Executive Summary

Q1 2023 was dominated by a non-recurring arbitration-driven charge: Hallmark recorded a $32.9M bad-debt write-off tied to its DARAG Loss Portfolio Transfer, driving a net loss from continuing operations of $39.2M and a net combined ratio of 215.7%; underlying combined ratio improved to 107.5% vs 109.8% YoY .
Investment income rose to $4.3M (+$2.5M YoY) while net premiums earned fell to $35.3M (-$4.0M YoY), resulting in total revenues of $39.8M (-$2.4M YoY) .
AM Best downgraded ratings in May and Hallmark withdrew from AM Best’s interactive rating process (to NR); Hallmark added an “A”-rated paper partnership to continue underwriting where higher ratings are required, though with increased cost structure .
Final arbitration award (June 2) increased the total write-off to $36.9M (additional $4.0M in Q2), confirming the first-quarter interim charge magnitude and removing residual uncertainty around the receivable .
No earnings call transcript was filed; consensus estimates from S&P Global were unavailable, so results vs Street cannot be assessed this quarter (S&P Global estimates unavailable)*.

What Went Well and What Went Wrong

What Went Well
- Underlying combined ratio improved to 107.5% (from 109.8% YoY), reflecting better core underwriting excluding prior-year development, catastrophes, and the DARAG write-off .
- Net investment income increased to $4.3M in Q1 (+$2.5M YoY) on portfolio repositioning; 91% of debt securities mature within five years and duration is 0.7 years, mitigating rate risk .
- Commercial Lines turned a modest pre-tax profit ($0.8M) on higher net earned premium and lower operating expenses, with a net combined ratio of 97.7% .
What Went Wrong
- The $32.9M arbitration-driven write-off (93.2 pts of combined ratio impact) was the primary loss driver; continuing ops net loss was $39.2M and net combined ratio spiked to 215.7% .
- AM Best downgrades and subsequent withdrawal to NR add distribution and cost challenges; Hallmark expects increased expense to write business on “A” paper .
- Personal Lines reported a pre-tax loss of $1.8M with elevated net loss ratio (81.8%) and combined ratio (115.0%), impacted by inflationary loss costs and adverse development .

Financial Results

YoY comparison (Q1 2022 → Q1 2023)

Metric	Q1 2022	Q1 2023
Total Revenues ($000s)	$42,223	$39,831
Net Premiums Earned ($000s)	$39,315	$35,280
Net (Loss) from Continuing Ops ($000s)	$(11,677)	$(39,246)
Net Income from Discontinued Ops ($000s)	$8,458	$104
Net (Loss) ($000s)	$(3,219)	$(39,142)
Net Loss/Share – Continuing Ops (diluted)	$(6.43)	$(21.59)
Net Loss/Share – Total (diluted)	$(1.77)	$(21.53)
Operating (Loss) ($000s)	$(11,717)	$(4,973)
Operating Loss/Share (diluted)	$(6.45)	$(2.74)
Net Investment Income ($000s)	$1,859	$4,342
Net Combined Ratio (%)	136.9%	215.7%
Underlying Combined Ratio (%)	109.8%	107.5%

QoQ trend (Q3 2022 → Q1 2023)

Metric	Q3 2022	Q1 2023
Total Revenues ($000s)	$38,232	$39,831
Net Premiums Earned ($000s)	$36,380	$35,280
Net (Loss) from Continuing Ops ($000s)	$(29,253)	$(39,246)
Net Investment Income ($000s)	$3,721	$4,342

Segment breakdown (Three Months Ended March 31)

Segment	Net Premiums Earned ($000s)	Pre-Tax Income (Loss) ($000s)	Net Loss Ratio (%)	Net Combined Ratio (%)
Commercial Lines (2023)	$21,610	$826	72.3%	97.7%
Personal Lines (2023)	$13,657	$(1,775)	81.8%	115.0%
Runoff Segment (2023)	$13	$(37,195)	N/A	N/A
Consolidated (2023)	$35,280	$(39,780)	84.4%	215.7%

KPIs and balance sheet items (as of March 31, 2023 unless noted)

KPI	Value
Gross Premiums Written ($000s, Q1)	$57,172
Net Premiums Written ($000s, Q1)	$42,381
Net Investment Income ($000s, Q1)	$4,342
Net Combined Ratio (Q1)	215.7%
Underlying Combined Ratio (Q1)	107.5%
Cash & Cash Equivalents ($000s)	$105,458
Debt Securities ($000s)	$340,054
Debt Securities ≤5 years	91% of portfolio
Avg Modified Duration	0.7 years
Book Value/Share	$12.95

Guidance Changes

No formal revenue, margin, EPS, or capex guidance was provided. Management disclosed rating actions and operating adjustments; we summarize below.

Metric	Period	Previous Guidance	Current Guidance	Change
Financial strength / ratings	2023	Under review; downgrades anticipated	Withdrew from AM Best interactive process; NR designation; “A” rated fronting partner arrangement	Changed (rating withdrawn)
Tax valuation allowance	2023	Full valuation allowance (FY22)	Continues to maintain full valuation allowance in 2023	Maintained

Earnings Call Themes & Trends

No earnings call transcript was filed for Q1 2023. Themes below reflect management’s filings (10‑Q and press releases) and how narratives evolved.

Topic	Previous Mentions (Q3 2022)	Previous Mentions (FY 2022)	Current Period (Q1 2023)	Trend
DARAG LPT arbitration	Dispute pending; Hallmark funding claims; adverse development in Runoff	Ongoing arbitration risk; potential write-off range cited	Interim award → $32.9M write-off; Final award lifts total to $36.9M (Q2 add’l $4.0M)	Resolved (financial hit recognized)
Ratings & distribution	Under review with negative implications (AM Best)	A‑ ratings before downgrades; risk noted	Downgraded; withdrew to NR; “A” paper partnership to continue underwriting, higher cost structure	Deteriorated ratings; mitigation via partner
Inflation / loss costs	Personal Lines impacted; elevated loss ratios	Persistent inflation pressure highlighted	Personal Lines still pressured; adverse PYD noted	Ongoing headwind
Catastrophe exposure	CAT losses impacted segments	CAT risk emphasis	Higher CAT impact YoY (4.9 pts vs 0.6 pts)	Slightly worse YoY
Liquidity & portfolio	Higher short duration; balanced portfolio	Strong fixed income, short maturities	$105.5M cash; 0.7-year duration; 91% ≤5 years	Stable / positioned for rates

Management Commentary

“The increase in operating expenses from continuing operations is solely due to the write-off of a receivable from a reinsurer of $32.9 million as a result of the interim binding arbitration decision on May 5, 2023.”
“On May 14, 2023, the Company submitted notice to AM Best to withdraw from AM Best’s interactive rating process… We will be assigned a Non-Rating Designation of NR by AM Best…”
“On May 5, 2023, the Company entered into an agreement with an A.M. Best rated ‘A’ insurance company to continue to write new business in circumstances that require an A.M. Best financial strength rating higher than our own… the cost structure… is negatively impacted by the additional expense…”
Segment narrative: Commercial Lines improved pre-tax results on higher net earned premium and lower operating expenses; Personal Lines saw unfavorable development tied to rising inflationary trends; Runoff pre-tax loss was dominated by the write-off and reducing unfavorable reserve development vs prior year .

Q&A Highlights

No Q1 2023 earnings call transcript was available; therefore, there were no disclosed analyst Q&A themes or guidance clarifications in transcript form [ListDocuments earnings-call-transcript returned none].

Estimates Context

S&P Global consensus estimates (EPS, revenue, EBITDA) for HALL Q1 2023 were unavailable; we could not retrieve CIQ mapping to assess results vs Street. Values retrieved from S&P Global were unavailable for this ticker*.
Implication: No quantitative “beat/miss” assessment vs consensus can be made this quarter.

Key Takeaways for Investors

Core underwriting improved (underlying combined ratio 107.5%), but reported results were overwhelmed by a one-time arbitration-related charge adding 93 points to the combined ratio .
Ratings downgrades and withdrawal to NR materially affect distribution; the “A”-rated paper partnership keeps the book viable but at higher cost, pressuring margins until core profitability and capital strengthen .
Investment portfolio is short duration (0.7 years) with strong liquidity ($105.5M cash), supporting flexibility amid rate volatility .
Commercial Lines stabilization is a bright spot (combined ratio 97.7%); focus on Personal Lines remediation in inflationary environment is critical to restoring group profitability .
With the final arbitration award locking in the total write-off ($36.9M), residual uncertainty fades; future quarters should reflect cleaner comparability absent the DARAG receivable effects .
Near-term trading: headline risk from NR designation and cost headwinds could weigh; medium-term thesis depends on sustaining underlying ratio improvement, lowering expense ratios, and Personal Lines rate adequacy .

*Values retrieved from S&P Global.

HALLMARK FINANCIAL SERVICES INC (HALL)·Q1 2023 Earnings Summary