HALLMARK FINANCIAL SERVICES INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

Introduction

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

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

Specialty Commercial Segment. Our Specialty Commercial Segment includes our

Commercial Auto business unit which offers primary and excess commercial

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

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

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

business unit which offers primary and excess commercial property insurance for

? both catastrophe and non-catastrophe exposures; our Professional Liability

business unit which offers healthcare and financial lines professional

liability insurance products and services primarily for businesses, medical

professionals, medical facilities and, through 2020, senior care facilities;

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

until exited during 2020, satellite launch property/casualty insurance products

   and services, as well as certain specialty programs.

Standard Commercial Segment. Our Standard Commercial Segment includes the

? package and monoline property/casualty and, until exited during 2016,

occupational accident insurance products and services

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handled by our Commercial Accounts business unit; and the runoff of workers

compensation insurance products handled by our former Workers Compensation

operating unit until discontinued during 2016.

Personal Segment. Our Personal Segment includes the non-standard personal

? automobile and renters insurance products and services handled by our Specialty

Personal Lines business unit.

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

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

Results of Operations

Management overview. During the three months ended September 30, 2021, our total
revenue was $97.4 million, representing a decrease of 19% from the $120.3
million in total revenue for the same period of 2020. During the nine months
ended September 30, 2021, our total revenue was $313.6 million, representing a
decrease of 10% from the $349.8 million in total revenue for the same period of
2020.  During the three months ended September 30, 2021, we reported pre-tax
income of $4.4 million, as compared to a pre-tax loss of $37.8 million reported
during the same period the prior year. During the nine months ended September
30, 2021, we reported pre-tax income of $14.6 million, as compared to a pre-tax
loss of $102.5 million reported during the same period the prior year.



The decrease in revenue for the three months ended September 30, 2021 compared
to the same period of the prior year was primarily due to lower net premiums
earned of $22.3 million, lower net investment income of $0.5 million, lower
finance charges of $0.2 million, partially offset by lower net investment losses
of $0.1 million. The decrease in revenue for the nine months ended September 30,
2021 compared to the same period of the prior year was primarily due to
decreased net premiums earned of $69.2 million, lower net investment income of
$2.7 million, lower commission and fees of $0.1 million and lower finance
charges of $1.2 million, partially offset by higher net investment gains of
$37.0 million.



The improvement in pre-tax results for the three months ended September 30, 2021
compared to the same period of the prior year was primarily due to decreased
losses and loss adjustment expenses ("LAE") of $58.8 million, lower operating
expenses of $5.8 million and lower amortization of intangible assets of $0.5
million, partially offset by decreased revenue discussed above. The decrease in
losses and LAE was primarily due to lower current accident year loss trends and
a $12.4 million improvement in unfavorable net prior year loss reserve
development. Losses and LAE for the third quarter of 2021 included $2.8 million
of net catastrophe losses as compared to $9.6 million during the same period of
the prior year.

The improvement in pre-tax results for the nine months ended September 30, 2021
as compared to the same period the prior year was primarily due to the absence
of $46.0 million of impairment charges to goodwill and indefinite-lived
intangible assets taken during the first quarter of 2020, a $98.6 million
decrease in losses and LAE, a $6.9 million decrease in operating expenses and a
$1.4 million decrease in amortization of intangible assets, partially offset by
the decreased revenue discussed above.  The impairment charges during the first
quarter of 2020 resulted from our determination that a significant decline in
market capitalization below stockholders' equity indicated the impairment of

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the goodwill and indefinite-lived intangible assets included in our balance
sheet.  The decrease in losses and LAE was primarily the result of exiting the
contract binding line of the primary automobile business marketed by our
Commercial Auto business unit commencing in February 2020, as well as a $30.7
million improvement in unfavorable net prior year loss reserve development.



We reported net income of $3.4 million for the three months ended September 30,
2021 as compared to a net loss of $28.4 million for the same period in 2020. We
reported net income of $11.6 million for the nine months ended September 30,
2021 as compared to a net loss of $86.5 million for the same period in 2020. On
a diluted basis per share, we reported net income of $0.19 per share for the
three months ended September 30, 2021, compared to net loss of $1.56 per share
for the same period in 2020. On a diluted basis per share, we reported net
income of $0.64 per share for the nine months ended September 30, 2021, as
compared to a net loss of $4.77 per share for the same period in 2020.  Our
effective tax rate was 20.8% for the first nine months of 2021 compared to 15.6%
for the same period in 2020.  The effective rate for the nine months ended
September 30, 2021 varied from the statutory tax rates primarily due to
tax-exempt interest income.  The effective tax rate for the nine months ended
September 30, 2020 varied from the statutory tax rates primarily due to the
non-deductible impairment of goodwill and indefinite-lived intangible assets.

Third Quarter 2021 as Compared to Third Quarter 2020

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

Three Months Ended September 30,

                            Specialty Commercial        Standard Commercial
                                  Segment                     Segment               Personal Segment             Corporate                 Consolidated
                             2021          2020          2021         2020         2021         2020         2021         2020          2021          2020
Gross premiums written    $  126,716    $  150,016    $   24,935    $  24,726    $  17,453    $  21,722    $       -    $       -    $  169,104    $  196,464
Ceded premiums written      (69,424)      (72,977)       (8,644)      (7,270)         (72)      (3,161)            -            -      (78,140)  

(83,408)

Net premiums written 57,292 77,039 16,291 17,456 17,381 18,561

            -            -        90,964       113,056
Change in unearned
premiums                       2,623         3,979         1,177        (744)        (417)          429            -            -         3,383         3,664
Net premiums earned           59,915        81,018        17,468      

16,712       16,964       18,990            -            -        94,347   

116,720

Total revenues                62,493        83,749        18,157       

17,398 18,316 20,513 (1,616) (1,367) 97,350

120,293

Losses and loss
adjustment expenses           36,560        92,625        10,411       14,683       16,735       15,247            -            -        63,706   

122,555

Pre-tax income (loss) $ 12,620 $ (27,237) $ 1,957 $ (1,672) $ (3,887) $ (2,065) $ (6,299) $ (6,818) $ 4,391

$ (37,792)

Net loss ratio (1)              61.0 %       114.3 %        59.6 %       87.9 %       98.7 %       80.3 %                                  67.5 %       105.0 %
Net expense ratio (1)           22.0 %        22.2 %        32.9 %       26.1 %       26.1 %       32.0 %                                  28.4 %        27.7 %
Net combined ratio (1)          83.0 %       136.5 %        92.5 %      114.0 %      124.8 %      112.3 %                                  95.9 %       132.7 %

Net (Unfavorable)
Favorable Prior Year
Development               $  (1,305)    $ (11,493)    $      993    $ (1,431)    $ (1,197)    $   (987)                              $  (1,509)    $ (13,911)

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) ratio is calculated as total underwriting expenses offset by agency fee

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

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

the net expense ratio.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were $126.7 million
for the three months ended September 30, 2021, which was $23.3 million, or 16%,
less than the $150.0 million reported for the same period of 2020.  Net premiums
written were $57.3 million for the three months ended September 30, 2021 as
compared to $77.0 million for the same period of 2020.  The decrease in gross
and net premiums written was primarily the result of lower premium

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production in our Commercial Auto, Professional Liability and E&S Property
business units, partially offset by increased premium production in our E&S
Casualty and Aerospace & Programs business units.

The $62.5 million of total revenue for the three months ended September 30, 2021
was $21.2 million less than the $83.7 million reported by the Specialty
Commercial Segment for the same period in 2020. This decrease in revenue was
primarily due to lower net premiums earned of $21.1 million driven primarily by
decreased net premiums earned in the Commercial Auto business unit and the
Professional Liability business unit.  Further contributing to the decrease in
revenue was lower net investment income of $0.1 million for the three months
ended September 30, 2021 as compared to the same period of 2020.

The Specialty Commercial Segment reported pre-tax income of $12.6 million for
the third quarter of 2021 as compared to pre-tax loss of $27.3 million reported
for the same period in 2020.  The pre-tax income was primarily the result of
lower losses and LAE of $56.1 million, lower operating expenses of $4.6 million
and lower amortization of intangible assets of $0.4 million during the
three months ended September 30, 2021 as compared to the same period during
2020, partially offset by the lower total revenue discussed above.

Our Specialty Commercial Segment reported lower losses and LAE for the quarter
ended September 30, 2021 compared to the same period of the prior year as the
combined result of (a) a $48.1 million decrease in losses and LAE in our
Commercial Auto business unit  due largely to exit of the contract binding line
of business as well as a $10.9 million improvement in unfavorable prior year net
loss reserve development, (b) a $10.5 million decrease in losses and LAE in our
E&S Property business unit due primarily due to a $6.1 million improvement in
net catastrophe losses, $0.6 million lower unfavorable net prior year loss
reserve development and lower current accident year non-catastrophe losses, (c)
a $6.5 million increase in losses and LAE in our E&S Casualty business unit due
primarily to a $3.0 million increase in unfavorable prior year net loss reserve
development and higher current accident year loss trends, (d) a $0.7 million
increase in losses and LAE in our Aerospace & Programs business unit due
primarily to higher current accident year net loss trends driven by higher
satellite losses, partially offset by a $0.1 million lower unfavorable net loss
reserve development, and (e) a $4.7 million decrease in losses and LAE
attributable to our Professional Liability business unit due primarily to lower
current accident year loss trends and favorable net prior year loss reserve
development of $1.1 million during the third quarter of 2021 as compared to
unfavorable net prior year loss reserve development of $0.5 million during

the
same period the prior year.

Operating expenses decreased $4.6 million primarily as the result of lower
production related expenses of $0.9 million, lower occupancy and related
expenses of $0.2 million, lower salary and related expenses of $3.1 million
driven by decreased incentive compensation expense and lower professional
services of $0.6 million, partially offset by higher other operating expenses of
$0.2 million.

The Specialty Commercial Segment reported a net loss ratio of 61.0% for the
three months ended September 30, 2021 as compared to 114.3% for the same period
in 2020. The gross loss ratio before reinsurance was 81.5% for the three months
ended September 30, 2021 as compared to 100.4% for the same period in 2020
driven primarily by lower current accident year loss trends and lower
catastrophe losses. The Specialty Commercial Segment reported $5.2 million of
gross catastrophe losses during the third quarter of 2021 as compared to $40.5
million during the same period of 2020. The decrease in the net loss ratio was
also impacted by $1.3 million of unfavorable prior year net loss reserve
development for the three months ended September 30, 2021 as compared to
unfavorable prior year net loss reserve development of $11.5 million for the
same period of 2020.  Net catastrophe losses of $2.2 million for the three
months ended September 30, 2021 as compared to catastrophe losses of $8.1
million during the third quarter of 2020 also contributed to the decrease in the
net loss ratio.  The Specialty Commercial Segment reported a net expense ratio
of 22.0% for the third quarter of 2021 as compared to 22.2% for the same period
of 2020 driven primarily by lower operating expenses.





Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $24.9 million
for the three months ended September 30, 2021, which was $0.2 million more than
the $24.7 million reported for the same period in 2020.  Net premiums written
were $16.3 million for the three months ended September 30, 2021 as compared to
$17.5 million for the

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same period in 2020. 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 was due to higher ceded catastrophe premiums
during the third quarter of 2021

Total revenue for the Standard Commercial Segment of $18.2 million for the
three months ended September 30, 2021, was $0.8 million more than the $17.4
million reported for the same period in 2020. This increase in total revenue was
due to higher net premiums earned of $0.8 million due to higher premium
production for the three months ended September 30, 2021 as compared to the same
period of 2020.

Our Standard Commercial Segment reported pre-tax income of $2.0 million for the
three months ended September 30, 2021 as compared to a pre-tax loss of $1.7
million reported for the same period of 2020.  The pre-tax income was the result
of lower loss and LAE of $4.3 million and the higher revenue discussed above,
partially offset by higher operating expenses of $1.4 million. Increased
operating expenses were primarily the result of higher production related
expenses of $1.1 million, higher other operating expenses of $0.1 million and
higher salary and related expenses of $0.2 million.

The Standard Commercial Segment reported a net loss ratio of 59.6% for the
three months ended September 30, 2021 as compared to 87.9% for the same period
of 2020.  The gross loss ratio before reinsurance for the three months ended
September 30, 2021 was 52.9% as compared to 72.0% reported for the same period
of 2020.  The decrease in the net loss ratio was due primarily to net
catastrophe losses of $0.5 million during the third quarter of 2021 compared to
$1.5 million for the same period of the prior year and lower non-catastrophe
current accident year loss trends.  The Standard Commercial Segment reported
favorable net loss reserve development of $1.0 million during the three months
ended September 30, 2021 as compared to unfavorable net loss reserve development
of $1.4 million during the same period of 2020 The Standard Commercial Segment
reported a net expense ratio of 32.9% for the third quarter of 2021 as compared
to 26.1% for the same period of 2020.  The increase in the expense ratio was
primarily due to higher production related expenses.





Personal Segment

Gross premiums written for the Personal Segment were $17.5 million for the
three months ended September 30, 2021 as compared to $21.7 million for the same
period in the prior year.  Net premiums written for our Personal Segment were
$17.4 million in the third quarter of 2021, which was a decrease of $1.2 million
from the $18.6 million reported for the third quarter of 2020.  The decrease in
gross and net written premiums was primarily due to lower premium production in
our current geographical footprint.

Total revenue for the Personal Segment was $18.3 million for the third quarter
of 2021 as compared to $20.5 million for the same period in 2020.  The decrease
in revenue was primarily due to lower net premiums earned of $2.0 million and
lower finance charges of $0.2 million during the third quarter of 2021 as
compared to the same period during 2020.

Pre-tax loss for the Personal Segment was $3.9 million for the three months
ended September 30, 2021 as compared to a pre-tax loss of $2.1 million for the
same period of 2020.  The pre-tax loss was primarily the result of higher losses
and LAE of $1.5 million and the decreased revenue as discussed above, partially
offset by decreased operating expenses of $1.8 million and decreased
amortization of intangible assets of $0.1 million for the three months ended
September 30, 2021 as compared to the same period during 2020.

The Personal Segment reported a net loss ratio of 98.7% for the three months
ended September 30, 2021 as compared to 80.3% for the same period of 2020.  The
gross loss ratio before reinsurance was 99.5% for the three months ended
September 30, 2021 as compared to 80.3% for the same period in 2020.  The higher
gross and net loss ratios were impacted by higher current accident year loss
trends and $0.2 million higher net unfavorable prior year loss reserve
development.   The Personal Segment reported a net expense ratio of 26.1% for
the third quarter of 2021 as compared to 32.0% for the same period of 2020.

The

decrease in the expense ratio was due primarily to lower operating expenses.

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Corporate

Total revenue for Corporate decreased by $0.2 million for the three months ended
September 30, 2021 as compared to the same period the prior year.  This decrease
in total revenue was due predominately to lower net investment income of $0.3
million for the three months ended September 30, 2021 as compared to the same
period during 2020, partially offset by a $0.1 million improvement in investment
losses during the third quarter of 2021 as compared to the same period of 2020.

Corporate pre-tax loss was $6.3 million for the three months ended September 30,
2021 as compared to pre-tax loss of $6.8 million for the same period of 2020.

 The improvement in pre-tax results for the third quarter of 2021 as compared to
the same period the prior year was primarily due to lower operating expenses of
$0.7 million driven primarily by lower professional services of $0.3 million,
lower salary and related expense of $0.5 million and higher general expenses of
$0.1 million, partially offset by lower revenue discussed above.

Nine Months Ended September 30, 2021 as compared to Nine Months Ended September
30, 2020 (in thousands):




                                                                              Nine Months Ended September 30,
                             Specialty Commercial         Standard Commercial
                                   Segment                      Segment                Personal Segment              Corporate                  Consolidated
                             2021           2020           2021          2020         2021         2020         2021          2020          2021           2020
Gross premiums written    $   366,896    $   438,113    $   82,382    $   74,944    $  52,560    $  68,640    $       -    $        -    $   501,838    $   581,697
Ceded premiums written      (202,433)      (207,699)      (29,224)      (21,770)        (234)      (9,798)            -             -      (231,891)      (239,267)
Net premiums written          164,463        230,414        53,158        53,174       52,326       58,842            -             -        269,947        342,430
Change in unearned
premiums                       24,985         21,681       (2,077)       (3,643)         (72)        1,549            -             -         22,836         19,587
Net premiums earned           189,448        252,095        51,081        49,531       52,254       60,391            -             -        292,783        362,017

Total revenues                196,982        262,761        53,085        52,130       56,390       65,300        7,134      (30,430)        313,591        349,761

Losses and loss
adjustment expenses           125,655        220,215        36,640        37,313       47,379       50,750            -             -        209,674        308,278

Pre-tax income (loss)          28,816        (5,752)           347         (154)      (8,275)      (5,836)      (6,280)      (90,742)         14,608      (102,484)

Net loss ratio (1)               66.3 %         87.4 %        71.7 %        75.3 %       90.7 %       84.0 %                                    71.6 %         85.2 %
Net expense ratio (1)            23.4 %         19.3 %        32.1 %        30.6 %       27.9 %       27.0 %                                    28.0 %         24.2 %
Net combined ratio (1)           89.7 %        106.7 %       103.8 %       105.9 %      118.6 %      111.0 %                                    99.6 %        109.4 %

Net (Unfavorable)
Favorable Prior Year
Development                     (533)       (23,961)         2,336       (2,350)      (4,356)      (6,948)                                   (2,553)       (33,259)


     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) ratio is calculated as total underwriting expenses offset by agency fee

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

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

     the net expense ratio.

Specialty Commercial Segment

Gross premiums written for the Specialty Commercial Segment were $366.9 million
for the nine months ended September 30, 2021 which was $71.2 million, or 16%,
less than the $438.1 million reported for the same period of 2020. Net premiums
written were $164.5 million for the nine months ended September 30, 2021 as
compared to $230.4 million for the same period of 2020. The decrease in gross
and net premiums written was primarily the result of lower premium production in
our Commercial Auto, Professional Liability, E&S Property and Aerospace &
Programs business units, partially offset by increased premium production in our
E&S Casualty business unit.

The $197.0 million of total revenue for the nine months ended September 30, 2021
was $65.8 million less than the $262.8 million reported by the Specialty
Commercial Segment for the same period in 2020. This decrease in revenue was
primarily due to lower net premiums earned of $62.6 million due primarily to the
decreased premium production

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discussed above, as well as lower net investment income of $3.2 million for the
nine months ended September 30, 2021 as compared to the same period of 2020.

Pre-tax income for the Specialty Commercial Segment was $28.8 million during the
nine months ended September 30, 2021 as compared to a pre-tax loss of $5.8
million for the same period in 2020. The pre-tax income was primarily the result
of lower losses and LAE of $94.6 million, lower operating expenses of $4.6
million and lower amortization of intangible assets of $1.2 million during the
nine months ended September 30, 2021 as compared to the same period during 2020,
partially offset by the lower revenue discussed above.

Our Specialty Commercial Segment reported lower losses and LAE for the nine
months ended September 30, 2021 compared to the same period of the prior year as
the combined result of (a) a $91.7 million decrease in losses and LAE in our
Commercial Auto business unit  due largely to exit of the contract binding line
of business, as well as a $27.7 million improvement in prior year net loss
reserve development, (b) a $12.2 million decrease in losses and LAE in our E&S
Property business unit due primarily to a $10.7 million improvement in net
catastrophe losses, partially offset by unfavorable net prior year loss reserve
development of $1.0 million during the nine months ended September 30, 2021 as
compared to $1.9 million of favorable prior year net loss reserve development
during the same period of 2020 and higher current accident year non-catastrophe
losses, (c) a $16.3 million increase in losses and LAE in our E&S Casualty
business unit due primarily to higher unfavorable prior year net loss reserve
development of $6.7 million and higher net premiums earned, (d) a $1.6 million
decrease in losses and LAE in our Aerospace & Programs business unit due
primarily to lower current accident year net loss trends driven by lower
satellite losses, and (e) a $5.4 million decrease in losses and LAE attributable
to our Professional Liability business unit  due primarily to $5.4 million
higher favorable net prior year loss reserve development, partially offset by
higher current accident year loss trends.



Operating expenses decreased $4.6 million primarily as the result of lower
production related expenses of $2.8 million, lower occupancy and related
expenses of $0.7 million, lower professional services of $1.5 million, lower
travel and related expenses of $0.1 million and lower salary and related
expenses of $0.5 million driven by decreased incentive compensation expense,
partially offset by higher other operating expenses of $1.0 million.

The Specialty Commercial Segment reported a net loss ratio of 66.3% for the
nine months ended September 30, 2021 as compared to 87.4% for the same period in
2020. The gross loss ratio before reinsurance was 82.2% for the nine months
ended September 30, 2021 as compared to 89.7% for the same period in 2020. The
decrease in the net loss ratio was impacted by $0.5 million of unfavorable
prior year net loss reserve development for the nine months ended September 30,
2021 as compared to unfavorable prior year net loss reserve development of $24.0
million for the same period of 2020.  Net catastrophe losses of $5.9 million for
the nine months ended September 30, 2021 as compared to net catastrophe losses
of $16.4 million during the same period of 2020 also contributed to the decrease
in the loss ratio.  The Specialty Commercial Segment reported a net expense
ratio of 23.4% for the nine months ended September 30, 2021 as compared to 19.3%
for the same period of 2020 driven primarily by lower net premiums earned.

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $82.4 million
for the nine months ended September 30, 2021, which was $7.5 million, or 10%,
more than the $74.9 million reported for the same period in 2020. Net premiums
written were $53.2 million for the nine months ended both September 30, 2021 and
2020. The increase in the gross premiums written was due to higher premium
production in our Commercial Accounts business unit.

Total revenue for the Standard Commercial Segment of $53.1 million for the
nine months ended September 30, 2021, was $1.0 million, more than the $52.1
million reported for the same period in 2020. This increase in total revenue was
due to higher net premiums earned of $1.6 million, partially offset by lower net
investment income of $0.5 million and lower finance charges of $0.1 million for
the nine months ended September 30, 2021 as compared to the same period of

2020.

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Our Standard Commercial Segment reported pre-tax income of $0.3 million for the
nine months ended September 30, 2021 as compared to a pre-tax loss of $0.2
million reported for the same period of 2020. The pre-tax income was the result
of lower loss and LAE of $0.7 million and the increased revenue discussed above,
partially offset by higher operating expenses of $1.2 million. Increased
operating expenses were primarily the result of higher production related
expenses of $1.1 million, higher salary and related expenses of $0.1 million and
higher other general expenses of $0.2 million, partially offset by lower
professional services of $0.2 million.

The Standard Commercial Segment reported a net loss ratio of 71.7% for the
nine months ended September 30, 2021 as compared to 75.3% for the same period of
2020. The gross loss ratio before reinsurance for the nine months ended
September 30, 2021 was 64.7% as compared to 68.9% reported for the same period
of 2020. The decrease in the gross and net loss ratios was due primarily to
lower gross and net prior year development, partially offset by higher current
accident year loss trends.  The Standard Commercial Segment reported favorable
net loss reserve development of $2.3 million during the nine months ended
September 30, 2021 as compared to unfavorable net loss reserve development of
$2.4 million during the same period of 2020. The Standard Commercial Segment
reported a net expense ratio of 32.1% for the nine months ended September 30,
2021 as compared to 30.6% for the same period of 2020. The increase in the
expense ratio was primarily due to higher operating expenses in our Commercial
Accounts business unit.



Personal Segment

Gross premiums written for the Personal Segment were $52.6 million for the
nine months ended September 30, 2021 as compared to $68.6 million for the same
period in the prior year. Net premiums written for our Personal Segment were
$52.3 million for the nine months ended September 30, 2021, which was a decrease
of $6.5 million from the $58.8 million reported for the same period of 2020. The
decrease in gross and net written premiums was primarily due to lower premium
production in our current geographical footprint.

Total revenue for the Personal Segment was $56.4 million for the nine months
ended September 30, 2021 as compared to $65.3 million for the same period in
2020. The decrease in revenue was due to a decrease in net premiums earned of
$8.1 million and lower finance charges of $1.1 million, partially offset by
higher investment income of $0.3 million during the nine months ended September
30, 2021 as compared to the same period during 2020.

Pre-tax loss for the Personal Segment was $8.3 million for the nine months ended
September 30, 2021 as compared to pre-tax loss of $5.8 million for the same
period of 2020. The increase in pre-tax loss was primarily the result of the
decreased revenue discussed above, partially offset by decreased losses and LAE
of $3.4 million, decreased operating expenses of $2.8 million and lower
amortization of intangible assets of $0.2 million for the nine months ended
September 30, 2021 as compared to the same period during 2020.

The Personal Segment reported a net loss ratio of 90.7% for the nine months
ended September 30, 2021 as compared to 84.0% for the same period of 2020. The
gross loss ratio before reinsurance was 91.8% for the nine months ended
September 30, 2021 as compared to 77.1% for the same period in 2020. The higher
gross and net loss ratios for the nine months ended September 30, 2021 was
primarily the result of higher current accident year loss trends.  The Personal
Segment reported $4.4 million net unfavorable prior year loss reserve
development during the first nine months of 2021 as compared to net unfavorable
prior year loss reserve development of $6.9 million during the first nine months
of 2020. The Personal Segment had net catastrophe losses of $0.9 million during
the nine months ended September 30, 2021 as compared to $0.4 million for the
same period of 2020. The Personal Segment reported a net expense ratio of 27.9%
during the nine months ended September 30, 2021 as compared to 27.0% for the
same period of 2020.



Corporate

Total revenue for Corporate increased by $37.6 million for the nine months ended
September 30, 2021 as compared to the same period the prior year. This increase
in total revenue was due predominately to investment gains of $9.1 million
during the nine months ended September 30, 2021 as compared to investment losses
of $27.9 million reported for the same period of 2020 and higher net investment
income of $0.6 million for the nine months ended September 30, 2021 as compared
to the same period during 2020.

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Corporate pre-tax loss was $6.3 million for the nine months ended September 30,
2021 as compared to pre-tax loss of $90.7 million for the same period of 2020.
The improvement in the pre-tax result was primarily due to increased revenue
discussed above and the absence of $46.0 million in impairment charges to
goodwill and indefinite-lived intangible assets in 2020. In connection with its
normal process for evaluating impairment triggering events, the Company
determined that a significant decline in its market capitalization below its
stockholders' equity during the first quarter of 2020 indicated the impairment
of the goodwill and indefinite-lived intangible assets included in our balance
sheet. Further contributing to the improved pre-tax result were lower operating
expenses of $0.5 million and lower interest expense of $0.3 million. The lower
operating expenses were primarily as a result of lower professional services,
travel and related and occupancy and related expenses, partially offset
increased salary and related expense.

Financial Condition and Liquidity

Sources and Uses of Funds

Our sources of funds are from insurance-related operations, financing activities
and investing activities. Major sources of funds from operations include
premiums collected (net of policy cancellations and premiums ceded),
commissions, and processing and service fees. As a holding company, Hallmark is
dependent on dividend payments and management fees from its subsidiaries to meet
operating expenses and debt obligations. As of September 30, 2021, Hallmark and
its non-insurance company subsidiaries had $4.3 million in unrestricted cash and
cash equivalents. As of that date, our insurance subsidiaries held $321.5
million of unrestricted cash and cash equivalents, as well as $317.9 million in
debt securities with an average modified duration of 0.7 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 2021, the
aggregate ordinary dividend capacity of these subsidiaries is $22.5 million, of
which $15.0 million is available to Hallmark. As a county mutual, dividends from
HCM are payable to policyholders. During the first nine months of 2021 and 2020,
our insurance subsidiaries paid $3.0 million and $8.0 million in dividends to
Hallmark, respectively. During the first nine months of 2021 and 2020, our
insurance subsidiaries paid $9.0 million and $4.2 million in management fees to
Hallmark, respectively.

Comparison of September 30, 2021 to December 31, 2020

On a consolidated basis, our cash (excluding restricted cash) and investments at
September 30, 2021 were $689.1 million compared to $639.2 million at
December 31, 2020. The primary reasons for this increase in unrestricted cash
and investments were increases in investment fair values, net sales of
investment securities and cash provided by operations.

Comparison of Nine Months Ended September 30, 2021 and September 30, 2020

During the nine months ended September 30, 2021, our cash flow provided by
operations was $47.3 million compared to cash flow used by operations of $62.9
million during the same period the prior year. The cash flow provided by
operations was driven by a decrease in net paid claims, decreased paid operating
expenses, higher collected commission and fee income,  lower interest paid, and
income tax refunds received, partially offset by decreased collected net
premiums, lower collected investment income and lower finance charges during the
nine months ended September 30, 2021 as compared to the same period the
prior year.

Net cash provided by investing activities during the first nine months of 2021
was $174.0 million as compared to net cash provided by investing activities of
$212.3 million during the first nine months of 2020. The decrease in cash

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provided by investing activities during the first nine months of 2021 was
primarily comprised of a decrease of $78.1 million in maturities, sales and
redemptions of investment securities, a $0.3 million increase in purchases of
fixed assets, partially offset by a decrease of $40.1 million in purchases of
debt and equity securities.

The Company did not report any net cash from financing activities during the
first nine months of 2021 or 2020.

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 37.2% as of September
30, 2021.

Subordinated Debt Securities

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

Each trust pays dividends on its preferred securities at the same rate each
quarter as interest is paid on the junior subordinated debt securities. Under
the terms of the 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 terms of the junior subordinated
debt and trust preferred securities:

                                                  Hallmark                      Hallmark
                                                  Statutory                     Statutory
                                                   Trust I                      Trust II

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






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