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. 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:

Standard Commercial Segment. Our Standard Commercial Segment includes the

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

occupational accident insurance products and services handled by our Commercial

? Accounts business unit; the Aviation business unit which offers general

aviation property/casualty insurance products and services; 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.

Runoff Segment. Our Runoff Segment consists solely of our Specialty Runoff

business unit which is comprised of the senior care facilities liability

insurance business previously reported as part of our Professional Liability

? business unit; the contract binding line of the primary automobile insurance

previously reported as part of our Commercial Auto business unit; and the

satellite launch property/casualty insurance products, as well as certain

   specialty programs, previously reported as part


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of our Aerospace & Programs business unit. The lines of business comprising the

Runoff Segment were discontinued at various times during 2020 through 2022 and

are presently in runoff. The Runoff Segment, together with our discontinued

operations, were previously reported as our former Specialty Commercial Segment.

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

The retained premium produced by these reportable segments and discontinued
operations 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 28% of the total net premiums written by any of them, HIC
retains 38% of our total net premiums written by any of them, HSIC retains 21%
of our total net premiums written by any of them and HNIC retains 13% 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, 2022, our total
revenue from continuing operations was $38.2 million, representing a decrease of
16% from the $45.5 million in total revenue from continuing operations for the
same period of 2021.  During the nine months ended September 30, 2022, our total
revenue from continuing operations was $117.6 million, representing a decrease
of 31% from the $171.4 million in total revenue from continuing operations for
the same period of 2021.  During the three months ended September 30, 2022, we
reported a pre-tax loss from continuing operations of $30.3 million, as compared
to a pre-tax loss from continuing operations of $1.9 million reported during the
same period the prior year.  During the nine months ended September 30, 2022, we
reported a pre-tax loss from continuing operations of $99.7 million, as compared
to a pre-tax loss from continuing operations of $3.0 million reported during the
same period the prior year.

The decrease in revenue from continuing operations for the three months ended
September 30, 2022 compared to the same period of the prior year was primarily
due to lower net premiums earned of $6.3 million, higher net investment losses
of $2.3 million, and lower finance charges of $0.1 million, partially offset by
$1.5 million higher net investment income. The decrease in revenue from
continuing operations for the nine months ended September 30, 2022 compared to
the same period of the prior year was primarily due to decreased net premiums
earned of $38.6 million, net investment losses of $6.8 million compared to net
investment gains of $9.1 million the prior year, and lower finance charges of
$0.4 million, partially offset by higher net investment income of $1.1 million.


The increase in pre-tax loss from continuing operations for the three months
ended September 30, 2022 compared to the same period of the prior year was
primarily due to the decreased revenue discussed above and increased losses and
loss adjustment expenses ("LAE") from continuing operations of $21.6 million,
partially offset by lower operating expenses from continuing operations of $0.7
million.  The increase in losses and LAE from continuing operations was

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primarily due to $20.6 million of adverse prior year loss reserve development
for the third quarter of 2022, $18.5 million of which was from the Runoff
Segment, as compared to $2.9 million of favorable prior year loss reserve
development for the same period the prior year.  Losses and LAE from continuing
operations for the third quarter of 2022 included $1.8 million of net
catastrophe losses as compared to $0.6 million during the same period of the
prior year.

The deterioration of pre-tax results from continuing operations for the nine
months ended September 30, 2022 compared to the same period of the prior year
was primarily due to the decreased revenue from continuing operations discussed
above and increased losses and LAE of $49.6 million, partially offset by lower
operating expenses from continuing operations of $7.1 million.  The increase in
losses and LAE from continuing operations was primarily due to $75.8 million of
unfavorable prior year loss reserve development for the nine months ended
September 30, 2022, $70.4 million of which was from the Runoff Segment, as
compared to $4.6 million of favorable prior year loss reserve development for
the prior year period, partially offset by lower net catastrophe losses of $3.2
million compared to $6.6 million during the same period of the prior year.

We reported a net loss from continuing operations of $29.3 million for the
three months ended September 30, 2022 as compared to a net loss from continuing
operations of $2.0 million for the same period in 2021.  We reported a net loss
from continuing operations of $104.9 million for the nine months ended September
30, 2022 as compared to net loss from continuing operations of $3.9 million for
the same period in 2021.  On a diluted basis per share, we reported net loss
from continuing operations of $1.61 per share for the three months ended
September 30, 2022, compared to a net loss from continuing operations of $0.11
per share for the same period in 2021.  On a diluted basis per share, we
reported a net loss from continuing operations of $5.77 per share for the nine
months ended September 30, 2022, as compared to a net loss from continuing
operations  of $0.21 per share for the same period in 2021.

We reported a net loss of $28.2 million for the three months ended September 30,
2022 as compared to net income of $3.4 million for the same period in 2021.

The

net loss/income for the three months ended September 30, 2022 and 2021 was the
result of the net loss from continuing operations partially or wholly offset by
net income from discontinued operations of $1.1 million and $5.5 million,
respectively.  We reported a net loss of $100.8 million for the nine months
ended September 30, 2022 as compared to net income of $11.6 million for the same
period in 2021.  The net loss/income for the nine months ended September 30,
2022 and 2021 was the result of the net loss from continuing operations
partially or wholly offset by net income from discontinued operations of $4.2
million and $15.4 million, respectively.  On a diluted basis per share, we
reported a net loss of $1.55 per share for the three months ended September 30,
2022, compared to net income of $0.19 per share for the same period in 2021.  On
a diluted basis per share, we reported a net loss of $5.54 per share for the
nine months ended September 30, 2022, as compared to net income of $0.64 per
share for the same period in 2021.

Our effective tax rate was (13.1)% for the first nine months of 2022 compared
to 20.8% for the same period in 2021.  During the first nine months of 2022 we
recorded a full valuation allowance of $30.4 million against our net deferred
tax assets primarily due to recent net losses, including the current period net
loss.  The effective rate for the nine months ended September 30, 2021 varied
from the statutory tax rates primarily due to tax exempt interest income.

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Third Quarter 2022 as Compared to Third Quarter 2021

The following is additional business segment information for the three months
ended September 30, 2022 and 2021 (in thousands):

Three Months Ended September 30,

                           Standard Commercial
                                 Segment                Personal Segment           Runoff Segment               Corporate                 Consolidated
                            2022          2021         2022         2021          2022         2021         2022         2021          2022          2021
Gross premiums
written                  $   34,556    $   34,274    $  15,638    $  17,453    $    2,326    $   3,401    $       -    $       -    $   52,520    $   55,128
Ceded premiums
written                    (15,801)      (16,245)         (76)         (72)          (25)      (5,271)            -            -      (15,902)      (21,588)

Net premiums written 18,755 18,029 15,562 17,381

         2,301      (1,870)            -            -        36,618        33,540
Change in unearned
premiums                      (206)           959           38        (417)          (70)        8,621            -            -         (238)         9,163
Net premiums earned          18,549        18,988       15,600       16,964         2,231        6,751            -            -        36,380        42,703

Total revenues               18,950        19,693       16,754       18,316         2,477        7,315           51          152        38,232        45,476

Losses and loss
adjustment expenses          14,484        11,553       14,735       16,735        19,922        (739)            -            -        49,141        27,549

Pre-tax (loss) income $ (2,386) $ 2,192 $ (3,412) $ (3,887)

   $ (19,364)    $   4,343    $ (5,098)    $ (4,531)    $ (30,260)    $  (1,883)

Net loss ratio (1)             78.1 %        60.8 %       94.5 %       98.7 %       893.0 %     (10.9) %                                 135.1 %        64.5 %
Net expense ratio (1)          37.9 %        31.2 %       30.3 %       26.1 %        45.1 %       36.0 %                                  42.0 %        41.0 %
Net combined ratio
(1)                           116.0 %        92.0 %      124.8 %      124.8 %       938.1 %       25.1 %                                 177.1 %       105.5 %

Net unfavorable
(favorable)
prior year
development              $      300    $    (973)    $   1,810    $   1,197    $   18,528    $ (3,088)                              $   20,638    $  (2,864)

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.

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $34.6 million
for the three months ended September 30, 2022, which was $0.3 million more than
the $34.3 million reported for the same period in 2021.  Net premiums written
were $18.8 million for the three months ended September 30, 2022 as compared to
$18.0 million for the same period in 2021.  The increase in the gross and net
premiums written was due to higher premium production in both our Commercial
Accounts business unit and Aviation business unit.

Total revenue for the Standard Commercial Segment of $19.0 million for the
three months ended September 30, 2022, was $0.7 million less than the $19.7
million reported for the same period in 2021. This decrease in total revenue was
primarily due to lower net premiums earned of $0.4 million and lower net
investment income of $0.3 million for the three months ended September 30, 2022
as compared to the same period of 2021.

The Standard Commercial Segment reported a pre-tax loss of $2.4 million for the
three months ended September 30, 2022 as compared to a pre-tax income of $2.2
million for the same period of 2021.  The deteriorated pre-tax result was
primarily the result of higher losses and LAE of $2.9 million and higher
operating expenses of $1.0 million and lower revenue as discussed above.
Increased operating expenses were primarily the result of higher salary and
related expenses and higher professional services during the three months ended
September 30, 2022 as compared to the same period the prior year.

The Standard Commercial Segment reported a net loss ratio of 78.1% for the
three months ended September 30, 2022 as compared to 60.8% for the same period
of 2021.  The gross loss ratio before reinsurance for the three months ended
September 30, 2022 was 61.0% as compared to 52.9% reported for the same period
of 2021.  The increase in the gross  loss ratio was due primarily to unfavorable
net loss reserve development during the three months ended September 30, 2022 as
compared to favorable net prior year development during the same period the
prior year. The higher net loss ratio was due to lower ceded losses during the
three months ended September 30, 02202 as compared to the same period the prior
year. The Standard Commercial Segment reported unfavorable net loss reserve

development of $0.3 million

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during the three months ended September 30, 2022 as compared to $1.0 million
favorable net loss reserved development during the same period of 2021. The
Standard Commercial Segment reported a net expense ratio of 37.9% for the third
quarter of 2022 as compared to 31.2% 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 $15.6 million for the
three months ended September 30, 2022 as compared to $17.5 million for the same
period in the prior year.  Net premiums written for the Personal Segment were
$15.6 million in the third quarter of 2022, which was a decrease of $1.8 million
from the $17.4 million reported for the third 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 $16.8 million for the third quarter
of 2022 as compared to $18.3 million for the same period in 2021.  The decrease
in revenue was primarily due to lower net premiums earned of $1.4 million and
lower finance charges of $0.1 million during the third quarter of 2022 as
compared to the same period during 2021.

Pre-tax loss for the Personal Segment was $3.4 million for the three months
ended September 30, 2022 as compared to a pre-tax loss of $3.9 million for the
same period of 2021.  Lower losses and LAE of $2.0 million were partially offset
by the decreased revenue discussed above for the three months ended September
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 94.5% for the three months
ended September 30, 2022 as compared to 98.7% for the same period of 2021.  The
gross loss ratio before reinsurance was 94.7% for the three months ended
September 30, 2022 as compared to 99.5% for the same period in 2021.  The
Personal Segment reported $1.8 million of unfavorable prior year loss reserve
development for the third quarter of 2022 as compared to $1.2 million report for
the same period the prior year.  The Personal Segment reported a net expense
ratio of 30.3% for the third quarter of 2022 as compared to 26.1% for the same
period of 2021.  The increase in the expense ratio was due primarily to lower
net premiums earned.

Runoff Segment

Gross premiums written for the Runoff Segment were $2.3 million for the
three months ended September 30, 2022, which was $1.1 million, or 32%, less than
the $3.4 million reported for the same period of 2021.  Net premiums written
were $2.3 million for the three months ended September 30, 2022 as compared to
($1.9) million for the same period of 2021.  The decrease in gross premiums
written was primarily the result of the runoff of the senior care facilities
business as well as certain  specialty programs. The increase in net premiums
written was primarily the result of the revision of the third quarter 2021
financials statements due to immaterial errors relating to the certain
reinsurance treaties.

The $2.5 million of total revenue for the three months ended September 30, 2022
was $4.8 million less than the $7.3 million reported by the Runoff Segment for
the same period in 2021.  This decrease in revenue was primarily due to lower
net premiums earned of $4.5 million, driven primarily by runoff of the senior
care facilities business and certain specialty programs, as well as lower net
investment income of $0.3 million.

The Runoff Segment reported a pre-tax loss of $19.4 million for the third
quarter of 2022 as compared to pre-tax income of $4.3 million reported for the
same period in 2021.  The deterioration in pre-tax results was primarily the
result of higher losses and LAE of $20.6 million and the lower total revenue
discussed above, partially offset by lower operating expenses of $1.7 million
during the three months ended September 30, 2022 as compared to the same period
during 2021.  The Runoff Segment reported higher losses and LAE for the quarter
ended September 30, 2022 compared to the same period of the prior year primarily
as the result of unfavorable net prior year development of $18.5 million, of
which $14.0 million was from the binding auto business, $0.7 million was from
the senior care facilities business and $3.8 million was

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from certain specialty programs , as compared to favorable prior year loss
development of $3.1 million for the same period of 2021.

Corporate

Total revenue for Corporate decreased by $0.1 million for the three months ended
September 30, 2022 as compared to the same period the prior year primarily as a
result of a $1.7 million increase in unrealized losses on equity securities and
a $0.5 million decrease in realized gains on investments, partially offset by
increased net investment income of $2.1 million.  Corporate pre-tax loss was
$5.1 million for the three months ended September 30, 2022 as compared to a
pre-tax loss of $4.5 million for the same period of 2021.  The deterioration in
pre-tax results for the third quarter of 2022 was primarily due to the decreased
revenue discussed above, higher operating expenses of $0.2 million and higher
interest expense of $0.3 million.

Nine Months Ended September 30, 2022 as compared to Nine Months Ended September
30, 2021 :

The following is additional business segment information for the nine months
ended September 30, 2022 and 2021 (in thousands):

Nine Months Ended September 30,

                           Standard Commercial
                                 Segment                Personal Segment            Runoff Segment                Corporate                 Consolidated
                            2022          2021         2022         2021          2022          2021          2022         2021          2022          2021
Gross premiums
written                  $  110,013    $  107,516    $  47,589    $  52,560    $   10,255    $   25,662    $        -    $       -    $  167,857    $  185,738
Ceded premiums
written                    (51,434)      (49,694)        (226)        (234)         (872)      (11,081)             -            -      (52,532)      (61,009)

Net premiums written 58,579 57,822 47,363 52,326

         9,383        14,581             -            -       115,325       

124,729

Change in unearned
premiums                    (3,584)       (2,326)        (350)         (72)         1,341        29,012             -            -       (2,593)        

26,614

Net premiums earned 54,995 55,496 47,013 52,254

       10,724        43,593             -            -       112,732       151,343

Total revenues               56,183        57,536       50,621       56,390        11,554        45,306         (745)       12,180       117,613       171,412

Losses and loss

adjustment expenses          40,398        39,769       41,408       47,379        79,362        24,422             -            -       161,168       

111,570

Pre-tax (loss) income $ (3,143) $ 1,261 $ (7,257) $ (8,275)

   $ (73,099)    $    5,212    $ (16,202)    $ (1,234)    $ (99,701)    $  (3,036)

Net loss ratio (1)             73.5 %        71.7 %       88.1 %       90.7 %       740.0 %        56.0 %                                  143.0 %        73.7
Net expense ratio (1)          35.7 %        30.8 %       30.3 %       27.9 %        40.3 %        34.2 %                                   41.1 %        35.1
Net combined ratio
(1)                           109.2 %       102.5 %      118.4 %      118.6 %       780.3 %        90.2 %                                  184.1 %       108.8

Net unfavorable
(favorable)
prior year
development              $      250    $  (2,371)    $   5,218    $   4,356    $   70,365    $  (6,543)                               $   75,833    $  (4,558)

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.


Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $110.0 million
for the nine months ended September 30, 2022, which was $2.5 million, or 2%,
more than the $107.5 million reported for the same period in 2021. Net premiums
written were $58.6 million for the three months ended September 30, 2022 as
compared to $57.8 million for the same period in 2021.  The increase in the
gross and net premiums written was due to higher premium production in both

our

Commercial Accounts business unit and Aviation business unit.

Total revenue for the Standard Commercial Segment of $56.2 million for the
nine months ended September 30, 2022 was $1.3 million less than the $57.5
million reported for the same period in 2021.  This decrease in total revenue
was primarily due to lower net investment income of $0.8 million and lower net
premiums earned of $0.5 million for the nine months ended September 30, 2022 as
compared to the same period of 2021.

Our Standard Commercial Segment reported a pre-tax loss of $3.1 million for the
nine months ended September 30, 2022 as compared to pre-tax income of $1.3
million reported for the same period of 2021. The deteriorated pre-tax

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results were the result of higher loss and LAE of $0.6 million and higher
operating expenses of $2.5 million and the decreased revenue discussed above.

Increased operating expenses were primarily the result of higher salary and
related expenses and higher professional service expenses.

The Standard Commercial Segment reported a net loss ratio of 73.5% for the
nine months ended September 30, 2022 as compared to 71.7% for the same period of
2021.  The gross loss ratio before reinsurance for the nine months ended
September 30, 2022 was 58.4% as compared to 64.3% reported for the same period
of 2021.  The decrease in the gross loss ratios was due primarily to lower
current accident year gross loss trends.  The increase in the net loss ratios
was due to lower ceded losses during the nine months ended September 30, 2022 as
compared to the same period of 2021.  The Standard Commercial Segment reported
unfavorable net loss reserve development of $0.3 million during the nine months
ended September 30, 2022 as compared to favorable net loss reserve development
of $2.4 million during the same period of 2021.  The Standard Commercial Segment
reported a net expense ratio of 35.7% for the nine months ended September 30,
2022 as compared to 30.8% 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 $47.6 million for the
nine months ended September 30, 2022 as compared to $52.6 million for the same
period in the prior year.  Net premiums written for our Personal Segment were
$47.4 million for the nine months ended September 30, 2022, which was a decrease
of $4.9 million from the $52.3 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 revenue for the Personal Segment was $50.6 million for the nine months
ended September 30, 2022 as compared to $56.4 million for the same period in
2021.  The decrease in revenue was primarily due to a decrease in net premiums
earned of $5.2 million, lower finance charges of $0.4 million and lower net
investment income of $0.2 million during the nine months ended September 30,
2022 as compared to the same period during 2021.

Pre-tax loss for the Personal Segment was $7.3 million for the nine months ended
September 30, 2022 as compared to a pre-tax loss of $8.3 million for the same
period of 2021.  The lower pre-tax loss was primarily the result of lower losses
and LAE of $6.0 million and lower operating expenses of $0.8 million, partially
offset by decreased revenue discussed above for the nine months ended September
30, 2022 as compared to the same period during 2021.

The Personal Segment reported a net loss ratio of 88.1% for the nine months
ended September 30, 2022 as compared to 90.7% for the same period of 2021.  The
gross loss ratio before reinsurance was 88.3% for the nine months ended
September 30, 2022 as compared to 91.8% for the same period in 2021.  The lower
gross and net loss ratios for the nine months ended September 30, 2022 was
primarily the result of lower net catastrophe losses of $0.2 million for the
nine months ended September 30, 2022 as compared to $0.9 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 $5.2 million net unfavorable prior year loss reserve
development during the first nine months of 2022 as compared to net unfavorable
prior year loss reserve development of $4.4 million during the first nine months
of 2021.  The Personal Segment reported a net expense ratio of  30.3% during the
nine months ended September 30, 2022 as compared to 27.9% for the same period of
2021. The increase in the expense ratio was due predominately to lower net
premiums earned and lower finance charges.

Runoff Segment

Gross premiums written for the Runoff Segment were $10.3 million for the
nine months ended September 30, 2022, which was $15.4 million, or 60%, less than
the $25.7 million reported for the same period of 2021.  Net premiums written
were $9.4 million for the nine months ended September 30, 2022 as compared to
$14.6 million for the same period of 2021.  The decrease in gross and net
premiums written was primarily the result of the runoff of the senior care

facilities business and  certain  specialty programs.

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The $11.5 million of total revenue for the nine months ended September 30, 2022
was $33.8 million less than the $45.3 million reported by the Runoff Segment for
the same period in 2021.  This decrease in revenue was primarily due to lower
net premiums earned of $32.9 million, driven primarily by runoff of the senior
care facilities business and certain specialty programs, as well as lower net
investment income of $0.9 million.

The Runoff Segment reported a pre-tax loss of $73.1 million for the nine months
ended September 30, 2022 as compared to pre-tax income of $5.2 million reported
for the same period in 2021.  The deterioration in pre-tax results was primarily
the result of higher losses and LAE of  $54.9 million and  the lower total
revenue discussed above, partially offset by lower operating expenses of $10.4
million during the nine months ended September 30, 2022 as compared to the same
period during 2021. Our Runoff Segment reported higher losses and LAE for the
quarter ended September 30, 2022 compared to the same period of the prior year
as the result of unfavorable net prior year development of $70.4 million, of
which $58.4 million was from the binding auto business, $8.6 million was from
the senior care facilities  business and $3.4 million was from certain specialty
programs,  as compared to favorable prior year loss development of $6.5 million
for the same period of 2021.

Corporate

Total revenue for Corporate decreased by $12.9 million for the nine months ended
September 30, 2022 as compared to the same period the prior year primarily as a
result of a $12.2 million decrease in unrealized gains on equity securities and
a $3.6 million decrease in realized gains on investments, partially offset by a
$2.9 million increase in net investment income. Corporate pre-tax loss was $16.2
million for the nine months ended September 30, 2022 as compared to a pre-tax
loss of $1.2 million for the same period of 2021.  The pre-tax loss for the nine
months ended September 30, 2022 was primarily due to the lower revenue discussed
above, as well as higher operating expenses of $1.6 million and higher interest
expense of $0.4 million.  The higher operating expenses were driven by a $1.1
million increase in salary and related expenses due to increased incentive
compensation accruals and higher non-cash stock compensation expense.  increased
professional service expense of $0.1 million, higher travel expense of $0.2
million and higher other general expenses of $0.2 million.

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, 2022, Hallmark and
its non-insurance company subsidiaries had $10.0 million in unrestricted cash
and cash equivalents. As of that date, our insurance subsidiaries held $119.5
million of unrestricted cash and cash equivalents, as well as $417.1 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 nine months of 2022 and 2021,
our insurance subsidiaries paid $6.0 million and $3.0 million, respectively, in
dividends to Hallmark. During the first nine months of 2022 and 2021, our
insurance subsidiaries paid $6.5 million and $9.0 million, respectively, in

management fees to Hallmark.

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Comparison of September 30, 2022 to December 31, 2021

On a consolidated basis, our cash (excluding restricted cash) and investments at
September 30, 2022 were $587.5 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 Nine Months Ended September 30, 2022 and September 30, 2021

During the nine months ended September 30, 2022, our cash flow used by
operations was $74.2 million compared to cash flow provided by operations of
$47.3 million during the same period the prior year. The cash flow used in
operations was driven primarily by higher reinsurance balances paid (including
$62.0 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
nine months ended September 30, 2022.

Net cash used in investing activities during the first nine months of 2022 was
$144.2 million as compared to net cash provided by investing activities of
$174.0 million during the first nine months of 2021. The net cash used in
investing activities during the first nine months of 2022 was primarily
comprised of an increase of $153.6 million in purchases of debt and equity
securities, a decrease of $164.1 million in maturities, sales and redemptions of
investment securities and a $0.5 million increase in purchases of fixed assets.

The Company did not report any net cash from financing activities during the
first nine months of 2022 or 2021.

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 62% as of September
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

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

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

                                                  Hallmark                      Hallmark
                                                  Statutory                     Statutory
                                                   Trust I                      Trust II

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, 2022                                            6.54%                  

6.19%