OLDWICK, N.J., October 07, 2022--(BUSINESS WIRE)--AM Best has placed under review with negative implications the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb-" (Good) and the Long-Term Issue Credit Ratings (Long-Term IR) of Hallmark Financial Services, Inc. (Hallmark Financial) [NASDAQ: HALL]. Concurrently, AM Best has placed under review with negative implications the Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term ICRs of "a-" (Excellent) of the members of Hallmark Insurance Group. These companies’ operations are headquartered in Dallas, TX and collectively referred to as Hallmark. See below for a detailed listing of the companies and Credit Ratings (ratings).
These ratings have been placed under review with negative implications following the announcement that Hallmark Financial has entered into a transaction with Core Specialty Insurance Holdings, Inc. (Core Specialty), a specialty property/casualty insurer, to sell its specialty business through a reinsurance transaction for a $40 million cash consideration, plus an estimated $19.9 million consideration for the assumption of certain net unearned premium reserves. The transaction is comprised of nine business units within Hallmark’s specialty commercial business segment, certain related assets and liabilities, and the immediate transition to Core Specialty of approximately 200 employees who produce and support these excess & surplus (E&S) lines businesses. Core Specialty’s acquisition and assumption of the E&S businesses and the related assets and liabilities will be effective as of Sept. 30, 2022.
This transaction mitigates a material capital decline in 2022 related to significant adverse reserve development on an existing loss portfolio transaction (LPT), which took effect Jan. 1, 2020, for accident years prior to Dec. 31, 2019, with several DARAG subsidiaries on Hallmark’s commercial auto liability policies up to an aggregate $240 million. In that transaction, Hallmark has resumed the handling of the claims administration function effective August 2022, and is in arbitration with respect to the overall contract terms. In the event that the arbitration panel rules favorably on Hallmark’s behalf, Hallmark could potentially attach up to $40 million from a letter of credit posted by DARAQ, but the final decision is not expected until the second half of 2023. While a favorable decision with the existing transaction will help stabilize the balance sheet, AM Best notes that the LPT cover has been breached and is no longer available, which exposes Hallmark to further potential adverse reserve development from the book of business.
With respect to the Core Specialty’s acquisition and assumption of Hallmark’s E&S business, AM Best acknowledges the additional influx of capital will be a net positive for policyholders. However, significant execution risk remains related to restoring profitability across Hallmark’s retained lines, particularly standard commercial insurance and personal nonstandard auto, which have had historically high net underwriting loss ratios.
The ratings will remain under review until AM Best can fully assess the impacts of the aforementioned transaction, in addition to the effects of initiatives to improve operating performance and stem further material adverse reserve development. Critical to this assessment will be Hallmark’s operating results for the remainder of 2022.
The FSR of A- (Excellent) and the Long-Term ICRs of "a-" (Excellent) have been placed under review with negative implications for the members of Hallmark Insurance Group:
American Hallmark Insurance Company of Texas
Hallmark Insurance Company
Hallmark Specialty Insurance Company
Hallmark County Mutual Insurance Company
Hallmark National Insurance Company
The following Long-Term IR has been placed under review with negative implications:
Hallmark Financial Services, Inc.—
-- "bbb-" (Good) on $50 million 6.25% senior unsecured notes, due 2029
The following indicative Long-Term IRs for securities available under the shelf registration have been placed under review with negative implications:
Hallmark Financial Services, Inc.—
-- "bbb-" (Good) on senior unsecured debt
-- "bb+" (Fair) on subordinated debt
-- "bb" (Fair) on preferred stock
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
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