Financial services

HALLMARK FINANCIAL SERVICES INC: Entering into a Material Definitive Agreement, Completion of Acquisition or Disposal of Assets, Other Events, Financial Statements and Exhibits (Form 8-K)

Item 1.01. Conclusion of a significant definitive agreement.

The information set forth below under “Item 2.01 Completion of Acquisition or Disposal of Assets” of this Current Report on Form 8-K is incorporated into this Item 1.01 by reference.

Item 2.01. Completion of acquisition or disposal of assets.

On October 7, 2022, Hallmark Financial Services, Inc. (the “Company”), and
Hallmark Specialty Underwriters, Inc. (“HSU” and, together with the Company, the “Sellers”), have entered into a Master Transaction Agreement (the “MTA”) with
Starstone US Holdings, Inc. (“Buyer”), a subsidiary of Core Specialty Insurance Holdings, Inc. (“Heart”).

Pursuant to the MTA, on the Effective Date (as defined below), the Company has sold, and the Purchaser has purchased, 100% of the issued and outstanding Units of the Company’s Agent Subsidiary, Heath XS, LLC (“HXS”), and the Sellers sold certain assets, and the Buyer acquired such assets and assumed certain liabilities, from excess and excess line operations of the Sellers (the “Company”), for total consideration of $40,000,000, subject to the adjustments foreseen in the ATM. Also from the Effective Date, in exchange for reinsurance by the Reinsurer (as defined below) of the liabilities associated with the provisions for unearned premiums under the Reinsurance Contract (as defined below ), the Ceding Companies (as defined below) remit to the Reinsurer an amount equal to the net provision for unearned premiums of the Ceding Companies in respect of the Activity (estimated at $86.4 million from the effective date) and received a sales commission of 23% (estimated at $19.9 million from the date of entry into force) in return.

The MTA contains customary representations and warranties regarding Buyer, Sellers and HXS, as well as customary post-closing covenants. Following the closing of the transactions contemplated by the MTA, Sellers and Buyer have agreed to indemnify the other for breaches of representations, warranties, covenants and certain other matters specified therein. The Affiliates of the Buyer and the Sellers have also entered into certain other transaction documents in order to effect the transactions contemplated by the MTA.

Raymond James & Associates, Inc.the Company’s financial advisor, has rendered its written opinion to the Company’s Board of Directors as to the fairness, from a financial point of view, of the consideration received by the Company under the MTA at September 30, 2022.

As part of the MTA, Hallmark Specialty Insurance Company(“HSIC”),
American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), and Hallmark National Insurance Company (“HNIC” and, together with HSIC, AHIC and HIC, the “Ceding Companies”), each a subsidiary of the Company, have entered into an Unearned Premium and Potential Quota Reinsurance Agreement (the “Concession Agreement”). reinsurance”) with Starstone National Insurance Company, a subsidiary of Core (the “Reinsurer”). Pursuant to the reinsurance agreement, each of the ceding companies will cede to the reinsurer, and the reinsurer will accept and reinsure, on a 100% quota share basis, unearned premiums from September 30, 2022 under certain reinsured policies of the Ceding Companies constituting the Company and business placed by HXS with the Ceding Companies between September 30, 2022 and September 30, 2023, and the reinsurer will provide certain administrative services on behalf of the ceding companies with respect to such reinsured policies. Certain transactions contemplated by the MTA and the Reinsurance Agreement are effective as of September 30, 2022 (the “Effective Date”).

The foregoing descriptions of the MTA, the Reinsurance Agreement and the transactions contemplated by these documents do not purport to be complete and are qualified in their entirety by reference to the full text of (i) the MTA and (ii) the Reinsurance Agreement. Copies of the MTA and Reinsurance Agreement are filed as Exhibits 2.1 and 10.1, respectively, and are incorporated herein by reference in their entirety.

The MTA is not intended to provide further factual information about the parties. In particular, the representations and warranties contained in the MTA were made solely for the purposes of the MTA on the specified dates and for the sole benefit of the parties to the MTA. The representations and warranties contained in the MTA are subject to the limitations agreed to by the parties and are qualified by the information contained in the Confidential Disclosure Schedules provided in connection with the execution thereof.

 Item 8.01. Other Events.

On October 7, 2022the company issued a press release announcing the completion of the transactions contemplated by the MTA and the reinsurance agreement, a copy of which is filed as Exhibit 99.1 to this current report on Form 8-K and is incorporated herein by reference in its entirety.

Forward-Looking Statements

This current report on Form 8-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements concerning the current intention, belief or expectations of the company and its management team. . Investors are cautioned that these forward-looking statements speak only as of the date they are made, are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in forward-looking statements as a result of various factors, which could adversely affect the Company’s ability to realize the anticipated benefits of the transaction. Material risk factors and information about the Company are described under “Risk Factors” in our Form 10-K filed with the SECOND on March 16, 2022our Form 10-Q filed with the SECOND on August 15, 2022and in subsequent filings made by us with the SECONDwhich are available on the DRY website at We caution you not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update any forward-looking statements or other information contained in this current report on Form 8-K, except as required by WE
federal securities law.

Section 9.01. Financial statements and supporting documents.

  (d) Exhibits

Exhibit No.   Description
  2.1           Master Transaction Agreement, dated as of October 7, 2022, by and
              among Hallmark Financial Services, Inc., Hallmark Specialty
              Underwriters, Inc. and Starstone U.S. Holdings, Inc.*

  10.1          Unearned Premium and Prospective Quota Share Reinsurance Agreement,
              dated as of October 7, 2022, by and among Hallmark Specialty Insurance
              Company, American Hallmark Insurance Company of Texas, Hallmark
              Insurance Company, Hallmark National Insurance Company and Starstone
              National Insurance Company.

  99.1          Press release, dated October 7, 2022.

104           Cover Page Interactive Data File (embedded within the Inline XBRL

*             Schedules have been omitted pursuant to Item 601(a)(5) of Regulation
              S-K. Hallmark Financial Services, Inc. agrees to furnish to the
              Securities and Exchange Commission a copy of such schedules and
              exhibits, or any section thereof, upon request.

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