AM Best has upgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to bbb+ from bbb and affirmed the Financial Credit Rating (FSR) of B++ (Good) of KnightBrook Insurance Company (KnightBrook) (Wilmington, DE). The outlook of the FSR has been revised to stable from negative, while the outlook of the Long-Term ICR remains negative. Concurrently, AM Best has affirmed the FSR of B++ (Good) and the Long-Term ICRs of bbb+ of Knight Insurance Company Ltd. (Knight Insurance) (Cayman Islands) and its reinsured U.S. insurance company subsidiary, Knight Specialty Insurance Company (Wilmington, DE). The outlook of the FSR is stable, while the outlook of the Long-Term ICRs is negative. These companies collectively are referred to as Knight.
The ratings reflect Knights balance sheet strength, which AM Best categorizes as very strong, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management (ERM).
The ratings also reflect Knights excellent risk-adjusted capitalization and the strategic role Knight performs as a member of the Hankey Group, a group of companies that operates primarily in the automotive industry. Knight Insurance generates a portion of business from an affiliated automotive finance company, but it also has written substantial programs and unaffiliated third-party business. It also assumes business from Knight Specialty Insurance Company via significant quota shares.
Knight has invested significant amounts of capital and human resources in bolstering its ERM platform based on underwriting losses sustained from program business written several years ago. ERM technology improvements are the result of infrastructure and customized systems designed by the Knight technology team. Partially offsetting these positive rating factors are concerns with regard to less-than-complete manifestation of ERM improvements in underwriting results.
Several years ago, Knight embarked upon a significant growth strategy that heightened execution risk on third-party program business, which resulted in significant underwriting losses, and loss and loss adjustment expense (LAE) reserve development. Knight took strategic action, cancelling the unprofitable programs, which significantly reduced premium volume starting in 2016, and continuing into 2017 and 2018. Loss and LAE reserves have begun to stabilize due to actions taken by management. While the company is profitable with a solid history in investment performance over the years, the underwriting losses persist due to residual reserve development and decreased earned premium, as these items work through the earnings process.
Also of note is that the prior concerns with financial reporting internal controls have abated as Knight has represented that improvements in policy and procedure have inured to a stabilized financial reporting process. Knight Insurance and KnightBrook have moderate common stock leverage relative to the composite. Lastly, Knight Insurance and KnightBrooks capitalization has been supported by substantial capital injections over the years to support growing business volumes, and loss and LAE reserve development.
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