AM Best Places Credit Ratings of Hallmark Financial Services, Inc. and Its Subsidiaries Under Review With Negative Implications

Rhea-AI Summary

AM Best has placed the Long-Term Issuer Credit Rating of Hallmark Financial Services (HALL) under review with negative implications, reflecting concerns over its recent transaction with Core Specialty Insurance Holdings. Hallmark will sell its specialty business for $40 million and $19.9 million for unearned premium reserves. The company is also managing previous adverse reserve developments and faces execution risks in restoring profitability. Ratings for Hallmark’s subsidiaries are similarly impacted as the review continues until AM Best evaluates the implications of these actions.

Positive

• Transaction with Core Specialty provides $40 million in cash and strengthens capital position.
• Potential favorable arbitration outcome may recover up to $40 million from a letter of credit.

Negative

• Long-Term Issuer Credit Rating placed under review with negative implications.
• Execution risk remains high in restoring profitability across retained lines due to historical underwriting losses.
• Loss portfolio transaction cover has been breached, exposing Hallmark to further reserve development.

OLDWICK, N.J.--(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.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2022 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

View source version on businesswire.com: https://www.businesswire.com/news/home/20221007005494/en/

Sergio Musacchio

Senior Financial Analyst

+1 908 439 2200, ext. 5032

sergio.musacchio@ambest.com



Rosemarie Mirabella

Director

+1 908 439 2200, ext. 5892

rosemarie.mirabella@ambest.com



Christopher Sharkey

Manager, Public Relations

+1 908 439 2200, ext. 5159

christopher.sharkey@ambest.com



Al Slavin

Communications Specialist

+1 908 439 2200, ext. 5098

al.slavin@ambest.com

Source: AM Best

FAQ

What does AM Best's negative review imply for Hallmark Financial Services (HALL)?

AM Best's negative review indicates potential risks to Hallmark's financial stability and creditworthiness following its recent transaction with Core Specialty.

What transaction is Hallmark Financial Services involved in?

Hallmark Financial is selling its specialty business to Core Specialty Insurance for $40 million plus additional considerations.

What are the implications of the recent transaction for Hallmark’s credit ratings?

The transaction has led to Hallmark's credit ratings being placed under review by AM Best, reflecting concerns about execution risks and future profitability.

How does the recent transaction affect Hallmark's capital situation?

The sale transaction is expected to mitigate a material capital decline related to adverse reserve developments.

When will AM Best finalize its assessment of Hallmark Financial Services?

AM Best will finalize its assessment after evaluating Hallmark’s operating results for the remainder of 2022.