UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the

(Mark One) Securities Exchange Act of 1934

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, ~~2020~~2021

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-11252

Hallmark Financial Services, Inc.

(Exact name of registrant as specified in its charter)


Nevada	87-0447375
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

5420 Lyndon B. Johnson Freeway, Suite 1100, Dallas, Texas	75240

(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (817) 348-1600

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.18 par value	HALL	Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☒☐

Non-accelerated filer ☐☒	Smaller reporting company ☒	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 15(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, par value $0.18 per share ~~–18,141,496~~– 18,171,032 shares outstanding as of August ~~10, 2020.~~12, 2021.

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

INDEX TO FINANCIAL STATEMENTS

	Page Number

Consolidated Balance Sheets at June 30, ~~2020~~2021 (unaudited) and December 31, ~~2019~~2020	3
Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	4
Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~ (unaudited) for the three months and six months ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	5
Consolidated Statements of Stockholders’ Equity (unaudited) for the three months and six months ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	6
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	7
Notes to Consolidated Financial Statements (unaudited)	8

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except par value)


		June 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
		(unaudited)				(unaudited)
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost; $552,266 in 2020 and $569,498 in 2019)	$	553,322	$	574,279
Equity securities (cost; $21,249 in 2020 and $71,895 in 2019)		17,949		99,215
Other investments (cost; $3,763 in 2020 and $3,763 in 2019)		295		2,169
Debt securities, available-for-sale, at fair value (amortized cost; $297,066 in 2021 and $502,167 in 2020)					$	300,737	$	507,279
Equity securities (cost; $39,124 in 2021 and $26,988 in 2020)						46,948		29,388
Total investments		571,566		675,663		347,685		536,667

Cash and cash equivalents		126,619		53,336		326,558		102,580
Restricted cash		1,858		1,612		5,474		5,728
Ceded unearned premiums		144,169		164,221		139,609		138,926
Premiums receivable		128,924		148,288		105,792		120,332
Accounts receivable		5,046		4,286		4,524		5,967
Receivable for securities		1,304		12,581		7,037		913
Reinsurance recoverable		377,988		315,466		494,473		490,231
Deferred policy acquisition costs		23,110		22,994		13,291		17,840
Goodwill		—		44,695
Intangible assets, net		2,556		5,087		1,070		1,322
Federal income tax recoverable		9,258		8,995		20,025		25,642
Deferred federal income taxes, net		9,031		2,185		8,190		8,724
Prepaid expenses		3,654		2,603		5,598		2,648
Other assets		29,313		33,262		27,368		28,013
Total assets	$	1,434,396	$	1,495,274	$	1,506,694	$	1,485,533
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $893 in 2020 and $942 in 2019)	$	49,107	$	49,058
Subordinated debt securities (less unamortized debt issuance cost of $820 in 2020 and $846 in 2019)		55,882		55,856
Reserves for unpaid losses and loss adjustment expenses		670,936		620,355	$	810,749	$	789,768
Unearned premiums		354,837		388,926		300,941		320,806
Reinsurance balances payable		55,818		59,274
Senior unsecured notes due 2029 (less unamortized debt issuance costs of $795 in 2021 and $844 in 2020)						49,205		49,156
Subordinated debt securities (less unamortized debt issuance costs of $769 in 2021 and $795 in 2020)						55,933		55,907
Reinsurance payable						51,921		46,700
Pension liability		1,223		1,388		1,640		1,859
Payable for securities		3		1,648		5,774		—
Accounts payable and other accrued expenses		44,418		55,487		51,647		50,415
Total liabilities		1,232,224		1,231,992		1,327,810		1,314,611
Commitments and contingencies (Note 19)
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2020 and 2019		3,757		3,757
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2021 and 2020						3,757		3,757
Additional paid-in capital		122,729		123,468		122,782		122,893
Retained earnings		102,961		160,570		77,793		68,915
Accumulated other comprehensive (loss) income		(2,243)		688		(687)		383
Treasury stock (2,731,335 shares in 2020 and 2,749,738 in 2019), at cost		(25,032)		(25,201)
Treasury stock (2,701,799 shares in 2021 and 2,730,673 in 2020), at cost						(24,761)		(25,026)
Total stockholders’ equity		202,172		263,282		178,884		170,922
Total liabilities and stockholders’ equity	$	1,434,396	$	1,495,274	$	1,506,694	$	1,485,533

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)



		Three Months Ended June 30,				Six Months Ended June 30,			Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Gross premiums written	$	183,644	$	218,236	$	385,233	$	405,552	$	169,716	$	183,644	$	332,734	$	385,233
Ceded premiums written		(74,657)		(94,393)		(149,741)		(164,306)		(80,582)		(74,657)		(150,453)		(149,741)
Net premiums written		108,987		123,843		235,492		241,246		89,134		108,987		182,281		235,492
Change in unearned premiums		16,609		(17,344)		14,037		(35,717)		9,477		16,609		20,548		14,037
Net premiums earned		125,596		106,499		249,529		205,529		98,611		125,596		202,829		249,529

Investment income, net of expenses		3,196		5,412		7,654		10,523		2,353		3,196		5,363		7,654
Investment gains (losses), net		2,058		6,817		(27,272)		18,754		3,876		2,058		9,655		(27,272)
Finance charges		1,528		1,797		3,172		3,531		1,109		1,528		2,242		3,172
Commission and fees		260		364		584		657		250		260		510		584
Other income		14		14		33		30		16		14		35		33

Total revenues		132,652		120,903		233,700		239,024		106,215		132,652		220,634		233,700

Losses and loss adjustment expenses		94,873		73,226		188,278		143,313		77,719		94,873		148,622		188,278
Operating expenses		30,259		29,336		59,407		56,582		27,653		30,259		58,094		59,407
Interest expense		1,320		1,240		2,788		2,493		1,249		1,320		2,498		2,788
Impairment of goodwill and other intangible assets		—		—		45,996		—		—		—		—		45,996
Amortization of intangible assets		617		617		1,234		1,234		126		617		252		1,234

Total expenses		127,069		104,419		297,703		203,622		106,747		127,069		209,466		297,703

Income (loss) before tax		5,583		16,484		(64,003)		35,402
Pre-tax (loss) income										(532)		5,583		11,168		(64,003)
Income tax (benefit) expense		(1,118)		3,455		(6,394)		7,348		(65)		(1,118)		2,290		(6,394)
Net income (loss)		6,701		13,029		(57,609)		28,054
Net (loss) income										(467)		6,701		8,878		(57,609)

Net income (loss) per share:
Net (loss) income per share:
Basic	$	0.37	$	0.72	$	(3.18)	$	1.55	$	(0.03)	$	0.37	$	0.49	$	(3.18)
Diluted	$	0.37	$	0.71	$	(3.18)	$	1.54	$	(0.03)	$	0.37	$	0.49	$	(3.18)

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~

(Unaudited)

($ in thousands)

Three Months Ended June 30,

Six Months Ended June 30,


2020

2019

2020

2019

Net income (loss)

$
6,701

$
13,029

$
(57,609)

$
28,054

Other comprehensive income (loss):









Change in net actuarial gain

35

37

69

72

Tax effect on change in net actuarial gain

(7)

(8)

(14)

(15)

Unrealized holding gains arising during the period

8,430

3,460

1,443

11,233

Tax effect on unrealized holding gains arising during the period

(1,771)

(727)

(304)

(2,359)

Reclassification adjustment for losses (gains) included in net income (loss)

414

(60)

(5,222)

(4,201)

Tax effect on reclassification adjustment for (losses) gains included in net income (loss)

(87)

13

1,097

883

Other comprehensive income (loss), net of tax

7,014

2,715

(2,931)

5,613

Comprehensive income (loss)

$
13,715

$
15,744

$
(60,540)

$
33,667



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Net (loss) income	$	(467)	$	6,701	$	8,878	$	(57,609)
Other comprehensive (loss) income:
Change in net actuarial gain		44		35		87		69
Tax effect on change in net actuarial gain		(9)		(7)		(18)		(14)
Unrealized holding gains arising during the period		2,202		8,430		2,787		1,443
Tax effect on unrealized holding gains arising during the period		(462)		(1,771)		(585)		(304)
Reclassification adjustment for (losses) gains included in net (loss) income		(2,826)		414		(4,229)		(5,222)
Tax effect on reclassification adjustment for gains (losses) included in net (loss) income		593		(87)		888		1,097
Other comprehensive (loss) gain, net of tax		(458)		7,014		(1,070)		(2,931)
Comprehensive (loss) income	$	(925)	$	13,715	$	7,808	$	(60,540)

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

($ in thousands)


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Common Stock
Balance, beginning of period	$	3,757	$	3,757	$	3,757	$	3,757	$	3,757	$	3,757	$	3,757	$	3,757

Balance, end of period		3,757		3,757		3,757		3,757		3,757		3,757		3,757		3,757

Additional Paid-In Capital
Balance, beginning of period		122,718		122,638		123,468		123,168		122,725		122,718		122,893		123,468
Equity based compensation		11		140		(570)		197		57		11		154		(570)
Shares issued under employee benefit plans		—		—		(169)		(587)		—		—		(265)		(169)
Balance, end of period		122,729		122,778		122,729		122,778		122,782		122,729		122,782		122,729

Retained Earnings
Balance, beginning of period		96,260		176,220		160,570		161,195		78,260		96,260		68,915		160,570
Net income (loss)		6,701		13,029		(57,609)		28,054
Net (loss) income										(467)		6,701		8,878		(57,609)
Balance, end of period		102,961		189,249		102,961		189,249		77,793		102,961		77,793		102,961

Accumulated Other Comprehensive Income
Balance, beginning of period		(9,257)		(3,762)		688		(6,660)		(229)		(9,257)		383		688
Additional minimum pension liability, net of tax		28		29		55		57		35		28		69		55
Unrealized holding gains arising during period, net of tax		6,659		2,733		1,139		8,874
Reclassification adjustment for losses (gains) included in net income, net of tax		327		(47)		(4,125)		(3,318)
Unrealized holding gains (losses) arising during period, net of tax										1,740		6,659		2,202		1,139
Reclassification adjustment for gains included in net income (loss), net of tax										(2,233)		327		(3,341)		(4,125)
Balance, end of period		(2,243)		(1,047)		(2,243)		(1,047)		(687)		(2,243)		(687)		(2,243)

Treasury Stock
Balance, beginning of period		(25,032)		(25,201)		(25,201)		(25,928)		(24,761)		(25,032)		(25,026)		(25,201)
Acquisition of treasury stock		—		—		—		(1,380)
Shares issued under employee benefit plans		—		—		169		2,107		—		—		265		169
Balance, end of period		(25,032)		(25,201)		(25,032)		(25,201)		(24,761)		(25,032)		(24,761)		(25,032)

Total Stockholders' Equity	$	202,172	$	289,536	$	202,172	$	289,536	$	178,884	$	202,172	$	178,884	$	202,172

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

($ in thousands)


	Six Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2021		2020
Cash flows from operating activities:
Net (loss) income	$	(57,609)	$	28,054
Net income (loss)					$	8,878	$	(57,609)

Adjustments to reconcile net income to cash (used in) provided by operating activities:
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization expense		2,818		2,626		1,651		2,818
Deferred federal income taxes (benefit) expense		(6,122)		3,634
Investment losses (gains), net		27,272		(18,754)
Share-based payments (benefit) expense		(570)		197
Deferred federal income taxes expense (benefit)						818		(6,122)
Investment (gains) losses, net						(9,655)		27,272
Share-based payments expense (benefit)						154		(570)
Impairment of goodwill and other intangibles		45,996		—		—		45,996
Change in ceded unearned premiums		20,052		(17,852)		(683)		20,052
Change in premiums receivable		19,364		(24,896)		14,540		19,364
Change in accounts receivable		(760)		287		1,443		(760)
Change in deferred policy acquisition costs		(116)		(6,017)		4,549		(116)
Change in reserves for losses and loss adjustment expenses		50,581		24,296		20,981		50,581
Change in unearned premiums		(34,089)		53,569		(19,865)		(34,089)
Change in reinsurance recoverable		(62,522)		(48,126)		(4,242)		(62,522)
Change in reinsurance balances (recoverable) payable		(3,456)		6,649
Change in federal income tax (recoverable) payable		(263)		866
Change in reinsurance payable						5,221		(3,456)
Change in federal income tax payable (recoverable)						5,617		(263)
Change in all other liabilities		(11,159)		(2,708)		1,088		(11,159)
Change in all other assets		3,623		4,860		(1,596)		3,623
Net cash (used in) provided by operating activities		(6,960)		6,685
Net cash provided by (used in) operating activities						28,899		(6,960)
Cash flows from investing activities:
Purchases of property and equipment		(1,122)		(2,447)		(1,328)		(1,122)
Purchases of investment securities		(153,708)		(97,292)		(52,409)		(153,708)
Maturities, sales and redemptions of investment securities		235,319		123,599		248,562		235,319
Net cash provided by investing activities		80,489		23,860		194,825		80,489
Cash flows from financing activities:
Proceeds from exercise of employee stock options		—		1,520
Purchase of treasury shares		—		(1,380)
Net cash provided by financing activities		—		140
Increase in cash and cash equivalents and restricted cash		73,529		30,685		223,724		73,529
Cash and cash equivalents and restricted cash at beginning of period		54,948		40,471		108,308		54,948
Cash and cash equivalents and restricted cash at end of period	$	128,477	$	71,156	$	332,032	$	128,477

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

1. General

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, the “Company”, “we,” “us” or “our”) is an insurance holding company that, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing our insurance products, as well as providing other insurance related services.

We market, distribute, underwrite and service our property/casualty insurance products primarily through business units organized by products and distribution ~~channel.~~channels. Our business units are supported by our insurance company subsidiaries. Our Commercial Auto business unit offers primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit offers primary and excess liability, excess public entity liability, E&S package and garage liability insurance products and services; our E&S Property business unit offers primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability business unit offers healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals, medical facilities and, through 2020, senior care facilities; and our Aerospace & Programs business unit offers general aviation and, until exited during 2020, satellite launch property/casualty insurance products and services, as well as certain specialty programs. Our Commercial Accounts business unit offers package and monoline property/casualty and, until exited in 2016, occupational accident insurance products. Effective June 1, 2016 we ceased marketing new or renewal occupational accident policies. Our former Workers Compensation operating unit specialized in small and middle market workers compensation business. Effective July 1, 2015, we no longer market or retain any risk on new or renewal workers compensation policies. Our Specialty Personal Lines business unit offers non-standard personal automobile and renters insurance products and services. Our former Workers Compensation operating unit specialized in small and middle market workers compensation business until discontinued during 2015. Our insurance company subsidiaries supporting these business units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”).

These business units are segregated into 3 reportable industry segments for financial accounting purposes. The Specialty Commercial Segment includes our Commercial Auto business unit, E&S Casualty business unit, E&S Property business unit, Professional Liability business unit and Aerospace & Programs business unit. The Standard Commercial Segment consists of the Commercial Accounts business unit and the runoff from our former Workers Compensation operating unit. The Personal Segment consists solely of our Specialty Personal Lines business unit.

2. Basis of Presentation

Our unaudited consolidated financial statements included herein have been prepared in accordance with ~~U.S.~~accounting principles generally accepted ~~accounting principles~~in the United States of America (“GAAP”) and include our accounts and the accounts of our subsidiaries. All ~~significant~~ intercompany accounts and transactions have been eliminated in consolidation. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, ~~2019~~2020 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of June 30, ~~2020~~2021 and ~~2019~~2020 is unaudited. However, in the opinion of management, the interim financial data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the ~~periods~~period ended June 30, ~~2020~~2021 are not necessarily indicative of the operating results to be expected for the full year.

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Use of Estimates in the Preparation of the Financial Statements

Our preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting period. Refer to “Critical Accounting Estimates and Judgments” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

Fair value estimates are made at a point in time based on relevant market data as well as the best information available about the financial instruments. Fair value estimates for financial instruments for which no or limited observable market data is available are based on judgments regarding current economic conditions, credit and interest rate risk. These estimates involve significant uncertainties and judgments and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique, including discount rate and estimates of future cash flows, could significantly affect these fair value estimates.

Cash and Cash Equivalents: The carrying amounts reported in the consolidated balance ~~sheet~~sheets for these instruments approximate their fair values.

Restricted Cash: The carrying amount for restricted cash reported in the consolidated balance ~~sheet~~sheets approximates the fair value.

Senior Unsecured Notes Due 2029: Our senior unsecured notes payable due in 2029 had a carrying value of ~~$49.1~~$49.2 million and a fair value of ~~$52.3~~$53.5 million as of June 30, ~~2020.~~2021. Our senior unsecured notes payable would be included in Level 3 of the fair value hierarchy if they were reported at fair value

Subordinated Debt Securities: Our trust preferred securities had a carrying value of $55.9 million and a fair value of ~~$29.3~~$28.8 million as of June 30, ~~2020.~~2021. Our trust preferred securities would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

For reinsurance balances, premiums receivable, federal income tax recoverable, other assets and other liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments.

Variable Interest Entities

On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0 million in trust preferred securities. Trust II used the proceeds from the sale of these securities and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II.

We evaluate on an ongoing basis our investments in Trust I and Trust II (collectively the “Trusts”) and have determined that we do not have a variable interest in the Trusts. Therefore, the Trusts are not included in our consolidated financial statements.

We are also involved in the normal course of business with variable interest entities primarily as a passive investor in mortgage-backed securities and certain collateralized corporate bank loans issued by third-party variable interest

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entities. The maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the consolidated balance sheets.

Income Taxes

We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. Deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes in effect for the year in which these temporary differences are expected to be recovered or settled.

~~Adoption of New~~Recently Adopted Accounting Pronouncements

On August 28, 2018, the FASB issued ASU 2018-13, “Fair Value Measurement: Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement” (Topic 820), which amends ASC 820 to add, remove, and modify fair value measurement disclosure requirements. The requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements have all been removed. However, the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period must be disclosed along with the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (or other quantitative information if it is more reasonable). Finally, for investments measured at net asset value, the requirements have been modified so that the timing of liquidation and the date when restrictions from redemption might lapse are only disclosed if the investee has communicated the timing to the entity or announced the timing publicly. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. As the amendments are only disclosure related, our financial statements were not materially impacted by this update.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (Topic 350). ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill. The ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this guidance did not have a material effect on the Company’s results of operations, financials position or liquidity.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU 2016-02 is effective for interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. During 2018, the FASB issued several amendments and targeted improvements to ease the application of the standard, including the addition of a transition approach that gives the Company the option of applying the standard at either the beginning of the earliest comparative period presented or the beginning of the period of adoption. We adopted the standard on its effective date of January 1, 2019. We also elected certain practical expedients that allow us not to reassess existing leases under the new guidance. As of June 30, 2020, $15.0 million of right-of-use assets and $16.9 million of lease liabilities for operating leases were included in the other assets and other liabilities line items of the balance sheet, respectively, as a result of the adoption of this update.

~~Recently Issued Accounting Pronouncements~~

In December 2019, the FASB ~~issued updated guidance~~released ASU 2019-12, Simplifying the Accounting for ~~the accounting for income taxes.~~Income Taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in the existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance is effective for the quarter ending March 31, 2021. ~~Early adoption is permitted.~~ The adoption of this guidance isdid not ~~expected to~~ have a material effect on the Company’s results of operations, financials position or liquidity.

10Recently Issued Accounting Pronouncements

~~Table~~In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform ("ASU 2020-04"). ASU 2020-04 provides optional guidance for a limited period of ~~Contents~~time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 can be adopted as of March 12, 2020 and are effective through December 31, 2022. We do not currently have any contracts that have been changed to a new reference rate, but we will continue to evaluate our contracts and the effects of this standard on our condensed consolidated financial statements prior to adoption.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326). ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. As a smaller reporting company, ASU 2016-13 is effective for fiscal years of the Company beginning after December 15, 2022, including interim periods within those fiscal years. ASU 2016-13 requires a modified retrospective transition method and early adoption is permitted. We are currently evaluating the impact that the adoption of this standard will have on our financial results and ~~disclosures, but do not anticipate that any potential impact would be material.~~ disclosures.

3. Acquisitions, Goodwill and Intangible Assets

In connection with its normal process for evaluating impairment triggering events, the Company determined that a significant decline in its market capitalization below its stockholders’ equity during the first quarter of 2020 indicated the impairment of the goodwill and indefinite-lived intangible assets included in its balance sheet. As a result, the Company took a $44.7 million charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets during the first quarter of 2020. As of June 30, ~~2020~~2021 there iswas 0 goodwillor indefinite-lived intangibles reported on our consolidated balance sheet.

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4. Fair Value

ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820, among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In addition, ASC 820 precludes the use of block discounts when measuring the fair value of instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities.

We determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820. In accordance with ASC 820, we utilize the following fair value hierarchy:

●

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.

This hierarchy requires the use of observable market data when available.

Under ASC 820, we determine fair value based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy described above. Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated based upon our pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other factors as appropriate. These estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability.

Where quoted prices are available on active exchanges for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include ~~common and preferred stock and an~~ equity ~~warrant classified as Other Investments.~~securities.

Level 2 investment securities include corporate bonds, collateralized corporate bank loans, municipal bonds, U.S. Treasury securities, other obligations of the U.S. Government and mortgage-backed securities for which quoted prices are

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not available on active exchanges for identical instruments. We use third-party pricing services to determine fair values for each Level 2 investment security in all asset classes. Since quoted prices in active markets for identical assets are not available, these prices are determined using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other things. We have reviewed the processes used by the pricing services and have determined that they result in fair values consistent with the requirements of ASC 820 for Level 2 investment securities. We have not adjusted any prices received from third-party pricing sources. There were 0 transfers between Level 1 and Level 2 securities.

In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Level 3 investments are valued based on the best available data in order to approximate fair value. This data may be internally developed and consider risk premiums that a market participant would require. Investment securities classified within Level 3 include other less liquid investment securities.

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The following table presents, for each of the fair value hierarchy levels, assets that are measured at fair value on a recurring basis at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 (in thousands):


	As of June 30, 2020									As of June 30, 2021
	Quoted Prices in									Quoted Prices in
	Active Markets for									Active Markets for
	Identical Assets			Other Observable		Unobservable				Identical Assets		Other Observable		Unobservable
	(Level 1)			Inputs (Level 2)		Inputs (Level 3)		Total		(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	—		$	155,065	$	-	$	155,065	$	0	$	23,699	$	0	$	23,699
Corporate bonds		—			269,000		306		269,306		0		157,462		358		157,820
Collateralized corporate bank loans		—			56,364		-		56,364
Corporate bank loans											0		71,846		0		71,846
Municipal bonds		—			65,326		-		65,326		0		44,773		0		44,773
Mortgage-backed		—			7,261		-		7,261		0		2,599		0		2,599
Total debt securities		—			553,016		306		553,322		0		300,379		358		300,737
Total equity securities		17,949			—		—		17,949		46,948		0		0		46,948
Total other investments		295	��		—		—		295
Total investments	$	18,244		$	553,016	$	306	$	571,566	$	46,948	$	300,379	$	358	$	347,685


	As of December 31, 2019								As of December 31, 2020
	Quoted Prices in								Quoted Prices in
	Active Markets for								Active Markets for
	Identical Assets		Other Observable		Unobservable				Identical Assets		Other Observable		Unobservable
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total		(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	—	$	66,600	$	—	$	66,600	$	0	$	179,746	$	0	$	179,746
Corporate bonds		—		300,486		339		300,825		0		219,020		348		219,368
Collateralized corporate bank loans		—		115,757		—		115,757
Corporate bank loans										0		52,782		0		52,782
Municipal bonds		—		83,270		—		83,270		0		50,539		0		50,539
Mortgage-backed		—		7,827		—		7,827		0		4,844		0		4,844
Total debt securities		—		573,940		339		574,279		0		506,931		348		507,279
Total equity securities		99,215		—		—		99,215		29,388		0		0		29,388
Total other investments		2,169		—		—		2,169
Total investments	$	101,384	$	573,940	$	339	$	675,663	$	29,388	$	506,931	$	348	$	536,667

Due to significant unobservable inputs into the valuation model for 1 corporate bond as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we classified this investment as Level 3 in the fair value hierarchy. The corporate bond is a convertible senior note and its fair value was estimated by the sum of the bond value using an income approach discounting the scheduled interest and principal payments and the conversion feature utilizing a binomial lattice model. We also estimated the fair value of the corporate bond utilizing an as-if converted basis into the underlying securities. Significant changes in the unobservable inputs in the fair value measurement of this corporate bond could result in a significant change in the fair value measurement.

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The following table summarizes the changes in fair value for all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, ~~2020~~2021 and ~~2019~~2020 (in thousands):


Beginning balance as of January 1, 2020	$	339
Beginning balance as of January 1, 2021			$	348
Sales		—		0
Settlements		—		0
Purchases		—		0
Issuances		—		0
Total realized/unrealized losses included in net income		(33)		0
Net gain included in other comprehensive income		—		10
Transfers into Level 3		—		0
Transfers out of Level 3		—		0
Ending balance as of June 30, 2020	$	306
Ending balance as of June 30, 2021			$	358

Beginning balance as of January 1, 2019

$
291
Sales

—
Settlements

—
Purchases

—
Issuances

—
Total realized/unrealized gains included in net income

242
Net gains included in other comprehensive income

—
Transfers into Level 3

—
Transfers out of Level 3

—
Ending balance as of June 30, 2019

$
533

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Beginning balance as of January 1, 2020	$	339
Sales		0
Settlements		0
Purchases		0
Issuances		0
Total realized/unrealized gains included in net loss		0
Net gains included in other comprehensive loss		(33)
Transfers into Level 3		0
Transfers out of Level 3		0
Ending balance as of June 30, 2020	$	306

5. Investments

The amortized cost and estimated fair value of investments in debt and equity securities by category is as follows (in thousands):


			Gross		Gross
		Amortized Cost/	Unrealized		Unrealized
	Carrying Value		Gains		Losses		Fair Value
As of June 30, 2021
U.S. Treasury securities and obligations of U.S. Government	$	23,501	$	199	$	(1)	$	23,699
Corporate bonds		154,275		3,639		(94)		157,820
Corporate bank loans		72,461		57		(672)		71,846
Municipal bonds		44,296		529		(52)		44,773
Mortgage-backed		2,533		70		(4)		2,599
Total debt securities		297,066		4,494		(823)		300,737
Total equity securities		39,124		9,101		(1,277)		46,948
Total investments	$	336,190	$	13,595	$	(2,100)	$	347,685


				Gross		Gross
		Amortized Cost/		Unrealized		Unrealized
As of December 31, 2020		Carrying Value		Gains		Losses		Fair Value
U.S. Treasury securities and obligations of U.S. Government	$	179,259	$	487	$	0	$	179,746
Corporate bonds		214,666		5,086		(384)		219,368
Corporate bank loans		53,650		3		(871)		52,782
Municipal bonds		49,833		756		(50)		50,539
Mortgage-backed		4,759		114		(29)		4,844
Total debt securities		502,167		6,446		(1,334)		507,279
Total equity securities		26,988		5,648		(3,248)		29,388
Total investments	$	529,155	$	12,094	$	(4,582)	$	536,667

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~~5. Investments~~

~~The amortized cost and estimated fair value of investments in debt and equity securities by category is as follows (in thousands):~~

Gross

Gross


Unrealized

Unrealized


Amortized Cost

Gains

Losses

Fair Value
As of June 30, 2020

U.S. Treasury securities and obligations of U.S. Government

$
154,267

$
833

$
(35)

$
155,065
Corporate bonds

266,926

5,992

(3,612)

269,306
Collateralized corporate bank loans

59,409

-

(3,045)

56,364
Municipal bonds

64,540

843

(57)

65,326
Mortgage-backed

7,124

141

(4)

7,261
Total debt securities

552,266

7,809

(6,753)

553,322
Total equity securities

21,249

2,085

(5,385)

17,949
Total other investments

3,763

—

(3,468)

295
Total investments

$
577,278

$
9,894

$
(15,606)

$
571,566

As of December 31, 2019






U.S. Treasury securities and obligations of U.S. Government

$
66,441

$
162

$
(3)

$
66,600
Corporate bonds

297,601

3,387

(163)

300,825
Collateralized corporate bank loans

115,669

556

(468)

115,757
Municipal bonds

81,787

1,531

(48)

83,270
Mortgage-backed

8,000

46

(219)

7,827
Total debt securities

569,498

5,682

(901)

574,279
Total equity securities

71,895

35,028

(7,708)

99,215
Total other investments

3,763

—

(1,594)

2,169
Total investments

$
645,156

$
40,710

$
(10,203)

$
675,663

Major categories of net investment gains (losses) on investments are summarized as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
U.S. Treasury securities and obligations of U.S. Government	$	—	$	—	$	—	$	—
Corporate bonds		359		(6)		414		17	$	164	$	359	$	361	$	414
Collateralized corporate bank loans		63		21		(85)		38
Corporate bank loans										40		63		91		(85)
Municipal bonds		2		46		1,422		4,147		15		2		7		1,422
Mortgage-backed		—		(1)		—		(1)
Equity securities		(838)		—		3,471		—		2,607		(838)		3,770		3,471
(Loss) gain on investments		(414)		60		5,222		4,201
Gain (loss) on investments										2,826		(414)		4,229		5,222
Unrealized gains (losses) on other investments		127		1,401		(1,874)		1,437		—		127		—		(1,874)
Unrealized gains (losses) on equity investments		2,345		5,356		(30,620)		13,116		1,050		2,345		5,426		(30,620)
Investment gains (losses), net	$	2,058	$	6,817	$	(27,272)	$	18,754	$	3,876	$	2,058	$	9,655	$	(27,272)

We realized gross gains on investments of ~~$1.5~~$3.2 million and ~~$0.2~~$1.5 million during the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$21.9~~$4.7 million and ~~$4.4~~$21.9 million for the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. We realized gross losses on investments of ~~$1.9~~$0.4 million and ~~$0.1~~$1.9 million for the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$16.7~~$0.5 million and ~~$0.2~~$16.7 million for the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. We recorded proceeds from the sale of investment securities of ~~$6.8~~$14.5 million and ~~$0.1~~$6.8 million during the three months ended June 30, ~~2020~~2021 and ~~2019~~2020, respectively and ~~$107.6~~$15.7 million and ~~$7.0~~$107.6 million for the six months ended June 30, 2021 and 2020, ~~or 2019,~~ respectively. Realized investment gains and losses are recognized in operations on the first in-first out method.

The following schedules summarize the gross unrealized losses showing the length of time that investments have been continuously in an unrealized loss position as of June 30, 2021 and December 31, 2020 (in thousands):


	As of June 30, 2021
	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	$	3,043	$	(1)	$	0	$	0	$	3,043	$	(1)
Corporate bonds		0		0		3,424		(94)		3,424		(94)
Corporate bank loans		28,926		(163)		24,574		(509)		53,500		(672)
Municipal bonds		2,951		(33)		1,320		(19)		4,271		(52)
Mortgage-backed		0		0		12		(4)		12		(4)
Total debt securities		34,920		(197)		29,330		(626)		64,250		(823)
Total equity securities		5,907		(403)		1,882		(874)		7,789		(1,277)
Total investments	$	40,827	$	(600)	$	31,212	$	(1,500)	$	72,039	$	(2,100)


	As of December 31, 2020
	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	$	0	$	0	$	0	$	0	$	0	$	0
Corporate bonds		7,801		(186)		3,556		(198)		11,357		(384)
Corporate bank loans		45,233		(559)		4,144		(312)		49,377		(871)
Municipal bonds		2,859		(33)		1,154		(17)		4,013		(50)
Mortgage-backed		635		(25)		14		(4)		649		(29)
Total debt securities		56,528		(803)		8,868		(531)		65,396		(1,334)
Total equity securities		9,572		(1,610)		1,848		(1,638)		11,420		(3,248)
Total investments	$	66,100	$	(2,413)	$	10,716	$	(2,169)	$	76,816	$	(4,582)

We had a total of 86 debt securities with an unrealized loss, of which 52 were in an unrealized loss position for less than one year and 34 were in an unrealized loss position for a period of one year or greater, as of June 30, 2021. We

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As of June 30, 2020

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

$
110,942

$
(35)

$
—

$
—

$
110,942

$
(35)
Corporate bonds

13,422

(3,230)

5,310

(382)

18,732

(3,612)
Collateralized corporate bank loans

50,701

(2,395)

5,663

(650)

56,364

(3,045)
Municipal bonds

2,180

(34)

2,022

(23)

4,202

(57)
Mortgage-backed

-

-

15

(4)

15

(4)
Total debt securities

177,245

(5,694)

13,010

(1,059)

190,255

(6,753)
Total equity securities

10,022

(4,107)

797

(1,278)

10,819

(5,385)
Total other investments

—

—

295

(3,468)

295

(3,468)
Total investments

$
187,267

$
(9,801)

$
14,102

$
(5,805)

$
201,369

$
(15,606)

As of December 31, 2019

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

$
—

$
—

$
5,513

$
(3)

$
5,513

$
(3)
Corporate bonds

27,268

(144)

1,150

(19)

28,418

(163)
Collateralized corporate bank loans

9,000

(41)

10,228

(427)

19,228

(468)
Municipal bonds

4,808

(29)

1,618

(19)

6,426

(48)
Mortgage-backed

1,712

(101)

562

(118)

2,274

(219)
Total debt securities

42,788

(315)

19,071

(586)

61,859

(901)
Total equity securities

10,905

(2,363)

6,093

(5,345)

16,998

(7,708)
Total other investments

—

—

2,169

(1,594)

2,169

(1,594)
Total investments

$
53,693

$
(2,678)

$
27,333

$
(7,525)

$
81,026

$
(10,203)

~~We had~~held a total of 8981 debt securities with an unrealized loss, of which 7164 were in an unrealized loss position for less than one year and 18 were in an unrealized loss position for a period of one year or greater, as of June 30, 2020. We held a total of 61 debt securities with an unrealized loss, of which 41 were in an unrealized loss position for less than one year and 2017 were in an unrealized loss position for a period of one year or greater, as of December 31, ~~2019.~~2020. We consider these losses as a temporary decline in value as they are predominately on securities that we do not intend to sell and do not believe we will be required to sell prior to recovery of our amortized cost basis. The gross unrealized losses on the debt security positions at June 30, 2021 and December 31, 2020 were due predominately to market and interest rate fluctuations and we see no other indications that the decline in values of these securities is other-than-temporary.

Based on evidence gathered through our normal credit evaluation process, we presently expect that all debt securities held in our investment portfolio will be paid in accordance with their contractual terms. Nonetheless, it is at least reasonably possible that the performance of certain issuers of these debt securities will be worse than currently expected resulting in future write-downs within our portfolio of debt securities.

Also, as a result of the challenging market conditions, we expect the volatility in the valuation of our equity securities to continue in the foreseeable future. This volatility may lead to changes regarding retention strategies for certain equity securities.

We complete a detailed analysis each quarter to assess whether any decline in the fair value of any debt security below cost is deemed other-than-temporary. All debt securities with an unrealized loss are reviewed. We recognize an impairment loss when a debt security’s value declines below cost, adjusted for accretion, amortization and previous ~~other-~~

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~~than-temporary~~other-than-temporary impairments and it is determined that the decline is other-than-temporary. We did ~~not~~0t recognize anany impairment loss on debt securities during the six months ended June 30, ~~2020~~2021 or ~~2019.~~2020.

Debt Investments: We assess whether we intend to sell, or it is more likely than not that we will be required to sell, a fixed maturity investment before recovery of its amortized cost basis less any current period credit losses. For fixed maturity investments that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the investment’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the investment’s fair value and the present value of future expected cash flows is recognized in other comprehensive income. During the six months ended June 30, ~~2020~~2021 we ~~did not dispose~~disposed of $0.4 million of previously impaired securities. During the six months ended June 30, ~~2019~~2020 we ~~disposed~~did 0t dispose of 6any previously impaired ~~securities and recognized a realized gain of $4.1 million.~~securities.

Equity Investments: ~~On January 1, 2018, we adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825).” ASU 2016-01 requires equity~~Equity investments that are not consolidated or accounted for under the equity method of accounting ~~to be measured at fair value with changes in fair value recognized in net income each reporting period. As a result of this standard, equity securities~~ with readily determinable fair values are not required to be evaluated for other-than-temporary-impairment.

~~Details regarding the carrying value of the other investments portfolio as of June 30, 2020 and December 31, 2019 are as follows (in thousands):~~

2020

2019
Investment Type




Equity warrant

$
295

$
2,169
Total other investments

$
295

$
2,169

~~We acquired this warrant in an active market. The warrant entitles us to buy the underlying common stock of a publicly traded company at a fixed price until the expiration date of January 19, 2021.~~

The amortized cost and estimated fair value of debt securities at June 30, ~~2020~~2021 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.

Amortized Cost

Fair Value

(in thousands)
Due in one year or less

$
211,915

$
213,229
Due after one year through five years

281,761

282,740
Due after five years through ten years

36,751

34,845
Due after ten years

14,715

15,247
Mortgage-backed

7,124

7,261

$
552,266

$
553,322


	Amortized Cost		Fair Value

	(in thousands)
Due in one year or less	$	137,832	$	139,227
Due after one year through five years		96,763		98,791
Due after five years through ten years		45,133		44,989
Due after ten years		14,805		15,131
Mortgage-backed		2,533		2,599
	$	297,066	$	300,737

6. Pledged Investments

We have pledged certain of our securities for the benefit of various state insurance departments and reinsurers. These securities are included with our available-for-sale debt securities because we have the ability to trade these securities. We retain the interest earned on these securities. These securities had a carrying value of ~~$22.7~~$28.4 million and ~~$28.9~~$29.7 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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7. Reserves for Unpaid Losses and Loss Adjustment Expenses

Year to-date activity in the consolidated reserves for unpaid losses and LAE is summarized as follows (in thousands):


	June 30,		June 30,		June 30,		June 30,
	2020		2019		2021		2020
Balance at January 1	$	620,355	$	527,247	$	789,768	$	620,355
Less reinsurance recoverable		272,604		221,716		349,585		272,604
Net balance at January 1		347,751		305,531		440,183		347,751

Incurred related to:
Current year		168,930		141,909		147,578		168,930
Prior years		19,348		1,404		1,044		19,348
Total incurred		188,278		143,313		148,622		188,278

Paid related to:
Current year		38,143		38,563		37,041		38,143
Prior years		143,967		107,899		91,689		143,967
Total paid		182,110		146,462		128,730		182,110

Net balance at June 30		353,919		302,382		460,075		353,919
Plus reinsurance recoverable		317,017		249,161		350,674		317,017
Balance at June 30	$	670,936	$	551,543	$	810,749	$	670,936

The year to date impact from the unfavorable (favorable) net prior years’ loss development on each reporting segment is presented below:


	June 30,				June 30,
	2020		2019		2021		2020
Specialty Commercial Segment	$	12,468	$	5,203	$	(772)	$	12,468
Standard Commercial Segment		919		(3,583)		(1,343)		919
Personal Segment		5,961		(216)		3,159		5,961
Corporate		—		—		0		0
Total unfavorable net prior year development	$	19,348	$	1,404
Total unfavorable (favorable) net prior year development					$	1,044	$	19,348

The following describes the primary factors behind each segment’s prior accident year reserve development for the six months ended June 30, ~~2020~~2021 and ~~2019:~~2020:

Six months ended June 30, 2021:

●

Specialty Commercial Segment. Our Commercial Auto business unit experienced net favorable development in the 2020 and 2019 accidentyears primarily in the excess commercial automobile liability lines of business, partially offset by net unfavorable development in both the primary and excess commercial automobile lines of business in the 2018 and prior accidentyears. Our E&S Casualty business unit experienced net unfavorable development primarily in our primary liability line of business in the 2019 and prior accident years, partially offset by net favorable development in the 2020 accident year. We experienced net unfavorable development in our E&S Property and Aerospace & Programs business units. We experienced net favorable development in our Professional Liability business unit.

●

Standard Commercial Segment. Our Commercial Accounts business unit experienced net favorable development for all lines of business in total, primarily due to net favorable development in our commercial property lines of business in accident years 2020, 2016 and 2015, partially offset by net

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unfavorable development in the general liability lines of business in accident years 2019, 2018, 2017 and 2014 and prior accident years. The run-off from our former Workers Compensation operating unit experienced net favorable development in the 2015 and prior accidentyears.

●

Personal Segment. Net unfavorable development in our Specialty Personal Lines business unit was driven predominately by unfavorable development attributable to the 2020 and 2019 accident years.

Six months ended June 30, 2020:

●

Specialty Commercial Segment. Our Commercial Auto business unit experienced net unfavorable development in the 2018 and prior accident years both in the primary and excess commercial automobile liability lines of business, partially offset by net favorable development in the excess commercial automobile lines of business in the 2019 accident year. Our E&S Casualty business unit experienced net unfavorable development primarily in our primary liability line of business and our E&S package insurance products in the 2019, 2017, 2016, 2015 and 2013 and prior accident years, partially offset by net favorable development in the 2018 and 2014 accident years. We experienced net favorable development in our E&S Property and Professional Liability business units, partially offset by net unfavorable development in our Aerospace & Programs business unit.

●

Standard Commercial Segment. Our Commercial Accounts business unit experienced net unfavorable development primarily in the general liability line of business in the 2018, 2017, 2016, 2015 and 2013

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and prior accident years, partially offset by net favorable development in the 2019 and 2014 accident years primarily in the general liability line of business. Our Commercial Accounts business unit experienced net favorable development in the 2016 and 2015 accident years, partially offset by net unfavorable development in the 2017 and 2014 accident years in the occupational accident line of business. The run-off from our former Workers Compensation operating unit experienced net favorable development in the 2014 and prior accident years.

●

Personal Segment. Net unfavorable development in our Specialty Personal Lines business unit was mostly attributable to the 2019, 2018, 2017 and 2016 accident years, partially offset by favorable development in the 2015 and 2013 and prior accident years. The net development ~~during~~for the six months ended June 30, 2020 was driven predominately by unfavorable development attributable to more recent treaty years where we retain a greater portion of the claims.

~~Six months ended June 30, 2019:~~

●

~~Specialty Commercial Segment.~~ Our Commercial Auto business unit experienced net unfavorable development in the 2017 and prior accident years primarily in the primary commercial automobile liability line of business, partially offset by net favorable development in the primary commercial automobile line of business in the 2018 accident year. Our E&S Casualty business unit experienced net unfavorable development primarily in our E&S package insurance products in the 2017 and prior accident years, partially offset by net favorable development in the 2018 accident year. We experienced net favorable development in our E&S Property and Professional Liability business units, partially offset by net unfavorable development in our Aerospace & Programs business unit.

●

~~Standard Commercial Segment.~~Our Commercial Accounts business unit experienced net favorable development in the 2018, 2017, 2014 and 2012 and prior accident years primarily in the general liability line of business, partially offset by net unfavorable development primarily in the general liability line of business in the 2016 and 2015 accident years. Our Commercial Accounts business unit experienced net favorable development in the 2017 and 2015 accident years in the occupational accident line of business, partially offset by net unfavorable development in the 2016 accident year. The run-off from our former Workers Compensation operating unit experienced net favorable development in the 2015 and 2012 and prior accident years.

●

~~Personal Segment.~~ ~~Net favorable development in our Specialty Personal Lines business unit was~~ ~~mostly attributable to the 2018, 2017, 2015, 2013 and prior accident years, partially offset by unfavorable development in the 2016 and 2014 accident years~~.

8. Share-Based Payment Arrangements

Our 2005 Long Term Incentive Plan (“2005 LTIP”) is a stock compensation plan for key employees and non-employee directors that was initially approved by the shareholders on May 26, 2005 and expired by its terms on May 27, 2015. As of June 30, ~~2020,~~2021, there were 0 outstanding incentive stock options and outstanding non-qualified stock options to purchase 14,157 shares of our common stock. The exercise price of all such outstanding stock options is equal to the fair market value of our common stock on the date of grant.

Our 2015 Long Term Incentive Plan (“2015 LTIP”) was approved by shareholders on May 29, 2015. There are 2,000,000 shares authorized for issuance under the 2015 LTIP. As of June 30, ~~2020,~~2021, restricted stock units representing the right to receive up to ~~362,794~~86,898 shares of our common stock were outstanding under the 2015 LTIP. There were 0 stock option awards granted under the 2015 LTIP as of June 30, ~~2020.~~2021.

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Stock Options:

Non-qualified stock options granted under the 2005 LTIP generally vest 100% six months after the date of grant and terminate ten years from the date of grant. The grant of 200,000 non-qualified stock options in 2009 vested in equal annual increments on each of the first 7 anniversary dates and was fully exercised prior to termination in 2019.

A summary of the status of our stock options as of June 30, ~~2020~~2021 and changes during the six months then ended is presented below:


				Average						Average
				Remaining	Aggregate					Remaining	Aggregate
	Number of	Weighted Average		Contractual	Intrinsic Value		Number of	Weighted Average		Contractual	Intrinsic Value
	Shares	Exercise Price		Term (Years)	($000)		Shares	Exercise Price		Term (Years)	($000)
Outstanding at January 1, 2020	14,157	$	6.99
Outstanding at January 1, 2021							14,157	$	6.99
Granted	—		—				0	$	0
Exercised	—	$	—				0	$	0
Forfeited or expired	—	$	—				0	$	0
Outstanding at June 30, 2020	14,157	$	6.99	1.5	$	—
Exercisable at June 30, 2020	14,157	$	6.99	1.5	$	—
Outstanding at June 30, 2021							14,157	$	6.99	0.5	$	0
Exercisable at June 30, 2021							14,157	$	6.99	0.5	$	0

The following table details the intrinsic value of options exercised, total cost of share-based payments charged against income before income tax benefit and the amount of related income tax benefit recognized in income for the periods indicated (in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,			Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Intrinsic value of options exercised	$	—	$	—	$	—	$	845	$	0	$	0	$	0	$	0
Cost of share-based payments (non-cash)	$	—	$	—	$	—	$	—	$	0	$	0	$	0	$	0
Income tax benefit of share-based payments recognized in income	$	—	$	—	$	—	$	—	$	0	$	0	$	0	$	0

As of June 30, ~~2020,~~2021, there was 0 unrecognized compensation cost related to non-vested stock options granted under our plans which is expected to be recognized in the future.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of Hallmark’s and similar companies’ common stock for a period equal to the expected term. The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options expected lives on the dates of grant. Expected term is determined based on the simplified method as we do not have sufficient historical exercise data to provide a basis for estimating the expected term. There were 0 stock options granted during the first six months of ~~2020~~2021 or ~~2019.~~2020.

Restricted Stock Units:

Restricted stock units awarded under the 2015 LTIP represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions. Restricted stock units vest and shares of common stock become issuable on March 31 of the third calendar year following the year of grant if performance criteria have been satisfied.

The performance criteria for all restricted stock units require that we achieve certain compound average annual growth rates in book value per share as well as certain average combined ratio percentages over the vesting period in order to receive shares of common stock in amounts ranging from 50% to 150% of the number of restricted stock units granted. Grantees of restricted stock units do not have any rights of a stockholder, and do not participate in any distributions to our common stockholders, until the award fully vests upon satisfaction of the vesting schedule, performance criteria and other conditions set forth in their award agreement. Therefore, unvested restricted stock units are not considered participating

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securities under ASC 260, “Earnings Per Share” (Topic 260), and are not included in the calculation of basic or diluted earnings per share.

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Compensation cost is measured as an amount equal to the fair value of the restricted stock units on the date of grant and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on our best estimate of the ultimate achievement level. The grant date fair value of restricted stock units granted in ~~2016,~~ 2017, 2018 and 2019 was ~~$11.41,~~ $10.20, $10.87 and $18.10 per unit, respectively. We incurred compensation expense of $57 thousand and $154 thousand related to restricted stock units during the three months and six months ended June 30, 2021, respectively. We incurred compensation expense (benefit) of $11 thousand and ($570) thousand related to restricted stock units during the three months and six months ended June 30, 2020, respectively. We ~~incurred compensation expense~~recorded income tax benefit of ~~$140~~$12 thousand and ~~$197~~$32 thousand related to restricted stock units during the three months and six months ended June 30, ~~2019,~~2021, respectively. We recorded income tax benefit (expense) of $2 thousand and ($120) thousand related to restricted stock units during the three months and six months ended June 30, 2020, respectively. ~~We recorded income tax benefit of $29 thousand and $41 thousand related to restricted stock units during the three months and six months ended June 30, 2019, respectively.~~

The following table details the status of our restricted stock units as of and for the six months ended June 30, ~~2020~~2021 and ~~2019:~~2020:



	Number of Restricted Stock Units		Number of Restricted Stock Units
	2020	2019	2021	2020
Nonvested at January 1	353,491	338,897	228,827	353,491
Granted	—	—	0	0
Vested	(18,403)	—	(28,874)	(18,403)
Forfeited	(93,225)	(83,210)	(142,021)	(93,225)
Nonvested at June 30	241,863	255,687	57,932	241,863

As of June 30, ~~2020,~~2021, there was ~~$1.7~~$0.3 million of unrecognized grant date compensation cost related to unvested restricted stock units assuming compensation cost accrual at target achievement level. Based on the current performance estimate, we expect to recognize ~~$0.5~~$0.2 million of compensation cost related to unvested restricted stock units, of which ~~$0.2~~$0.1 million is expected to be recognized during the remainder of ~~2020, $0.2 million is expected to be recognized in~~ 2021 and $0.1 million is expected to be recognized in 2022.

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9. Segment Information

The following is business segment information for the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020 (in thousands):


		Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	2020		2019		2020		2019		2021		2020		2021		2020
Revenues
Specialty Commercial Segment	$	91,124	$	73,592	$	183,244	$	141,559	$	66,917	$	91,124	$	138,882	$	183,244
Standard Commercial Segment		17,096		17,310		34,732		35,683		17,240		17,096		34,928		34,732
Personal Segment		22,464		23,116		44,787		42,599		19,115		22,464		38,074		44,787
Corporate		1,968		6,885		(29,063)		19,183		2,943		1,968		8,750		(29,063)
Consolidated	$	132,652	$	120,903	$	233,700	$	239,024	$	106,215	$	132,652	$	220,634	$	233,700

Pre-tax income (loss)
Pre-tax (loss) income
Specialty Commercial Segment	$	5,882	$	10,427	$	22,174	$	18,395	$	5,327	$	5,882	$	17,148	$	22,174
Standard Commercial Segment		802		2,057		1,518		3,564		(1,976)		802		(1,610)		1,518
Personal Segment		1,884		2,441		(3,771)		4,014		(2,766)		1,884		(4,389)		(3,771)
Corporate		(2,985)		1,559		(83,924)		9,429		(1,117)		(2,985)		19		(83,924)
Consolidated	$	5,583	$	16,484	$	(64,003)	$	35,402	$	(532)	$	5,583	$	11,168	$	(64,003)

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The following is additional business segment information as of the dates indicated (in thousands):


	June 30,		December 31,		June 30,		December 31,
Assets:	2020		2019		2021		2020
Specialty Commercial Segment	$	1,032,979	$	1,082,804	$	1,100,817	$	1,104,953
Standard Commercial Segment		185,933		193,710		202,678		183,689
Personal Segment		153,259		164,685		134,682		133,310
Corporate		62,225		54,075		68,517		63,581
Consolidated	$	1,434,396	$	1,495,274	$	1,506,694	$	1,485,533

10. Reinsurance

We reinsure a portion of the risk we underwrite in order to control the exposure to losses and to protect capital resources. We cede to reinsurers a portion of these risks and pay premiums based upon the risk and exposure of the policies subject to such reinsurance. Ceded reinsurance involves credit risk and is generally subject to aggregate loss limits. Although the reinsurer is liable to us to the extent of the reinsurance ceded, we are ultimately liable as the direct insurer on all risks reinsured. Reinsurance recoverables are reported after allowances for uncollectible amounts. We monitor the financial condition of reinsurers on an ongoing basis and review our reinsurance arrangements periodically. Reinsurers are selected based on their financial condition, business practices and the price of their product offerings. In order to mitigate credit risk to reinsurance companies, most of our reinsurance recoverable balance as of June 30, ~~2020~~2021 was with reinsurers that had an A.M. Best rating of “A–” or better. We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.

The following table shows earned premiums ceded and reinsurance loss recoveries by period (in thousands):

Three Months Ended

Six Months Ended

June 30,

June 30,


2020

2019

2020

2019

Ceded earned premiums

$
81,784

$
76,309

$
169,793

$
146,455
Reinsurance recoveries

$
69,523

$
58,975

$
153,117

$
107,564

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~~11. Revolving Credit Facility~~

Our Second Restated Credit Agreement with Frost Bank (“Frost”) dated June 30, 2015, as amended, provided a $15.0 million revolving credit facility (“Facility A”), with a $5.0 million letter of credit sub-facility. The outstanding balance of the Facility A bore interest at a rate equal to the prime rate or LIBOR plus 2.5%, at our election. We paid an annual fee of 0.25% of the average daily unused balance of Facility A and letter of credit fees at the rate of 1.00% per annum. On August 19, 2019, we terminated Facility A.

~~12. Subordinated Debt Securities~~

We issued trust preferred securities through Trust I and Trust II. These Delaware statutory trusts are sponsored and wholly-owned by Hallmark and each was created solely for the purpose of issuing the trust preferred securities. Each trust pays dividends on its preferred securities at the same rate each quarter as interest is paid on the junior subordinated debt securities. Under the terms of the junior subordinated debt securities, we pay interest only each quarter and the principal of each note at maturity. The subordinated debt securities of each trust are uncollateralized and do not require maintenance of minimum financial covenants.

~~The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities:~~

Trust I

Trust II

Issue date

June 21, 2005

August 23, 2007
Principal amount of trust preferred securities

$
30,000

$
25,000
Principal amount of junior subordinated debt securities

$
30,928

$
25,774
Maturity date of junior subordinated debt securities

June 15, 2035

September 15, 2037
Trust common stock

$
928

$
774
Interest rate, per annum

Three Month LIBOR + 3.25%

Three Month LIBOR + 2.90%
Current interest rate at June 30, 2020

3.56%

3.21%

~~13. Senior Unsecured Notes~~

On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029. Interest on the Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020. The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject to any sinking fund requirements. At Hallmark’s option, the Notes are redeemable, in whole or in part, prior to the stated maturity subject to certain provisions intended to make the holders of the Notes whole on scheduled interest and principal payments. The indenture governing the Notes contains covenants which restrict Hallmark’s ability to incur additional indebtedness,pay dividends on or acquire its common stock, or make payments on its other securities or indebtedness if any such action would cause the Company’s debt to capital ratio (calculated in accordance with the indenture) to exceed 35%. Among other things, the indenture also limits Hallmark’s ability to create liens on the stock of, dispose of all or substantially all of the assets of, or permit the merger or consolidation with another entity of any direct or indirect insurance company subsidiary with statutory surplus of at least $50.0 million. Hallmark is in compliance with all of these covenants.

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~~14. Deferred Policy Acquisition Costs~~

~~The following table shows total deferred and amortized policy acquisition cost activity by period (in thousands):~~

Three Months Ended

Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Deferred

$
(8,422)

$
(35,871)

$
(24,403)

$
(47,547)
Amortized

10,899

34,788

24,287

41,530
Net

$
2,477

$
(1,083)

$
(116)

$
(6,017)

~~15. Earnings per Share~~

~~The following table sets forth basic and diluted weighted average shares outstanding for the periods indicated (in thousands):~~

Three Months Ended

Six Months Ended

June 30,

June 30,


2020


2019

2020


2019

Weighted average shares - basic

18,141

18,123

18,132

18,090
Effect of dilutive securities

—

128

—

160
Weighted average shares - assuming dilution

18,141

18,251

18,132

18,250

For the three months and six months ended June 30, 2020, 14,157 shares of common stock potentially issuable upon the exercise of employee stock options were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive. For the three months and six months ended June 30, 2019, all shares of common stock potentially issuable upon the exercise of employee stock options were included in the weighted average number of shares outstanding on a diluted basis.

~~16. Net Periodic Pension Cost~~

~~The following table details the net periodic pension cost incurred by period (in thousands):~~

Three Months Ended

Six Months Ended

June 30,

June 30,


2020

2019

2020

2019
Interest cost

$
88

$
114

$
177

$
227
Amortization of net loss

35

36

70

72
Expected return on plan assets

(171)

(150)

(342)

(299)
Net periodic pension cost

$
(48)

$
—

$
(95)

$
—
Contributed amount

$
—

$
—

$
—

$
—

~~Refer to Note 15 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 for more discussion of our retirement plans.~~

~~17. Income Taxes~~

Our effective income tax rate for the six months ended June 30, 2020 and 2019 was 10% and 20.8%, respectively. The effective rate for the six months ended June 30, 2020 varied from the statutory tax rates primarily due to the non-deductible impairment of goodwill. The effective tax rate for the six months ended June 30, 2019 varied from the statutory tax rates primarily due to tax exempt interest income.

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~~18. Supplemental Cash Flow Information~~

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheet to the total of the same such amounts shown in the statement of cash flows (in thousands):

As of June 30,

2020

2019

Cash and cash equivalents

$
126,619

$
67,670
Restricted cash

1,858

3,486
Total cash, cash equivalents and restricted cash shown in the statement of cash flows

$
128,477

$
71,156

~~Restricted cash represents amounts required to be set aside by a contractual agreement with a third-party insurer and amounts pledged for the benefit of various state insurance departments.~~

~~The following table provides supplemental cash flow information for the six months ended June 30, 2020 and 2019:~~

Six Months Ended June 30,

2020

2019

Interest paid

$
2,797

$
2,527

Income taxes (recovered) paid

$
(9)

$
2,848

Supplemental schedule of non-cash investing activities:

Receivable for securities related to investment disposals

$
1,304

$
2,581

Payable for securities related to investment purchases

$
3

$
3,167

~~19. Commitments and Contingencies~~

On May 5, 2020, a lawsuit styled Schulze v. Hallmark Financial Services, Inc., et. al (Case No. 3:20-cv-01130) was filed in the U.S. District Court for the Northern District of Texas, Dallas Division. The Company, its Chief Executive Officer and its Chief Financial Officer are named defendants in the lawsuit brought on behalf of a putative class of shareholders who acquired Hallmark securities between March 5, 2019 and March 17, 2020. In general, the complaint alleges that the defendants violated the Securities Exchange Act of 1934 by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company would be forced to report $63.8 million of prior year net adverse loss development, (d) the Company would exit the contract binding line of its commercial automobile primary insurance business, and (e) the defendants’ positive statements about the Company’s business, operations and prospects were materially misleading and/or lacked a reasonable basis. Defendants’ responsive pleading is not yet due and has not been filed. The litigation is in its initial stages and we are unable to reasonably predict its potential outcome. The Company, however, believes that the lawsuit is without merit and intends to vigorously defend the claims. The Company’s current policy is to expense legal costs as incurred. Historically, the Company has not carried director and officer liability insurance and does not currently hold such a policy.

As of June 30, 2020, we were engaged in various other legal proceedings in the ordinary course of business, none of which, either individually or in the aggregate, are believed likely to have a material adverse effect on our consolidated

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~~financial position or results of operations, in the opinion of management. The various other legal proceedings to which we were a party are routine in nature and incidental to our business.~~

~~20. Changes in Accumulated Other Comprehensive Income Balances~~

~~The changes in accumulated other comprehensive income balances as of June 30, 2020 and 2019 were as follows (in thousands):~~

Accumulated Other

Pension

Unrealized

Comprehensive


Liability

Gains (Loss)

Income (Loss)
Balance at December 31, 2018

$
(3,334)

$
(3,326)

$
(6,660)
Other comprehensive income:





Change in net actuarial gain

72

—

72
Tax effect on change in net actuarial gain

(15)

—

(15)
Unrealized holding gains arising during the period

—

11,233

11,233
Tax effect on unrealized gains arising during the period

—

(2,359)

(2,359)
Reclassification adjustment for gains included in net income

—

(4,201)

(4,201)
Tax effect on reclassification adjustment for gains included in net income

—

883

883
Other comprehensive income, net of tax

57

5,556

5,613
Balance at June 30, 2019

$
(3,277)

$
2,230

$
(1,047)

Balance at December 31, 2019

$
(3,239)

$
3,927

$
688
Other comprehensive loss:






Change in net actuarial gain

69

—

69
Tax effect on change in net actuarial gain

(14)

—

(14)
Unrealized holding gains arising during the period

—

1,443

1,443
Tax effect on unrealized holding gains arising during the period

—

(304)

(304)
Reclassification adjustment for gains included in net losses

—

(5,222)

(5,222)
Tax effect on reclassification adjustment for gains included in net loss

—

1,097

1,097
Other comprehensive income (loss), net of tax

55

(2,986)

(2,931)
Balance at June 30, 2020

$
(3,184)

$
941

$
(2,243)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020

Ceded earned premiums	$	75,179	$	81,784	$	149,770	$	169,793
Reinsurance recoveries	$	77,050	$	69,523	$	137,525	$	153,117

~~21. Leases~~Loss Portfolio Transfer

We adopted ASU 2016-02, “Leases, (Topic 842)” on January 1, 2019, which resulted in the recognition of operating leases on the balance sheet in 2019 and going forward. See Note 2 for more information on the adoption of ASU 2016-02. Right-of-use assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We also elected certain practical expedients that allow us not to reassess existing leases under the new guidance. We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. Since our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.

The Company’s operating lease obligations predominately pertain to office leases utilized in the operation of our business. Our leases have remaining terms of 1 to 13 years, some of which include options to extend the leases. The components of lease expense and other lease information as of and during the three- and six-month periods ended June 30, 2020 and 2019 were as follows (in thousands):

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Three Months Ended

Six Months Ended

June 30,

June 30,

June 30,
June 30,


2020


2019


2020

2019


Operating lease cost

$
751

$
816

$
1,541

$
1,356

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$
555

$
552

$
991

$
1,103

Right-of-use assets obtained in exchange for new operating lease liabilities

$
—

$
—

$
—

$
—

~~Other lease information as of June 30, 2020 and December 31, 2019 are as follows (in thousands):~~

June 30,

December 31,

2020

2019

Operating lease right-of-use assets

$
14,972

$
16,044

Operating lease liabilities

$
16,862

$
17,347

Weighted-average remaining lease term - operating leases

10.4

10.6

Weighted-average discount rate - operating leases

5.87%

5.88%

~~We incurred $12 thousand in short-term lease payments not included in our lease liability during the six months ended June 30, 2020.~~

~~Future minimum lease payments under non-cancellable leases as of June 30, 2020 and December 31, 2019 were as follows (in thousands):~~

June 30,

December 31,

2020

2019

2020

$
1,482

$
2,473
2021

2,172

2,172
2022

2,171

2,171
2023

1,885

1,885
2024

1,941

1,941
Thereafter

13,325

13,325
Total future minimum lease payments

$
22,976

$
23,967

Less imputed interest

$
(6,114)

$
(6,620)
Total operating lease liability

$
16,862

$
17,347

~~22. Subsequent Events:~~

On July 16, 2020, AHIC, HIC, HSIC, HCM and HNIC (collectively, the “Hallmark Insurers”), entered into a Loss Portfolio Transfer Reinsurance Contract to be effective as of January 1, 2020 (the “LPT Contract”) with DARAG Bermuda Ltd. (“DARAG Bermuda”) and DARAG Insurance (Guernsey) Limited (“DARAG Guernsey” and, collectively, ~~with DARAG Bermuda,~~ the “Reinsurers”). The ~~transactions contemplated by the~~ LPT Contract ~~were~~was consummated on

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July 31, 2020. The Company ~~expects to record~~recorded a $21.7 million pre-tax ~~charge to earnings~~loss during the third quarter of 2020 attributable to the closing of the LPT Contract.

Pursuant to the LPT Contract, (a) the Hallmark Insurers ceded to the Reinsurers all existing and future claims for losses occurring on or prior to December 31, 2019 on the binding primary commercial automobile liability insurance policies and the brokerage primary commercial automobile liability insurance policies issued by the Hallmark Insurers (the “Subject Business”) up to an aggregate limit of $240.0 million, with (i) the first layer of $151.2 million in reinsurance provided by DARAG Bermuda, (ii) the Hallmark Insurers retaining a loss corridor of the next $24.9 million in losses on the Subject Business, (iii) DARAG Bermuda reinsuring a second layer of $27.8 million above the first layer and the Hallmark Insurers’ loss corridor, and (iv) DARAG Guernsey reinsuring the top layer of $36.1 million in losses on the Subject Business, in each case net of third-party reinsurance and other recoveries; (b) the Hallmark Insurers will continue to manage and retain the benefit of other third-party reinsurance on the Subject Business; and (c) the Hallmark Insurers paid the Reinsurers a net reinsurance premium of $92.6 million. In connection with the closing, the parties also entered into a Services Agreement and a Trust Agreement. Pursuant to the Services Agreement, DARAG Bermuda assumed responsibility for certain administrative services, including claims handling, for the Subject Business. Pursuant to the Trust Agreement, the Reinsurers made initial cash deposits in the aggregate amount of $96.7 million into collateral trust

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accounts with The Bank of New York Mellon, as trustee, to be held as security for the Reinsurers’ obligations to the Hallmark Insurers under the LPT Contract.

As of June 30, 2021, the ultimate incurred losses from the subject business were $195.9 million or $19.8 million in excess of the Hallmark Insurers’ loss corridor. Our reinsurance recoverables of $494.5 million include $53.7 million related to the LPT Contract as of June 30, 2021.

11. Subordinated Debt Securities

The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities:


		Hallmark		Hallmark
		Statutory		Statutory
		Trust I		Trust II

Issue date		June 21, 2005		August 23, 2007
Principal amount of trust preferred securities	$	30,000	$	25,000
Principal amount of junior subordinated debt securities	$	30,928	$	25,774
Maturity date of junior subordinated debt securities		June 15, 2035		September 15, 2037
Trust common stock	$	928	$	774
Interest rate, per annum		Three Month LIBOR + 3.25%		Three Month LIBOR + 2.90%
Current interest rate at June 30, 2021		3.37%		3.02%

12. Senior Unsecured Notes

On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029. Interest on the Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020. The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject to any sinking fund requirements. At Hallmark’s option, the Notes are redeemable, in whole or in part, prior to the stated maturity subject to certain provisions intended to make the holders of the Notes whole on scheduled interest and principal payments. The indenture governing the Notes contains covenants which, among other things, restrict Hallmark’s ability to incur additional indebtedness, make certain payments, create liens on the stock of certain subsidiaries, dispose of certain assets, or merge or consolidate with other entities. The terms of the indenture prohibit payments or other distributions on any security of the Company that ranks junior to the Notes when the Company’s debt to capital ratio (as defined in the indenture) is greater than 35%. The Company’s debt to capital ratio was 37.4% as of June 30, 2021.

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13. Deferred Policy Acquisition Costs

The following table shows total deferred and amortized policy acquisition cost activity by period reported in operating expenses (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020

Deferred	$	(6,061)	$	(8,422)	$	(21,164)	$	(24,403)
Amortized		9,156		10,899		25,713		24,287
Net	$	3,095	$	2,477	$	4,549	$	(116)

14. Earnings per Share

The following table sets forth basic and diluted weighted average shares outstanding for the periods indicated (in thousands):


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2021	2020	2021	2020

Weighted average shares - basic	18,171	18,141	18,157	18,132
Effect of dilutive securities	0	0	0	0
Weighted average shares - assuming dilution	18,171	18,141	18,157	18,132

For the three months and six months ended June 30, 2021 and 2020, 14,157 shares of common stock potentially issuable upon the exercise of employee stock options were excluded from the weighted average number of shares outstanding on a diluted basis because the effect of such options would be anti-dilutive.

15. Net Periodic Pension Cost

The following table details the net periodic pension cost incurred by period (in thousands):


	Three Months Ended				Six Months Ended
	June 30,					June 30,
	2021		2020		2021		2020
Interest cost	$	67	$	88	$	135	$	177
Amortization of net loss		44		35		87		70
Expected return on plan assets		(177)		(171)		(354)		(342)
Net periodic pension cost	$	(66)	$	(48)	$	(132)	$	(95)
Contributed amount	$	0	$	0	$	0	$	0

Refer to Note 15 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for more discussion of our retirement plans.

16. Income Taxes

Our effective income tax rate for the six months ended June 30, 2021 and 2020 was 20.5% and 10.0%, respectively. The effective rate for the six months ended June 30, 2021 varied from the statutory tax rates primarily due to tax exempt interest income. The effective tax rate for the six months ended June 30, 2020 varied from the statutory tax

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rates primarily due to the non-deductible impairment of goodwill. We concluded that 0 valuation allowance was necessary against our deferred tax assets as of June 30, 2021 and December 31, 2020.

17. Supplemental Cash Flow Information


	As of June 30,
	2021		2020

Cash and cash equivalents	$	326,558	$	126,619
Restricted cash		5,474		1,858
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	332,032	$	128,477

Restricted cash represents amounts required to be set aside by a contractual agreement with a third-party insurer and amounts pledged for the benefit of various state insurance departments.

The following table provides supplemental cash flow information for the six months ended June 30, 2021 and 2020:


	Six Months Ended June 30,
	2021		2020


Interest paid	$	1,590	$	2,797

Income taxes (recovered) paid	$	(4,145)	$	(9)

Supplemental schedule of non-cash investing activities:

Receivable for securities related to investment disposals	$	7,037	$	1,304

Payable for securities related to investment purchases	$	5,774	$	3

18. Commitments and Contingencies

On May 5, 2020, a lawsuit styled Schulze v. Hallmark Financial Services, Inc., et al. (Case No. 3:20-cv-01130) was filed in the U.S. District Court for the Northern District of Texas, Dallas Division (the “Schulze Matter”). The Company, its former Chief Executive Officer and its former Chief Financial Officer are named defendants in the lawsuit brought on behalf of a putative class of shareholders who acquired Hallmark securities between March 5, 2019 and March 17, 2020. In general, the complaint alleges that the defendants violated the Securities Exchange Act of 1934 by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company would be forced to report $63.8 million of prior year net adverse loss development, (d) the Company would exit the contract binding line of its commercial automobile primary insurance business, and by making positive statements about the Company’s business, operations and prospects that were allegedly materially misleading and/or lacked a reasonable basis. On July 21, 2020, the court appointed Rajeev Yalamanchili as Lead Plaintiff. Lead Plaintiff filed an Amended Complaint on September 30, 2020. On July 28, 2021, the court granted the defendants’ motion to dismiss the lawsuit without prejudice to the plaintiff filinga second amended complaint within 28 days, and denied plaintiff’s request to submit supplemental evidence in

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support of his opposition to the motion to dismiss. The Company’s current policy is to expense legal costs as incurred. Historically, the Company has not carried director and officer liability insurance and does not currently hold such a policy.

As of June 30, 2021, we were engaged in various other legal proceedings in the ordinary course of business, none of which, either individually or in the aggregate, are believed likely to have a material adverse effect on our consolidated financial position or results of operations, in the opinion of management. The various other legal proceedings to which we were a party are routine in nature and incidental to our business.

From time to time, assessments are levied on us by the guaranty association of the states where we offer our insurance products. Such assessments are made primarily to cover the losses of policyholders of insolvent or rehabilitated insurers. Since these assessments can generally be recovered through a reduction in future premium taxes paid, we capitalize the assessments that can be recovered as they are paid and amortize the capitalized balance against our premium tax expense. We did 0t pay an assessment during the first six months of 2021 or 2020.

19. Changes in Accumulated Other Comprehensive (Loss) Income Balances

The changes in accumulated other comprehensive (loss) income balances as of June 30, 2021 and 2020 were as follows (in thousands):


					Accumulated Other
	Pension		Unrealized		Comprehensive
	Liability		Gains (Loss)		Income (Loss)
Balance at January 1, 2020	$	(3,239)	$	3,927	$	688
Other comprehensive loss:
Change in net actuarial gain		69		0		69
Tax effect on change in net actuarial gain		(14)		0		(14)
Unrealized holding gains arising during the period		0		1,443		1,443
Tax effect on unrealized holding gains arising during the period		0		(304)		(304)
Reclassification adjustment for gains included in net income		0		(5,222)		(5,222)
Tax effect on reclassification adjustment for gains included in net income		0		1,097		1,097
Other comprehensive loss, net of tax		55		(2,986)		(2,931)

Balance at June 30, 2020	$	(3,184)	$	941	$	(2,243)

Balance at January 1, 2021	$	(3,762)	$	4,145	$	383
Other comprehensive loss:
Change in net actuarial gain		87		0		87
Tax effect on change in net actuarial gain		(18)		0		(18)
Unrealized holding gains arising during the period		0		2,787		2,787
Tax effect on unrealized holding gains arising during the period		0		(585)		(585)
Reclassification adjustment for gains included in net income		0		(4,229)		(4,229)
Tax effect on reclassification adjustment for gains included in net income		0		888		888
Other comprehensive loss, net of tax		69		(1,139)		(1,070)

Balance at June 30, 2021	$	(3,693)	$	3,006	$	(687)

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20. Leases

Right-of-use assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. Since our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.

The Company’s operating lease obligations predominately pertain to office leases utilized in the operation of our business. Our leases have remaining terms of 1 to 13 years, some of which include options to extend the leases. The components of lease expense and other lease information as of and during the three and six month periods ended June 30, 2021 and 2020 were as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020

Operating lease cost	$	375	$	751	$	1,094	$	1,541

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	539	$	555	$	1,084	$	991

Right-of-use assets obtained in exchange for new operating lease liabilities	$	436	$	0	$	436	$	0

Other lease information as of June 30, 2021 and December 31, 2020 are as follows (in thousands):


	June 30,		December 31,
	2021		2020

Operating lease right-of-use assets	$	13,786	$	13,986

Operating lease liabilities	$	15,671	$	15,862

Weighted-average remaining lease term - operating leases		11.6		10.2

Weighted-average discount rate - operating leases		6.22%		5.88%

We incurred $0.2 million in short-term lease payments not included in our lease liability during the six months ended June 30, 2021.

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Future minimum lease payments under non-cancellable leases as of June 30, 2021 and December 31, 2020 were as follows (in thousands):


	June 30,			December 31,
	2021			2020

2021	$	1,087	$	2,172
2022		2,171		2,171
2023		2,023		1,885
2024		2,216		1,941
2025		2,450		1,975
Thereafter		18,264		11,350
Total future minimum lease payments	$	28,211	$	21,494

Less imputed interest	$	(12,540)	$	(5,632)
Total operating lease liability	$	15,671	$	15,862

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read together with our consolidated financial statements and the notes thereto. This discussion contains forward-looking statements. Please see “Risks Associated with Forward-Looking Statements in this Form 10-Q” for a discussion of some of the uncertainties, risks and assumptions associated with these statements.

Introduction

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, “we,” “us,” “our,” or the Company) is an insurance holding company that, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing our insurance products, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our Specialty Commercial business which is written on a national basis. We pursue our business activities through subsidiaries whose operations are organized into product-specific business units, which are supported by our insurance company subsidiaries.

Our non-carrier insurance activities are segregated by business units into the following reportable segments:

●

Specialty Commercial Segment. Our Specialty Commercial Segment includes our Commercial Auto business unit which offers primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit which offers primary and excess liability, excess public entity liability and E&S package and garage liability insurance products and services; our E&S Property business unit which offers primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability business unit which offers healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals, medical facilities and, through 2020, senior care facilities; and our Aerospace & Programs business unit which offers general aviation and, until exited during 2020, satellite launch property/casualty insurance products and services, as well as certain specialty programs.

●

Standard Commercial Segment. Our Standard Commercial Segment includes the package and monoline property/casualty and, until exited during 2016, occupational accident insurance products and services ~~handled by our Commercial Accounts business unit and the runoff of workers compensation insurance products handled by our~~

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~~former Workers Compensation operating unit. Effective June 1, 2016, we ceased marketing new or renewal occupational accident policies. Effective July 1, 2015,~~handled by our Commercial Accounts business unit; and the runoff of workers compensation insurance products handled by our former Workers Compensation operating unit ~~ceased retaining any risk on new or renewal policies.~~until discontinued during 2016.

●

Personal Segment. Our Personal Segment includes the non-standard personal automobile and renters insurance products and services handled by our Specialty Personal Lines business unit.

The retained premium produced by these reportable segments is supported by our American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark Insurance Company (“HIC”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”) insurance subsidiaries. In addition, control and management of Hallmark County Mutual Insurance Company (“HCM”) is maintained through our wholly owned subsidiary, 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. HCM does not retain any business.

AHIC, HIC, HSIC and HNIC have entered into a pooling arrangement pursuant to which AHIC retains 32% of the total net premiums written by any of them, HIC retains 32% of our total net premiums written by any of them, HSIC retains 26% of our total net premiums written by any of them and HNIC retains 10% of our total net premiums written by any of them. Neither HCM nor TBIC is a party to the intercompany pooling arrangement.

Results of Operations

Management overview. During the three months ended June 30, ~~2020,~~2021, our total revenue was ~~$132.7~~$106.2 million, representing ~~an increase~~a decrease of ~~10%~~20% from the ~~$120.9~~$132.7 million in total revenue for the same period of ~~2019.~~2020. During the six months ended June 30, ~~2020,~~2021, our total revenue was ~~$233.7~~$220.6 million, representing a decrease of 2%6% from the ~~$239.0~~$233.7 million in total revenue for the same period of ~~2019.~~2020. During the three months ended June 30, ~~2020, our~~2021, we reported a pre-tax ~~income was $5.6~~loss of $0.5 million, as compared to pre-tax income of ~~$16.5~~$5.6 million reported during the same period the prior year. During the six months ended June 30, ~~2020, our~~2021, we reported pre-tax ~~loss was $64.0~~income of $11.2 million, as compared to a pre-tax ~~income~~loss of ~~$35.4~~$64.0 million reported during the same period the prior year.

The ~~increase~~decrease in revenue for the three months ended June 30, ~~2020 was largely due to higher net premiums earned, partially offset by lower net investment and lower net investment gains~~2021 compared to the same period of the prior ~~year.~~year was primarily due to lower net premiums earned of $27.0 million and lower net investment income of $0.8 million, partially offset by higher net investment gains of $1.8 million. The decrease in revenue for the six months ended June 30, 2020 was primarily due to net investment losses of $27.3 million as compared to net investment gains of $18.8 million during the same period of 2019, as well as a decrease in net investment income for the six months ended June 30, 2020 as compared to the same period of the prior year. This decrease in revenue was partially offset by increased net premiums earned of $44.0 million for the six months ended June 30, 2020 compared to the same period of the prior year.

The decrease in income before tax for the three months ended June 30, 2020 was due primarily to increased losses and loss adjustment expenses (“LAE”) of $21.6 million, as compared to the same period in 2019, partially offset by the increase in revenue. The increase in losses and LAE was due primarily to increased net premiums earned, as well as $10.8 million of unfavorable net prior year loss reserve development during the three months ended June 30, 2020 as compared to $1.5 million during the same periods of 2019. Loss and LAE for the second quarter of 2020 was also impacted by a $4.6 million increase in catastrophe losses as2021 compared to the same period of the prior year was primarily due to decreased net premiums earned of ~~which~~$46.7 million, lower net investment income of $2.3 million and lower finance charges of $1.0 million, partially offset by higher net investment gains of $36.9 million.

The decline in pre-tax results for the three months ended June 30, 2021 compared to the same period of the prior year was primarily due to the decreased revenue discussed above, partially offset by decreased losses and loss adjustment expenses (“LAE”) of $17.2 million. The decrease in losses and LAE was primarily due to lower current accident year loss trends and a $7.7 million improvement in unfavorable net prior year loss reserve development. Losses and LAE for the second quarter of 2021 included $3.7 million ~~was attributable~~of net catastrophe losses as compared to ~~reserves for COVID-19 claims.~~ $6.6 million during the same period of the prior year.

The improvement in pre-tax ~~loss during~~results for the six months ended June 30, ~~2020~~2021 as compared to the same period the prior year was primarily due to ~~a $44.7~~the absence of $46.0 million of impairment ~~charge~~charges to goodwill and ~~a $1.3 million charge to~~ indefinite-lived intangible assets ~~as well as~~taken during the first quarter of 2020 and a $39.7 million decrease in losses and LAE, partially offset by the decreased ~~revenue. In connection with its normal process for evaluating~~revenue discussed above. The impairment ~~triggering events,~~charges during the ~~Company determined~~first quarter of 2020 resulted from our determination that a significant decline in ~~its~~ market capitalization below ~~its~~ stockholders’ equity ~~during the first quarter of 2020~~ indicated the impairment of the goodwill and indefinite-lived intangible assets included in our balance sheet.

~~Further contributing to the increase~~ The decrease in ~~pre-tax loss for the six months ended June 30, 2020 were increased~~ losses and LAE was primarily the result of ~~$45.0 million, due primarily to increased net premiums earned as compared to~~exiting the ~~same period in 2019, as~~contract binding line of the primary automobile business marketed by our Commercial

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Auto business unit commencing in February 2020, as well as ~~unfavorable prior year loss reserve development. We reported $19.3~~an $18.3 million ofimprovement in unfavorable net prior year loss reserve development during the six months ended June 30, 2020 as compared to $1.4 million of unfavorable net prior year loss reserve development during the same period of 2019. Loss and LAE for the first six months of 2020 was also impacted by a $8.6 million increase in catastrophe losses as compared to the same period of the prior year, of which $5.0 million was attributable to reserves for COVID-19 claims. development.

We reported a net ~~income~~loss of ~~$6.7~~$0.5 million for the three months ended June 30, ~~2020~~2021 as compared to net income of ~~$13.0~~$6.7 million for the same period in ~~2019.~~2020. We reported net income of $8.9 million for the six months ended June 30, 2021 as compared to a net loss of $57.6 million for the ~~six months ended June 30, 2020 as compared to net income of $28.1 million for the~~ same period in ~~2019. On a diluted basis per share, we reported net income of $0.37 per share for the three months ended June 30, 2020, as compared to net income of $0.71 per share for the same period in 2019.~~2020. On a diluted basis per share, we reported a net loss of ~~$3.18~~$0.03 per share for the three months ended June 30, 2021, compared to net income of $0.37 per share for the same period in 2020. On a diluted basis per share, we reported a net income of $0.49 per share for the six months ended June 30, ~~2020,~~2021, as compared to a net ~~income~~loss of ~~$1.54~~$3.18 per share for the same period in ~~2019.~~2020. Our effective tax rate was ~~10%~~20.5% for the first six months of ~~2020 as~~2021 compared to ~~20.8%~~10.0% for the same period in ~~2019.~~2020. The ~~decrease in~~effective rate for the six months ended June 30, 2021 varied from the statutory tax rates primarily due to tax exempt interest income. The effective tax rate for the ~~first~~ six months inended June 30, 2020 ~~was~~varied from the statutory tax rates primarily due ~~in large part~~ to the non-deductible impairment of ~~goodwill and indefinite-lived intangible assets.~~goodwill.

Second Quarter ~~2020~~2021 as Compared to Second Quarter ~~2019~~2020

The following is additional business segment information for the three months ended June 30, ~~2020~~2021 and ~~2019~~2020 (in thousands):


	Three Months Ended June 30,																											Three Months Ended June 30,
	Specialty Commercial						Standard Commercial																					Specialty Commercial						Standard Commercial
	Segment						Segment						Personal Segment						Corporate				Consolidated					Segment						Segment						Personal Segment						Corporate				Consolidated
	2020			2019			2020			2019			2020			2019			2020		2019		2020			2019		2021			2020			2021			2020			2021			2020			2021		2020		2021			2020
Gross premiums written	$	138,627		$	172,940		$	23,842		$	21,835		$	21,175		$	23,461		$	—	$	—	$	183,644		$	218,236	$	126,190		$	138,627		$	27,712		$	23,842		$	15,814		$	21,175		$	—	$	—	$	169,716		$	183,644
Ceded premiums written		(64,640)			(83,370)			(7,037)			(7,170)			(2,980)			(3,853)			—		—		(74,657)			(94,393)		(70,157)			(64,640)			(10,330)			(7,037)			(95)			(2,980)			—		—		(80,582)			(74,657)
Net premiums written		73,987			89,570			16,805			14,665			18,195			19,608			—		—		108,987			123,843		56,033			73,987			17,382			16,805			15,719			18,195			—		—		89,134			108,987
Change in unearned premiums		14,350			(20,216)			(404)			1,611			2,663			1,261			—		—		16,609			(17,344)		8,316			14,350			(835)			(404)			1,996			2,663			—		—		9,477			16,609
Net premiums earned		88,337			69,354			16,401			16,276			20,858			20,869			—		—		125,596			106,499		64,349			88,337			16,547			16,401			17,715			20,858			—		—		98,611			125,596

Total revenues		91,124			73,592			17,096			17,310			22,464			23,116			1,968		6,885		132,652			120,903		66,917			91,124			17,240			17,096			19,115			22,464			2,943		1,968		106,215			132,652

Losses and loss adjustment expenses		69,262			48,374			10,775			10,613			14,836			14,239			—		—		94,873			73,226		47,342			69,262			14,138			10,775			16,239			14,836			—		—		77,719			94,873

Pre-tax income (loss)	$	5,882		$	10,427		$	802		$	2,057		$	1,884		$	2,441		$	(2,985)	$	1,559	$	5,583		$	16,484	$	5,327		$	5,882		$	(1,976)		$	802		$	(2,766)		$	1,884		$	(1,117)	$	(2,985)	$	(532)		$	5,583

Net loss ratio (1)		78.4	%		69.7	%		65.7	%		65.2	%		71.1	%		68.2	%						75.5	%		68.8		73.6	%		78.4	%		85.4	%		65.7	%		91.7	%		71.1	%						78.8	%		75.5	%
Net expense ratio (1)		18.5	%		22.1	%		34.4	%		29.0	%		21.0	%		23.3	%						22.9	%		25.7		23.6	%		18.5	%		31.7	%		34.4	%		27.2	%		21.0	%						26.9	%		22.9	%
Net combined ratio (1)		96.9	%		91.8	%		100.1	%		94.2	%		92.1	%		91.5	%						98.4	%		94.5		97.2	%		96.9	%		117.1	%		100.1	%		118.9	%		92.1	%						105.7	%		98.4	%

Net (Unfavorable) Favorable Prior Year Development	$	(9,315)		$	(3,277)		$	(794)		$	1,778		$	(680)		$	29						$	(10,789)		$	(1,470)	$	(1,127)		$	(9,315)		$	(18)		$	(794)		$	(1,985)		$	(680)						$	(3,130)		$	(10,789)

(1)

The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated as total underwriting expenses offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were ~~$138.6~~$126.2 million for the three months ended June 30, ~~2020,~~2021, which was ~~$34.3~~$12.4 million, or ~~20%~~9.0%, less than the ~~$172.9~~$138.6 million reported for the same period of ~~2019.~~2020. Net premiums written were ~~$74.0~~$56.0 million for the three months ended June 30, ~~2020~~2021 as compared to ~~$89.6~~$74.0 million for the same period of ~~2019.~~2020. The decrease in gross and net premiums written was primarily the result of lower premium production in our Commercial Auto, Professional Liability and E&S Property business ~~unit,~~units, partially offset by increased premium production in our E&S Casualty ~~E&S Property~~ and ~~Professional Liability~~Aerospace & Programs business units.In February 2020, we made the strategic decision to exit the contract binding line of the primary automobile business marketed by our Commercial Auto business unit as a result of increasing claim

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severity and limited opportunity for meaningful rate increases. At that time, we began the process of non-renewing policies and placing in-force policies in runoff in accordance with state regulatory guidelines.

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The exit of the contract binding line of the primary commercial automobile business contributed $3.5 million and $6.7 million to the decline in gross premiums written and net premiums written, respectively, for the three months ended June 30, 2021 as compared to the same period the prior year.

The ~~$91.1~~$66.9 million of total revenue for the three months ended June 30, ~~2020~~2021 was ~~$17.5~~$24.2 million ~~more~~less than the ~~$73.6~~$91.1 million reported by the Specialty Commercial Segment for the same period in ~~2019.~~2020. This ~~increase~~decrease in revenue was primarily due to lower net premiums earned of $24.0 million driven mostly by decreased net premiums earned of $25.0 million in the Commercial Auto business unit, $0.8 million from the Professional Liability business unit and $0.6 million from the E&S Property business unit, partially offset by higher net premiums earned of ~~$19.0~~$2.4 million ~~due mostly to increased premium production~~ in ~~our~~the E&S Casualty ~~E&S Property and Professional Liability~~ business ~~units, as well as higher net premiums earned in our Commercial Auto business unit due~~unit. Further contributing to ~~higher premium production in 2019 and~~ the ~~related impact to 2020 net earned premiums. The increase~~decrease in revenue was ~~partially offset by~~ lower net investment income of ~~$1.4 million and lower commission and fees of $0.1~~$0.2 million for the three months ended June 30, ~~2020~~2021 as compared to the same period of ~~2019.~~2020.

~~Pre-tax income for the~~The Specialty Commercial Segment reported pre-tax income of ~~$5.9~~$5.3 million for the second quarter of ~~2020 was $4.5 million less than the $10.4~~2021 as compared to pre-tax income of $5.9 million reported for the same period in ~~2019.~~2020. The ~~decrease~~$0.6 million decline in pre-tax income was primarily the result of ~~higher~~the lower revenue discussed above, partially offset by lower losses and LAE ~~$20.9~~of $21.9 million, ~~and higher~~lower operating expenses of ~~$1.1~~$1.3 million ~~partially offset by the increased revenue discussed above~~and lower amortization of intangible assets of $0.4 million during the three months ended June 30, ~~2020~~2021 as compared to the same period during ~~2019.~~2020.

Our Specialty Commercial Segment reported ~~higher~~lower losses and LAE for the quarter ended June 30, 2021 compared to the same period of the prior year as the combined result of (a) a ~~$5.7~~$21.6 million ~~increase~~decrease in losses and LAE in our Commercial Auto business unit due largely to ~~$7.8~~exit of the contract binding line of business as well as a $7.5 million ofimprovement in unfavorable prior year net loss reserve development, ~~recognized during the three months ended June 30, 2020 as compared~~(b) stable losses and LAE in our E&S Property business unit due primarily to ~~$2.8~~a $2.2 million ofimprovement in net catastrophe losses, partially offset by $1.0 million higher unfavorable net prior year ~~net~~ loss reserve development ~~during the same period of 2019, (b)~~and higher current accident year non-catastrophe losses, (c) a ~~$1.5~~$4.6 million increase in losses and LAE in our E&S Casualty business unit due primarily to ~~increased net premiums earned, partially offset by negligible prior year net loss reserve development during the second quarter of 2020 as compared to $2.6~~a $2.7 million ofincrease in unfavorable prior year net loss reserve development ~~during the second quarter of 2019, (c)~~and higher current accident year loss trends, (d) a ~~$3.9~~$3.6 million ~~increase~~decrease in losses and LAE in our ~~E&S Property~~Aerospace & Programs business unit due primarily to ~~higher~~lower current accident year net ~~premiums earned and~~loss trends driven by lower satellite losses, partially offset by a $0.3 million higher unfavorable net ~~prior year~~ loss reserve development, ~~of $0.7~~and (e) a $1.3 million ~~during the second quarter of 2020 as compared to favorable net prior year loss reserve development of $2.1 million during the same period the prior year, (d) a $5.0 million increase~~decrease in losses and LAE attributable to our Professional Liability business unit due primarily to ~~increased~~favorable net ~~premiums earned,~~prior year loss reserve development of $4.1 million during the second quarter of 2021 as ~~well as~~compared to unfavorable net prior year loss reserve development of $0.6 million during the ~~second quarter of 2020 as compared to negligible net prior year loss reserve development during the~~ same period the prior year, ~~and (e) a $4.8 million increase in losses and LAE in our Aerospace & Programs business unit due primarily to~~partially offset by higher net current accident year ~~satellite losses and $0.2 million of unfavorable prior year net~~ loss ~~reserve development during the second quarter of 2020 compared to negligible prior year net loss reserve development during the second quarter of 2019.~~trends.

Operating expenses ~~increased $1.1~~decreased $1.3 million primarily as the result of ~~higher~~lower production related expenses of ~~$1.1 million, increased professional services of $0.5~~$1.8 million and ~~increased~~lower occupancy and ~~other operating~~related expenses of ~~$0.1~~$0.2 million, , partially offset by ~~lower~~higher salary and related expenses of $0.3 million driven by increased incentive compensation expense and ~~lower travel and related~~higher other operating expenses of ~~$0.3~~$0.4 million.

The Specialty Commercial Segment reported a net loss ratio of ~~78.4%~~73.6% for the three months ended June 30, ~~2020~~2021 as compared to ~~69.7%~~78.4% for the same period in ~~2019.~~2020. The gross loss ratio before reinsurance was ~~82.3%~~90.0% for the three months ended June 30, ~~2020~~2021 as compared to ~~71.8%~~82.3% for the same period in ~~2019.~~2020 driven by unfavorable gross loss reserve development from the exited contract binding line of the primary commercial automobile business that was ceded under the loss portfolio transfer agreement entered during 2020. The ~~increase~~Company did not retain any of this unfavorable reserve development during the quarter ended June 30, 2021. The exit of the contract binding line of the primary commercial automobile business contributed 1.6% to the decline in the ~~gross and~~ net loss ~~ratios~~ratio during the three months ended June 30, 2021 as compared to same period during 2020. The decrease in the net loss ratio was ~~primarily due to $9.3~~also impacted by $1.1 million of unfavorable prior year net loss reserve development for the three months ended June 30, ~~2020~~2021 as compared to unfavorable prior year net loss reserve development of ~~$3.3~~$9.3 million for the same period of ~~2019.~~2020. Catastrophe losses of ~~$3.9~~$0.1 million for the three months ended June 30, ~~2020~~2021 as compared to ~~$1.0~~catastrophe losses of $3.9 million ~~for the same period the prior year also contributed to the increase in the loss ratios.Catastrophe losses~~ during the second quarter of 2020 ~~included $1.9 million of~~also contributed to the decrease in the net ~~losses for COVID-19 claims.~~ loss ratio.The Specialty Commercial Segment reported a net expense ratio of ~~18.5%~~23.6% for the second quarter of ~~2020~~2021 as compared to ~~22.1%~~18.5% for the same period of ~~2019. The decrease in the expense ratio was due predominately to higher~~2020 driven primarily by lower net premiums earned.

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Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were ~~$23.8~~$27.7 million for the three months ended June 30, ~~2020,~~2021, which was ~~$2.0~~$3.9 million, or 9%16%, more than the ~~$21.8~~$23.8 million reported for the same period in ~~2019.~~2020. Net premiums written were ~~$16.8~~$17.4 million for the three months ended June 30, ~~2020~~2021 as compared to ~~$14.7~~$16.8 million for the same period in ~~2019.~~2020. The increase in the gross and net premiums written was due to higher premium production in our Commercial Accounts business unit.

Total revenue for the Standard Commercial Segment of ~~$17.1~~$17.2 million for the three months ended June 30, ~~2020,~~2021, was ~~$0.2~~$0.1 million ~~or 1%, less~~more than the ~~$17.3~~$17.1 million reported for the same period in ~~2019.~~2020. This ~~decrease~~increase in total revenue was due to ~~lower net investment income of $0.3 million, partially offset by~~ higher net premiums earned of $0.1 million due ~~primarily~~ to ~~increased net premiums written~~higher premium production for the three months ended June 30, ~~2020~~2021 as compared to the same period of ~~2019.~~2020.

Our Standard Commercial Segment reported a pre-tax ~~income~~loss of ~~$0.8~~$2.0 million for the three months ended June 30, ~~2020~~2021 as compared to ~~$2.1~~pre-tax income of $0.8 million reported for the same period of ~~2019. This decrease in~~2020. The pre-tax ~~income~~loss was the result of ~~the decreased revenue discussed above and~~ higher loss and LAE of ~~$0.2~~$3.4 million, ~~and higher~~partially offset by lower operating expenses of ~~$0.9 million. Increased~~$0.5 million and the higher revenue discussed above. Decreased operating expenses were primarily the result of ~~higher~~lower production related expenses of ~~$0.7~~$0.5 million and lower professional services of $0.1 million, partially offset by higher salary and related expenses ~~of $0.1 million and higher professional services~~ of $0.1 million.

The Standard Commercial Segment reported a net loss ratio of ~~65.7%~~85.4% for the three months ended June 30, ~~2020~~2021 as compared to ~~65.2%~~65.7% for the same period of ~~2019.~~2020. The gross loss ratio before reinsurance for the three months ended June 30, ~~2020~~2021 was ~~69.0%~~83.5% as compared to ~~72.6%~~69.0% reported for the same period of ~~2019.~~2020. The ~~decrease~~increase in the gross and net loss ~~ratio~~ratios was due primarily to ~~lower gross~~net catastrophe losses of $3.2 million during the second quarter of 2021 compared to $2.3 million for the same period of the prior year and higher non-catastrophe current accident year loss trends. The ~~increase in the~~Standard Commercial Segment reported unfavorable net loss ~~ratio was due to higher ceded earned premium~~reserve development of $18 thousand during the three months ended June 30, ~~2020~~2021 as compared to ~~the same period the prior year,~~ unfavorable net loss reserve development of $0.8 million during the ~~three months ended June 30, 2020 as compared to favorable net loss reserve development of $1.8 million during the~~ same period of ~~2019and catastrophe losses of $2.3 million during the second quarter of~~ 2020 ~~compared to $0.7 million for the same period of the prior year. Catastrophe losses during the second quarter of 2020 included $1.8 million of net losses for COVID-19 claims.~~ The Standard Commercial Segment reported a net expense ratio of ~~34.4%~~31.7% for the second quarter of ~~2020~~2021 as compared to ~~29.0%~~34.4% for the same period of ~~2019.~~2020. The ~~increase~~decrease in the expense ratio was primarily due to ~~higher~~increased net premiums earned and decreased operating ~~expenses in our Commercial Accounts business unit.~~expenses.

Personal Segment

Gross premiums written for the Personal Segment were ~~$21.2~~$15.8 million for the three months ended June 30, ~~2020~~2021 as compared to ~~$23.5~~$21.2 million for the same period in the prior year. Net premiums written for our Personal Segment were ~~$18.2~~$15.7 million in the second quarter of ~~2020,~~2021, which was a decrease of ~~$1.4~~$2.5 million from the ~~$19.6~~$18.2 million reported for the second quarter of ~~2019.~~2020. The decrease in gross and net written premiums was primarily due to lower premium production in our current geographical footprint.

Total revenue for the Personal Segment was ~~$22.5~~$19.1 million for the second quarter of ~~2020~~2021 as compared to ~~$23.1~~$22.5 million for the same period in ~~2019.~~2020. The decrease in revenue was primarily due to lower ~~investment income~~net premiums earned of ~~$0.4~~$3.1 million and lower finance charges of ~~$0.2~~$0.4 million, partially offset by higher investment income of $0.1 million during the second quarter of ~~2020~~2021 as compared to the same period during ~~2019, while net premiums earned remained relatively unchanged.~~2020.

Pre-tax ~~income~~loss for the Personal Segment was ~~$1.9~~$2.8 million for the three months ended June 30, ~~2020~~2021 as compared to pre-tax income of ~~$2.4~~$1.9 million for the same period of ~~2019.~~2020. The ~~decrease in~~ pre-tax ~~income~~loss was primarily the result of ~~increased~~higher losses and LAE of ~~$0.6~~$1.4 million and the decreased revenue as discussed above, partially offset by decreased ~~operating expenses~~amortization of ~~$0.7~~intangible assets of $0.1 million for the three months ended June 30, ~~2020~~2021 as compared to the same period during ~~2019.The decreased operating expenses~~2020.

The Personal Segment reported a net loss ratio of 91.7% for the three months ended June 30, 2021 as compared to 71.1% for the same period of 2020. The gross loss ratio before reinsurance was 91.9% for the three months ended June 30, 2021 as compared to 70.9% for the same period in 2020. The higher gross and net loss ratios were ~~primarily the result of lower salary~~impacted by higher current accident year loss trends and ~~related expenses of $0.4~~$1.3 million higher net unfavorable prior year loss reserve development. The Personal

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~~lower production related expenses~~Segment had $0.4 million of ~~$0.1 million, lower travel and related expenses of $0.1 million and lower occupancy and related expenses of $0.1 million.~~

~~The Personal Segment reported a~~ net loss ratio of 71.1% for the three months ended June 30, 2020 as compared to 68.2% for the same period of 2019. The gross loss ratio before reinsurance was 70.9% for the three months ended June 30, 2020 as compared to 75.9% for the same period in 2019. The lower gross loss ratio for the three months ended June 30, 2020 was due to lower gross current accident year loss trends. The higher net loss ratio for the three months ended June 30, 2020 was primarily the result of lower cededcatastrophe losses ~~as well as $0.7 million net unfavorable prior year loss reserve development~~ during both the second quarter of ~~2020 as compared to negligible net prior year loss reserve development during the second quarter of 2019.The Personal Segment had catastrophe losses of $0.4 million during the second quarter of 2020 compared to $0.3 million for the same period of the prior year.~~2021 and 2020. The Personal Segment reported a net expense ratio of ~~21.0%~~27.2% for the second quarter of ~~2020~~2021 as compared to ~~23.3%~~21.0% for the same period of ~~2019.~~2020. The ~~decrease~~increase in the expense ratio was due ~~predominately~~primarily to lower ~~operating expenses.~~net premiums earned.

Corporate

Total revenue for Corporate ~~decreased~~increased by ~~$4.9~~$1.0 million for the three months ended June 30, ~~2020~~2021 as compared to the same period the prior year. This ~~decrease~~increase in total revenue was due predominately to investment gains of ~~$2.1~~$3.9 million during the second quarter of ~~2020~~2021 as compared to investment gains of ~~$6.8~~$2.1 million reported for the same period of ~~2019, and~~2020, partially offset by lower net investment income of ~~$0.2~~$0.8 million for the three months ended June 30, ~~2020~~2021 as compared to the same period during ~~2019.~~2020.

Corporate pre-tax loss was ~~$3.0~~$1.1 million for the three months ended June 30, ~~2020~~2021 as compared to pre-tax ~~income~~loss of ~~$1.6~~$3.0 million for the same period of ~~2019.~~2020. The improvement in pre-tax ~~loss~~results for the second quarter of ~~2020~~2021 as compared to ~~pre-tax income for~~ the same period the prior year was primarily due to the ~~lower~~higher revenue discussed above as well as ~~higher~~lower operating expenses of $0.8 million driven primarily by lower professional services of $0.4 million, lower salary and related expense of $0.3 million and lower travel and entertainment expenses of $0.1 million. Further contributing to the improvement in the pre-tax loss was lower interest expense of $0.1 million. The pre-tax loss was partially reduced by lower operating expenses of $0.4 million, primarily as a result of decreased salary and related expense, primarily the result of lower incentive compensation expense, partially offset by higher professional services, occupancy and related and other general expenses.

Six Months Ended June 30, ~~2020~~2021 as compared to Six Months Ended June 30, ~~2019~~

~~The following is additional business segment information for the six months ended June 30,~~ 2020 ~~and 2019~~ (in thousands):

Six Months Ended June 30,

Specialty Commercial

Standard Commercial

Segment

Segment

Personal Segment

Corporate

Consolidated


2020

2019

2020

2019

2020

2019

2020

2019

2020

2019
Gross premiums written

$
288,097

$
307,339

$
50,218

$
47,363

$
46,918

$
50,850

$
—

$
—

$
385,233

$
405,552
Ceded premiums written

(128,604)

(140,731)

(14,500)

(15,273)

(6,637)

(8,302)

—

—

(149,741)

(164,306)
Net premiums written

159,493

166,608

35,718

32,090

40,281

42,548

—

—

235,492

241,246
Change in unearned premiums

15,816

(33,066)

(2,899)

1,560

1,120

(4,211)

—

—

14,037

(35,717)
Net premiums earned

175,309

133,542

32,819

33,650

41,401

38,337

—

—

249,529

205,529

Total revenues

183,244

141,559

34,732

35,683

44,787

42,599

(29,063)

19,183

233,700

239,024

Losses and loss adjustment expenses

130,145

94,323

22,630

22,264

35,503

26,726

—

—

188,278

143,313







Pre-tax income (loss)

22,174

18,395

1,518

3,564

(3,771)

4,014

(83,924)

9,429

(64,003)

$
35,402

Net loss ratio (1)

74.2
%

70.6
%

69.0
%

66.2
%

85.8
%

69.7
%





75.5
%

69.7
Net expense ratio (1)

18.1
%

22.2
%

32.9
%

29.7
%

24.7
%

22.8
%





22.5
%

25.7
Net combined ratio (1)

92.3
%

92.8
%

101.9
%

95.9
%

110.5
%

92.5
%





98.0
%

95.4

Net (Unfavorable) Favorable Prior Year Development

(12,468)

(5,203)

(919)

3,583

(5,961)

216





(19,348)

(1,404)


	Six Months Ended June 30,
	Specialty Commercial						Standard Commercial
	Segment						Segment						Personal Segment						Corporate				Consolidated
	2021			2020			2021			2020			2021			2020			2021		2020		2021			2020
Gross premiums written	$	240,180		$	288,097		$	57,447		$	50,218		$	35,107		$	46,918		$	—	$	—	$	332,734		$	385,233
Ceded premiums written		(129,711)			(128,604)			(20,580)			(14,500)			(162)			(6,637)			—		—		(150,453)			(149,741)
Net premiums written		110,469			159,493			36,867			35,718			34,945			40,281			—		—		182,281			235,492
Change in unearned premiums		23,457			15,816			(3,254)			(2,899)			345			1,120			—		—		20,548			14,037
Net premiums earned		133,926			175,309			33,613		��	32,819			35,290			41,401			—		—		202,829			249,529

Total revenues		138,882			183,244			34,928			34,732			38,074			44,787			8,750		(29,063)		220,634			233,700

Losses and loss adjustment expenses		91,749			130,145			26,229			22,630			30,644			35,503			—		—		148,622			188,278

Pre-tax income (loss)		17,148			22,174			(1,610)			1,518			(4,389)			(3,771)			19		(83,924)		11,168			(64,003)

Net loss ratio (1)		68.5	%		74.2	%		78.0	%		69.0	%		86.8	%		85.8	%						73.3	%		75.5	%
Net expense ratio (1)		23.8	%		18.1	%		31.7	%		32.9	%		28.8	%		24.7	%						27.5	%		22.5	%
Net combined ratio (1)		92.3	%		92.3	%		109.7	%		101.9	%		115.6	%		110.5	%						100.8	%		98.0	%

Net (Unfavorable) Favorable Prior Year Development		772			(12,468)			1,343			(919)			(3,159)			(5,961)							(1,044)			(19,348)

(1)

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Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were ~~$288.1~~$240.2 million for the six months ended June 30, ~~2020,~~2021 which was ~~$19.2~~$47.9 million, or 6%17%, less than the ~~$307.3~~$288.1 million reported for the same period of ~~2019.~~2020. Net premiums written were ~~$159.5~~$110.5 million for the six months ended June 30, ~~2020~~2021 as compared to ~~$166.6~~$159.5 million for the same period of ~~2019.~~2020. The decrease in gross and net premiums written was primarily the result of lower premium production in our Commercial Auto, Professional Liability, E&S Property and Aerospace & Programs business ~~unit,~~units, partially offset by increased premium production in our E&S ~~Property, Professional Liability, Aerospace & Programs and E&S~~ Casualty business ~~units.~~unit. In February 2020, we made the strategic decision to

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exit the contract binding line of the primary automobile business marketed by our Commercial Auto business unit as a result of increasing claim severity and limited opportunity for meaningful rate increases. At that time, we began the process of non-renewing policies and placing in-force policies in runoff in accordance with state regulatory guidelines. The exit of the contract binding line of the primary commercial automobile business contributed $21.8 million and $21.0 million to the decline in gross premiums written and net premiums written, respectively, for the six months ended June 30, 2021 as compared to the same period the prior year.

The ~~$183.2~~$138.9 million of total revenue for the six months ended June 30, ~~2020~~2021 was ~~$41.7~~$44.3 million ~~more~~less than the ~~$141.5~~$183.2 million reported by the Specialty Commercial Segment for the same period in ~~2019.~~2020. This ~~increase~~decrease in revenue was primarily due to ~~higher~~lower net premiums earned of ~~$41.8~~$41.4 million due ~~mostly~~primarily to ~~increased~~the decreased premium production ~~in our E&S Property, Professional Liability, E&S Casualty and Aerospace & Programs business units,~~discussed above, as well as ~~higher~~lower net premiums earned in our Commercial Auto business unit due to higher premium production in 2019 and the related impact to 2020 net earned premiums. The increase in revenue was partially offset by lower commission and feesinvestment income of ~~$0.1~~$2.9 million for the six months ended June 30, ~~2020~~2021 as compared to the same period of ~~2019.~~2020.

Pre-tax income for the Specialty Commercial Segment of ~~$22.2~~$17.1 million during the six months ended June 30, ~~2020~~2021 was ~~$3.8~~$5.1 million ~~more~~less than the ~~$18.4~~$22.2 million reported for the same period in ~~2019.~~2020. The ~~increase~~decrease in pre-tax income was primarily the result of the ~~increased~~decreased revenue discussed above, partially offset by ~~higher~~lower losses and LAE of ~~$35.8~~$38.4 million, ~~and higher~~lower operating expenses of ~~$2.1~~$0.1 million and lower amortization of intangible assets of $0.7 million during the six months ended June 30, ~~2020~~2021 as compared to the same period during ~~2019.~~2020.

Our Specialty Commercial Segment reported ~~higher~~lower losses and LAE for the six months ended June 30, 2021 compared to the same period of the prior year as the combined result of (a) a ~~$14.0~~$43.5 million ~~increase~~decrease in losses and LAE in our Commercial Auto business unit due largely to ~~$14.5~~exit of the contract binding line of business, as well as a $15.8 million ~~of unfavorable~~improvement in prior year net loss reserve development, ~~recognized~~(b) a $1.7 million decrease in losses and LAE in our E&S Property business unit due primarily to a $4.6 million improvement in net catastrophe losses, partially offset by unfavorable net prior year loss reserve development of $1.2 million during the six months ended June 30, ~~2020~~2021 as compared to ~~$2.5~~$2.3 million of ~~unfavorable~~favorable prior year net loss reserve development during the same period of ~~2019, (b)~~2020 and higher current accident year non-catastrophe losses, (c) a ~~$5.5~~$9.8 million increase in losses and LAE in our E&S Casualty business unit due primarily to ~~increased net premiums earned, partially offset by $0.3 million of~~higher unfavorable prior year net loss reserve development ~~during the six months ended June 30, 2020 as compared to $3.6~~of $3.7 million ~~of unfavorable prior year~~and higher net ~~loss reserve development during the same period of 2019, (c)~~premiums earned, (d) a ~~$2.6~~$2.3 million ~~increase~~decrease in losses and LAE in our ~~E&S Property~~Aerospace & Programs business unit due primarily to ~~higher~~lower current accident year net ~~premiums earned,~~loss trends driven by lower satellite losses partially offset by ~~favorable~~$0.1 million higher unfavorable net ~~prior year~~ loss reserve development, ~~of $2.3~~and (e) a $0.7 million ~~during the six months ended June 30, 2020 as compared to favorable net prior year loss reserve development of $1.1 million during the same period the prior year, (d) a $8.7 million increase~~decrease in losses and LAE attributable to our Professional Liability business unit due primarily to ~~increased net premiums earned, partially offset by~~$4.8 million higher favorable net prior year loss reserve development, of $0.4 million during the six months ended June 30, 2020 as compared to favorable net prior year loss reserve development of $0.2 million during the same period the prior year, and (e) a $5.0 million increase in losses and LAE in our Aerospace & Programs business unit due primarily topartially offset by higher current accident year ~~satellite losses while $0.4 million of unfavorable prior year net~~ loss ~~reserve development during the second quarter of 2020 was unchanged from the same period of the prior year.~~trends.

Operating expenses ~~increased $2.1~~decreased $0.1 million primarily as the result of ~~higher~~lower production related expenses of ~~$3.2~~$1.8 million, ~~increased professional services of $1.3 million and increased~~lower occupancy and ~~other operating~~related expenses of $0.5 million, ~~, partially offset by~~ lower ~~salary and related expenses~~professional services of ~~$2.6~~$0.9 million ~~due primarily to incentive compensation accrual adjustments reported during the first quarter of 2020,~~ and lower travel and related expenses of ~~$0.3~~$0.2 million, partially offset by higher salary and related expenses of $2.5 million driven by increased incentive compensation expense and higher other operating expenses of $0.8 million.

The Specialty Commercial Segment reported a net loss ratio of ~~74.2%~~68.5% for the six months ended June 30, ~~2020~~2021 as compared to ~~70.6%~~74.2% for the same period in ~~2019.~~2020. The gross loss ratio before reinsurance was ~~84.6%~~82.4% for the six months ended June 30, ~~2020~~2021 as compared to ~~71.3%~~84.6% for the same period in ~~2019.~~2020. The ~~increase~~exit of the contract binding line of the primary commercial automobile business contributed 5.0% to the decline in the net loss ratio during the six months ended June 30, 2021 as compared to same period during 2020. The decrease in the gross and net loss ratios were ~~primarily the result of higher catastrophe losses as well as increased unfavorable prior year net loss reserve development.~~

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~~The Specialty Commercial Segment reported $8.3~~also impacted by $0.8 million of ~~net catastrophe losses during the six months ended June 30, 2020 as compared to $2.5 million of net catastrophe losses reported during the same period the prior year.Catastrophe losses during the six months ended June 30, 2020 included $2.0 million of net losses for COVID-19 claims. The Specialty Commercial Segment reported $12.5 million of unfavorable~~favorable prior year net loss reserve development for the six months ended June 30, ~~2020~~2021 as compared to unfavorable prior year net loss reserve development of ~~$5.2~~$12.5 million for the same period of ~~2019.~~ 2020. Catastrophe losses of $3.7 million for the six months ended June 30, 2021 as compared to catastrophe losses of $8.3 million during the same period of 2020 also contributed to the decrease in the loss ratio.The Specialty Commercial Segment reported a net expense ratio of ~~18.1%~~23.8% for the six months ended June 30, ~~2020~~2021 as compared to ~~22.2%~~18.1% for the same period of ~~2019. The decrease in the expense ratio was due predominately to~~2020 driven primarily by lower ~~salary and related expenses and higher~~ net premiums earned.

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Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were ~~$50.2~~$57.4 million for the six months ended June 30, ~~2020,~~2021, which was ~~$2.8~~$7.2 million, or 6%14%, more than the ~~$47.4~~$50.2 million reported for the same period in ~~2019.~~2020. Net premiums written were ~~$35.7~~$36.9 million for the three months ended June 30, ~~2020~~2021 as compared to ~~$32.1~~$35.7 million for the same period in ~~2019.~~2020. The increase in the gross and net premiums written was due to higher premium production in our Commercial Accounts business unit.

Total revenue for the Standard Commercial Segment of ~~$34.7~~$34.9 million for the six months ended June 30, ~~2020,~~2021, was ~~$1.0~~$0.2 million, ~~or 3%, less~~more than the ~~$35.7~~$34.7 million reported for the same period in ~~2019.~~2020. This ~~decrease~~increase in total revenue was due to ~~lower~~higher net premiums earned of $0.8 million, ~~due primarily to a quota share reinsurance agreement entered into during the fourth quarter of 2018 on the casualty lines of business produced~~partially offset by ~~the Commercial Accounts business unit, as well as~~ lower net investment income of ~~$0.1~~$0.5 million and lower finance charges of $0.1 million for the three months ended June 30, ~~2020~~2021 as compared to the same period of ~~2019.~~2020.

Our Standard Commercial Segment reported a pre-tax ~~income~~loss of ~~$1.5~~$1.6 million for the six months ended June 30, ~~2020~~2021 as compared to ~~$3.6~~pre-tax income of $1.5 million reported for the same period of ~~2019. This decrease in~~2020. The pre-tax ~~income~~loss was the result of ~~the decreased revenue discussed above and~~ higher loss and LAE of ~~$0.4~~$3.6 million, ~~and higher~~partially offset by lower operating expenses of ~~$0.7 million. Increased~~$0.3 million and the increased revenue discussed above. Decreased operating expenses were primarily the result of ~~higher production related expenses of $0.3 million, higher salary and related expenses of $0.2 million, higher~~lower professional services of $0.2 million and ~~increased occupancy related and other operating expense of $0.1 million, partially offset by~~ lower ~~travel~~salary and related expenses of $0.1 million.

The Standard Commercial Segment reported a net loss ratio of ~~69.0%~~78.0% for the six months ended June 30, ~~2020~~2021 as compared to ~~66.2%~~69.0% for the same period of ~~2019.~~2020. The gross loss ratio before reinsurance for the six months ended June 30, ~~2020~~2021 was ~~67.3%~~70.8% as compared to ~~70.3%~~67.3% reported for the same period of ~~2019.~~2020. The ~~decrease~~increase in the gross and net loss ~~ratio~~ratios was due primarily to ~~lower~~higher gross current accident year loss ~~trends.~~trends and catastrophe losses of $5.2 million during the six months ended June 30, 2021 compared to $3.9 million for the same period of the prior year. The ~~increase in the~~Standard Commercial Segment reported favorable net loss ~~ratio was due~~reserve development of $1.3 million during the six months ended June 30, 2021 as compared to ~~increased ceded earned premium,~~ unfavorable net loss reserve development of $0.9 million during the ~~six months ended June 30, 2020 as compared to favorable net loss reserve development of $3.6 million during the~~ same period of ~~2019~~and catastrophe losses of $3.9 million during the six months ended June 30, 2020 compared to $1.1 million for the same period of the prior year. Catastrophe losses during the six months ended June 30, 2020 included $3.0 million of net losses for COVID-19 claims.2020. The Standard Commercial Segment reported a net expense ratio of ~~32.9%~~31.7% for the six months ended June 30, ~~2020~~2021 as compared to ~~29.7%~~32.9% for the same period of ~~2019.~~2020. The ~~increase~~decrease in the expense ratio was primarily due to ~~higher~~lower operating expenses and ~~lower~~higher net premiums earned in our Commercial Accounts business unit.

Personal Segment

Gross premiums written for the Personal Segment were ~~$46.9~~$35.1 million for the six months ended June 30, ~~2020~~2021 as compared to ~~$50.9~~$46.9 million for the same period in the prior year. Net premiums written for our Personal Segment were ~~$40.3~~$34.9 million for the six months ended June 30, ~~2020,~~2021, which was a decrease of ~~$2.2~~$5.4 million from the ~~$42.5~~$40.3 million reported for the same period of ~~2019.~~2020. The decrease in gross and net written premiums was primarily due to lower premium production in our current geographical footprint.

Total revenue for the Personal Segment was ~~$44.8~~$38.1 million for the six months ended June 30, ~~2020~~2021 as compared to ~~$42.6~~$44.8 million for the same period in ~~2019.~~2020. The ~~increase~~decrease in revenue was due to ~~an increase~~a decrease in net premiums earned of ~~$3.1 million driven by increased retention of premiums written beginning during the fourth quarter of 2018, partially offset~~

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~~by lower investment income of $0.6~~$6.1 million and lower finance charges of $0.9 million, partially offset by higher investment income of $0.3 million during the six months ended June 30, ~~2020~~2021 as compared to the same period during ~~2019.~~2020.

Pre-tax loss for the Personal Segment was ~~$3.8~~$4.4 million for the six months ended June 30, ~~2020~~2021 as compared to pre-tax ~~income~~loss of ~~$4.0~~$3.8 million for the same period of ~~2019.~~2020. The increase in pre-tax loss was primarily the result of ~~increased~~the decreased revenue discussed above, partially offset by decreased losses and LAE of ~~$8.8~~$4.9 million, ~~and increased~~decreased operating expenses of ~~$1.2~~$1.1 million ~~partially offset by increased revenue discussed above~~and lower amortization of intangible assets of $0.1 million for the six months ended June 30, ~~2020~~2021 as compared to the same period during ~~2019.~~2020.

The Personal Segment reported a net loss ratio of ~~85.8%~~86.8% for the six months ended June 30, ~~2020~~2021 as compared to ~~69.7%~~85.8% for the same period of ~~2019.~~2020. The gross loss ratio before reinsurance was ~~75.7%~~88.1% for the six months ended June 30, ~~2020~~2021 as compared to ~~73.4%~~75.7% for the same period in ~~2019.~~2020. The higher gross and net loss ratios for the six months ended June 30, ~~2020~~2021 was primarily the result of ~~$6.0~~higher current accident year loss trends. The Personal Segment reported $3.2 million net unfavorable prior year loss reserve development during the first six months of ~~2020~~2021 as compared to net ~~favorable~~

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unfavorable prior year loss reserve development of ~~$0.2~~$6.0 million during the first six months of ~~2019. The net development for the first six months of 2020 was driven in large part by unfavorable development attributable to more recent treaty years where we retain a greater portion of the claims.~~2020. The Personal Segment had catastrophe losses of ~~$0.4~~$0.8 million during the six months ended ~~both~~ June 30, ~~2020 and 2019.~~2021 as compared to $0.4 million for the same period of 2020. The Personal Segment reported a net expense ratio of ~~24.7%~~28.8% during the six months ended June 30, ~~2020~~2021 as compared to ~~22.8%~~24.7% for the same period of ~~2019.~~2020. The increase in the expense ratio was due predominately to ~~higher production related expenses due to increased retention of business effective October 1, 2018.~~lower net premiums earned and lower finance charges.

Corporate

Total revenue for Corporate ~~decreased~~increased by ~~$48.2~~$37.8 million for the six months ended June 30, ~~2020~~2021 as compared to the same period the prior year. This ~~decrease~~increase in total revenue was due predominately to investment ~~losses~~gains of ~~$27.3~~$9.7 million during the six months ended June 30, ~~2020~~2021 as compared to investment ~~gains~~losses of ~~$18.8~~$27.3 million reported for the same period of ~~2019~~2020 and ~~lower~~higher net investment income of ~~$2.1~~$0.8 million for the six months ended June 30, ~~2020~~2021 as compared to the same period during ~~2019.~~2020.

Corporate pre-tax ~~loss~~income was ~~$83.9 million~~$19 thousand for the six months ended June 30, ~~2020~~2021 as compared to pre-tax ~~income~~loss of ~~$9.4~~$83.9 million for the same period of ~~2019.~~2020. The improvement in the pre-tax ~~loss~~result was primarily due to a $44.7 million impairment charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets. In connection with its normal process for evaluating impairment triggering events, the Company determined that a significant decline in its market capitalization below its stockholders’ equity during the first quarter of 2020 indicated the impairment of the goodwill and indefinite-lived intangible assets included in our balance sheet. Further contributing to the improved pre-tax ~~loss~~result was ~~higher~~lower interest expense of $0.3 million, as well as the ~~lower~~higher revenue discussed above. The pre-tax ~~loss~~income was partially reduced by ~~lower~~higher operating expenses of ~~$1.2~~$0.2 million, primarily as a result of ~~decreased~~increased salary and related expense, largely due to incentive compensation accrual adjustments, partially offset by ~~higher~~lower professional services, ~~occupancy~~travel and related and ~~other general~~occupancy and related expenses.

Financial Condition and Liquidity

Sources and Uses of Funds

Our sources of funds are from insurance-related operations, financing activities and investing activities. Major sources of funds from operations include premiums collected (net of policy cancellations and premiums ceded), commissions, and processing and service fees. As a holding company, Hallmark is dependent on dividend payments and management fees from its subsidiaries to meet operating expenses and debt obligations. As of June 30, ~~2020,~~2021, Hallmark and its non-insurance company subsidiaries had ~~$10.0~~$13.8 million in unrestricted cash and cash equivalents, including ~~$7.5~~$17.6 million held in premium and claim trust accounts. As of that date, our insurance subsidiaries held ~~$116.6~~$312.8 million of unrestricted cash and cash equivalents, as well as ~~$553.3~~$300.7 million in debt securities with an average modified duration of ~~0.9~~0.7 years. Accordingly, we do not anticipate selling long-term debt instruments to meet ~~any~~ liquidity needs.

AHIC and TBIC, domiciled in Texas, are limited in the payment of dividends to their stockholders in any 12-month period, without the prior written consent of the Texas Department of Insurance, to the greater of statutory net

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income for the prior calendar year or 10% of statutory policyholders’ surplus as of the prior year end. Dividends may only be paid from unassigned surplus funds. HIC and HNIC, both domiciled in Arizona, are limited in the payment of dividends to the lesser of 10% of prior year policyholders’ surplus or prior year’s statutory net income, without prior written approval from the Arizona Department of Insurance. HSIC, domiciled in Oklahoma, is limited in the payment of dividends to the greater of 10% of prior year policyholders’ surplus or prior year’s statutory net income, not including realized capital gains, without prior written approval from the Oklahoma Insurance Department. During ~~2020,~~2021, the aggregate ordinary dividend capacity of these subsidiaries is ~~$22.6~~$22.5 million, of which ~~$15.8~~$15.0 million is available to Hallmark. As a county mutual, dividends from HCM are payable to policyholders. During the first six months of ~~2020~~2021 and ~~2019,~~2020, our insurance ~~company~~ subsidiaries paid ~~$8.0~~$3.0 million and ~~$10.0~~$8.0 million in dividends to Hallmark, respectively. During the first six months of 2021 and 2020, our insurance subsidiaries paid $7.0 million and $1.5 million in ~~managements fees to Hallmark. During the first six months of 2019 our insurance subsidiaries did not pay~~ management fees to ~~Hallmark.~~Hallmark, respectively.

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Comparison of June 30, ~~2020~~2021 to December 31, ~~2019~~2020

On a consolidated basis, our cash (excluding restricted cash) and investments at June 30, ~~2020~~2021 were ~~$698.2~~$674.2 million compared to ~~$729.0~~$639.2 million at December 31, ~~2019.~~2020. The primary reasons for this ~~decrease~~increase in unrestricted cash and investments were ~~decreases~~increases in investment fair values and cash ~~used in operations and net purchases of fixed assets.~~provided by operations.

Comparison of Six Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020

During the six months ended June 30, ~~2020,~~2021, our cash flow provided by operations was $28.9 million compared to cash flow used by operations ~~was~~of $7.0 ~~million compared to cash flow provided by operations of $6.7~~ million during the same period the prior year. The cash flow ~~used~~provided by operations was driven by ~~an increase~~a decrease in net paid claims, ~~increased~~decreased paid operating expenses, ~~lower~~higher collected ~~investment income, lower~~ commission and fee income and ~~higher~~lower interest paid, and income tax refunds received, partially offset by ~~increased~~decreased collected net premiums, lower collected investment income and lower ~~taxes paid~~finance charges during the six months ended June 30, ~~2020~~2021 as compared to the same period the prior year.

Net cash provided by investing activities during the first six months of ~~2020~~2021 was ~~$80.5~~$194.8 million as compared to net cash provided by investing activities of ~~$23.9~~$80.5 million during the first six months of ~~2019.~~2020. The increase in cash provided by investing activities during the first six months of ~~2020~~2021 was primarily comprised of a decrease of $101.3 million in purchases of debt and equity securities, an increase of ~~$111.7~~$13.2 million in maturities, sales and redemptions of investment securities, ~~and~~partially offset by a ~~$1.3~~$0.2 million ~~decrease~~increase in purchases of fixed ~~assets, partially offset by an increase of $56.4 million in purchases of debt and equity securities.~~

assets.

The Company did not report any net cash from financing activities during the first six months of 2021 or 2020. ~~Cash provided by financing activities during~~

Senior Unsecured Notes

On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029. Interest on the first six months of 2019 was $0.1 million primarily as a result of proceeds from the exercise of employee stock options of $1.5 million, partially offset by $1.4 million in repurchases of our common stock.

~~Revolving Credit Facilities~~

Our Second Restated Credit Agreement with Frost Bank (“Frost”) dated June 30, 2015, as amended, provided a $15.0 million revolving credit facility (“Facility A”), with a $5.0 million letter of credit sub-facility. The outstanding balance of the Facility A bore interest at a rate equal to the prime rate or LIBOR plus 2.5%, at our election. We paid an annual fee of 0.25% of the average daily unused balance of Facility A and letter of credit feesNotes accrues at the rate of ~~1.00% per annum. On August 19, 2019, we terminated Facility A.~~

The Second Restated Credit Agreement with Frost also provided a $30.0 million revolving credit facility (“Facility B”), in addition to Facility A. We used Facility B loan proceeds solely for the purpose of making capital contributions to AHIC and HIC. We paid a quarterly fee of 0.25%6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020. The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject to any sinking fund requirements. At Hallmark’s option, the Notes are redeemable, in whole or in part, prior to the stated maturity subject to certain provisions intended to make the holders of the ~~average daily unused balance~~Notes whole on scheduled interest and principal payments. The indenture governing the Notes contains certain covenants which, among other things, restrict Hallmark’s ability to incur additional indebtedness, make certain payments, create liens on the stock of ~~Facility B. Facility B bore interest at a rate equal~~certain subsidiaries, dispose of certain assets, or merge or consolidate with other entities. The terms of the indenture prohibits payments or other distributions on any security of the Company that ranks junior to the ~~prime rate or LIBOR plus 3.00%, at our election. On August 19, 2019, we repaid~~Notes when the ~~$30.0 million principal balance and accrued interest on Facility B. Upon such repayment, we terminated Facility B.~~

~~Table~~Company’s debt to capital ratio (as defined in the indenture) is greater than 35%. The Company’s debt to capital ratio was 37.4% as of ~~Contents~~June 30, 2021.

Subordinated Debt Securities

On June 21, 2005, we formed Hallmark Statutory Trust I (“Trust I”), an unconsolidated trust subsidiary, for the sole purpose of issuing $30.0 million in trust preferred securities. Trust I used the proceeds from the sale of these securities and our initial capital contribution to purchase $30.9 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I. On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0 million in trust preferred securities. Trust II used the proceeds from the sale of these securities and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II.

Each trust pays dividends on its preferred securities at the same rate each quarter as interest is paid on the junior subordinated debt securities. Under the terms of the ~~junior~~trust subordinated debt securities, we pay interest only each quarter and the principal of each note at maturity. We may elect to defer payments of interest on the trust subordinated debt securities by extending the interest payment period for up to 20 consecutive quarterly periods. During any such extension period, interest continues to accrue on the trust subordinated debt securities, as well as interest on such accrued interest. In order to maintain compliance with the terms of our senior unsecured Notes, we have elected to defer payment of interest on the trust subordinated securities until our debt to capital ratio (as defined in the indenture governing the Notes) is less

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than 35%. The subordinated debt securities of each trust are uncollateralized and do not require maintenance of minimum financial covenants.

The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities:


						Hallmark		Hallmark
						Statutory		Statutory
		Trust I		Trust II		Trust I		Trust II

Issue date		June 21, 2005		August 23, 2007		June 21, 2005		August 23, 2007
Principal amount of trust preferred securities	$	30,000	$	25,000	$	30,000	$	25,000
Principal amount of junior subordinated debt securities	$	30,928	$	25,774	$	30,928	$	25,774
Maturity date of junior subordinated debt securities		June 15, 2035		September 15, 2037		June 15, 2035		September 15, 2037
Trust common stock	$	928	$	774	$	928	$	774
Interest rate, per annum		Three Month LIBOR + 3.25%		Three Month LIBOR + 2.90%		Three Month LIBOR + 3.25%		Three Month LIBOR + 2.90%
Current interest rate at June 30, 2020		3.56%		3.21%
Current interest rate at June 30, 2021						3.37%		3.02%

~~Senior Unsecured Notes~~

On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029. Interest on the Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020. The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject to any sinking fund requirements. At Hallmark’s option, the Notes are redeemable, in whole or in part, prior to the stated maturity subject to certain provisions intended to make the holders of the Notes whole on scheduled interest and principal payments. The indenture governing the Notes contains certain covenants which, among other things, restrict Hallmark’s ability to incur additional indebtedness, make certain payments, create liens on the stock of certain subsidiaries, dispose of certain assets, or merge or consolidate with other entities. Hallmark is in compliance with all of these covenants.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting company.

Item 4. Controls and Procedures.

The principal executive officer and principal financial officer of Hallmark have evaluated our disclosure controls and procedures and have concluded that, as of the end of the period covered by this report, such disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is timely recorded, processed, summarized and reported. The principal executive officer and principal financial officer also concluded that such disclosure controls and procedures were effective

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in ensuring that information required to be disclosed by us in the reports that we file or submit under such Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. During the most recent fiscal quarter, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Risks Associated with Forward-Looking Statements Included in this Form 10-Q

This Form 10-Q 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 our 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, weather-related events and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe 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-Q 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 us or any other person that our objectives and plans will be achieved.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

On May 5, 2020, a lawsuit styled Schulze v. Hallmark Financial Services, Inc., ~~et. al~~et al. (Case No. 3:20-cv-01130) was filed in the U.S. District Court for the Northern District of Texas, Dallas ~~Division.~~Division (the “Schulze Matter”). The Company, its former Chief Executive Officer and its former Chief Financial Officer are named defendants in the lawsuit brought on behalf of a putative class of shareholders who acquired Hallmark securities between March 5, 2019 and March 17, 2020. In general, the complaint alleges that the defendants violated the Securities Exchange Act of 1934 by failing to disclose that (a) the Company lacked effective internal controls over financial reporting related to its reserves for unpaid losses, (b) the Company improperly accounted for reserves for unpaid losses, (c) the Company would be forced to report $63.8 million of prior year net adverse loss development, (d) the Company would exit the contract binding line of its commercial automobile primary insurance business, and ~~(e) the defendants’~~by making positive statements about the Company’s business, operations and prospects that were allegedly materially misleading and/or lacked a reasonable basis. ~~Defendants’ responsive pleading is not yet due and has not been filed. The litigation is in its initial stages and we are unable~~On July 21, 2020, the court appointed Rajeev Yalamanchili as Lead Plaintiff. Lead Plaintiff filed an Amended Complaint on September 30, 2020. On July 28, 2021, the court granted the defendants’ motion to ~~reasonably predict its potential outcome. The Company, however, believes that~~dismiss the lawsuit is without ~~merit~~prejudice to the plaintiff filinga second amended complaint within 28 days, and ~~intends~~denied plaintiff’s request to ~~vigorously defend~~submit supplemental evidence in support of his opposition to the ~~claims.~~ motion to dismiss. The Company’s current policy is to expense legal costs as incurred. Historically, the Company has not carried director and officer liability insurance and does not currently hold such a policy.

~~We are~~

As of June 30, 2021, we were engaged in various other legal proceedings ~~that are routine~~ in ~~nature and incidental to our business. None~~the ordinary course of ~~these proceedings,~~business, none of which, either individually or in the aggregate, are believed ~~in our opinion,~~likely to have a material adverse effect on our consolidated financial position or ~~our~~ results of ~~operations.~~operations, in the opinion of management. The various other legal proceedings to which we were a party are routine in nature and incidental to our business.

Item 1A. Risk Factors.

There have been no material changes to the risk factors discussed in Item 1A to Part I of our Form 10-K for the fiscal year ended December 31, ~~2019.~~2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Our stock buyback program initially announced on April 18, 2008, authorized the repurchase of up to 1,000,000 shares of our common stock in the open market or in privately negotiated transactions (the “Stock Repurchase Plan”). On January 24, 2011, we announced an increased authorization to repurchase up to an additional 3,000,000 shares. The Stock Repurchase Plan does not have an expiration date. We did not repurchase any shares of our common stock during the three months ended June 30, ~~2020.~~2021.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

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Item 6. Exhibits.

The following exhibits are filed herewith or incorporated herein by reference:

Exhibit Number		Description
~~3(a)~~3.1		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)~~3.2		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 March 28, 2017).

4		Description of registrant’s securities (incorporated by reference to Exhibit 4.1 to the registrant’s Form 10-K for the year ended December 31, 2019).

4.2		Specimen certificate for common stock, $0.18 par value, 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).

4.3		Indenture dated 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).

4.4		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).

4.5		Form of Junior Subordinated Debt Security Due 2035 (included in Exhibit 4.3 above).

4.6		Form of Capital Security Certificate (included in Exhibit 4.4 above).

4.7		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).

4.8		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).

4.9		Form of Junior Subordinated Debt Security Due 2037 (included in Exhibit 4.7 above).

4.10		Form of Capital Security Certificate (included in Exhibit 4.8 above).

4.11		Indenture between Hallmark Financial Services, Inc. and The Bank of New York Mellon Trust Company, N.A. dated August 19, 2019 (incorporated by reference to Exhibit 4.1 to the registrant’s Form 8-K filed August 21, 2019).

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4.12		First Supplemental Indenture between Hallmark Financial Services, Inc. and The Bank of New York Mellon Trust Company, N.A. dated August 19, 2019 (incorporated by reference to Exhibit 4.2 to the registrant’s Form 8-K filed August 21, 2019).

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).

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.

101 INS+		XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101 SCH+		XBRL Taxonomy Extension Schema Document.

101 CAL+		XBRL Taxonomy Extension Calculation Linkbase Document.

101 LAB+		XBRL Taxonomy Extension Label Linkbase Document.

101 PRE+		XBRL Taxonomy Extension Presentation Linkbase Document.

101 DEF+		XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 104		Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

+		Filed with this Quarterly Report on Form 10-Q and included in Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, (ii) Consolidated Statements of Operations for the three months and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, (iii) Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, (iv) Consolidated Statements of Stockholder’s Equity for the three months and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, (v) Consolidated Statements of Cash Flows for the six months ended June 30, ~~2020~~2021 and ~~2019~~2020 and (vi) related notes.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HALLMARK FINANCIAL SERVICES, INC.

(Registrant)



Date: August ~~10, 2020~~12, 2021	/s/ ~~Naveen Anand~~Mark E. Schwarz
	~~Naveen Anand,~~Mark E. Schwarz, Chief Executive Officer and President


Date: August ~~10, 2020~~12, 2021	/s/ ~~Jeffrey R. Passmore~~Christopher J. Kenney
	~~Jeffrey R. Passmore,~~Christopher J. Kenney, Chief Financial Officer and Senior Vice President

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Beginning balance as of January 1, 2019	$	291
Sales		—
Settlements		—
Purchases		—
Issuances		—
Total realized/unrealized gains included in net income		242
Net gains included in other comprehensive income		—
Transfers into Level 3		—
Transfers out of Level 3		—
Ending balance as of June 30, 2019	$	533


	2020		2019
Investment Type
Equity warrant	$	295	$	2,169
Total other investments	$	295	$	2,169