A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of Hallmark Insurance Group (Hallmark Group) (Fort Worth, TX) and its operating members. Additionally, A.M. Best has affirmed the ICR of “bbb-” for the group’s holding company parent, Hallmark Financial Services, Inc. (Hallmark Financial) (Nevada) (NASDAQ: HALL). The outlook for all ratings is stable. (See below for a detailed listing of the companies.) The affirmation of the ratings reflects Hallmark Group’s solid risk-adjusted capitalization and five-year operating performance, as well as the financial flexibility afforded by Hallmark Financial. Hallmark Group’s solid risk-adjusted capitalization was derived from organic surplus growth through profitable underwriting performance and solid investment income over the previous five-year period. Furthermore, management continues to focus on improving operating performance through controlled geographic diversification into markets that are viewed as less price competitive than its primary state of Texas. Hallmark Financial’s acquisition of various agency production sources also have resulted in a greater geographic and product spread of risk for the group. Partially offsetting these positive rating factors is Hallmark Group’s continued execution risk associated with the development of various parent company acquisitions, as well as geographic and product expansion initiatives. Since more than half of Hallmark Group’s direct premiums written are concentrated in three key states, earnings are susceptible to increased competition and changes in the regulatory, judicial and legislative environments. In addition, Hallmark Group’s operating earnings declined substantially in 2010, driven by unfavorable Florida non-standard personal auto loss experience, as it grew faster than expected in the state and was impacted by inadequate rates, primarily for personal injury protection coverage. However, Hallmark Group expects that there will be a rapid decline in its Florida personal automobile premiums in 2011 due to rate increases and a reduction of the agency force. Furthermore, some larger commercial property losses (greater than $100,000) adversely impacted this line of business in the form of winter storm losses, several large fire losses and two significant hailstorms. Hallmark Group maintains above average non-affiliated investment leverage, driven by its holdings in non-investment grade collateralized bank loans and unaffiliated common stock.