A.M. Best Upgrades American Hallmark Insurance Company of Texas and Phoenix Indemnity Insurance Company; Assigns Issuer Credit R

A.M. Best Co. has upgraded the financial strength rating
to A- (Excellent) from B (Fair) of American Hallmark Insurance Company
of Texas (American Hallmark) (Dallas, TX) and the financial strength
rating to B+ (Very Good) from B- (Fair) of Phoenix Indemnity Insurance
Company (Phoenix Indemnity) (Phoenix, AZ). Additionally, A.M. Best has
assigned an issuer credit rating (ICR) of "a-" to American Hallmark
and an ICR of "bbb-" to Phoenix Indemnity, as well as an ICR of "bbb-"
to the holding company parent, Hallmark Financial Services, Inc.
(Hallmark Financial) (AMEX:HAF). The rating outlooks are stable.
   Hallmark Financial completed various capital raising initiatives
in June of 2005, totaling $75 million, of which $45 million was funded
from an additional equity offering and $30 million from debt
instruments. The funds were subsequently contributed to the insurance
entities, with $55 million contributed to American Hallmark and $20
million contributed to Phoenix Indemnity. The capital contributions
will be used to support planned initiatives for American Hallmark to
begin writing a commercial book of business, which has historically
been underwritten by its affiliated Managing General Agent and 100%
ceded to an outside carrier. In addition, American Hallmark's current
Texas non-standard personal automobile book will be quota-shared to
Phoenix Indemnity. Subsequently Phoenix Indemnity will underwrite this
Texas automobile book of business via assumption from a non-affiliated
Texas County Mutual.
   The rating of American Hallmark reflects the favorable capital
position enhanced by the recent capital contributions, improved
operating performance and improving geographical diversification
initiatives. These rating factors are partially offset by inconsistent
loss reserve development trends and modest execution risk regarding
the transfer of business. Phoenix Indemnity's rating also reflects an
enhanced capital position from the recent capital raising initiatives,
continued expansion of its non-standard personal automobile products
and improved operating performance, somewhat offset by inconsistent
loss reserve development trends.
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