Business Moves

Chicago’s Specialty Underwriters, Hallmark Financial

Chicago-based Specialty Underwriters’ Alliance Inc. (SUAI) announced it has responded to a letter, dated July 1, 2008, from Hallmark Financial Services Inc. (Hallmark) in which Hallmark stated that it was reaffirming its conditional proposal to acquire all the outstanding stock of SUAI for shares of common stock of Hallmark, valuing each share of SUAI stock at $6.50.

In a story covered by Insurance Journal on July 1, SUAI declined the original offer from Hallmark. And on June 26, the SUAI board of directors, in consultation with its financial and legal advisors, reviewed Hallmark’s proposal to acquire SUAI. After a thorough deliberation, the SUAI Board unanimously concluded that the Hallmark proposal should be rejected and that SUAI should remain independent and continue with the execution of its current business strategy, which the board believes represents a better long-term value for the company’s shareholders.

In a letter to Hallmark, dated July 2, SUAI informed Hallmark that, given that Hallmark’s letter of July 1 was just a restatement of the original Hallmark proposal, there was no reason for the board of SUAI to reconsider.

The following is a copy of SUAI’s letter to Hallmark dated July 2, 2008 to Mark E. Schwarz, executive chairman of Hallmark Financial Services, Fort Worth, Texas:

“I am writing in response to your letter of July 1, 2008 in which you state that you reaffirm the conditional proposal Hallmark Financial Services, Inc. (“Hallmark”) made, in a letter dated June 16, 2008 to the board of directors of Specialty Underwriters’ Alliance, Inc. to acquire all the outstanding stock of the company for shares of common stock of Hallmark, valuing each share of the Company’s stock at $6.50.

“The July 1st Letter does not constitute a new proposal, nor does it modify any of the material terms of the proposal that was set forth in the June 16th Letter and that was carefully considered by our Board and its advisers.

“The July 1st Letter also incorrectly characterizes the company as not having responded to your inquires since June 17, 2008. In fact, in an email to you on June 20, 2008, I invited you to send me any additional information that you felt our board should consider which you did not provide.

“As the company publicly announced on June 26, 2008, our board, in the exercise of its fiduciary duties, thoroughly considered the Hallmark proposal in light of the Company’s current business strategy and with input from our financial and legal advisors. After our Board’s review of the Hallmark proposal, it unanimously concluded that the Hallmark proposal should be rejected and that execution of the Company’s current business strategy represents a better long-term value for our shareholders.

“Given that the July 1st Letter is just a restatement of the original Hallmark proposal that our Board rejected, we see no reason for our board to reconsider that proposal.”

The letter was signed by Courtney Smith, chairman of the Board and CEO of Specialty Underwriters’ Alliance Inc. At this writing no other offer has been made by Hallmark.

Source: Specialty Underwriters’ Alliance, Inc.

Cincinnati Insurance Companies Rating Changes

Citing recent catastrophe losses and a rapid decline in the insurer’s equity portfolio, A.M. Best Co. has placed the financial strength ratings of “A++” (Superior) and issuer credit ratings of “aa+” of The Cincinnati Insurance Companies (CIC) and its property/casualty members under review with negative implications.

Concurrently, A.M. Best has also placed the FSR of “A+” (Superior) and ICR of “aa-” of The Cincinnati Life Insurance Co. under review with negative implications and the ICR and senior debt ratings of “aa-“of CIC and Cincinnati Life’s publicly traded parent, Cincinnati Financial Corp. under review with negative implications.

The stand alone ratings of The Cincinnati Specialty Underwriters Insurance Co. Inc. are unaffected.

All companies are domiciled in Fairfield, Ohio.

A.M. Best said these rating actions reflect the rapid decline in the value of CINF’s equity portfolio, along with an associated decline in future dividend income from that portfolio. In addition, the group has suffered significant catastrophic losses through second quarter 2008 and remains susceptible to competitive pricing pressures, according to the rating analysts at A.M. Best.

A.M. Best said that while the equity portfolio’s value has declined substantially, CINF continues to be exposed to capital market fluctuations. Common stocks represent a significant amount of CINF’s capital equity and are concentrated within the financial/banking sector, namely Fifth Third Bancorp.

Although the investment concentration was evident, the inaction of CINF to mitigate the significant losses of the equity portfolio questions the effectiveness of its enterprise risk management, in A.M. Best’s opinion.

Despite the effects of recent equity market volatility and catastrophic losses, Best’s said CIC’s and Cincinnati Life’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio, remains well supportive of their current A.M. Best ratings. The company maintains a large and diversified fixed income portfolio that covers its insurance liabilities.

Nevertheless, the magnitude and confluence of recent events have resulted in limiting the group’s flexibility to address further deterioration, A.M. Best said. As such, it said the insurer’s the ratings will remain under review pending further evaluation.

The property/casualty members of Cincinnati Insurance Companies include The Cincinnati Insurance Co., The Cincinnati Indemnity Co. and The Cincinnati Casualty Co.

Cincinnati Financial Corp. said it will hold a conference call to discuss second-quarter 2008 results on August 6, 2008, at 11:00 a.m.

Source: A.M. Best Co.

Topics AM Best