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

Introduction

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

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

Specialty Commercial Segment. Our Specialty Commercial Segment includes our

Commercial Auto business unit which offers primary and excess commercial

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

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

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

business unit which offers primary and excess commercial property insurance for

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

business unit which offers healthcare and financial lines professional

liability insurance products and services primarily for businesses, medical

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

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

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


   and services, as well as certain specialty programs.

Standard Commercial Segment. Our Standard Commercial Segment includes the

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

occupational accident insurance products and services




                                       26

  Table of Contents

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

compensation insurance products handled by our former Workers Compensation

operating unit until discontinued during 2016.

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

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

Personal Lines business unit.


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

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

Results of Operations


Management overview. During the three months ended June 30, 2021, our total
revenue was $106.2 million, representing a decrease of 20% from the $132.7
million in total revenue for the same period of 2020. During the six months
ended June 30, 2021, our total revenue was $220.6 million, representing a
decrease of 6% from the $233.7 million in total revenue for the same period of
2020.  During the three months ended June 30, 2021, we reported a pre-tax loss
of $0.5 million, as compared to pre-tax income of $5.6 million reported during
the same period the prior year. During the six months ended June 30, 2021, we
reported pre-tax income of $11.2 million, as compared to a pre-tax loss of $64.0
million reported during the same period the prior year.

The decrease in revenue for the three months ended June 30, 2021 compared to the
same period of the prior year was primarily due to lower net premiums earned of
$27.0 million and lower net investment income of $0.8 million, partially offset
by higher net investment gains of $1.8 million. The decrease in revenue for the
six months ended June 30, 2021 compared to the same period of the prior year was
primarily due to decreased net premiums earned of $46.7 million, lower net
investment income of $2.3 million and lower finance charges of $1.0 million,
partially offset by higher net investment gains of $36.9 million.



The decline in pre-tax results for the three months ended June 30, 2021 compared
to the same period of the prior year was primarily due to the decreased revenue
discussed above, partially offset by decreased losses and loss adjustment
expenses ("LAE") of $17.2 million. The decrease in losses and LAE was primarily
due to lower current accident year loss trends and a $7.7 million improvement in
unfavorable net prior year loss reserve development. Losses and LAE for the
second quarter of 2021 included $3.7 million of net catastrophe losses as
compared to $6.6 million during the same period of the prior year.





The improvement in pre-tax results for the six months ended June 30, 2021 as
compared to the same period the prior year was primarily due to the absence of
$46.0 million of impairment charges to goodwill and indefinite-lived intangible
assets taken during the first quarter of 2020 and a $39.7 million decrease in
losses and LAE, partially offset by the decreased revenue discussed above.  The
impairment charges during the first quarter of 2020 resulted from our
determination that a significant decline in market capitalization below
stockholders' equity indicated the impairment of the goodwill and
indefinite-lived intangible assets included in our balance sheet.  The decrease
in losses and LAE was primarily the result of exiting the contract binding line
of the primary automobile business marketed by our Commercial

                                       27

Table of Contents

Auto business unit commencing in February 2020, as well as an $18.3 million improvement in unfavorable net prior year loss reserve development.


We reported a net loss of $0.5 million for the three months ended June 30, 2021
as compared to net income of $6.7 million for the same period in 2020. We
reported net income of $8.9 million for the six months ended June 30, 2021 as
compared to a net loss of $57.6 million for the same period in 2020. On a
diluted basis per share, we reported a net loss of $0.03 per share for the
three months ended June 30, 2021, compared to net income of $0.37 per share for
the same period in 2020. On a diluted basis per share, we reported a net income
of $0.49 per share for the six months ended June 30, 2021, as compared to a net
loss of $3.18 per share for the same period in 2020. Our effective tax rate was
20.5% for the first six months of 2021 compared to 10.0% for the same period in
2020.  The effective rate for the six months ended June 30, 2021 varied from the
statutory tax rates primarily due to tax exempt interest income. The effective
tax rate for the six months ended June 30, 2020 varied from the statutory tax
rates primarily due to the non-deductible impairment of goodwill.

Second Quarter 2021 as Compared to Second Quarter 2020

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

Three Months Ended June 30,


                            Specialty Commercial        Standard Commercial
                                  Segment                     Segment               Personal Segment             Corporate                 Consolidated
                             2021          2020          2021         2020         2021         2020         2021         2020          2021          2020
Gross premiums written    $  126,190    $  138,627    $   27,712    $  23,842    $  15,814    $  21,175    $       -    $       -    $  169,716    $  183,644
Ceded premiums written      (70,157)      (64,640)      (10,330)      (7,037)         (95)      (2,980)            -            -      (80,582)

(74,657)

Net premiums written 56,033 73,987 17,382 16,805 15,719 18,195

            -            -        89,134

108,987


Change in unearned
premiums                       8,316        14,350         (835)        (404)        1,996        2,663            -            -         9,477

16,609


Net premiums earned           64,349        88,337        16,547       16,401       17,715       20,858            -            -        98,611

125,596



Total revenues                66,917        91,124        17,240

17,096 19,115 22,464 2,943 1,968 106,215

132,652



Losses and loss
adjustment expenses           47,342        69,262        14,138       10,775       16,239       14,836            -            -        77,719

94,873

Pre-tax income (loss) $ 5,327 $ 5,882 $ (1,976) $ 802 $ (2,766) $ 1,884 $ (1,117) $ (2,985) $ (532) $

5,583



Net loss ratio (1)              73.6 %        78.4 %        85.4 %       65.7 %       91.7 %       71.1 %                                  78.8 %        75.5 %
Net expense ratio (1)           23.6 %        18.5 %        31.7 %       34.4 %       27.2 %       21.0 %                                  26.9 %        22.9 %
Net combined ratio (1)          97.2 %        96.9 %       117.1 %      100.1 %      118.9 %       92.1 %                                 105.7 %        98.4 %

Net (Unfavorable)
Favorable Prior Year
Development               $  (1,127)    $  (9,315)    $     (18)    $   (794)    $ (1,985)    $   (680)                              $  (3,130)    $ (10,789)

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

premiums earned, each determined in accordance with GAAP. The net expense (1) ratio is calculated as total underwriting expenses offset by agency fee

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

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

the net expense ratio.

Specialty Commercial Segment



Gross premiums written for the Specialty Commercial Segment were $126.2 million
for the three months ended June 30, 2021, which was $12.4 million, or 9.0%, less
than the $138.6 million reported for the same period of 2020.  Net premiums
written were $56.0 million for the three months ended June 30, 2021 as compared
to $74.0 million for the same period of 2020.  The decrease in gross and net
premiums written was primarily the result of lower premium production in our
Commercial Auto, Professional Liability and E&S Property business units,
partially offset by increased premium production in our E&S Casualty and
Aerospace & Programs business units. In February 2020, we made the strategic
decision to exit the contract binding line of the primary automobile business
marketed by our Commercial Auto business unit as a result of increasing claim
severity and limited opportunity for meaningful rate increases. At that time, we
began the process of non-renewing policies and placing in-force policies in
runoff in accordance with state regulatory guidelines.

                                       28

Table of Contents

The exit of the contract binding line of the primary commercial automobile business contributed $3.5 million and $6.7 million to the decline in gross premiums written and net premiums written, respectively, for the three months ended June 30, 2021 as compared to the same period the prior year.


The $66.9 million of total revenue for the three months ended June 30, 2021 was
$24.2 million less than the $91.1 million reported by the Specialty Commercial
Segment for the same period in 2020. This decrease in revenue was primarily due
to lower net premiums earned of $24.0 million driven mostly by decreased net
premiums earned of $25.0 million in the Commercial Auto business unit, $0.8
million from the Professional Liability business unit and $0.6 million from the
E&S Property business unit, partially offset by higher net premiums earned of
$2.4 million in the E&S Casualty business unit.  Further contributing to the
decrease in revenue was lower net investment income of $0.2 million for the
three months ended June 30, 2021 as compared to the same period of 2020.

The Specialty Commercial Segment reported pre-tax income of $5.3 million for the
second quarter of 2021 as compared to pre-tax income of $5.9 million reported
for the same period in 2020.  The $0.6 million decline in pre-tax income was
primarily the result of the lower revenue discussed above, partially offset by
lower losses and LAE of $21.9 million, lower operating expenses of $1.3 million
and lower amortization of intangible assets of $0.4 million during the
three months ended June 30, 2021 as compared to the same period during 2020.

Our Specialty Commercial Segment reported lower losses and LAE for the quarter
ended June 30, 2021 compared to the same period of the prior year as the
combined result of (a) a $21.6 million decrease in losses and LAE in our
Commercial Auto business unit due largely to exit of the contract binding line
of business as well as a $7.5 million improvement in unfavorable prior year net
loss reserve development,  (b) stable losses and LAE in our E&S Property
business unit due primarily to a $2.2 million improvement in net catastrophe
losses, partially offset by $1.0 million higher unfavorable net prior year loss
reserve development and higher current accident year non-catastrophe losses, (c)
a $4.6 million increase in losses and LAE in our E&S Casualty business unit due
primarily to a $2.7 million increase in unfavorable prior year net loss reserve
development and higher current accident year loss trends, (d) a $3.6 million
decrease in losses and LAE in our Aerospace & Programs business unit due
primarily to lower current accident year net loss trends driven by lower
satellite losses, partially offset by a $0.3 million higher unfavorable net loss
reserve development, and (e) a $1.3 million decrease in losses and LAE
attributable to our Professional Liability business unit due primarily to
favorable net prior year loss reserve development of $4.1 million during the
second quarter of 2021 as compared to unfavorable net prior year loss reserve
development of $0.6 million during the same period the prior year, partially
offset by higher net current accident year loss trends.



Operating expenses decreased $1.3 million primarily as the result of lower
production related expenses of $1.8 million and lower occupancy and related
expenses of $0.2 million, partially offset by higher salary and related expenses
of $0.3 million driven by increased incentive compensation expense and higher
other operating expenses of $0.4 million.

The Specialty Commercial Segment reported a net loss ratio of 73.6% for the
three months ended June 30, 2021 as compared to 78.4% for the same period in
2020. The gross loss ratio before reinsurance was 90.0% for the three months
ended June 30, 2021 as compared to 82.3% for the same period in 2020 driven by
unfavorable gross loss reserve development from the exited contract binding line
of the primary commercial automobile business that was ceded under the loss
portfolio transfer agreement entered during 2020.  The Company did not retain
any of this unfavorable reserve development during the quarter ended June 30,
2021. The exit of the contract binding line of the primary commercial automobile
business contributed 1.6% to the decline in the net loss ratio during the three
months ended June 30, 2021 as compared to same period during 2020. The decrease
in the net loss ratio was also impacted by $1.1 million of unfavorable
prior year net loss reserve development for the three months ended June 30, 2021
as compared to unfavorable prior year net loss reserve development of $9.3
million for the same period of 2020.  Catastrophe losses of $0.1 million for the
three months ended June 30, 2021 as compared to catastrophe losses of $3.9
million during the second quarter of 2020 also contributed to the decrease in
the net loss ratio.  The Specialty Commercial Segment reported a net expense
ratio of 23.6% for the second quarter of 2021 as compared to 18.5% for the same
period of 2020 driven primarily by lower net premiums earned.





                                       29

  Table of Contents

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $27.7 million
for the three months ended June 30, 2021, which was $3.9 million, or 16%, more
than the $23.8 million reported for the same period in 2020.  Net premiums
written were $17.4 million for the three months ended June 30, 2021 as compared
to $16.8 million for the same period in 2020.  The increase in the gross and net
premiums written was due to higher premium production in our Commercial Accounts
business unit.

Total revenue for the Standard Commercial Segment of $17.2 million for the
three months ended June 30, 2021, was $0.1 million more than the $17.1 million
reported for the same period in 2020. This increase in total revenue was due to
higher net premiums earned of $0.1 million due to higher premium production for
the three months ended June 30, 2021 as compared to the same period of 2020.

Our Standard Commercial Segment reported a pre-tax loss of $2.0 million for the
three months ended June 30, 2021 as compared to pre-tax income of $0.8 million
reported for the same period of 2020.  The pre-tax loss was the result of higher
loss and LAE of $3.4 million, partially offset by lower operating expenses of
$0.5 million and the higher revenue discussed above. Decreased operating
expenses were primarily the result of lower production related expenses of $0.5
million and lower professional services of $0.1 million, partially offset by
higher salary and related expenses of $0.1 million.

The Standard Commercial Segment reported a net loss ratio of 85.4% for the
three months ended June 30, 2021 as compared to 65.7% for the same period of
2020.  The gross loss ratio before reinsurance for the three months ended June
30, 2021 was 83.5% as compared to 69.0% reported for the same period of 2020.
 The increase in the gross and net loss ratios was due primarily to net
catastrophe losses of $3.2 million during the second quarter of 2021 compared to
$2.3 million for the same period of the prior year and higher non-catastrophe
current accident year loss trends.  The Standard Commercial Segment reported
unfavorable net loss reserve development of $18 thousand during the three months
ended June 30, 2021 as compared to unfavorable net loss reserve development of
$0.8 million during the same period of 2020 The Standard Commercial Segment
reported a net expense ratio of 31.7% for the second quarter of 2021 as compared
to 34.4% for the same period of 2020.  The decrease in the expense ratio was
primarily due to increased net premiums earned and decreased operating expenses.





Personal Segment


Gross premiums written for the Personal Segment were $15.8 million for the
three months ended June 30, 2021 as compared to $21.2 million for the same
period in the prior year.  Net premiums written for our Personal Segment were
$15.7 million in the second quarter of 2021, which was a decrease of $2.5
million from the $18.2 million reported for the second quarter of 2020.  The
decrease in gross and net written premiums was primarily due to lower premium
production in our current geographical footprint.

Total revenue for the Personal Segment was $19.1 million for the second quarter
of 2021 as compared to $22.5 million for the same period in 2020.  The decrease
in revenue was primarily due to lower net premiums earned of $3.1 million and
lower finance charges of $0.4 million, partially offset by higher investment
income of $0.1 million during the second quarter of 2021 as compared to the same
period during 2020.

Pre-tax loss for the Personal Segment was $2.8 million for the three months
ended June 30, 2021 as compared to pre-tax income of $1.9 million for the same
period of 2020.  The pre-tax loss was primarily the result of higher losses and
LAE of $1.4 million and the decreased revenue as discussed above, partially
offset by decreased amortization of intangible assets of $0.1 million for the
three months ended June 30, 2021 as compared to the same period during 2020.

The Personal Segment reported a net loss ratio of 91.7% for the three months
ended June 30, 2021 as compared to 71.1% for the same period of 2020.  The gross
loss ratio before reinsurance was 91.9% for the three months ended June 30, 2021
as compared to 70.9% for the same period in 2020.  The higher gross and net loss
ratios were impacted by higher current accident year loss trends and $1.3
million higher net unfavorable prior year loss reserve development.  The
Personal

                                       30

  Table of Contents

Segment had $0.4 million of net catastrophe losses during both the second
quarter of 2021 and 2020.  The Personal Segment reported a net expense ratio of
27.2% for the second quarter of 2021 as compared to 21.0% for the same period of
2020.  The increase in the expense ratio was due primarily to lower net premiums
earned.

Corporate


Total revenue for Corporate increased by $1.0 million for the three months ended
June 30, 2021 as compared to the same period the prior year.  This increase in
total revenue was due predominately to investment gains of $3.9 million during
the second quarter of 2021 as compared to investment gains of $2.1 million
reported for the same period of 2020, partially offset by lower net investment
income of $0.8 million for the three months ended June 30, 2021 as compared to
the same period during 2020.

Corporate pre-tax loss was $1.1 million for the three months ended June 30, 2021
as compared to pre-tax loss of $3.0 million for the same period of 2020.  The
improvement in pre-tax results for the second quarter of 2021 as compared to the
same period the prior year was primarily due to the higher revenue discussed
above as well as lower operating expenses of $0.8 million driven primarily by
lower professional services of $0.4 million, lower salary and related expense of
$0.3 million and lower travel and entertainment expenses of $0.1 million.

Further contributing to the improvement in the pre-tax loss was lower interest expense of $0.1 million.



Six Months Ended June 30, 2021 as compared to Six Months Ended June 30, 2020 (in
thousands):




                                                                                 Six Months Ended June 30,
                             Specialty Commercial         Standard Commercial
                                   Segment                      Segment                Personal Segment             Corporate                  Consolidated
                             2021           2020           2021          2020         2021         2020         2021         2020          2021           2020
Gross premiums written    $   240,180    $   288,097    $   57,447    $   50,218    $  35,107    $  46,918    $      -    $        -    $   332,734    $   385,233
Ceded premiums written      (129,711)      (128,604)      (20,580)      (14,500)        (162)      (6,637)           -             -      (150,453)      (149,741)
Net premiums written          110,469        159,493        36,867        35,718       34,945       40,281           -             -        182,281        235,492
Change in unearned
premiums                       23,457         15,816       (3,254)       (2,899)          345        1,120           -             -         20,548         14,037
Net premiums earned           133,926        175,309        33,613        32,819       35,290       41,401           -             -        202,829        249,529

Total revenues                138,882        183,244        34,928        34,732       38,074       44,787       8,750      (29,063)        220,634        233,700

Losses and loss
adjustment expenses            91,749        130,145        26,229        22,630       30,644       35,503           -             -        148,622        188,278

Pre-tax income (loss)          17,148         22,174       (1,610)         1,518      (4,389)      (3,771)          19      (83,924)         11,168       (64,003)

Net loss ratio (1)               68.5 %         74.2 %        78.0 %        69.0 %       86.8 %       85.8 %                                   73.3 %         75.5 %
Net expense ratio (1)            23.8 %         18.1 %        31.7 %        32.9 %       28.8 %       24.7 %                                   27.5 %         22.5 %
Net combined ratio (1)           92.3 %         92.3 %       109.7 %       101.9 %      115.6 %      110.5 %                                  100.8 %         98.0 %

Net (Unfavorable)
Favorable Prior Year
Development                       772       (12,468)         1,343         (919)      (3,159)      (5,961)                                  (1,044)       (19,348)

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

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

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

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

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


     the net expense ratio.

Specialty Commercial Segment



Gross premiums written for the Specialty Commercial Segment were $240.2 million
for the six months ended June 30, 2021 which was $47.9 million, or 17%, less
than the $288.1 million reported for the same period of 2020. Net premiums
written were $110.5 million for the six months ended June 30, 2021 as compared
to $159.5 million for the same period of 2020. The decrease in gross and net
premiums written was primarily the result of lower premium production in our
Commercial Auto, Professional Liability, E&S Property and Aerospace & Programs
business units, partially offset by increased premium production in our E&S
Casualty business unit. In February 2020, we made the strategic decision to

                                       31

Table of Contents


exit the contract binding line of the primary automobile business marketed by
our Commercial Auto business unit as a result of increasing claim severity and
limited opportunity for meaningful rate increases. At that time, we began the
process of non-renewing policies and placing in-force policies in runoff in
accordance with state regulatory guidelines.  The exit of the contract binding
line of the primary commercial automobile business contributed $21.8 million and
$21.0 million to the decline in gross premiums written and net premiums written,
respectively, for the six months ended June 30, 2021 as compared to the same
period the prior year.




The $138.9 million of total revenue for the six months ended June 30, 2021 was
$44.3 million less than the $183.2 million reported by the Specialty Commercial
Segment for the same period in 2020. This decrease in revenue was primarily due
to lower net premiums earned of $41.4 million due primarily to the decreased
premium production discussed above, as well as lower net investment income of
$2.9 million for the six months ended June 30, 2021 as compared to the same
period of 2020.

Pre-tax income for the Specialty Commercial Segment of $17.1 million during the
six months ended June 30, 2021 was $5.1 million less than the $22.2 million
reported for the same period in 2020. The decrease in pre-tax income was
primarily the result of the decreased revenue discussed above, partially offset
by lower losses and LAE of $38.4 million, lower operating expenses of $0.1
million and lower amortization of intangible assets of $0.7 million during the
six months ended June 30, 2021 as compared to the same period during 2020.

Our Specialty Commercial Segment reported lower losses and LAE for the six
months ended June 30, 2021 compared to the same period of the prior year as the
combined result of (a) a $43.5 million decrease in losses and LAE in our
Commercial Auto business unit due largely to exit of the contract binding line
of business, as well as a $15.8 million improvement in prior year net loss
reserve development,  (b) a $1.7 million decrease in losses and LAE in our E&S
Property business unit due primarily to a $4.6 million improvement in net
catastrophe losses, partially offset by unfavorable net prior year loss reserve
development of $1.2 million during the six months ended June 30, 2021 as
compared to $2.3 million of favorable prior year net loss reserve development
during the same period of 2020 and higher current accident year non-catastrophe
losses, (c) a $9.8 million increase in losses and LAE in our E&S Casualty
business unit due primarily to higher unfavorable prior year net loss reserve
development of $3.7 million and higher net premiums earned,  (d) a $2.3 million
decrease in losses and LAE in our Aerospace & Programs business unit due
primarily to lower current accident year net loss trends driven by lower
satellite losses partially offset by $0.1 million higher unfavorable net loss
reserve development,  and (e) a $0.7 million decrease in losses and LAE
attributable to our Professional Liability business unit due primarily to $4.8
million higher favorable net prior year loss reserve development, partially
offset by higher current accident year loss trends.



Operating expenses decreased $0.1 million primarily as the result of lower
production related expenses of $1.8 million, lower occupancy and related
expenses of $0.5 million, lower professional services of $0.9 million and lower
travel and related expenses of $0.2 million, partially offset by higher salary
and related expenses of $2.5 million driven by increased incentive compensation
expense and higher other operating expenses of $0.8 million.

The Specialty Commercial Segment reported a net loss ratio of 68.5% for the
six months ended June 30, 2021 as compared to 74.2% for the same period in 2020.
The gross loss ratio before reinsurance was 82.4% for the six months ended June
30, 2021 as compared to 84.6% for the same period in 2020. The exit of the
contract binding line of the primary commercial automobile business contributed
5.0% to the decline in the net loss ratio during the six months ended June 30,
2021 as compared to same period during 2020. The decrease in the gross and net
loss ratios were also impacted by $0.8 million of favorable prior year net loss
reserve development for the six months ended June 30, 2021 as compared to
unfavorable prior year net loss reserve development of $12.5 million for the
same period of 2020.  Catastrophe losses of $3.7 million for the six months
ended June 30, 2021 as compared to catastrophe losses of $8.3 million during the
same period of 2020 also contributed to the decrease in the loss ratio.  The
Specialty Commercial Segment reported a net expense ratio of 23.8% for the six
months ended June 30, 2021 as compared to 18.1% for the same period of 2020
driven primarily by lower net premiums earned.



                                       32

  Table of Contents

Standard Commercial Segment

Gross premiums written for the Standard Commercial Segment were $57.4 million
for the six months ended June 30, 2021, which was $7.2 million, or 14%, more
than the $50.2 million reported for the same period in 2020. Net premiums
written were $36.9 million for the three months ended June 30, 2021 as compared
to $35.7 million for the same period in 2020. The increase in the gross and net
premiums written was due to higher premium production in our Commercial Accounts
business unit.

Total revenue for the Standard Commercial Segment of $34.9 million for the
six months ended June 30, 2021, was $0.2 million, more than the $34.7 million
reported for the same period in 2020. This increase in total revenue was due to
higher net premiums earned of $0.8 million, partially offset by lower net
investment income of $0.5 million and lower finance charges of $0.1 million for
the three months ended June 30, 2021 as compared to the same period of 2020.

Our Standard Commercial Segment reported a pre-tax loss of $1.6 million for the
six months ended June 30, 2021 as compared to pre-tax income of $1.5 million
reported for the same period of 2020. The pre-tax loss was the result of higher
loss and LAE of $3.6 million, partially offset by lower operating expenses of
$0.3 million and the increased revenue discussed above. Decreased operating
expenses were primarily the result of lower professional services of $0.2
million and lower salary and related expenses of $0.1 million.

The Standard Commercial Segment reported a net loss ratio of 78.0% for the
six months ended June 30, 2021 as compared to 69.0% for the same period of 2020.
The gross loss ratio before reinsurance for the six months ended June 30, 2021
was 70.8% as compared to 67.3% reported for the same period of 2020. The
increase in the gross and net loss ratios was due primarily to higher gross
current accident year loss trends and catastrophe losses of $5.2 million during
the six months ended June 30, 2021 compared to $3.9 million for the same period
of the prior year. The Standard Commercial Segment reported favorable net loss
reserve development of $1.3 million during the six months ended June 30, 2021 as
compared to unfavorable net loss reserve development of $0.9 million during the
same period of 2020. The Standard Commercial Segment reported a net expense
ratio of 31.7% for the six months ended June 30, 2021 as compared to 32.9% for
the same period of 2020. The decrease in the expense ratio was primarily due to
lower operating expenses and higher net premiums earned in our Commercial
Accounts business unit.

Personal Segment


Gross premiums written for the Personal Segment were $35.1 million for the
six months ended June 30, 2021 as compared to $46.9 million for the same period
in the prior year. Net premiums written for our Personal Segment were $34.9
million for the six months ended June 30, 2021, which was a decrease of $5.4
million from the $40.3 million reported for the same period of 2020. The
decrease in gross and net written premiums was primarily due to lower premium
production in our current geographical footprint.

Total revenue for the Personal Segment was $38.1 million for the six months
ended June 30, 2021 as compared to $44.8 million for the same period in 2020.
The decrease in revenue was due to a decrease in net premiums earned of $6.1
million and lower finance charges of $0.9 million, partially offset by higher
investment income of $0.3 million during the six months ended June 30, 2021 as
compared to the same period during 2020.

Pre-tax loss for the Personal Segment was $4.4 million for the six months ended
June 30, 2021 as compared to pre-tax loss of $3.8 million for the same period of
2020. The increase in pre-tax loss was primarily the result of the decreased
revenue discussed above, partially offset by decreased losses and LAE of $4.9
million, decreased operating expenses of $1.1 million and lower amortization of
intangible assets of $0.1 million for the six months ended June 30, 2021 as
compared to the same period during 2020.

The Personal Segment reported a net loss ratio of 86.8% for the six months ended
June 30, 2021 as compared to 85.8% for the same period of 2020. The gross loss
ratio before reinsurance was 88.1% for the six months ended June 30, 2021 as
compared to 75.7% for the same period in 2020. The higher gross and net loss
ratios for the six months ended June 30, 2021 was primarily the result of higher
current accident year loss trends.  The Personal Segment reported $3.2 million
net unfavorable prior year loss reserve development during the first six months
of 2021 as compared to net

                                       33

  Table of Contents


unfavorable prior year loss reserve development of $6.0 million during the first
six months of 2020. The Personal Segment had catastrophe losses of $0.8 million
during the six months ended June 30, 2021 as compared to $0.4 million for the
same period of 2020. The Personal Segment reported a net expense ratio of 28.8%
during the six months ended June 30, 2021 as compared to 24.7% for the same
period of 2020. The increase in the expense ratio was due predominately to lower
net premiums earned and lower finance charges.

Corporate



Total revenue for Corporate increased by $37.8 million for the six months ended
June 30, 2021 as compared to the same period the prior year. This increase in
total revenue was due predominately to investment gains of $9.7 million during
the six months ended June 30, 2021 as compared to investment losses of $27.3
million reported for the same period of 2020 and higher net investment income of
$0.8 million for the six months ended June 30, 2021 as compared to the same
period during 2020.

Corporate pre-tax income was $19 thousand for the six months ended June 30, 2021
as compared to pre-tax loss of $83.9 million for the same period of 2020. The
improvement in the pre-tax result was primarily due to a $44.7 million
impairment charge to goodwill and a $1.3 million charge to indefinite-lived
intangible assets. In connection with its normal process for evaluating
impairment triggering events, the Company determined that a significant decline
in its market capitalization below its stockholders' equity during the first
quarter of 2020 indicated the impairment of the goodwill and indefinite-lived
intangible assets included in our balance sheet. Further contributing to the
improved pre-tax result was lower interest expense of $0.3 million, as well as
the higher revenue discussed above. The pre-tax income was partially reduced by
higher operating expenses of $0.2 million, primarily as a result of increased
salary and related expense, largely due to incentive compensation accrual
adjustments, partially offset by lower professional services, travel and related
and occupancy and related expenses.

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 June 30, 2021, Hallmark and its
non-insurance company subsidiaries had $13.8 million in unrestricted cash and
cash equivalents, including $17.6 million held in premium and claim trust
accounts. As of that date, our insurance subsidiaries held $312.8 million of
unrestricted cash and cash equivalents, as well as $300.7 million in debt
securities with an average modified duration of 0.7 years. Accordingly, we do
not anticipate selling long-term debt instruments to meet liquidity needs.

AHIC and TBIC, domiciled in Texas, are limited in the payment of dividends to
their stockholders in any 12-month period, without the prior written consent of
the Texas Department of Insurance, to the greater of statutory net income for
the prior calendar year or 10% of statutory policyholders' surplus as of the
prior year end. Dividends may only be paid from unassigned surplus funds. HIC
and HNIC, both domiciled in Arizona, are limited in the payment of dividends to
the lesser of 10% of prior year policyholders' surplus or prior year's statutory
net income, without prior written approval from the Arizona Department of
Insurance. HSIC, domiciled in Oklahoma, is limited in the payment of dividends
to the greater of 10% of prior year policyholders' surplus or prior year's
statutory net income, not including realized capital gains, without prior
written approval from the Oklahoma Insurance Department. During 2021, the
aggregate ordinary dividend capacity of these subsidiaries is $22.5 million, of
which $15.0 million is available to Hallmark. As a county mutual, dividends from
HCM are payable to policyholders. During the first six months of 2021 and 2020,
our insurance subsidiaries paid $3.0 million and $8.0 million in dividends to
Hallmark, respectively. During the first six months of 2021 and 2020, our
insurance subsidiaries paid $7.0 million and $1.5 million in management fees to
Hallmark, respectively.

                                       34

  Table of Contents

Comparison of June 30, 2021 to December 31, 2020



On a consolidated basis, our cash (excluding restricted cash) and investments at
June 30, 2021 were $674.2 million compared to $639.2 million at December 31,
2020. The primary reasons for this increase in unrestricted cash and investments
were increases in investment fair values and cash provided by operations.

Comparison of Six Months Ended June 30, 2021 and June 30, 2020



During the six months ended June 30, 2021, our cash flow provided by operations
was $28.9 million compared to cash flow used by operations of $7.0 million
during the same period the prior year. The cash flow provided by operations was
driven by a decrease in net paid claims, decreased paid operating expenses,
higher collected commission and fee income and lower interest paid, and income
tax refunds received, partially offset by decreased collected net premiums,
lower collected investment income and lower finance charges during the
six months ended June 30, 2021 as compared to the same period the prior year.

Net cash provided by investing activities during the first six months of 2021
was $194.8 million as compared to net cash provided by investing activities of
$80.5 million during the first six months of 2020. The increase in cash provided
by investing activities during the first six months of 2021 was primarily
comprised of a decrease of $101.3 million in purchases of debt and equity
securities, an increase of $13.2 million in maturities, sales and redemptions of
investment securities, partially offset by a $0.2 million increase in purchases
of fixed assets.

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

Senior Unsecured Notes


On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes
("Notes") due August 15, 2029. Interest on the Notes accrues at the rate of
6.25% per annum and is payable semi-annually in arrears commencing February 15,
2020. The Notes are not obligations of or guaranteed by any of Hallmark's
subsidiaries and are not subject to any sinking fund requirements. At Hallmark's
option, the Notes are redeemable, in whole or in part, prior to the stated
maturity subject to certain provisions intended to make the holders of the Notes
whole on scheduled interest and principal payments. The indenture governing the
Notes contains certain covenants which, among other things, restrict Hallmark's
ability to incur additional indebtedness, make certain payments, create liens on
the stock of certain subsidiaries, dispose of certain assets, or merge or
consolidate with other entities. The terms of the indenture prohibits payments
or other distributions on any security of the Company that ranks junior to the
Notes when the Company's debt to capital ratio (as defined in the indenture) is
greater than 35%.  The Company's debt to capital ratio was 37.4% as of June

30,
2021.

Subordinated Debt Securities

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

Each trust pays dividends on its preferred securities at the same rate each
quarter as interest is paid on the junior subordinated debt securities. Under
the terms of the trust subordinated debt securities, we pay interest only each
quarter and the principal of each note at maturity. We may elect to defer
payments of interest on the trust subordinated debt securities by extending the
interest payment period for up to 20 consecutive quarterly periods.  During any
such extension period, interest continues to accrue on the trust subordinated
debt securities, as well as interest on such accrued interest.  In order to
maintain compliance with the terms of our senior unsecured Notes, we have
elected to defer payment of interest on the trust subordinated securities until
our debt to capital ratio (as defined in the indenture governing the Notes)

is
less

                                       35

  Table of Contents

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 June 30,
2021                                                3.37%

3.02%

© Edgar Online, source Glimpses