AM Best Downgrades Credit Ratings of Hallmark Financial Services, Inc. and Its Subsidiaries; Maintains Under Review With Negative Implications Status

AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to "ccc-" (Weak) from "bb" (Fair) and associated Long-Term Issue Ratings (Long-Term IRs) of Hallmark Financial Services, Inc. (Hallmark Financial) (NASDAQ:HALL). Concurrently, AM Best has downgraded the Financial Strength Rating (FSR) to C++ (Marginal) from B++ (Good) and the Long-Term ICRs to "b+" (Marginal) from "bbb" (Good) of the members of Hallmark Insurance Group. In addition, AM Best has maintained the under review with negative implications status of all Credit Ratings (ratings). These companies' operations are headquartered in Dallas, TX, and collectively referred to as Hallmark. See below for a detailed listing of the companies and ratings.

The ratings reflect Hallmark's balance sheet strength, which AM Best assesses as weak, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.

The rating downgrades follow Hallmark Financial's 8-K filing on May 5, 2023, which states that an arbitration proceeding related to a loss portfolio contract with DARAG Bermuda Ltd. and DARAG Insurance Limited resulted in an interim final award that will result in a loss to Hallmark, estimated to be in a range of $25 million to $35 million. This award, which impacts first-quarter 2023 results, further weakens Hallmark's balance sheet, which previously had lost 26.4% of its surplus in 2022 due to continued adverse reserve development in the group's retained and discontinued commercial auto lines.

Hallmark Financial also has entered a partnership with an insurance carrier, which will allow Hallmark to underwrite its policies on this carrier's paper to accommodate insureds' requirements. Furthermore, Hallmark Financial has been advised by Core Specialty Insurance Holdings, Inc., which in October 2022 acquired Hallmark's excess and surplus (E&S) lines operations, that it has concluded the interim period during which it was issuing Hallmark policies in respect of the E&S business and will now be issuing new and renewal policies using its own insurance carrier subsidiaries and own systems. Such policies were fully reinsured by a Core Specialty insurance carrier subsidiary from the date of acquisition.

These events have led AM Best to lower the assessments of Hallmark's balance sheet strength, business profile and enterprise risk management. Operating performance remains assessed as marginal. The weak balance sheet assessment primarily reflects the significant decline in risk-adjusted capitalization as a result of the arbitration decision. The limited business profile reflects Hallmark's business mix that has become more concentrated from a product offering perspective. Furthermore, the cost structure of the remaining business is negatively impacted by the additional expense associated with the aforementioned partnership. The marginal assessment of Hallmark's enterprise risk management reflects deficiencies in risk management and controls, specifically as it relates to reserve and operational risks.

Hallmark's ratings have been maintained as under review with negative implications as AM Best has not had the opportunity to review the full interim final award document. The ratings will remain under review until AM Best reviews the details of the interim final award, the first-quarter 2023 financial statements of Hallmark and revised financial projections.

AM Best previously downgraded and maintained the under review status with negative implications on Hallmark's ratings on May 5, 2023 (see related press release). At the time of the rating action, the result of the arbitration was not publicly available and AM Best indicated that an adverse arbitration decision could result in additional negative rating activity.

The FSR has been downgraded to C++ (Marginal) from B++ (Good) and the Long-Term ICRs downgraded to "b+" (Marginal) from "bbb" (Good) with the under review implications status maintained as negative 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 downgraded with the under review implications status maintained as negative:

Hallmark Financial Services, Inc.—

-- to "ccc-" (Weak) from "bb" (Fair) 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 downgraded with the under review implications status maintained as negative:

Hallmark Financial Services, Inc.—

-- to "ccc-" (Weak) from "bb" (Fair) on senior unsecured debt

-- to "cc" (Very Weak) from "bb-" (Fair) on subordinated debt

-- to "c" (Poor) from "b+" (Marginal) 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 © 2023 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/20230509006256/en/