OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has upgraded the Financial Strength Rating to “B+” (Good) from B (Fair) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb-” (Good) from “bb+” (Fair) of Discovery Insurance Company (Discovery) (Kinston, NC). The outlook of these Credit Ratings (ratings) has been revised to stable from positive.
The ratings reflect Discovery’s balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, limited business profile and marginal enterprise risk management (ERM).
The upgrade of the Long-Term ICR reflects Discovery’s sustained improvement in overall balance sheet strength. Discovery has maintained the strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), while lowering its net underwriting leverage ratios over the most recent five-year period. In addition, loss reserve development has been consistently redundant and loss reserves as a percentage of surplus and earned premium compare favorably with AM Best’s composite averages. Discovery’s surplus has grown in each of the past five years, primarily driven by steady stream of net investment income and policy and service fee income. In total, surplus grew by 79% from year-end 2016 to year-end 2020 and has continued to grow in 2021.
The overall strong balance sheet strength assessment is derived from Discovery’s elevated common stock leverage, dependence on the North Carolina Reinsurance Facility, limited scale of operations and financial flexibility.
Discovery’s adequate operating performance reflects five consecutive years of profitability with return on revenue and equity measures and a five-year average combined ratio that compare favorably with the five-year averages of AM Best’s private passenger non-standard auto composite. The improved operating profitability is primarily due to recent improvements in its underwriting performance, which has benefitted from Discovery’s competitive expense position.
Discovery’s limited business profile reflects its narrow product offerings and geographic spread of risk as it writes all of its business in North Carolina.
The company’s ERM program is considered marginal for its risk profile and scale of operations as it continues to enhance its overall framework. As a single-state coastal writer of a concentrated book of auto physical damage business, Discovery is susceptible to several weather-related perils that have resulted in fluctuating operating performance. However, to mitigate this risk from catastrophic weather-related events, Discovery has purchased excess of loss reinsurance from a diversified panel of reinsurers.
The stable outlooks reflect AM Best’s expectation that Discovery will maintain its strongest level of risk– adjusted capitalization, strong balance sheet strength with continued positive operating profitability and moderate volatility over the near to medium term, and further develop its ERM framework.
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