| Item 2.01. | Completion of Acquisition or Disposition 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”),
entered into a Master Transaction Agreement (the “MTA”) with Starstone U.S. Holdings, Inc. (“Buyer”), an affiliate
of Core Specialty Insurance Holdings, Inc. (“Core”).
Pursuant to the MTA, as of the Effective Date
(as defined below), the Company sold, and Buyer purchased, 100% of the issued and outstanding units of the Company’s agency subsidiary,
Heath XS, LLC (“HXS”), and the Sellers sold certain assets, and Buyer acquired such assets and assumed certain liabilities,
of the Sellers’ excess and surplus lines operations (the “Business”), for total consideration of $40,000,000,
subject to adjustment as provided in the MTA. Also as of the Effective Date, in exchange for the reinsurance by the Reinsurer (as defined
below) of liabilities associated with the unearned premium reserves under the Reinsurance Agreement (as defined below), the Ceding Companies
(as defined below) delivered to the Reinsurer an amount equal to the net unearned premium reserve of the Ceding Companies in respect of
the Business (estimated to be $86.4 million as of the Effective Date) and received a 23% ceding commission (estimated to be $19.9 million
as of the Effective Date) in consideration therefor.
The
MTA contains customary representations and warranties with respect to Buyer, the Sellers and HXS, as well as customary post-closing covenants.
Following the closing of the transactions contemplated by the MTA, the Sellers and Buyer have agreed to indemnify the other for breaches
of representations, warranties, covenants and certain other matters specified therein. Affiliates of Buyer and the Sellers also
entered into certain other transaction documents in order to effectuate the transactions contemplated by the MTA.
Raymond
James & Associates, Inc., the Company’s financial advisor, delivered its written opinion to the Board of Directors of
the Company as to the fairness, from a financial point of view, of the consideration received by the Company pursuant to the MTA as of
September 30, 2022.
In connection with 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, entered into an Unearned Premium and Prospective Quota Share Reinsurance Agreement
(the “Reinsurance Agreement”) with Starstone National Insurance Company, an affiliate of Core (the “Reinsurer”).
Pursuant to the Reinsurance Agreement, each of the Ceding Companies will cede to Reinsurer, and Reinsurer will accept and reinsure, on
a 100% quota share indemnity reinsurance basis, unearned premium as of September 30, 2022 in respect of certain reinsured policies of
the Ceding Companies constituting the Business and business placed by HXS with the Ceding Companies between September 30, 2022 and September
30, 2023, and 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, Reinsurance
Agreement and transactions contemplated by such 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 any other factual
information about the parties thereto. In particular, the representations and warranties contained in the MTA were made only for the purposes
of the MTA as of specific dates therein and were solely for the benefit of the parties to the MTA. The representations and warranties
contained in the MTA are subject to limitations agreed upon by the parties thereto and are qualified by information in confidential
disclosure schedules provided in connection with the signing thereof.