HALLMARK FINANCIAL SERVICES INC – 10-Q – Management’s report and analysis of financial condition and operating results.

0
The following discussion should be read together with our consolidated financial
statements and the notes thereto. This discussion contains forward-looking
statements. Please see "Risks Associated with Forward-Looking Statements in this
Form 10-Q" for a discussion of some of the uncertainties, risks and assumptions
associated with these statements.

Introduction

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

Our non-carrier insurance activities are separated by business units in the
following declarable segments:

Specialized commercial segment. Our specialized business segment includes our

Commercial Auto business unit that provides primary and surplus commercial services

automobile insurance products and services; our E&S Casualty business unit which

offers prime and excess liability, excess public entity liability and E&S

package and garage civil liability insurance products and services; our E&S property

business unit which offers primary and excess commercial property insurance for

? catastrophic and non-catastrophic exposures; our professional responsibility

business unit that offers professional healthcare and financial lines

liability insurance products and services mainly for businesses,

professionals, medical establishments and, until 2020, care establishments for the elderly;

and our Aerospace & Programs business unit which offers general aviation and,

until their release in 2020, P&C insurance products by satellite

and services, as well as some specialty programming.

Standard business segment. Our standard business segment includes the

? multi-risk and monoline IARD and, until their release in 2016,

workers’ compensation insurance products and services

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managed by our Commercial Accounts business unit; and worker runoff

indemnity insurance products managed by our former workers’ compensation

operating unit until its shutdown in 2016.

Personal segment. Our personal segment includes non-standard personnel

? auto and tenant insurance products and services managed by our specialty

Personal lines insurance business unit.

The retained premium produced by these reportable segments is supported by our
American Hallmark Insurance Company of Texas ("AHIC"), Hallmark Specialty
Insurance Company ("HSIC"), Hallmark Insurance Company ("HIC"), Hallmark
National Insurance Company ("HNIC") and Texas Builders Insurance Company
("TBIC") insurance subsidiaries. In addition, control and management of Hallmark
County Mutual Insurance Company ("HCM") is maintained through our wholly owned
subsidiary, CYR Insurance Management Company ("CYR"). CYR has as its primary
asset a management agreement with HCM which provides for CYR to have management
and control of HCM. HCM is used to front certain lines of business in our
Specialty Commercial and Personal Segments in Texas. HCM does not retain any
business.

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

Operating results

Management overview. During the three months ended June 30, 2022, our total
revenue was $80.5 million, representing a decrease of 23% from the $104.2
million in total revenue for the same period of 2021.  During the six months
ended June 30, 2022, our total revenue was $166.2 million, representing a
decrease of 23% from the $216.2 million in total revenue for the same period of
2021.  During the three months ended June 30, 2022, we reported a pre-tax loss
of $57.6 million, as compared to a pre-tax loss of $1.0 million reported during
the same period the prior year.  During the six months ended June 30, 2022, we
reported a pre-tax loss of $61.7 million, as compared to pre-tax income of $10.2
million reported during the same period the prior year.

The decrease in revenue for the three months ended June 30, 2022 compared to the
same period of the prior year was primarily due to lower net premiums earned of
$16.5 million, net investment losses of $4.0 million compared to investment
gains of $3.9 million the prior year, and lower finance charges of $0.1 million,
partially offset by higher net investment income of $0.8 million. The decrease
in revenue for the six months ended June 30, 2022 compared to the same period of
the prior year was primarily due to decreased net premiums earned of $35.8
million, net investment losses of $3.9 million compared to investment gains of
$9.7 million the prior year, lower net investment income of $0.4 million and
lower finance charges of $0.3 million, partially offset by higher commission and
fees of $0.1 million.

The increase in pre-tax loss for the three months ended June 30, 2022 compared
to the same period of the prior year was primarily due to the decreased revenue
discussed above as well as increased losses and loss adjustment expenses ("LAE")
of $35.4 million.  The increase in losses and LAE was primarily due to $55.6
million of adverse prior year loss reserve development for the second quarter of
2022, $35.6 million of which was from the exited contract binding line of the
primary commercial automobile business, as compared to $3.1 million of
unfavorable prior year loss reserve development for the same period the prior
year, partially offset by lower earned premium volume and lower net catastrophe
losses.  Losses and LAE for the second quarter of 2022 included $2.0 million of
net catastrophe losses as compared to $3.7 million during the same period of the
prior year.  Lower operating expenses of $2.7 million partially offset the
increase in pre-tax loss for the three months ended June 30, 2022 as compared to
the same period of the prior year.

The deterioration of pre-tax results for the six months ended June 30, 2022
compared to the same period of the prior year was primarily due to the decreased
revenue discussed above as well as by increased losses and loss adjustment
expenses ("LAE") of $30.0 million.  The increase in losses and LAE was primarily
due to $63.3 million of unfavorable prior year loss reserve development for the
six months ended June 30, 2022, $44.4 million of which was from the exited

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contract binding line of the primary commercial automobile business, as compared
to $1.0 million of unfavorable prior year loss reserve development for the prior
year period, partially offset by lower earned premium volume and lower net
catastrophe losses.  Losses and LAE for the six months ended June 30, 2022
included $3.1 million of net catastrophe losses as compared to $9.6 million
during the same period of the prior year. Lower operating expenses of $8.3
million partially offset the increase in pre-tax loss for the six months ended
June 30, 2022 as compared to pre-tax income reported for the same period of the
prior year.

We reported a net loss of $69.4 million for the three months ended June 30, 2022
as compared to a net loss of $0.8 million for the same period in 2021.  We
reported a net loss of $72.6 million for the six months ended June 30, 2022 as
compared to net income of $8.1 million for the same period in 2021.  On a
diluted basis per share, we reported a net loss of $3.82 per share for the
three months ended June 30, 2022, compared to a net loss of $0.05 per share for
the same period in 2021.  On a diluted basis per share, we reported a net loss
of $4.00 per share for the six months ended June 30, 2022, as compared to net
income of $0.45 per share for the same period in 2021.  Our effective tax rate
was -17.8% for the first six months of 2022 compared to 20.5% for the same
period in 2021.  During the second quarter of 2022 we recorded a full valuation
allowance of $23.9 million against our net deferred tax assets primarily due to
recent net losses, including the current period net loss.     The effective rate
for the six months ended June 30, 2021 varied from the statutory tax rates
primarily due to tax exempt interest income.

Second quarter 2022 compared to second quarter 2021

Here is additional information on the business sectors for the three months
ended June 30, 2022 and 2021 (in thousands):

Three months completed June 30th,

                           Specialty Commercial        Standard Commercial
                                 Segment                     Segment                Personal Segment             Corporate                 Consolidated
                            2022          2021          2022          2021         2022         2021         2022         2021          2022          2021
Gross premiums
written                  $  138,379    $  126,190    $   28,569    $   27,712    $  15,118    $  15,814    $       -    $       -    $  182,066   
$  169,716
Ceded premiums
written                    (86,846)      (71,805)      (10,845)      (10,330)         (74)         (95)            -            -      (97,765)      (82,230)

Net written premiums 51,533 54,385 17,724 17,382 15,044 15,719

            -            -        84,301    

87,486

Change in unearned
premiums                    (3,838)         7,937       (1,160)         (835)          810        1,996            -            -       (4,188)    

9,098

Net earned premiums 47,695 62,322 16,564 16,547 15,854 17,715

            -            -        80,113    

96,584

Total revenues               49,087        64,890        16,888        

17,240 17,048 19,115 (2,509) 2,943 80,514

104 188

losses and loss
settlement costs 85,765 46,112 12,074 14,138 14,094 16,239

            -            -       111,933    

76,489

Income (loss) before tax ($45,907) $4,848 ($786) $(1,976) ($2,819) ($2,766) $(8,038) ($1,117) ($57,550)

$(1,011)

Net loss ratio (1)            179.8 %        74.0 %        72.9 %        85.4 %       88.9 %       91.7 %                                 139.7 %   

79.2%
Net expense ratio(1) 19.2% 23.8% 34.5% 31.7% 31.6% 27.2%

                                  29.5 %        27.2 %
Net combined ratio
(1)                           199.0 %        97.8 %       107.4 %       117.1 %      120.5 %      118.9 %                                 169.2 %  
    106.4 %

Net unfavorable
(favorable)
prior year
development              $   53,278    $    1,127    $      470    $      
18    $   1,835    $   1,985                              $   55,583    $  

3,130

The net loss ratio is calculated as incurred losses and LAE divided by net

premiums earned, each determined in accordance with GAAP. The net expense
(1) the ratio is calculated as the total technical charges offset by the agency fees

income divided by net premiums earned, each determined in accordance with

GAAP. The net combined ratio is calculated as the sum of the net loss ratio and

the net expense ratio.

Specialized business segment

Gross premiums written for the Specialty Commercial Segment were $138.4 million
for the three months ended June 30, 2022, which was $12.2 million, or 10%,
higher than the $126.2 million reported for the same period of 2021.  Net
premiums written were $51.5 million for the three months ended June 30, 2022 as
compared to $54.4 million for the same period of 2021.  The increase in gross
premiums written was primarily the result of higher premium production in our
 E&S Property,  E&S Casualty and Commercial Auto business units, partially
offset by lower premium production in our Aerospace & Programs and Professional
Liability business units.  The decrease in net premiums written was primarily
the

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result of higher ceded premiums in our E&S Property, E&S Casualty and Commercial
Auto business units as well as lower premium production in our Aerospace &
Programs and Professional Liability business units causing the net premiums
written in all of our Specialty Commercial Segment's business units except for
our E&S Property business unit to be lower during the second quarter of 2022 as
compared to the second quarter of 2021.

The $49.1 million of total revenue for the three months ended June 30, 2022 was
$15.8 million less than the $64.9 million reported by the Specialty Commercial
Segment for the same period in 2021.  This decrease in revenue was primarily due
to lower net premiums earned of $14.6 million, driven primarily by decreased net
premiums earned in our Aerospace & Programs, Commercial Auto, Professional
Liability and E&S Property business units, partially offset by higher net
premiums earned in our E&S Casualty business unit.  Further contributing to the
decrease in revenue was lower net investment income of $1.2 million for the
three months ended June 30, 2022 as compared to the same period of 2021.

The Specialty Commercial Segment reported a pre-tax loss of $45.9 million for
the second quarter of 2022 as compared to pre-tax income of $4.8 million
reported for the same period in 2021.  The deterioration in pre-tax results was
primarily the result of higher losses and LAE of $39.7 million, as well as the
lower total revenue discussed above, partially offset by lower operating
expenses of $4.7 million during the three months ended June 30, 2022 as compared
to the same period during 2021.

Our Specialty Commercial Segment reported higher losses and LAE for the quarter
ended June 30, 2022 compared to the same period of the prior year as the
combined result of (a) a $32.0 million increase in losses and LAE in our
Commercial Auto business unit, (b) a $1.3 million decrease in losses and LAE in
our E&S Property business unit, (c) a $9.0 million increase in losses and LAE in
our E&S Casualty business unit, (d) a $5.1 million decrease in losses and LAE in
our Aerospace & Programs business unit, and (e) a $5.1 million increase in
losses and LAE attributable to our Professional Liability business unit.  The
Commercial Auto business unit's increase in losses and LAE was primarily due to
unfavorable net prior year loss reserve development of $35.4 million for the
second quarter of 2022 as compared to $0.3 million of unfavorable net prior year
loss reserve development during the second quarter of 2021.  The unfavorable
development during the second quarter of 2022 included $35.6 million of
unfavorable net prior year loss reserve development attributable to the exited
contract binding line of business.  The E&S Property business unit's decrease in
losses and LAE was primarily due to $0.1 million unfavorable net prior year loss
reserve development during the second quarter of 2022 as compared to $1.7
million unfavorable net prior year loss reserve development during the same
period of 2021 as well as improved current accident year non-catastrophe loss
trends, partially offset by $1.3 million of net catastrophe losses during the
quarter compared to nominal catastrophe losses the same period the prior year.
 The E&S Casualty business unit's increase in losses and LAE was primarily due
to $10.3 million of unfavorable prior year net loss reserve development during
the second quarter of 2022 as compared to $2.8 million of unfavorable prior year
net loss reserve development during the same period of 2021 as well as higher
net premiums earned.  The Aerospace & Programs business unit's decrease in
losses and LAE was primarily due to lower net premiums earned and lower current
accident year net loss trends in its general aviation line of business partially
offset by $2.2 million of unfavorable prior year net loss reserve development
during the second quarter of 2022 as compared to $0.5 million of unfavorable
prior year net loss reserve development during the same period of 2021.  The
Professional Liability business unit's increase in losses and LAE was primarily
due to unfavorable prior year net loss reserve development of $5.3 million
during the second quarter of 2022 as compared to $4.1 million of favorable prior
year net loss reserve development during the same period of 2021, partially
offset by lower net premiums earned as well as improved current accident year
loss trends.  Operating expenses decreased $4.7 million primarily as the result
of lower production related expenses.

The Specialty Commercial Segment reported a net loss ratio of 179.8% for the
three months ended June 30, 2022 as compared to 74.0% for the same period in
2021.  The gross loss ratio before reinsurance was 124.6% for the three months
ended June 30, 2022 as compared to 89.8% for the same period in 2021.  The
increase in the gross and net loss ratios was driven primarily by increased
unfavorable prior year loss development primarily in our exited contract binding
line of business, as well as higher net catastrophe losses.  The Specialty
Commercial Segment reported unfavorable prior year net loss reserve development
of $53.3 million during the three months ended June 30, 2022 as compared to
prior year unfavorable net loss reserve development of $1.1 million during the
same period of 2021.  The Specialty Commercial Segment reported $1.1 million of
net catastrophe losses during the second quarter of 2022 as compared to $0.1
million during the same period of 2021.  The Specialty Commercial Segment
reported a net expense ratio of 19.2% for the second quarter of 2022 as compared
to 23.8% for the same period of 2021 driven primarily by lower operating
expenses.

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Standard business segment

Gross premiums written for the Standard Commercial Segment were $28.6 million
for the three months ended June 30, 2022, which was $0.9 million more than the
$27.7 million reported for the same period in 2021.  Net premiums written were
$17.7 million for the three months ended June 30, 2022 as compared to $17.4
million for the same period in 2021.  The increase in the gross and net premiums
written was due to higher premium production in our Commercial Accounts business
unit, partially offset by higher ceded catastrophe premiums during the second
quarter of 2022.

Total Standard Business Segment Revenue of $16.9 million for the
three months completed June 30, 2022has been $0.3 million less than the $17.2 million
reported for the same period in 2021. This decline in total revenue was
primarily due to lower net investment income from $0.3 million for the
three months completed June 30, 2022 compared to the same period of 2021.

The Standard Commercial Segment reported a pre-tax loss of $0.8 million for the
three months ended June 30, 2022 as compared to a pre-tax loss of $2.0 million
for the same period of 2021.  The lower pre-tax loss was primarily the result of
lower losses and LAE of $2.1 million, partially offset by higher operating
expenses of $0.6 million and lower revenue as discussed above. Increased
operating expenses were primarily the result of higher salary and related
expenses of $0.6 million driven by higher incentive compensation accrued during
the three months ended June 30, 2022 as compared to the same period the prior
year.

The Standard Commercial Segment reported a net loss ratio of 72.9% for the
three months ended June 30, 2022 as compared to 85.4% for the same period of
2021.  The gross loss ratio before reinsurance for the three months ended June
30, 2022 was 60.7% as compared to 83.5% reported for the same period of 2021.
 The decrease in the gross and net loss ratio was due primarily to lower net
catastrophe losses of $0.8 million during the second quarter of 2022 compared to
$3.2 million for the same period of the prior year, partially offset by higher
net loss reserve development.  The Standard Commercial Segment reported
unfavorable net loss reserve development of $0.5 million during the three months
ended June 30, 2022 as compared to $18 thousand during the same period of 2021.
The Standard Commercial Segment reported a net expense ratio of 34.5% for the
second quarter of 2022 as compared to 31.7% for the same period of 2021.  The
increase in the net expense ratio was due to higher operating expenses discussed
above.

Personal Segment
Gross premiums written for the Personal Segment were $15.1 million for the
three months ended June 30, 2022 as compared to $15.8 million for the same
period in the prior year.  Net premiums written for the Personal Segment were
$15.0 million in the second quarter of 2022, which was a decrease of $0.7
million from the $15.7 million reported for the second quarter of 2021.  The
decrease in gross and net written premiums was primarily due to lower premium
production in our current geographical footprint.

Total revenue for the Personal Segment was $17.0 million for the second quarter
of 2022 as compared to $19.1 million for the same period in 2021.  The decrease
in revenue was primarily due to lower net premiums earned of $1.9 million, lower
finance charges of $0.1 million and lower net investment income of $0.1 million
during the second quarter of 2022 as compared to the same period during 2021.

Pre-tax loss for the Personal Segment was $2.8 million for the three months
ended June 30, 2022 as compared to a pre-tax loss of $2.8 million for the same
period of 2021.  Lower losses and LAE of $2.1 million were offset by the
decreased revenue discussed above for the three months ended June 30, 2022 as
compared to the same period during 2021.  Rising inflationary trends,
specifically loss costs, continue to impact the profitability of our Personal
Segment.

The Personal Segment reported a net loss ratio of 88.9% for the three months
ended June 30, 2022 as compared to 91.7% for the same period of 2021.  The gross
loss ratio before reinsurance was 89.1% for the three months ended June 30, 2022
as compared to 91.9% for the same period in 2021.  The lower gross and net loss
ratios were due mostly to lower

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net catastrophe losses of $68 thousand for the second quarter of 2022 as
compared to $0.4 million for the same period the prior year.  The Personal
Segment reported $1.8 million of unfavorable prior year loss reserve development
for the second quarter of 2022 as compared to $2.0 million report for the same
period the prior year.  The Personal Segment reported a net expense ratio of
31.6% for the second quarter of 2022 as compared to 27.2% for the same period of
2021.  The increase in the expense ratio was due primarily to lower net premiums
earned.

Corporate
Total revenue for Corporate decreased by $5.5 million for the three months ended
June 30, 2022 as compared to the same period the prior year.  This decrease in
total revenue was due predominately to a reduction in unrealized gains on equity
securities of $5.0 million for the three months ended June 30, 2022 as compared
to an increase in unrealized gain on equity securities of $1.0 million for the
same period during 2021, as well as a $1.8 million reduction in realized gains
on investments during the second quarter of 2022 as compared to the same period
of 2021, partially offset by increased net investment income during the second
quarter of 2022 of $2.4 million as compared to the same period the prior year.

Corporate pre-tax loss was $8.0 million for the three months ended June 30, 2022
as compared to a pre-tax loss of $1.1 million for the same period of 2021.  The
increased pre-tax loss for the second quarter of 2022 was primarily due to the
lower revenue discussed above, higher operating expenses of $1.4 million and
higher interest expense of $0.1 million.  The higher operating expenses were
driven by a $0.9 million increase in salary and related expenses due to
increased incentive compensation accruals and higher non-cash stock compensation
expense for restricted stock units granted in the fourth quarter of 2021 and the
second quarter of 2022.  Increased professional service expense of $0.3 million,
higher travel expense of $0.1 million and higher other general expenses of $0.1
million also contributed to the increase in operating expenses for the second
quarter of 2022 as compared to the same period the prior year.

Semester completed June 30, 2022 compared to the half-year ended June 30, 2021 (in
thousands):

Here is additional information on the business segments for the six months
ended June 30, 2022 and 2021 (in thousands):

                Six Months Ended June 30,


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                             Specialty Commercial         Standard Commercial
                                   Segment                      Segment                Personal Segment             Corporate                  Consolidated
                             2022           2021           2022         

2021 2022 2021 2022 2021 2022

2021

Gross premiums written $242,229 $240,180 $58,846 $57,447 $31,950 $35,107 $-$- $333,025

 $   332,734
Ceded premiums written      (147,915)      (133,009)      (22,338)      (20,580)        (150)        (162)             -           -      (170,403)      (153,751)
Net premiums written           94,314        107,171        36,508       
36,867       31,800       34,945             -           -        162,622  
     178,983
Change in unearned
premiums                        3,591         22,362       (3,237)       (3,254)        (387)          345             -           -           (33)         19,453
Net premiums earned            97,905        129,533        33,271       
33,613       31,413       35,290             -           -        162,589  

198,436

Total revenues                100,998        134,489        34,016        

34,928 33,867 38,074 (2,695) 8,750 166 186

216 241

Losses and loss
adjustment expenses           125,077         89,095        24,207        26,229       26,673       30,644             -           -        175,957  

145,968

Income (loss) before tax ($43,342) $16,196 $(1,478) ($1,610) ($3,845) ($4,389) $(13,004) $19 ($61,669)

$10,216

Net loss ratio (1)              127.8 %         68.8 %        72.8 %        78.0 %       84.9 %       86.8 %                                  108.2 %  

73.6

Net expense ratio (1)            20.7 %         24.0 %        34.6 %        31.7 %       30.3 %       28.8 %                                   28.9 %  

27.7

Net combined ratio (1) 148.5% 92.8% 107.4% 109.7% 115.2% 115.6%

                                  137.1 %        101.3

Net unfavorable
(favorable) prior year
development               $    59,658    $     (772)    $      208    $  (1,343)    $   3,408    $   3,159                              $    63,274    $     1,044


     The net loss ratio is calculated as incurred losses and LAE divided by net

premiums earned, each determined in accordance with GAAP. The net expense

(1) the ratio is calculated as the total technical charges offset by the agency fees

income divided by net premiums earned, each determined in accordance with

GAAP. The net combined ratio is calculated as the sum of the net loss ratio and

the net expense ratio.

Specialized business segment

Gross premiums written for the Specialty Commercial Segment were $242.2 million
for the six months ended June 30, 2022 which was $2.0 million, or 1%, higher
than the $240.2 million reported for the same period of 2021.  Net premiums
written were $94.3 million for the six months ended June 30, 2022 as compared to
$107.2 million for the same period of 2021.  The increase in gross premiums
written was primarily the result of higher premium production in our E&S
Property and E&S Casualty business units, partially offset by lower premium
production in our Aerospace & Programs, Professional Liability and Commercial
Auto business units.  The decrease in net premiums written was primarily the
result of higher ceded premiums in our E&S Property, E&S Casualty and Commercial
Auto business units as well as lower premium production in our Aerospace &
Programs, Professional Liability and Commercial Auto business units causing the
net premiums written in all of our Specialty Commercial Segment's business units
except for our E&S Property business unit to be lower during the first six
months of 2022 as compared to the same period the prior year.

The $101.0 million of total revenue for the six months ended June 30, 2022 was
$33.5 million less than the $134.5 million reported by the Specialty Commercial
Segment for the same period in 2021.  This decrease in revenue was primarily due
to lower net premiums earned of $31.6 million due primarily to the decreased
premium production discussed above, as well as lower net investment income of
$1.9 million for the six months ended June 30, 2022 as compared to the same
period of 2021.

The Specialty Commercial Segment reported pre-tax loss of $43.3 million during
the six months ended June 30, 2022 as compared to pre-tax income of $16.2
million reported for the same period in 2021.  The deterioration in pre-tax
results was primarily the result of the decreased revenue discussed above as
well as higher losses and LAE of $36.0 million, partially offset by lower
operating expenses of $9.9 million during the six months ended June 30, 2022 as
compared to the same period during 2021.

Our Specialty Commercial Segment reported higher losses and LAE for the six
months ended June 30, 2022 compared to the same period of the prior year as the
combined result of (a) a $31.0 million increase in losses and LAE in our
Commercial Auto business unit, (b) a $3.1 million increase in losses and LAE in
our E&S Property business unit, (c) a $7.7 million increase in losses and LAE in
our E&S Casualty business unit, (d) a $9.9 million decrease in losses and LAE in
our Aerospace & Programs business unit, and (e) a $4.2 million increase in
losses and LAE attributable to our Professional Liability business unit.  The
Commercial Auto business unit's increase in losses and LAE was primarily due to
unfavorable net prior year loss reserve development of $37.8 million for the
first six months of 2022 as compared to

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$1.3 million of favorable net prior year loss reserve development during the
same period of 2021, partially offset by lower net premiums earned.  The
unfavorable development during the the first six months of 2022 included $44.4
million of unfavorable net prior year loss reserve development attributable to
the exited contract binding line of business.  The E&S Property business unit's
increase in losses and LAE was primarily due to $3.2 million unfavorable net
prior year loss reserve development during the first six months of 2022 as
compared to $1.2 million unfavorable net prior year loss reserve development
during the same period of 2021 as well as net catastrophe losses of $1.9 million
during the first six months of 2022 compared to $1.2 million of net catastrophe
losses the same period the prior year and higher net current accident year
non-catastrophe loss trends.  The E&S Casualty business unit's increase in
losses and LAE was primarily due to $11.2 million of unfavorable prior year net
loss reserve development during the first six months of 2022 as compared to $4.0
million of unfavorable prior year net loss reserve development during the same
period of 2021 as well as higher net premiums earned.  The Aerospace & Programs
business unit's decrease in losses and LAE was primarily due to lower net
premiums earned and lower current accident year net loss trends in its general
aviation line of business partially offset by $2.5 million of unfavorable prior
year net loss reserve development during the first six months of 2022 as
compared to $0.5 million of unfavorable prior year net loss reserve development
during the same period of 2021.  The Professional Liability business unit's
increase in losses and LAE was primarily due to unfavorable prior year net loss
reserve development of $5.0 million during the first six months of 2022 as
compared to $5.2 million of favorable prior year net loss reserve development
during the same period of 2021, partially offset by lower net premiums earned as
well as improved current accident year loss trends.  Operating expenses
decreased $9.9 million primarily as the result of lower production related
expenses as well as lower salary and related expenses.

The Specialty Commercial segment recorded a net loss ratio of 127.8% for
six months completed June 30, 2022 compared to 68.8% for the same period in 2021.

 The gross loss ratio before reinsurance was 106.4% for the six months ended
June 30, 2022 as compared to 82.2% for the same period in 2021.  The increase in
the gross and net loss ratios was driven primarily by increased unfavorable
prior year loss development primarily in our exited contract binding line of
business.  The Specialty Commercial Segment reported unfavorable prior year net
loss reserve development of $59.7 million during the six months ended June 30,
2022 as compared to favorable prior year net loss reserve development of $0.8
million during the same period of 2021.  The Specialty Commercial Segment
reported $2.0 million of net catastrophe losses during the first six months of
2022 as compared to $3.7 million during the same period of 2021.  The Specialty
Commercial Segment reported a net expense ratio of 20.7% for the first six
months of 2022 as compared to 24.0% for the same period of 2021 driven primarily
by lower operating expenses.

Standard business segment

Gross premiums written for the Standard Commercial Segment were $58.8 million
for the six months ended June 30, 2022, which was $1.4 million, or 2%, more than
the $57.4 million reported for the same period in 2021. Net premiums written
were $36.5 million for the three months ended June 30, 2022 as compared to $36.9
million for the same period in 2021.  The increase in the gross premiums written
was due to higher premium production in our Commercial Accounts business unit.

The decrease in net premiums written is mainly explained by the increase in ceded premiums
catastrophe premiums compared to the same period the previous year.

Total Standard Business Segment Revenue of $34.0 million for the
six months completed June 30, 2022 has been $0.9 million less than the $34.9 million
reported for the same period in 2021. This decline in total revenue was
primarily due to lower net investment income from $0.6 million and lower net
bonuses earned from $0.3 million for the three months ended June 30, 2022 as
compared to the same period of 2021.

Our Standard Commercial Segment reported a pre-tax loss of $1.5 million for the
six months ended June 30, 2022 as compared to a pre-tax loss of $1.6 million
reported for the same period of 2021.  The lower pre-tax loss was the result of
lower loss and LAE of $2.0 million, partially offset by higher operating
expenses of $1.0 million and the decreased revenue discussed above.  Increased
operating expenses were primarily the result of higher salary and related
expenses of $0.8 million, mostly due to increased incentive compensation accrual
as compared to the prior year period, and higher other general expenses of
$0.2
million.

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The Commercial Standard segment posted a net loss ratio of 72.8% for
six months completed June 30, 2022 compared to 78.0% for the same period of 2021.

 The gross loss ratio before reinsurance for the six months ended June 30, 2022
was 59.7% as compared to 70.8% reported for the same period of 2021.  The
decrease in the gross and net loss ratios was due primarily to lower net
catastrophe losses of $1.0 million during the six months ended June 30, 2022
compared to $5.2 million for the same period of the prior year, partially offset
by higher current accident year gross and net loss trends as well as adverse
prior year loss reserve development.  The Standard Commercial Segment reported
unfavorable net loss reserve development of $0.2 million during the six months
ended June 30, 2022 as compared to favorable net loss reserve development of
$1.3 million during the same period of 2021.  The Standard Commercial Segment
reported a net expense ratio of 34.6% for the six months ended June 30, 2022 as
compared to 31.7% for the same period of 2021.  The increase in the expense
ratio was primarily due to higher operating expenses as discussed above.

Personal Segment

Gross premiums written for the Personal Segment were $32.0 million for the
six months ended June 30, 2022 as compared to $35.1 million for the same period
in the prior year.  Net premiums written for our Personal Segment were $31.8
million for the six months ended June 30, 2022, which was a decrease of $3.1
million from the $34.9 million reported for the same period of 2021.  The
decrease in gross and net written premiums was primarily due to lower premium
production in our current geographical footprint.

Total retail segment revenue was $33.9 million for six months
ended June 30, 2022 compared to $38.1 million for the same period in 2021.

 The decrease in revenue was primarily due to a decrease in net premiums earned
of $3.9 million and lower finance charges of $0.3 million during the six months
ended June 30, 2022 as compared to the same period during 2021.

Pre-tax loss for the Personal Segment was $3.8 million for the six months ended
June 30, 2022 as compared to a pre-tax loss of $4.4 million for the same period
of 2021.  The lower pre-tax loss was primarily the result of lower losses and
LAE of $4.0 million and lower operating expenses of $0.8 million, partially
offset by decreased revenue discussed above for the six months ended June 30,
2022 as compared to the same period during 2021.

The Personal Segment reported a net loss ratio of 84.9% for the six months ended
June 30, 2022 as compared to 86.8% for the same period of 2021.  The gross loss
ratio before reinsurance was 85.1% for the six months ended June 30, 2022 as
compared to 88.1% for the same period in 2021.  The lower gross and net loss
ratios for the six months ended June 30, 2022 was primarily the result of lower
net catastrophe losses of $89 thousand for the six months ended June 30, 2022 as
compared to $0.8 million for the same period the prior year, as well as lower
current accident year loss trends, partially offset by higher unfavorable prior
year loss reserve development.  The Personal Segment reported $3.4 million net
unfavorable prior year loss reserve development during the first six months of
2022 as compared to net unfavorable prior year loss reserve development of $3.2
million during the first six months of 2021.  The Personal Segment reported a
net expense ratio of 30.3% during the six months ended June 30, 2022 as compared
to 28.8% for the same period of 2021. The increase in the expense ratio was due
predominately to lower net premiums earned and lower finance charges.

Company

Total revenue for Corporate decreased by $11.5 million for the six months ended
June 30, 2022 as compared to the same period the prior year.  This decrease in
total revenue was due predominately to a decrease in unrealized gains on equity
securities of $5.1 million during the six months ended June 30, 2022 as compared
to an increase in unrealized gains on equity securities of $5.4 million reported
for the same period of 2021, as well as a decrease in realized gains on
investment of $3.1 million, partially offset by higher net investment income of
$2.1 million for the six months ended June 30, 2022 as compared to the same
period during 2021.

Corporate pre-tax loss was $13.0 million for the six months ended June 30, 2022
as compared to pre-tax income of $19 thousand for the same period of 2021.  The
pre-tax loss for the six months ended June 30, 2022 was primarily due to the
lower revenue discussed above as well as higher operating expenses of $1.4
million and higher interest expense of $0.1 million.  The higher operating
expenses were driven by a $0.9 million increase in salary and related expenses
due to

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increased incentive compensation accruals and higher non-cash stock compensation
expense for restricted stock units granted in the fourth quarter of 2021 and the
second quarter of 2022.  Increased professional service expense of $0.2 million,
higher travel expense of $0.1 million and higher other general expenses of $0.2
million also contributed to the increase in operating expenses for the six
months ended June 30, 2022 as compared to the same period the prior year.

Financial situation and liquidity

Sources and uses of funds

Our sources of funds are from insurance-related operations, financing activities
and investing activities. Major sources of funds from operations include
premiums collected (net of policy cancellations and premiums ceded),
commissions, and processing and service fees. As a holding company, Hallmark is
dependent on dividend payments and management fees from its subsidiaries to meet
operating expenses and debt obligations. As of June 30, 2022, Hallmark and its
non-insurance company subsidiaries had $13.3 million in unrestricted cash and
cash equivalents. As of that date, our insurance subsidiaries held $99.9 million
of unrestricted cash and cash equivalents, as well as $435.3 million in debt
securities with an average modified duration of 1.0 years. Accordingly, we do
not anticipate selling long-term debt instruments to meet liquidity needs.

AHIC and TBIC, domiciled in Texas, are limited in the payment of dividends to
their stockholders in any 12-month period, without the prior written consent of
the Texas Department of Insurance, to the greater of statutory net income for
the prior calendar year or 10% of statutory policyholders' surplus as of the
prior year end. Dividends may only be paid from unassigned surplus funds. HIC
and HNIC, both domiciled in Arizona, are limited in the payment of dividends to
the lesser of 10% of prior year policyholders' surplus or prior year's statutory
net income, without prior written approval from the Arizona Department of
Insurance. HSIC, domiciled in Oklahoma, is limited in the payment of dividends
to the greater of 10% of prior year policyholders' surplus or prior year's
statutory net income, not including realized capital gains, without prior
written approval from the Oklahoma Insurance Department. During 2022, the
aggregate ordinary dividend capacity of these subsidiaries is $32.0 million, of
which $22.7 million is available to Hallmark. As a county mutual, dividends from
HCM are payable to policyholders. During the first six months of both 2022 and
2021, our insurance subsidiaries paid $3.0 million in dividends to Hallmark.
During the first six months of 2022 and 2021, our insurance subsidiaries paid
$6.5 million and $7.0 million in management fees to Hallmark, respectively.

Comparison of June 30, 2022 at December 31, 2021

On a consolidated basis, our cash (excluding restricted cash) and investments at
June 30, 2022 were $592.8 million compared to $691.6 million at December 31,
2021. The primary reasons for this decrease in unrestricted cash and investments
were cash used by operations and purchases of investment securities.

Comparison of the six months ended June 30, 2022 and June 30, 2021

During the six months ended June 30, 2022, our cash flow used by operations was
$78.3 million compared to cash flow provided by operations of $28.9 million
during the same period the prior year. The cash flow used in operations was
driven primarily by higher reinsurance balances paid (including $38.6 million
paid to fund the payment of claims under the LPT Contract without prejudice on
behalf of DARAG under the interim agreement), an increase in net paid claims and
lower collected investment income, partially offset by decreased paid operating
expenses and federal income taxes recovered during the six months ended June 30,
2022 as compared to the same period the prior year.

Net cash used in investing activities during the first six months of 2022 was
$161.1 million as compared to net cash provided by investing activities of
$194.8 million during the first six months of 2021. The net cash used in
investing activities during the first six months of 2022 was primarily comprised
of an increase of $217.8 million in purchases of debt and equity securities, a
decrease of $137.6 million in maturities, sales and redemptions of investment
securities and a $0.5 million increase in purchases of fixed assets.

The Company reported no net cash provided by financing activities during the year
first six months of 2022 or 2021.

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Senior Unsecured Notes
On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes
("Notes") due August 15, 2029. Interest on the Notes accrues at the rate of
6.25% per annum and is payable semi-annually in arrears commencing February 15,
2020. The Notes are not obligations of or guaranteed by any of Hallmark's
subsidiaries and are not subject to any sinking fund requirements. At Hallmark's
option, the Notes are redeemable, in whole or in part, prior to the stated
maturity subject to certain provisions intended to make the holders of the Notes
whole on scheduled interest and principal payments. The indenture governing the
Notes contains certain covenants which, among other things, restrict Hallmark's
ability to incur additional indebtedness, make certain payments, create liens on
the stock of certain subsidiaries, dispose of certain assets, or merge or
consolidate with other entities. The terms of the indenture prohibits payments
or other distributions on any security of the Company that ranks junior to the
Notes when the Company's debt to capital ratio (as defined in the indenture) is
greater than 35%.  The Company's debt to capital ratio was 52.0% as of June
30,
2022.

Subordinated Debt Securities

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

Each trust pays dividends on its preferred securities at the same rate each
quarter as interest is paid on the junior subordinated debt securities. Under
the terms of the trust subordinated debt securities, we pay interest only each
quarter and the principal of each note at maturity. We may elect to defer
payments of interest on the trust subordinated debt securities by extending the
interest payment period for up to 20 consecutive quarterly periods.  During any
such extension period, interest continues to accrue on the trust subordinated
debt securities, as well as interest on such accrued interest.  In order to
maintain compliance with the terms of our senior unsecured Notes, we have
elected to defer payment of interest on the trust subordinated securities until
our debt to capital ratio (as defined in the indenture governing the Notes) is
less than 35%. The subordinated debt securities of each trust are
uncollateralized and do not require maintenance of minimum financial covenants.

The following table summarizes the nature and modalities of the junior subordinate
Preferred Debt and Trust Securities:

                                                  Hallmark                      Hallmark
                                                  Statutory                     Statutory
                                                   Trust I                      Trust II

Issue date                                      June 21, 2005                August 23, 2007
Principal amount of trust preferred
securities                              $          30,000             $          25,000
Principal amount of junior
subordinated debt securities            $          30,928             $          25,774
Maturity date of junior subordinated
debt securities                                 June 15, 2035              September 15, 2037
Trust common stock                      $            928              $            774
Interest rate, per annum                  Three Month LIBOR + 3.25%     Three Month LIBOR + 2.90%
Current interest rate at June 30,
2022                                                5.08%                         4.73%


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