A.M. Best Revises Outlook to Negative and Affirms Ratings of Hallmark Financial Services Inc. and Its Subsidiaries

A.M. Best has revised the outlook to negative from stable and affirmed the financial strength rating of A- (Excellent) and issuer credit rating of "a-" for the members of Hallmark Insurance Group (Hallmark Group) (headquartered in Fort Worth, TX).

Concurrently, A.M. Best has revised the outlook to negative from stable and affirmed the ICR of "bbb-" of Hallmark Group's holding company parent, Hallmark Financial Services, Inc. (Hallmark Financial) (Nevada).

The revised outlook for Hallmark Group's ratings reflects the continuation of its volatile operating results as well as its lower risk-adjusted capitalization in recent years. This is due primarily to Hallmark Group's unfavorable underwriting performance that resulted in significant underwriting losses during the last four years. These underwriting losses were particularly evidenced in 2011 by unfavorable Florida non-standard personal automobile loss experience followed by increased frequent and severe weather- related events in 2012 and into 2013.

In response to unfavorable underwriting performance, 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. Underwriting corrective actions include exiting from Florida's non- standard personal automobile business; de-emphasizing of personal and commercial property exposure in catastrophe-prone areas; and exiting certain underperforming states and closing unprofitable products. In addition, significant rate increases have been taken and tighter underwriting guidelines have been implemented.

The affirmation of Hallmark Group's ratings recognizes its adequate risk-adjusted capitalization, generally conservative investment portfolio and favorable balance sheet liquidity. The group's adequate risk-adjusted capitalization has been driven by its historical pattern of surplus growth through a steady stream of investment income, capital gains and other income over the last five years. Furthermore, Hallmark Financial's acquisition of various agency production sources also 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.

The ratings may be downgraded if Hallmark Group has a continuation of adverse operating results and declining risk- adjusted capitalization. Removal of the negative outlook is contingent upon consistent and sustained operating profitability and improved overall risk-adjusted capitalization.

The FSR of A- (Excellent) and ICRs of "a-" have been affirmed for the following members of the 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 methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology: ambest.com/ratings/methodology.

A.M. Best Company is an insurance rating and information source.

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