OLDWICK, NJ, July 26, 2022–(BUSINESS WIRE)–AM the best revised the outlook to negative from stable and affirmed the Financial Strength Rating of B+ (Good) and the Long-Term Issuer Credit Rating of “bbb-” (Good) of Discovery Insurance Company (Discovery) (Kinston, NC).
The credit ratings (ratings) reflect Discovery’s balance sheet strength, which AM Best rates as strong, as well as its adequate operating performance, limited business profile and enterprise margin risk management (ERM).
The negative outlook reflects the decline in Discovery’s operating and earnings performance over the past year, which has led to a decline in policy backlog. This decrease is primarily due to the deterioration in underwriting results as a result of the decline in premiums written and earned due to pricing pressures from increased competition among market participants in the North Carolina non-standard auto insurance market. Underwriting results have been negatively impacted by challenges in the auto market, which include supply chain issues for parts, labor shortages and significant increases in used car prices. While management plans to take various pricing actions to return to profitable underwriting performance, it is uncertain whether these actions will be sufficient to return Discovery to its historical operating profitability over the medium term. AM Best will continue to monitor the implementation of management plans and their impact on alleviating pressure on Discovery’s operating performance.
Discovery’s strong balance sheet continues to be supported by a stronger level of risk-adjusted capitalization as measured by Best’s capital adequacy ratio (BCAR), consistent loss reserve trends and an adequate reinsurance program. Adequate assessment of operating performance reflects key operating ratios, which are generally consistent with AM Best’s non-standard vehicle composition on a five- and 10-year average basis. The business profile rating reflects the company’s focus on the non-standard auto insurance business in North Carolina. Marginal ERM reflects the company’s evolving ERM practices, which have less ability to manage price risk adequately in a timely manner from recent increasing competitive pressures.
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