AM Best has removed from under review with negative implications and affirmed the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb-” and the Long-Term Issue Credit Ratings (Long-Term IR) of Hallmark Financial Services Inc. (Hallmark Financial), headquartered in Dallas.
Concurrently, AM Best removed from under review with negative implications and affirmed the Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term ICRs of “a-” of the members of Hallmark Insurance Group (Hallmark Group).
The outlook assigned to the ratings is negative.
Hallmark Financial is a specialty property and casualty insurance company with a diversified portfolio of insurance products written on a national platform. With six insurance subsidiaries and offices in Dallas-Fort Worth, Atlanta, Chicago, Jersey City, and San Antonio, Hallmark Financial markets, the company underwrites and services over $750 million annually in commercial and personal insurance premiums in select markets.
AM Best placed the company’s ratings under review with negative implications on March 4, 2020, following the announcement by Hallmark Financial that its 2019 statutory results will include pre-tax adverse prior-year loss development of $63.8 million, net of reinsurance.
Citing losses, Hallmark in early March announced that it was exiting its Binding Primary Auto business. The commercial auto product is primary coverage written through brokers, who have binding authority once the company decides to issue a quote.
Hallmark Financial’s Binding Primary Auto portfolio represented approximately $114 million of the company’s gross written premiums for 2019. The company had scaled back its Binding Primary Auto line of business in recent years, including a reduction of 60% in total policies in-force since 2016 (from over 10,000 to approximately 4,200 at year-end 2019).
AM Best maintained the under review with negative implications status following Hallmark Financial’s announcement that it received notice from NASDAQ on May 13, 2020, due to the company’s failure to timely file its Form 10-Q for the period ending March 31, 2020, and because it remained delinquent in filing its Form 10-K for the year ended Dec. 31, 2019.
While the company had until May 28, 2020, to submit an update to its original plan to regain compliance with filing requirements, NASDAQ has granted an extension up to Sept. 14, 2020, to regain compliance to file the 2019 Form 10-K and Form 10-Q for first-quarter 2020.
The ratings have been removed from under review as the company is in compliance with NASDAQ filings and AM Best has completed its assessments of full-year reserve information.
The ratings reflect Hallmark Group’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
The negative outlooks reflect a declining trend in Hallmark Group’s risk-adjusted capital, as measured by Best’s Capital Adequacy Ratio (BCAR). Year-end 2019 results were negatively impacted by adverse prior-year loss development, while more recent results have been impacted by unrealized capital losses.
The group has entered into a loss portfolio reinsurance transaction to limit the potential impact of further reserve volatility and disassociate discontinued lines of business from ongoing operations. In addition, the group exited the binding primary auto book of business, a driver of the adverse loss development, and de-risk its investment portfolio.
Despite the actions taken to reduce volatility and strengthen the balance sheet, AM Best remains concerned about whether capital will continue to support the balance sheet strength assessment of very strong as these proposed additional underwriting and operational changes are implemented.
AM Best will continue to monitor volatility within the group’s balance sheet. In addition, AM Best also will monitor the execution of risk management-related corrective actions the group has initiated to determine if further negative rating action is warranted.
The FSR of A- (Excellent) and the Long-Term ICRs of “a-” have been removed from under review with negative implications and affirmed for the following 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
Source: A.M. Best
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