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Rating Action on Donegal Group

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A.M. Best Co. reiterated the issuer credit ratings (“ICR”) of “bbb” of Donegal Group Inc. (DGICA - Free Report) .  Concurrently, the rating agency reiterated financial strength ratings (“FSR”) of A and ICR of “a” of the members of the Donegal Insurance Group as well as Michigan Insurance Company (“MICO”), the subsidiaries of Donegal Group.

The FSR affirmation of the members of the Donegal Insurance Group came on the back of sustained profitability, well diversified geographic and product portfolio, solid capitalization, and strong liquidity. Also, the financial flexibility provided by Donegal Group accounts for the affirmation.  

However, low interest rates, slightly higher expense structure, as well as weather events and lower investment yields pressurizing operational results, dwarf the positives. Nevertheless, initiatives undertaken by the company to improve its operational results via rate increases, better underwriting standards, and use of enterprise risk management are viewed favorably by the rating agency.

The ICR affirmation takes into account the solid financial positioning of the property/casualty insurance operation as well as moderate financial leverage.

The ratings affirmations of MICO account for sturdy capitalization, continued solid operational results, and support provided by Donegal Mutual Insurance Company, the parent company of MICO.  However, geographic concentration, higher leverage, and reliance on reinsurance to lower risks, coupled with soft macro conditions, offset the positives to some extent.

The rating agency believes sustained profitability leading to capital appreciation could help retain the ratings. However, if Donegal Group fails to retain its streak of profitability or if capital erodes, a downward revision in rating and outlook may take place.

Rating affirmations or upgrades from credit rating agencies play an important role in retaining investor confidence in the stock and in maintaining credit worthiness in the market. Rating downgrades, therefore, adversely affect the business, apart from increasing the costs of future debt issuances. We believe that strong ratings will help Donegal Group retain investor confidence and enable it to write more businesses going forward, thereby boosting results.

Donegal Group carries a Zacks Rank #5 (Strong). Though we prefer to avoid the stock presently, Alleghany Corp. (Y - Free Report) , CNA Financial Corp. (CNA - Free Report) , and Everest Re Group Ltd. (RE - Free Report) , among other property and casualty insurers, are worth considering. All these stocks carry a Zacks Rank #1 (Strong Buy).

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