OLDWICK, New Jersey – (COMMERCIAL THREAD) –AM Best raised the financial strength rating to “B +” (good) from B (fair) and the issuer’s long-term credit rating (long-term ICR) to “bbb-” (good) from “bb +” ( passable) from Discovery Insurance Company (Discovery) (Kinston, NC). The outlook for these credit ratings (ratings) has been revised from positive to stable.
The ratings reflect the strength of Discovery’s balance sheet, which AM Best considers strong, as well as its adequate operational performance, limited business profile and marginal enterprise risk management (ERM).
The long-term ICR upgrade reflects Discovery’s continued improvement in overall balance sheet strength. Discovery maintained the highest level of risk-adjusted capitalization, as measured by Best’s capital adequacy ratio (BCAR), while reducing its net underwriting leverage ratios over the five-year period. more recent. In addition, the development of claims reserves has been consistently redundant and claims 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 due to a steady stream of net investment income and policy and service fee income. In total, the surplus increased by 79% from the end of 2016 to the end of 2020 and continued to grow in 2021.
The overall assessment of balance sheet strength is derived from the high leverage of Discovery’s common stock, its reliance on the North Carolina reinsurance facility, the limited scale of operations and financial flexibility.
Discovery’s adequate operating performance reflects five consecutive years of profitability with measures of return on revenue and equity and a five-year average combined ratio that compares favorably to the five-year averages of the non-standard automotive composite of private passengers by AM Best. The improvement in operating profitability is primarily due to recent improvements in its underwriting performance, which has benefited Discovery’s competitive expense position.
Discovery’s limited business profile reflects its narrow product offerings and geographic spread of risk, as it underwrites all of its business in North Carolina.
The company’s ERM program is considered marginal for its risk profile and the scale of its operations, as it continues to improve its overall framework. As the coastal one-state author of a concentrated book of automotive physical damage activities, Discovery is susceptible to several weather-related hazards that have resulted in fluctuating operating performance. However, to mitigate this risk associated with catastrophic weather events, Discovery has purchased excess of loss reinsurance from a diverse range of reinsurers.
The stable outlook reflects AM Best’s expectations that Discovery will maintain its highest level of risk-adjusted capitalization, a strong balance sheet with consistently positive operating profitability and moderate volatility in the short to medium term, and further develop its ERM framework. .
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