A.M. Best Places Ratings of Michigan Insurance Company Under Review With Negative Implications

A.M. Best Co. 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) (Grand Rapids, MI). The ratings will 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) (Marietta, PA) [NASDAQ: DGICA, DGICB].

On July 16, 2010, Donegal announced it has agreed to acquire all of the outstanding stock of MIC for approximately $39 million. MIC is over 80% owned by West Bend Mutual Insurance Company (West Bend) (West Bend, WI). The FSR of A (Excellent) and ICR of “a+” of West Bend are not impacted by this transaction.

MIC’s ratings consider the support it receives from West Bend, including West Bend’s assumption of 75% 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% of its business, Donegal Mutual Insurance Company (Donegal Mutual) (Marietta, PA) is expected to assume 25% with third party reinsurers assuming the other 50%. 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.

West Bend formed the group in late 1997 to write indigenous business exclusively in Michigan. MIC writes personal auto, homeowners, commercial auto, commercial package and workers’ compensation insurance. Business is produced through approximately 170 independent agents, the majority of whom currently have an ownership stake in the company.

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at http://www.ambest.com/ratings/methodology.