Donegal Ratings ‘Unchanged;’ Michigan under Review Negative Says Best

July 22, 2010

A.M. Best Co. has issued two bulletins following the announcement that the Donegal Group has entered into an agreement to acquire all of the outstanding stock of Michigan Insurance Co., a majority-owned stock subsidiary of West Bend Mutual Insurance Co. [See IJ web site –].

Best said the financial strength ratings of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Donegal Insurance Group (group) and its members as well as Peninsula Insurance Group and its members, are unchanged following the announcement. Best also commented that the ICR of “bbb” of Donegal is unchanged. The outlook for all ratings is stable.

However, Best has placed under review with negative implications the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of Michigan Insurance Company (MIC). Best said the ratings would “remain under review pending regulatory review, approval and the completion of A.M. Best’s analytical process. The ratings being placed under review with negative implications indicates that they either will be downgraded or affirmed, depending upon A.M. Best’s view of the level of support to be provided by MIC’s new parent, Donegal Group Inc.”

Donegal’s agreement to purchase all of the outstanding stock of MIC, which is 80 percent owned by Wet Bend, for approximately $39 million, will have no impact on West bend’s ratings, Best added.

However, Best explained that “MIC’s ratings consider the support it receives from West Bend, including West Bend’s assumption of 75 percent of all business written by MIC under a quota share arrangement. Furthermore, West Bend has extended a $5 million surplus note to MIC that has no repayment or interest payment requirements.

“The acquisition of MIC includes the purchase of the surplus note from West Bend.” While MIC will continue to cede 75 percent of its business, Donegal “is expected to assume 25 percent with third party reinsurers assuming the other 50 percent. Business currently ceded to West Bend will remain with West Bend until the natural expiration of those policies and associated reserves. MIC also will continue to benefit from West Bend’s third party reinsurance arrangements through year-end 2010.”

Best also noted that the acquisition would “expand Donegal’s Midwestern operations into Michigan and enhance the group’s geographic diversification and growth opportunities. MIC also will benefit from Donegal’s technology and operational support to further enhance its policyholder and agency relationships.”

Best also said it “anticipates that Donegal’s strong capitalization will provide ample support to fully integrate MIC’s operations without materially impacting the group’s overall results or financial strength.”

Best summarized its current ratings on the Donegal group and the peninsula Insurance Group as follows:

The FSR of A (Excellent) and ICRs of “a” are unchanged for the Donegal Insurance Group and its following members:
• Atlantic States Insurance Company
• Donegal Mutual Insurance Company
• Southern Insurance Company of Virginia
• Le Mars Insurance Company
• Sheboygan Falls Insurance Company
• Southern Mutual Insurance Company
The FSR of A (Excellent) and ICRs of “a” are unchanged for the Peninsula Insurance Group and its following members:
• The Peninsula Insurance Company
• Peninsula Indemnity Company

Source: A.M. Best

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