Best Affirms Donegal Insurance Group & Members, Michigan Ins., Donegal Group

September 8, 2011

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A ‘(Excellent) and issuer credit ratings (ICR) of ‘a’ of Donegal Insurance Group, its members and Michigan Insurance Company.

Best also affirmed the ICR of ‘bbb’ of the publicly-traded holding company, Delaware-based Donegal Group Inc. The outlook for all ratings is stable. All of the companies, except Michigan Insurance are headquartered in Marietta, Pennsylvania.

The Donegal Insurance Group’s ratings reflect its “strong risk-adjusted capitalization, sound balance sheet liquidity, historically favorable operating performance, effective use of technology, established regional market presence and its improving geographic and product line diversification through acquisitions,” Best explained.

The report also noted that in December 2010, “Donegal completed the purchase of Michigan, which provided Donegal with entry into that state and an increased diversification between personal and commercial lines products. The ratings are further enhanced by the added financial flexibility for Donegal to raise capital through the issuance of equity or debt during favorable markets.”

As partial offsetting considerations Best cited the group’s “negative earnings trend, which is primarily due to increased frequency and severity of claims from severe weather, home fires, rising claims cost inflation, below average interest rates and the downturn in the general economy. In addition, the acquisition of Michigan and more recently, Union National Financial Corp. in May 2011, were funded by increasing debt; however, debt leverage remains within acceptable limits for the group’s current ratings.”

Best also indicated that although, “the group’s banking operation remains modest in comparison to its property/casualty insurance operation, the banking sector has not performed as well and presents a competing interest for capital within the organization. These concerns are partially mitigated by the strong capitalization within Donegal, its experienced management team and its use of a formal risk management process.”

Best said its ratings for Michigan are reflective of its “supportive capitalization, historically favorable earnings and the financial and managerial support provided by Donegal Mutual Insurance Company, the lead company in the Donegal Insurance Group. Donegal Mutual provides Michigan with a 25 percent quota share reinsurance cover and holds a $5 million surplus note from Michigan. The surplus note is long term and receives favorable consideration in Michigan’s overall capitalization.”

However, Best also indicated that the positive rating aspects are partially offset by “Michigan’s single state concentration of risk, the weak economic conditions in the state, as well as the below average interest rates and above average dependence on reinsurance to offset the company’s above average gross leverage measures.

“The ICR of Donegal 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 observed that, although the outlook on all ratings is stable, they “may come under pressure if the current earnings trend does not begin to show improvement. This concern is partially mitigated by several initiatives underway to improve underwriting, primarily by exiting or limiting new business in several markets, raising rates and reviewing homeowners’ deductibles in catastrophe prone areas.

Best listed the companies whose ratings are affected by its actions as follows:
The FSR of ‘A’ (Excellent) and ICR of ‘a’ have been affirmed for the Donegal Insurance Group and its following members:
* 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

Was this article valuable?

Here are more articles you may enjoy.