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A Regional Powerhouse

What Donegal Does Right

Conservative underwriting and a studious approach to acquisitions built a small farmers' mutual into a regional powerhouse.
By: | April 7, 2014 • 7 min read
042014_10donegal_ins

The town of Marietta, Pa., sits in Lancaster County, about 100 miles west of Philadelphia, right on the banks of the Susquehanna River. The town is less than a square mile in size and has a population of roughly 2,600. The borough’s website dubs the community “a quintessential small town.”

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You’ll find no Starbucks on Market Street, and the nearest Dunkin’ Donuts is a 10-minute drive away in the town of Mt. Joy. The most impressive structure in town may be the Donegal Insurance Group’s corporate campus, a multi-wing building that in 1961 became home to one of the region’s leading providers of both commercial and personal lines of property and casualty insurance.

On May 13, 1889, the Governor of the Commonwealth of Pennsylvania, James A. Beaver, issued Letters of Patent to the Donegal and Conoy Mutual Fire Insurance Co. The fledgling insurer was formed by a small group of farmers in Lancaster County who joined forces to protect their property and crops. Its first policy was issued to a local farmer for dwelling coverage for $4,300, with an annual premium of $3.90.

Now in its 125th year, Donegal boasts $700 million in direct premium writings, with assets of more than $1 billion. It has 800 employees, nine offices in 22 states, and a ranking among Forbes’ 100 Most Trustworthy Cos. in America.

Slow and Steady

“A significant part of it has to do with a strong, long-term business strategy,” said President and CEO Don Nikolaus. A conservative approach, he said, is the name of the game.

The company just doesn’t take on risky classes of business that many larger companies write.

“We don’t write in jurisdictions that have high susceptibility to catastrophic losses,” said CFO Jeff Miller.

That includes “municipalities, large industrial risk, taxi cabs in New York, for example,” Nikolaus said. The company’s strategy has been to stick to safer classes where it has developed expertise.

“In a very price-sensitive cycle where there’s a lot of competitiveness, if you’re committed to a long-term business strategy focused on underwriting profitability, you invoke the discipline not to chase after business at inadequate premiums,” Nikolaus said.

The commitment to be unswayed by competitors’ strategies sometimes keeps the company from pursuing fast-growth opportunities that provide short-term reward. But keeping its mind on its own knitting has protected Donegal from devastating losses.

Donegal expanded its agricultural insurance underwriting base from Pennsylvania to the Midwest.

Donegal expanded its agricultural insurance underwriting base from Pennsylvania to the Midwest.

Choosing new geographic regions to move into follows the same logic. States prone to hurricanes and tornadoes are out; ditto coastal regions at risk for flooding. That worked to Donegal’s benefit especially after Superstorm Sandy, from which it emerged without heavy losses due to its decision to avoid New Jersey and coastal New York.

The legislative, judicial and regulatory environment in any state eyed for expansion also goes under a microscope. With strategic moves into the South and Midwest, Donegal has been able to grow without jeopardizing its stability.

Diversification and Expansion

Donegal and Conoy purchased its first office in downtown Marietta in 1919, expanding it in 1949, when the company changed its name to Donegal Mutual Insurance Co. In that year, premium writings had risen to more than $600,000.

Donegal has been able to grow by diversifying its offerings, adding automobile and homeowners insurance among other property/casualty lines, and by branching off onto the commercial side.

Numerous acquisitions of personal lines companies over the years have helped the company edge into new states.

Donegal capitalized on those expansions by introducing commercial products into those branches, using existing channels to distribute commercial policies for property, liability, inland marine, auto and workers’ compensation.

“Over the last three to four years, we’ve begun to concentrate on building up the commercial lines side to get closer to that 50/50 mix,” Miller said. “We’ve also been appointing some commercially focused agencies to try to bolster the production of our commercial business.”

While organic growth has continued steadily, acquisitions have been key in transforming Donegal into a leading regional provider. Since its first acquisition in 1976, Donegal has added 10 more companies into the fold, eventually merging some of those together. Three stand out as critical moves that helped Donegal get a foot in the door of new markets.

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First was the incorporation of Atlantic States Insurance Co. as a wholly owned subsidiary in 1986. Originally formed to write workers’ compensation insurance, it eventually served as a launching pad for other commercial products.

Donegal merged other acquired companies into Atlantic States in 2001 and in 2006, including Delaware Atlantic States Insurance and Pioneer Mutual in Ohio and New York. Rolling these companies into one corporate structure increased regional market competitiveness and gave Donegal the platform it needed to deliver commercial products on a wider level.

A second critical move was made in 2002, with the acquisition of the LeMars Insurance Co. in Iowa, which provided an entrée into four additional Midwestern states: Iowa, South Dakota, Nebraska and Oklahoma.

The LeMars deal paved the way for future acquisitions in Wisconsin and Michigan, and kicked off the westward phase of Donegal’s expansion strategy. With a mix of 48.1 percent personal and 51.9 percent commercial business, it also moved them closer to achieving that 50/50 mix. By 2005, the company was seeing written premiums of $423 million, with combined assets of $872 million.

Donegal then made a big push into the South in 2009, entering into an affiliation agreement with Southern Mutual Insurance Co. This agreement added business in Georgia and South Carolina, building on previous acquisitions in Virginia and Maryland in the 1990s.

The company’s latest acquisitions could prove to be the next major step forward.

“The most recent acquisition is the largest we’ve done, which is Michigan Insurance Co., a $100 million company,” Nikolaus said.
Nikolaus said the company’s agency distribution system was attractive and the acquisition strengthens Donegal’s Midwestern presence.

Moving into the Midwest has helped reinvigorate the product that got Donegal started in the first place: farm owners’ insurance. While most of that business has been focused in Pennsylvania, where farms are typically 100 acres or less, Midwestern farms five times that size offer an opportunity to write coverage for larger and more complex operations.

Building Agency Relationships

According to Dave Krenkel, vice president, marketing and advertising, a key to Donegal’s success has been making it easy for their agents to do business with them, which means maintaining open lines of communication.

Donegal hosts agencies in their headquarters in “spring meetings” where Donegal’s officers and agents get a chance to discuss progress made and problems encountered.

Donegal's annual meetings with agents provide networking and educational opportunities.

Donegal’s annual meetings with agents provide networking and educational opportunities.

“We distribute only through the independent agency system,” Nikolaus said. Agents are expected to be “first line underwriters” with keen knowledge of the risks they are working with. The meetings therefore provide a venue for agents to make recommendations based on the risk environments they’re seeing.

Agents might also be drawn to Donegal because of the resources invested in talent and technology development. A training facility was built on Donegal’s campus in 1998 to prep new employees and provide continuing education courses for veterans.

“Agents really take advantage of that to come see our campus, meet our people and interact with the underwriters they’re dealing with,” Miller said.

Always with an eye on the future, the company takes in college graduates with an interest in the insurance industry and starts them as trainees, working with underwriting management in both commercial and personal lines on a daily basis.
Individual trainees that stand out for leadership qualities are fast-tracked in a leaders’ program, which provides them with extra training, conferences, and more hands-on participation opportunities.

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“It’s been very helpful to identify and help provide additional resources to people so they can develop and take the next step in their careers,” Nikolaus said. All that investment
has paid off; Donegal’s employee turnover rate has held steady at under 3 percent.

“We provide an environment where employees can grow in their profession. If you want to be successful in the long term, employees have to feel that they work in an environment that has interest and concern for them and their families, and how they might succeed over time,” Nikolaus said.

Ahead of the Game

Keeping up on technology, while an ongoing process, has helped Donegal position itself as a carrier that agents and policyholders want to work with. A technology wing built in 2004 houses massive database servers that are crucial to the success of the company’s mobile apps, WritePro and WriteBiz.

For personal and commercial underwriters, respectively, the apps draw from the database to prefill information and underwrite a risk in real time, producing quotes in as little as five minutes.

While the latest editions of each app were released in 2006, they are under constant review.

“Your technology is never a completed project,” Nikolaus said. “If you’re not continually looking for ways to enhance it, you’ll fall behind.”

If Donegal’s long history proves anything, it’s that continually looking ahead, with patience and diligence, pays off in a big way.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.
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The Law

Legal Spotlight: April 2014

A look at the latest decisions impacting the industry.
By: | April 7, 2014 • 5 min read
LegalSpotlight

Third Party Can Pay Retention

The Supreme Court of Florida ruled that an insured fulfilled its self-insured retention even though the amount required for a settlement was paid by a third party. Intervest Construction of Jax Inc. had a general liability insurance policy with General Fidelity Insurance Co. Intervest also had a contract with one of its subcontractors, Custom Cutting Inc., (CCI) that required CCI to indemnify it for any damages resulting from its own negligence. CCI had a CGL policy with North Pointe Insurance Co.

R4-14p16_LegalSpotlight.inddIn this case, a homeowner sued Intervest for damages after suffering serious injuries falling from attic stairs installed by CCI in a home built by Intervest. Intervest then sought indemnification from CCI.

All of the parties agreed to a $1.6 million settlement of the homeowner’s claim, and North Pointe agreed to pay Intervest $1 million of that amount, which it then used to pay its $1 million self-insured retention.

Intervest and General Fidelity split the remaining $600,000 owed to the homeowner, under a reservation of rights. Intervest filed suit seeking $300,000 from General Fidelity, while the insurance company argued that Intervest did not fulfill its self-insured retention and that Intervest was responsible to pay the entire $600,000.

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A district court ruled that Intervest did not exhaust its retained limit, but the U.S. 11th Circuit Court of Appeals “expressed skepticism” of that analysis and asked the Florida Supreme Court to decide.

The state’s high court ruled the insured did not have to pay the self-insured retention from its own pocket.

Scorecard: General Fidelity must pay the entire $600,000 to the homeowner to fulfill the settlement agreement.

Takeaway: The ruling benefits the insurance programs of many large companies that include policies that name them as additional insureds.

Court Dismisses Data Breach Lawsuit

A federal judge in the Southern District of Ohio dismissed a class-action lawsuit filed against Nationwide Mutual Insurance Co., which alleged violations of the Fair Credit Reporting Act, negligence and invasion of privacy following the theft of personal data of 1.1 million people who had sought insurance quotes.

U.S. District Judge Michael H. Watson ruled the plaintiffs did not have standing to bring an FCRA claim because they did not allege violation of any of the statute’s specific requirements. The judge also ruled the plaintiffs’ alleged injuries of “identity theft, identity fraud, medical fraud or phishing” were “based on their fears of hypothetical future harm that is not certainly impending.”

While the court ruled the plaintiffs did have standing to bring an invasion of privacy claim, the judge ruled the data was stolen, and that the insurance company “took no action” to publicize the data.

Scorecard: Nationwide did not have to pay damages for losses, alleged wrongful conduct or expanded customer services such as credit monitoring for more than the year that was provided.

Takeaway: The risk that stolen data will be sold and lead to identity theft is “speculative” and does not translate to a concrete injury sufficient to pursue a legal claim.

NY Court Reverses Decision on Policy Exclusions in Highly Watched Case

Asked to reconsider its prior opinion in a case, the New York Court of Appeals ruled that an insurance company’s failure to defend an insured does not impact the insurer’s ability to later cite policy exclusions to reject the claim.

In the original decision, the court ruled that when an insurer breached its duty to defend, it could not later rely on exclusions to escape indemnifying the insured. In making that decision, the court ignored its own precedent stating that an insurer is not liable to indemnify an insured if coverage is disputed, even if it had previously breached its contractual duty to defend the insured.

Underlying the lawsuit is a $3.1 million legal malpractice judgment against Jeffrey Daniels, an attorney who was also a principal of Goldan LLC, which failed to repay loans made to it by K2 Investment Group and ATAS Management Group.

After the judgment, Daniels assigned to the plaintiffs his rights against American Guarantee & Liability Insurance Co., which had insured him.

American argued the policy’s “business enterprise” exclusion meant any claims resulting from actions of the insured as an officer, manager or employee of an enterprise would be denied.

The court vacated its prior opinion, which had upheld the summary dismissal of the lawsuit. The case will now go to trial on whether the exclusion should be upheld.

Scorecard: American Guarantee & Liability Insurance Co. may be held responsible for the payment of a $3.1 million legal malpractice judgment.

Takeaway: The New York decision protects insurers from automatic liability if they breach their duty to defend.

Court: No Duty to Defend

R4-14p16_LegalSpotlight.inddGeneral Star National Insurance Co. prevailed in its lawsuit filed in the U.S. District Court for the Northern District of Illinois that argued it had no duty to defend a bank appraisal firm and its chairman of the board, who were accused of defrauding the government.

Adams Valuation Corp. (AVC) and Douglas Adams had a real estate errors and omissions liability insurance policy with General Star.

The duty to defend related to an underlying whistleblower action filed by former Mutual Bank of Harvey (Ill.) employee, Kenneth Conner, who alleged he repeatedly informed the bank that it “grossly overvalued the collateral on commercial real estate loans based on falsely inflated appraisals provided by AVC.”

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That overstated value reduced the bank’s liability for Federal Deposit Insurance Corp. assessments, according to court documents.

Conner, who was fired by the bank, was also a party to the duty-to-defend suit, arguing that the alleged conduct falls within General Star’s policy.

U.S. District Judge Rebecca R. Pallmeyer disagreed, ruling the insurance policy’s exclusion for any claims “arising out of a dishonest, fraudulent, criminal or malicious act or omission, or intentional misrepresentation,” relieved the insurer of the duty to defend.

Scorecard: The insurer will not have to defend the underlying False Claims Act lawsuit against its insureds.

Takeaway: The court noted there is a distinct difference between false statements “about” professional services versus false statements generated “as part of” professional services.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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Sponsored Content by Riskonnect

Passionate About Technology

Brit Waters and his team revolutionized Avery Dennison's risk management process. Now other departments are looking to follow suit.
By: | April 7, 2014 • 5 min read
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If you overheard the passion and enthusiasm that Brit Waters uses to describe his most important business technology, you would immediately assume it was the latest smartphone or tablet. But it’s not Apple or Google that generates so much enthusiasm, it’s the Riskonnect risk management platform.

“Riskonnect revolutionized how our department does business. This system changed the way we gather, analyze and communicate information. It’s made us more efficient, effective and reliable,” said Waters, Manager, Risk Management at Avery Dennison Corporation. “These are not bandages, but complete solutions.”

Avery Dennison is a multinational company offering labeling and packaging materials and solutions whose applications and technologies are an integral part of products used in every major market and industry. The company operates in more than 50 countries with over 26,000 employees and $6 billion in revenues in 2013.

SponsoredContent_Riskonnect“Riskonnect revolutionized how our department does business. This system changed the way we gather, analyze and communicate information. It’s made us more efficient, effective and reliable. These are not bandages, but complete solutions.”
– Brit Waters, Manager, Risk Management, Avery Dennison Corporation

The company partnered with Riskonnect, the provider of premier, enterprise-class technology platforms. In just 18 months, the system not only revolutionized the department but also delivered wide-ranging value for plenty of other parts of the organization. Those departments utilize the system to manage financial assets, keep track of vehicles and will soon oversee facilities requests.

‘The Simplicity is Unreal’

For global property insurance renewals, Riskonnect changed the way Avery Dennison collects data on its 300 manufacturing facilities, warehouses and other properties around the world. Gone are the days of sorting through hundreds of separate emails with information about the properties and merging hundreds of separate spreadsheets into one.

Not only was the old process cumbersome, it left lots of room for error.

With Riskonnect, the process is automated. It sends emails to the more than 100 individual contacts and the users insert the information into the Riskonnect portal themselves — something that makes Waters’ life a whole lot easier.

“I hit a button once and it runs the report for me. The simplicity is unreal,” he said. “Plus, it gives us better information that we can communicate to our insurance carriers, and gives them increased confidence about the risks they’re insuring.”

Waters said it’s a big time-saver. “Before, the process could take up to three months, and now we get it done in less than a month.”

One thing he’s particularly excited about is the configurability of the portal. If he wants to customize it, he can easily do so without going through a computer programmer or contacting an account executive.

“It gives you the power to set up the system as you need it, not as someone else envisions you need it,” said Waters.

Expediting Claims

The Riskonnect portal is also the primary source for reporting workers’ compensation claims. Again, the Riskonnect system simplified the process. Before, employees had to call a 1-800 number or fill out a long form and fax it to the Third Party Claims Administrator (TPA). Now they just log on and use the claims reporting portal, which is equipped with drop-down menus and other efficiencies that help expedite the process.

“We take the guessing game out of their hands,” said Waters. “In a matter of minutes, they get a confirmation email that the claim has been submitted to the TPA.”

Through the Riskonnect dashboard tools, Waters and his department can learn a lot about trends in workers’ comp claims. The system tracks claims year-to-date, costs, causes of injury and even the top body parts that are hurt. Then risk management communicates that information to local managers to make sure that safety-and-prevention programs are appropriate and will help reduce the amount of claims and their costs.

“The Riskonnect dashboards layout all this valuable information in easy-to-use tables and charts, making it simple for us to study the data and implement necessary safety changes,” said Waters.

ROI on a Values Collection Module

SponsoredContent_Riskonnect

Enterprise Integration

At the start of the process, Waters never imagined just how many other departments would use the tool. The finance department uses the system for asset management. The fleet administrator uses it to have drivers sign off on its manuals. Even the facilities department is jumping on board, using the Riskonnect system to identify when properties need repairs to big-ticket items like roofs or windows.

The company is also looking to report global property claims, transit claims and employers’ liability claims through the platform. It’s even evaluating if it can use it on the shop floor with health-and-safety team members having easy access to the system via iPads.

”The Riskonnect platform can help many different departments with a wide variety of tasks,” said Waters. “It’s really making risk management a much more strategic contributor to the company.”

“I hit a button once and it runs the report for me. The simplicity is unreal,” Waters said. “Plus, it gives us better information that we can communicate to our insurance carriers, and gives them increased confidence about the risks they’re insuring. Before, the process could take up to three months, and now we get it done in less than a month.”

Happy End-Users

Waters’ enthusiasm for the product is clear, but he’s not alone. End-users are raving about how easy, intuitive and customizable it is. For example, training end-users used to consist of holding approximately 15 different webinars to walk everyone through the process. Now, it’s accomplished in one easy-to-understand mass communication through the Riskonnect portal.

The end users even helped Waters and the Avery Dennison team add efficiencies that improve the entire process. On the property reporting side, they suggested adding an attachment tool for adding spreadsheets – so the information is easy to find the following year.

“It’s amazing when you give the end users a product and you see how they come back to you with advice that you never even thought of,” said Waters. “That speaks volumes for the system.”

In just 18 months, Riskonnect changed the way Avery Dennison does business — something Waters can’t hide his enthusiasm about.

“I don’t consider them just a vendor,” said Waters. “I consider them a long-term strategic partner.”

This article was produced by Riskonnect and not the Risk & Insurance® editorial team.

Riskonnect is the provider of a premier, enterprise-class technology platform for the risk management industry.
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