UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
|
||
Washington,
D.C. 20549
|
||
FORM
10-K
|
||
(Mark
One)
|
||
x
ANNUAL
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
||
For
the fiscal year ended DECEMBER
31, 2007
|
||
Or
|
||
o
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
||
For
the transition period from _________________________ to
_________________________
|
||
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 Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
||
777
Main Street, Suite 1000, Fort Worth, Texas
|
76102
|
||
(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
|
Name
of Each Exchange on Which Registered
|
||
Common
Stock $.18 par value
|
Nasdaq
Global Market
|
Securities
registered pursuant to Section 12(g) of the Act: None
|
||
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act.
Yes
o No
x
|
||
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yeso No x
|
||
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 x No
o
|
||
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of
Regulation S-K is not contained herein, and will not be contained,
to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any
amendment to this Form 10-K. o
|
||
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, a non-accelerated filer or a smaller reporting
company.
See definition of “accelerated filer”, “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller
reporting company x
|
||
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act).
Yes
o No x
|
||
State
the aggregate market value of the voting and non-voting common equity
held
by non-affiliates computed by reference to the price at which the
common
equity was last sold, or the average bid and asked price of such
common
equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter. $71,259,673
|
||
Indicate
the number of shares outstanding of each of the registrant's classes
of
common stock, as of the latest practicable date. 20,785,753 shares
of
common stock, $.18 par value per share, outstanding as of March 15,
2008.
|
DOCUMENTS
INCORPORATED BY REFERENCE
|
The
information required by Part III is incorporated by reference from
the
Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end
of the
fiscal year covered by this report.
|
· |
our
business and growth strategies;
|
· |
our
performance goals;
|
· |
our
projected financial condition and operating
results;
|
· |
our
understanding of our competition;
|
· |
industry
and market trends;
|
· |
the
impact of technology on our products, operations and business;
and
|
· |
any
other statements or assumptions that are not historical
facts.
|
Year
Ended December 31,
|
||||||||||
2007
|
2006
|
2005
|
||||||||
(dollars
in thousands)
|
||||||||||
Gross
Premiums Produced:
|
||||||||||
Standard
Commercial Segment
|
$
|
90,985
|
$
|
91,679
|
$
|
81,721
|
||||
Specialty
Commercial Segment (1)
|
151,003
|
156,490
|
-
|
|||||||
Personal
Segment
|
55,916
|
45,135
|
36,345
|
|||||||
Total
|
$
|
297,904
|
$
|
293,304
|
$
|
118,066
|
||||
Gross
Premiums Written:
|
||||||||||
Standard
Commercial Segment
|
$
|
90,868
|
$
|
91,070
|
$
|
52,952
|
||||
Specialty
Commercial Segment (1)
|
102,688
|
77,740
|
-
|
|||||||
Personal
Segment
|
55,916
|
45,135
|
36,515
|
|||||||
Total
|
$
|
249,472
|
$
|
213,945
|
$
|
89,467
|
||||
Net
Premiums Written:
|
||||||||||
Standard
Commercial Segment
|
$
|
84,222
|
$
|
82,220
|
$
|
51,249
|
||||
Specialty
Commercial Segment (1)
|
98,005
|
75,573
|
-
|
|||||||
Personal
Segment
|
55,916
|
45,135
|
37,003
|
|||||||
Total
|
$
|
238,143
|
$
|
202,928
|
$
|
88,252
|
1 |
The
subsidiaries included in the Specialty Commercial Segment were acquired
effective January 1, 2006 and, therefore, are not included in the
year
ended December 31, 2005.
|
·
|
Commercial
automobile. Commercial
automobile insurance provides
third-party bodily injury and property damage coverage and first-party
property damage coverage against losses resulting from the ownership,
maintenance or use of automobiles and trucks in connection with an
insured’s business.
|
·
|
General
liability. General
liability insurance provides coverage for third-party bodily injury
and
property damage claims arising from accidents occurring on the insured’s
premises or from their general business
operations.
|
·
|
Umbrella.
Umbrella
insurance provides coverage for third-party liability claims where
the
loss amount exceeds coverage limits provided by the insured’s underlying
general liability and commercial automobile
policies.
|
·
|
Commercial
property. Commercial
property insurance provides first-party coverage for the insured’s real
property, business personal property, and business interruption losses
caused by fire, wind, hail, water damage, theft, vandalism and other
insured perils.
|
·
|
Commercial
multi-peril. Commercial
multi-peril insurance provides a combination of property and liability
coverage that can include commercial automobile coverage on a single
policy.
|
·
|
Business
owner’s. Business
owner’s insurance provides
a package of coverage designed for small- to medium-sized businesses
with
homogeneous risk profiles. Coverage includes general liability, commercial
property and commercial automobile.
|
·
|
Commercial
automobile. Commercial
automobile insurance provides third-party bodily injury and property
damage coverage and first-party property damage coverage against
losses
resulting from the ownership, maintenance or use of automobiles and
trucks
in connection with an insured’s
business.
|
·
|
General
liability. General
liability insurance provides coverage for third-party bodily injury
and
property damage claims arising from accidents occurring on the insured’s
premises or from their general business
operations.
|
·
|
Commercial
property. Commercial
property insurance provides
first-party coverage for the insured’s real property, business personal
property, theft and business interruption losses caused by fire,
wind,
hail, water damage, theft, vandalism and other insured perils. Windstorm,
hurricane and hail are generally excluded in coastal
areas.
|
·
|
Aircraft.
Aircraft
insurance provides third-party bodily injury and property damage
coverage
and first-party hull damage coverage against losses resulting from
the
ownership, maintenance or use of
aircraft.
|
·
|
Airport
liability. Airport
liability insurance provides coverage for third-party bodily injury
and
property damage claims arising from accidents occurring on airport
premises or from their operations.
|
·
|
Personal
automobile liability. Personal
automobile liability insurance provides coverage primarily at the
minimum
limits required by law for automobile liability exposures, including
bodily injury and property damage, arising from accidents involving
the
insured.
|
·
|
Personal
automobile physical damage. Personal
automobile physical damage insurance provides collision and comprehensive
coverage for physical damage exposure to the insured vehicle as a
result
of an accident with another vehicle or object or as a result of causes
other than collision such as vandalism, theft, wind, hail or water.
|
State
|
Standard
Commercial Segment
|
Specialty
Commercial Segment
|
Personal
Segment
|
Total
|
Percent
of Total
|
|||||||||||
(dollars
in thousands)
|
||||||||||||||||
Texas
|
$
|
22,870
|
$
|
70,346
|
$
|
15,839
|
$
|
109,055
|
43.7
|
%
|
||||||
Oregon
|
32,467
|
500
|
512
|
33,479
|
13.4
|
%
|
||||||||||
New
Mexico
|
14,623
|
381
|
9,091
|
24,095
|
9.7
|
%
|
||||||||||
Idaho
|
14,062
|
439
|
1,781
|
16,282
|
6.5
|
%
|
||||||||||
Arizona
|
-
|
1,154
|
12,824
|
13,978
|
5.6
|
%
|
||||||||||
All
other states
|
6,846
|
29,868
|
15,869
|
52,583
|
21.1
|
%
|
||||||||||
Total
gross premiums written
|
$
|
90,868
|
$
|
102,688
|
$
|
55,916
|
$
|
249,472
|
||||||||
Percent
of total
|
36.4
|
%
|
41.2
|
%
|
22.4
|
%
|
100.0
|
%
|
Year
Ended December 31,
|
||||||||||
2007
|
2006
|
2005
|
||||||||
Gross
premiums written
|
$
|
249,472
|
$
|
213,945
|
$
|
89,467
|
||||
Statutory
loss & LAE ratio
|
61.7
|
%
|
61.5
|
%
|
60.3
|
%
|
||||
Statutory
expense ratio
|
30.1
|
%
|
29.4
|
%
|
32.8
|
%
|
||||
Statutory
combined ratio
|
91.8
|
%
|
90.9
|
%
|
93.1
|
%
|
As
of and for Year Ended December 31,
|
||||||||||
2007
|
2006
|
2005
|
||||||||
(dollars
in thousands)
|
||||||||||
Reserve
for unpaid losses and LAE, net of reinsurance recoverables, January
1
|
$
|
72,801
|
$
|
25,997
|
$
|
17,700
|
||||
Acquisitions
of subsidiaries effective January 1
|
-
|
4,562
|
-
|
|||||||
Provision
for losses and LAE for claims occurring in the current
period
|
139,332
|
88,294
|
36,184
|
|||||||
Increase
(decrease) in reserve for unpaid losses and LAE for claims occurring
in
prior periods
|
(6,414
|
)
|
(1,177
|
)
|
(2,400
|
)
|
||||
Payments
for losses and LAE, net of reinsurance:
|
||||||||||
Current
period
|
(54,809
|
)
|
(28,154
|
)
|
(17,414
|
)
|
||||
Prior
periods
|
(30,061
|
)
|
(16,721
|
)
|
(8,073
|
)
|
||||
Reserve
for unpaid losses and LAE at December 31, net of reinsurance
recoverable
|
$
|
120,849
|
$
|
72,801
|
$
|
25,997
|
||||
Reinsurance
recoverable on unpaid losses and LAE at December 31
|
4,489
|
4,763
|
324
|
|||||||
Reserve
for unpaid losses and LAE at December 31, gross of
reinsurance
|
$
|
125,338
|
$
|
77,564
|
$
|
26,321
|
As
of December 31,
|
|||||||
2007
|
2006
|
||||||
(in
thousands)
|
|||||||
Reserve
for unpaid losses and LAE on a SAP basis (net of reinsurance recoverables
on unpaid losses)
|
$
|
120,798
|
$
|
72,796
|
|||
Loss
reserve discount from the PIIC acquisition
|
-
|
(11
|
)
|
||||
Unamortized
risk premium reserve discount from the PIIC acquisition
|
1
|
16
|
|||||
Estimated
future unallocated LAE reserve for claim service subsidiaries
|
50
|
-
|
|||||
Reserve
for unpaid losses and LAE on a GAAP basis (net of reinsurance recoverables
on unpaid losses)
|
$
|
120,849
|
$
|
72,801
|
ANALYSIS
OF LOSS AND LAE DEVELOPMENT
|
|||||||||||||||||||||||
As
of and for Year Ended December
31
|
|
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||
A.
Reserve for Unpaid Losses & LAE, Net of Reinsurance
Recoverables
|
$
|
4,668
|
$
|
4,580
|
$
|
5,409
|
$
|
7,451
|
$
|
7,919
|
$
|
8,411
|
$
|
21,197
|
$
|
17,700
|
$
|
25,997
|
$
|
72,801
|
$
|
120,849
|
||||||||||||
B.
Net Reserve Re-estimated as of :
|
||||||||||||||||||||||||||||||||||
One
year later
|
4,985
|
4,594
|
5,506
|
7,974
|
8,096
|
8,875
|
20,003
|
15,300
|
24,820
|
66,387
|
||||||||||||||||||||||||
Two
years later
|
4,954
|
4,464
|
5,277
|
7,863
|
8,620
|
8,881
|
19,065
|
15,473
|
24,903
|
|||||||||||||||||||||||||
Three
years later
|
4,884
|
4,225
|
5,216
|
7,773
|
8,856
|
8,508
|
19,698
|
13,962
|
||||||||||||||||||||||||||
Four
years later
|
4,757
|
4,179
|
5,095
|
7,901
|
8,860
|
8,446
|
18,551
|
|||||||||||||||||||||||||||
Five
years later
|
4,732
|
4,111
|
5,028
|
7,997
|
8,855
|
8,478
|
||||||||||||||||||||||||||||
Six
years later
|
4,687
|
4,101
|
5,153
|
7,999
|
8,884
|
|||||||||||||||||||||||||||||
Seven
years later
|
4,695
|
4,209
|
5,153
|
8,026
|
||||||||||||||||||||||||||||||
Eight
years later
|
4,675
|
4,203
|
5,182
|
|||||||||||||||||||||||||||||||
Nine
years later
|
4,674
|
4,227
|
||||||||||||||||||||||||||||||||
Ten
years later
|
4,698
|
|||||||||||||||||||||||||||||||||
C.
Net Cumulative Redundancy (Deficiency)
|
(30
|
)
|
353
|
227
|
(575
|
)
|
(965
|
)
|
(67
|
)
|
2,646
|
3,738
|
1,094
|
6,414
|
||||||||||||||||||||
D.
Cumulative Amount of Claims Paid, Net of Reinsurance Recoveries,
through:
|
||||||||||||||||||||||||||||||||||
One
year later
|
3,326
|
2,791
|
3,229
|
5,377
|
5,691
|
5,845
|
12,217
|
8,073
|
16,721
|
30,061
|
||||||||||||||||||||||||
Two
years later
|
4,287
|
3,476
|
4,436
|
7,070
|
7,905
|
7,663
|
15,814
|
12,004
|
22,990
|
|||||||||||||||||||||||||
Three
years later
|
4,387
|
3,911
|
4,909
|
7,584
|
8,603
|
8,228
|
18,162
|
13,113
|
||||||||||||||||||||||||||
Four
years later
|
4,571
|
4,002
|
5,014
|
7,810
|
8,798
|
8,374
|
17,997
|
|||||||||||||||||||||||||||
Five
years later
|
4,618
|
4,051
|
4,966
|
7,960
|
8,821
|
8,417
|
||||||||||||||||||||||||||||
Six
years later
|
4,643
|
4,061
|
5,116
|
7,970
|
8,853
|
|||||||||||||||||||||||||||||
Seven
years later
|
4,664
|
4,204
|
5,124
|
7,995
|
||||||||||||||||||||||||||||||
Eight
years later
|
4,675
|
4,203
|
5,151
|
|||||||||||||||||||||||||||||||
Nine
years later
|
4,674
|
4,227
|
||||||||||||||||||||||||||||||||
Ten
years later
|
4,698
|
2007
|
2006
|
||||||
Net
Reserve, December 31
|
$
|
120,849
|
$
|
72,801
|
|||
Reinsurance
Recoverables
|
4,489
|
4,763
|
|||||
Gross
Reserve, December 31
|
$
|
125,338
|
$
|
77,564
|
|||
Net
Re-estimated Reserve
|
66,387
|
||||||
Re-estimated
Reinsurance Recoverable
|
8,052
|
||||||
Gross
Re-estimated Reserve
|
$
|
74,439
|
|||||
Gross
Cumulative Redundancy
|
$
|
3,125
|
Year
Ended December 31,
|
||||||||||
2007
|
2006
|
2005
|
||||||||
Gross
premiums written
|
$
|
249,472
|
$
|
213,945
|
$
|
89,467
|
||||
Ceded
premiums written
|
(11,329
|
)
|
(11,017
|
)
|
(1,215
|
)
|
||||
Net
premiums written
|
$
|
238,143
|
$
|
202,928
|
$
|
88,252
|
||||
Gross
premiums earned
|
$
|
238,080
|
$
|
162,216
|
$
|
59,632
|
||||
Ceded
premiums earned
|
(12,777
|
)
|
(10,155
|
)
|
(448
|
)
|
||||
Net
premiums earned
|
$
|
225,303
|
$
|
152,061
|
$
|
59,184
|
||||
Reinsurance
recoveries
|
$
|
3,862
|
$
|
5,225
|
$
|
(492
|
)
|
·
|
Property
catastrophe.
Our property catastrophe reinsurance reduces the financial impact
a
catastrophe could have on our commercial property insurance lines.
Catastrophes might include multiple claims and policyholders. Catastrophes
include hurricanes, windstorms, earthquakes, hailstorms, explosions,
severe winter weather and fires. Our property catastrophe reinsurance
is
excess-of-loss reinsurance, which provides us reinsurance coverage
for
losses in excess of an agreed-upon amount. We utilize catastrophe
models
to assist in determining appropriate retention and limits to purchase.
The
terms of our property catastrophe reinsurance, effective July 1,
2007,
are:
|
·
|
We
retain the first $2.0 million of property catastrophe losses;
and
|
·
|
Our
reinsurers reimburse us 100% for each $1.00 of loss in excess of
our $2.0
million retention up to $28.0 million for each catastrophic occurrence,
subject to a maximum of two events for the contractual
term.
|
·
|
Commercial
property.
Our commercial property reinsurance is excess-of-loss coverage intended
to
reduce the financial impact a single-event or catastrophic loss may
have
on our results. The terms of our commercial property reinsurance,
effective July 1, 2007, are:
|
·
|
We
retain the first $1.0 million of loss for each commercial property
risk;
|
·
|
Our
reinsurers reimburse us for the next $5.0 million for each commercial
property risk; and
|
·
|
Individual
risk facultative reinsurance is purchased on any commercial property
with
limits above $6.0 million.
|
·
|
Commercial
casualty.
Our commercial casualty reinsurance is excess-of-loss coverage intended
to
reduce the financial impact a single-event loss may have on our results.
The terms of our commercial casualty reinsurance, effective July
1, 2007,
are:
|
·
|
We
retain the first $1.0 million of any commercial liability risk: and
|
·
|
Our
reinsurers reimburse us for the next $5.0 million for each commercial
liability risk.
|
·
|
Aviation.
We
purchase reinsurance specific to the aviation risks underwritten
by our
Aerospace Operating Unit. This reinsurance provides aircraft hull
and
liability coverage and airport liability coverage on a per occurrence
basis on the following terms:
|
·
|
We
retain the first $350,000 of each aircraft hull or liability loss
or
airport liability loss;
|
·
|
Our
reinsurers reimburse us for the next $1.15 million of each aircraft
hull
loss and for the next $650,000 of each airport liability loss;
and
|
·
|
Our
reinsurers provide additional reimbursement of $4.0 million for each
airport liability loss and aircraft liability loss, excluding passenger
liability.
|
As
of December 31, 2007
|
As
of December 31, 2006
|
||||||||||||||||||
|
|
Fair
|
|
Percent
of
|
|
|
|
Fair
|
|
Percent
of
|
|
|
|
||||||
|
|
Value
|
|
Total
|
|
Yield
|
|
Value
|
|
Total
|
|
Yield
|
|||||||
|
|
(in
thousands)
|
|
(in
thousands)
|
|||||||||||||||
Category
|
|||||||||||||||||||
Corporate
bonds
|
50,096
|
20.0
|
%
|
6.8
|
%
|
40,483
|
25.6
|
%
|
6.6
|
%
|
|||||||||
Municipal
bonds
|
98,923
|
39.5
|
%
|
7.2
|
%
|
52,132
|
32.9
|
%
|
6.5
|
%
|
|||||||||
US
Treasury bonds
|
99,047
|
39.5
|
%
|
4.7
|
%
|
40,407
|
25.5
|
%
|
4.0
|
%
|
|||||||||
US
Treasury bills and other
|
|||||||||||||||||||
short-term
|
2,625
|
1.0
|
%
|
4.8
|
%
|
25,275
|
16.0
|
%
|
3.8
|
%
|
|||||||||
Mortgage
backed securities
|
3
|
0.0
|
%
|
6.8
|
%
|
8
|
0.0
|
%
|
7.6
|
%
|
|||||||||
Total
|
$
|
250,694
|
100.0
|
%
|
6.1
|
%
|
$
|
158,305
|
100.0
|
%
|
5.5
|
%
|
As
of
|
As
of
|
||||||
December
31, 2007
|
December
31, 2006
|
||||||
Rating:
|
|||||||
"AAA"
|
73.6
|
%
|
68.5
|
%
|
|||
"AA"
|
6.4
|
%
|
6.4
|
%
|
|||
"A"
|
6.3
|
%
|
3.4
|
%
|
|||
"BBB"
|
4.7
|
%
|
11.6
|
%
|
|||
"BB"
|
6.1
|
%
|
8.8
|
%
|
|||
"B"
|
2.9
|
%
|
1.3
|
%
|
|||
"CCC"
|
0.0
|
%
|
0.0
|
%
|
|||
Total
|
100.0
|
%
|
100.0
|
%
|
As
of December 31, 2007
|
As
of December 31, 2006
|
||||||||||||
|
Percentage
of
|
|
Percentage
of
|
||||||||||
Total
|
Total
|
||||||||||||
Fair
Value
|
Fair
Value
|
Fair
Value
|
Fair
Value
|
||||||||||
(in
thousands)
|
(in
thousands)
|
||||||||||||
Remaining
time to maturity:
|
|||||||||||||
Less
than one year
|
15,189
|
6.1
|
%
|
67,060
|
42.4
|
%
|
|||||||
One
to five years
|
162,524
|
64.8
|
%
|
44,018
|
27.8
|
%
|
|||||||
Five
to ten years
|
53,305
|
21.3
|
%
|
42,616
|
26.9
|
%
|
|||||||
More
than ten years
|
19,673
|
7.8
|
%
|
4,603
|
2.9
|
%
|
|||||||
Mortgage-backed
securities
|
3
|
0.0
|
%
|
8
|
0.0
|
%
|
|||||||
Total
|
250,694
|
100.0
|
%
|
158,305
|
100.0
|
%
|
Net
Unrealized
|
||||
Category
|
Loss
(Gain) Balance
|
|||
(in
thousands)
|
||||
Corporate
bonds
|
$
|
1,690
|
||
Municipal
bonds
|
(376
|
)
|
||
Equity
securities
|
(79
|
)
|
||
US
Treasury securities
|
(147
|
)
|
||
Short
term
|
(3
|
)
|
||
$
|
1,085
|
·
|
misrepresenting
pertinent facts or insurance policy provisions relating to coverages
at
issue;
|
·
|
failing
to acknowledge and act reasonably promptly upon communications with
respect to claims arising under insurance
policies;
|
·
|
failing
to adopt and implement reasonable standards for the prompt investigation
and settlement of claims arising under insurance
policies;
|
·
|
failing
to affirm or deny coverage of claims within a reasonable time after
proof
of loss statements have been completed;
|
·
|
attempting
to settle a claim for less than the amount to which a reasonable
person
would have believed such person was
entitled;
|
·
|
attempting
to settle claims on the basis of an application that was altered
without
notice to, or knowledge and consent of, the
insured;
|
·
|
compelling
insureds to institute suits to recover amounts due under policies
by
offering substantially less than the amounts ultimately recovered
in suits
brought by them;
|
·
|
refusing
to pay claims without conducting a reasonable
investigation;
|
·
|
making
claim payments to an insured without indicating the coverage under
which
each payment is being made;
|
·
|
delaying
the investigation or payment of claims by requiring an insured, claimant
or the physician of either to submit a preliminary claim report and
then
requiring the subsequent submission of formal proof of loss forms,
both of
which submissions contain substantially the same
information;
|
·
|
failing,
in the case of claim denials or offers of compromise or settlement,
to
promptly provide a reasonable and accurate explanation of the basis
for
such actions; and
|
·
|
not
attempting in good faith to effectuate prompt, fair and equitable
settlements of claims in which liability has become reasonably
clear.
|
· |
the
availability of sufficient reliable data and our ability to properly
analyze available data;
|
· |
the
uncertainties that inherently characterize estimates and assumptions;
|
· |
our
selection and application of appropriate pricing techniques; and
|
· |
changes
in applicable legal liability standards and in the civil litigation
system
generally.
|
·
|
approval
of policy forms and rates;
|
·
|
standards
of solvency, including risk-based capital measurements, which are
a
measure developed by the National Association of Insurance Commissioners
and used by the state insurance regulators to identify insurance
companies
that potentially are inadequately
capitalized;
|
·
|
licensing
of insurers and their agents;
|
·
|
restrictions
on the nature, quality and concentration of
investments;
|
·
|
restrictions
on the ability of insurance company subsidiaries to pay
dividends;
|
·
|
restrictions
on transactions between insurance company subsidiaries and their
affiliates;
|
·
|
requiring
certain methods of accounting;
|
·
|
periodic
examinations of operations and
finances;
|
·
|
the
use of non-public consumer information and related privacy
issues;
|
·
|
the
use of credit history in underwriting and
rating;
|
·
|
limitations
on the ability to charge policy
fees;
|
·
|
the
acquisition or disposition of an insurance company or of any company
controlling an insurance company;
|
·
|
involuntary
assignments of high-risk policies, participation in reinsurance facilities
and underwriting associations, assessments and other governmental
charges;
|
·
|
restrictions
on the cancellation or non-renewal of policies and, in certain
jurisdictions, withdrawal from writing certain lines of
business;
|
·
|
prescribing
the form and content of records of financial condition to be
filed;
|
·
|
requiring
reserves for unearned premium, losses and other purposes;
and
|
·
|
with
respect to premium finance business, the federal Truth-in-Lending
Act and
similar state statutes. In states where specific statutes have not
been
enacted, premium finance is generally subject to state usury laws
that are
applicable to consumer loans.
|
Period
|
High
Sale
|
|
Low
Sale
|
||||
Year
Ended December 31, 2007:
|
|||||||
First
quarter
|
$
|
12.25
|
$
|
9.64
|
|||
Second
quarter
|
13.15
|
11.86
|
|||||
Third
quarter
|
15.29
|
9.97
|
|||||
Fourth
quarter
|
17.62
|
13.29
|
|||||
Year
Ended December 31, 2006:
|
|||||||
First
quarter
|
$
|
12.30
|
$
|
8.16
|
|||
Second
quarter
|
12.00
|
8.52
|
|||||
Third
quarter
|
14.40
|
10.15
|
|||||
Fourth
quarter
|
11.40
|
8.50
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans [excluding securities reflected in column
(a)]
|
|||||||
(a)
|
(b)
|
(c)
|
||||||||
Equity
compensation plans approved by security holders1
|
831,334
|
$
|
10.58
|
115,834
|
||||||
Equity
compensation plans not approved by security holders2
|
16,666
|
$
|
2.25
|
-
0 -
|
||||||
Total
|
848,000
|
$
|
10.41
|
115,834
|
1
|
Includes
shares of our common stock authorized for issuance under our 2005
Long
Term Incentive Plan, as well as shares of our common stock issuable
upon
exercise of options outstanding under our 1994 Key Employee Long
Term
Incentive Plan and our 1994 Non-Employee Director Stock Option Plan,
both
of which terminated in accordance with their terms in
2004.
|
2 |
Represents
shares of our common stock issuable upon exercise of non-qualified
stock
options granted to our non-employee directors in lieu of cash compensation
for their service on the board of directors during fiscal 1999. The
options became fully exercisable on August 16, 2000, and terminate
on
March 15, 2010, to the extent not previously
exercised.
|
Year
Ended December 31,
|
||||||||||||||||
(1)
|
|
(1)
|
|
|||||||||||||
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
||||||||
(in
thousands, except per share data)
|
||||||||||||||||
Statement
of Operations Data:
|
||||||||||||||||
Gross
premiums written
|
$
|
249,472
|
$
|
213,945
|
$
|
89,467
|
$
|
33,389
|
$
|
43,338
|
||||||
Ceded
premiums written
|
(11,329
|
)
|
(11,017
|
)
|
(1,215
|
)
|
(322
|
)
|
(6,769
|
)
|
||||||
Net
premiums written
|
238,143
|
202,928
|
88,252
|
33,067
|
36,569
|
|||||||||||
Change
in unearned premiums
|
(12,840
|
)
|
(50,867
|
)
|
(29,068
|
)
|
(622
|
)
|
5,406
|
|||||||
Net
premiums earned
|
225,303
|
152,061
|
59,184
|
32,445
|
41,975
|
|||||||||||
Investment
income, net of expenses
|
13,180
|
10,461
|
3,836
|
1,386
|
1,198
|
|||||||||||
Realized
gains (losses)
|
2,586
|
(1,466
|
)
|
58
|
(27
|
)
|
(88
|
)
|
||||||||
Finance
charges
|
4,702
|
3,983
|
2,044
|
2,183
|
3,544
|
|||||||||||
Commission
and fees
|
28,054
|
35,343
|
16,703
|
21,100
|
17,544
|
|||||||||||
Processing
and service fees
|
657
|
2,330
|
5,183
|
6,003
|
4,900
|
|||||||||||
Other
income
|
16
|
29
|
27
|
31
|
486
|
|||||||||||
Total
revenues
|
274,498
|
202,741
|
87,035
|
63,121
|
69,559
|
|||||||||||
Loss
and loss adjustment expenses
|
132,918
|
87,117
|
33,784
|
19,137
|
30,188
|
|||||||||||
Other
operating costs and expenses
|
94,272
|
83,583
|
38,492
|
35,290
|
37,386
|
|||||||||||
Interest
expense
|
3,914
|
5,798
|
1,264
|
64
|
1,271
|
|||||||||||
Interest
expense from amortization of discount on
|
||||||||||||||||
convertible
notes (2)
|
-
|
9,625
|
-
|
-
|
-
|
|||||||||||
Amortization
of intangible assets
|
2,293
|
2,293
|
27
|
28
|
28
|
|||||||||||
Total
expenses
|
233,397
|
188,416
|
73,567
|
54,519
|
68,873
|
|||||||||||
Income
before income tax and extraordinary gain
|
41,101
|
14,325
|
13,468
|
8,602
|
686
|
|||||||||||
Income
tax expense
|
13,672
|
5,134
|
4,282
|
2,753
|
25
|
|||||||||||
Income
before extrordinary gain
|
27,429
|
9,191
|
9,186
|
5,849
|
661
|
|||||||||||
Extraordinary
gain (3)
|
-
|
-
|
-
|
-
|
8,084
|
|||||||||||
Net
income
|
$
|
27,429
|
$
|
9,191
|
$
|
9,186
|
$
|
5,849
|
$
|
8,745
|
||||||
Common
stockholders basic earnings per share:
|
||||||||||||||||
Income
before extraordinary gain
|
$
|
1.32
|
$
|
0.53
|
$
|
0.76
|
$
|
0.83
|
$
|
0.14
|
||||||
Extraordinary
gain (3)
|
-
|
-
|
-
|
-
|
1.66
|
|||||||||||
Net
income
|
$
|
1.32
|
$
|
0.53
|
$
|
0.76
|
$
|
0.83
|
$
|
1.80
|
||||||
Common
stockholders diluted earnings per share:
|
||||||||||||||||
Income
before extraordinary gain
|
$
|
1.32
|
$
|
0.53
|
$
|
0.76
|
$
|
0.82
|
$
|
0.13
|
||||||
Extraordinary
gain (3)
|
-
|
-
|
-
|
-
|
1.64
|
|||||||||||
Net
income
|
$
|
1.32
|
$
|
0.53
|
$
|
0.76
|
$
|
0.82
|
$
|
1.77
|
As
of December 31, 2007
|
||||||||||||||||
Balance
Sheet Items:
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|||||||
Total
investments (4)
|
$
|
267,562
|
$
|
162,885
|
$
|
102,956
|
$
|
34,727
|
$
|
34,958
|
||||||
Total
assets
|
$
|
606,314
|
$
|
415,953
|
$
|
208,906
|
$
|
82,511
|
$
|
83,853
|
||||||
Unpaid
loss and loss adjustment expenses
|
$
|
125,338
|
$
|
77,564
|
$
|
26,321
|
$
|
19,648
|
$
|
28,456
|
||||||
Unearned
premiums
|
$
|
102,998
|
$
|
91,606
|
$
|
36,027
|
$
|
6,192
|
$
|
5,862
|
||||||
Total
liabilities
|
$
|
427,127
|
$
|
265,222
|
$
|
123,718
|
$
|
49,855
|
$
|
56,456
|
||||||
Total
stockholders' equity
|
$
|
179,187
|
$
|
150,731
|
$
|
85,188
|
$
|
32,656
|
$
|
27,397
|
||||||
Book
value per share (5)
|
$
|
8.63
|
$
|
7.26
|
$
|
5.89
|
$
|
5.37
|
$
|
4.52
|
1 |
Includes
the results of the Specialty Commercial Segment, all of which was
acquired
effective as of January 1, 2006.
|
2 |
In
accordance with Financial Accounting Standards Board Emerging Issues
Task
Force Issue No. 98-5, “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios,” and Issue No. 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments,” at the time of issuance we booked a $9.6 million
deemed discount to convertible notes attributable to their conversion
feature. Prior to conversion, this deemed discount was amortized
as
interest expense over the term of the notes, resulting in a $1.1
million
non-cash interest expense during the first quarter of 2006. As a
result of
the subsequent conversion of the convertible notes, the $8.5 million
balance of the deemed discount was written off as a non-cash interest
expense during the quarter ending June 30, 2006. Neither the deemed
discount on the convertible notes nor the resulting interest expense
have
any ultimate impact on cash flow or book
value.
|
3 |
In
January 2003, we acquired PIIC in satisfaction of $7.0 million of
a $14.85
million balance on a note receivable due from Millers American Group,
Inc.
This resulted in us recognizing an $8.1 million extraordinary gain
in
2003.
|
4 |
Investment
balances that we reported in Restricted Cash and Investments on the
balance sheet prior to 2007 have been reclassified to debt securities,
available-for-sale, at market value, to conform to current year
presentation.
|
5 |
Book
value per share is calculated as consolidated stockholders’ equity on the
basis of U.S. generally accepted accounting principles divided by
the
number of outstanding common shares. Book value per share for years
prior
to 2006 has been adjusted to reflect a one-for-six reverse stock
split
effected July 31, 2006.
|
·
|
Standard
Commercial Segment.
The Standard Commercial Segment includes the standard lines commercial
property/casualty insurance products and services handled by our
HGA
Operating Unit which is comprised of our American Hallmark Insurance
Services and ECM subsidiaries.
|
·
|
Specialty
Commercial Segment.
The Specialty Commercial Segment primarily includes the excess and
surplus
lines commercial property/casualty insurance products and services
handled
by our TGA Operating Unit and the general aviation insurance products
and
services handled by our Aerospace Operating Unit. The Specialty Commercial
Segment also includes a relatively small amount of non-strategic
legacy
personal lines insurance products handled by our TGA Operating Unit.
Our
TGA Operating Unit is comprised of our Texas General Agency, PAAC
and
TGARSI subsidiaries. Our Aerospace Operating Unit is comprised of
our
Aerospace Insurance Managers, ASRI and ACMG subsidiaries. All of
the
subsidiaries included in the Specialty Commercial Segment were acquired
effective January 1, 2006.
|
·
|
Personal
Segment.
The Personal Segment includes the non-standard personal automobile
insurance products and services handled by our Phoenix Operating
Unit
which is comprised of American Hallmark General Agency, Inc. and
Hallmark
Claims Services, Inc., both of which do business as Phoenix General
Agency.
|
·
|
American
Hallmark Insurance Company of Texas
presently retains all of the risks on the commercial property/casualty
policies marketed within the Standard Commercial Segment and assumes
a
portion of the risks on the commercial and aviation property/casualty
policies marketed within the Specialty Commercial Segment.
|
·
|
Hallmark
Specialty Insurance Company,
which was acquired effective January 1, 2006, presently assumes a
portion
of the risks on the commercial property/casualty policies marketed
within
the Specialty Commercial Segment.
|
·
|
Phoenix
Indemnity Insurance Company
presently assumes all of the risks on the non-standard personal automobile
policies marketed within the Personal Segment and assumes a portion
of the
risks on the aviation property/casualty products marketed within
the
Specialty Commercial Segment.
|
Treaty
Effective Dates
|
|||||||||||||
7/1/01
|
7/1/02
|
7/1/03
|
7/1/04
|
||||||||||
Provisional
loss ratio
|
60.0
|
%
|
59.0
|
%
|
59.0
|
%
|
64.2
|
%
|
|||||
Estimated
ultimate loss ratio booked to at December 31, 2007
|
63.5
|
%
|
64.5
|
%
|
67.0
|
%
|
54.6
|
%
|
|||||
Effect
of actual 5.0% above estimated loss ratio at December 31, 2007
|
-
|
-
|
-
|
($2,793
|
)
|
||||||||
Effect
of actual 5.0% below estimated loss ratio at December 31,
2007
|
$
|
1,850
|
$
|
3,055
|
$
|
3,360
|
$
|
2,793
|
Treaty
Effective Date
|
Treaty
Effective Date
|
||||||
1/1/06
|
1/1/07
|
||||||
Provisional
loss ratio
|
65.0
|
%
|
65.0
|
%
|
|||
Estimated
ultimate loss ratio booked to at December 31, 2007
|
56.0
|
%
|
65.0
|
%
|
|||
Effect
of actual 5.0% above estimated loss ratio at December 31, 2007
|
($3,092
|
)
|
-
|
||||
Effect
of actual 5.0% below estimated loss ratio at December 31,
2007
|
$
|
1,237
|
$
|
1,897
|
Year
Ended December 31, 2007
|
||||||||||||||||
Standard
|
|
Specialty
|
|
|
|
|
|
|
|
|||||||
|
|
Commercial
|
|
Commercial
|
|
Personal
|
|
|
|
|
|
|||||
|
|
Segment
|
|
Segment
|
|
Segment
|
|
Corporate
|
|
Consolidated
|
||||||
(in
thousands)
|
||||||||||||||||
Produced
premium
|
90,985
|
151,003
|
55,916
|
-
|
297,904
|
|||||||||||
|
||||||||||||||||
Gross
premiums written
|
90,868
|
102,688
|
55,916
|
-
|
249,472
|
|||||||||||
Ceded
premiums written
|
(6,646
|
)
|
(4,683
|
)
|
-
|
-
|
(11,329
|
)
|
||||||||
Net
premiums written
|
84,222
|
98,005
|
55,916
|
-
|
238,143
|
|||||||||||
Change
in unearned premiums
|
(840
|
)
|
(9,589
|
)
|
(2,411
|
)
|
(12,840
|
)
|
||||||||
Net
premiums earned
|
83,382
|
88,416
|
53,505
|
-
|
225,303
|
|||||||||||
|
||||||||||||||||
Total
revenues
|
86,139
|
126,255
|
58,268
|
3,836
|
274,498
|
|||||||||||
|
||||||||||||||||
Losses
and loss adjustment expenses
|
48,480
|
48,484
|
35,969
|
(15
|
)
|
132,918
|
||||||||||
|
||||||||||||||||
Pre-tax
income (loss)
|
12,042
|
28,043
|
7,523
|
(6,507
|
)
|
41,101
|
||||||||||
|
||||||||||||||||
Net
loss ratio (1)
|
58.1
|
%
|
54.8
|
%
|
67.2
|
%
|
59.0
|
%
|
||||||||
Net
expense ratio (2)
|
28.9
|
%
|
31.2
|
%
|
23.2
|
%
|
28.4
|
%
|
||||||||
Net
combined ratio (3)
|
87.0
|
%
|
86.0
|
%
|
90.4
|
%
|
87.4
|
%
|
Year
Ended December 31, 2006
|
||||||||||||||||
Standard
|
|
Specialty
|
|
|
|
|
|
|
|
|||||||
|
|
Commercial
|
|
Commercial
|
|
Personal
|
|
|
|
|
|
|||||
|
|
Segment
|
|
Segment
|
|
Segment
|
|
Corporate
|
|
Consolidated
|
||||||
(in
thousands)
|
||||||||||||||||
Produced
premium
|
91,679
|
156,490
|
45,135
|
-
|
293,304
|
|||||||||||
Gross
premiums written
|
91,070
|
77,740
|
45,135
|
-
|
213,945
|
|||||||||||
Ceded
premiums written
|
(8,850
|
)
|
(2,167
|
)
|
-
|
-
|
(11,017
|
)
|
||||||||
Net
premiums written
|
82,220
|
75,573
|
45,135
|
-
|
202,928
|
|||||||||||
Change
in unearned premiums
|
(12,146
|
)
|
(35,903
|
)
|
(2,818
|
)
|
-
|
(50,867
|
)
|
|||||||
Net
premiums earned
|
70,074
|
39,670
|
42,317
|
-
|
152,061
|
|||||||||||
Total
revenues
|
75,325
|
80,689
|
46,998
|
(271
|
)
|
202,741
|
||||||||||
Losses
and loss adjustment expenses
|
38,799
|
21,908
|
26,443
|
(33
|
)
|
87,117
|
||||||||||
Pre-tax
income (loss)
|
11,757
|
14,309
|
8,760
|
(20,501
|
)
|
14,325
|
||||||||||
Net
loss ratio (1)
|
55.4
|
%
|
55.2
|
%
|
62.5
|
%
|
57.3
|
%
|
||||||||
Net
expense ratio (2)
|
29.4
|
%
|
30.5
|
%
|
24.9
|
%
|
28.4
|
%
|
||||||||
Net
combined ratio (3)
|
84.8
|
%
|
85.7
|
%
|
87.4
|
%
|
85.7
|
%
|
1
|
Net
loss ratio is calculated as total net losses and loss adjustment
expenses
divided by net premiums earned, each determined in accordance with
GAAP.
|
2
|
Net
expense ratio is calculated as total underwriting expenses of our
insurance company subsidiaries, including allocated overhead expenses
and
offset by agency fee income, divided by net premiums earned, each
determined in accordance with GAAP.
|
3
|
Net
combined ratio is calculated as the sum of the net loss ratio and
the net
expense ratio.
|
Year
Ended
|
||||
December
31,
|
||||
2006
|
||||
(in
thousands)
|
||||
Earned
premium on retained business
|
$
|
39,670
|
||
Third
party commission revenue
|
36,111
|
|||
Investment
income, finance charges and
|
||||
other
revenue items
|
4,908
|
|||
Revenue
contributions from acquisitions
|
$
|
80,689
|
Year
Ended
|
||||
December
31, 2006
|
||||
(in
thousands)
|
||||
Income
excluding interest expense
|
||||
from
amortization of discount, net of tax
|
$
|
15,257
|
||
Interest
expense from amortization of discount
|
9,625
|
|||
Less
related tax effect
|
(3,559
|
)
|
||
6,066
|
||||
Net
income
|
$
|
9,191
|
Year
Ended December 31, 2006
|
||||||||||||||||
Standard
|
|
Specialty
|
|
|
|
|
|
|
|
|||||||
|
|
Commercial
|
|
Commercial
|
|
Personal
|
|
|
|
|
|
|||||
|
|
Insurance
|
|
Insurance
|
|
Insurance
|
|
Corporate
|
|
Consolidated
|
||||||
Produced
premium
|
91,679
|
156,490
|
45,135
|
-
|
293,304
|
|||||||||||
|
||||||||||||||||
Gross
premiums written
|
91,070
|
77,740
|
45,135
|
-
|
213,945
|
|||||||||||
Ceded
premiums written
|
(8,850
|
)
|
(2,167
|
)
|
-
|
-
|
(11,017
|
)
|
||||||||
Net
premiums written
|
82,220
|
75,573
|
45,135
|
-
|
202,928
|
|||||||||||
Change
in unearned premiums
|
(12,146
|
)
|
(35,903
|
)
|
(2,818
|
)
|
(50,867
|
)
|
||||||||
Net
premiums earned
|
70,074
|
39,670
|
42,317
|
-
|
152,061
|
|||||||||||
|
||||||||||||||||
Total
revenues
|
75,325
|
80,689
|
46,998
|
(271
|
)
|
202,741
|
||||||||||
|
||||||||||||||||
Loss
and loss adjustment expenses
|
38,799
|
21,908
|
26,443
|
(33
|
)
|
87,117
|
||||||||||
Pre-tax
income
|
11,757
|
14,309
|
8,760
|
(20,501
|
)
|
14,325
|
||||||||||
|
||||||||||||||||
Loss
ratio (1)
|
55.4
|
%
|
55.2
|
%
|
62.5
|
%
|
57.3
|
%
|
||||||||
Expense
ratio (2)
|
29.4
|
%
|
30.5
|
%
|
24.9
|
%
|
28.4
|
%
|
||||||||
Combined
ratio (3)
|
84.8
|
%
|
85.7
|
%
|
87.4
|
%
|
85.7
|
%
|
Year
Ended December 31, 2005
|
||||||||||||||||
Standard
|
|
Specialty
|
|
|
|
|
|
|
|
|||||||
|
|
Commercial
|
|
Commercial
|
|
Personal
|
|
|
|
|
|
|||||
|
|
Segment
|
|
Segment
|
|
Segment
|
|
Corporate
|
|
Consolidated
|
||||||
(in
thousands)
|
||||||||||||||||
Produced
premium
|
81,721
|
-
|
36,345
|
-
|
118,066
|
|||||||||||
Gross
premiums written
|
52,952
|
-
|
36,515
|
-
|
89,467
|
|||||||||||
Ceded
premiums written
|
(1,703
|
)
|
-
|
488
|
-
|
(1,215
|
)
|
|||||||||
Net
premiums written
|
51,249
|
-
|
37,003
|
-
|
88,252
|
|||||||||||
Change
in unearned premiums
|
(29,498
|
)
|
-
|
430
|
-
|
(29,068
|
)
|
|||||||||
Net
premiums earned
|
21,751
|
-
|
37,433
|
-
|
59,184
|
|||||||||||
Total
revenues
|
43,067
|
-
|
43,907
|
61
|
87,035
|
|||||||||||
Losses
and loss adjustment expenses
|
12,610
|
-
|
21,239
|
(65
|
)
|
33,784
|
||||||||||
Pre-tax
income (loss)
|
6,651
|
-
|
11,647
|
(4,830
|
)
|
13,468
|
||||||||||
Net
loss ratio (1)
|
58.0
|
%
|
56.7
|
%
|
57.1
|
%
|
||||||||||
Net
expense ratio (2)
|
34.4
|
%
|
28.8
|
%
|
30.8
|
%
|
||||||||||
Net
combined ratio (3)
|
92.4
|
%
|
85.5
|
%
|
87.9
|
%
|
1
|
Net
loss ratio is calculated as total net losses and loss adjustment
expenses
divided by net premiums earned, each determined in accordance with
GAAP.
|
2
|
Net
expense ratio is calculated as total underwriting expenses of our
insurance company subsidiaries, including allocated overhead expenses
and
offset by agency fee income, divided by net premiums earned, each
determined in accordance with GAAP. During the fourth quarter of
fiscal
2006, we adopted the widely used industry calculation that offsets
expenses with agency fee income. Prior period comparative expense
ratios
have been restated.
|
3
|
Net
combined ratio is calculated as the sum of the net loss ratio and
the net
expense ratio.
|
Estimated
Payments by Period
|
||||||||||||||||
Total
|
|
2008
|
|
2009-2010
|
|
2011-2012
|
|
After
2012
|
||||||||
Notes
payable
|
60,814
|
420
|
2,432
|
1,120
|
56,842
|
|||||||||||
Interest
on note payable
|
125,906
|
4,650
|
9,106
|
8,860
|
103,290
|
|||||||||||
Structured
settlements
|
10,000
|
10,000
|
-
|
-
|
-
|
|||||||||||
Unpaid
losses and loss
|
||||||||||||||||
adjustment
expenses
|
125,338
|
60,423
|
49,713
|
12,862
|
2,340
|
|||||||||||
Operating
leases
|
3,909
|
1,711
|
1,914
|
284
|
-
|
|||||||||||
Purchase
obligations
|
6,322
|
1,564
|
1,674
|
1,550
|
1,534
|
Description
|
Page
Number
|
|||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|||
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
F-3
|
|||
Consolidated
Statements of Operations for the Years Ended
|
F-4
|
|||
December
31, 2007, 2006 and 2005
|
||||
Consolidated
Statements of Stockholders’ Equity and Comprehensive
Income
|
F-5
|
|||
for
the Years Ended December 31, 2007, 2006 and 2005
|
||||
Consolidated
Statements of Cash Flows for the Years Ended
|
F-7
|
|||
December
31, 2007, 2006 and 2005
|
||||
Notes
to Consolidated Financial Statements
|
F-8
|
|||
Unaudited
Selected Quarterly Information
|
F-36
|
|||
Financial
Statement Schedules
|
F-37
|
(a)(1) |
Financial
Statements
|
The
following consolidated financial statements, notes thereto and related
information are included in Item 8 of this
report:
|
Report of Independent Registered Public Accounting Firm |
Consolidated
Balance Sheets at December 31, 2007 and
2006
|
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005 |
Consolidated Statements of Stockholders’ Equity and
Comprehensive Income for the Years Ended
December
31, 2007, 2006 and 2005
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005 |
Notes to Consolidated Financial Statements |
(a)(2) | Financial Statement Schedules |
The following financial statement schedules are included in this report: |
Unaudited Selected Quarterly Information |
Schedule
II - Condensed Financial Information of Registrant - Hallmark
Financial
Services, Inc. (Parent Company Only)
|
Schedule III - Supplemental Insurance Information |
Schedule IV - Reinsurance |
Schedule
VI - Supplemental Information Concerning Property-Casualty
Insurance
Operations
|
(a)(3) |
Exhibit
Index
|
Exhibit
Number
|
Description
|
|
3.1
|
Restated
Articles of Incorporation of the registrant (incorporated by reference
to
Exhibit 3.1 to Amendment No. 1 to the registrant’s Registration Statement
on Form S-1 [Registration No. 333-136414] filed September 8,
2006).
|
|
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 October
1, 2007).
|
|
4.1
|
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).
|
|
4.2
|
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).
|
|
4.3
|
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).
|
4.4
|
Form
of Junior Subordinated Debt Security Due 2035 (included in Exhibit
4.2
above).
|
||
4.5
|
Form
of Capital Security Certificate (included in Exhibit 4.3
above).
|
||
4.6
|
First
Restated Credit Agreement dated January 27, 2006, between Hallmark
Financial Services, Inc. and The Frost National Bank (incorporated
by
reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K
filed February 2, 2006).
|
4.7
|
Form
of Registration Rights Agreement dated January 27, 2006, between
Hallmark
Financial Services, Inc. and Newcastle Special Opportunity Fund I,
Ltd.
and Newcastle Special Opportunity Fund II, L.P. (incorporated by
reference
to Exhibit 4.1 to the registrant’s Current Report on Form 8-K filed
February 2, 2006).
|
||
4.8
|
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).
|
||
4.9
|
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).
|
||
4.10
|
Form
of Junior Subordinated Debt Security Due 2037 (included in Exhibit
4.8
above).
|
||
4.11
|
Form
of Capital Security Certificate (included in Exhibit 4.9
above).
|
||
10.1
|
Office
Lease for 14651 Dallas Parkway, Dallas, Texas, dated January 1, 1995,
between American Hallmark Insurance Company of Texas and Fults Management
Company, as agent for The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10(a) to the registrant’s Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1994).
|
||
10.2
|
Tenth
Amendment to Office Lease for 14651 Dallas Parkway, Dallas, Texas,
dated
May 5th,
2003, between American Hallmark Insurance Company of Texas and Fults
Management Company, as agent for The Prudential Insurance Company
of
America (incorporated by reference to Exhibit 10(a) to the registrant’s
Quarterly Report on Form 10-QSB for the quarter ended March 31,
2003).
|
||
10.3
|
Lease
Agreement for 777 Main Street, Fort Worth, Texas, dated June 12,
2003
between Hallmark Financial Services, Inc. and Crescent Real Estate
Funding
I, L.P. (incorporated by reference to Exhibit 10(a) to the registrant’s
Quarterly Report on Form 10-QSB for the quarter ended June 30,
2003).
|
||
10.4
|
Lease
Agreement for 7411 John Smith Drive, San Antonio, Texas, dated February
18, 1997, between Pan American Acceptance Corporation and Medical
Plaza
Partners, Ltd. (incorporated by reference to Exhibit 10.4 to the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed August 8, 2006).
|
||
10.5
|
Amendment
No. 1 to Lease Agreement for 7411 John Smith Drive, San Antonio,
Texas,
dated June 10, 2002, between Pan American Acceptance Corporation
and San
Antonio Technology Center Corporation, as successor to Medical Plaza
Partners, Ltd. (incorporated by reference to Exhibit 10.5 to the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed August 8, 2006).
|
||
10.6
|
Amendment
No. 2 to Lease Agreement for 7411 John Smith Drive, San Antonio,
Texas,
dated February 27, 2003, between Pan American Acceptance Corporation
and
San Antonio Technology Center Corporation, as successor to Medical
Plaza
Partners, Ltd. (incorporated by reference to Exhibit 10.6 to the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed August 8, 2006).
|
||
10.7
|
Amendment
No. 3 to Lease Agreement for 7411 John Smith Drive, San Antonio,
Texas,
dated November 10, 2004, between Pan American Acceptance Corporation
and
San Antonio Technology Center Corporation, as successor to Medical
Plaza
Partners, Ltd. (incorporated by reference to Exhibit 10.7 to the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed August 8, 2006).
|
||
10.8
|
Amended
and Restated Lease Agreement for 14990 Landmark Boulevard, Addison,
Texas,
dated December 13, 2005, between Aerospace Managers, Inc. and Donnell
Investments, L.L.C. (incorporated by reference to Exhibit 10.8 to
the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed August 8, 2006).
|
10.9*
|
1994
Key Employee Long Term Incentive Plan (incorporated by reference
to
Exhibit 10(f) to the registrant’s Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994).
|
||
10.10*
|
First
Amendment to Hallmark Financial Services, Inc. 1994 Key Employee
Long Term
Incentive Plan (incorporated by reference to Exhibit 10(bm) to the
registrant’s Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002).
|
||
10.11*
|
1994
Non-Employee Director Stock Option Plan (incorporated by reference
to
Exhibit 10(g) to the registrant’s Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994).
|
||
10.12*
|
First
Amendment to Hallmark Financial Services, Inc. 1994 Non-Employee
Director
Stock Option Plan (incorporated by reference to Exhibit 10(bn) to
the
registrant’s Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002).
|
||
10.13*
|
Second
Amendment to Hallmark Financial Services, Inc. 1994 Non-Employee
Director
Stock Option Plan (incorporated by reference to Exhibit 10(e) to
the
registrant’s Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2001).
|
||
10.14*
|
Form
of Indemnification Agreement between Hallmark Financial Services,
Inc. and
its officers and directors, adopted July 19, 2002 (incorporated by
reference to Exhibit 10(c) to the registrant’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002).
|
||
10.15*
|
Hallmark
Financial Services, Inc. 2005 Long Term Incentive Plan (incorporated
by
reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K
filed June 3, 2005).
|
||
10.16*
|
Form
of Incentive Stock Option Grant Agreement (incorporated by reference
to
Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed June 3,
2005).
|
||
10.17*
|
Form
of Non-qualified Stock Option Agreement (incorporated by reference
to
Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed June 3,
2005).
|
||
10.18*
|
Employment
Agreement dated as of February 1, 2006, among Aerospace Holdings,
LLC,
Hallmark Financial Services, Inc. and Curtis R. Donnell (incorporated
by
reference to Exhibit 10.18 to the registrant’s Registration Statement on
Form S-1 [Registration No. 333-136414] filed August 8,
2006).
|
||
10.19*
|
Employment
Agreement dated as of February 1, 2006, between Texas General Agency,
Inc.
and Donald E. Meyer (incorporated by reference to Exhibit 10.19 to
the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed August 8, 2006).
|
||
10.20
|
Guarantee
Agreement dated as of June 21, 2005, by Hallmark Financial Services,
Inc.
for the benefit of the holders of trust preferred securities (incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed June 27, 2005).
|
||
10.21
|
Guarantee
Agreement dated as of August 23, 2007, by Hallmark Financial Services,
Inc. for the benefit of the holders of trust preferred securities
(incorporated by reference to Exhibit 10.1 to the registrant’s Current
Report on Form 8-K filed August 24, 2007).
|
||
10.22
|
Purchase
Agreement dated November 9, 2005, by and among Hallmark Financial
Services, Inc. and Samuel M. Cangelosi, Donate A. Cangelosi and Donald
E.
Meyer (incorporated by reference to Exhibit 4.1 to the registrant’s
Current Report on Form 8-K filed November 14, 2005).
|
||
10.23
|
Purchase
Agreement dated December 12, 2005, by and among Hallmark Financial
Services, Inc. and Donnell Children Revocable Trust and Curtis R.
Donnell
(incorporated by reference to Exhibit 4.1 to the registrant’s Current
Report on Form 8-K filed December 13, 2005).
|
||
10.24
|
Quota
Share Reinsurance Treaty Attaching January 1, 2006 by and among American
Hallmark Insurance Company, Phoenix Indemnity Insurance Company and
Gulf
States Insurance Company (n/k/a Hallmark Specialty Insurance
Company)
(incorporated by reference to Exhibit 10.25 to the registrant’s
Registration Statement on Form S-1 [Registration No. 333-136414]
filed
August 8, 2006).
|
10.25
|
Amendment
No. 1 to Quota Share Reinsurance Treaty Attaching January 1, 2006
by and
among American Hallmark Insurance Company, Phoenix Indemnity Insurance
Company and Gulf States Insurance Company (n/k/a Hallmark Specialty
Insurance Company) (incorporated by reference to Exhibit 10.26 to
the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed August 8, 2006).
|
|
10.26
|
Amendment
No. 2 to Quota Share Reinsurance Treaty Attaching January 1, 2006
by and
among American Hallmark Insurance Company, Phoenix Indemnity Insurance
Company and Gulf States Insurance Company (n/k/a Hallmark Specialty
Insurance Company) (incorporated by reference to Exhibit 10.27 to
the
registrant’s Registration Statement on Form S-1 [Registration No.
333-136414] filed August 8, 2006).
|
|
10.27
|
Amendment
No. 3 to Quota Share Reinsurance Treaty attaching January 1, 2006
by and
among American Hallmark Insurance Company, Phoenix Indemnity Insurance
Company and Gulf States Insurance Company (n/k/a Hallmark Specialty
Insurance Company) (incorporated by reference to Exhibit 10.28 to
the
registrant’s Annual Report on Form 10-K for the fiscal year ended December
31, 2006).
|
|
21+
|
List
of subsidiaries of the registrant.
|
|
23+
|
Consent
of KPMG LLP
|
|
31(a)+
|
Certification
of principal executive officer required by Rule 13a-14(a) or Rule
15d-14(b).
|
|
31(b)+
|
Certification
of principal financial officer required by Rule 13a-14(a) or Rule
15d-14(b).
|
|
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.
|
|
*
|
Management
contract or compensatory plan or arrangement.
|
|
+
|
Filed
herewith.
|
HALLMARK
FINANCIAL SERVICES, INC.
|
||
(Registrant)
|
||
|
|
|
Date:
March
17, 2008
|
/s/
Mark J. Morrison
|
|
Mark
J. Morrison,
Chief
Executive Officer and President
|
||
(Principal
Executive Officer)
|
Date:
March
17, 2008
|
/s/
Jeffrey R. Passmore
|
|
Jeffrey
R. Passmore,
Chief
Accounting Officer and Senior Vice President
|
||
(Principal
Financial Officer and Principal Accounting
Officer)
|
Date:
March
17, 2008
|
/s/
Mark E. Schwarz
|
|
Mark
E. Schwarz,
|
||
Executive Chairman |
Date:
March
17, 2008
|
/s/
James H. Graves
|
|
James
H. Graves,
Director
|
Date:
March
17, 2008
|
/s/
George R. Manser
|
|
George
R. Manser,
Director
|
Date:
March
17, 2008
|
/s/
Scott T. Berlin
|
|
Scott
T. Berlin,
Director
|
HALLMARK
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
|
|
|
INDEX
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
Description
|
Page
Number
|
|||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|||
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
F-3
|
|||
Consolidated
Statements of Operations for the Years Ended December 31, 2007,
2006 and
2005
|
F-4
|
|||
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income for the Years
Ended December 31, 2007, 2006 and 2005
|
F-5
F-6
|
|||
Consolidated
Statements of Cash Flows for the Years Ended December
31, 2007, 2006 and 2005
|
F-7
|
|||
Notes
to Consolidated Financial Statements
|
F-8
|
|||
Unaudited
Selected Quarterly Information
|
F-36
|
|||
Financial
Statement Schedules
|
F-37
|
HALLMARK
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
|||||||
CONSOLIDATED
BALANCE SHEETS
|
|||||||
December
31, 2007 and 2006
|
|||||||
(In
thousands)
|
|||||||
2007
|
|
2006
|
|||||
ASSETS
|
|||||||
Investments:
|
|||||||
Debt
securities, available-for-sale, at fair value
|
$
|
248,069
|
$
|
133,030
|
|||
Equity
securities, available-for-sale, at fair value
|
16,868
|
4,580
|
|||||
Short-term
investments, available-for-sale, at fair value
|
2,625
|
25,275
|
|||||
Total
investments
|
267,562
|
162,885
|
|||||
Cash
and cash equivalents
|
145,884
|
81,474
|
|||||
Restricted
cash and investments
|
16,043
|
24,569
|
|||||
Prepaid
reinsurance premiums
|
274
|
1,629
|
|||||
Premiums
receivable
|
46,026
|
44,644
|
|||||
Accounts
receivable
|
5,219
|
7,852
|
|||||
Receivable
for securities
|
27,395
|
5,371
|
|||||
Reinsurance
recoverable
|
4,952
|
5,930
|
|||||
Deferred
policy acquisition costs
|
19,757
|
17,145
|
|||||
Excess
of cost over fair value of net assets acquired
|
30,025
|
31,427
|
|||||
Intangible
assets
|
23,781
|
26,074
|
|||||
Deferred
federal income taxes
|
275
|
-
|
|||||
Prepaid
expenses
|
1,240
|
1,769
|
|||||
Other
assets
|
17,881
|
5,184
|
|||||
$
|
606,314
|
$
|
415,953
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Liabilities:
|
|||||||
Notes
payable
|
$
|
60,814
|
$
|
35,763
|
|||
Structured
settlements
|
10,000
|
24,587
|
|||||
Reserves
for unpaid losses and loss adjustment expenses
|
125,338
|
77,564
|
|||||
Unearned
premiums
|
102,998
|
91,606
|
|||||
Unearned
revenue
|
2,949
|
5,734
|
|||||
Reinsurance
balances payable
|
-
|
1,060
|
|||||
Accrued
agent profit sharing
|
2,844
|
1,784
|
|||||
Accrued
ceding commission payable
|
12,099
|
3,956
|
|||||
Pension
liability
|
1,669
|
3,126
|
|||||
Deferred
federal income taxes
|
-
|
2,310
|
|||||
Payable
for securities
|
91,401
|
-
|
|||||
Current
federal income tax payable
|
630
|
2,132
|
|||||
Accounts
payable and other accrued expenses
|
16,385
|
15,600
|
|||||
427,127
|
265,222
|
||||||
Commitments
and contingencies (Note 15)
|
|||||||
Stockholders’
equity:
|
|||||||
Common
stock, $.18 par value, authorized 33,333,333 shares in 2007 and
2006;
|
|||||||
issued
20,776,080 shares in 2007 and 2006
|
3,740
|
3,740
|
|||||
Capital
in excess of par value
|
118,459
|
117,932
|
|||||
Retained
earnings
|
58,909
|
31,480
|
|||||
Accumulated
other comprehensive loss
|
(1,8447
|
)
|
(2,3444
(2,3447
|
)
|
|||
Treasury
stock, 7,828 shares in 2007 and 2006, at cost
|
(77
|
)
|
(77
|
)
|
|||
Total
stockholders’ equity
|
179,187
|
150,731
|
|||||
$
|
606,314
|
$
|
415,953
|
HALLMARK
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
for
the years ended December 31, 2007, 2006 and
2005
|
||||||||
(In
thousands, except per share amounts)
|
||||||||
2007
|
|
2006
|
|
2005
|
||||||
Gross
premiums written
|
$
|
249,472
|
$
|
213,945
|
$
|
89,467
|
||||
Ceded
premiums written
|
(11,329
|
)
|
(11,017
|
)
|
(1,215
|
)
|
||||
Net
premiums written
|
238,143
|
202,928
|
88,252
|
|||||||
Change
in unearned premiums
|
(12,840
|
)
|
(50,867
|
)
|
(29,068
|
)
|
||||
Net
premiums earned
|
225,303
|
152,061
|
59,184
|
|||||||
Investment
income, net of expenses
|
13,180
|
10,461
|
3,836
|
|||||||
Gain
(loss) on investments
|
2,586
|
(1,466
|
)
|
58
|
||||||
Finance
charges
|
4,702
|
3,983
|
2,044
|
|||||||
Commission
and fees
|
28,054
|
35,343
|
16,703
|
|||||||
Processing
and service fees
|
657
|
2,330
|
5,183
|
|||||||
Other
income
|
16
|
29
|
27
|
|||||||
Total
revenues
|
274,498
|
202,741
|
87,035
|
|||||||
Losses
and loss adjustment expenses
|
132,918
|
87,117
|
33,784
|
|||||||
Other
operating costs and expenses
|
94,272
|
83,583
|
38,492
|
|||||||
Interest
expense
|
3,914
|
5,798
|
1,264
|
|||||||
Interest
expense from amortization of discount on convertible notes
|
-
|
9,625
|
-
|
|||||||
Amortization
of intangible asset
|
2,293
|
2,293
|
27
|
|||||||
Total
expenses
|
233,397
|
188,416
|
73,567
|
|||||||
Income
before income tax
|
41,101
|
14,325
|
13,468
|
|||||||
Income
tax expense
|
13,672
|
5,134
|
4,282
|
|||||||
Net
income
|
$
|
27,429
|
$
|
9,191
|
$
|
9,186
|
||||
Common
stockholders net income per share:
|
||||||||||
Basic
|
$
|
1.32
|
$
|
0.53
|
$
|
0.76
|
||||
Diluted
|
$
|
1.32
|
$
|
0.53
|
$
|
0.76
|
The
accompanying notes are an integral part
|
||||||||||
of
the consolidated financial
statements
|
HALLMARK
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME
|
|
for
the years ended December 31, 2007, 2006 and 2005
|
|
(in
thousands)
|
Number
|
|
|
|
Capital
In Excess
|
|
|
|
Accumulated
Other
|
|
|
|
Number
|
|
Total
|
|
Comprehensive
|
|
|||||||||||
|
|
of
|
|
Par
|
|
of Par
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
of
|
|
Stockholders'
|
|
Income
|
|
|||||||||
|
|
Shares
|
|
Value
|
|
Value
|
|
Earnings
|
|
Income
(Loss)
|
|
Stock
|
|
Shares
|
|
Equity
|
|
(Loss)
|
||||||||||
Balance
at December 31, 2004
|
6,143
|
$
|
1,106
|
$
|
19,647
|
$
|
13,103
|
$
|
(759
|
)
|
$
|
(441
|
)
|
63
|
$
|
32,656
|
||||||||||||
Rights
offering
|
8,333
|
1,500
|
43,391
|
-
|
-
|
-
|
-
|
44,891
|
||||||||||||||||||||
Amortization
of fair value of stock options granted
|
-
|
-
|
63
|
-
|
-
|
-
|
-
|
63
|
||||||||||||||||||||
Stock
options exercised
|
-
|
-
|
(194
|
)
|
-
|
-
|
424
|
(61
|
)
|
230
|
||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
9,186
|
-
|
-
|
-
|
9,186
|
$
|
9,186
|
||||||||||||||||||
Other
comprehensive income:
|
||||||||||||||||||||||||||||
Additional
minimum pension liability
|
-
|
-
|
-
|
-
|
(761
|
)
|
-
|
-
|
(761
|
)
|
(761
|
)
|
||||||||||||||||
Net
unrealized holding losses arising during period
|
-
|
-
|
-
|
-
|
(1,949
|
)
|
-
|
-
|
(1,991
|
)
|
(1,991
|
)
|
||||||||||||||||
Reclassification
adjustment for gains included in net income
|
-
|
-
|
-
|
-
|
(90
|
)
|
-
|
-
|
(48
|
)
|
(48
|
)
|
||||||||||||||||
Net
unrealized losses on securities
|
(2,039
|
)
|
(2,039
|
)
|
(2,039
|
)
|
||||||||||||||||||||||
Total
other comprehensive loss before tax
|
(2,800
|
)
|
(2,800
|
)
|
(2,800
|
)
|
||||||||||||||||||||||
Tax
effect on other comprehensive loss
|
962
|
962
|
962
|
|||||||||||||||||||||||||
Other
comprehensive loss after tax
|
(1,838
|
)
|
(1,838
|
)
|
(1,838
|
)
|
||||||||||||||||||||||
7,348
|
||||||||||||||||||||||||||||
Balance
at December 31, 2005
|
14,476
|
$
|
2,606
|
$
|
62,907
|
$
|
22,289
|
$
|
(2,597
|
)
|
$
|
(17
|
)
|
2
|
$
|
85,188
|
||||||||||||
Stock
offering
|
3,000
|
540
|
24,149
|
-
|
-
|
-
|
-
|
24,689
|
||||||||||||||||||||
Amortization
of fair value of stock options granted
|
-
|
-
|
157
|
-
|
-
|
-
|
-
|
157
|
||||||||||||||||||||
Stock
options exercised
|
-
|
5
|
91
|
-
|
-
|
(60
|
)
|
6
|
36
|
|||||||||||||||||||
Discount
on convertible note, net of tax
|
-
|
-
|
6,066
|
-
|
-
|
-
|
-
|
6,066
|
||||||||||||||||||||
Conversion
of note payable to common stock
|
3,300
|
589
|
24,562
|
-
|
-
|
-
|
-
|
25,151
|
||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
9,191
|
-
|
-
|
-
|
9,191
|
$
|
9,191
|
||||||||||||||||||
Other
comprehensive income:
|
||||||||||||||||||||||||||||
Change
in net actuarial loss
|
-
|
-
|
-
|
-
|
(226
|
)
|
-
|
-
|
(226
|
)
|
(226
|
)
|
||||||||||||||||
Net
unrealized holding loss arising during period
|
-
|
-
|
-
|
-
|
(653
|
)
|
-
|
-
|
(653
|
)
|
(653
|
)
|
||||||||||||||||
Reclassification
adjustment for losses included in net income
|
-
|
-
|
-
|
-
|
1,242
|
-
|
-
|
1,242
|
1,242
|
|||||||||||||||||||
Net
unrealized gains on securities
|
589
|
589
|
589
|
|||||||||||||||||||||||||
Total
other comprehensive gain before tax
|
363
|
363
|
363
|
|||||||||||||||||||||||||
Tax
effect on other comprehensive gain
|
(110
|
)
|
(110
|
)
|
(110
|
)
|
||||||||||||||||||||||
Other
comprehensive gain after tax
|
253
|
253
|
253
|
|||||||||||||||||||||||||
Comprehensive
income
|
$
|
9,444
|
||||||||||||||||||||||||||
Balance
at December 31, 2006
|
20,776
|
$
|
3,740
|
$
|
117,932
|
$
|
31,480
|
$
|
(2,344
|
)
|
$
|
(77
|
)
|
8
|
$
|
150,731
|
HALLMARK
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(Continued)
|
|
for
the years ended December 31, 2007, 2006 and 2005
|
|
(in
thousands)
|
|
|
|
|
Capital
In
|
|
|
|
Accumlated
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
Number
|
|
|
|
Excess
|
|
|
|
Other
|
|
|
|
Number
|
|
Total
|
|
Comprehensive
|
|
|||||||||
|
|
of
|
|
Par
|
|
of
Par
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
of
|
|
Stockholders'
|
|
Income
|
|
|||||||||
|
|
Shares
|
|
Value
|
|
Value
|
|
Earnings
|
|
Income
(Loss)
|
|
Stock
|
|
Shares
|
|
Equity
|
|
(Loss)
|
||||||||||
Balance
at December 31, 2006
|
20,776
|
$
|
3,740
|
$
|
117,932
|
$
|
31,480
|
$
|
(2,344
|
)
|
$
|
(77
|
)
|
8
|
$
|
150,731
|
||||||||||||
Amortization
of fair value of stock options granted
|
-
|
-
|
527
|
-
|
-
|
-
|
-
|
527
|
||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
27,429
|
-
|
-
|
-
|
27,429
|
$
|
27,429
|
||||||||||||||||||
Other
comprehensive income:
|
||||||||||||||||||||||||||||
Change
in net actuarial loss
|
-
|
-
|
-
|
-
|
1,378
|
-
|
-
|
1,378
|
1,378
|
|||||||||||||||||||
Net
unrealized holding losses arising during period
|
-
|
-
|
-
|
-
|
(339
|
)
|
-
|
-
|
(339
|
)
|
(339
|
)
|
||||||||||||||||
Reclassification
adjustment for gains included in net income
|
-
|
-
|
-
|
-
|
(270
|
)
|
-
|
-
|
(270
|
)
|
(270
|
)
|
||||||||||||||||
Net
unrealized losses on
securities
|
(609
|
)
|
(609
|
)
|
(609
|
)
|
||||||||||||||||||||||
Total
other comprehensive income before tax
|
769
|
769
|
769
|
|||||||||||||||||||||||||
Tax
effect on other comprehensive income
|
(269
|
)
|
(269
|
)
|
(269
|
)
|
||||||||||||||||||||||
Other
comprehensive income after tax
|
500
|
500
|
500
|
|||||||||||||||||||||||||
Comprehensive
income
|
$
|
27,929
|
||||||||||||||||||||||||||
Balance
at December 31, 2007
|
20,776
|
$
|
3,740
|
$
|
118,459
|
$
|
58,909
|
$
|
(1,844
|
)
|
$
|
(77
|
)
|
8
|
$
|
179,187
|
HALLMARK
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
For
the years ended December 31, 2007, 2006 and 2005
|
||||||||||
(In
thousands)
|
2007
|
2006
|
2005
|
||||||||
Cash
flows from operating activities:
|
||||||||||
Net
income
|
$
|
27,429
|
$
|
9,191
|
$
|
9,186
|
||||
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||||
Depreciation
and amortization expense
|
3,119
|
3,214
|
413
|
|||||||
Amortization
of beneficial conversion feature
|
-
|
9,625
|
-
|
|||||||
Amortization
of discount on structured settlement
|
413
|
1,045
|
-
|
|||||||
Deferred
income tax expense (benefit)
|
(1,481
|
)
|
(6,529
|
)
|
2,143
|
|||||
Realized
(gain) loss on investments
|
(2,586
|
)
|
1,466
|
(58
|
)
|
|||||
Change
in prepaid reinsurance premiums
|
1,355
|
(862
|
)
|
(767
|
)
|
|||||
Change
in premiums receivable
|
(1,382
|
)
|
6,392
|
(22,427
|
)
|
|||||
Change
in prepaid commissions
|
487
|
1,306
|
-
|
|||||||
Change
in accounts receivable
|
2,632
|
(4,484
|
)
|
1,411
|
||||||
Change
in deferred policy acquisition costs
|
(2,612
|
)
|
(7,981
|
)
|
(1,689
|
)
|
||||
Change
in unpaid losses and loss adjustment expenses
|
47,774
|
41,753
|
6,673
|
|||||||
Change
in unearned premiums
|
11,392
|
51,635
|
29,835
|
|||||||
Change
in unearned revenue
|
(2,785
|
)
|
(7,861
|
)
|
(7,228
|
)
|
||||
Change
in accrued agent profit sharing
|
1,060
|
(389
|
)
|
298
|
||||||
Change
in reinsurance recoverable
|
978
|
(4,846
|
)
|
2,639
|
||||||
Change
in reinsurance balances payable
|
(1,060
|
)
|
295
|
116
|
||||||
Change
in current federal income tax payable/recoverable
|
(1,502
|
)
|
1,745
|
(1,043
|
)
|
|||||
Excess
tax benefits from share-based payment arrangements
|
-
|
(25
|
)
|
-
|
||||||
Change
in accrued ceding commission payable
|
8,143
|
(7,474
|
)
|
9,735
|
||||||
Change
in all other liabilities
|
(673
|
)
|
(13,075
|
)
|
3,817
|
|||||
Change
in all other assets
|
(10,364
|
)
|
1,821
|
(3,400
|
)
|
|||||
Net
cash provided by operating activities
|
80,337
|
75,962
|
29,654
|
|||||||
Cash
flows from investing activities:
|
||||||||||
Purchases
of property and equipment
|
(455
|
)
|
(685
|
)
|
(532
|
)
|
||||
Acquisitions
of subsidiaries, net of cash received
|
-
|
(25,964
|
)
|
-
|
||||||
Premium
finance notes repaid, net of finance notes originated
|
(723
|
)
|
(2,750
|
)
|
-
|
|||||
Change
in restricted cash
|
8,526
|
(15,857
|
)
|
(1,987
|
)
|
|||||
Purchases
of debt and equity securities
|
(226,476
|
)
|
(75,478
|
)
|
(60,565
|
)
|
||||
Proceeds
from maturities and redemptions of securities
|
170,207
|
41,944
|
1,747
|
|||||||
Net
redemptions (purchases) of short-term investments
|
22,894
|
(12,776
|
)
|
(11,832
|
)
|
|||||
Net
cash used in investing activities
|
(26,027
|
)
|
(91,566
|
)
|
(73,169
|
)
|
||||
Cash
flows from financing activities:
|
||||||||||
Proceeds
from borrowings
|
25,774
|
52,500
|
30,928
|
|||||||
Debt
issuance costs
|
(674
|
)
|
-
|
(907
|
)
|
|||||
Proceeds
from equity offerings
|
-
|
24,689
|
44,891
|
|||||||
Proceeds
from exercise of employee stock options
|
-
|
36
|
230
|
|||||||
Excess
tax benefits from share-based payment arrangements
|
-
|
25
|
-
|
|||||||
Repayment
of borrowings
|
(15,000
|
)
|
(24,700
|
)
|
-
|
|||||
Net
cash provided by financing activities
|
10,100
|
52,550
|
75,142
|
|||||||
Increase
in cash and cash equivalents
|
64,410
|
36,946
|
31,627
|
|||||||
Cash
and cash equivalents at beginning of year
|
81,474
|
44,528
|
12,901
|
|||||||
Cash
and cash equivalents at end of year
|
$
|
145,884
|
$
|
81,474
|
$
|
44,528
|
||||
Supplemental
cash flow information:
|
||||||||||
Interest
(paid)
|
$
|
(3,402
|
)
|
$
|
(4,678
|
)
|
$
|
(1,167
|
)
|
|
Income
taxes (paid)
|
$
|
(16,655
|
)
|
$
|
(9,830
|
)
|
$
|
(3,182
|
)
|
1.
|
Accounting
Policies:
|
Treaty
Effective Dates
|
|||||||||||||
7/1/01
|
7/1/02
|
7/1/03
|
7/1/04
|
||||||||||
Provisional
loss ratio
|
60.0
|
%
|
59.0
|
%
|
59.0
|
%
|
64.2
|
%
|
|||||
Estimated
ultimate loss ratio booked to at December 31, 2007
|
63.5
|
%
|
64.5
|
%
|
67.0
|
%
|
54.6
|
%
|
|||||
Effect
of actual 5.0% above estimated loss ratio at December 31,
2007
|
-
|
-
|
-
|
($2,793
|
)
|
||||||||
Effect
of actual 5.0% below estimated loss ratio at December 31,
2007
|
$
|
1,850
|
$
|
3,055
|
$
|
3,360
|
$
|
2,793
|
Treaty
Effective Date
|
Treaty
Effective Date
|
||||||
1/1/06
|
1/1/07
|
||||||
Provisional
loss ratio
|
65.0
|
%
|
65.0
|
%
|
|||
Ultimate
loss ratio booked to at December 31, 2007
|
56.0
|
%
|
65.0
|
%
|
|||
Effect
of actual 5.0% above estimated loss ratio at December 31, 2007
|
($3,092
|
)
|
-
|
||||
Effect
of actual 5.0% below estimated loss ratio at December 31,
2007
|
$
|
1,237
|
$
|
1,897
|
Year
Claim Fee Revenue Recognized
|
|||||||||||||
1st
|
2nd
|
3rd
|
4th
|
||||||||||
Commercial
property fees
|
80
|
%
|
20
|
%
|
-
|
-
|
|||||||
Commercial
liability fees
|
60
|
%
|
30
|
%
|
10
|
%
|
-
|
||||||
Personal
property fees
|
90
|
%
|
10
|
%
|
-
|
-
|
|||||||
Personal
liability fees
|
49
|
%
|
33
|
%
|
12
|
%
|
6
|
%
|
Investments
|
$
|
19,597
|
||
Cash
and equivalents
|
2,199
|
|||
Premium
receivable
|
17,556
|
|||
Premium
finance notes receivable
|
6,146
|
|||
Reinsurance
recoverable
|
640
|
|||
Tradename
|
1,973
|
|||
Customer
relationships
|
19,417
|
|||
Non-compete/employment
agreements
|
2,477
|
|||
Goodwill
|
15,476
|
|||
Other
assets
|
7,178
|
|||
|
||||
Total
assets acquired
|
92,659
|
|||
Total
liabilities assumed
|
54,260
|
|||
|
||||
Net
assets acquired
|
$
|
38,399
|
Years
|
|
Tradename
|
15
|
Customer
relationships
|
15
|
Non-compete
agreements
|
5
|
2005
|
||||
Revenues
|
$
|
137,078
|
||
Net
income
|
10,103
|
|||
Net
income per share:
|
||||
Basic
|
$
|
0.84
|
||
Diluted
|
$
|
0.75
|
December
31,
|
|||||||
2007
|
|
2006
|
|||||
Gross
Carrying Amount:
|
|||||||
Customer/agent
relationships
|
$
|
22,729
|
$
|
22,729
|
|||
Tradename
|
2,682
|
2,682
|
|||||
Non-compete
& employment agreements
|
3,040
|
3,040
|
|||||
Total
gross carrying amount
|
28,451
|
28,451
|
|||||
Accumulated
Amortization:
|
|||||||
Customer/agent
relationships
|
(3,096
|
)
|
(1,590
|
)
|
|||
Tradename
|
(358
|
)
|
(179
|
)
|
|||
Non-compete
& employment agreements
|
(1,216
|
)
|
(608
|
)
|
|||
Total
accumulated amortization
|
(4,670
|
)
|
(2,377
|
)
|
|||
Total
net carrying amount
|
$
|
23,781
|
$
|
26,074
|
2008
|
$
|
2,293
|
||
2009
|
$
|
2,293
|
||
2010
|
$
|
2,293
|
||
2011
|
$
|
1,685
|
||
2012
|
$
|
1,685
|
Years
|
|
Tradename
|
15
|
Customer
relationships
|
15
|
Non-compete
agreements
|
5
|
2005
|
||||
Net
income
|
$
|
9,186
|
||
Add:
stock-based employee compensation expenses included in reported net
income, net of tax
|
41
|
|||
Deduct:
total stock-based employee compensation expense determined under
fair
value based method for all awards, net of tax
|
(48
|
)
|
||
Pro
forma net income
|
$
|
9,179
|
||
Net
income per share:
|
||||
Basic
- as reported
|
$
|
0.76
|
||
Basic
- pro forma
|
$
|
0.76
|
||
Diluted
- as reported
|
$
|
0.76
|
||
Diluted
- pro forma
|
$
|
0.76
|
2.
|
Investments:
|
||||||||
|
|
||||||||
|
Major
categories of net investment income (in thousands) are summarized
as
follows:
|
|
|
Years
ended December 31,
|
|
|||||||
|
|
2007
|
|
2006
|
|
2005
|
|
|||
|
|
|
|
|
|
|
|
|||
Debt
securities
|
|
$
|
7,436
|
|
$
|
6,587
|
|
$
|
2,806
|
|
Equity
securities
|
|
|
300
|
|
|
160
|
|
|
90
|
|
Short-term
investments
|
|
|
1,765
|
|
|
1,154
|
|
|
161
|
|
Cash
equivalents
|
|
|
3,890
|
|
|
2,683
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,391
|
|
|
10,584
|
|
|
3,899
|
|
Investment
expenses
|
|
|
(211
|
)
|
|
(123
|
)
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
13,180
|
|
$
|
10,461
|
|
$
|
3,836
|
|
|
At
December 31, 2007 we had an investment of $89.6 million in a U.S.
Treasury
Note with a maturity date of January 31, 2009 which exceeded 10%
of our
stockholders equity. No other investment in any entity or its affiliates
exceeded 10% of stockholders' equity at December 31, 2007, 2006 or
2005.
|
|
Major
categories of recognized gains (losses) on investments (in thousands)
are
summarized as follows:
|
|
|
Years
ended December 31,
|
|
|||||||
|
|
2007
|
|
2006
|
|
2005
|
|
|||
|
|
|
|
|
|
|
|
|||
Debt
securities
|
|
$
|
70
|
|
$
|
(461
|
)
|
$
|
14
|
|
Equity
securities
|
|
|
2,889
|
|
|
155
|
|
|
99
|
|
Short-term
investments
|
|
|
103
|
|
|
-
|
|
|
-
|
|
Realized
gains (losses)
|
|
|
3,062
|
|
|
(306
|
)
|
|
113
|
|
Other
than temporary impairments
|
|
|
(476
|
)
|
|
(1,160
|
)
|
|
(55
|
)
|
Recognized
gains (losses)
|
|
$
|
2,586
|
|
$
|
(1,466
|
)
|
$
|
58
|
|
|
The
amortized cost and estimated fair value of investments in debt and
equity
securities (in thousands) by category is as
follows:
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
||||
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
||||
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
||||
As
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
U.S.
Treasury securities and obligations of U.S. government corporations
and
agencies
|
|
$
|
98,900
|
|
$
|
147
|
|
$
|
-
|
|
$
|
99,047
|
|
Corporate
debt securities
|
|
|
51,786
|
|
|
46
|
|
|
1,736
|
|
|
50,096
|
|
Municipal
bonds
|
|
|
98,547
|
|
|
628
|
|
|
252
|
|
|
98,923
|
|
Mortgage
backed securities
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt securities
|
|
|
249,236
|
|
|
821
|
|
|
1,988
|
|
|
248,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
16,789
|
|
|
397
|
|
|
318
|
|
|
16,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term securities
|
|
|
2,622
|
|
|
4
|
|
|
1
|
|
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt and equity securities
|
|
$
|
268,647
|
|
$
|
1,222
|
|
$
|
2,307
|
|
$
|
267,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and obligations of U.S. government corporations
and
agencies
|
|
$
|
40,417
|
|
$
|
48
|
|
$
|
58
|
|
$
|
40,407
|
|
Corporate
debt securities
|
|
|
41,288
|
|
|
83
|
|
|
888
|
|
|
40,483
|
|
Municipal
bonds
|
|
|
52,244
|
|
|
192
|
|
|
304
|
|
|
52,132
|
|
Mortgage
backed securities
|
|
|
8
|
|
|
-
|
|
|
-
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt securities
|
|
|
133,957
|
|
|
323
|
|
|
1,250
|
|
|
133,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
4,146
|
|
|
453
|
|
|
19
|
|
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term securities
|
|
|
25,258
|
|
|
17
|
|
|
-
|
|
|
25,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt and equity securities
|
|
$
|
163,361
|
|
$
|
793
|
|
$
|
1,269
|
|
$
|
162,885
|
|
2.
|
Investments,
continued:
|
||||||
|
|
||||||
|
The
amortized cost and estimated fair value of investments in debt and
equity
securities with a gross unrealized loss position at December 31,
2007 and
2006 (in thousands) is as follows:
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Gross
Unrealized
Loss
|
|
|||
As
of December 31, 2007
|
|
|
|
|
|
|
|
|||
5
Equity Positions
|
|
$
|
7,272
|
|
$
|
6,954
|
|
$
|
318
|
|
45
Bond Positions
|
|
|
71,510
|
|
|
69,522
|
|
|
1,988
|
|
1
Short Term Position
|
|
|
353
|
|
|
352
|
|
|
1
|
|
|
|
$
|
79,135
|
|
$
|
76,828
|
|
$
|
2,307
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
10
Equity Positions
|
|
$
|
249
|
|
$
|
230
|
|
$
|
19
|
|
195
Bond Positions
|
|
|
73,589
|
|
|
72,339
|
|
|
1,250
|
|
|
|
$
|
73,838
|
|
$
|
72,569
|
|
$
|
1,269
|
|
|
Of
the gross unrealized loss at December 31, 2007, $1.0 million is more
than
twelve months old, consisting of 22 bond positions. Of the gross
unrealized loss at December 31, 2006, $1.2 million is more than twelve
months old, consisting of 139 bond positions. We consider these losses
as
a temporary decline in value as they are predominately on bonds where
we
believe we have the ability to hold our positions until maturity
and whose
decline in fair value is driven by interest rate increases. We see
no
other indications that the decline in value of these securities is
other
than temporary.
|
||||||
|
|
||||||
|
The
amortized cost and estimated fair value of debt securities at December
31,
2007 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.
|
Maturity
(in thousands):
|
|
Amortized
Cost
|
|
Fair
Value
|
|
||
Due
in one year or less
|
|
$
|
15,185
|
|
$
|
15,189
|
|
Due
after one year through five years
|
|
|
162,972
|
|
|
162,524
|
|
Due
after five years through ten years
|
|
|
53,942
|
|
|
53,305
|
|
Due
after ten years
|
|
|
19,756
|
|
|
19,673
|
|
Mortgage-backed
securities
|
|
|
3
|
|
|
3
|
|
|
|
$
|
251,858
|
|
$
|
250,694
|
|
At
December 31, 2007 and 2006, investments in debt securities with an
approximate carrying value of $18.5 million and $23.8 million,
respectively, were pledged for the benefit of various state insurance
departments, reinsurers and the sellers of our TGA Operating Unit.
|
3. |
Other
Assets:
|
|
|
2007
|
|
2006
|
|
||
Profit
sharing commission receivable
|
|
$
|
10,961
|
|
$
|
649
|
|
Accrued
investment income
|
|
|
4,104
|
|
|
2,002
|
|
Debt
issuance costs
|
|
|
1,465
|
|
|
826
|
|
Fixed
assets
|
|
|
1,272
|
|
|
1,644
|
|
Other
assets
|
|
|
79
|
|
|
63
|
|
|
|
$
|
17,881
|
|
$
|
5,184
|
|
4. |
Reserves
for Unpaid Losses and Loss Adjustment
Expenses:
|
|
|
2007
|
|
2006
|
|
2005
|
|
|||
|
|
|
|
|
|
|
|
|||
Balance
at January 1
|
|
$
|
77,564
|
|
$
|
26,321
|
|
$
|
19,648
|
|
Plus
acquisition of Phoenix at January 1
|
|
|
-
|
|
|
4,562
|
|
|
-
|
|
Less
reinsurance recoverable
|
|
|
4,763
|
|
|
324
|
|
|
1,948
|
|
Net
Balance at January 1
|
|
|
72,801
|
|
|
30,559
|
|
|
17,700
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred
related to:
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
139,332
|
|
|
88,294
|
|
|
36,184
|
|
Prior
years
|
|
|
(6,414
|
)
|
|
(1,177
|
)
|
|
(2,400
|
)
|
Total
incurred
|
|
|
132,918
|
|
|
87,117
|
|
|
33,784
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
related to:
|
|
|
|
|
|
|
|
|
|
|
Current
year
|
|
|
54,809
|
|
|
28,154
|
|
|
17,414
|
|
Prior
years
|
|
|
30,061
|
|
|
16,721
|
|
|
8,073
|
|
Total
paid
|
|
|
84,870
|
|
|
44,875
|
|
|
25,487
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Balance at December 31
|
|
|
120,849
|
|
|
72,801
|
|
|
25,997
|
|
Plus
reinsurance recoverable
|
|
|
4,489
|
|
|
4,763
|
|
|
324
|
|
Balance
at December 31
|
|
$
|
125,338
|
|
$
|
77,564
|
|
$
|
26,321
|
|
The
$6.4 million, $1.2 million and $2.4 million favorable development
in prior
accident years recognized in 2007, 2006 and 2005, respectively, represent
normal changes in our loss reserve estimates primarily attributable
to
favorable loss development in each of our segments. The loss reserve
estimates for prior years were decreased to reflect this favorable
loss
development when the available information indicated a reasonable
likelihood that the ultimate losses would be less than the previous
estimates.
|
5. |
Reinsurance:
|
2007
|
|
2006
|
|
2005
|
||||||
Premium
Written :
|
||||||||||
Direct
|
$
|
157,202
|
$
|
129,669
|
$
|
44,237
|
||||
Assumed
|
92,270
|
84,276
|
45,230
|
|||||||
Ceded
|
(11,329
|
)
|
(11,017
|
)
|
(1,215
|
)
|
||||
$
|
238,143
|
$
|
202,928
|
$
|
88,252
|
|||||
Premium
Earned:
|
||||||||||
Direct
|
$
|
151,276
|
$
|
97,082
|
$
|
23,747
|
||||
Assumed
|
86,804
|
65,134
|
35,885
|
|||||||
Ceded
|
(12,777
|
)
|
(10,155
|
)
|
(448
|
)
|
||||
$
|
225,303
|
$
|
152,061
|
$
|
59,184
|
|||||
Reinsurance
recoveries
|
$
|
3,862
|
$
|
5,225
|
$
|
(492
|
)
|
·
|
Property
catastrophe.
Our property catastrophe reinsurance reduces the financial impact
a
catastrophe could have on our commercial property insurance lines.
Catastrophes might include multiple claims and policyholders. Catastrophes
include hurricanes, windstorms, earthquakes, hailstorms, explosions,
severe winter weather and fires. Our property catastrophe reinsurance
is
excess-of-loss reinsurance, which provides us reinsurance coverage
for
losses in excess of an agreed-upon amount. We utilize catastrophe
models
to assist in determining appropriate retention and limits to purchase.
The
terms of our property catastrophe reinsurance, effective July 1,
2007,
are:
|
·
|
We
retain the first $2.0 million of property catastrophe losses;
and
|
·
|
Our
reinsurers reimburse us 100% for each $1.00 of loss in excess of
our $2.0
million retention up to $28.0 million for each catastrophic occurrence,
subject to a maximum of two events for the contractual
term.
|
·
|
Commercial
property.
Our commercial property reinsurance is excess-of-loss coverage intended
to
reduce the financial impact a single-event or catastrophic loss may
have
on our results. The terms of our commercial property reinsurance,
effective July 1, 2007, are:
|
·
|
We
retain the first $1.0 million of loss for each commercial property
risk;
|
·
|
Our
reinsurers reimburse us for the next $5.0 million for each commercial
property risk; and
|
·
|
Individual
risk facultative reinsurance is purchased on any commercial property
with
limits above $6.0 million.
|
·
|
Commercial
casualty.
Our commercial casualty reinsurance is excess-of-loss coverage intended
to
reduce the financial impact a single-event loss may have on our results.
The terms of our commercial casualty reinsurance, effective July
1, 2007,
are:
|
·
|
We
retain the first $1.0 million of any commercial liability risk; and
|
·
|
Our
reinsurers reimburse us for the next $5.0 million for each commercial
liability risk.
|
·
|
Aviation.
We
purchase reinsurance specific to the aviation risks underwritten
by our
Aerospace Operating Unit. This reinsurance provides aircraft hull
and
liability coverage and airport liability coverage on a per occurrence
basis on the following terms:
|
·
|
We
retain the first $350,000 of each aircraft hull or liability loss
or
airport liability loss;
|
·
|
Our
reinsurers reimburse us for the next $1.15 million of each aircraft
hull
loss and for the next $650,000 of each airport liability loss;
and
|
·
|
Our
reinsurers provide additional reimbursement of $4.0 million for each
airport liability loss and aircraft liability loss, excluding passenger
liability.
|
7. |
Structured
Settlements
|
8. |
Credit
Facilities:
|
9. |
Segment
Information:
|
·
|
Standard
Commercial Segment.
The Standard Commercial Segment includes the standard lines commercial
property/casualty insurance products and services handled by our
HGA
Operating Unit which is comprised of our American Hallmark Insurance
Services and ECM subsidiaries.
|
·
|
Specialty
Commercial Segment.
The Specialty Commercial Segment primarily includes the excess and
surplus
lines commercial property/casualty insurance products and services
handled
by our TGA Operating Unit and the general aviation insurance products
and
services handled by our Aerospace Operating Unit. The Specialty Commercial
Segment also includes a relatively small amount of non-strategic
legacy
personal lines insurance products handled by our TGA Operating Unit.
Our
TGA Operating Unit is comprised of our Texas General Agency, PAAC
and
TGARSI subsidiaries. Our Aerospace Operating Unit is comprised of
our
Aerospace Insurance Managers, ASRI and ACMG subsidiaries. All of
the
subsidiaries included in the Specialty Commercial Segment were acquired
effective January 1, 2006.
|
·
|
Personal
Segment.
The Personal Segment includes the non-standard personal automobile
insurance products and services handled by our Phoenix Operating
Unit
which is comprised of American Hallmark General Agency, Inc. and
Hallmark
Claims Services, Inc., both of which do business as Phoenix General
Agency.
|
·
|
American
Hallmark Insurance Company of Texas
presently retains all of the risks on the commercial property/casualty
policies marketed within the Standard Commercial Segment and assumes
a
portion of the risks on the commercial and aviation property/casualty
policies marketed within the Specialty Commercial Segment.
|
·
|
Hallmark
Specialty Insurance Company,
which was acquired effective January 1, 2006, presently assumes a
portion
of the risks on the commercial property/casualty policies marketed
within
the Specialty Commercial Segment.
|
·
|
Phoenix
Indemnity Insurance Company
presently assumes all of the risks on the non-standard personal automobile
policies marketed within the Personal Segment and assumes a portion
of the
risks on the aviation property/casualty products marketed within
the
Specialty Commercial Segment.
|
2007
|
|
2006
|
|
2005
|
||||||
Revenues
|
||||||||||
Standard
Commercial Segment
|
$
|
86,139
|
$
|
75,325
|
$
|
43,067
|
||||
Speciality
Commercial Segment
|
126,255
|
80,689
|
-
|
|||||||
Personal
Segment
|
58,268
|
46,998
|
43,907
|
|||||||
Corporate
|
3,836
|
(271
|
)
|
61
|
||||||
Consolidated
|
$
|
274,498
|
$
|
202,741
|
$
|
87,035
|
||||
Depreciation
Expense
|
||||||||||
Standard
Commercial Segment
|
$
|
188
|
$
|
183
|
$
|
144
|
||||
Speciality
Commercial Segment
|
343
|
468
|
-
|
|||||||
Personal
Segment
|
222
|
238
|
226
|
|||||||
Corporate
|
73
|
32
|
16
|
|||||||
Consolidated
|
$
|
826
|
$
|
921
|
$
|
386
|
||||
Interest
Expense
|
||||||||||
Standard
Commercial Segment
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
Speciality
Commercial Segment
|
151
|
258
|
-
|
|||||||
Personal
Segment
|
1
|
4
|
10
|
|||||||
Corporate
|
3,762
|
5,536
|
1,254
|
|||||||
Consolidated
|
$
|
3,914
|
$
|
5,798
|
$
|
1,264
|
||||
Tax
Expense
|
||||||||||
Standard
Commercial Segment
|
$
|
3,211
|
$
|
2,759
|
$
|
1,194
|
||||
Speciality
Commercial Segment
|
8,426
|
4,279
|
-
|
|||||||
Personal
Segment
|
1,956
|
2,072
|
3,225
|
|||||||
Corporate
|
79
|
(3,976
|
)
|
(137
|
)
|
|||||
Consolidated
|
$
|
13,672
|
$
|
5,134
|
$
|
4,282
|
||||
Pre-tax
Income
|
||||||||||
Standard
Commercial Segment
|
$
|
12,042
|
$
|
11,757
|
$
|
6,651
|
||||
Speciality
Commercial Segment
|
28,043
|
14,309
|
-
|
|||||||
Personal
Segment
|
7,523
|
8,760
|
11,647
|
|||||||
Corporate
|
(6,507
|
)
|
(20,501
|
)
|
(4,830
|
)
|
||||
Consolidated
|
$
|
41,101
|
$
|
14,325
|
$
|
13,468
|
9. |
Segment
Information,
continued
|
December
31,
|
|||||||
2007
|
2006
|
||||||
Assets
|
|||||||
Standard
Commercial Segment
|
$
|
211,428
|
$
|
133,697
|
|||
Specialty
Commercial Segment
|
229,138
|
162,441
|
|||||
Personal
Segment
|
100,986
|
71,754
|
|||||
Corporate
|
64,762
|
48,061
|
|||||
Consolidated
|
$
|
606,314
|
$
|
415,953
|
10. |
Earnings
Per Share
|
2007
|
|
2006
|
|
2005
|
||||||
Numerator
for both basic and diluted earnings per share:
|
||||||||||
Net
income
|
$
|
27,429
|
$
|
9,191
|
$
|
9,186
|
||||
Denominator,
basic shares
|
20,768
|
17,181
|
12,008
|
|||||||
Effect
of dilutive securities:
|
||||||||||
Stock
options
|
-
|
13
|
96
|
|||||||
Denominator,
diluted shares
|
20,768
|
17,194
|
12,104
|
|||||||
Basic
earnings (loss) per share:
|
$
|
1.32
|
$
|
0.53
|
$
|
0.76
|
||||
Diluted
earnings (loss) per share:
|
$
|
1.32
|
$
|
0.53
|
$
|
0.76
|
||||
11. |
Regulatory
Capital Restrictions:
|
12. |
Share-based
Payment Arrangements:
|
|
|
|
|
Average
|
|
|
|
||||||
|
|
|
|
Weighted
|
|
Remaining
|
|
Aggregate
|
|
||||
|
|
|
|
Average
|
|
Contractual
|
|
Intrinsic
|
|
||||
|
|
Number
of
|
|
Exercise
|
|
Term
|
|
Value
|
|
||||
|
|
Shares
|
|
Price
|
|
(Years)
|
|
($000)
|
|||||
Outstanding
at January 1, 2007
|
332,334
|
$
|
7.04
|
-
|
-
|
||||||||
Granted
|
520,000
|
$
|
12.52
|
-
|
-
|
||||||||
Exercised
|
-
|
$
|
-
|
-
|
-
|
||||||||
Forfeited
or expired
|
4,334
|
$
|
5.08
|
-
|
-
|
||||||||
Outstanding
at December 31, 2007
|
848,000
|
$
|
10.41
|
7.9
|
$
|
4,620
|
|||||||
Exercisable
at December 31, 2007
|
176,250
|
$
|
6.54
|
4.7
|
$
|
1,643
|
2007
|
|
2006
|
|
2005
|
||||||
Intrinsic
value of options exercised
|
$
|
-
|
$
|
162
|
$
|
260
|
||||
Cost
of share-based payments (non-cash)
|
$
|
527
|
$
|
157
|
$
|
63
|
||||
Income
tax benefit of share-based payments
|
||||||||||
recognized
in income
|
$
|
185
|
$
|
55
|
$
|
22
|
2007
|
|
2006
|
|
2005
|
||||||
Grant
date fair value per share
|
$
|
4.04
|
$
|
6.26
|
$
|
4.01
|
||||
Expected
term
|
6
|
5
|
5
|
|||||||
Expected
volatility
|
19.4
|
%
|
59.1
|
%
|
62.5
|
%
|
||||
Risk
free interest rate
|
4.5
|
%
|
4.9
|
%
|
3.9
|
%
|
13. |
Retirement
Plans:
|
2007
|
|
2006
|
|
2005
|
||||||
Assumptions
(end of period):
|
||||||||||
Discount
rate used in determining benefit obligation
|
5.75
|
%
|
5.75
|
%
|
5.50
|
%
|
||||
Rate
of compensation increase
|
N/A
|
N/A
|
N/A
|
|||||||
Reconciliation
of funded status (end of period):
|
||||||||||
Accumulated
benefit obligation
|
$
|
(12,053
|
)
|
$
|
(12,994
|
)
|
$
|
(12,959
|
)
|
|
Projected
benefit obligation
|
$
|
(12,053
|
)
|
$
|
(12,994
|
)
|
$
|
(12,959
|
)
|
|
Fair
value of plan assets
|
10,384
|
9,868
|
10,027
|
|||||||
Funded
status
|
$
|
(1,669
|
)
|
$
|
(3,126
|
)
|
$
|
(2,932
|
)
|
|
Net
actuarial loss
|
(1,752
|
)
|
(3,130
|
)
|
(2,847
|
)
|
||||
Accumulated
other comprehensive loss
|
(1,752
|
)
|
(3,130
|
)
|
(2,847
|
)
|
||||
Prepaid/(accrued)
pension cost
|
83
|
4
|
(85
|
)
|
||||||
Net
amount recognized as of December 31
|
$
|
(1,669
|
)
|
$
|
(3,126
|
)
|
$
|
(2,932
|
)
|
|
Changes
in projected benefit obligation:
|
||||||||||
Benefit
obligation as of beginning of period
|
$
|
12,994
|
$
|
12,959
|
$
|
13,081
|
||||
Interest
cost
|
720
|
720
|
724
|
|||||||
Actuarial
liability (gain)/loss
|
(749
|
)
|
198
|
352
|
||||||
Benefits
paid
|
(912
|
)
|
(883
|
)
|
(1,198
|
)
|
||||
Benefit
obligation as of end of period
|
$
|
12,053
|
$
|
12,994
|
$
|
12,959
|
||||
Change
in plan assets:
|
||||||||||
Fair
value of plan assets as of beginning of period
|
$
|
9,868
|
$
|
10,027
|
$
|
10,901
|
||||
Actual
return on plan assets (net of expenses)
|
1,073
|
321
|
192
|
|||||||
Employer
contributions
|
355
|
403
|
132
|
|||||||
Benefits
paid
|
(912
|
)
|
(883
|
)
|
(1,198
|
)
|
||||
Fair
value of plan assets as of end of period
|
$
|
10,384
|
$
|
9,868
|
$
|
10,027
|
||||
Net
periodic pension cost:
|
||||||||||
Service
cost - benefits earned during the period
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
Interest
cost on projected benefit obligation
|
720
|
720
|
724
|
|||||||
Expected
return on plan assets
|
(642
|
)
|
(633
|
)
|
(682
|
)
|
||||
Recognized
actuarial loss
|
199
|
227
|
81
|
|||||||
Net
periodic pension cost
|
$
|
277
|
$
|
314
|
$
|
123
|
||||
Discount
rate
|
5.75
|
%
|
5.50
|
%
|
5.75
|
%
|
||||
Expected
return on plan assets
|
6.50
|
%
|
6.50
|
%
|
6.50
|
%
|
||||
Rate
of compensation increase
|
N/A
|
N/A
|
N/A
|
Estimated
future benefit payments by fiscal year (in thousands):
|
||||
2008
|
$
|
892
|
||
2009
|
$
|
883
|
||
2010
|
$
|
881
|
||
2011
|
$
|
880
|
||
2012
|
$
|
878
|
||
2013-2017
|
$
|
4,362
|
12/31/07
|
|
12/31/06
|
|||||
Asset
Category:
|
|||||||
Fixed
income securities
|
35
|
%
|
34
|
%
|
|||
Equity
securities
|
63
|
%
|
62
|
%
|
|||
Other
|
2
|
%
|
4
|
%
|
|||
Total
|
100
|
%
|
100
|
%
|
14. |
Income
Taxes:
|
The
composition of deferred tax assets and liabilities and the related
tax
effects (in thousands) as of December 31, 2007 and 2006, are as
follows:
|
|
2007
|
2006
|
|||||
Deferred
tax liabilities:
|
|||||||
Deferred
policy acquisition costs
|
$
|
(6,915
|
)
|
$
|
(6,425
|
)
|
|
Profit
sharing commission
|
(-
|
)
|
(257
|
)
|
|||
Agency
relationship
|
(142
|
)
|
(151
|
)
|
|||
Intangible
assets
|
(8,182
|
)
|
(8,975
|
)
|
|||
Fixed
assets
|
(100
|
)
|
(166
|
)
|
|||
Purchase
discount
|
(2
|
)
|
(156
|
)
|
|||
Other
|
(242
|
)
|
(183
|
)
|
|||
Total
deferred tax liabilities
|
$
|
(15,583
|
)
|
$
|
(16,313
|
)
|
|
Deferred
tax assets:
|
|||||||
Unearned
premiums
|
$
|
7,197
|
$
|
6,398
|
|||
Deferred
ceding commissions
|
942
|
1,315
|
|||||
Amortization
of non-compete agreements
|
774
|
-
|
|||||
Pension
liability
|
584
|
1,096
|
|||||
Net
operating loss carry-forward
|
1,217
|
1,217
|
|||||
Unrealized
holding losses on investments
|
380
|
166
|
|||||
Allowance
for bad debt
|
-
|
9
|
|||||
Unpaid
loss and loss adjustment expense
|
3,280
|
2,030
|
|||||
Goodwill
|
929
|
1,083
|
|||||
Rent
reserve
|
57
|
80
|
|||||
Investment
impairments
|
408
|
242
|
|||||
Unearned
revenue
|
-
|
20
|
|||||
Capital
loss
|
-
|
410
|
|||||
Other
|
90
|
140
|
|||||
Total
deferred tax assets
|
$
|
15,858
|
$
|
14,206
|
|||
|
|||||||
Net
deferred tax asset (liability) before valuation allowance
|
275
|
(2,107
|
)
|
||||
Valuation
allowance
|
-
|
203
|
|||||
Net
deferred tax asset (liability)
|
$
|
275
|
$
|
(2,310
|
)
|
14. |
Income
Taxes,
continued:
|
A
reconciliation of the income tax provisions (in thousands)
based on the
statutory tax rate to the provision reflected in the consolidated
financial statements for the years ended December 31, 2007,
2006 and 2005,
is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|||||
Computed
expected income tax expense
|
|
|
|
|||||||
at
statutory regulatory tax rate
|
$
|
14,385
|
$
|
5,014
|
$
|
4,579
|
||||
Meals
and entertainment
|
23
|
15
|
6
|
|||||||
Tax
exempt interest
|
(813
|
)
|
(507
|
)
|
(302
|
)
|
||||
Dividends
received deduction
|
(43
|
)
|
(9
|
)
|
(11
|
)
|
||||
State
taxes (net of federal benefit)
|
194
|
301
|
158
|
|||||||
Valuation
allowance
|
(203
|
)
|
203
|
-
|
||||||
Other
|
129
|
117
|
(148
|
)
|
||||||
Income
tax expense
|
$
|
13,672
|
$
|
5,134
|
$
|
4,282
|
||||
|
||||||||||
Current
income tax expense
|
$
|
15,153
|
$
|
11,663
|
$
|
2,139
|
||||
Deferred
tax expense (benefit)
|
(1,481
|
)
|
(6,529
|
)
|
2,143
|
|||||
Income
tax expense
|
$
|
13,672
|
$
|
5,134
|
$
|
4,282
|
Approximately
$0.1 million of the 2007 current income tax provision results from
tax
deductible goodwill from the PIIC acquisition.
|
||||||||||||||||||||||
We
have available, for federal income tax purposes, unused net operating
loss
of approximately $3.5 million at December 31, 2007. The losses were
acquired as part of the PIIC acquisition and may be used to offset
future
taxable income. Utilization of the losses is limited under Internal
Revenue Code Section 382. The Internal Revenue Code has provided
that
effective with tax years beginning September 1997, the carry-back
and
carry-forward periods are 2 years and 20 years, respectively, with
respect
to newly generated operating losses. The net operating losses (in
thousands) will expire, if unused, as
follows:
|
Year
|
||||
2021
|
$
|
2,600
|
||
2022
|
878
|
|||
$
|
3,478
|
15. |
Commitments
and Contingencies:
|
We
have several leases, primarily for office facilities and computer
equipment, which expire in various years through 2011. Certain
of these
leases contain renewal options. Rental expense amounted to $2.1
million,
$1.9 million and $1.2 million for the years ended December 31,
2007, 2006
and 2005, respectively.
|
Future
minimum lease payments (in thousands) under non-cancelable operating
leases as of December 31, 2007 are as
follows:
|
Year
|
||||
2008
|
$
|
1,711
|
||
2009
|
1,074
|
|||
2010
|
840
|
|||
2011
|
284
|
|||
2012
|
-
|
|||
2013
and thereafter
|
-
|
|||
|
||||
Total
minimum lease payments
|
$
|
3,909
|
16.
|
Concentrations
of Credit Risk:
|
2007
|
2006
|
||||||||||||||||||||||||
Q1
|
Q2
|
Q3
|
Q4
|
Q1
|
Q2
|
Q3
|
Q4
|
||||||||||||||||||
Total
revenue
|
$
|
63,958
|
$
|
68,736
|
$
|
72,218
|
$
|
69,586
|
$
|
44,520
|
$
|
47,187
|
$
|
56,365
|
$
|
54,669
|
|||||||||
Total
expense
|
56,245
|
55,804
|
62,409
|
58,939
|
40,991
|
50,969
|
48,733
|
47,723
|
|||||||||||||||||
Income
(loss) before tax
|
7,713
|
12,932
|
9,809
|
10,647
|
3,529
|
(
3,782
|
)
|
7,632
|
6,946
|
||||||||||||||||
Income
tax expense (benefit)
|
2,743
|
4,117
|
3,227
|
3,585
|
1,103
|
(940
|
)
|
2,755
|
2,216
|
||||||||||||||||
Net
income (loss)
|
$
|
4,970
|
$
|
8,815
|
$
|
6,582
|
$
|
7,062
|
$
|
2,426
|
($2,842
|
)
|
$
|
4,877
|
$
|
4,730
|
|||||||||
Basic
earnings per share:
|
$
|
0.24
|
$
|
0.42
|
$
|
0.32
|
$
|
0.34
|
$
|
0.17
|
($0.18
|
)
|
$
|
0.27
|
$
|
0.23
|
|||||||||
Diluted
earnings per share:
|
$
|
0.24
|
$
|
0.42
|
$
|
0.32
|
$
|
0.34
|
$
|
0.17
|
($0.18
|
)
|
$
|
0.27
|
$
|
0.23
|
HALLMARK
FINANCIAL SERVICES, INC.
|
||||
BALANCE
SHEETS
|
||||
December
31, 2007 and 2006
|
||||
(In
thousands)
|
2007
|
|
2006
|
|||||
ASSETS
|
|||||||
Debt
securities, available-for-sale, at fair value
|
$
|
-
|
$
|
4,969
|
|||
Equity
securities, available-for-sale, at fair value
|
11,467
|
998
|
|||||
Cash
and cash equivalents
|
14,226
|
2,910
|
|||||
Restricted
cash
|
10,644
|
20,862
|
|||||
Investment
in subsidiaries
|
214,335
|
184,792
|
|||||
Accounts
receivable
|
-
|
184
|
|||||
Current
federal income tax receivable
|
-
|
1,920
|
|||||
Deferred
federal income taxes
|
289
|
-
|
|||||
Other
assets
|
2,651
|
2,201
|
|||||
$
|
253,612
|
$
|
218,836
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Liabilities:
|
|||||||
Notes
payable
|
$
|
59,503
|
$
|
33,729
|
|||
Structured
settlements
|
10,000
|
24,587
|
|||||
Unpaid
losses and loss adjustment expenses
|
1
|
16
|
|||||
Current
federal income tax payable
|
724
|
-
|
|||||
Deferred
federal income taxes
|
-
|
101
|
|||||
Accounts
payable and other accrued expenses
|
4,197
|
9,672
|
|||||
74,425
|
68,105
|
||||||
Stockholders’
equity:
|
|||||||
Common
stock, $.18 par value, authorized 33,333,333 shares;
|
|||||||
issued
20,776,080 shares in 2007 and 2006
|
3,740
|
3,740
|
|||||
Capital
in excess of par value
|
118,459
|
117,932
|
|||||
Retained
earnings
|
58,909
|
31,480
|
|||||
Accumulated
other comprehensive income
|
(1,844
|
)
|
(2,344
|
)
|
|||
Treasury
stock, 7,828 shares in 2007 and 2006, at cost
|
(77
|
)
|
(77
|
)
|
|||
Total
stockholders’ equity
|
179,187
|
150,731
|
|||||
Total
liabilities and stockholder’s equity
|
$
|
253,612
|
$
|
218,836
|
HALLMARK
FINANCIAL SERVICES, INC.
|
||||||||||
STATEMENTS
OF OPERATIONS
|
||||||||||
for
the years ended December 31, 2007, 2006 and
2005
|
||||||||||
(In
thousands)
|
||||||||||
2007
|
|
2006
|
|
2005
|
||||||
Investment
income, net of expenses
|
$
|
457
|
$
|
1,195
|
$
|
61
|
||||
Realized
gain (loss)
|
508
|
(3
|
)
|
-
|
||||||
Management
fee income
|
7,205
|
9,413
|
4,830
|
|||||||
8,170
|
10,605
|
4,891
|
||||||||
Losses
and loss adjustment expenses
|
(15
|
)
|
(33
|
)
|
(65
|
)
|
||||
Other
operating costs and expenses
|
6,596
|
5,102
|
3,701
|
|||||||
Interest
expense
|
3,762
|
5,536
|
1,254
|
|||||||
Interest
expense from amortization of discount on
|
||||||||||
convertible
notes
|
-
|
9,625
|
-
|
|||||||
10,343
|
20,230
|
4,890
|
||||||||
Income
(loss) before equity in undistributed earnings of subsidiaries and
income
tax expense
|
(2,173
|
)
|
(9,625
|
)
|
1
|
|||||
Income
tax benefit
|
(653
|
)
|
(3,464
|
)
|
(137
|
)
|
||||
Income
(loss) before equity in undistributed earnings of
subsidiaries
|
(1,520
|
)
|
(6,161
|
)
|
138
|
|||||
Equity
in undistributed share of net earnings in subsidiaries
|
28,949
|
15,352
|
9,048
|
|||||||
Net
income
|
$
|
27,429
|
$
|
9,191
|
$
|
9,186
|
HALLMARK
FINANCIAL SERVICES, INC.
|
|||||
STATEMENT
OF CASH FLOW
|
|||||
For
the years ended December 31, 2007, 2006 and
2005
|
|||||
(In
thousands)
|
2007
|
|
2006
|
|
2005
|
||||||
Cash
flows from operating activities:
|
||||||||||
Net
income
|
$
|
27,429
|
$
|
9,191
|
$
|
9,186
|
||||
Adjustments
to reconcile net income to cash used in operating
activities:
|
||||||||||
Depreciation
and amortization expense
|
486
|
1,077
|
16
|
|||||||
Amortization
of discount on convertible notes
|
-
|
9,625
|
-
|
|||||||
Deferred
income tax expense (benefit)
|
170
|
(3,877
|
)
|
14
|
||||||
Change
in unpaid losses and loss adjustment expenses
|
(15
|
)
|
(33
|
)
|
(65
|
)
|
||||
Undistributed
share of net earnings of subsidiaries
|
(28,949
|
)
|
(15,352
|
)
|
(9,048
|
)
|
||||
Recognized
investment losses (gains)
|
(508
|
)
|
3
|
-
|
||||||
Change
in accounts receivable
|
184
|
(184
|
)
|
-
|
||||||
Change
in current federal income tax payable/recoverable
|
2,644
|
(2,413
|
)
|
(566
|
)
|
|||||
Excess
tax benefits from share-based payments
|
-
|
(25
|
)
|
-
|
||||||
Change
in all other liabilities
|
(5,475
|
)
|
2,930
|
2,928
|
||||||
Change
in all other assets
|
209
|
699
|
(286
|
)
|
||||||
Net
cash provided by (used in) operating activities
|
(3,825
|
)
|
1,641
|
2,179
|
||||||
Cash
flows from investing activities:
|
||||||||||
Purchases
of property and equipment
|
(50
|
)
|
(206
|
)
|
(30
|
)
|
||||
Acquisition
of subsidiaries
|
-
|
(27,396
|
)
|
-
|
||||||
Change
in restricted cash
|
10,218
|
(20,862
|
)
|
-
|
||||||
Purchase
of fixed maturity and equity securities
|
(60,580
|
)
|
(24,747
|
)
|
(928
|
)
|
||||
Maturities
and redemptions of investment securities
|
55,453
|
19,989
|
-
|
|||||||
Capital
contributed to insurance company subsidiaries
|
-
|
-
|
(75,000
|
)
|
||||||
Net
cash provided by (used in) investing activities
|
5,041
|
(53,222
|
)
|
(75,958
|
)
|
|||||
Cash
flows from financing activities:
|
||||||||||
Proceeds
from exercise of employee stock options
|
-
|
36
|
230
|
|||||||
Excess
tax benefits from share-based payments
|
-
|
25
|
-
|
|||||||
Proceeds
from borrowings
|
25,774
|
52,500
|
30,928
|
|||||||
Debt
issuance costs
|
(674
|
)
|
-
|
(907
|
)
|
|||||
Proceeds
from equity offerings
|
-
|
24,689
|
44,891
|
|||||||
Repayment
of borrowings
|
(15,000
|
)
|
(24,700
|
)
|
-
|
|||||
Net
cash provided by financing activities
|
10,100
|
52,550
|
75,142
|
|||||||
Increase
in cash and cash equivalents
|
11,316
|
969
|
1,363
|
|||||||
Cash
and cash equivalents at beginning of year
|
2,910
|
1,941
|
578
|
|||||||
Cash
and cash equivalents at end of year
|
$
|
14,226
|
$
|
2,910
|
$
|
1,941
|
||||
Supplemental
cash flow information:
|
||||||||||
Interest
paid
|
$
|
(3,250
|
)
|
$
|
(4,417
|
)
|
$
|
(1,157
|
)
|
|
Income
taxes recovered (paid)
|
$
|
2,957
|
$
|
(2,516
|
)
|
$
|
(415
|
)
|
Hallmark
Financial Services
|
||||||||||
Schedule
III - Supplementary Insurance Information
|
||||||||||
(In
thousands)
|
Column
A
|
Column
B
|
|
Column
C
|
|
Column
D
|
|
Column
E
|
|
Column
F
|
|
Column
G
|
|
Column
H
|
|
Column
I
|
|
Column
J
|
|
Column
K
|
||||||||||||
Segment
|
|
Deferred
Policy
Acquisition
Cost
|
|
Future
Policy
Benefits,
Losses,
Claims
and
Loss
Adjustment
Expenses
|
|
Unearned
Premiums
|
|
Other
Policy
Claims
and
Benefits
Payable
|
|
Premium
Revenue
|
|
Net
Investment
Income
|
|
Benefits,
Claims,
Losses
and
Settlement
Expenses
|
|
Amortization
of
Deferred
Policy
Acquisition
Costs
|
|
Other
Operating
Expenses
|
Premiums
Written
|
||||||||||||
2007
|
|||||||||||||||||||||||||||||||
Personal
Segment
|
$
|
2,436
|
$
|
19,939
|
$
|
10,991
|
$
|
-
|
$
|
53,505
|
$
|
1,717
|
$
|
35,969
|
$
|
11,459
|
$
|
15,291
|
$
|
55,916
|
|||||||||||
Standard
Commercial Segment
|
8,019
|
81,417
|
42,664
|
-
|
83,382
|
5,304
|
48,480
|
23,006
|
25,869
|
84,222
|
|||||||||||||||||||||
Specialty
Commercial Segment
|
9,302
|
23,981
|
49,343
|
-
|
88,416
|
4,911
|
48,484
|
20,642
|
49,128
|
98,005
|
|||||||||||||||||||||
Corporate
|
-
|
1
|
-
|
-
|
-
|
1,248
|
(15
|
)
|
-
|
6,596
|
-
|
||||||||||||||||||||
Consolidated
|
$
|
19,757
|
$
|
125,338
|
$
|
102,998
|
$
|
-
|
$
|
225,303
|
$
|
13,180
|
$
|
132,918
|
$
|
55,107
|
$
|
96,884
|
$
|
238,143
|
|||||||||||
2006
|
|||||||||||||||||||||||||||||||
Personal
Segment
|
$
|
1,919
|
$
|
17,597
|
$
|
8,581
|
$
|
-
|
$
|
42,317
|
$
|
2,301
|
$
|
26,443
|
$
|
9,382
|
$
|
12,392
|
$
|
45,135
|
|||||||||||
Standard
Commercial Segment
|
7,740
|
36,596
|
43,272
|
-
|
70,074
|
3,737
|
38,799
|
16,520
|
24,636
|
82,220
|
|||||||||||||||||||||
Specialty
Commercial Segment
|
7,486
|
23,355
|
39,753
|
-
|
39,670
|
3,228
|
21,908
|
6,651
|
49,432
|
75,573
|
|||||||||||||||||||||
Corporate
|
-
|
16
|
-
|
-
|
-
|
1,195
|
(33
|
)
|
-
|
5,102
|
-
|
||||||||||||||||||||
Consolidated
|
$
|
17,145
|
$
|
77,564
|
$
|
91,606
|
$
|
-
|
$
|
152,061
|
$
|
10,461
|
$
|
87,117
|
$
|
32,553
|
$
|
91,562
|
$
|
202,928
|
|||||||||||
2005
|
|||||||||||||||||||||||||||||||
Personal
Segment
|
$
|
1,318
|
$
|
16,457
|
$
|
5,762
|
$
|
-
|
$
|
37,433
|
$
|
2,283
|
$
|
21,239
|
$
|
11,626
|
$
|
10,839
|
$
|
37,003
|
|||||||||||
Standard
Commercial Segment
|
7,846
|
9,815
|
30,265
|
-
|
21,751
|
1,492
|
12,610
|
15,216
|
30,448
|
51,249
|
|||||||||||||||||||||
Corporate
|
-
|
49
|
-
|
-
|
-
|
61
|
(65
|
)
|
-
|
3,701
|
-
|
||||||||||||||||||||
Consolidated
|
$
|
9,164
|
$
|
26,321
|
$
|
36,027
|
$
|
-
|
$
|
59,184
|
$
|
3,836
|
$
|
33,784
|
$
|
26,842
|
$
|
44,988
|
$
|
88,252
|
Hallmark
Financial Services
|
||||||||||||||||
Schedule
IV - Reinsurance
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
Column
F
|
|||||||||||
|
Gross
Amount
|
Ceded
to
Other
Companies
|
Assumed
From
Other
Companies
|
Net
Amount
|
Percentage
of
Amount
Assumed
to
Net
|
|||||||||||
Year
Ended December 31, 2007
|
||||||||||||||||
Life
insurance in force
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
Premiums
|
||||||||||||||||
Life
insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Accident
and health insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Property
and liability insurance
|
151,276
|
12,777
|
86,804
|
225,303
|
38.5
|
%
|
||||||||||
Title
Insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Total
premiums
|
$
|
151,276
|
$
|
12,777
|
$
|
86,804
|
$
|
225,303
|
38.5
|
%
|
||||||
Year
Ended December 31, 2006
|
||||||||||||||||
Life
insurance in force
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
Premiums
|
||||||||||||||||
Life
insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Accident
and health insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Property
and liability insurance
|
97,082
|
10,155
|
65,134
|
152,061
|
42.8
|
%
|
||||||||||
Title
Insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Total
premiums
|
$
|
97,082
|
$
|
10,155
|
$
|
65,134
|
$
|
152,061
|
42.8
|
%
|
||||||
Year
Ended December 31, 2005
|
||||||||||||||||
Life
insurance in force
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
Premiums
|
||||||||||||||||
Life
insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Accident
and health insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Property
and liability insurance
|
23,747
|
448
|
35,885
|
59,184
|
60.6
|
%
|
||||||||||
Title
Insurance
|
-
|
-
|
-
|
-
|
||||||||||||
Total
premiums
|
$
|
23,747
|
$
|
448
|
$
|
35,885
|
$
|
59,184
|
60.6
|
%
|
||||||
Hallmark
Financial Services
|
||||||||||||||||||||||||||||||||||
Schedule
VI - Supplemental Information Concerning Property-Casualty Insurance
Operations
|
||||||||||||||||||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||||||||||||
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
Column
F
|
Column
G
|
Column
H
|
Column
I
|
Column
J
|
Column
K
|
||||||||||||||||||||||||
Claims
and Claim Adjustment
|
||||||||||||||||||||||||||||||||||
|
|
Expenses
Incurred Related to
|
|
|||||||||||||||||||||||||||||||
Affiliation
With
Registrant
|
Deferred
Policy
Acquisition
Costs
|
Reserves
for
Unpaid
Claims
and
Claim
Adjustment
Expenses
|
Discount
if
any,
Deducted
In
Column
C
|
Unearned
Premiums
|
Earned
Premiums
|
Net
Investment
Income
|
(1)
Current
Year
|
(2)
Prior
Years
|
Amortization
of
Deferred
Policy
Acquisition
Costs
|
Paid
Claims
and
Claims
Adjustment
Expenses
|
Premiums
Written
|
|||||||||||||||||||||||
(a)
Consolidated
|
||||||||||||||||||||||||||||||||||
property-casualty
|
||||||||||||||||||||||||||||||||||
Entities
|
||||||||||||||||||||||||||||||||||
2007
|
$
|
19,757
|
$
|
125,338
|
$
|
-
|
$
|
102,998
|
$
|
225,303
|
$
|
13,180
|
$
|
139,332
|
$
|
(6,414
|
)
|
$
|
55,107
|
$
|
84,870
|
$
|
238,143
|
|||||||||||
2006
|
$
|
17,145
|
$
|
77,564
|
$
|
-
|
$
|
91,606
|
$
|
152,061
|
$
|
10,461
|
$
|
88,294
|
$
|
(1,177
|
)
|
$
|
32,553
|
$
|
44,875
|
$
|
202,928
|
|||||||||||
2005
|
$
|
9,164
|
$
|
26,321
|
$
|
-
|
$
|
36,027
|
$
|
59,184
|
$
|
3,836
|
$
|
36,184
|
$
|
(2,400
|
)
|
$
|
26,842
|
$
|
25,487
|
$
|
88,252
|