Climate Change Data

Environmental Metrics

Climate Goals & Targets

Environmental Challenges

• Underwriting losses in 2010 and 2011 due to soft pricing, low interest rates, recessionary effects, and weather-related losses.
• Ill-fated expansion into the Florida personal automobile market leading to adverse reserve development of nearly $20 million.
• Increased volatility of large losses and weather-related claims in commercial lines.
• Uncharacteristically poor underwriting result in Personal Lines due to rapid growth in Florida personal automobile claim volume and fraudulent claims.

Mitigation Strategies

• Change in leadership and overhaul of Personal Lines operation in Florida.
• Aggressive price increases, changed policy renewal terms, suspended new business production, and expanded claims department capabilities in Florida.
• Exiting underperforming states and unprofitable programs in Personal Lines.
• Emphasis on achieving additional rate increases to respond to increased claims costs.
• Pursuing selected, opportunistic acquisitions of insurance organizations.

Supply Chain Management

Climate-Related Risks & Opportunities

Physical Risks

• Weather-related losses

Environmental Metrics

Climate Goals & Targets

Environmental Challenges

• Difficult credit markets
• Fourth consecutive year with a greater than 100% combined ratio
• Extraordinarily high level of catastrophic losses from weather events
• Adverse development on prior year loss reserves of $10 million during fiscal 2013

Mitigation Strategies

• Increased investment in data analytics and related human capital
• Underwriting actions taken to reduce exposure in geographic areas with increased storm activity
• Reduced property risks susceptible to hail damage
• Increased wind/hail deductibles and coverage restrictions on cosmetic damages in renewal policies
• Corrective actions taken to improve profitability in core products and states in Personal Lines business unit
• Aggressive rate activity in personal automobile and property

Supply Chain Management

Climate-Related Risks & Opportunities

Physical Risks

• Catastrophic losses from weather events

Environmental Metrics

Climate Goals & Targets

Environmental Challenges

• Lingering effects of the Great Recession on underwriting profits and investment returns.
• Artificially depressed interest rates reducing the value of insurance float.
• Economic sectors critical to the insurance industry (construction, manufacturing, auto sales, energy) remaining below pre-recession peaks.
• Severe convective storm activity impacting Standard Commercial Segment results.
• Catastrophic losses impacting results.

Mitigation Strategies

• Improved underwriting quality and focus on Specialty segments.
• Mitigation of volatility through tighter underwriting, risk selection, coverage restrictions, higher deductibles, and improved reinsurance structures.
• Investments in data and analytics to enhance pricing and underwriting decisions.
• Strengthening core analytic capabilities through technology, enhanced management skills, and continuing education.
• Exiting underperforming states and ancillary products in Personal Lines.
• Evolving underwriting appetite to a more focused strategy targeting specific profitable industry segments.
• Implementation of a new technology platform for greater pricing sophistication and claims management discipline in the Personal Segment.
• Property catastrophe reinsurance to reduce financial impact of catastrophes.
• Commercial property and casualty reinsurance to reduce financial impact of single-event or catastrophic losses.
• Proportional reinsurance for aviation, occupational accident, workers' compensation, personal property, and personal auto risks.
• Conservative investment, reinsurance, and reserving practices.

Supply Chain Management

Climate-Related Risks & Opportunities

Physical Risks

• Increased frequency and severity of natural disasters due to climate change.

Environmental Metrics

Climate Goals & Targets

Environmental Challenges

• Estimating reserves is inherently uncertain. If our loss reserves are not adequate, it will have an unfavorable impact on our results.
• Our failure to maintain favorable financial strength ratings could negatively impact our ability to compete successfully.
• The loss of key executives could disrupt our business.
• Our industry is very competitive, which may unfavorably impact our results of operations.
• Our results may be unfavorably impacted if we are unable to obtain adequate reinsurance.
• If the companies that provide our reinsurance do not pay our claims in a timely manner, we could incur severe losses.
• Catastrophic losses are unpredictable and may adversely affect our results of operations, liquidity and financial condition.
• We are subject to comprehensive regulation, and our results may be unfavorably impacted by these regulations.
• State statutes limit the aggregate amount of dividends that our subsidiaries may pay Hallmark, thereby limiting its funds to pay expenses and dividends.
• Our insurance company subsidiaries are subject to minimum capital and surplus requirements.
• We are subject to assessments and other surcharges from state guaranty funds, mandatory reinsurance arrangements and state insurance facilities, which may reduce our profitability.
• Adverse securities market conditions can have a significant and negative impact on our investment portfolio.
• We rely on independent agents and specialty brokers to market our products and their failure to do so would have a material adverse effect on our results of operations.
• We may experience difficulty in integrating acquisitions into our operations.
• Our internal controls are not fail-safe.
• Our geographic concentration ties our performance to the business, economic and regulatory conditions of certain states.
• The exclusions and limitations in our policies may not be enforceable.
• We rely on our information technology and telecommunications systems and the failure or disruption of these systems could disrupt our operations and adversely affect our results of operations.
• Global climate change may have an adverse effect on our financial statements.

Mitigation Strategies

• We purchase reinsurance for significant amounts of risk, especially catastrophe risks that we and our insurance company subsidiaries underwrite.
• In order to mitigate credit risk to reinsurance companies, most of our reinsurance recoverable balance as of December 31, 2016 was with reinsurers that had an A.M. Best rating of “A–” or better.
• We also mitigate our credit risk for the remaining reinsurance recoverable by obtaining letters of credit.
• We continually enhance our operating procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements.
• We believe that we have adopted appropriate measures to mitigate potential risks to our information technology systems.

Supply Chain Management

Climate-Related Risks & Opportunities

Physical Risks

• Claims arising from these incidents could increase our exposure to losses and have a material adverse impact on our business, results of operations, and/or financial condition.

Environmental Metrics

Climate Goals & Targets

Environmental Challenges

• Adverse prior year loss development in commercial and personal auto lines, primarily from 2015 and prior accident years.
• Catastrophe losses, primarily from hurricanes in Texas and Florida.
• Industry losses in the commercial auto segment nearly quadrupled from 2011 to 2016.
• Many carriers exited the commercial auto line of business.
• Increased frequency and severity of losses due to low gas prices, higher employment, driving distractions, higher repair costs, rising medical costs, and increased claim litigation.
• More adverse verdicts hitting policy limits, making commercial auto a target for litigation and large claim settlements.
• Similar issues in personal auto.
• Commercial auto industry trends had an amplified impact on Hallmark’s bottom line due to its concentration in the commercial auto segment (approximately 50% of gross premiums) and in southwestern states, particularly Texas.

Mitigation Strategies

• Narrowed focus in personal lines to core products and reduced operating territory from 33 to 10 states.
• Aggressively pursued rate increases and culled underperforming risks and agents (over 65 rate increases in three years).
• Retooled underwriting processes and pricing capabilities with a new technology platform, improving pricing and risk segmentation.
• Revamped claims operations, reviewing open claims and upgrading procedures to address claims sooner and reduce litigation.
• Increased rates on all segments of commercial auto and culled underperforming accounts and brokers.
• Exited two states due to price inadequacy.
• Enhanced claims operations for commercial auto, conducting comprehensive reviews of open claims and improving efficiency.
• Transitioned Hallmark’s claims operation from decentralized units to a centralized approach.
• Re-balanced exposure to auto lines and developed additional specialty products to diversify the portfolio.
• Introduced new product lines in specialty commercial segment (primary & excess casualty, public entity excess liability, professional liability, management liability, errors & omissions, shared & layered property, primary property).
• Developed proprietary coverage forms and rates for targeted customers in the standard commercial segment.
• Expanded distribution channels and targeted new agents.

Supply Chain Management

Climate-Related Risks & Opportunities

Physical Risks

• Natural catastrophes, storms and weather-related losses

Environmental Metrics

Climate Goals & Targets

Environmental Challenges

• Catastrophe losses (storms, wildfires) impacting the insurance industry.
• Negative returns in stock and bond markets.
• Challenges in commercial transportation lines.
• Legacy claims in established product lines (commercial auto).

Mitigation Strategies

• Underwriting actions and risk management efforts to protect the portfolio.
• Increased stock portfolio size, particularly during market decline.
• Cumulative double-digit rate increase in commercial auto over two years.
• Exiting poor-performing states (LA and MS) in commercial auto.
• Developing a next-generation predictive pricing model for commercial auto.
• Claims initiatives to address legacy and new claims faster, reducing costs.
• Re-tooling the Specialty Personal Lines business with a new technology platform and rate increases.
• Repositioning the Standard Commercial segment to focus on targeted segments.
• Embedding data and analytics into decision-making.
• Disciplined expense management.

Supply Chain Management

Climate-Related Risks & Opportunities

Physical Risks

• Catastrophic losses from hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather, and fires.

Environmental Metrics

Climate Goals & Targets

Environmental Challenges

• COVID-19 pandemic disrupting business operations and agent/broker activities.
• Increasing claim severity in certain lines of business.
• Uncertainty in estimating reserves for unpaid losses and LAE.
• Unpredictability of catastrophic losses.
• Geographic concentration of business in certain states.
• Highly competitive insurance market.
• Potential for litigation related to insurance coverage and claim settlement practices.
• Cybersecurity threats.
• Potential for global climate change to increase the frequency and severity of natural disasters.

Mitigation Strategies

• Implementing measures to mitigate the impact of the COVID-19 pandemic.
• Exiting unprofitable lines of business (e.g., contract binding line of primary automobile business).
• Employing conservative investment, reinsurance, and reserving practices.
• Purchasing reinsurance to control exposure to losses.
• Monitoring the financial condition of reinsurers.
• Maintaining a diversified portfolio of investments.
• Implementing comprehensive employee engagement and training programs to guard against cybersecurity threats.
• Maintaining cyber liability insurance.
• Employing technological security measures to prevent, detect, and mitigate cybersecurity threats.

Supply Chain Management

Climate-Related Risks & Opportunities

Physical Risks

• Increased frequency and severity of natural disasters due to climate change.

Environmental Metrics

ESG Focus Areas

• Not disclosed

Environmental Achievements

• Not disclosed

Social Achievements

• Not disclosed

Governance Achievements

• Not disclosed

Climate Goals & Targets

Environmental Challenges

• Global climate change may increase the frequency and severity of natural disasters, leading to increased losses.
• The COVID-19 pandemic could disrupt business operations and materially adversely impact results of operations and financial condition.

Mitigation Strategies

• The company monitors developments relating to the COVID-19 pandemic and implements measures intended to mitigate its impact on its business.
• Not disclosed

Supply Chain Management

Supplier Audits: Not disclosed

Responsible Procurement

• Not disclosed

Climate-Related Risks & Opportunities

Physical Risks

• Increased frequency and severity of natural disasters due to climate change

Transition Risks

• Not disclosed

Opportunities

• Not disclosed

Reporting Standards

Frameworks Used: Null

Certifications: Null

Third-party Assurance: Not disclosed

UN Sustainable Development Goals

• Not disclosed

Not disclosed

Sustainable Products & Innovation

• Not disclosed

Awards & Recognition

• Not disclosed

Environmental Metrics

Climate Goals & Targets

Environmental Challenges

• Increased unfavorable prior year loss reserve development.
• Global climate change may increase the frequency and severity of natural disasters, leading to increased losses.

Mitigation Strategies

• The company is continually enhancing its operating procedures and internal controls over financial reporting to mitigate risks.
• The company purchases reinsurance to control exposure to losses and protect capital resources.
• The company monitors the financial condition of reinsurers and reviews reinsurance arrangements periodically.

Supply Chain Management

Climate-Related Risks & Opportunities

Physical Risks

• Increased frequency and severity of natural disasters