Hallmark Financial Services - Chapter 11 Case Summary

Business Description

Headquartered in Dallas, TX, Hallmark Financial Services, Inc. ("Hallmark" or the "Debtor") is a diversified property and casualty ("P&C") insurance holding company that, together with its non-Debtor subsidiaries, has historically underwritten, marketed, and distributed insurance products in specialty and niche markets throughout the United States.

• The Debtor conducts its primary business through its operating subsidiaries (collectively, the "Subsidiaries"), which comprise both licensed insurance carriers (the "Insurance Subsidiaries") and managing general agents (the "MGA Subsidiaries").
• Through these Subsidiaries, Hallmark offers commercial and personal insurance solutions to businesses and individuals on an admitted basis, focusing on P&C products that require specialized underwriting expertise and market knowledge.

The Debtor's operating Subsidiaries maintain a broad national footprint, and are:

• Licensed as admitted carriers in 49 states;
• Licensed as managing general agents in 48 states;
• Eligible as excess and surplus carriers in 44 states; and
• Engaged in active business in 48 states.

Notably, none of the Subsidiaries are debtors in this chapter 11 case. The only entity seeking bankruptcy relief is the parent company, Hallmark Financial Services, Inc., while the Insurance Subsidiaries and MGA Subsidiaries continue to operate in the ordinary course as their parent completes a balance sheet restructuring through these proceedings.

As of the Petition Date, Hallmark employed 121 staff, all based at its Dallas, TX headquarters. Chris Kenney serves as Chief Executive Officer, President, Chief Financial Officer, Treasurer, and Secretary, reporting to a four-member board of directors:

• Mark Schwarz — Chairman and Director
• Scott Berlin — Director
• Mark Pape — Director
• Doug Slape — Director

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Corporate History

Hallmark was founded in 1987 as a Nevada corporation.

Public Listing and Deregistration

• Until January 1, 2024, the Debtor was a publicly listed corporation, with its stock trading on the Nasdaq under the symbol "HALL."
• Effective January 1, 2024, the company elected to deregister, citing market and other factors.

Portfolio Rationalization

In recent years, Hallmark has discontinued certain lines of business — placing those lines into voluntary run-off, entering into reinsurance agreements with third parties, or selling portions of the business.

• Effective July 1, 2015, Hallmark ceased marketing or retaining any risk on new or renewal policies in its workers compensation business unit, with the run-off of existing policies administered by an independent third party.
• Effective June 30, 2025, Hallmark sold its aviation business to a third-party purchaser.

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Operations Overview

The Debtor directly or indirectly owns all of the equity interests in its Subsidiaries. Each business unit is led by its own management team — with significant experience distributing products to its target markets and a track record of underwriting profitability — and is responsible for marketing, distribution, and underwriting. The Debtor, in turn, provides centralized support at the parent level, including capital management, claims management, reinsurance, actuarial, investment, financial reporting, technology, legal, and other administrative services. Revenue is generated through the MGA Subsidiaries, which earn commissions and fees in exchange for services provided to the Insurance Subsidiaries.

Key Subsidiaries

• Insurance Subsidiaries: Hallmark Insurance Company, Hallmark Specialty Insurance Company, Hallmark National Insurance Company, and American Hallmark Insurance Company of Texas, among others.
• MGA Subsidiaries: American Hallmark General Agency, Inc. and Hallmark Underwriters, Inc.

Hallmark has historically marketed, distributed, underwritten, and serviced its insurance products through three business units: commercial lines, personal lines, and specialty commercial lines. In addition to its ongoing units, the Debtor maintains a run-off segment for discontinued business lines.

Commercial Lines Segment

Hallmark's commercial accounts business unit primarily underwrites low-severity, short-tailed commercial P&C products in the standard market. It distributes through a network of 242 independent agency groups, primarily serving businesses in the non-urban areas of 16 states, predominantly across the southwest and northwest regions. Core products include:

• Commercial automobile: Third-party bodily injury and property damage coverage, plus first-party property damage coverage, against losses from the ownership, maintenance, or use of automobiles and trucks in the insured's business.
• General liability: Coverage for third-party bodily injury and property damage claims arising from accidents on the insured's premises or from its general business operations.
• Umbrella: Coverage for third-party liability claims where the loss exceeds the limits of the insured's underlying general liability and commercial automobile policies.
• Commercial property: First-party coverage for real property, business personal property, and business interruption losses caused by fire, wind, hail, water damage, theft, vandalism, and other insured perils.
• Commercial multi-peril: A combination of property and liability coverage that can include commercial automobile coverage on a single policy.
• Business owner's: A packaged coverage designed for small to midsize businesses with homogeneous risk profiles, bundling general liability, commercial property, commercial automobile, and umbrella coverage.

The commercial segment previously included workers compensation and aviation business units, both of which have since been exited — the former through run-off (effective July 1, 2015) and the latter through a sale to a third-party purchaser (effective June 30, 2025).

Personal Lines Segment

Hallmark manages a specialty personal line that markets and services non-standard personal automobile policies in 10 states and renters insurance in 12 states. Non-standard personal automobile insurance generally provides the minimum liability limits mandated by state law to drivers who find it difficult to obtain coverage from standard carriers due to factors such as driving record, vehicle, age, claims history, or limited financial resources. Products include:

• Personal automobile: Third-party bodily injury and property damage coverage at statutory minimum limits, physical damage coverage for the insured's own vehicle from collision and other perils, and, where required, first-party personal injury protection (no-fault) coverage.
• Renters: Coverage similar to homeowners insurance, except that it does not cover the structure.

Run-Off Segment

Hallmark continues to process claims on certain business lines for which its Subsidiaries no longer write new policies, including the commercial automobile, senior care facilities, and satellite launch business lines.

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Prepetition Obligations

As of the Petition Date, the Debtor reported approximately $133.8 million in total funded debt, comprised of the Senior Unsecured Notes and two series of Junior Subordinated Debt Securities, together with approximately $400,000 in general unsecured claims. The Debtor’s prepetition capital structure is summarized below:

Senior Unsecured Notes

• On August 19, 2019, the Debtor issued $50 million in aggregate principal amount of senior unsecured notes under an indenture with The Bank of New York Mellon Trust Company, N.A., as indenture trustee.
  • The notes bear interest at a fixed rate of 6.25% per annum, payable semiannually, and mature on August 19, 2029.
  • As of April 30, 2026, the estimated outstanding amount of the Senior Unsecured Notes Claims, including accrued interest, was approximately $52.2 million. Separately, as of June 15, 2026, the notes comprised $50 million in principal plus approximately $2.6 million in accrued but unpaid interest.
  • Hildene, through its managed funds and accounts, holds approximately 72% of the notes, with other noteholders representing the remaining 28%.
  • Critically, the indenture prohibits payments or distributions on any security ranking junior to the notes whenever the Debtor’s debt-to-capital ratio exceeds 35%. That threshold has been breached for several months, and the ratio currently exceeds 100%.

Junior Subordinated Debt Securities

In 2005 and 2007, the Debtor raised funds through two series of junior subordinated debt securities. Each series pays interest at a fixed rate for its first ten years, converts thereafter to a variable rate tied to three-month SOFR plus CSA, and permits the Debtor to defer interest for up to 20 consecutive quarters. Interest on both series continued to accrue through the filing of the chapter 11 case.

• 2035 Junior Subordinated Debt Securities: Issued in 2005 in the aggregate principal amount of $30,928,000 under an indenture with JPMorgan Chase Bank, National Association, as indenture trustee.
  • Interest accrues at a fixed rate of 7.725% per annum for the first ten years, then at three-month SOFR plus CSA plus 3.25%, payable quarterly.
  • As of April 30, 2026, $30,928,000 of principal remained outstanding, together with approximately $13.4 million in accrued and unpaid interest (approximately $13.7 million as of June 15, 2026).
  • Hildene holds approximately 66.7% of the series, which matures on June 15, 2035.
• 2037 Junior Subordinated Debt Securities: Issued in 2007 in the aggregate principal amount of $25,774,000 under an indenture with The Bank of New York Trust Company, National Association, as indenture trustee.
  • Interest accrues at a fixed rate of 8.28% per annum for the first ten years, then at three-month SOFR plus CSA plus 2.90%, payable quarterly.
  • As of April 30, 2026, $25,774,000 of principal remained outstanding, together with approximately $10.5 million in accrued and unpaid interest (approximately $10.7 million as of June 15, 2026).
  • Hildene holds approximately 50.1% of the series, which matures on September 15, 2037.

Interest Deferral and Restructuring Efforts

• The Debtor elected to defer interest payments on the Junior Subordinated Debt Securities beginning in Q1 2020. When that deferred interest came due in 2025, the payment restrictions in the Senior Unsecured Notes Indenture left the Debtor unable to pay it.
• Anticipating the resulting stalemate and an impending event of default, the Debtor engaged restructuring professionals — including Gray Reed, Olshan, CR3, and Raymond James — to help negotiate a consensual resolution among the parties.

Trade and Other Unsecured Claims

• As of the Petition Date, general unsecured claims (GUCs) are estimated at approximately $400,000, excluding unliquidated and disputed litigation claims, contingent lease obligations, and potential cure obligations under executory contracts or unexpired leases.
  • GUCs consist of claims arising from trade payables, professional services, and other general obligations that are neither secured by liens nor entitled to priority under the Bankruptcy Code.
  • As detailed in the Plan and Disclosure Statement, the Debtor intends to pay allowed GUCs in full, while reserving the right to review and object to disputed claims.

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Events Leading to Bankruptcy

Loss Portfolio Transfer Transaction and the DARAG Arbitration

• Beginning in late 2019 and early 2020, Hallmark began experiencing greater-than-historical losses across certain of its portfolios. In spring 2020, the Company solicited offers for loss portfolio transfer and other reinsurance transactions, ultimately leading its Subsidiaries to enter into a Loss Portfolio Transfer Reinsurance Contract (the “LPT Contract”) with DARAG Bermuda Ltd. and DARAG Insurance (Guernsey) Limited (collectively, “DARAG”). The LPT Contract was consummated on July 31, 2020, effective as of January 1, 2020.
  • Shortly after closing, DARAG commenced an arbitration against Hallmark and its Subsidiaries alleging misrepresentations in the LPT Contract. On June 2, 2023, the arbitration panel rendered a final award in DARAG’s favor, terminating the LPT Contract and saddling Hallmark with an estimated loss of between $25 million and $35 million.

AM Best Ratings Downgrade and Withdrawal

• The adverse arbitration ruling reverberated well beyond the immediate balance sheet loss. Before the ruling, Hallmark held an A- (Excellent) financial strength rating (FSR) from A.M. Best Company, Inc. (“AM Best”)—a rating the Company viewed as essential to its Subsidiaries’ ability to write commercial insurance policies.
  • Following the unfavorable DARAG ruling, AM Best downgraded Hallmark’s FSR from A- (Excellent) to ccc- (weak), and Hallmark ultimately withdrew from the ratings altogether.
  • To keep underwriting, Hallmark entered into “fronting” arrangements with other carriers to write its policies on those carriers’ paper. Though common in the industry, such arrangements carry significant costs that erode profitability. Absent a sale through this chapter 11 case, the Debtor intends to reenter the commercial market following the effective date of a restructuring plan, once it can demonstrate restored financial strength.

Exit from the Specialty Commercial Segment

• While the DARAG arbitration was ongoing in 2022, Hallmark elected to exit the specialty commercial business segment altogether, driven in large part by an unusually high volume of claims exceeding the reserves held against them.
  • On October 7, 2022, Hallmark sold substantially all of its excess and surplus lines operations to an affiliate of Core Specialty Insurance Holdings, Inc. The transaction comprised nine business units within the specialty commercial segment, certain related assets and liabilities, and the immediate transition of approximately 200 employees to the acquirer.
  • Because the sale did not transfer all claims, Hallmark placed the unassumed claims into run-off. The elevated claims volume—exceeding reserves—generated significant balance sheet losses and pushed Hallmark out of compliance with the 35% debt-to-capital ratio covenant under its Senior Unsecured Notes Indenture.

Director and Officer Litigation

• The DARAG arbitration surfaced significant alleged misconduct by members of the Company’s former management team, including Chief Executive Officer Naveen Anand (“Anand”) and Chief Actuary Kenneth Krissinger (“Krissinger”). Hallmark retained outside advisors to investigate the facts and circumstances underlying DARAG’s allegations.
  • The Anand Action: On December 18, 2024, Anand filed a declaratory judgment action in the U.S. District Court for the Northern District of Texas seeking advancement of legal expenses. Hallmark responded with compulsory counterclaims for breach of fiduciary duty and fraudulent concealment, alleging that Anand and other senior executives orchestrated a campaign to “takedown” or “suppress” claim reserves in 2018 and 2019—concealed from the Company’s auditors, board, and DARAG—that ultimately produced the 2023 arbitration award.
    • After Anand’s March 13, 2025 summary judgment motion on advancement was denied and dismissed on December 9, 2025, he filed a second amended complaint on January 22, 2026 seeking advancement of fees incurred since the counterclaim, and moved to dismiss Hallmark’s counterclaim on February 23, 2026.
    • On June 11, 2026, the Court partially granted Anand’s advancement motion—requiring Hallmark to advance his legal fees while deferring on amount—and directed the parties to meet and confer, with a status report due July 10, 2026 absent agreement. The same day, the Court denied Anand’s motion to dismiss Hallmark’s breach of fiduciary duty claim but dismissed its contribution claim. The action remains ongoing, with trial set for February 2027.
  • The Krissinger Action: On October 10, 2025, Hallmark filed a petition against Krissinger in the Business Court of the State of Texas concerning his role in the takedown scheme. Krissinger removed the case to the Northern District of Texas on January 7, 2026, and on January 30, 2026 answered, counterclaimed for advancement, and moved to dismiss and for partial summary judgment.
    • The matter sits before the same judge who granted Anand’s advancement motion; however, Hallmark argues that Krissinger is not entitled to advancement because he was not an “officer” under the Bylaws, distinguishing him from Anand. On May 12, 2026, the District Court set trial for July 2027.

Prepetition Sale Efforts

• By late 2024, it had become apparent that Hallmark would need a balance sheet restructuring or capital infusion to satisfy deferred interest obligations on its Junior Subordinated Debt Securities, which were scheduled to come due by the end of 2025. In December 2024, Hallmark engaged Raymond James & Associates (“Raymond James”) to explore a possible sale of some or all of its Subsidiary businesses.
  • Going to market in spring 2025, Raymond James contacted 164 industry participants—80 prospective financial buyers and 84 potential strategic buyers. Approximately 52 signed NDAs, 10 submitted indications of interest, and three submitted formal letters of intent. At least one proposal contemplated acquiring Hallmark’s entire enterprise, but the Company deemed it non-actionable because the consideration offered was insufficient.
  • The process generated three letters of intent for Aerospace Insurance Managers (“AIM”), one of Hallmark’s MGA Subsidiaries. Following a robust process to secure the highest and best offer, Hallmark reached an agreement with Bishop Street Underwriters to acquire its equity interests in AIM. The transaction closed on June 30, 2025, yielding net proceeds of approximately $30.9 million (the “Aviation Sale Proceeds”) after fees and expenses.

Restructuring Negotiations with Hildene

• Although the Aviation Sale Proceeds left Hallmark with sufficient cash to pay the deferred interest on the Junior Subordinated Debt Securities, the terms of the Senior Unsecured Notes Indenture restricted such payments. Despite seeking consent from the Senior Unsecured Noteholders, the Debtor was unable to obtain it and was therefore prohibited from making the payments.
  • On February 23, 2026, Hildene delivered a Notice of Acceleration on the 2035 Junior Subordinated Debt Securities, citing a January 15, 2026 event of default stemming from Hallmark’s failure to make the December 15, 2025 interest payment. On March 2, 2026, Hildene—as majority holder of the Senior Unsecured Notes—delivered a corresponding Notice of Acceleration on the Senior Unsecured Notes.
  • Following extensive arm’s-length negotiations, the Company and Hildene executed a Restructuring Term Sheet on March 27, 2026, and on April 3, 2026 entered into the Restructuring Support and Forbearance Agreement (the “RSA”), which incorporates the term sheet and sets forth binding commitments to consummate the Restructuring Transaction or, alternatively, an Alternative Restructuring Transaction.
  • As a key component of the RSA, Hildene agreed to forbear from exercising remedies on claims arising from defaults under the Senior Unsecured Notes Indenture and the 2035 and 2037 Junior Subordinated Debt Securities Indentures—from the RSA’s effective date until the earlier of the Petition Date or the RSA’s termination—and to direct the indenture trustees not to exercise remedies, except to the extent another holder directs otherwise.

The Prepackaged Plan and Dual-Track Toggle Structure

• Hallmark commenced this chapter 11 case to effectuate a value-maximizing balance sheet restructuring through a prepackaged plan (the “Plan”), implementing the Restructuring Transaction contemplated by the RSA. The RSA’s dual-track toggle structure positions the Hildene Restructuring Transaction as the backstop, or stalking horse bid, while Hallmark simultaneously markets for an Alternative Restructuring Transaction offering higher or better cash recoveries.
  • Under the first track, the Debtor’s non-cash assets will be marketed through a “go-shop” sale process soliciting Alternative Restructuring Transactions at a minimum purchase price of no less than the Initial Plan Value, which the parties agree is approximately $51.2 million. Under the second track, if the go-shop process does not exceed the Initial Plan Value, the Restructuring Transaction will be consummated under a pre-negotiated plan of reorganization.
  • Principal terms of the Restructuring Transaction include:
    • Holders of Senior Unsecured Notes Claims (other than those held or managed by Hildene) receive New Senior Unsecured Notes of the Reorganized Debtor at 100% of their allowed claim;
    • Holders of allowed general unsecured claims are paid in full in cash;
    • Holders of Junior Subordinated Debt Securities Claims (other than those affiliated with Hildene) receive 10% of their claim in cash;
    • Hildene’s Senior Unsecured Notes Claims convert into New Convertible Preferred Equity with an initial liquidation preference equal to 100% of the allowed claim;
    • Hildene-affiliated Junior Subordinated Debt Securities Claims receive non-voting membership interests in a special purpose entity holding 100% of the New Common Equity, subject to dilution; and
    • Existing equity interests receive nothing and are cancelled under the Plan.

Marketing Process, Milestones, and Prepetition Solicitation

• The RSA establishes detailed prepetition and postpetition milestones, including launch of the marketing process and Hildene’s outreach to state regulators in Texas, Arizona, and Oklahoma by April 6, 2026; a prepetition voting deadline of June 8, 2026; and postpetition targets of confirmation within 60 days and regulatory approvals within 90 days of the Petition Date (or 150 days after an auction if a third party prevails), in each case subject to agreed extensions.
  • On or around April 1, 2026, Raymond James launched the marketing process to solicit Alternative Restructuring Transactions, with letters of intent due by May 30, 2026. Before the Petition Date, Raymond James contacted 173 industry participants—81 prospective financial buyers and 92 potential strategic buyers—of which approximately 61 signed NDAs, two submitted indications of interest, and three submitted formal letters of intent. The Debtor intends to continue these efforts under formalized bidding procedures.
  • On May 7, 2026, Stretto, Inc., acting as solicitation agent, commenced prepetition solicitation of ballots from holders in Class 3 (Senior Unsecured Notes Claims) and Class 5 (Junior Subordinated Debt Securities Claims). By the June 4, 2026 voting deadline, both voting classes had overwhelmingly accepted the Plan, positioning Hallmark to consummate the Restructuring Transaction subject to any higher or better Alternative Restructuring Transaction.