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FOR IMMEDIATE RELEASE
OLDWICK - NOVEMBER 13, 2014 03:14 PM (EST)
A.M. Best has upgraded the financial strength rating to B++ (Good) from B+ (Good) and the issuer credit rating to "bbb" from "bbb-" of Universal Insurance Company (NC) (Universal) (Winston-Salem, NC). The outlook for both ratings remains stable.
The ratings reflect the company's adequate capitalization and reduced risk exposures, as well as its ability to generate fee income through its participation in the North Carolina Reinsurance Facility, to which it cedes its auto liability book of business.
The rating upgrades are based partly on the implicit support from its relatively new parent, the Carolina Motor Club, Inc. (AAA Carolinas), which acquired Universal in 2012. The acquisition was accompanied by a $3 million capital contribution from AAA Carolinas in the first quarter of 2012, bolstering Universal's capital base, which had been significantly eroded following several consecutive years of poor underwriting performance. Going forward, Universal has the potential to receive further capital contributions to support its operations. The sale of Universal to AAA Carolinas also resulted in a fundamental restructuring of Universal's book of business through the run-off of the commercial property book of business completed in the fourth quarter of 2013. Commercial property had represented about a third of the overall book of business and was the primary source of Universal's underwriting losses prior to 2012. This step to reduce underwriting exposure has further improved the company's risk-adjusted capitalization and reduced its previously high underwriting leverage. Universal has also taken steps to improve rate adequacy on its personal auto physical damage book.
As a result of these actions, Universal faces a less challenging environment in which to sustain a positive operating performance trend. Pre-tax earnings had been hampered by underwriting results, which were adversely impacted from catastrophe-related losses in its commercial book (which has since been run-off in 2013), a previously soft underwriting market cycle characterized by extremely competitive pricing, and an elevated expense ratio primarily due to high commission expenses and technology investments. Additionally, AAA Carolinas, which is affiliated with the nationwide American Automobile Association, Inc. (AAA) network, provides the company 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 the parent, including the past capital contribution and potential future ones. The joint use of facilities, back-office systems and sharing of administrative costs should gradually have a favorable impact on the high expense ratio, as well as upcoming co-branding initiatives, which is expected to improve Universal's business profile and marketing efforts.
Downward movement in the company's ratings may result from further deterioration in underwriting performance, resulting in further erosion of risk-adjusted capitalization or a sudden withdrawal or lack of future support from its parent. Upward ratings movement may 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. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.