CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
Commission file number 0-16090
Hallmark Financial Services, Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0447375
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
14651 Dallas Parkway, Suite 900 Dallas, Texas 75240
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (972) 404-1637
Check whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Common Stock, par value $.03 per share - 11,049,133 shares
outstanding as of May 12, 2002.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page Number
-----------
Consolidated Balance Sheets at March 31, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Operations (unaudited) for
the three months ended March 31, 2002 and March 31, 2001 4
Consolidated Statements of Cash Flows (unaudited) for
the three months ended March 31, 2002 and March 31, 2001 5
Notes to Consolidated Financial Statements (unaudited) 6
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31 December 31
ASSETS 2002 2001
(Unaudited)
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Investments:
Debt securities, held-to-maturity,
at amortized cost $ 3,799 $ 876
Equity securities, available-for-sale,
at market value 144 144
Short-term investments, at cost which
approximates market value 8,957 15,203
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Total investments 12,900 16,223
Cash and cash equivalents 7,489 5,533
Restricted cash 1,693 1,990
Prepaid reinsurance premiums 11,956 11,611
Premiums receivable from lender (net of allowance for
doubtful accounts of $162 in 2002 and $208 in 2001) 14,664 13,740
Premiums receivable 816 414
Reinsurance recoverable 14,670 16,871
Deferred policy acquisition costs 1,181 761
Excess of cost over net assets acquired 4,431 4,431
Current federal income tax recoverable 677 696
Deferred federal income taxes 339 425
Accrued investment income 11 6
Other assets 738 904
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$ 71,565 $ 73,605
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 13,943 $ 13,933
Unpaid losses and loss adjustment expenses 18,102 20,089
Unearned premiums 18,395 16,793
Reinsurance balances payable 5,227 4,426
Drafts outstanding 909 890
Accrued ceding commission refund 1,508 4,598
Accounts payable and other accrued expenses 2,918 2,508
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Total liabilities 61,002 63,237
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Stockholders' equity
Common stock, $.03 par value, authorized 100,000,000
shares Issued 11,855,610 shares in 2002 and 2001 356 356
Capital in excess of par value 10,875 10,875
Retained earnings 375 180
Treasury stock, 806,477 shares in 2002
and 2001, at cost (1,043) (1,043)
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Total stockholders' equity 10,563 10,368
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$ 71,565 $ 73,605
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The accompanying notes are an integral part
of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended
March 31
----------------------------
2002 2001
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Gross premiums written $ 13,952 $ 15,747
Ceded premiums written (8,546) (10,559)
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Net premiums written $ 5,406 $ 5,188
Revenues:
Gross premiums earned 12,312 12,431
Ceded premiums earned (8,164) (8,055)
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Net premiums earned 4,148 4,376
Investment income, net of expenses 126 310
Finance charges 655 832
Processing and service fees 143 423
Other income 76 46
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Total revenues 5,148 5,987
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Benefits, losses and expenses:
Losses and loss adjustment expenses 7,963 10,891
Reinsurance recoveries (4,784) (7,084)
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Net losses and loss adjustment expenses 3,179 3,807
Acquisition costs, net (419) 57
Other acquisition and underwriting expenses
(net of ceding commission of $2,240 in
2002 and $3,074 in 2001) 1,285 838
Operating expenses 599 1,110
Interest expense 205 294
Amortization of intangible assets - 39
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Total benefits, losses and expenses 4,849 6,145
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Income (loss) from operations before
federal income taxes 299 (158)
Federal income tax expense (benefit) 104 (59)
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Net income (loss) $ 195 $ (99)
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Basic and diluted earnings per share $ 0.02 $ (0.01)
========== ===========
Common stock shares outstanding 11,049,133 11,049,133
========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31
---------------------
2002 2001
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Cash flows from operating activities:
Net income (loss) $ 195 $ (99)
Adjustments to reconcile net income (loss) to cash
(used in) provided by operating activities:
Depreciation and amortization expense 40 69
Change in deferred federal income taxes 86 (101)
Change in prepaid reinsurance premiums (345) (2,503)
Change in premiums receivable (402) 478
Change in deferred policy acquisition costs (420) 57
Change in unpaid losses and loss
adjustment expenses (1,987) (403)
Change in unearned premiums 1,602 3,316
Change in reinsurance recoverable 2,201 (111)
Change in reinsurance balances payable 801 2,235
Change in current federal income tax recoverable 19 95
Change in current federal income tax payable - 37
Change in accrued ceding commission refund (3,090) 623
Change in litigation costs - (1,386)
Change in all other liabilities 429 (143)
Change in all other assets 167 (296)
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Net cash (used in) provided by
operating activites (704) 1,868
Cash flows from investing activities:
Purchases of property and equipment (46) (65)
Premium finance notes originated (13,090) (14,167)
Premium finance notes repaid 12,166 11,134
Change in restricted cash 297 1,457
Purchases of debt securities (3,000) -
Maturities and redemptions of investment securities 77 2,083
Purchase of short-term investments (7,996) (4,383)
Maturities of short-term investments 14,242 2,000
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Net cash provided by (used in)
investing activities 2,650 (1,941)
Cash flows from financing activities:
Net advances from lender 10 (1,161)
Repayment of short-term borrowings - (182)
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Net cash provided by (used in)
financing activities 10 (1,343)
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Increase (decrease) in cash and cash equivalents 1,956 (1,416)
Cash and cash equivalents at beginning of period 5,533 6,831
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Cash and cash equivalents at end of period $ 7,489 $ 5,415
======= =======
The accompanying notes are an integral part
of the consolidated financial statements
HALLMARK FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Item 1. Notes to Consolidated Financial Statements (Unaudited).
Note 1 - Summary of Accounting Policies
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting primarily of normal recurring
adjustments, necessary to present fairly the financial position of Hallmark
Financial Services, Inc. and subsidiaries (the "Company") as of March 31,
2002 and the consolidated results of operations and cash flows for the
periods presented. The accompanying financial statements have been prepared
by the Company without audit.
Certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. Reference is made to the Company's annual consolidated financial
statements for the year ended December 31, 2001 for a description of
accounting policies and certain other disclosures. Certain items in the
2001 interim financial statements have been reclassified to conform to the
2002 presentation.
The results of operations for the period ended March 31, 2002 are not
necessarily indicative of the operating results to be expected for the full
year.
Note 2 - Reinsurance
The Company is involved in the assumption and cession of reinsurance
from/to other companies. The Company remains obligated to its policyholders
in the event that reinsurers do not meet their obligations under the
reinsurance agreements.
Effective March 1, 1992, the Company entered into a reinsurance
arrangement with State & County Mutual Fire Insurance Company ("State &
County"), an unaffiliated company, to assume 100% of the nonstandard auto
business produced by the Company and underwritten by State & County. The
arrangement is supplemented by a separate retrocession agreement effective
July 1, 2000 between the Company and Dorinco Reinsurance Company
("Dorinco"). Under the agreement, the Company currently retains 35% and
cedes 65% of the risk to Dorinco. Prior to January 1, 2002, the Company
retained 30% and ceded 70% of the risk to Dorinco.
Note 3 - Intangible Assets
When Hallmark, AHGA, HFC and HCS were purchased by HFS, the excess cost
over the fair value of the net assets acquired was recorded as goodwill and
was amortized on a straight-line basis over forty years. Other intangible
assets consist of a trade name, a managing general agent's license and non-
compete arrangements, all of which were fully amortized at March 31, 2002.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". SFAS 141 supersedes Accounting Principles Board Opinion ("APB")
No. 16, "Business Combinations". SFAS 141 (1) requires that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001, (2) provides specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill and (3) requires
that unamortized negative goodwill be written off immediately as an
extraordinary gain. SFAS 142 supersedes APB 17, "Intangible Assets," and is
effective for fiscal years beginning after December 15, 2001. SFAS 142
primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. SFAS 142 (1) prohibits the
amortization of goodwill and indefinite-lived intangible assets, (2)
requires testing of goodwill and indefinite-lived intangible assets on an
annual basis for impairment (and more frequently if the occurrence of an
event or circumstance indicates an impairment), (3) requires that reporting
units be identified for the purpose of assessing potential future
impairments of goodwill, and (4) removes the forty-year limitation on the
amortization period of intangible assets that have finite lives.
The Company adopted the provisions of SFAS 142 during the first quarter
of 2002. The Company is making the determinations as to what its reporting
units are and what amounts of goodwill, intangible assets, other assets, and
liabilities should be allocated to those reporting units. In accordance
with SFAS 142, the Company has ceased recording amortization expense of its
goodwill.
A reconciliation of net income and earnings per share as reported to
illustrate the impact of goodwill amortization for the three months ended
March 31, 2002 and 2001 is as follows:
Three Months Ended March 31
(In thousands except for earnings 2002 2001
per share amounts) ------ ------
Reported net income (loss) $ 195 $ (99)
Add back: Goodwill amortization - 39
------ ------
Adjusted net income (loss) $ 195 $ (60)
====== ======
Basic and diluted earnings per share:
Reported net income (loss) $ 0.02 $ (0.01)
Goodwill amortization - -
------ ------
Adjusted net income (loss) $ 0.02 $ (0.01)
SFAS 142 requires that goodwill be tested annually for impairment using
a two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the
fiscal year. However, a company has six months from the date of adoption to
complete the first step. The Company expects to complete the first step of
the goodwill impairment test during the second quarter of 2002. The second
step of the goodwill impairment test measures the amount of the impairment
loss (measured as of the beginning of the year of adoption), if any, and
must be completed by the end of the company's fiscal year. Any intangible
assets of the Company deemed to have an indefinite life will be tested for
impairment using a one-step process which compares the fair value to the
carrying amount of the asset as of the beginning of the fiscal year. Any
impairment loss resulting from the transitional impairment tests is expected
to be reflected as the cumulative effect of a change in accounting principle
in the Company's second quarter of 2002. The Company has not yet determined
what effect these impairment tests will have on the Company's earnings and
financial position. However, an impairment loss may be recognized.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Introduction. Hallmark Financial Services, Inc. ("HFS") and its wholly
owned subsidiaries (collectively, the "Company") engage in the sale of
property and casualty insurance products. The Company's business primarily
involves marketing, underwriting and premium financing of non-standard
automobile insurance, as well as claims adjusting and other insurance
related services.
The Company pursues its business activities through an integrated
insurance group, (collectively, the "Insurance Group"), the members of which
are an authorized Texas property and casualty insurance company, American
Hallmark Insurance Company of Texas ("Hallmark"); a managing general agency,
American Hallmark General Agency, Inc. ("AHGA"); a network of four insurance
agencies known as the American Hallmark Agencies ("Hallmark Agencies"); a
premium finance company, Hallmark Finance Corporation ("HFC"); and a claims
handling and adjusting firm, Hallmark Claims Service, Inc. ("HCS"). The
Company operates only in Texas.
Hallmark provides non-standard automobile liability and physical damage
insurance through a reinsurance arrangement with an unaffiliated company,
State & County Mutual Fire Insurance Company ("State & County"). Through
State & County, Hallmark provides insurance primarily for high-risk drivers
who do not qualify for standard-rate insurance. Under a supplementary quota-
share reinsurance agreement, Hallmark, upon mutual agreement with its
current reinsurer, may elect on a quarterly basis to retain 30% to 45% of
the risk while ceding the remaining percentage to its reinsurer. The
Company's principal reinsurer, Dorinco Reinsurance Company ("Dorinco"),
currently assumes 65% of Hallmark's risk. HFC finances annual and six-
month policy premiums through its premium finance program. AHGA manages
the marketing of Hallmark policies through the Hallmark Agencies, and
independent agents. Additionally, AHGA provides premium processing,
underwriting, reinsurance accounting and cash management for unaffiliated
managing general agents ("MGAs"). HCS provides fee-based claims adjustment,
salvage, subrogation recovery and litigation services to Hallmark and
unaffiliated MGAs.
Financial Condition and Liquidity
The Company's sources of funds are principally derived from insurance
related operations. Major sources of funds from operations include premiums
collected (net of policy cancellations and premiums ceded), ceding
commissions, premium finance charges and service fees. Other sources of
funds are from financing and investment activities.
On a consolidated basis, the Company's total cash, cash equivalents and
investments (excluding restricted cash) at March 31, 2002 and December 31,
2001 were $20.4 million and $21.8 million, respectively. The Company's
liquidity decreased 6% during the first quarter of 2002 as compared to
December 31, 2001 principally as a result of an annual ceding commission
adjustment with its reinsurer in the amount of $3.4 million during the first
quarter of 2002, which was not significant in 2001.
Net cash used by the Company's consolidated operating activities was
$0.7 million for the first quarter of 2002 compared to net cash provided by
operating activities of approximately $1.9 million for the first quarter of
2001. The approximate $3.4 million ceding commission adjustment paid to
reinsurers during the first quarter of 2002 was partially offset by an
increase in monthly policy production, and to a lesser extent, by the
increase in the Company's retention of State & County business to 35% (from
30%) effective January 1, 2002 under the Company's quota share retrocession
agreement with Dorinco.
Cash provided by investing activities during the first quarter of 2002
increased approximately $4.6 million as compared to the first quarter of
2001. This increase in cash provided by investing activities was primarily
the result of increased maturities of short-term investments during the
first quarter of 2002 as compared to the first quarter of 2001. This
increase was partially offset by reinvestment of the matured funds into both
long and short-term investments during the first quarter of 2002.
Cash provided by financing activities increased by approximately $1.4
million in the first quarter of 2002 as compared to the same period of 2001
primarily due to a decrease in net advances from the Company's premium
finance lender. The decrease in net advances was attributable to decreased
production of annual policies during the first quarter of 2002 as compared
to the same period of 2001.
A substantial portion of the Company's liquid assets is held by
Hallmark and is not available for general corporate purposes. Of the
Company's consolidated liquid assets of $20.4 million at March 31, 2002, and
$21.8 million at December 31, 2001, $2.1 million and $1.9 million,
respectively, represented non-restricted cash. Since state insurance
regulations restrict financial transactions between an insurance company and
its affiliates, HFS is limited in its ability to use Hallmark funds for its
own working capital purposes. Furthermore, dividends and loans by Hallmark
to the Company are restricted and subject to Texas Department of Insurance
("TDI") approval. Although TDI has sanctioned the payment of management
fees, commissions and claims handling fees by Hallmark to HFS and
affiliates, since the second half of 2000, Hallmark has elected not to pay
all of the commissions allowed to AHGA. Additionally, during the first
three months of 2002, Hallmark paid only nominal management fees to HFS.
These steps were taken to preserve Hallmark's surplus. Management
anticipates that Hallmark may pay management fees periodically during the
remainder of 2002. The Company has never received a dividend from Hallmark,
and there is no immediate plan to pay a dividend.
Ceding commission income represents a significant source of funds to
the Company. Ceding commission income for the first quarter of 2002
decreased $0.8 million (representing a 27% decrease) as compared to the
comparable period of 2001. This decrease was the result of the combined
effect of (1) less favorable reinsurance terms during the first quarter of
2002 compared to 2001, (2) a decrease in overall core State & County premium
volume, and (3) an increase in Hallmark's retention rate to 35% from 30%.
In accordance with GAAP, a portion of ceding commission income and policy
acquisition costs is deferred and recognized as income and expense,
respectively, as related net premiums are earned. Deferred policy
acquisition costs (net of deferred ceding commission) increased to
approximately $1.2 million at March 31, 2002 from $0.8 million at December
31, 2001. The increase in net deferred acquisition costs was principally
due to the combined effect of (1) decreased ceding commission due to less
favorable reinsurance terms, (2) decreased annual policy production, and (3)
increased retention to 35%. These factors were partially offset by a
decrease in underwriting expenses.
At March 31, 2002, Hallmark reported statutory capital and surplus of
$6.1 million, which reflects an increase of $0.1 million since December 31,
2001. Hallmark's premium-to-surplus ratio for the twelve months ended March
31, 2002 was 2.61 to 1 as compared to 2.62 for the twelve months ended
December 31, 2001. Effective January 1, 2001, TDI adopted the Codification
of Statutory Accounting Principles (the "Codification"), which replaced the
National Association of Insurance Commissioners primary guidance on
statutory accounting. As a result of the implementation of the
Codification, Hallmark recognized a deferred tax asset. The deferred tax
adjustment required by the Codification is recognized by TDI as an increase
to surplus; however, certain rating agencies, such as A.M. Best, do not
recognize the adjustment as an increase to surplus. Hallmark's premium-to-
surplus ratio, without the Codification, for the twelve months ended March
31, 2002 was 2.86 to 1 as compared to 2.83 to 1 for the year ended December
31, 2001.
The Company provides program administration and claims handling for
unaffiliated MGAs. The Company currently provides these services for one
unaffiliated MGA which continues to produce new business. Hallmark assumes
a pro-rata share of the business produced under this unaffiliated MGA
program, and Dorinco assumes the remainder. Three other unaffiliated MGAs
for whom the Company provides similar services have discontinued writing new
business due to the inability to obtain reinsurance and are in run-off.
Management is continuing to investigate opportunities to enhance and
expand the Company's operations. While additional capital or strategic
alliances may be required to fund future expansion, operational enhancements
through increased information technology capabilities are in progress.
During the summer of 2001, the Company rolled out its web-based information
system (named e-Integrity and referred to as the "Integrity System") which
is designed to enhance Company and agency relationships by improving content
and timeliness of information to support agents in servicing their
customers. The second phase of the Integrity System is composed of two
parts. Part One relates to electronic reporting and communication
capabilities, and Part Two encompasses, among other things, payment and new
business upload to support agents in more promptly and efficiently producing
new business, as well as to improve the quality and timeliness of servicing
existing policyholders. Part One alleviates certain manual processes and
results in daily communication of time-sensitive information to agents, thus
decreasing labor, supplies and postage costs and increasing the agent's
likelihood of policyholder retention. This phase was completed during the
first quarter of 2002. Part Two, which will further reduce processing
costs, is targeted to be completed by year-end 2002 with related cost
savings to commence in 2003.
Results of Operations
Overview
The Company had profitable results for the first quarter of 2002
principally due to its focus on rate adequacy, underwriting discipline and
agent management. For the first quarter ended March 31, 2002, net income
was $0.2 million compared to a net loss of $0.1 million for the same quarter
in 2001. Gross premiums written for the first quarter of 2002 decreased
11%, while net premiums written for the quarter increased by 4% to $5.4
million compared to $5.2 million in the first quarter of 2001. Net premiums
earned of $4.1 million for the quarter decreased 5% in relation to net
premiums earned of $4.4 million for the 2001 quarter.
The Company's net incurred loss ratios declined to 76.6% for the first
quarter of 2002 from 87.0% for the first quarter of 2001. Certain key
financial insurance operational ratios follow:
First First
quarter quarter
2002 2001
----- -----
GAAP Incurred Loss Ratio (excluding storm
and loss corridor) 64.8% 87.0%
GAAP Loss Corridor Incurred Loss Ratio (1) 10.4% -
GAAP Storm Incurred Loss Ratio (2) 1.4% -
----- -----
GAAP Incurred Loss Ratio 76.6% 87.0%
GAAP Expense Ratio (3) 21.6% 15.1%
----- -----
GAAP Combined Ratio 98.2% 102.1%
===== ======
(1) Effective April 1, 2001, the Company's reinsurance agreement
was amended to include a loss corridor provision. Losses incurred
within the loss corridor range are retained 100% by the Company.
The loss corridor for the three months ended March 31, 2002 was
$0.4 million.
(2) Net storm losses retained by the Company were approximately
$0.06 million for the three months ended March 31, 2002.
(3) The GAAP expense ratio represents underwriting expenses and
other income less certain expenses as a percentage of net
premiums written. The principal reason for the increased GAAP
expense ratio is the decrease in ceding commission income. As a
percentage of net premiums written, ceding commission income
declined 17.9%, as discussed in the Financial Condition and
Liquidity section.
Analysis
Gross premiums written (prior to reinsurance) for the first quarter of
2002 decreased 11%, while net premiums written (after reinsurance) increased
4%, in relation to the same period in 2001. The decrease in gross premiums
written was principally due to the Company's strategic focus on underwriting
profitability rather than market share. This focus included increased
attention to rate adequacy, agent performance and underwriting discipline.
The disparity between gross premiums written and net premiums written is
primarily due to the increase in the Company's retention of premiums from
30% to 35% effective January 1, 2002.
Despite the 11% decrease in gross premiums written compared to the same
quarter of the prior year, gross premiums earned (prior to reinsurance) for
the first quarter of 2002 decreased only slightly as compared to the same
period of 2001. This was principally due to the combined effect of a shift
in policy mix from annual to monthly policies and the continued earning of
annual premiums written at a higher volume level during 2001. For the first
quarter of 2002, net premiums earned (after reinsurance) decreased
approximately 5% in relation to the same period of 2001. The
disproportionate change in premiums earned prior to and after reinsurance is
principally due to the reduction in premiums earned from unaffiliated MGA
programs, three of which are currently in run-off. The unaffiliated MGA
programs have a greater impact on net premiums as the Company assumes this
business from Dorinco (i.e. the same amount is reflected in both gross and
net premiums).
Net incurred loss ratio (computed on net premiums earned after
reinsurance) for the first quarter of 2002 was 76.6% compared to 87.0% for
the same period of 2001. During the second quarter of 2001, the Company's
reinsurance agreement was amended to include a loss corridor provision which
increases net losses incurred by the Company between certain loss ratio
levels. If the loss corridor provision had not been in place during the
first quarter of 2002, the net incurred loss ratio would have been 66.2%.
Additionally, severe storms occurring in March 2002 impacted the 2002 loss
ratio. Excluding the impact of storms and the loss corridor, the loss ratio
for 2002 would have been 64.8%. The significant improvement in the loss
ratio from 2001 to 2002 is principally the result of the Company's
increasing focus on underwriting profitability during 2001 which is now
reflected in first quarter 2002 results. Specific strategies implemented in
late 2000 and 2001 to improve the Company's loss ratio included multiple
rate increases, more restrictive underwriting guidelines, reductions in
agency force and emphasis on faster payment of claims.
Investment income decreased 59% during the first quarter of 2002
compared to the same period of 2001. The decrease is attributable to the
combined effect of decreased yields currently available in the marketplace
and maturities/calls of higher yield investments.
Finance charges, which decreased approximately $0.2 million during the
first quarter of 2002 compared to the same period of 2001, represent
interest earned on premium notes issued by HFC. This decrease is directly
correlated to the decrease in the annual policy premium volume.
Processing and service fees represent fees earned on third party
processing and servicing contracts with unaffiliated MGAs. Processing and
service fees for the first quarter of 2002 decreased approximately $0.3
million (66%) as a result of cancellation of service contracts with three
unaffiliated MGAs (which are currently in run-off).
Acquisition costs, net represents the amortization of acquisition costs
(and credits) deferred over the past twelve months and the deferral of
acquisition costs (and credits) incurred in the current period. The $0.5
million decrease in acquisition costs, net is primarily due to the combined
effect of a decrease in ceding commission income due to changes in the
Company's reinsurance terms and an increase in the deferral rate as a result
of the Company increasing its retention of State & County business under its
quota share retrocession agreement.
Other acquisition and underwriting expenses increased 53% during the
first quarter of 2002 as compared to the same period of 2001. The increase
in expenses is primarily attributable to decreased ceding commission income
as a result of decreased core State & County premium volume and a 5%
increase in the Company's retention of its core business. This was
partially offset by a decrease in variable expenses, such as commissions,
front fees and premium taxes. Additionally, certain other underwriting
expenses which fluctuate with premium volume decreased due to information
technology enhancements.
Operating expenses include expenses related to premium finance
operations, general corporate overhead, and third party administrative and
claims handling contracts. Related revenues are derived from finance
charges and processing and service fees. Operating expenses decreased 46%
for the first quarter of 2002 as compared to the same period of 2001. The
majority of this decrease in operating expenses is attributable to decreased
operating costs related to third party processing and claims handling.
Interest expense decreased approximately $0.1 million during 2002 as
compared to 2001. This decrease is principally the result of a decrease in
the effective interest rate related to the premium finance line of credit
and to lower premium note volume as a result of lower annual premium volume.
Risks Associated with Forward-Looking Statements Included in this Form
10-QSB
This Form 10-QSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the
safe harbors created thereby. These statements include the plans and
objectives of management for future operations, including plans and
objectives relating to future growth of the Company's business activities
and availability of funds. The forward-looking statements included herein
are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions, regulatory framework, and future business decisions, all of
which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that
the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this Form 10-QSB
will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company
or any other person that the objectives and plans of the Company will be
achieved.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Except for routine litigation incidental to the
business of the Company and as described in Note 3 to
the Consolidated Financial Statements of the Company,
neither the Company, nor any of the properties of the
Company was subject to any material pending or
threatened legal proceedings as of the date of this
report.
Item 2. Changes in Securities.
None.
Item 3. Defaults on Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are filed herewith
(b) The Company did not file any Form 8-K Current Reports
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HALLMARK FINANCIAL SERVICES, INC.
(Registrant)
Date: May 14, 2002 /s/ Linda H. Sleeper
---------------------------
Linda H. Sleeper, President
(Chief Executive Officer)
Date: May 14, 2002 /s/ John J. DePuma
---------------------------
John J. DePuma,
Chief Financial Officer