Nevada
|
87-0447375
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or organization)
|
|
Identification
No.)
|
777 Main Street, Suite 1000, Fort Worth,
Texas
|
76102
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Page Number
|
||
Consolidated
Balance Sheets at September 30, 2010 (unaudited) and December 31,
2009
|
3
|
|
Consolidated
Statements of Operations (unaudited) for the three months and nine months
ended September 30, 2010 and September 30, 2009
|
4
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income (unaudited)
for the three months and nine months ended September 30, 2010 and
September 30, 2009
|
5
|
|
Consolidated
Statements of Cash Flows (unaudited) for the nine months ended September
30, 2010 and September 30, 2009
|
6
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
7
|
September 30
|
December 31
|
|||||||
|
2010
|
2009
|
||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Investments:
|
||||||||
Debt
securities, available-for-sale, at fair value (cost;
$353,659 in 2010 and $287,108 in 2009)
|
$ | 360,238 | $ | 291,876 | ||||
Equity
securities, available-for-sale, at fair value (cost; $34,366 in 2010 and
$27,251 in 2009)
|
44,025 | 35,801 | ||||||
Total
investments
|
404,263 | 327,677 | ||||||
Cash
and cash equivalents
|
81,984 | 112,270 | ||||||
Restricted
cash and cash equivalents
|
5,991 | 5,458 | ||||||
Premiums
receivable
|
52,288 | 46,635 | ||||||
Accounts
receivable
|
2,958 | 3,377 | ||||||
Receivable
for securities
|
7 | - | ||||||
Ceded
unearned premiums
|
15,520 | 12,997 | ||||||
Reinsurance
recoverable
|
19,684 | 10,008 | ||||||
Deferred
policy acquisition costs
|
23,181 | 20,792 | ||||||
Goodwill
|
41,080 | 41,080 | ||||||
Intangible
assets, net
|
26,124 | 28,873 | ||||||
Federal
income tax recoverable
|
3,120 | - | ||||||
Prepaid
expenses
|
1,733 | 923 | ||||||
Other
assets
|
15,437 | 18,779 | ||||||
Total
assets
|
$ | 693,370 | $ | 628,869 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Liabilities:
|
||||||||
Note
payable
|
$ | 2,800 | $ | 2,800 | ||||
Subordinated
debt securities
|
56,702 | 56,702 | ||||||
Reserves
for unpaid losses and loss adjustment expenses
|
223,828 | 184,662 | ||||||
Unearned
premiums
|
138,218 | 125,089 | ||||||
Unearned
revenue
|
140 | 191 | ||||||
Reinsurance
balances payable
|
1,141 | 3,281 | ||||||
Accrued
agent profit sharing
|
1,772 | 1,790 | ||||||
Accrued
ceding commission payable
|
4,232 | 8,600 | ||||||
Pension
liability
|
2,367 | 2,628 | ||||||
Deferred
federal income taxes, net
|
1,366 | 942 | ||||||
Federal
income tax payable
|
- | 1,266 | ||||||
Payable
for securities
|
11,609 | 19 | ||||||
Accounts
payable and other accrued expenses
|
12,209 | 13,258 | ||||||
Total
liabilities
|
456,384 | 401,228 | ||||||
Commitments
and contingencies (Note 17)
|
||||||||
Redeemable
non-controlling interest
|
1,288 | 1,124 | ||||||
Stockholders'
equity:
|
||||||||
Common
stock, $0.18 par value (authorized 33,333,333 shares in 2010 and
2009;
|
||||||||
issued
20,872,831 in 2010 and 2009)
|
3,757 | 3,757 | ||||||
Additional
paid-in capital
|
121,589 | 121,016 | ||||||
Retained
earnings
|
105,396 | 98,482 | ||||||
Accumulated
other comprehensive income
|
10,218 | 8,589 | ||||||
Treasury
stock, at cost (748,662 shares in 2010 and 757,828 in
2009)
|
(5,262 | ) | (5,327 | ) | ||||
Total
stockholders' equity
|
235,698 | 226,517 | ||||||
$ | 693,370 | $ | 628,869 |
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30
|
September
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Gross
premiums written
|
$ | 82,199 | $ | 74,013 | $ | 247,238 | $ | 220,545 | ||||||||
Ceded
premiums written
|
(10,152 | ) | (11,222 | ) | (29,263 | ) | (16,714 | ) | ||||||||
Net
premiums written
|
72,047 | 62,791 | 217,975 | 203,831 | ||||||||||||
Change
in unearned premiums
|
(1,641 | ) | 1,447 | (10,606 | ) | (17,844 | ) | |||||||||
Net
premiums earned
|
70,406 | 64,238 | 207,369 | 185,987 | ||||||||||||
Investment
income, net of expenses
|
4,036 | 3,467 | 10,513 | 11,203 | ||||||||||||
Net
realized gains
|
311 | 597 | 5,757 | 1,116 | ||||||||||||
Finance
charges
|
1,833 | 1,525 | 5,247 | 4,324 | ||||||||||||
Commission
and fees
|
(392 | ) | 2,018 | (1,204 | ) | 10,834 | ||||||||||
Other
income
|
23 | 58 | 45 | 93 | ||||||||||||
Total
revenues
|
76,217 | 71,903 | 227,727 | 213,557 | ||||||||||||
Losses
and loss adjustment expenses
|
51,293 | 40,579 | 146,449 | 115,552 | ||||||||||||
Operating
expenses
|
21,602 | 23,428 | 65,956 | 71,056 | ||||||||||||
Interest
expense
|
1,151 | 1,147 | 3,447 | 3,456 | ||||||||||||
Amortization
of intangible assets
|
917 | 916 | 2,749 | 2,412 | ||||||||||||
Total
expenses
|
74,963 | 66,070 | 218,601 | 192,476 | ||||||||||||
Income
before tax
|
1,254 | 5,833 | 9,126 | 21,081 | ||||||||||||
Income
tax expense
|
205 | 1,585 | 2,142 | 5,766 | ||||||||||||
Net
income
|
1,049 | 4,248 | 6,984 | 15,315 | ||||||||||||
Less:
Net income attributable to
|
||||||||||||||||
non-controlling interest
|
33 | 34 | 70 | 36 | ||||||||||||
Net
income attributable to Hallmark Financial Services, Inc.
|
$ | 1,016 | $ | 4,214 | $ | 6,914 | $ | 15,279 | ||||||||
Net
income per share attributable to Hallmark Financial
|
||||||||||||||||
Services,
Inc. common stockholders:
|
||||||||||||||||
Basic
|
$ | 0.05 | $ | 0.20 | $ | 0.34 | $ | 0.73 | ||||||||
Diluted
|
$ | 0.05 | $ | 0.20 | $ | 0.34 | $ | 0.73 |
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Common
Stock
|
||||||||||||||||
Balance,
beginning of period
|
$ | 3,757 | $ | 3,757 | $ | 3,757 | $ | 3,751 | ||||||||
Issuance
of common stock upon option exercises
|
- | - | - | 6 | ||||||||||||
Balance,
end of period
|
3,757 | 3,757 | 3,757 | 3,757 | ||||||||||||
Additional
Paid-In Capital
|
||||||||||||||||
Balance,
beginning of period
|
121,403 | 120,736 | 121,016 | 119,928 | ||||||||||||
Accretion
of redeemable noncontrolling interest
|
(77 | ) | (87 | ) | (239 | ) | (259 | ) | ||||||||
Equity
based compensation
|
263 | 612 | 852 | 1,488 | ||||||||||||
Exercise
of stock options
|
- | - | (40 | ) | 104 | |||||||||||
Balance,
end of period
|
121,589 | 121,261 | 121,589 | 121,261 | ||||||||||||
Retained
Earnings
|
||||||||||||||||
Balance,
beginning of period
|
104,380 | 84,972 | 98,482 | 72,242 | ||||||||||||
Adjustment
to opening balance, net of tax (Note 2)
|
- | - | - | 1,665 | ||||||||||||
104,380 | 84,972 | 98,482 | 73,907 | |||||||||||||
Net
income attributable to Hallmark Financial Services, Inc.
|
1,016 | 4,214 | 6,914 | 15,279 | ||||||||||||
Balance,
end of period
|
105,396 | 89,186 | 105,396 | 89,186 | ||||||||||||
Accumulated
Other Comprehensive Income (Loss)
|
||||||||||||||||
Balance,
beginning of period
|
6,966 | 836 | 8,589 | (16,432 | ) | |||||||||||
Adjustment
to opening balance, net of tax (Note 2)
|
- | - | - | (1,665 | ) | |||||||||||
Adjusted
balance, beginning of period
|
6,966 | 836 | 8,589 | (18,097 | ) | |||||||||||
Additional
minimum pension liability, net of tax
|
36 | 80 | 109 | 239 | ||||||||||||
Net
unrealized holding gains arising during period
|
3,527 | 7,881 | 7,277 | 27,197 | ||||||||||||
Reclassification
adjustment for gains included in net income
|
(311 | ) | (636 | ) | (5,757 | ) | (1,178 | ) | ||||||||
Balance,
end of period
|
10,218 | 8,161 | 10,218 | 8,161 | ||||||||||||
Treasury
Stock
|
||||||||||||||||
Balance,
beginning of period
|
(5,262 | ) | (77 | ) | (5,327 | ) | (77 | ) | ||||||||
Acquisition
of treasury shares
|
- | (5,250 | ) | - | (5,250 | ) | ||||||||||
Issuance
of treasury stock upon option exercises
|
- | - | 65 | - | ||||||||||||
Balance,
end of period
|
(5,262 | ) | (5,327 | ) | (5,262 | ) | (5,327 | ) | ||||||||
Total
Stockholders' Equity
|
$ | 235,698 | $ | 217,038 | $ | 235,698 | $ | 217,038 | ||||||||
Net
income
|
$ | 1,049 | $ | 4,248 | $ | 6,984 | $ | 15,315 | ||||||||
Additional
minimum pension liability, net of tax
|
36 | 80 | 109 | 239 | ||||||||||||
Net
unrealized holding gains arising during period
|
3,527 | 7,881 | 7,277 | 27,197 | ||||||||||||
Reclassification
adjustment for gains included in net income
|
(311 | ) | (636 | ) | (5,757 | ) | (1,178 | ) | ||||||||
Comprehensive
income
|
4,301 | 11,573 | 8,613 | 41,573 | ||||||||||||
Less:
Comprehensive income attributable to
|
||||||||||||||||
non-controlling
interest
|
33 | 34 | 70 | 36 | ||||||||||||
Comprehensive
income attributable to
|
||||||||||||||||
Hallmark
Financial Services, Inc.
|
$ | 4,268 | $ | 11,539 | $ | 8,543 | $ | 41,537 |
Nine
Months Ended
|
||||||||
September
30
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 6,984 | $ | 15,315 | ||||
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||
Depreciation
and amortization expense
|
3,527 | 2,979 | ||||||
Deferred
federal income taxes
|
(1,034 | ) | (1,117 | ) | ||||
Realized
gains on investments
|
(5,757 | ) | (1,116 | ) | ||||
Change
in ceded unearned premiums
|
(2,523 | ) | (5,036 | ) | ||||
Change
in premiums receivable
|
(5,653 | ) | (4,787 | ) | ||||
Change
in accounts receivable
|
370 | 815 | ||||||
Change
in deferred policy acquisition costs
|
(2,389 | ) | (3,105 | ) | ||||
Change
in reserves for unpaid losses and loss adjustment expenses
|
39,166 | 15,252 | ||||||
Change
in unearned premiums
|
13,129 | 23,462 | ||||||
Change
in unearned revenue
|
(51 | ) | (1,771 | ) | ||||
Change
in accrued agent profit sharing
|
(18 | ) | (243 | ) | ||||
Change
in reinsurance recoverable
|
(9,676 | ) | 5,087 | |||||
Change
in reinsurance balances payable
|
(2,140 | ) | 2,680 | |||||
Change
in current federal income tax recoverable/payable
|
(4,386 | ) | (384 | ) | ||||
Change
in accrued ceding commission payable
|
(4,368 | ) | (5 | ) | ||||
Change
in all other liabilities
|
(1,310 | ) | (8,094 | ) | ||||
Change
in all other assets
|
5,063 | 5,763 | ||||||
Net
cash provided by operating activities
|
28,934 | 45,695 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(1,155 | ) | (907 | ) | ||||
Net
transfers (into)/from restricted cash and cash equivalents
|
(533 | ) | 3,470 | |||||
Purchases
of investment securities
|
(157,332 | ) | (74,430 | ) | ||||
Maturities,
sales and redemptions of investment securities
|
99,919 | 65,283 | ||||||
Payment
for acquisition of subsidiaries
|
- | (7,246 | ) | |||||
Net
cash used in investing activities
|
(59,101 | ) | (13,830 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from exercise of employee stock options
|
25 | 110 | ||||||
Net
repayments of notes payable
|
- | (1,417 | ) | |||||
Distribution
to non-controlling interest
|
(144 | ) | (20 | ) | ||||
Purchase
of treasury shares
|
- | (5,250 | ) | |||||
Net
cash used in financing activities
|
(119 | ) | (6,577 | ) | ||||
Increase
(Decrease) in cash and cash equivalents
|
(30,286 | ) | 25,288 | |||||
Cash
and cash equivalents at beginning of period
|
112,270 | 59,134 | ||||||
Cash
and cash equivalents at end of period
|
$ | 81,984 | $ | 84,422 | ||||
Supplemental
cash flow information:
|
||||||||
Interest
paid
|
$ | 3,442 | $ | 3,494 | ||||
Taxes
paid
|
$ | 7,564 | $ | 7,267 | ||||
Supplemental
schedule of non-cash investing activities:
|
||||||||
Change
in receivable for securities related to investment disposals settled after
the balance sheet date
|
$ | 42 | $ | 850 | ||||
Change
in payable for securities related to investment purchases settled after
the balance sheet date
|
$ | 11,590 | $ | (2,918 | ) |
|
·
|
Level
1: quoted prices in active markets for identical
assets;
|
|
·
|
Level
2: inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, inputs of identical assets for
less active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term
of the instrument; and
|
|
·
|
Level
3: inputs to the valuation methodology that are unobservable for the asset
or liability.
|
Quoted Prices in
|
Other
|
|||||||||||||||
Active Markets for
|
Observable
|
Unobservable
|
||||||||||||||
Identical Assets
|
Inputs
|
Inputs
|
||||||||||||||
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
|||||||||||||
U.S.
Treasury securities and obligations of U.S. Government
|
$ | - | $ | 6,545 | $ | - | $ | 6,545 | ||||||||
Corporate
debt securities
|
- | 198,402 | - | 198,402 | ||||||||||||
Municipal
bonds
|
- | 134,419 | 20,024 | 154,443 | ||||||||||||
Asset
backed
|
- | 848 | - | 848 | ||||||||||||
Total
debt securities
|
- | 340,214 | 20,024 | 360,238 | ||||||||||||
Financial
services
|
21,356 | - | - | 21,356 | ||||||||||||
All
other
|
22,669 | - | - | 22,669 | ||||||||||||
Total
equity securities
|
44,025 | - | - | 44,025 | ||||||||||||
Total
debt and equity securities
|
$ | 44,025 | $ | 340,214 | $ | 20,024 | $ | 404,263 |
Beginning
balance as of January 1, 2010
|
$ | 25,272 | ||
Net
purchases, issuances, sales and settlements
|
(5,125 | ) | ||
Total
realized/unrealized gains included in net income
|
- | |||
Net
losses included in other comprehensive income
|
(123 | ) | ||
Transfers
in and/or out of Level 3
|
- | |||
Ending
balance as of September 30, 2010
|
$ | 20,024 |
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30
|
September
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
U.S.
Treasury securities and obligations of U.S. Government
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Corporate
debt securities
|
281 | 239 | 3,650 | 1,269 | ||||||||||||
Municipal
bonds
|
- | - | (74 | ) | (48 | ) | ||||||||||
Equity
securities-financial services
|
- | 58 | 1,767 | 115 | ||||||||||||
Equity
securities-all other
|
30 | 300 | 414 | 318 | ||||||||||||
Net
realized gain before other-than-temporary impairments
|
311 | 597 | 5,757 | 1,654 | ||||||||||||
Other-than-temporary
impairments
|
- | - | - | (538 | ) | |||||||||||
Net
realized gain
|
$ | 311 | $ | 597 | $ | 5,757 | $ | 1,116 |
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
As of September 30, 2010
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
U.S.
Treasury securities and
|
||||||||||||||||
obligations
of U.S. Government
|
$ | 6,509 | $ | 36 | $ | - | $ | 6,545 | ||||||||
Corporate
debt securities
|
193,469 | 5,854 | (921 | ) | 198,402 | |||||||||||
Municipal
bonds
|
152,877 | 3,621 | (2,055 | ) | 154,443 | |||||||||||
Asset
backed
|
804 | 44 | - | 848 | ||||||||||||
Total
debt securities
|
353,659 | 9,555 | (2,976 | ) | 360,238 | |||||||||||
Financial
services
|
16,834 | 4,727 | (205 | ) | 21,356 | |||||||||||
All
other
|
17,532 | 5,465 | (328 | ) | 22,669 | |||||||||||
Total
equity securities
|
34,366 | 10,192 | (533 | ) | 44,025 | |||||||||||
Total
debt and equity securities
|
$ | 388,025 | $ | 19,747 | $ | (3,509 | ) | $ | 404,263 | |||||||
As of December 31, 2009
|
||||||||||||||||
U.S.
Treasury securities and
|
||||||||||||||||
obligations
of U.S. Government
|
$ | 6,830 | $ | 23 | $ | (17 | ) | $ | 6,836 | |||||||
Corporate
debt securities
|
94,560 | 7,190 | (2,201 | ) | 99,549 | |||||||||||
Municipal
bonds
|
185,036 | 2,543 | (2,786 | ) | 184,793 | |||||||||||
Asset
backed
|
682 | 17 | (1 | ) | 698 | |||||||||||
Total
debt securities
|
287,108 | 9,773 | (5,005 | ) | 291,876 | |||||||||||
Financial
services
|
17,156 | 5,008 | (232 | ) | 21,932 | |||||||||||
All
other
|
10,095 | 3,790 | (16 | ) | 13,869 | |||||||||||
Total
equity securities
|
27,251 | 8,798 | (248 | ) | 35,801 | |||||||||||
Total
debt and equity securities
|
$ | 314,359 | $ | 18,571 | $ | (5,253 | ) | $ | 327,677 |
As
of September 30, 2010
|
||||||||||||||||||||||||
12
months or less
|
Longer
than 12 months
|
Total
|
||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
|||||||||||||||||||
U.S.
Treasury securities and obligations of U.S. Government
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Corporate
debt securities
|
28,953 | (229 | ) | 4,774 | (692 | ) | 33,727 | (921 | ) | |||||||||||||||
Municipal
bonds
|
7,356 | (32 | ) | 48,391 | (2,023 | ) | 55,747 | (2,055 | ) | |||||||||||||||
Total
debt securities
|
36,309 | (261 | ) | 53,165 | (2,715 | ) | 89,474 | (2,976 | ) | |||||||||||||||
Financial
services
|
1,259 | (205 | ) | - | - | 1,259 | (205 | ) | ||||||||||||||||
All
other
|
4,611 | (328 | ) | - | - | 4,611 | (328 | ) | ||||||||||||||||
Total
equity securities
|
5,870 | (533 | ) | - | - | 5,870 | (533 | ) | ||||||||||||||||
Total
debt and equity securities
|
$ | 42,179 | $ | (794 | ) | $ | 53,165 | $ | (2,715 | ) | $ | 95,344 | $ | (3,509 | ) |
As
of December 31, 2009
|
||||||||||||||||||||||||
12
months or less
|
Longer
than 12 months
|
Total
|
||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
|||||||||||||||||||
U.S.
Treasury securities and obligations of U.S. Government
|
$ | 3,202 | $ | (17 | ) | $ | - | $ | - | $ | 3,202 | $ | (17 | ) | ||||||||||
Corporate
debt securities
|
18,924 | (166 | ) | 9,642 | (2,035 | ) | 28,566 | (2,201 | ) | |||||||||||||||
Municipal
bonds
|
28,940 | (1,524 | ) | 42,183 | (1,262 | ) | 71,123 | (2,786 | ) | |||||||||||||||
Asset
backed
|
51 | (1 | ) | - | - | 51 | (1 | ) | ||||||||||||||||
Total
debt securities
|
51,117 | (1,708 | ) | 51,825 | (3,297 | ) | 102,942 | (5,005 | ) | |||||||||||||||
Financial
services
|
1,417 | (232 | ) | - | - | 1,417 | (232 | ) | ||||||||||||||||
All
other
|
658 | (16 | ) | - | - | 658 | (16 | ) | ||||||||||||||||
Equity
securities
|
2,075 | (248 | ) | - | - | 2,075 | (248 | ) | ||||||||||||||||
Total
debt and equity securities
|
$ | 53,192 | $ | (1,956 | ) | $ | 51,825 | $ | (3,297 | ) | $ | 105,017 | $ | (5,253 | ) |
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
(in
thousands)
|
||||||||
Due
in one year or less
|
$ | 27,776 | $ | 28,312 | ||||
Due
after one year through five years
|
184,429 | 190,046 | ||||||
Due
after five years through ten years
|
96,305 | 97,434 | ||||||
Due
after ten years
|
44,345 | 43,598 | ||||||
Asset
backed
|
804 | 848 | ||||||
$ | 353,659 | $ | 360,238 |
Balance,
January 1, 2010
|
$ | 1,168 | ||
Reductions
for securities sold or matured during the period
|
(1,168 | ) | ||
Balance,
September 30, 2010
|
$ | - |
Average
|
Contractual
|
Intrinsic
|
||||||||||||||
Number
of
|
Exercise
|
Term
|
Value
|
|||||||||||||
Shares
|
Price
|
(Years)
|
$ | (000 | ) | |||||||||||
Outstanding
at January 1, 2010
|
1,614,166 | $ | 9.62 | |||||||||||||
Granted
|
25,000 | $ | 9.12 | |||||||||||||
Exercised
|
(9,166 | ) | $ | 2.69 | ||||||||||||
Forfeited
or expired
|
- | $ | - | |||||||||||||
Outstanding
at September 30, 2010
|
1,630,000 | $ | 9.65 | 7.3 | $ | 1,515 | ||||||||||
Exercisable
at September 30, 2010
|
779,427 | $ | 10.34 | 6.6 | $ | 538 |
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Intrinsic
value of options exercised
|
$ | - | $ | - | $ | 47 | $ | 107 | ||||||||
Cost
of share-based payments (non-cash)
|
$ | 263 | $ | 612 | $ | 852 | $ | 1,488 | ||||||||
Income
tax benefit of share-based
|
||||||||||||||||
payments
recognized in income
|
$ | 8 | $ | 118 | $ | 23 | $ | 231 |
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2010
|
2009
|
|||||||
Grant
date fair value per share
|
$ | 3.62 | $ | 2.84 | ||||
Expected
term (in years)
|
6.0 | 6.2 | ||||||
Expected
volatility
|
35.0 | % | 40.0 | % | ||||
Risk
free interest rate
|
3.2 | % | 2.5 | % |
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues:
|
||||||||||||||||
Standard
Commercial Segment
|
$ | 17,211 | $ | 19,569 | $ | 52,510 | $ | 57,783 | ||||||||
Specialty
Commercial Segment
|
32,892 | 32,346 | 97,503 | 97,601 | ||||||||||||
Personal
Segment
|
25,418 | 18,735 | 71,386 | 54,971 | ||||||||||||
Corporate
|
696 | 1,253 | 6,328 | 3,202 | ||||||||||||
Consolidated
|
$ | 76,217 | $ | 71,903 | $ | 227,727 | $ | 213,557 | ||||||||
Pre-tax income (loss), net of non-controlling
interest:
|
||||||||||||||||
Standard
Commercial Segment
|
$ | (234 | ) | $ | 2,164 | $ | (3,043 | ) | $ | 5,987 | ||||||
Specialty
Commercial Segment
|
2,515 | 3,588 | 9,829 | 14,280 | ||||||||||||
Personal
Segment
|
743 | 2,225 | 4,525 | 7,738 | ||||||||||||
Corporate
|
(1,803 | ) | (2,178 | ) | (2,255 | ) | (6,960 | ) | ||||||||
Consolidated
|
$ | 1,221 | $ | 5,799 | $ | 9,056 | $ | 21,045 |
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Standard
Commercial Segment
|
$ | 130,916 | $ | 136,745 | ||||
Specialty
Commercial Segment
|
316,040 | 280,970 | ||||||
Personal
Segment
|
165,692 | 109,844 | ||||||
Corporate
|
80,722 | 101,310 | ||||||
$ | 693,370 | $ | 628,869 |
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Ceded
earned premiums
|
$ | 9,483 | $ | 7,137 | $ | 26,740 | $ | 12,331 | ||||||||
Reinsurance
recoveries
|
$ | 6,247 | $ | 4,166 | $ | 16,825 | $ | 7,388 |
|
·
|
Property
catastrophe. Our property catastrophe reinsurance
reduces the financial impact a catastrophe could have on our commercial
and personal property insurance lines. Catastrophes might
include multiple claims and policyholders. Catastrophes include
hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter
weather and fires. Our property catastrophe reinsurance is
excess-of-loss reinsurance, which provides us reinsurance coverage for
losses in excess of an agreed-upon amount. We utilize
catastrophe models to assist in determining appropriate retention and
limits to purchase. The terms of our property catastrophe
reinsurance are:
|
|
o
|
We
retain the first $3.0 million of property catastrophe losses;
and
|
|
o
|
Our
reinsurers reimburse us 100% for any loss in excess of our $3.0 million
retention up to $30.0 million for each catastrophic occurrence, subject to
an aggregate limit of $54.0
million.
|
|
·
|
Commercial
property. Our commercial property reinsurance is
excess-of-loss coverage intended to reduce the financial impact a
single-event or catastrophic loss may have on our results. The
terms of our commercial property reinsurance
are:
|
|
o
|
We
retain the first $1.0 million of loss for each commercial property
risk;
|
|
o
|
Our
reinsurers reimburse us for the next $5.0 million for each commercial
property risk, and $10.0 million for all commercial property risk involved
in any one occurrence, in all cases subject to an aggregate limit of $30.0
million for all commercial property losses occurring during the treaty
period; and
|
|
o
|
Individual
risk facultative reinsurance is purchased on any commercial property with
limits above $6.0 million.
|
|
·
|
Commercial
casualty. Our commercial casualty reinsurance is
excess-of-loss coverage intended to reduce the financial impact a
single-event loss may have on our results. The terms of our
commercial casualty reinsurance
are:
|
|
o
|
We
retain the first $1.0 million of any commercial liability risk;
and
|
|
o
|
Our
reinsurers reimburse us for the next $5.0 million for each commercial
liability risk.
|
|
·
|
Aviation. We
purchase reinsurance specific to the aviation risks underwritten by our
General Aviation business unit. This reinsurance provides
aircraft hull and liability coverage and airport liability coverage on a
per occurrence basis on the following
terms:
|
|
o
|
We
retain the first $1.0 million of each aircraft hull or liability loss or
airport liability loss;
|
|
o
|
Our
reinsurers reimburse us for the next $5.5 million of each combined
aircraft hull and liability loss and for the next $4.0 million of each
airport liability loss.
|
|
·
|
Excess &
Umbrella. Currently, we purchase proportional
reinsurance where we retain 21% of each risk and cede the remaining 79% to
reinsurers. In states where we are not yet licensed to offer a
non-admitted product, we utilize a fronting arrangement pursuant to which
we assume all of the risk and then retrocede a portion of that risk under
the same proportional reinsurance treaty. Through June 30, 2009, our
Excess & Umbrella business unit wrote policies pursuant to a general
agency agreement with an unaffiliated carrier and we assumed 35% of
the risk from that carrier.
|
|
·
|
Hallmark County
Mutual. HCM is used to front certain lines of business
in our Specialty Commercial and Personal Segments in Texas where we
previously produced policies for third party county mutual insurance
companies and reinsured 100% for a fronting fee. In addition,
HCM is used to front business produced by unaffiliated third parties. HCM
does not retain any business.
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Deferred
|
$ | (10,725 | ) | $ | (7,454 | ) | $ | (38,422 | ) | $ | (38,539 | ) | ||||
Amortized
|
10,280 | 8,257 | 36,033 | 35,434 | ||||||||||||
Net
|
$ | (445 | ) | $ | 803 | $ | (2,389 | ) | $ | (3,105 | ) |
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Weighted
average shares - basic
|
20,124 | 20,652 | 20,122 | 20,790 | ||||||||||||
Effect
of dilutive securities
|
62 | 14 | 56 | 32 | ||||||||||||
Weighted
average shares - assuming dilution
|
20,186 | 20,666 | 20,178 | 20,822 |
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Interest
cost
|
$ | 163 | $ | 160 | $ | 488 | $ | 482 | ||||||||
Amortization
of net loss
|
56 | 122 | 168 | 366 | ||||||||||||
Expected
return on plan assets
|
(136 | ) | (121 | ) | (409 | ) | (363 | ) | ||||||||
Net
periodic pension cost
|
$ | 83 | $ | 161 | $ | 247 | $ | 485 |
|
·
|
Standard
Commercial Segment. Our Standard Commercial Segment
includes the standard lines commercial property/casualty insurance
products and services handled by our Standard Commercial business unit
(formerly known as our AHIS Operating
Unit).
|
|
·
|
Specialty
Commercial Segment. Our Specialty Commercial Segment
includes the excess and surplus lines commercial property/casualty
insurance products and services handled by our E&S Commercial business
unit (formerly known as our TGA Operating Unit), the general aviation
insurance products and services handled by our General Aviation business
unit (formerly known as our Aerospace Operating Unit), and the low and
middle market commercial umbrella and excess liability insurance products
handled by our Excess & Umbrella business unit (formerly known as our
Heath XS Operating Unit).
|
|
·
|
Personal
Segment. Our Personal Segment includes the non-standard
personal automobile insurance and complementary personal insurance
products and services handled by our Personal Lines business unit
(formerly known as our Personal Lines Operating
Unit).
|
|
·
|
American
Hallmark Insurance Company of Texas (“AHIC”) presently retains
all of the risks on the commercial property/casualty policies marketed
within the Standard Commercial Segment, retains a portion of risks on the
personal policies marketed within the Personal Segment and assumes a
portion of the risks on the commercial and aviation property/casualty
policies marketed within the Specialty Commercial
Segment.
|
|
·
|
Hallmark
Specialty Insurance Company (“HSIC”) presently retains a
portion of the risks on the commercial property/casualty policies marketed
within the Specialty Commercial
Segment.
|
|
·
|
Hallmark
Insurance Company (“HIC”) presently retains a portion of the risks
on both the personal policies marketed within the Personal Segment and
commercial and aviation property/casualty products marketed within the
Specialty Commercial Segment.
|
|
·
|
Hallmark
County Mutual Insurance Company (“HCM”) control and
management was acquired effective June 5, 2009 through the acquisition of
all of the issued and outstanding shares of CYR Insurance Management
Company (“CYR”). CYR has as its primary asset a
management agreement with HCM, which provides for CYR to have management
and control of HCM. HCM is used to front certain lines of
business in our Specialty Commercial and Personal Segments in Texas where
we previously produced policies for third party county mutual insurance
companies and reinsured 100% for a fronting fee. HCM does not
retain any business.
|
Three
Months Ended September 30, 2010
|
||||||||||||||||||||
Standard
|
Specialty
|
|||||||||||||||||||
Commercial
|
Commercial
|
Personal
|
||||||||||||||||||
Segment
|
Segment
|
Segment
|
Corporate
|
Consolidated
|
||||||||||||||||
Produced
premium (1)
|
$ | 15,586 | $ | 39,653 | $ | 25,188 | $ | - | $ | 80,427 | ||||||||||
Gross
premiums written
|
15,586 | 41,425 | 25,188 | - | 82,199 | |||||||||||||||
Ceded
premiums written
|
(1,147 | ) | (8,915 | ) | (90 | ) | - | (10,152 | ) | |||||||||||
Net
premiums written
|
14,439 | 32,510 | 25,098 | - | 72,047 | |||||||||||||||
Change
in unearned premiums
|
1,626 | (1,368 | ) | (1,899 | ) | - | (1,641 | ) | ||||||||||||
Net
premiums earned
|
16,065 | 31,142 | 23,199 | - | 70,406 | |||||||||||||||
Total
revenues
|
17,211 | 32,892 | 25,418 | 696 | 76,217 | |||||||||||||||
Losses
and loss adjustment expenses
|
12,183 | 20,788 | 18,322 | - | 51,293 | |||||||||||||||
Pre-tax income
(loss), net of
|
||||||||||||||||||||
non-controlling
interest
|
(234 | ) | 2,515 | 743 | (1,803 | ) | 1,221 | |||||||||||||
Net
loss ratio (2)
|
75.8 | % | 66.8 | % | 79.0 | % | 72.9 | % | ||||||||||||
Net
expense ratio (2)
|
32.2 | % | 30.1 | % | 21.0 | % | 29.4 | % | ||||||||||||
Net
combined ratio (2)
|
108.0 | % | 96.9 | % | 100.0 | % | 102.3 | % | ||||||||||||
Three
Months Ended September 30, 2009
|
||||||||||||||||||||
Standard
|
Specialty
|
|||||||||||||||||||
Commercial
|
Commercial
|
Personal
|
||||||||||||||||||
Segment
|
Segment
|
Segment
|
Corporate
|
Consolidated
|
||||||||||||||||
Produced
premium (1)
|
$ | 17,309 | $ | 36,064 | $ | 17,424 | $ | - | $ | 70,797 | ||||||||||
Gross
premiums written
|
17,309 | 39,280 | 17,424 | - | 74,013 | |||||||||||||||
Ceded
premiums written
|
(1,144 | ) | (10,078 | ) | - | - | (11,222 | ) | ||||||||||||
Net
premiums written
|
16,165 | 29,202 | 17,424 | - | 62,791 | |||||||||||||||
Change
in unearned premiums
|
1,627 | 92 | (272 | ) | - | 1,447 | ||||||||||||||
Net
premiums earned
|
17,792 | 29,294 | 17,152 | - | 64,238 | |||||||||||||||
Total
revenues
|
19,569 | 32,346 | 18,735 | 1,253 | 71,903 | |||||||||||||||
Losses
and loss adjustment expenses
|
11,425 | 17,641 | 11,513 | - | 40,579 | |||||||||||||||
Pre-tax income
(loss), net of
|
||||||||||||||||||||
non-controlling
interest
|
2,164 | 3,588 | 2,225 | (2,178 | ) | 5,799 | ||||||||||||||
Net
loss ratio (2)
|
64.2 | % | 60.2 | % | 67.1 | % | 63.2 | % | ||||||||||||
Net
expense ratio (2)
|
32.8 | % | 29.8 | % | 22.4 | % | 31.0 | % | ||||||||||||
Net
combined ratio (2)
|
97.0 | % | 90.0 | % | 89.5 | % | 94.2 | % |
Nine
Months Ended September 30, 2010
|
||||||||||||||||||||
Standard
|
Specialty
|
|||||||||||||||||||
Commercial
|
Commercial
|
Personal
|
||||||||||||||||||
Segment
|
Segment
|
Segment
|
Corporate
|
Consolidated
|
||||||||||||||||
Produced
premium (1)
|
$ | 52,487 | $ | 115,286 | $ | 74,932 | $ | - | $ | 242,705 | ||||||||||
Gross
premiums written
|
52,475 | 119,831 | 74,932 | - | 247,238 | |||||||||||||||
Ceded
premiums written
|
(3,092 | ) | (26,062 | ) | (109 | ) | - | (29,263 | ) | |||||||||||
Net
premiums written
|
49,383 | 93,769 | 74,823 | - | 217,975 | |||||||||||||||
Change
in unearned premiums
|
200 | (1,288 | ) | (9,518 | ) | - | (10,606 | ) | ||||||||||||
Net
premiums earned
|
49,583 | 92,481 | 65,305 | - | 207,369 | |||||||||||||||
Total
revenues
|
52,510 | 97,503 | 71,386 | 6,328 | 227,727 | |||||||||||||||
Losses
and loss adjustment expenses
|
39,451 | 58,415 | 48,583 | - | 146,449 | |||||||||||||||
Pre-tax income
(loss), net of
|
||||||||||||||||||||
non-controlling
interest
|
(3,043 | ) | 9,829 | 4,525 | (2,255 | ) | 9,056 | |||||||||||||
Net
loss ratio (2)
|
79.6 | % | 63.2 | % | 74.4 | % | 70.6 | % | ||||||||||||
Net
expense ratio (2)
|
31.9 | % | 29.2 | % | 21.7 | % | 29.5 | % | ||||||||||||
Net
combined ratio (2)
|
111.5 | % | 92.4 | % | 96.1 | % | 100.1 | % | ||||||||||||
Nine
Months Ended September 30, 2009
|
||||||||||||||||||||
Standard
|
Specialty
|
|||||||||||||||||||
Commercial
|
Commercial
|
Personal
|
||||||||||||||||||
Segment
|
Segment
|
Segment
|
Corporate
|
Consolidated
|
||||||||||||||||
Produced
premium (1)
|
$ | 56,881 | $ | 110,598 | $ | 54,968 | $ | - | $ | 222,447 | ||||||||||
Gross
premiums written
|
56,881 | 108,696 | 54,968 | - | 220,545 | |||||||||||||||
Ceded
premiums written
|
(3,331 | ) | (13,383 | ) | - | - | (16,714 | ) | ||||||||||||
Net
premiums written
|
53,550 | 95,313 | 54,968 | - | 203,831 | |||||||||||||||
Change
in unearned premiums
|
419 | (13,692 | ) | (4,571 | ) | - | (17,844 | ) | ||||||||||||
Net
premiums earned
|
53,969 | 81,621 | 50,397 | - | 185,987 | |||||||||||||||
Total
revenues
|
57,783 | 97,601 | 54,971 | 3,202 | 213,557 | |||||||||||||||
Losses
and loss adjustment expenses
|
33,890 | 48,422 | 33,240 | - | 115,552 | |||||||||||||||
Pre-tax income
(loss), net of
|
||||||||||||||||||||
non-controlling
interest
|
5,987 | 14,280 | 7,738 | (6,960 | ) | 21,045 | ||||||||||||||
Net
loss ratio (2)
|
62.8 | % | 59.3 | % | 66.0 | % | 62.1 | % | ||||||||||||
Net
expense ratio (2)
|
32.4 | % | 30.0 | % | 21.4 | % | 30.8 | % | ||||||||||||
Net
combined ratio (2)
|
95.2 | % | 89.3 | % | 87.4 | % | 92.9 | % |
Exhibit
Number
|
Description
|
|
3(a)
|
Restated
Articles of Incorporation of the registrant, as amended (incorporated by
reference to Exhibit 3.1 to the registrant’s Registration Statement on
Form S-1 [Registration No. 333-136414] filed September 8,
2006).
|
|
3(b)
|
Amended
and Restated By-Laws of the registrant (incorporated by reference to
Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed October
1, 2007).
|
|
4(a)
|
Specimen
certificate for Common Stock, $0.18 par value per share, of the registrant
(incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed September 8,
2006).
|
Exhibit
Number
|
Description
|
|
4(b)
|
Indenture
dated as of June 21, 2005, between Hallmark Financial Services, Inc. and
JPMorgan Chase Bank, National Association (incorporated by reference to
Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed June 27,
2005).
|
|
4(c)
|
Amended
and Restated Declaration of Trust of Hallmark Statutory Trust I dated as
of June 21, 2005, among Hallmark Financial Services, Inc., as sponsor,
Chase Bank USA, National Association, as Delaware trustee, and JPMorgan
Chase Bank, National Association, as institutional trustee, and Mark
Schwarz and Mark Morrison, as administrators (incorporated by reference to
Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed June 27,
2005).
|
|
4(d)
|
Form
of Junior Subordinated Debt Security Due 2035 (incorporated by reference
to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed June
27, 2005).
|
|
4(e)
|
Form
of Capital Security Certificate (incorporated by reference to Exhibit 4.2
to the registrant’s Current Report on Form 8-K filed June 27,
2005).
|
|
4(f)
|
First
Restated Credit Agreement dated January 27, 2006, between Hallmark
Financial Services, Inc. and The Frost National Bank (incorporated by
reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K
filed February 2, 2006).
|
|
4(g)
|
Form
of Registration Rights Agreement dated January 27, 2006, between Hallmark
Financial Services, Inc. and Newcastle Special Opportunity Fund I, L.P.
and Newcastle Special Opportunity Fund II, L.P. (incorporated by reference
to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed
February 2, 2006).
|
|
4(h)
|
Indenture
dated as of August 23, 2007, between Hallmark Financial Services, Inc. and
The Bank of New York Trust Company, National Association (incorporated by
reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K
filed August 24, 2007).
|
|
4(i)
|
Amended
and Restated Declaration of Trust of Hallmark Statutory Trust II dated as
of August 23, 2007, among Hallmark Financial Services, Inc., as sponsor,
The Bank of New York (Delaware), as Delaware trustee, and The Bank of New
York Trust Company, National Association, as institutional trustee, and
Mark Schwarz and Mark Morrison, as administrators (incorporated by
reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K
filed August 24, 2007).
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|
4(j)
|
Form
of Junior Subordinated Debt Security Due 2037 (incorporated by reference
to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed August
24, 2007).
|
|
4(k)
|
Form
of Capital Security Certificate (incorporated by reference to Exhibit 4.2
to the registrant’s Current Report on Form 8-K filed August 24,
2007).
|
|
4(l)
|
Seventh
Amendment to First Restated Credit Agreement dated May 27, 2010, between
Hallmark Financial Services, Inc. and The Frost National Bank
(incorporated by reference to Exhibit 10.1 to the registrant’s Current
Report on Form 8-K filed June 17, 2010).
|
|
31(a)
|
Certification
of principal executive officer required by Rule 13a-14(a) or Rule
15d-14(a).
|
|
31(b)
|
Certification
of principal financial officer required by Rule 13a-14(a) or Rule
15d-14(a).
|
Exhibit
Number
|
Description
|
|
32(a)
|
Certification
of principal executive officer Pursuant to 18 U.S.C.
1350.
|
|
32(b)
|
|
Certification
of principal financial officer Pursuant to 18 U.S.C.
1350.
|
Date: November
10, 2010
|
/s/ Mark J. Morrison
|
|
Mark
J. Morrison, Chief Executive Officer and President
|
||
(Principal
Executive Officer)
|
||
Date: November
10, 2010
|
/s/ Jeffrey R. Passmore
|
|
Jeffrey
R. Passmore, Chief Accounting Officer and
|
||
Senior
Vice President
|
||
(Principal
Financial Officer)
|