A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of the Donegal Insurance Group and its members.

Concurrently, A.M. Best has affirmed the FSR of A (Excellent) and ICRs of “a” of The Peninsula Insurance Company (Peninsula Insurance) and its wholly owned subsidiary, Peninsula Indemnity Company (Peninsula Indemnity) (both domiciled in Salisbury, MD). Peninsula Insurance and Peninsula Indemnity were part of the Peninsula Insurance Group (Peninsula Group), but are now part of the Donegal Insurance Group. Additionally, A.M. Best has withdrawn the FSR of A (Excellent) and ICR of “a” of the Peninsula Insurance Group and assigned an NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR.

A.M. Best also has affirmed the ICR of “bbb” of Donegal Group Inc. (Donegal) [NASDAQ: DGICA and DGICB], a publicly-traded holding company. The outlook for all ratings is stable. (See below for a detailed list of the companies.)

The Donegal Insurance Group’s ratings are reflective of its excellent risk-adjusted capitalization and liquid balance sheet, historically favorable operating performance, effective use of technology, established regional market presence and its improving geographic diversification. The ratings further acknowledge its successful growth through acquisition strategy and the added financial flexibility of Donegal to raise capital through the issuance of equity or debt.

These favorable rating aspects of Donegal Insurance Group are partially offset by a negative earnings trend primarily due to increased frequency and severity of claims from severe weather, home fires, rising claims cost inflation, below average interest rates and the down turn in the general economy. In addition, the Donegal Insurance Group is in the process of acquiring Michigan Insurance Company and Union National Financial Corp., a bank holding company for Union National Community Bank. These acquisitions will be funded by increasing debt; however, debt leverage is expected to remain within acceptable limits for the group’s current ratings. Although, the group’s banking operations will remain modest in comparison to its property/casualty insurance operations, 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 Insurance Group, its experienced management team and its use of a formal risk management process.

The FSR of A (Excellent) and ICRs 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

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition , which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “ Rating Members of Insurance Groups“; and “ A.M. Best’s Ratings & the Treatment of Debt.” Methodologies can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.

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