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AM Best Revises Donegal Group (DGICA) and Unit’s Outlook


Credit rating giant AM Best has revised the outlook from stable to negative with respect to the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of Donegal Insurance Group. Additionally, the rating agency affirmed the aforementioned ratings of “a” for members of Donegal Insurance.

At the same time, it asserted the Long-Term ICR of “bbb” for the parent company, Donegal Group Inc. DGICA. The outlook for this rating has been revised to negative from stable.

Notably, the aforementioned credit ratings denote a robust balance sheet, sustained operational excellence, neutral business profile and adequate enterprise risk management of a company.

Donegal Group’s weak operating performance in the last couple years (2017 and 2018) mainly indicates the revised negative outlooks. This in turn, has put pressure on the credit rating agency’s current assessment of the property and casualty (P&C) insurer’s performance. Modest adverse loss reserving trends and a slight decrease in risk-adjusted capitalization are also reflected in the negative outlooks.

Donegal Group’s capital assessment signifies its Best’s Capital Adequacy Ratio (BCAR) that is recognized by AM Best as possessing the strongest liquidity position and a conservative investment portfolio. However, increasing underwriting leverage, moderately adverse loss reserve development and restricted surplus growth over the last five-year period can offset the aforementioned attributes.

Per the rating giant, the substantial changes made by Donegal Group to its reinsurance program in 2019 are expected to drive operating results in the near term. The result will be dependent on the incidence of large loss activity and the occurrence of catastrophe events.

Donegal Group’s affirmed Long-Term ICR rating acknowledges the overall financial strength of its property/casualty insurance operation, modest level of financial leverage and the subordination of its creditors to the insurance companies’ policyholders.

It is important to note that rating affirmations or upgrades from credit rating agencies play a pivotal role in retaining investor confidence and maintaining the stock’s credit worthiness. Whereas rating downgrades not only hamper the respective company’s business but also raise its cost of future debt issuances. We believe, such ratings will help Donegal Group keep investors’ trust and write more businesses going forward.

Zacks Rank and Share Price Movement

Shares of this Zacks Rank #5 (Strong Sell) P&C insurer have slipped 0.9% year to date against the industry’s increase of 1.4%. We expect the company’s premium growth, higher revenues and a solid capital position to turn the stock around as well as perk it up in the near term.

Stocks to Consider

Investors interested in better-ranked stocks from the insurance industry can consider Health Insurance Innovations, Inc. HIIQ, Cincinnati Financial Corporation CINF and Berkshire Hathaway Inc. BRK.B, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Health Insurance Innovations operates as a cloud-based technology platform and distributor of individual and family health insurance plans and supplemental products in the United States. The company delivered positive surprises in all the last four quarters, the average being 9.02%.

Cincinnati Financial provides property and casualty insurance products in the United States. The company pulled off positive surprises in three of the trailing four quarters, the average earnings surprise being 18.08%.

Berkshire Hathaway provides property and casualty insurance and reinsurance plus life, accident and health reinsurance besides operating railroad systems in North America. The company came up with positive surprises in three of the preceding four quarters, the average beat being 4.31%.

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