Form 10-Q - Quarterly report [Sections 13 or 15(d)]

http://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperating0000http://fasb.org/us-gaap/2023#OtherAssetshttp://fasb.org/us-gaap/2023#AccountsPayableAndAccruedLiabilitiesCurrentAndNoncurrent0000819913--12-312023Q2false000000000.10.1http://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatinghttp://fasb.org/us-gaap/2023#OtherCostAndExpenseOperatingP1Yhttp://fasb.org/us-gaap/2023#OtherAssetshttp://fasb.org/us-gaap/2023#AccountsPayableAndAccruedLiabilitiesCurrentAndNoncurrent0000819913us-gaap:SubordinatedDebtMember2022-12-310000819913us-gaap:SeniorNotesMember2022-12-310000819913hall:WorkersCompensationBusinessUnitMember2023-01-012023-06-300000819913hall:StandardCommercialSegmentMember2023-01-012023-06-300000819913hall:StandardCommercialSegmentMember2022-01-012022-06-300000819913us-gaap:TreasuryStockCommonMember2022-04-012022-06-300000819913us-gaap:TreasuryStockCommonMember2022-01-012022-06-300000819913us-gaap:TreasuryStockCommonMember2023-06-300000819913us-gaap:RetainedEarningsMember2023-06-300000819913us-gaap:CommonStockMember2023-06-300000819913us-gaap:AdditionalPaidInCapitalMember2023-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-06-300000819913us-gaap:TreasuryStockCommonMember2023-03-310000819913us-gaap:RetainedEarningsMember2023-03-310000819913us-gaap:CommonStockMember2023-03-310000819913us-gaap:AdditionalPaidInCapitalMember2023-03-310000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-03-310000819913us-gaap:TreasuryStockCommonMember2022-12-310000819913us-gaap:RetainedEarningsMember2022-12-310000819913us-gaap:CommonStockMember2022-12-310000819913us-gaap:AdditionalPaidInCapitalMember2022-12-310000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-12-310000819913us-gaap:TreasuryStockCommonMember2022-06-300000819913us-gaap:RetainedEarningsMember2022-06-300000819913us-gaap:CommonStockMember2022-06-300000819913us-gaap:AdditionalPaidInCapitalMember2022-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-06-300000819913us-gaap:TreasuryStockCommonMember2022-03-310000819913us-gaap:RetainedEarningsMember2022-03-310000819913us-gaap:CommonStockMember2022-03-310000819913us-gaap:AdditionalPaidInCapitalMember2022-03-310000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-03-310000819913us-gaap:TreasuryStockCommonMember2021-12-310000819913us-gaap:RetainedEarningsMember2021-12-310000819913us-gaap:CommonStockMember2021-12-310000819913us-gaap:AdditionalPaidInCapitalMember2021-12-310000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-310000819913us-gaap:EmployeeStockOptionMember2022-06-300000819913us-gaap:EmployeeStockOptionMember2023-04-012023-06-300000819913us-gaap:EmployeeStockOptionMember2023-01-012023-06-300000819913us-gaap:EmployeeStockOptionMember2022-04-012022-06-300000819913us-gaap:EmployeeStockOptionMember2022-01-012022-06-300000819913hall:LongTermIncentivePlan2015Member2023-06-300000819913us-gaap:RestrictedStockUnitsRSUMember2022-12-310000819913us-gaap:RestrictedStockUnitsRSUMember2022-06-300000819913us-gaap:RestrictedStockUnitsRSUMember2021-12-310000819913us-gaap:RestrictedStockUnitsRSUMemberhall:LongTermIncentivePlan2015Member2022-01-012022-12-310000819913us-gaap:RestrictedStockUnitsRSUMemberhall:LongTermIncentivePlan2015Member2021-01-012021-12-310000819913us-gaap:RestrictedStockUnitsRSUMemberhall:LongTermIncentivePlan2015Member2019-01-012019-12-310000819913us-gaap:RestrictedStockUnitsRSUMemberhall:LongTermIncentivePlan2015Memberhall:VestingPercentageThirdAnniversaryMember2023-01-012023-06-300000819913us-gaap:RestrictedStockUnitsRSUMemberhall:LongTermIncentivePlan2015Memberhall:VestingPercentageFourthAnniversaryMember2023-01-012023-06-300000819913us-gaap:RestrictedStockUnitsRSUMemberhall:LongTermIncentivePlan2015Memberhall:VestingPercentageFifthAnniversaryMember2023-01-012023-06-300000819913srt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:AccountingStandardsUpdate201613Member2023-06-300000819913hall:LossPortfolioTransferContractRightDisputeMemberus-gaap:PendingLitigationMemberhall:RunoffSegmentMember2023-04-012023-06-300000819913hall:LossPortfolioTransferContractRightDisputeMemberus-gaap:PendingLitigationMemberhall:RunoffSegmentMember2023-01-012023-06-300000819913hall:LossPortfolioTransferContractRightDisputeMemberus-gaap:PendingLitigationMember2023-01-012023-06-300000819913hall:LossPortfolioTransferContractRightDisputeMemberus-gaap:PendingLitigationMember2023-01-012023-03-310000819913us-gaap:RetainedEarningsMember2023-04-012023-06-300000819913us-gaap:RetainedEarningsMember2023-01-012023-06-300000819913us-gaap:RetainedEarningsMember2022-04-012022-06-300000819913us-gaap:RetainedEarningsMember2022-01-012022-06-300000819913hall:HallmarkStatutoryTrustIIMemberus-gaap:RelatedPartyMember2007-08-232007-08-230000819913hall:HallmarkStatutoryTrustIMemberus-gaap:RelatedPartyMember2005-06-212005-06-210000819913srt:ScenarioForecastMemberhall:MauiHawaiiWildfiresMember2023-07-012023-09-300000819913hall:HallmarkStatutoryTrustIIMemberus-gaap:SubordinatedDebtMemberus-gaap:RelatedPartyMember2007-08-232007-08-230000819913hall:HallmarkStatutoryTrustIMemberus-gaap:SubordinatedDebtMemberus-gaap:RelatedPartyMember2005-06-212005-06-210000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-01-012023-06-300000819913us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2023-01-012023-06-300000819913hall:UnrealizedGainsLossMember2023-01-012023-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-01-012022-06-300000819913us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2022-01-012022-06-300000819913hall:UnrealizedGainsLossMember2022-01-012022-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-04-012023-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-01-012023-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-04-012022-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-01-012022-06-300000819913us-gaap:SeniorNotesMember2023-06-300000819913us-gaap:SegmentDiscontinuedOperationsMember2023-01-012023-06-300000819913us-gaap:SegmentContinuingOperationsMember2023-01-012023-06-300000819913us-gaap:SegmentDiscontinuedOperationsMember2022-01-012022-06-300000819913us-gaap:SegmentContinuingOperationsMember2022-01-012022-06-300000819913srt:MinimumMember2023-06-300000819913srt:MaximumMember2023-06-300000819913us-gaap:EmployeeStockOptionMember2023-06-300000819913us-gaap:CorporateMember2023-04-012023-06-300000819913hall:RunoffSegmentMember2023-04-012023-06-300000819913hall:PersonalSegmentMember2023-04-012023-06-300000819913hall:CommercialLinesSegmentMember2023-04-012023-06-300000819913us-gaap:CorporateMember2023-01-012023-06-300000819913hall:RunoffSegmentMember2023-01-012023-06-300000819913hall:PersonalSegmentMember2023-01-012023-06-300000819913hall:CommercialLinesSegmentMember2023-01-012023-06-300000819913us-gaap:CorporateMember2022-04-012022-06-300000819913hall:RunoffSegmentMember2022-04-012022-06-300000819913hall:PersonalSegmentMember2022-04-012022-06-300000819913hall:CommercialLinesSegmentMember2022-04-012022-06-300000819913us-gaap:CorporateMember2022-01-012022-06-300000819913hall:RunoffSegmentMember2022-01-012022-06-300000819913hall:PersonalSegmentMember2022-01-012022-06-300000819913hall:CommercialLinesSegmentMember2022-01-012022-06-300000819913us-gaap:JuniorSubordinatedDebtMember2023-06-300000819913srt:AMBestARatingMember2023-06-300000819913us-gaap:CorporateBondSecuritiesMember2023-04-012023-06-300000819913us-gaap:BankLoanObligationsMember2023-04-012023-06-300000819913us-gaap:MunicipalBondsMember2023-01-012023-06-300000819913us-gaap:CorporateBondSecuritiesMember2023-01-012023-06-300000819913us-gaap:BankLoanObligationsMember2023-01-012023-06-300000819913hall:UsTreasurySecuritiesAndObligationMember2023-01-012023-06-300000819913us-gaap:MunicipalBondsMember2022-04-012022-06-300000819913us-gaap:MortgageBackedSecuritiesMember2022-04-012022-06-300000819913us-gaap:CorporateBondSecuritiesMember2022-04-012022-06-300000819913us-gaap:BankLoanObligationsMember2022-04-012022-06-300000819913us-gaap:MunicipalBondsMember2022-01-012022-06-300000819913us-gaap:MortgageBackedSecuritiesMember2022-01-012022-06-300000819913us-gaap:CorporateBondSecuritiesMember2022-01-012022-06-300000819913us-gaap:BankLoanObligationsMember2022-01-012022-06-300000819913us-gaap:DebtSecuritiesMember2023-06-300000819913us-gaap:DebtSecuritiesMember2022-12-310000819913us-gaap:MunicipalBondsMemberus-gaap:DebtSecuritiesMember2023-06-300000819913us-gaap:MortgageBackedSecuritiesMemberus-gaap:DebtSecuritiesMember2023-06-300000819913us-gaap:CorporateBondSecuritiesMemberus-gaap:DebtSecuritiesMember2023-06-300000819913us-gaap:BankLoanObligationsMemberus-gaap:DebtSecuritiesMember2023-06-300000819913hall:UsTreasurySecuritiesAndObligationMemberus-gaap:DebtSecuritiesMember2023-06-300000819913us-gaap:DebtSecuritiesMember2023-06-300000819913us-gaap:MunicipalBondsMemberus-gaap:DebtSecuritiesMember2022-12-310000819913us-gaap:MortgageBackedSecuritiesMemberus-gaap:DebtSecuritiesMember2022-12-310000819913us-gaap:CorporateBondSecuritiesMemberus-gaap:DebtSecuritiesMember2022-12-310000819913us-gaap:BankLoanObligationsMemberus-gaap:DebtSecuritiesMember2022-12-310000819913hall:UsTreasurySecuritiesAndObligationMemberus-gaap:DebtSecuritiesMember2022-12-310000819913us-gaap:DebtSecuritiesMember2022-12-310000819913hall:HallmarkStatutoryTrustIMemberus-gaap:JuniorSubordinatedDebtMember2023-06-300000819913hall:HallmarkStatutoryTrustIIMemberus-gaap:JuniorSubordinatedDebtMember2023-06-300000819913hall:SeniorUnsecuredNotesDueAugust152029Member2019-08-190000819913hall:HallmarkStatutoryTrustIIMemberus-gaap:JuniorSubordinatedDebtMember2007-08-232007-08-230000819913hall:HallmarkStatutoryTrustIMemberus-gaap:JuniorSubordinatedDebtMember2005-06-212005-06-210000819913hall:HallmarkStatutoryTrustIIMemberus-gaap:JuniorSubordinatedDebtMemberhall:LondonInterbankOfferedRateLIBORExtensionMember2007-08-232007-08-230000819913hall:HallmarkStatutoryTrustIMemberus-gaap:JuniorSubordinatedDebtMemberhall:LondonInterbankOfferedRateLIBORExtensionMember2005-06-212005-06-2100008199132023-01-010000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MunicipalBondsMember2023-06-300000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2023-06-300000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2023-06-300000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:BankLoanObligationsMember2023-06-300000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberhall:UsTreasurySecuritiesAndObligationMember2023-06-300000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MunicipalBondsMember2023-06-300000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2023-06-300000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2023-06-300000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:BankLoanObligationsMember2023-06-300000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberhall:UsTreasurySecuritiesAndObligationMember2023-06-300000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MunicipalBondsMember2023-06-300000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2023-06-300000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2023-06-300000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:BankLoanObligationsMember2023-06-300000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberhall:UsTreasurySecuritiesAndObligationMember2023-06-300000819913us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MunicipalBondsMember2023-06-300000819913us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2023-06-300000819913us-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2023-06-300000819913us-gaap:FairValueMeasurementsRecurringMemberus-gaap:BankLoanObligationsMember2023-06-300000819913us-gaap:FairValueMeasurementsRecurringMemberhall:UsTreasurySecuritiesAndObligationMember2023-06-300000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2023-06-300000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2023-06-300000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2023-06-300000819913us-gaap:FairValueMeasurementsRecurringMember2023-06-300000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MunicipalBondsMember2022-12-310000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2022-12-310000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2022-12-310000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:BankLoanObligationsMember2022-12-310000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMemberhall:UsTreasurySecuritiesAndObligationMember2022-12-310000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MunicipalBondsMember2022-12-310000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2022-12-310000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2022-12-310000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:BankLoanObligationsMember2022-12-310000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberhall:UsTreasurySecuritiesAndObligationMember2022-12-310000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MunicipalBondsMember2022-12-310000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2022-12-310000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2022-12-310000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:BankLoanObligationsMember2022-12-310000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberhall:UsTreasurySecuritiesAndObligationMember2022-12-310000819913us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MunicipalBondsMember2022-12-310000819913us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2022-12-310000819913us-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2022-12-310000819913us-gaap:FairValueMeasurementsRecurringMemberus-gaap:BankLoanObligationsMember2022-12-310000819913us-gaap:FairValueMeasurementsRecurringMemberhall:UsTreasurySecuritiesAndObligationMember2022-12-310000819913us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2022-12-310000819913us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2022-12-310000819913us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2022-12-310000819913us-gaap:FairValueMeasurementsRecurringMember2022-12-310000819913us-gaap:MunicipalBondsMember2023-06-300000819913us-gaap:MortgageBackedSecuritiesMember2023-06-300000819913us-gaap:CorporateBondSecuritiesMember2023-06-300000819913us-gaap:BankLoanObligationsMember2023-06-300000819913hall:UsTreasurySecuritiesAndObligationMember2023-06-300000819913us-gaap:MunicipalBondsMember2022-12-310000819913us-gaap:MortgageBackedSecuritiesMember2022-12-310000819913us-gaap:CorporateBondSecuritiesMember2022-12-310000819913us-gaap:BankLoanObligationsMember2022-12-310000819913hall:UsTreasurySecuritiesAndObligationMember2022-12-310000819913us-gaap:CorporateMemberus-gaap:SegmentContinuingOperationsMember2023-06-300000819913hall:RunoffSegmentMemberus-gaap:SegmentContinuingOperationsMember2023-06-300000819913hall:PersonalSegmentMemberus-gaap:SegmentContinuingOperationsMember2023-06-300000819913hall:CommercialLinesSegmentMemberus-gaap:SegmentContinuingOperationsMember2023-06-300000819913us-gaap:SegmentContinuingOperationsMember2023-06-300000819913us-gaap:CorporateMemberus-gaap:SegmentContinuingOperationsMember2022-12-310000819913hall:RunoffSegmentMemberus-gaap:SegmentContinuingOperationsMember2022-12-310000819913hall:PersonalSegmentMemberus-gaap:SegmentContinuingOperationsMember2022-12-310000819913hall:CommercialLinesSegmentMemberus-gaap:SegmentContinuingOperationsMember2022-12-310000819913us-gaap:SegmentContinuingOperationsMember2022-12-310000819913us-gaap:RestrictedStockUnitsRSUMember2023-04-012023-06-300000819913us-gaap:RestrictedStockUnitsRSUMember2022-04-012022-06-300000819913us-gaap:RestrictedStockUnitsRSUMember2022-01-012022-06-300000819913us-gaap:AdditionalPaidInCapitalMember2023-04-012023-06-300000819913us-gaap:AdditionalPaidInCapitalMember2023-01-012023-06-300000819913us-gaap:AdditionalPaidInCapitalMember2022-04-012022-06-300000819913us-gaap:AdditionalPaidInCapitalMember2022-01-012022-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-06-300000819913us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2023-06-300000819913hall:UnrealizedGainsLossMember2023-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-12-310000819913us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2022-12-310000819913hall:UnrealizedGainsLossMember2022-12-310000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-06-300000819913us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2022-06-300000819913hall:UnrealizedGainsLossMember2022-06-300000819913us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-310000819913us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2021-12-310000819913hall:UnrealizedGainsLossMember2021-12-310000819913us-gaap:SubordinatedDebtMember2023-06-3000008199132023-01-012023-01-010000819913hall:LongTermIncentivePlan2015Member2023-01-012023-06-3000008199132022-06-3000008199132021-12-310000819913srt:AMBestAMinusRatingMember2023-01-012023-06-300000819913hall:LossPortfolioTransferReinsuranceContractMember2020-07-012020-09-300000819913srt:MinimumMemberus-gaap:RestrictedStockUnitsRSUMember2023-06-300000819913srt:MaximumMemberus-gaap:RestrictedStockUnitsRSUMember2023-06-300000819913hall:HallmarkStatutoryTrustIIMemberus-gaap:JuniorSubordinatedDebtMember2007-08-230000819913hall:HallmarkStatutoryTrustIMemberus-gaap:JuniorSubordinatedDebtMember2005-06-210000819913us-gaap:DiscontinuedOperationsHeldForSaleOrDisposedOfBySaleMemberhall:ExcessAndSurplusLinesMember2022-10-072022-10-0700008199132023-06-3000008199132022-12-310000819913us-gaap:EquitySecuritiesMember2023-06-300000819913us-gaap:EquitySecuritiesMember2022-12-310000819913us-gaap:RestrictedStockUnitsRSUMember2023-06-300000819913us-gaap:RestrictedStockUnitsRSUMember2023-01-012023-06-300000819913us-gaap:DiscontinuedOperationsHeldForSaleOrDisposedOfBySaleMemberhall:ExcessAndSurplusLinesMember2022-10-070000819913us-gaap:JuniorSubordinatedDebtMember2023-01-012023-06-300000819913hall:SeniorUnsecuredNotesDueAugust152029Member2019-08-192019-08-1900008199132023-04-012023-06-3000008199132022-04-012022-06-3000008199132022-01-012022-06-300000819913us-gaap:DiscontinuedOperationsHeldForSaleOrDisposedOfBySaleMemberhall:ExcessAndSurplusLinesMember2023-04-012023-06-300000819913us-gaap:DiscontinuedOperationsHeldForSaleOrDisposedOfBySaleMemberhall:ExcessAndSurplusLinesMember2023-01-012023-06-300000819913us-gaap:DiscontinuedOperationsHeldForSaleOrDisposedOfBySaleMemberhall:ExcessAndSurplusLinesMember2022-04-012022-06-300000819913us-gaap:DiscontinuedOperationsHeldForSaleOrDisposedOfBySaleMemberhall:ExcessAndSurplusLinesMember2022-01-012022-06-3000008199132022-01-012022-12-3100008199132023-08-1400008199132023-01-012023-06-30xbrli:shareshall:securityiso4217:USDxbrli:purehall:itemhall:employeeiso4217:USDxbrli:shareshall:segment

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

(Mark One) Securities Exchange Act of 1934

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

For the quarterly period ended June 30, 2023

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

Commission file number 001-11252

Hallmark Financial Services, Inc.

(Exact name of registrant as specified in its charter)


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

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

(Address of principal executive offices)	(Zip Code)

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

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1.00 par value	HALL	Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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


Large accelerated filer ☐	Accelerated filer ☐

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, par value $1.00 per share –1,818,482 shares outstanding as of August 14, 2023.

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

INDEX TO FINANCIAL STATEMENTS

	Page Number

Consolidated Balance Sheets at June 30, 2023 (unaudited) and December 31, 2022	3
Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, 2023 and June 30, 2022	4
Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the three months and six months ended June 30, 2023 and June 30, 2022	5
Consolidated Statements of Stockholders’ Equity (unaudited) for the three months and six months ended June 30, 2023 and June 30, 2022	6
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2023 and June 30, 2022	7
Notes to Consolidated Financial Statements (unaudited)	8

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except par value)



	June 30, 2023		December 31, 2022
	(unaudited)
ASSETS
Investments:
Debt securities, available-for-sale, at fair value (amortized cost; $299,544 in 2023 and $434,119 in 2022; allowance for expected credit losses of $0 in 2023)	$	295,761	$	426,597
Equity securities (cost; $24,284 in 2023 and $30,058 in 2022)		22,763		28,199
Total investments		318,524		454,796
Cash and cash equivalents		150,528		59,133
Restricted cash		14,781		29,486
Ceded unearned premiums		86,661		237,086
Premiums receivable		49,506		78,355
Accounts receivable		1,076		10,859
Receivable from reinsurer		—		58,882
Receivable for securities		476		945
Reinsurance recoverable (net of allowance for expected credit losses of $200 in 2023)		593,635		578,424
Deferred policy acquisition costs		9,858		8
Federal income tax recoverable		—		2,668
Prepaid pension assets		239		163
Prepaid expenses		1,878		1,508
Other assets		22,186		24,389
Total assets	$	1,249,348	$	1,536,702
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $599 in 2023 and $648 in 2022)		49,401		49,352
Subordinated debt securities (less unamortized debt issuance cost of $666 in 2023 and $691 in 2022)		56,036		56,011
Reserves for unpaid losses and loss adjustment expenses		784,846		880,869
Unearned premiums		156,394		292,691
Reinsurance payable		111,176		128,950
Federal income tax payable		464		—
Accounts payable and other accrued expenses		78,646		68,535
Total liabilities	$	1,236,963	$	1,476,408
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock, $1.00 par value, authorized 3,333,333 shares; issued 2,087,283 shares in 2023 and 2022		2,087		2,087
Additional paid-in capital		124,879		124,740
Retained (deficit) earnings		(84,458)		(33,407)
Accumulated other comprehensive loss		(5,489)		(8,492)
Treasury stock (268,801 shares in 2023 and 2022), at cost		(24,634)		(24,634)
Total stockholders’ equity	$	12,385	$	60,294
Total liabilities and stockholders’ equity	$	1,249,348	$	1,536,702

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

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)



	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Gross premiums written	$	54,511	$	56,004	$	111,683	$	115,337
Ceded premiums written		(10,636)		(18,566)		(25,427)		(36,630)
Net premiums written		43,875		37,438		86,256		78,707
Change in unearned premiums		(7,028)		(401)		(14,129)		(2,355)
Net premiums earned		36,847		37,037		72,127		76,352

Investment income, net of expenses		4,019		3,120		8,361		4,979
Investment gains (losses), net		248		(3,994)		(392)		(3,943)
Finance charges		732		980		1,511		1,963
Other income		64		14		134		29
Total revenues		41,910		37,157		81,741		79,380

Losses and loss adjustment expenses		36,752		72,646		66,516		112,028
Operating expenses		21,138		17,723		69,087		34,150
Interest expense		1,938		1,366		3,836		2,630
Amortization of intangible assets		—		7		—		14
Total expenses		59,828		91,742		139,439		148,822

Loss from continuing operations before tax		(17,918)		(54,585)		(57,698)		(69,442)
Income tax (benefit) expense from continuing operations		(133)		12,450		(667)		9,270
Net loss from continuing operations		(17,785)		(67,035)		(57,031)		(78,712)

Discontinued Operations:
Total pretax income (loss) from discontinued operations	$	5,876	$	(2,965)	$	5,980	$	7,773
Income tax expense (benefit) from discontinued operations		—		(583)		—		1,697
Net income (loss) from discontinued operations	$	5,876	$	(2,382)	$	5,980	$	6,076

Net loss	$	(11,909)	$	(69,417)	$	(51,051)	$	(72,636)

Net (loss) income per share basic:
Net loss from continuing operations	$	(9.78)	$	(36.85)	$	(31.37)	$	(43.30)
Net income (loss) from discontinued operations		3.23		(1.31)		3.29		3.35
Basic net loss per share	$	(6.55)	$	(38.16)	$	(28.08)	$	(39.95)

Net (loss) income per share diluted:
Net loss from continuing operations	$	(9.78)	$	(36.85)	$	(31.37)	$	(43.30)
Net income (loss) from discontinued operations		3.23		(1.31)		3.29		3.35
Diluted net loss per share	$	(6.55)	$	(38.16)	$	(28.08)	$	(39.95)

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

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

($ in thousands)



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Net (loss) income	$	(11,909)	$	(69,417)	$	(51,051)	$	(72,636)
Other comprehensive (loss) income:
Change in net actuarial loss decrease (increase)		31		27		62		54
Tax effect on change in net actuarial (gain) loss		(6)		(6)		(13)		(12)
Unrealized holding gains (losses) arising during the period		(467)		(5,745)		2,396		(8,826)
Tax effect on unrealized holding (losses) gains arising during the period		98		1,206		(503)		1,853
Reclassification adjustment for gains included in net loss		1,343		123		1,343		(23)
Tax effect on reclassification adjustment for gains included in net loss		(282)		(26)		(282)		5
Other comprehensive (loss) income, net of tax		717		(4,421)		3,003		(6,949)
Comprehensive (loss)	$	(11,192)	$	(73,838)	$	(48,048)	$	(79,585)

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

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

($ in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Common Stock
Balance, beginning of period	$	2,087	$	2,087	$	2,087	$	2,087

Balance, end of period		2,087		2,087		2,087		2,087

Additional Paid-In Capital
Balance, beginning of period		124,837		124,411		124,740		124,514
Equity based compensation		42		374		139		436
Shares issued under employee benefit plans		—		51		—		(114)
Balance, end of period		124,879		124,836		124,879		124,836

Retained (Deficit) Earnings
Balance, beginning of period		(72,549)		71,484		(33,407)		74,703
Net loss		(11,909)		(69,417)		(51,051)		(72,636)
Balance, end of period		(84,458)		2,067		(84,458)		2,067

Accumulated Other Comprehensive (Loss) Income
Balance, beginning of period		(6,206)		(3,563)		(8,492)		(1,035)
Additional minimum pension liability, net of tax		25		21		49		42
Unrealized holding gains (losses) arising during period, net of tax		(369)		(4,539)		1,893		(6,973)
Reclassification adjustment for (gains) losses included in net income, net of tax		1,061		97		1,061		(18)
Balance, end of period		(5,489)		(7,984)		(5,489)		(7,984)

Treasury Stock
Balance, beginning of period		(24,634)		(24,583)		(24,634)		(24,748)
Shares issued under employee benefit plans		—		(51)		—		114
Balance, end of period		(24,634)		(24,634)		(24,634)		(24,634)

Total Stockholders' Equity	$	12,385	$	96,372	$	12,385	$	96,372

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

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

($ in thousands)



	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(51,051)	$	(72,636)

Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Income from discontinued operations, net of tax		(5,980)		(6,076)
Depreciation and amortization expense		819		910
Deferred federal income tax (benefit) expense		(798)		10,754
Investment losses (gains), net		392		3,943
Share-based payments expense		139		436
Change in ceded unearned premiums		150,425		(2,231)
Change in premiums receivable		28,849		(9,373)
Change in accounts receivable		9,783		2,501
Change in receivable from reinsurer		58,882		(38,645)
Change in deferred policy acquisition costs		(9,850)		1,493
Change in reserves for losses and loss adjustment expenses		(96,023)		31,526
Change in unearned premiums		(136,297)		4,587
Change in reinsurance recoverable		(15,211)		27,007
Change in reinsurance balances		(17,774)		(53,442)
Change in federal income tax recoverable		3,132		15,311
Change in all other liabilities		10,110		4,590
Change in all other assets		1,505		(2,727)
Net cash used in operating activities- continuing operations		(68,948)		(82,072)
Net cash provided by operating activities- discontinued operations		5,980		3,766
Net cash used in operating activities		(62,968)		(78,306)
Cash flows from investing activities:
Purchases of property and equipment		(649)		(1,845)
Purchases of investment securities		(15,174)		(270,217)
Maturities, sales and redemptions of investment securities		155,481		110,917
Net cash provided by (used in)investing activities		139,658		(161,145)
Increase (decrease) in cash and cash equivalents and restricted cash		76,690		(239,451)
Cash and cash equivalents and restricted cash at beginning of period		88,619		356,677
Cash and cash equivalents and restricted cash at end of period	$	165,309	$	117,226

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

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

1. General

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

Our Commercial Accounts business unit offers package and monoline property/casualty and, until exited in 2016, occupational accident insurance products and services. Our Aviation business unit offers general aviation insurance. Our former Workers Compensation operating unit specialized in small and middle market workers compensation business until discontinued during 2015. Our Specialty Personal Lines business unit offers non-standard personal automobile and renters insurance products and services. Our Specialty Runoff business unit consists of the senior care facilities professional liability insurance and services previously reported as part of our Professional Liability business unit; the contract binding line of the primary automobile insurance products and services previously reported as part of our Commercial Auto business unit; and the satellite launch property/casualty insurance products and services, as well as certain specialty programs, previously reported as part of our Aerospace & Programs business unit. The lines of business comprising the Specialty Runoff business unit were discontinued at various times during 2020 through 2022 and are presently in runoff.

These business units are segregated into three reportable industry segments for financial accounting purposes. The Commercial Lines Segment consists of the Commercial Accounts business unit, the Aviation business unit, and the runoff from our former Workers Compensation operating unit. The Personal Segment consists solely of our Specialty Personal Lines business unit and the Runoff Segment consists solely of the Specialty Runoff business unit. The Runoff Segment was previously reported as part of our former Specialty Commercial Segment.

Our discontinued operations consist of our Commercial Auto business unit (excluding the exited contract binding line) which offered primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit which offered primary and excess liability, excess public entity liability, E&S package and garage liability insurance products and services; our E&S Property business unit which offered primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; and our Professional Liability business unit (excluding the exited senior care facilities line) which offered healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals and medical facilities. Our Discontinued Operations business units, which were sold in October 2022, were previously reported as part of our former Specialty Commercial Segment. (See, Note 3.)

Our insurance company subsidiaries supporting these business units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”).

2. Basis of Presentation

Our unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include our accounts and the accounts of our subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the SEC.

Table of Contents

The interim financial data as of June 30, 2023 and 2022 is unaudited. However, in the opinion of management, the interim financial data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the periods ended June 30, 2023 are not necessarily indicative of the operating results to be expected for the full year.

Subsequent Event

Due to the Maui, Hawaii wildfires on August 9, 2023, we preliminarily estimate our net loss exposure to be $7.5 million plus additional cost in the form of reinstatement premiums to restore any necessary reinsurance layers. The net loss and any additional cost incurred will be recognized in our third quarter 2023 financial statements.

Use of Estimates in the Preparation of the Financial Statements

Our preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting period. Refer to “Critical Accounting Estimates and Judgments” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

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

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

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

Senior Unsecured Notes Due 2029: Our senior unsecured notes payable due in 2029 had a carrying value of $49.4 million and a fair value of $44.9 million as of June 30, 2023. Our senior unsecured notes payable would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

Subordinated Debt Securities: Our trust preferred securities had a carrying value of $56.0 million and a fair value of $35.4 million as of June 30, 2023. Our trust preferred securities would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

For accounts receivable, reinsurance balances, premiums receivable, federal income tax recoverable and other assets, the carrying amounts are held at net realizable value which approximates fair value because of the short maturity of such financial instruments.

Variable Interest Entities

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

Table of Contents

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

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

Income Taxes

We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. We account for income taxes under the asset and liability method, which requires the recognition of deferred taxes for temporary differences between the financial statement and tax return basis of assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred or expenditures for which we have already taken a deduction in our tax return but have not yet been recognized in our financial statements.

Under GAAP, we are required to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that future taxable income will be insufficient to realize the value of the deferred tax assets. We evaluate all significant available positive and negative evidence as part of our analysis. Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income and tax-planning strategies that would result in the realization of deferred tax assets. The underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable. If actual experience differs from these estimates and assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in our results of operations.

As of June 30, 2023, the Company maintained a full valuation allowance of $41.4 million against its deferred tax assets because we determined that it is more likely than not that these assets will not be recoverable. If, in the future, we determine we can support the recoverability of all or a portion of the deferred tax assets under the guidance, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense and result in an increase in equity. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions at June 30, 2023.

Reverse Stock Split

On November 29, 2022, we filed a Certificate of Change to our Articles of Incorporation to affect a reverse split of our issued and outstanding common stock on a one-for-ten reverse split of all issued and unissued shares of the Company. The reverse stock split was effective on January 1, 2023. The Certificate of Change effected a one-for-ten reverse split of all issued and unissued shares of the Company’s common stock and adjusted the post-split par value of the common stock to $1.00 per share. As a result, the Company’s total authorized capital stock consists of 3,333,333 shares of common stock, $1.00 par value per share. No fractional shares were issued in connection with the reverse stock split and all fractions of a share were rounded up to the next whole share. The reverse stock split did not otherwise alter any of the voting powers, designations, preferences, limitations, restrictions, or relative rights of the capital stock of the Company. Accordingly, as

Table of Contents

required in accordance with U.S. GAAP, all common share and per share data are retrospectively restated to give effect of the Reverse Stock Split for all periods presented herein.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform ("ASU 2020-04"). ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 could be adopted as of March 12, 2020 and are effective through December 31, 2024. We do not currently have any contracts that have been changed to a new reference rate and do not expect the adoption of this guidance to have a material effect on the Company’s results of operations, financial position or liquidity.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326). ASU 2016-13 replaces the existing incurred loss impairment model with an expected credit loss impairment model. The expected credit loss impairment model requires the entity to recognize its estimate of expected credit losses for affected financial assets using an allowance for credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected. The income statement includes the measurement of credit losses for newly recognized financial assets, as well as the increases or decreases of expected credit losses that occur during the period. Credit losses on available-for-sale debt securities are measured in a manner similar to current GAAP, although ASU 2016-13 requires that they be presented as an allowance rather than as a write-down of the amortized cost. In situations where the estimate of credit loss on an available-for-sale debt security declines, we are able to record a reversal of the allowance to income in the current period, which was prohibited prior to the adoption of ASU 2016-13. The expected loss approach requires us to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The standard also requires expanded disclosures related to credit losses and credit quality indicators. As a smaller reporting company, ASU 2016-13 is effective for fiscal years of the Company beginning after December 15, 2022, including interim periods within those fiscal years and accordingly we adopted ASU 2016-13 effective with our March 31, 2023 interim reporting. ASU 2016-13 requires a modified retrospective transition method and early adoption is permitted. Application of the standard to our applicable assets, including debt securities, cash, premium receivable, accounts receivable, reinsurance recoverables and prepaid expenses, did not have a material impact on our financial results. After consideration of risk and qualitative factors for each asset type in scope, an allowance for expected credit losses of $200 thousand was established in regards to reinsurance recoverables. See “Note 5. Investments” for a discussion regarding expected credit loss on our debt security assets. For determination of the reinsurance recoverables expected credit loss allowance, our Company relies on external ratings of credit worthiness from A.M. Best and collectability of recorded amounts considering letters of credit pledged by reinsurance partners. The external rating is utilized to place our reinsurance recoverables into appropriate risk layers of expected loss considering duration and historical loss patterns. The ratings at June 30, 2023 of our reinsurance recoverables, not offset by our liabilities for amounts owed to reinsurers and pledged letters of credit, are 95% rated A- or better .

Table of Contents

3. Discontinued Operations Classification

On October 7, 2022 the Company consummated the sale of substantially all of its excess and surplus lines operations to Core Specialty Insurance Holdings, Inc. (“Core Specialty”) for $40.0 million cash consideration, plus an estimated $19.9 million consideration for the acquisition costs associated with certain net unearned premium reserves. The Company retained the related loss and loss adjustment expenses (“LAE”) reserves of its excess and surplus lines businesses and will experience future cash outflows and change in estimates for these reserves until all claims have been settled. The transaction was comprised of substantially all of nine business units within the Company’s former Specialty Commercial Segment, certain related assets and liabilities, and the immediate transition to Core Specialty of approximately 200 employees who produce and support these lines of businesses. This transaction met the criteria for discontinued operations accounting. As a result, the results of operations for the affected excess and surplus lines are included in discontinued operations in our Consolidated Statement of Operations for all periods shown. The following table summarizes income (loss) from discontinued operations (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Gross premiums written	$	(75,225)	$	126,062	$	29,229	$	217,688
Ceded premiums written		75,139		(79,199)		(29,546)		(133,773)
Net premiums written		(86)		46,863		(317)		83,915
Change in unearned premiums		-		(3,788)		-		2,322
Net premiums earned		(86)		43,075		(317)		86,237

Commissions and fees		-		282		-		569
Other income		2,199		-		4,808		-

Total revenues		2,113		43,357		4,491		86,806

Losses and loss adjustment expenses		(4,641)		39,287		(4,987)		63,929
Operating expenses		878		6,916		3,498		14,866
Amortization of intangible assets		-		119		-		238

Total expenses		(3,763)		46,322		(1,489)		79,033

Income (loss) from discontinued operations before tax	$	5,876	$	(2,965)	$	5,980	$	7,773
Income tax expense from discontinued operations		-		(583)		-		1,697
Net income (loss) from discontinued operations	$	5,876	$	(2,382)	$	5,980	$	6,076

4. Fair Value

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

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

●

Level 1: quoted prices in active markets for identical assets;

●

Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, inputs of identical assets for less active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and

Table of Contents

●

Level 3: inputs to the valuation methodology that are unobservable for the asset or liability.

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

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

Where quoted prices are available on active exchanges for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include equity securities.

Level 2 investment securities include corporate bonds, collateralized corporate bank loans, municipal bonds, U.S. Treasury securities, other obligations of the U.S. Government and mortgage-backed securities for which quoted prices are not available on active exchanges for identical instruments. We use third-party pricing services to determine fair values for each Level 2 investment security in all asset classes. Since quoted prices in active markets for identical assets are not available, these prices are determined using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other things. We have reviewed the processes used by the pricing services and have determined that they result in fair values consistent with the requirements of ASC 820 for Level 2 investment securities. We have not adjusted any prices received from third-party pricing sources. There were no transfers between Level 1 and Level 2 securities.

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

The following table presents, for each of the fair value hierarchy levels, assets that are measured at fair value on a recurring basis at June 30, 2023 and December 31, 2022 (in thousands):


	As of June 30, 2023
	Quoted Prices in
	Active Markets for
	Identical Assets		Other Observable		Unobservable
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
U.S. Treasury securities and obligations of U.S. Government	$	—	$	22,435	$	—	$	22,435
Corporate bonds		—		191,345		—		191,345
Corporate bank loans		—		49,503		—		49,503
Municipal bonds		—		31,240		—		31,240
Mortgage-backed		—		1,238		—		1,238
Total debt securities		—		295,761		—		295,761
Total equity securities		22,763		—		—		22,763
Total investments	$	22,763	$	295,761	$	—	$	318,524

Table of Contents

As of December 31, 2022

Quoted Prices in

Active Markets for

Identica

Boards:

Quotes:

Boards

News

Market Data

Markets

Discover

HALL Hallmark Financial Services Inc