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On Friday, Hallmark Financial Services, Inc. and Core Specialty announced the sale of Hallmark’s excess and surplus lines operations to Core Specialty Insurance Holdings, Inc. for roughly $40 million in cash.
The business that Core Specialty acquired is the portion of Hallmark’s Specialty Commercial Segment that it distributed through the wholesale insurance brokerage channel.
Core Specialty said that Hallmark E&S produced $436 million of wholesale distributed E&S business during the 12-months ended June 30, and that the acquisition will result in nearly $1 billion E&S direct premiums, propelling Core Specialty onto a Top 20 E&S insurers based on direct premiums that it annually compiled by rating agency AM Best (based on combined 2021 premiums).
Separately, AM Best announced that the financial strength rating of A- (Excellent) of the members of Hallmark Insurance Group was placed under review with negative implications.
In August, AM Best revised its outlooks for the financial strength ratings of Core Specialty’s StarStone Specialty Insurance Company and StarStone National Insurance Company to positive from stable, and affirmed the FSR of A- (Excellent) of Core Specialty’s Lancer Insurance Company and Lancer Insurance Company of New Jersey. Core Specialty completed a merger with Lancer in December last year.
Separately, in late December last year, Hallmark announced that it would no longer actively pursue a previously announced separation of its specialty commercial business segment and would not proceed with an initial public offering of the specialty segment.
Describing the deal announced on Friday, Core Specialty said it did not acquire any insurance company entities as part of the transaction and the transaction excludes loss reserves associated with the Hallmark E&S business which will be retained by Hallmark. Instead, Core Specialty said that is has specifically completed the acquisition of Heath XS, LLC (“Heath XS”), a Dallas, Texas-based E&S underwriting agency subsidiary of Hallmark Financial Services, Inc. and certain other operating assets of Hallmark. Hallmark said the agency sale included all data, agency relationships, intellectual property, lease arrangements and personnel related to the acquired E&S businesses.
Core Specialty has also acquired the rights to the ongoing wholesale distributed E&S business underwritten by Heath XS for insurance company affiliates of Hallmark and, through its wholly owned subsidiary, StarStone National Insurance Company (“StarStone National”).
Heath XS will continue to underwrite policies issued by insurance company affiliates of Hallmark, and such policies will be fully reinsured by StarStone National during a transition period set to expire after the third quarter of 2023. At that point StarStone Specialty Insurance Company, Core Specialty’s E&S is expected to become the policy-issuing carrier, Core Specialty said.
In connection with the deal, management and the approximately 176 employees of the Hallmark E&S business, based in Dallas, Atlanta and Jersey City, New Jersey, will transition to Core Specialty.
Industry veteran Gerald A. Dupre, Jr., currently president and chief underwriting officer of Hallmark’s Specialty Commercial Segment, will join Core Specialty as part of the transaction in a leadership role within the combined excess and surplus lines business.
Core Specialty’s acquisition and assumption of the E&S businesses and the related assets and liabilities is effective as of Sept. 30, 2022.
Hallmark noted that the transaction does not include Hallmark’s Standard Commercial business segment, Personal business segment, Aerospace & Programs business unit, exited Binding Primary Auto business, or any business produced by third-party program managers (which includes a senior care and a commercial auto program), each of which will be retained by Hallmark.
Hallmark said it expects an approximate $59.9 million increase in statutory capital (less transaction and other expenses).
In its announcement, AM Best noted that the additional influx of capital from Core Specialty’s acquisition and assumption of Hallmark’s E&S business will be a net positive for policyholders. Still, the Best announcement said that significant execution risk remains related to restoring profitability across Hallmark’s retained lines, particularly standard commercial insurance and personal nonstandard auto, which have had historically high net underwriting loss ratios.
Also central to AM Best’s rationale is consideration of a breached loss portfolio transfer of a commercial auto liability policies. The rating announcement said that the Core Specialty transaction mitigates a material capital decline in 2022 related to significant adverse reserve development on the LPT with legacy acquirer DARAG.
The LPT took effect Jan. 1, 2020, for accident years prior to Dec. 31, 2019. Effective August 2022,
Hallmark resumed the handling of the claims administration function, and is in arbitration with respect to the overall contract terms. In the event that the arbitration panel rules favorably on Hallmark’s behalf, Hallmark could potentially attach up to $40 million from a letter of credit posted by DARAQ, but the final decision is not expected until the second half of 2023. While a favorable decision with the existing transaction will help stabilize the balance sheet, AM Best notes that the LPT cover has been breached and is no longer available, which exposes Hallmark to further potential adverse reserve development from the book of business.
Sources: Core Specialty, Hallmark Financial Services, AM Best