A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of B+ (Good) and issuer credit rating of “bbb-” of Universal Insurance Company (Universal) (Winston-Salem, NC).
The affirmation of the ratings reflects Universal’s prospects for improved risk-adjusted capitalization, as well as solid fee income through its participation in the North Carolina reinsurance facility, to which it cedes its auto liability book of business.
The revised outlook is based on the prospects of improved risk-adjusted capitalization for Universal following its recent sale to the Carolina Motor Club, Inc. (AAA Carolinas). The outlook was previously revised to negative following several consecutive years of poor underwriting performance, which steadily eroded its capital base. The recent sale will result in additional capital contributions from AAA Carolinas, which are expected to bolster Universal’s capital base. The transaction also will result in a restructuring of Universal’s book of business through an anticipated run off of the commercial property book of business. This book represents about a third of Universal’s overall book and has been the primary source of its underwriting losses in recent years. This initiative to reduce underwriting exposure is further expected to improve the company’s risk-adjusted capitalization and reduce underwriting leverage.
Universal still faces a challenging environment to reverse its current unfavorable earnings trend as its operating performance in recent years has been adversely impacted by underwriting losses related to catastrophe activity, a soft underwriting market cycle characterized by extremely competitive pricing and an elevated expense ratio primarily due to high commission expenses and technology investments. Furthermore, Universal’s investment income has been on a declining trend in recent years partly due to the low interest rate environment. However, Universal’s parent, AAA Carolinas, which is affiliated with the nationwide American Automobile Association, Inc. network, provides the company with access to an extended customer base, which can be leveraged for member retention and lower acquisition costs.
Additionally, these strengths are enhanced by support from AAA Carolinas, which includes the aforementioned capital contribution, joint use of its facilities, back-office systems and sharing of administrative costs, which is expected to gradually have a favorable impact on Universal’s high expense ratio.
Downward movement in Universal’s ratings could result from further deterioration in its underwriting performance, resulting in further erosion of risk-adjusted capitalization, or a sudden withdrawal or lack of future support from AAA Carolinas. Upward movement in the company’s ratings could result from significant improvement in underwriting and operating performance trends in conjunction with sustained improvement in risk-adjusted capitalization.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Understanding BCAR for Property/Casualty Insurers”; “Risk Management and the Rating Process for Insurance Companies”; “Catastrophe Analysis in A.M. Best Ratings”; and “A.M. Best’s Ratings & the Treatment of Debt.” Best’s Credit Rating Methodology can be found at http://www.ambest.com/ratings/methodology.