AM Best downgrades Citadel Re after failed capital raise

AM Best has removed from under review with developing implications and downgraded the Financial Strength Rating (FSR) of American Millennium Insurance Company (AMIC), a wholly owned subsidiary of Citadel Reinsurance Company, to D (Poor) from C- (Weak). The outlook assigned to these Credit Ratings (ratings) is negative.

Additionally, AM Best has removed from under review with developing implications and downgraded the FSR to C+ (Marginal) from B (Fair) of Citadel Re. The outlook assigned to these ratings is negative. Concurrently, AM Best has withdrawn the ratings of AMIC and Citadel Re as the companies have requested to no longer participate in AM Best’s interactive rating process.

AM Best said the ratings of AMIC reflect its balance sheet strength, which AM Best assesses as very weak, as well as its weak operating performance, limited business profile and marginal enterprise risk management (ERM).

It added that the ratings of Citadel Re reflect its balance sheet strength, which AM Best assesses as weak, as well as its marginal operating performance, limited business profile and marginal ERM.

Prior to these rating actions, AM Best downgraded the ratings of AMIC and Citadel Re in February 2021, and maintained the under review with negative implications status, resulting from persistent underwriting losses that negatively impacted the risk-adjusted capitalization of both companies. The under review status was pending due to a planned recapitalization of AMIC and Citadel Re to raise capital from outside investors.

In August 2021, Citadel Re completed its recapitalization of AMIC with a $6.2 million cash injection, raising the risk-based capital ratio to above 300% to the satisfaction of AMIC’s regulator, the Department of Banking and Insurance of New Jersey. However, management’s planned capital raise was not successful, as the transaction failed to get approval from the Bermuda Monetary Authority (BMA).

The failed transaction also led to Citadel Re having to return a portion of its capital to the outside investor and causing Citadel Re’s capital to fall below Bermuda’s Solvency Capital Requirement (SCR); consequently, the BMA ordered Citadel Re to stop writing any new and renewal business.

AM best said the downgrading of Citadel Re’s ratings reflects its weakened balance sheet strength, as well as a lower assessment of its business profile due to its run-off status. The downgrading of AMIC’s ratings is mainly due to it no longer receiving lift from Citadel Re, because of Citadel Re’s diminished capital position. The negative outlooks on both entities reflect the uncertainty surrounding their future business prospects and the challenges associated with the regulatory and capital requirements imposed on Citadel Re by the BMA.