OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb” (Fair) from “bbb-” (Good) 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 B++ (Good) from A- (Excellent) and the Long-Term ICRs to “bbb” (Good) from “a-” (Excellent) 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 adequate, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management.
The credit rating downgrades reflect a significant decline in Hallmark’s balance sheet strength and operating performance due to continued adverse reserve development in the group’s retained discontinued commercial auto lines. These losses have resulted in a 26.4% reduction of statutory capital in 2022 and the group’s regulatory capital adequacy is highly dependent upon whether it can realize reinsurance recoveries from its pending arbitration with DARAG. In addition, the group’s balance sheet is exposed to further adverse reserve development on the discontinued commercial auto business line as losses now have exceeded the original loss portfolio transfer (LPT) cover with DARAG. The revision to the balance sheet strength assessment to adequate from strong and the operating performance assessment to marginal from adequate reflect 2022 losses on a statutory and GAAP basis, as well as execution risk in Hallmark achieving its 2023 forecast for retained business lines.
Hallmark’s ratings have been maintained as under review with negative implications, as the LPT cover has now been exhausted, and Hallmark is going through an arbitration process to secure substantial reinsurance recoverables from DARAG. An adverse decision could lead to further negative rating action. The ratings will remain under review until the arbitration outcome is finalized, weaknesses in internal controls have been fully addressed and AM Best reviews 2023 operating results.
The FSR has been downgraded to B++ (Good) from A- (Excellent) and the Long-Term ICRs downgraded to “bbb” (Good) from “a-” (Excellent) 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 “bb” (Fair) from “bbb-” (Good) 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 “bb” (Fair) from “bbb-” (Good) on senior unsecured debt
-- to “bb-” (Fair) from “bb+” (Fair) on subordinated debt
-- to “b+” (Marginal) from “bb” (Fair) on preferred stock
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