EXHIBIT 10 (f)
August 3, 2001
Dorinco Reinsurance Company
0000 Xxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, Xxxxxxxx 00000
Attention: Xxxxx X. Xxxxxxxxxxx
RE: Loan Agreement dated March 10, 1997, and amended by Amendment No. 1
executed August 14, 1998, Amendment No. 2 effective March 5, 1999 and
Amendment No. 3 effective November 19, 1999 (as amended, the "Loan
Agreement") between Hallmark Financial Services, Inc. ("Borrower") and
Dorinco Reinsurance Company ("Lender")
Dear Xx. Xxxxxxxxxxx:
The purpose of this letter is to obtain written acknowledgment of Lender's
waiver of the "triggering events" under Subsections 3.a and 3.b. of the Loan
Agreement for the quarter ended June 30, 2001.
As you know, effective July 1, 2000, Borrower's insurance subsidiary,
American Hallmark Insurance Company of Texas ("AH"), entered into a new
reinsurance agreement with Lender which altered several terms of the
previous reinsurance arrangement between the parties. Among other things,
the new reinsurance agreement provides that policy fees are ceded on the
same basis as premiums rather than retained by AH as provided under the
prior arrangement. This change in treatment of policy fees has predictably
had an adverse impact on AH's statutory accounting Loss Ratio (as defined in
the Loan Agreement). Effective April 1, 2001, AH and Dorinco further
amended the reinsurance agreement to include a loss corridor on policies
written effective April 1, 2001. Thus, for losses that fall within the loss
corridor AH assumes 100% of the risk. Additionally, during the second
quarter ended June 30, 2001, AH incurred extraordinary weather-related
losses principally in connection with a catastrophic flood in Houston,
Texas. Finally, although AH has implemented premium rate increases of
approximately 30% during the last eighteen month period, a significant
portion of earned premiums as reflected in financial statements ended June
30, 2001, are still at depressed rates.
The Combined Ratio and the Loss Ratio of AH for the six month period ended
June 30, 2001, exceeded the respective thresholds of 83% and 107% set forth
in Subsections 3.a and 3.b. of the Loan Agreement. AH's Loss Ratio was 101%
and the Combined Ratio was 115%. However, in the absence of the change in
treatment of policy fees, the addition of the loss corridor and weather-
related claims (particularly the Houston flood which significantly impacted
the loss corridor), the Combined Ratio and Loss Ratio for the six month
period ended June 30, 2001, would have been 89.1% and 77.9%, respectively.
Further, the change in treatment of policy fees favorably impacted AH's
premium to surplus ratio, as intended. The premium to surplus ratio was at
an acceptable 2.85:1 on reported surplus of $6.3 million at June 30, 2001.
Therefore, Borrower requests a waiver of the "triggering events" under
Subsections 3.a. and 3.b. of the Loan Agreement for the six month period
ended June 30, 2001.
Please acknowledge Lender's consent to the requested waiver by executing and
returning to the undersigned the enclosed duplicate original of this letter.
Thank you for your courtesy and cooperation in this matter.
Very truly yours,
Xxxxx X. Xxxxxxx
President and CEO
CONSENTED TO AND AGREED AS OF __________________, 2001:
DORINCO REINSURANCE COMPANY
By: ______________________________
Name:_________________________
Title:________________________
