AM Best has downgraded the Financial Strength Rating (FSR) to B (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb+” (Fair) from “bbb-” (Good) of Discovery Insurance Company (Discovery) (Kinston, NC). AM Best has revised the outlook of the FSR to stable from negative, while the outlook for the Long-Term ICR is negative.
The Credit Ratings (ratings) reflect Discovery’s balance sheet strength, which AM Best assesses as adequate, as well as its marginal operating performance, limited business profile and marginal enterprise risk management (ERM).
The rating downgrades reflect the decline in Discovery’s operating performance and earnings over the last year and a half, which has led to a 49% decline in policyholders’ surplus through June 30, 2023. This decline is due primarily to deteriorating underwriting results from lack of adequate pricing owing to inflationary pressures on loss costs and increased competition of market entrants into the non-standard automobile insurance marketplace in North Carolina. Underwriting results have been impacted negatively by the challenges in the automobile market, which includes supply chain issues for parts, labor shortages and significantly elevated used car prices. While management has taken various pricing actions to return to profitable underwriting performance, it is uncertain whether or not these actions will be sufficient to return Discovery to operating profitability over the intermediate term. AM Best will continue to monitor the execution of management’s plans and their impact on alleviating pressure on Discovery’s operating performance.
The negative Long-Term ICR outlook reflects Discovery’s weakening balance sheet metrics and corresponding decline in overall risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). A continuation of these results could lead to a downward revision of the company’s balance sheet strength assessment. The marginal operating performance assessment reflects the deterioration in key operating and return ratios over the last year and a half. The business profile assessment reflects the company’s concentration of non-standard automobile insurance business in North Carolina. The marginal ERM reflects the company’s evolving ERM practices, which have less capability to manage pricing risk adequately in a timely manner.
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