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 moderate five-year operating performance, as well as the financial flexibility afforded by Hallmark Financial. Hallmark Group’s risk-adjusted capitalization was derived from organic surplus growth through solid investment income, capital gains and other income over the previous five-year period, which is partially offset by moderate underwriting losses. 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 has resulted in a greater geographic and product spread of risk for Hallmark 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. This was evident in 2010 and 2011, when Hallmark Group’s operating results significantly deteriorated, driven by unfavorable Florida non-standard personal automobile loss experience, as it grew faster than expected in the state and was impacted by inadequate rates and adverse loss reserve development, primarily in personal injury protection coverage. Beginning in the last half of 2010 and into 2011, a number of actions were taken to address the issues in Florida. Hallmark Group increased rates, suspended new business production, changed policy renewal terms, significantly increased its personal lines claims department capabilities and made other increases in its claims staffing, including hiring experienced claim personnel in Florida. Most recently, Florida personal automobile policies have been completely non-renewed and only a modest amount of claims remain open. In addition, Hallmark Group maintains above average non-affiliated investment leverage, driven by its holdings in non-investment grade senior secured collateralized bank loans and unaffiliated common stock.