A.M. Best has revised the outlooks of Donegal Insurance Group and its members from stable to negative due to a decline in Donegal Group’s operating performance in 2017 and 2018.
At the same time, the rating agency affirmed the insurer’s Financial Strength Rating of A (Excellent) and its Long-Term Issuer Credit Ratings of ‘a’.
The downturn in Donegal Group’s outlook reflects the impact of above-average weather losses on its operating performance, analysts said, as well as moderate adverse loss reserving trends and a slight decline in risk-adjusted capitalisation.
Management attributes the reserve development to increased frequency of severity of losses in the auto segment, as well as the changing trends in the reporting of casualty loss data and a deceleration in claim closure rates.
Nevertheless, A.M. Best noted that Donegal Group has implemented a number of initiatives to help improve underwriting performance, including significant rate actions, the transfer of unprofitable accounts and investing in new technology.
The affirmation of its Credit Ratings also reflect the company’s balance sheet strength, which A.M. Best categorises as very strong, its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
Although the individual members within Donegal Group play a specific role in the organisation’s overall business plan, and their operating performances may vary, each contributes favourably to the group’s risk-adjusted capitalisation, analysts said.
Additionally, each member supports the corporate business strategy and benefits from shared senior management, intercompany reinsurance and added financial flexibility to raise capital through debt or equity offerings during favourable investment markets.
A.M. Best also accounted for Donegal Group’s various excess of loss and per risk reinsurance treaties that protect surplus, reduce volatility and increase capacity.
Donegal Group made significant changes to its reinsurance program at the January 2019 renewals, which A.M. Best expects to benefit operating results going forward, depending on the extent of large losses and catastrophe activity.
Donegal Group subsidiaries that had their outlooks revised to negative include: Atlantic States Insurance Company; Donegal Mutual Insurance Company; Le Mars Insurance Company; Michigan Insurance Company; Mountain States Commercial Insurance Company; Mountain States Indemnity Company; Peninsula Indemnity Company; Peninsula Insurance Company; Sheboygan Falls Insurance Company; Southern Insurance Company of Virginia; and Southern Mutual Insurance Company.