AM Best goes negative on Donegal’s A rating

AM Best has revised the ratings outlooks of the Donegal Insurance Group to negative from stable after catastrophe losses and reserve increases.

The Pennsylvania-based insurer currently has an AM Best financial strength rating of A and its members have long-term issuer credit ratings of “a”.

The negative outlook reflects the decline in Donegal’s operating performance in 2017 and 2018, which has placed pressure on AM Best’s assessment of it as adequate.

“While the operating performance has been impacted by above-average weather-related losses, the negative outlooks also consider the moderate adverse loss reserving trends and the slight decline in risk-adjusted capitalisation,” said AM Best.

Donegal, which has a publicly traded holding company and mutual insurer parent, reported a combined ratio of 110.5 percent in the fourth quarter of 2018, up from 104.8 percent in the same period of 2017.

The insurer was hit with $12.5mn of weather-related losses last quarter, much higher than its five-year average for fourth-quarter weather losses of $5.2mn.

Reserve increases added 3.6 percentage points to the fourth quarter loss ratio in 2018.

The company reported a full-year net loss of $32.8mn for 2018 compared with net income of $7.1mn in 2017.

The combined ratio for 2018 was 110.1 percent, up from 103.0 percent for the full year of 2017.

Management attributed its recent reserve development to increased frequency of severe 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.

AM 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.

As previously reported, the insurer has also restructured its reinsurance programmes with a combined structure with Donegal Mutual.

Donegal Group president and CEO Kevin Burke has also ruled out the insurer’s mutual parent buying up the shares in its publicly traded subsidiary it doesn’t already own.

AM Best’s rating reflects Donegal’s “very strong” balance sheet, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

AM Best also revised the outlook to negative from stable and affirmed the long-term issuer credit rating of “bbb” of the publicly traded holding company, Donegal Group.