Hallmark Insurance Group Ratings Affirmed, Outlook Still Negative

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A.M. Best has affirmed the financial strength rating (FSR) of A- (Excellent) and the issuer credit ratings (ICR) of “a-” of the members of Fort Worth, Texas-based Hallmark Insurance Group (Hallmark Group).

Additionally, A.M. Best has affirmed the ICR of “bbb-” for the group’s holding company parent, Hallmark Financial Services Inc. (Hallmark Financial) based in Nevada.

The outlook for all ratings remains negative.

The affirmation of Hallmark Group’s ratings reflects its adequate risk-adjusted capitalization, generally positive net earnings and improved underwriting performance in 2014.

Hallmark Group’s adequate risk-adjusted capitalization has been driven by its historical pattern of surplus growth through positive fee income, solid investment income and capital gains, which have partially mitigated underwriting losses and enabled the group to report net earnings over the past five years.

In addition, Hallmark Group returned to underwriting profitability in 2014 reflective of management’s strategic initiatives, which resulted in overall improvement across all business segments.

The group’s management continues to focus on improving operating performance through enhanced underwriting guidelines and controlled geographic diversification into markets that are viewed to have less catastrophe exposure than in its primary state of Texas.

Corrective underwriting actions include exiting from Florida’s non-standard personal automobile business; de-emphasizing of personal and commercial property exposure in catastrophe-prone areas; exiting certain underperforming states and closing unprofitable products including personal homeowners’ insurance. In addition, significant rate increases have been taken and tighter underwriting guidelines have been implemented.

Furthermore, Hallmark Financial’s acquisition of various agency production sources has resulted in a greater geographic and product spread of risk for Hallmark Group. The members of Hallmark Group benefit from the financial flexibility of Hallmark Financial, a publicly traded company. Lastly, Hallmark Group maintains a generally conservative investment portfolio and adequate balance sheet liquidity.

The continuation of the negative outlook reflects Hallmark Group’s volatile operating results, as well as its lower risk-adjusted capitalization over the past five years. This is due primarily to Hallmark Group’s unfavorable underwriting performance in four of the past five years, which resulted in significant underwriting losses. Consequently, the group’s five-year combined ratio and pre-tax operating returns are elevated when compared with the commercial casualty composite.

The adverse underwriting results were driven by unfavorable Florida non-standard personal automobile loss experience in the earlier part of the past five years, followed by increased frequent and severe weather-related events in later years.

In addition, Hallmark Group maintains an elevated common stock investment leverage ratio. However, this risk is partially mitigated by its overall investment portfolio as the majority of its invested assets are placed in well-diversified long-term bonds.

Finally, Hallmark Group’s underwriting leverage measures are elevated and compare unfavorably with the industry norms.

The ratings may be downgraded if Hallmark Group’s underwriting results deteriorate and/or there is a decline in its risk-adjusted capitalization. Removal of the negative outlook is contingent upon consistent operating and underwriting profitability, surplus appreciation and improved overall risk-adjusted capitalization.

The FSR of A- (Excellent) and the ICRs of “a-” have been affirmed for the members of Hallmark Insurance Group: