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.

The ratings for Michigan are reflective of its supportive capitalization, historically favorable earnings and the financial and managerial support provided by Donegal Mutual Insurance Company (Donegal Mutual), the lead company in the Donegal Insurance Group. Donegal Mutual provides Michigan with a 25% 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.

These 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.

Although the outlook on all ratings is stable, the ratings 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.

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

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”; “Natural Catastrophe Stress Test Methodology”; “ 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 the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2011 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Copyright Business Wire 2010

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