A.M. Best Co. has affirmed the financial strength ratings (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the Pennsylvania-based members of the Donegal Insurance Group, as well as Michigan Insurance Company (MICO), and has also affirmed the ICR of “bbb” of the publicly traded holding company, Donegal Group Inc. of Delaware [DGICA and DGICB].
The outlook for all of the ratings is stable.
The affirmation of the ratings of the Donegal Group members is “based on supportive risk-adjusted capitalization, sound balance sheet liquidity, generally positive earnings and good business profile, which includes geographic and product line diversification, effective use of technology in the independent agency distribution channel and a history of successful expansion through strategic acquisitions and affiliations,” Best explained.
The report also notes that “although the individual members within the Donegal Group play a specific role in the organization’s overall business plan and their operating performances may vary, each contributes favorably to the group’s risk-adjusted capitalization. In addition, each of the members support the corporate business strategy and benefit from shared senior management, intercompany reinsurance and the added financial flexibility of Donegal Group Inc. to raise capital through debt or equity offerings during favorable investment markets.”
As partial offsetting factors Best cited “the organization’s overall less favorable operating performance over the last five years, below average interest rates and a slightly higher expense structure. Operating performance in recent years has been adversely impacted by more frequent and severe weather events and lower investment yields.”
However, Best also noted that “earnings improved in 2012 and through the first six months of 2013,” and 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 MICO are mainly reflective of its sound capitalization, historically favorable operating performance and the benefits it derives from its ultimate parent, Donegal Mutual Insurance Company. These attributes are partially offset by MICO’s concentration of risk in Michigan, above average gross leverage and dependence on reinsurance to lower its net retained risks to a more manageable level, compounded by a weakened economy.
“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.”
In conclusion Best said the “ratings would be further stabilized by stronger earnings, which could lead to capital appreciation. However, the organization’s outlook may be revised to negative and/or the ratings downgraded if capitalization significantly weakens or a positive trend towards sustained underwriting profitability does not develop.”
Best summarized the entities affected by its ratings report 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