OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has revised the outlooks to positive from stable and affirmed the Financial Strength Rating of B (Fair) and the Long-Term Issuer Credit Rating of “bb+” of Discovery Insurance Company (Discovery) (Kinston, NC).
The Credit Ratings (ratings) reflect Discovery’s balance sheet strength, which AM Best categorizes as adequate, as well as its adequate operating performance, limited business profile and marginal enterprise risk management (ERM).
The revised outlooks reflect risk-adjusted capitalization at the strongest level, supported by premium leverage that has trended lower in recent years to a level comparable with the composite. The balance sheet further benefits from the investment portfolio that is weighted toward high quality fixed-income securities with solid liquidity levels enhanced by service fee income. These strengths are offset partially by limited financial flexibility and scale of operations, above average common stock leverage and reinsurance dependence that is well in excess of the composite as 100% of the company’s auto liability premiums and losses (excluding unallocated loss adjustment expenses) are ceded to the North Carolina Reinsurance Facility. AM Best expects Discovery’s overall balance sheet strength will continue to be supported by that strongest level of risk-adjusted capitalization, decreased underwriting leverage metrics and organic surplus growth through profitable operations.
Discovery’s adequate operating performance reflects pretax operating income reported in each of the last five years driven by net investment income and other income, partially offset by volatile underwriting results. The limited business profile reflects the company’s product and geographic concentration as an insurer of private passenger non-standard auto liability and physical damage insurance operating exclusively in North Carolina. AM Best considers the company’s ERM program to be marginal as the framework continues to evolve with improvements in reporting and auditing functions.
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