounting and cash management for unaffiliated
managing general agents ("MGAs"). HCS provides fee-based claims adjustment,
salvage, subrogation recovery and litigation services to Hallmark and
unaffiliated MGAs.
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, and premium finance service fees. Other
sources of funds are from financing and investment activities.
Net cash provided by the Company's consolidated operating activities
decreased approximately $0.4 million during the first quarter of 2000
compared to the first quarter of 1999. This decrease is primarily the
result of the combined effect of increased assumed premium volume of
unaffiliated MGAs, and the fact that these assumed premiums are received
from the reinsurer on a collected basis rather than a written basis. This
decrease is partially offset by increases in various liabilities. Cash
used by investing activities increased approximately $0.9 million. As a
result of increased annual policy premium volume, HFC originated more
premium finance notes than it received in premium finance payments. Cash
provided by financing activities increased $2.1 million as a result of net
advances under HFC's secured financing arrangement with an unaffiliated
third party.
On a consolidated basis, the Company's liquidity increased $2.7 million
during the first quarter of 2000. The Company's total cash, cash
equivalents and investments (excluding restricted cash of approximately $3.4
million) at March 31, 2000 and December 31, 1999 were $18.9 million and
$16.1 million respectively. This increased liquidity is primarily due to
the increased policy production relative to year-end 1999.
<PAGE>
A substantial portion of the Company's liquid assets is held by
Hallmark and is not available for general corporate purposes. Of the
Company's consolidated liquid assets of $18.9 million at March 31, 2000,
$1.1 million (as compared to approximately $.9 million at December 31,
1999) 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. 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 three months of 2000 and 1999, Hallmark paid
or accrued management fees of $50,000 and $175,000, respectively. Management
anticipates that Hallmark will continue to pay management fees periodically
during the remainder of 2000, 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.
During the first quarter of 2000, the amount of funding available to
fund premium finances notes under the secured financing arrangement with the
unaffiliated third party was increased to $10.0 million from $8.0 million.
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 $6.1 million during the
first quarter of 2000 as compared to $4.5 million during the first quarter
of 1999. During the first quarter of 2000, AHGA received $1.3 million in
commissions related to this program from Hallmark and paid earned
commissions of $0.7 million to independent agents. This has resulted in
increased unrestricted liquidity for the Company. During the first quarter
of 1999, AHGA received $0.9 million in commissions related to this program
from Hallmark and paid earned commissions of $0.4 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 $2.6 million at March 31, 2000 from $2.1 million at December
31, 1999. Deferred policy acquisition costs increased to $3.3 million at
March 31, 2000 from $2.7 million at December 31, 1999. The increase in
deferred ceding commission income and deferred policy acquisition costs is
primarily due to the increase in Hallmark's core State and County annual
premium volume.
Prepaid reinsurance premiums, unpaid losses and LAE, reinsurance
recoverable and unearned premiums generally increased as expected in
relation to increased premium writings.
<PAGE>
At March 31, 2000, Hallmark reported statutory capital and surplus of
approximately $6.1 million, which reflects a slight increase over the
balance reported at December 31, 1999. On a rolling-twelve months premium
basis, Hallmark's premium-to-surplus ratio for the twelve months ended March
31, 2000 was 2.75 to 1 as compared to 2.57 to 1 for the year ended December
31, 1999 and 2.24 to 1 for the twelve months ended March 31, 1999.
Management does not presently expect Hallmark to require additional capital
during 2000 to fund existing operations.
The Company continues to pursue third party claims handling and
administrative contracts. The Company provides program administration for
three 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, 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.
Management believes that in order to effectively compete in today's
marketplace, the Company must expand its offerings of products and services
and enhance its information technology capabilities. To better serve agents
and insureds, as well as to diversify risk and revenue sources, the Company
intends to begin offering homeowners and renters insurance commencing June
2000. The program will be offered through an alliance with an unaffiliated
MGA. Marketing and administration of the program will be handled by the
Company, while underwriting functions will be retained by the unaffiliated
MGA. The Company will not assume any underwriting risk in connection with
this program.
Additionally, management plans to implement a phased program to strengthen
its information technology capabilities in several areas. The thrust of the
first phase will be to enhance Company and agency relationships by improving
content and timeliness of information to support agents in servicing
insureds. The target date for commencement of testing by certain agents is
August 2000, with a full roll-out beginning in the fourth quarter of fiscal
2000. The emphasis of the second phase will be to implement point-of-sale-
technology to support agents in more promptly and efficiently producing new
business, as well as to improve the quality and timeliness of service to
existing insureds. Roll-out of this phase is scheduled for early 2001.
When fully implemented, these information technology enhancements should
result in significant cost savings for the Company as well as participating
agents.
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) and net premiums written
(after reinsurance) for the first quarter of 2000 increased 30% and 31%,
respectively, in relation to premiums written during the same period in
1999. The increase in premiums written was due to the increase in the core
State & County premium volume and increased premium volume from assumed
business produced by unaffiliated MGAs as compared to the prior year.
<PAGE>
Gross premiums earned (prior to reinsurance) for the first quarter of
2000 increased 37% as compared to the same period of 1999. For the first
quarter of 2000, net premiums earned (after reinsurance) increased 47% in
relation to the same period of 1999. The disproportionate change in
premiums earned prior to and after reinsurance is due to policy fees and the
assumption of increased premiums produced by the unaffiliated MGAs, both of
which are fully retained by the Company and thus have a greater impact on
net premiums earned.
Net incurred loss ratio (computed on net premiums earned after
reinsurance) for the first quarter of 2000 was 69% compared to 59% for the
same respective period of 1999. Hail incurred during the first quarter of
2000 accounted for 1% of the 10% increase in the net loss ratio. The
remaining increase is attributable to the increased loss ratios on the core
State & County business and the assumed unaffiliated MGA business.
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
decrease in the credit balance of acquisition costs, net is primarily due to
a larger increase in ceding commission income (credits) than in acquisition
costs (debits) along with an increase in the deferral rate (of both credits
and debits).
Other acquisition and underwriting expenses decreased approximately 13%
during the first quarter of 2000 as compared to the same respective period
of 1999. The decrease in expenses is primarily attributable to the combined
effect of (1) increased ceding commission income as a result of increased
core State & County premium volume and (2) increased management resources
spent on premium finance operations and third party administrative and
claims handling contracts. Management resources focused on building the
third party processing and program administration business are allocated to
operating expenses rather than acquisition and underwriting expenses. These
decreases are partially offset by an increase in commission expenses related
to assumption of business written by unaffiliated MGAs and other variable
expenses associated with increased premium volume.
Operating expenses include 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 61% for the first quarter of 2000 as compared to the same
period of 1999. The majority of this increase in operating expenses is
attributable to the variable expenses related to increased volume in the
Company's premium finance operations as well as the deployment of management
and staff resources devoted to the development, administration and/or
processing of third party contracts.
During 1999, the Company earned finance charges (interest) on premium
notes issued by HFC. The Company has not earned finance charges during 2000
as the result of a secured financing and servicing arrangement with an
unaffiliated third party to fund HFC's premium finance activities. This
arrangement was initiated during the fourth quarter of 1999. As HFC
services the premium finance notes for the unaffiliated third party, income
derived from the premium finance notes is reflected in processing and
servicing fees.
<PAGE>
Processing and service fees represents income earned on the servicing
arrangement with the unaffiliated third party (as discussed above) and third
party processing and servicing contracts with unaffiliated MGAs. Processing
and service fees for the first quarter of 2000 increased $0.9 million
(196%) principally as a result of the premium finance servicing arrangement
with the unaffiliated third party.
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 on Senior 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 exhibit listed in the Exhibit Index appearing on page
(b) The Company did not file any Form 8-K Current Reports
<PAGE>
Exhibit Index
Exhibit Description
Number
------
10 (a) Automobile Physical damage catastrophe Excess of
Loss Reinsurance Contract effective July 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: May 12, 2000 /s/ Ramon D. Phillips
-----------------------------------
Ramon D. Phillips, President (Chief
Executive Officer)
Date: May 12, 2000 /s/ John J. DePuma
-----------------------------------
John J. DePuma, Chief Financial Officer
EXHIBIT 10 (a)
AUTOMOBILE PHYSICAL DAMAGE CATASTROPHE
EXCESS OF LOSS REINSURANCE CONTRACT
Effective: July 1, 1999
issued to
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Dallas, Texas
JOHN B. COLLINS ASSOCIATES, INC.
8300 Norman Center Drive
Minneapolis, Minnesota 55437
<PAGE>
CONTENTS
ARTICLE PAGE
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I CLASSES OF BUSINESS REINSURED 1
II TERM 1
III TERRITORY 2
IV EXCLUSIONS 2
V RETENTION AND LIMIT 3
VI DEFINITIONS 3
VII LOSS NOTICES AND SETTLEMENTS 5
VIII SALVAGE AND SUBROGATION 5
IX PREMIUM 6
X OFFSET 6
XI ACCESS TO RECORDS 6
XII NET RETAINED LIABILITY 6
XIII ERRORS AND OMISSIONS 7
XIV SERVICE OF SUIT 7
XV INSOLVENCY 8
XVI ARBITRATION 8
XVII ENTIRE CONTRACT 9
XVIII WARRANTY 10
XIX INTERMEDIARY 10
<PAGE>
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")
and
GE REINSURANCE CORPORATION
Lincolnshire, Illinois
(hereinafter referred to as the "Reinsurer")
<PAGE>
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, Van Wagoner Companies, Inc., Plano, 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 July 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 hereunder 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.
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
Underwriting 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.
<PAGE>
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
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.
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 Contract 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.
<PAGE>
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 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 states 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 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 subparagraphs 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.
<PAGE>
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.
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 $15,500 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
$19,000 in four equal installments of $4,750 on 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 Reinsurer 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.
<PAGE>
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.
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 Company 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 possible 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 liquidation 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 Reinsurer 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 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.
ARTICLE XVI - ARBITRATION
A. As a condition precedent to any right of action hereunder, in the event
of any dispute or difference of opinion hereafter 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 - WARRANTY
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.
ARTICLE XIX - 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 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their duly authorized representatives at:
Dallas, Texas, this _________ day of _____________________, 20__.
_____________________________________________
AMERICAN HALLMARK INSURANCE COMPANY OF TEXAS
Lincolnshire, Illinois, this ______ day of _______________, 20__.
_____________________________________________
GE REINSURANCE CORPORATION
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Due to format constraints of this Financial Data Schedule (FDS) certain
Balance Sheet items were omitted: i.e. Prepaid reinsurance premiums,
Premium notes receivable, Installment premiums receivable, Excess of cost
over net assets acquired and Other assets. Refer to actual 10QSB
submission.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 2,937,181
<DEBT-MARKET-VALUE> 10,352,829
<EQUITIES> 142,417
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 13,432,427
<CASH> 5,446,697
<RECOVER-REINSURE> 17,007,486
<DEFERRED-ACQUISITION> 664,994
<TOTAL-ASSETS> 70,119,280
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 14,341,822
<POLICY-OTHER> 4,041,176
<POLICY-HOLDER-FUNDS> 5,719,382
<NOTES-PAYABLE> 11,377,225
0
0
<COMMON> 355,638
<OTHER-SE> 11,714,717
<TOTAL-LIABILITY-AND-EQUITY> 70,119,280
4,546,378
<INVESTMENT-INCOME> 225,797
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 1,456,719
<BENEFITS> 3,156,507
<UNDERWRITING-AMORTIZATION> (66,015)
<UNDERWRITING-OTHER> 2,310,103
<INCOME-PRETAX> 557,572
<INCOME-TAX> 203,726
<INCOME-CONTINUING> 353,846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 353,846
<EPS-BASIC> .03
<EPS-DILUTED> .03
<RESERVE-OPEN> 17,804,000
<PROVISION-CURRENT> 8,367,832
<PROVISION-PRIOR> 1,100,907
<PAYMENTS-CURRENT> (3,326,871)
<PAYMENTS-PRIOR> (5,149,733)
<RESERVE-CLOSE> 18,796,135
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
