S&P Assigns Donegal Mutual Ins and Subs 'BBBpi' FSR.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

Jan. 18, 2001-- Standard & Poor's today assigned its triple-'Bpi' financial strength rating to Donegal Mutual Insurance Co. (Donegal Mutual) and its wholly owned, reinsured subsidiaries (see list).

These rating actions reflect the combined group's extremely strong capitalization, product-line diversity, and sound reinsurance. Limiting factors include the evident susceptibility to drastic surplus changes and some degree of geographic concentration.

Donegal Mutual is a regional insurer that writes business primarily in Pennsylvania, with some additional business in Maryland, Delaware, Ohio, Virginia, New York, and Georgia. Major product lines include private passenger auto, homeowners multi-peril, commercial multi-peril, auto physical damage, and workers' compensation insurance, which are written through its independent agency system.

The company was originally formed as the Donegal and Conoy Mutual Fire Insurance Co. in Marietta, Pa., in 1889. In 1986, what was then Donegal Mutual formed a downstream insurance holding company--Donegal Group Inc.--and completed an initial public offering (NASDAQ: DGIC). Donegal Mutual retains the majority interest (62% as of year-end 1999) in Donegal Group.

In addition to the holding company, there are five insurance subsidiaries that are 100% owned by Donegal Group Inc. and another that is owned directly by Donegal Mutual. Five of the six subsidiaries -- Pioneer Insurance Co. (NY), Pioneer Insurance Co. (OH), Delaware Atlantic Insurance Co., Southern Insurance Co. of Virginia, and Southern Heritage Insurance Co. -- cede 100% of their premiums to Donegal Mutual, which then retrocedes the business back to the respective companies. These five companies all receive the implied group rating, as they are considered strategically important to the group. Atlantic States Insurance Co. (PA) also receives the implied group rating, as it participates in an inter-company pooling arrangement with Donegal Mutual and retains 65% of the combined business.

Major Rating Factors:

-- The combined group had $169.1 million in surplus as of year-end 1999. Capitalization is considered extremely strong, as evident by a consolidated capital adequacy ratio of 224% based on Standard & Poor's model.

-- Direct premiums written amounted to $216.3 million for the group in 1999 and were well diversified across the product lines. Private passenger auto (22.5% of direct premiums), auto physical damage (19.4%), homeowners multi-peril (18.5%), commercial multi-peril (15.1%), and workers' compensation (12.7%) constituted the majority of business.

-- Donegal Mutual utilizes excess-of-loss reinsurance through Dorinco Reinsurance Co. (single-'Api' financial strength rating), Swiss Reinsurance America Corp. (triple-'A' financial strength rating), and Continental Casualty Co. (single-'A' financial strength rating) as well as a multi-layer catastrophe reinsurance program that is diversified among several domestic and foreign reinsurers.

-- The company was susceptible to drastic surplus changes caused by movement in the market value of Donegal Group, as the 62% ownership stake was held on the books at market value until year-end 1999. Since mid 1998 through the end of 1999, the stock price lost almost 75% of its value. The recent switch to book valuation should add stability, but as a result, Donegal Mutual lost $37.1 million (38% of its 1998 surplus) in the conversion.

-- Although the group has some diversity across states, it has been vulnerable in recent years to severe weather. This is evident by losses in its homeowners lines caused by events such as Hurricane Floyd in 1999.

Ratings with a 'pi' subscript are insurer financial strength ratings based on an analysis of an insurer's published financial information and additional information in the public domain. They do not reflect in-depth meetings with an insurer's management and are therefore based on less comprehensive information than ratings without a 'pi' subscript. Ratings with a 'pi' subscript are reviewed annually based on a new year's financial statements, but may be reviewed on an interim basis if a major event that may affect the insurer's financial security occurs. Ratings with a 'pi' subscript are not subject to potential CreditWatch listings.

Ratings with a 'pi' subscript generally are not modified with "plus" or "minus" designations. However, such designations may be assigned when the insurer's financial strength rating is constrained by sovereign risk or the credit quality of a parent company or affiliated group, Standard & Poor's said. - CreditWire.

NEW RATINGS
Donegal Mutual Insurance Co. (NAIC: 13692)
Atlantic States Insurance Co. (PA) (NAIC: 22586)
Southern Insurance Co. of VA (NAIC: 26867)
Delaware Atlantic Insurance Co. (NAIC: 13870)
Pioneer Insurance Co. (NY) (NAIC: 15016)
Pioneer Insurance Co. (OH) (NAIC: 15717)
Southern Heritage Insurance Co. (NAIC: 18090)
  Financial strength rating               BBBpi