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-K" for a discussion of some of the uncertainties, risks and assumptions
associated with these statements.

Overview



Hallmark is an insurance holding company which, through its subsidiaries,
engages in the sale of property/casualty insurance products to businesses and
individuals. Our business involves marketing, distributing, underwriting and
servicing our insurance products, as well as providing other insurance related
services. We pursue our business activities primarily through subsidiaries whose
operations are organized into business units and are supported by our insurance
carrier subsidiaries.

Our insurance activities are organized by business units into the following reportable segments:

Commercial Lines Segment. Our Commercial Lines 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 2015.

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

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

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 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.




TIn 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 is supported by our
American Hallmark Insurance Company of Texas, Hallmark Specialty Insurance
Company, Hallmark Insurance Company, Hallmark National Insurance Company and
Texas Builders Insurance Company insurance subsidiaries. In addition, control
and management of Hallmark County Mutual 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
Personal Lines 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 net premiums written by any of them, HIC retains
38% of the net premiums written by any of them, HSIC retains 21% of the

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net premiums written by any of them and HNIC retains 13% of the net premiums written by any of them. Neither HCM nor TBIC is a party to the intercompany pooling arrangement.

Critical Accounting Estimates and Judgments



Certain significant accounting policies requiring our estimates and judgments
are discussed below. Such estimates and judgments are based on historical
experience, changes in laws and regulations, observation of industry trends and
information received from third parties. While the estimates and judgments
associated with the application of these accounting policies may be affected by
different assumptions or conditions, we believe the estimates and judgments
associated with the reported consolidated financial statement amounts are
appropriate in the circumstances. For additional discussion of our accounting
policies, see Note 1 to the audited consolidated financial statements included
in this report.

Reserves for unpaid losses and LAE. Reserves for unpaid losses and LAE are
established for claims that have already been incurred by the policyholder but
which we have not yet paid. Unpaid losses and LAE represent the estimated
ultimate net cost of all reported and unreported losses incurred through each
balance sheet date. The reserves for unpaid losses and LAE are estimated using
individual case-basis valuations and statistical analyses. These reserves are
revised periodically and are subject to the effects of trends in loss severity
and frequency. (See "Item 1. Business - Analysis of Losses and LAE" and Note 6
to the audited consolidated financial statements included in this report.)

Although considerable variability is inherent in such estimates, we believe that
our reserves for unpaid losses and LAE are adequate. Due to the inherent
uncertainty in estimating unpaid losses and LAE, the actual ultimate amounts may
differ from the recorded amounts. A small percentage change could result in a
material effect on reported earnings. For example, a 1% change in December 31,
2022 reserves for unpaid losses and LAE would have produced a $8.8 million
change to pretax earnings. The estimates are reviewed as part of a regular,
ongoing process, and adjusted as experience develops or new information becomes
known. Such adjustments are included in current operations.

Our actuaries estimate claim liabilities by considering a variety of reserving
methods, each of which reflects a level of uncertainty.  The estimated range
derived from the various methods is used to assess the reasonableness of
management's estimates. There is no exclusive method for determining this range,
and judgment enters into the process. The primary actuarial technique utilized
is a loss development analysis in which ultimate losses are projected based upon
historical development patterns. The primary assumption underlying this loss
development analysis is that the historical development patterns will be a
reasonable predictor of the future development of losses for accident years
which are less mature. An alternate actuarial technique, known as the
Bornhuetter-Ferguson method, combines an analysis of loss development patterns
with an initial estimate of expected losses or loss ratios. This approach is
most useful for recent accident years. In addition to assuming the stability of
loss development patterns, this technique is heavily dependent on the accuracy
of the initial estimate of expected losses or loss ratios. Consequently, the
Bornhuetter-Ferguson method is primarily used to confirm the results derived
from the loss development analysis.

The range of unpaid losses and LAE estimated by our actuary as of December 31,
2022 was $781.4 million to $1,036 million. Our best estimate of unpaid losses
and LAE as of December 31, 2022 is $880.9 million. Our carried reserve for
unpaid losses and LAE as of December 31, 2022 is comprised of $436.5 million in
case reserves and $444.4 million in incurred but not reported reserves. In
setting this estimate of unpaid losses and LAE, we have assumed, among other
things, that current trends in loss frequency and severity will continue and
that the actuarial analysis was empirically valid. We have established a best
estimate of unpaid losses and LAE which is $27.8 million below the midpoint, or
85.0% of the high end, of the actuarial range at December 31, 2022 as compared
to $35.1 million below the midpoint, or 85.4% of the high end, of the actuarial
range at December 31, 2021. We expect our best estimate to move within the
actuarial range from year to year due to changes in our operations and changes
within the marketplace. Due to the inherent uncertainty in reserve estimates,
there can be no assurance that the actual losses ultimately experienced will
fall within the actuarial range. However, because of the breadth of the
actuarial range, we believe that it is reasonably likely that actual losses will
fall within such range.

Our reserve requirements are also interrelated with product pricing and profitability. We must price our products at a level sufficient to fund our policyholder benefits and still remain profitable. Because claim expenses represent the single largest



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category of our expenses, inaccuracies in the assumptions used to estimate the amount of such benefits can result in our failing to price our products appropriately and to generate sufficient premiums to fund our operations.


Our recorded reserves represent management's best estimate of the provision for
unpaid losses and LAE as of the balance sheet date, and establishing them
involves a process that includes collaboration with various relevant parties in
the Company. While we believe that our reserves for unpaid losses and LAE at
December 31, 2022 are adequate, new information or emerging trends that differ
from our assumptions may lead to future development of losses and loss expenses
that is significantly greater or less than the recorded reserve, which could
have a material effect on future operating results. Our best estimate of
required loss reserves for most of our lines of business is selected for each
accident year using management's judgment, after considering the results from a
number of reserving methods and is not a purely mechanical process. Therefore,
it is difficult to convey, in a simple and quantitative manner, the impact that
a change to a single assumption will have on our best estimate.

Deferred income tax assets and liabilities. We file a consolidated federal
income tax return. Deferred federal income taxes reflect the future tax
consequences of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year end. Deferred taxes are
recognized using the liability method, whereby tax rates are applied to
cumulative temporary differences based on when and how they are expected to
affect the tax return. Deferred tax assets and liabilities are adjusted for tax
rate changes. The realization of deferred tax assets depends upon the existence
of sufficient taxable income within the carryback or carryforward periods under
the tax law in the applicable tax jurisdiction. At each balance sheet date,
management assesses the need to establish a valuation allowance that reduces
deferred tax assets when it is more likely than not that all, or some portion,
of the deferred tax assets will not be realized. The determination of the need
for a valuation allowance is based on all available information including
projections of future taxable income, principally derived from business plans
and where appropriate available tax planning strategies. Projections of future
taxable income incorporate assumptions of future business and operations that
are apt to differ from actual experience. If our assumptions and estimates that
resulted in our forecast of future taxable income prove to be incorrect, an
additional valuation allowance could become necessary, which could have a
material adverse effect on our financial condition, results of operations, and
liquidity. As of December 31, 2022, the Company maintained  a full valuation
allowance of $31.2 million against its deferred tax assets because we determined
that it is more likely than not that these assets will not be recoverable. If,
in the future, we determine we can support the recoverability of all or a
portion of the deferred tax assets under the guidance, the tax benefits relating
to any reversal of the valuation allowance on deferred tax assets will be
accounted for as a reduction of income tax expense and result in an increase in
equity.  Changes in tax laws and rates may affect recorded deferred tax assets
and liabilities and our effective tax rate in the future.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no unknown tax positions at December 31, 2022.


Impairment of investments. We complete a detailed analysis each quarter to
assess whether any decline in the fair value of any debt investment below cost
is deemed other-than-temporary. All debt securities with an unrealized loss are
reviewed. We recognize an impairment loss when a debt investment's value
declines below cost, adjusted for accretion, amortization and previous
other-than-temporary impairments, and it is determined that the decline is
other-than-temporary.

Debt Investments: We assess whether we intend to sell, or it is more likely than
not that we will be required to sell, a fixed maturity investment before
recovery of its amortized cost basis less any current period credit losses. For
fixed maturity investments that are considered other-than-temporarily impaired
and that we do not intend to sell and will not be required to sell, we separate
the amount of the impairment into the amount that is credit related (credit loss
component) and the amount due to all other factors. The credit loss component is
recognized in earnings and is the difference between the investment's amortized
cost basis and the present value of its expected future cash flows. The
remaining difference between the investment's fair value and the present value
of future expected cash flows is recognized in other comprehensive income. The
fair value at the time of impairment is the new cost basis for the impaired
security.

The fair value of our fixed income securities as of December 31, 2022 was $426.6
million. If market interest rates were to increase 1%, the fair value of our
fixed-income securities would decrease by approximately $3.4 million as of
December 31, 2022. The calculated change in fair value was determined using the
duration modeling assuming no prepayments.

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Equity Investments: ASU 2016-01, "Recognition and Measurement of Financial
Assets and Financial Liabilities"  requires equity investments that are not
consolidated or accounted for under the equity method of accounting to be
measured at fair value with changes in fair value recognized in net income each
reporting period.  As a result of this standard, equity securities with readily
determinable fair values are not required to be evaluated for
other-than-temporary-impairment.

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

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

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

Level 2: inputs to the valuation methodology include quoted prices for similar

assets and liabilities in active markets, inputs of identical assets for less

? active markets, and inputs that are observable for the asset or liability,

either directly or indirectly, for substantially the full term of the

instrument; and

? Level 3: inputs to the valuation methodology that are unobservable for the

asset or liability.

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



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

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

Level 2 investment securities include corporate bonds, corporate bank loans,
municipal bonds, U.S. Treasury securities, other obligations of the U.S.
Government and mortgage-backed securities for which quoted prices are not
available on active exchanges for identical instruments. We use a third party
pricing service to determine fair values for each Level 2 investment security in
all asset classes. Since quoted prices in active markets for identical assets
are not available, these prices are determined using observable market
information such as quotes from less active markets and/or quoted prices of
securities with similar characteristics, among other things. We have reviewed
the processes used by the pricing service and have determined that they result
in fair values consistent with the requirements of ASC 820 for Level 2
investment securities. We have not adjusted any prices received from third-party
pricing sources.

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

Deferred policy acquisition costs. Policy acquisition costs (mainly commission,
premium taxes, underwriting and marketing expenses and ceding commissions) that
vary with and are primarily related to the successful acquisition of new and
renewal insurance contracts are deferred and charged to operations over periods
in which the related premiums are earned. Ceding commissions from reinsurers,
which include expense allowances, are deferred and recognized over the period
premiums are earned for the underlying policies reinsured.

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The method followed in computing deferred policy acquisition costs limits the
amount of such deferred costs to their estimated realizable value. A premium
deficiency exists if the sum of expected claim costs and claim adjustment
expenses, unamortized acquisition costs, and maintenance costs exceeds related
unearned premiums and expected investment income on those unearned premiums, as
computed on a product line basis. We routinely evaluate the realizability of
deferred policy acquisition costs. At December 31, 2022 and 2021 there was no
premium deficiency related to deferred policy acquisition costs.

Results of Operations

Comparison of Years ended December 31, 2022 and December 31, 2021


Management overview. During fiscal 2022, our total revenues from continuing
operations were $159.9 million, which was $66.6 million less than the $226.5
million in total revenues from continuing operations for fiscal 2021. During the
year ended December 31, 2022, we reported a net loss before tax from continuing
operations of $127.1 million as compared to a net loss before tax from
continuing operations of $12.5 million during the same period of 2021.

The decrease in revenue from continuing operations for the year ended December
31, 2022 was primarily due to a decrease in net premiums earned of $54.2
million, net investment losses of $5.3 million for the year ended December 31,
2022 as compared to net investment gains of $10.2 million for the prior year and
a decrease in finance charge revenue of $0.6 million partially offset by
increased net investment income of $3.7 million.

Contributing to the increased pre-tax loss from continuing operations for the
year ended December 31, 2022 was an increase in losses and LAE of $56.0 million,
due primarily to increased unfavorable prior year loss reserve development,
partially offset by decreased net catastrophe losses of $1.5 million.  We
reported $91.5 million of unfavorable net prior year loss reserve development
from continuing operations during the year ended December 31, 2022 as compared
to $1.6 million of unfavorable net prior year loss reserve development from
continuing operations during the same period of 2021.  Higher interest expense
of $0.9 million also contributed to the increased pre-tax loss from continuing
operations partially offset by lower operating expenses of $8.9 million driven
by lower production related expenses.

We reported net loss from continuing operations of $134.9 million for the year
ended December 31, 2022, as compared to a net loss from continuing operations of
$9.8 million for the year ended December 31, 2021. On a diluted per share basis,
net loss from continuing operations was $74.22 per share for fiscal 2022 as
compared to a net loss from continuing operations of $5.38 per share for fiscal
2021.

We reported net loss of $108.1 million for the year ended December 31, 2022, as
compared to net income of $9.0 million for the year ended December 31, 2021. The
net loss/income for the year ended December 31, 2022 and 2021 was the result of
the net loss from continuing operations partially or wholly offset by net income
from discontinued operations of $26.8 million and $18.8 million, respectively.
The net income from discontinued operations for the year ended December 31, 2022
includes a $33.5 million gain on the sale of substantially all of our excess and
surplus lines operations to Core Specialty Insurance Holdings, Inc. ("Core
Specialty") on October 7, 2022. On a diluted per share basis, net loss was
$59.47 per share for fiscal 2022 as compared to net income of $4.96 per share
for fiscal 2021.

Our effective tax rate was -11.2% for the year ended December 31, 2022 as
compared to 21.7% for the same period in 2021. During the twelve months ended
December 31, 2022 we recorded a full valuation allowance of $31.2 million
against our net deferred tax assets primarily due to recent net losses,
including the current period net loss. The effective rate for the twelve months
ended December 31, 2021 varied from the statutory tax rates primarily due to tax
exempt interest income.

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Segment information

The following is additional business segment information for the years ended December 31, 2022 and 2021 (in thousands):



                                                                                  Year Ended December 31,
                               Commercial Lines            Personal Lines
                                   Segment                     Segment                Runoff Segment                Corporate

Consolidated


                              2022          2021          2022         2021

2022 2021 2022 2021 2022

2021

Gross premiums written $ 144,829 $ 138,687 $ 61,115 $ 67,213 $ 11,433 $ 27,578 $ - $ - $ 217,377

$ 233,478 Ceded premiums written (65,651) (64,763) (299) (303) (868) (1,754)

             -            -       (66,818)

(66,820)


Net premiums written           79,178        73,924        60,816       66,910        10,565       25,824             -            -        150,559

166,658


Change in unearned
premiums                      (5,332)           636         1,249        1,624         1,448       33,235             -            -        (2,635)

35,495


Net premiums earned            73,846        74,560        62,065       68,534        12,013       59,059             -            -        147,924

202,153



Total revenues                 75,513        77,333        66,845

73,969 13,153 61,310 4,407 13,890 159,918

226,502



Losses and loss
adjustment expenses            53,271        53,563        59,208       61,363        96,691       38,236             -            -        209,170

153,162

Pre-tax income (loss) $ (2,572) $ 589 $ (13,765) $ (9,955) $ (91,674) $ 1,517 $ (19,060) $ (4,614) $ (127,071) $ (12,463)



Net loss ratio (1)               72.1 %        71.8 %        95.4 %       89.5 %       804.9 %       64.7 %                                   141.4 %        75.8 %
Net expense ratio (1)            34.6 %        32.3 %        29.8 %       27.9 %        69.1 %       35.2 %                                    44.5 %

37.8 % Net combined ratio (1) 106.7 % 104.1 % 125.2 % 117.4 % 874.0 % 99.9 %

                                   185.9 %       113.6 %

Net Unfavorable
(Favorable) Prior Year
Development                $    (268)    $  (1,459)    $    6,559    $   4,891    $   85,235    $ (1,873)                               $    91,526    $    1,559

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.

Commercial Lines Segment.


Gross premiums written for the Commercial Lines Segment were $144.8 million for
the year ended December 31, 2022, which was $6.1 million, or 4%, more than the
$138.7 million reported for the same period in 2021.  Net premiums written were
$79.2 million for the year ended December 31, 2022 as compared to $73.9 million
for the same period in 2021. The increase in gross and net premiums written was
due to higher premium production in both our Commercial Accounts and Aviation
business units.

Total revenue for the Commercial Lines Segment of $75.5 million for the year
ended December 31, 2022, was $1.8 million, or 2%, less than the $77.3 million
reported for the same period in 2021. This decrease in total revenue was due to
a decrease in net premiums earned of $0.7 million, due primarily to the timing
of earning the net premiums written in our Commercial Accounts business unit in
2022 versus the prior year as well as by lower net investment income of $1.1
million during the year ended December 31, 2022 as compared to the same period
during 2021.

Our Commercial Lines Segment reported a pre-tax loss of $2.6 million for the
year ended December 31, 2022 as compared to pre-tax income of $0.6 million for
the same period of 2021. The higher pre-tax loss was the result of the lower
revenue discussed above a well as higher operating expenses of $1.7 million
partially offset by a decrease in losses and LAE of $0.3 million. The higher
operating expenses were largely the result of higher salary and related
expenses, higher professional fees and other general expense partially offset by
lower production related expenses.

The Commercial Lines Segment reported a net loss ratio of 72.1% for the year
ended December 31, 2022 as compared to 71.8% for the same period of 2021. The
gross loss ratio before reinsurance for the year ended December 31, 2022 was
61.8% as compared to the 65.2% reported for the same period of 2021. The
decrease in the gross loss ratio was due primarily to lower current accident
year loss trends and lower gross catastrophe losses. The increase in the net
loss ratio was due to lower ceded losses during the year ended December 31, 2022
as compared to the same period during 2021. During the year ended December 31,
2022, the Commercial Lines Segment reported favorable net loss reserve
development of $0.3 million as compared to favorable net loss reserve
development of $1.5 million during the same period

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of 2021. The Commercial Lines Segment reported $5.5 million of net catastrophe
losses during the year ended December 31, 2022 as compared to $6.3 million of
net catastrophe losses during the same period of 2021.  The Commercial Lines
Segment reported a net expense ratio of 34.6% for the year ended December 31,
2022 as compared to 32.3% for the same period of 2021. The increase in the
expense ratio was primarily due to the impact of the higher operating expenses
discussed above.

Personal Lines Segment.

Gross premiums written for the Personal Lines Segment were $61.1 million for the
year ended December 31, 2022 as compared to $67.2 million for the same period in
the prior year.  Net premiums written for the Personal Lines Segment were $60.8
million for the year ended December 31, 2022, which was a decrease of $6.1
million from the $66.9 million reported for the same period in 2021. The
decrease in gross and net premiums written was primarily due to lower premium
production in our current geographical footprint.

Total revenue for the Personal Lines Segment was $66.8 million for the year
ended December 31, 2022 as compared to $74.0 million for the same period in
2021. The decrease in revenue was due to a decrease in net premiums earned of
$6.5 million, lower finance charges of $0.6 million and lower net investment
income of $0.1 million during the year ended December 31, 2022 as compared to
the same period during 2021.

Pre-tax loss for the Personal Lines Segment was $13.8 million for the year ended
December 31, 2022 as compared to a pre-tax loss of $10.0 million for the same
period of 2021. The increase in pre-tax loss was primarily the result of the
decreased revenue discussed above partially offset by decreased losses and LAE
of $2.2 million and decreased operating expenses of $1.2 million for the year
ended December 31, 2022 as compared to the same period during 2021.

The Personal Lines Segment reported a net loss ratio of 95.4% for the year ended
December 31, 2022 as compared to 89.5% for the same period of 2021. The gross
loss ratio before reinsurance was 94.8% for the year ended December 31, 2022 as
compared to 90.5% for the same period in 2021. The higher gross and net loss
ratios were primarily the result of higher current accident year loss trends and
higher unfavorable prior year loss reserve development partially offset by lower
net catastrophe losses for the year ended December 31, 2022 as compared to the
prior year.  Our Personal Lines Segment reported unfavorable prior year net loss
reserve development of $6.6 million for the year ended December 31, 2022 as
compared to $4.9 million of unfavorable prior year net loss reserve development
in 2021. The Personal Lines Segment reported a net expense ratio of 29.8% for
the year ended December 31, 2022 as compared to 27.9% 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 $11.4 million for the year
ended December 31, 2022 as compared to $27.6 million for the same period in the
prior year. Net premiums written for the Runoff Segment were $10.6 million for
the year ended December 31, 2022 as compared to $25.8 million reported for the
same period in 2021. The decrease in gross and net premiums written was due to
the runoff of premium production in each of our business units in this segment.

Total revenue for the Runoff Segment was $13.2 million for the year ended
December 31, 2022 as compared to $61.3 million for the same period in 2021. The
decrease in revenue was due to a decrease in net premiums earned of $47.0
million as well as lower net investment income of $1.1 million during the year
ended December 31, 2022 as compared to the same period during 2021.

Pre-tax loss for the Runoff Segment was $91.7 million for the year ended
December 31, 2022 as compared to pre-tax income of $1.5 million for the same
period of 2021. The deterioration in pre-tax results was primarily the result of
higher losses and LAE of $58.5 million and the decreased revenue discussed above
partially offset by decreased operating expenses of $13.6 million for the year
ended December 31, 2022 as compared to the same period during 2021.

The Runoff Segment reported a net loss ratio of 804.9% for the year ended
December 31, 2022 as compared to 64.7% for the same period of 2021. The gross
loss ratio before reinsurance was 1080.0% for the year ended December 31, 2022
as

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compared to 152.3% for the same period in 2021. The higher gross and net loss
ratios were primarily the result of unfavorable prior year net loss reserve
development of $85.2 million for the year ended December 31, 2022 as compared to
$1.9 million of favorable prior year net loss reserve development in 2021. The
Runoff Segment reported a net expense ratio of 69.1% for the year ended December
31, 2022 as compared to 35.2% for the same period of 2021. The increase in the
expense ratio was due primarily to lower net premiums earned as well as higher
legal fees associated with the DARAG arbitration.

Corporate.



Total revenue for Corporate decreased by $9.5 million for the year ended
December 31, 2022 as compared to the same period the prior year. This decrease
in total revenue was due predominately to investment losses of $5.3 million
during the year ended December 31, 2022 as compared to investment gains of $10.2
million reported for the same period of 2021 and lower net investment income of
$6.0 million for the year ended December 31, 2022 as compared to the same period
during 2021.

Corporate pre-tax loss was $19.1 million for the year ended December 31, 2022 as
compared to pre-tax loss of $4.6 million for the same period of 2021.  The
pre-tax loss for the year ended December 31, 2022 was primarily due to the lower
revenue discussed above, as well as higher operating expenses of $4.1 million
and higher interest expense of $0.9 million.  The higher operating expenses were
driven by a $4.8 million increase in salary and related expenses due to
increased incentive compensation accruals and higher non-cash stock compensation
expense, higher travel expense of $0.2 million, higher occupancy and related
expenses of $0.2 million and higher other general expenses of $0.3 million,
partially offset by decreased professional service expense of $1.4 million.

Liquidity and Capital Resources

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 December 31, 2022, Hallmark and its
non-insurance company subsidiaries had a $5.0 million deficit in unrestricted
cash and cash equivalents. As of that date, our insurance subsidiaries held
$64.1 million of unrestricted cash and cash equivalents as well as $426.6
million in debt securities with an average modified duration of 0.8 years. See
Note 12, "Regulatory Capital Restrictions" for the limitations the Company is
subject to in funding any short term or long term 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. 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 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. For all our
insurance companies, dividends may only be paid from unassigned surplus funds.
During 2023, any dividends paid to Hallmark will require prior regulatory
approval from the state regulators. As a county mutual, dividends from HCM are
payable to policyholders. During the years ended December 31, 2022 and 2021 our
insurance company subsidiaries paid $6.0 million and $3.0 million, respectively,
in dividends to Hallmark.

The state insurance departments also regulate financial transactions between our
insurance subsidiaries and their affiliated companies. Applicable regulations
require approval of management fees, expense sharing contracts and similar
transactions. During 2022 our insurance subsidiaries paid $11.0 million in
management fees to Hallmark and our non-insurance company subsidiaries. During
2021 our insurance subsidiaries paid $15.5 million in management fees to
Hallmark and our non-insurance company subsidiaries.

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Statutory capital and surplus is calculated as statutory assets less statutory
liabilities. The various state insurance departments that regulate our insurance
company subsidiaries require us to maintain a minimum statutory capital and
surplus. As of December 31, 2022, our insurance company subsidiaries reported
statutory capital and surplus of $171.0 million, substantially greater than the
minimum requirements for each state. Each of our insurance company subsidiaries
is also required to satisfy certain risk-based capital requirements. (See,
"Item 1. Business - Insurance Regulation - Risk-based Capital Requirements.")
 As of December 31, 2022, the adjusted capital under the risk-based capital
calculation of five of our insurance company subsidiaries exceeded the minimum
requirements. The risk-based capital level of AHIC triggered a Company Action
Level event under the NAIC standard under the trend test as the RBC level was
between 200% and 300% and the combined ratio exceeded 120%. As a result, AHIC is
required to submit a risk-based capital plan to the Texas Insurance Department
(TDI) in April 2023 including identifying the conditions which contributed to
the Company Action Level Event, proposals of corrective actions and four year
financial projections. Upon receipt of the plan, TDI  may accept the plan or
require further amendments to the plan. Our total statutory net
premium-to-surplus percentage for the years ended December 31, 2022 and 2021 was
114% and 139%, respectively. (See "Item 1A. Risk Factors" for a further
discussion regarding risk based capital requirements).

Comparison of December 31, 2022 to December 31, 2021



On a consolidated basis, our cash and investments, excluding restricted cash and
investments, at December 31, 2022 were $513.9 million compared to $691.6 million
at December 31, 2021. The primary reason for this decrease in unrestricted cash
and investments stems primarily from lower premiums due to our discontinued
operations in 2022. (see Note 1)

Comparison of Years Ended December 31, 2022 and December 31, 2021



Net cash used by our consolidated operating activities was $165.0 million for
the year ended December 31, 2022 compared to net cash provided by operations of
$43.8 million for the year ended December 31, 2021.  The cash flow used by
operations was driven by a decrease in collected premium and ceding
commission coupled with an increase in loss paid and interest paid offset in
part by lower operating expense, lower income tax, and an increase in investment
income collected during the year ended December 31, 2022 as compared to the same
period the prior year.

Net cash used in our consolidated investing activities during the year ended
December 31, 2022 was $103.1 million as compared to net cash provided by
investing activities of $204.6 million for the prior year. The decrease in cash
provided by investing activities during the year ended December 31, 2022 was
primarily comprised of an increase of $185.3 million in purchases of debt and
equity securities, along with a decrease of $155.7 million in maturities, sales
and redemptions of investment securities, partially offset by proceeds of $33.5
million from the sale of our discontinued operations.

The Company did not report any net cash from financing activities during the year ended December 31, 2022 or December 31, 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 prohibit 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 64% as of December
31, 2022.

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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 junior
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. As of
December 31, 2022, we have deferred interest for 9 consecutive quarters. 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%. As of December 31, 2022, our debt to capital ratio was
64% and we have deferred $5.1 million of interest on the trust subordinated
securities. 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 December
31, 2022                                           8.02%

7.67%

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