AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb” (Fair) from “bb+” (Fair) and affirmed the Financial Strength Rating (FSR) of B (Fair) of Discovery Insurance Company (Discovery) (Kinston, NC). The outlook of the FSR has been revised to negative from stable, while the outlook of 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.

The Long-Term ICR downgrade reflects a material decline in Discovery’s policyholders’ surplus over the last two years with this trend continuing through June 30, 2024. As a result, the company’s overall risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), has fallen to a level that no longer supports its assessment. This decline is due primarily to negative pre-tax operating results for three consecutive years and through June 30, 2024. However, on a year-over-year basis, operating results have improved. Further impacting the balance sheet strength is the significant decline in invested assets and the reduction in its current liquidity metric. Underwriting losses, while having moderated over the recent six-month period, were impacted negatively in 2023 by pricing challenges in the nonstandard automobile market and the settlement of a large liability claim. While management has taken various pricing actions to return to profitable underwriting performance, it is uncertain whether these actions will be sufficient to return Discovery to sustained 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 and balance sheet strength.

The negative outlooks reflect Discovery’s weakening balance sheet metrics, including an increased underwriting leverage ratio, and corresponding decline in overall risk-adjusted capitalization, as measured by BCAR. A continuation of these results could lead to a downward revision of the company’s balance sheet strength assessment.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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