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A.M. Best Affirms Ratings Of Donegal Insurance Group, Its Members, Michigan Insurance Company And Donegal Group Inc.

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 (Michigan) (Grand Rapids, MI).

In addition, A.M. Best has affirmed the ICR of “bbb” of the publicly-traded holding company, Donegal Group Inc. (Donegal) (Delaware) [NASDAQ: DGICA and DGICB]. The outlook for all ratings is stable. All the above companies are headquartered in Marietta, PA, unless otherwise specified. (See below for a detailed list of the companies.)

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. 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.

These favorable rating aspects are partially offset by 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.

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.

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