Hallmark Financial to Acquire State Auto’s Non-Standard Auto Unit

August 10, 2010

Hallmark Financial Services Inc., headquartered in Fort Worth, Texas, announced that its subsidiary, Hallmark Insurance Co., will acquire State Auto National Insurance Co. from Ohio-based State Auto Financial Corp. (STFC). The acquisition is subject to regulatory approval and other customary closing conditions.

State Auto National (SAN) writes approximately $37 million in non-standard automobile insurance coverage through independent agents in 21 states, around 80 percent (or $30 million) of which is retained by STFC under its intercompany reinsurance pooling agreement with its parent, State Automobile Mutual Insurance Co., according to information released by State Auto.

Hallmark said the purchase price for the acquisition will be $14 million cash at closing plus an earn-out of up to $2 million. Hallmark expects to fund the acquisition out of working capital. The cash portion of the purchase price is subject to post-closing adjustment to the extent the statutory capital and surplus of SAN is greater or less than $10 million.

The earn-out is payable quarterly in an amount equal to 2 percent of gross collected premiums on new or renewal personal lines insurance policies written by SAN agents during the three years following closing.

STFC said it will retain liability for the preclosing book of business and will continue to provide policy and claims service to State Auto National policyholders until the policies are renewed with Hallmark following a six-month transition period.

Although written premium so far in 2010 has increased over that of 2009, STFC recently reported $26.2 million in losses for the second quarter of 2010 compared with a net loss of $3.2 million for the same period in 2009.

For the first six months of 2010, State Auto’s results were slightly better than during the first half of 2009. The company had a net loss of $13.3 million during the period compared to a loss of $17.2 million for same 2009 period. The company has attributed the bulk of its losses to weather events.

“State Auto’s second quarter results are traditionally hurt by weather, both catastrophic and non-catastrophic,” said State Auto Financial Chairman, President and CEO Bob Restrepo. “This year was no exception with significantly higher levels of wind and hail losses, particularly in the northern Midwest. Approximately 60 percent of storm losses were reported in four of our largest property states: Indiana, Minnesota, Ohio and Tennessee. In addition to wind and hail, the Nashville area suffered a thousand year storm and unprecedented flooding. Although flood is not a covered peril for homeowners, it is for commercial property and automobile insurance. In addition, the heavy rain produced numerous claims for leaky roofs and water damage.”

Restrepo noted that catastrophe results overshadowed continued improvement in the company’s non-catastrophe loss ratio driven by personal lines. He said State Auto continues “to see substantial improvement in our personal automobile experience, even with an increase in claims resulting from the Nashville flooding.”

Hallmark President and Chief Executive Officer Mark J. Morrison stated that the acquisition of State Auto National “as a clean statutory entity, along with the policy renewals of its existing book of non-standard personal automobile business, will significantly expand our Personal Lines business unit into new states through an already existing agency distribution.”

He said the company’s existing personal lines platform “is tailor-made to meet the needs of the non-standard personal auto marketplace. Additionally, this transaction entails very little integration risk, as we will not be assuming any staff, operating platforms or run-off exposure from State Auto Financial Corporation’s existing operations.”

Brooks Davis, president of Hallmark’s Personal Lines business unit, added that while the business being acquired “is non-core to State Auto Financial Corporation, it is very complementary to Hallmark’s personal lines portfolio from a product, distribution and geographic standpoint.”

Davis said Hallmark expects “to benefit from a significantly expanded agency network and intend to provide these agents with additional Hallmark personal lines specialty products.”

Source: Hallmark Financial Services, State Auto Financial Corp.

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