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.
The ratings reflect Hallmark’s balance sheet strength, which AM Best has assessed as weak, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.
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. These companies’ operations are headquartered in Dallas, Texas, and are collectively referred to as Hallmark.
The rating downgrades due to Hallmark Financial’s 8-K filing on May 5, 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 impacts Q1 2023 results and 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 has entered a partnership with an insurance carrier, which will allow the company to underwrite its policies on this carrier’s paper to accommodate the insured’s requirements. Hallmark Financial has been advised by Core Specialty Insurance Holdings, Inc., which in October 2022 acquired Hallmark’s excess and surplus 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.
AM Best assesses the company’s 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 which has become more concentrated from a product offering perspective. While 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.
