Shares of Donegal Group Inc. (DGICA) increased 1.4% over the last trading session to close at $15.79 after affirmation of the company’s ratings by A. M. Best Company. The credit rating giant reiterated the issuer credit ratings (ICR) of Donegal Group at “bbb” on the back of financial strength of its property and casualty insurance operation and reasonable financial leverage.
Concurrently, the credit rating agency affirmed the financial strength rating (FSR) and ICR of one of the subsidiaries of Donegal Group, Donegal Insurance Group at “A” and “a” respectively. The FSR and ICR of the new subsidiary of Donegal Group, Michigan Insurance Company (MICO) was also affirmed at “A” and “a” respectively. All the ratings carried a stable outlook.
The rating affirmation on of Donegal Group came on the back of strong risk-adjusted capitalization, balance sheet liquidity, earnings momentum and a robust business profile. Moreover, the rating agency recognized the contribution of each of the members of MICO toward the risk-adjusted capitalization.
A.M. Best also stated that the members’ support to the corporate business strategy and benefit from shared senior management, intercompany reinsurance and financial flexibility of the parent company are commendable as these help to raise capital through debt or equity offerings when the investment market scenario is favorable.
However, these positives are partly offset by Donegal Group’s less favorable operating performance over the last five years and rising expenses. Nevertheless, A.M. Best remains optimistic about management’s initiatives toward improving operating performance. These initiatives include rate increases, stringent underwriting standards and the usage of enterprise risk management.
The credit rating agency stated that an upgrade in the ratings is possible if Donegal Group generates sustained underwriting profitability. Conversely, the ratings could be downgraded if the underwriting and operating performances deteriorate significantly.
Rating affirmation or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe that Donegal Group’s present score with the credit rating agency will help it write more business going forward.
Currently, Donegal Group carries a Zacks Rank #3 (Hold). Better-ranked stocks in the property and casualty space that look attractive at current levels include Alleghany Corp. (Y) AmTrust Financial Services, Inc. (AFSI) and Aspen Insurance Holdings Ltd. (AHL). All of these have a Zacks Rank #1 (Strong Buy).
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