A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the members of the Donegal Insurance Group, based in Marietta, Pennsylvania, as well as the FSR of ‘A’ (Excellent) and ICR of “a” of Michigan Insurance Company (MIC), the stand-alone rated subsidiary of the Delaware-based Donegal Group Inc. Best also affirmed the ICR of “bbb” of the group’s publicly-traded holding company, Donegal Group Inc. The outlook for all ratings is stable.
The affirmation of the ratings of the Donegal Group’s members is “based on their consolidated financial strength, which is reflected by adequate risk-adjusted capitalization, sound balance sheet liquidity, continued positive earnings and good geographic and product line diversification,” Best explained.
Best also indicated that “although the individual companies within the Donegal Group play a specific role in the organization’s overall business plan and their operating performance may vary, each contributes favorably to the group’s risk-adjusted capitalization. In addition, each of the members supports Donegal Group’s overall business strategy and each benefit from shared senior management and information technology systems, intercompany reinsurance and the added financial flexibility of Donegal Group Inc.”
As partial offsetting factors, Best cited “a downturn in the organization’s operating performance in recent years, strong competitive market pressure, weak economic conditions and a low interest rate environment. Operating performance has declined primarily due to increased frequency of property claims from severe weather events and lower investment yields.” Best said it “looks favorably upon the actions being taken by management to improve operating performance through rate increases, stronger underwriting standards and use of enterprise risk management.”
The ratings of MIC are “mainly reflective of its sound capitalization and historically favorable operating performance partially offset by a modest decline in earnings and concentration of risk in Michigan,” Best said. They also “reflect its successful integration following its acquisition by Donegal Group Inc. in 2010.”
The ICR of Donegal Group Inc. recognizes the overall financial strength of the property/casualty insurance operation, its moderate amount of financial leverage and the subordination of its creditors to the insurance companies’ policyholders.
Best also observed that “although capitalization and business profile are supportive of the organization’s ratings, operating performance in recent years has fallen below Best’s expectations. Results through the first six months of 2012 are an improvement over the prior year; however, the ratings and outlook may come under pressure if a favorable earnings trend does not develop. The ratings would be further stabilized by stronger earnings that lead to capital appreciation without excessive growth.”
Best summarized the companies affected by its ratings actions as follows:
The FSR of ‘A’ (Excellent) and ICRs of “a” have been affirmed for the following members of Donegal Insurance Group:
Atlantic States Insurance Company
Donegal Mutual Insurance Company
Le Mars Insurance Company
The Peninsula Insurance Company
Peninsula Indemnity Company
Sheboygan Falls Insurance Company
Southern Insurance Company of Virginia
Southern Mutual Insurance Company
Source: A.M. Best