Citadel Re downgraded following losses at AMIC subsidiary

01-03-2021

AM Best has downgraded Bermuda-based Citadel Reinsurance Company’s financial strength rating (FSR) to B (fair) from B++ (good), following problems affecting its subsidiary, American Millennium Insurance Company (AMIC).

AM Best also downgraded AMIC’s FSR to C- (weak) from C++ (marginal).

AM Best assessed Citadel Re’s balance sheet strength as adequate, while its operating performance and enterprise risk management (ERM) were marginal and its business profile neutral.

AMIC’s balance sheet was classed as very weak. AM Best said its operating performance was weak, its business profile limited and its ERM marginal.

The AMIC rating action results from “persistent net underwriting losses that continued into the second half of 2020 and negatively impacted AMIC’s risk-adjusted capitalisation,” AM Best explained. Higher-than-expected loss costs and adverse loss reserve development related to two commercial auto programmes - which have since been placed in runoff - resulted in a significant deterioration of surplus and risk-based capital (RBC) levels that are likely to prompt state regulatory action, it warned. 

Meanwhile, Citadel Re’s ability to support AMIC in the near term has diminished, AM Best noted. “Given Citadel Re’s direct ownership in AMIC, AM Best takes a consolidated view of Citadel Re and its subsidiary. As such, the deterioration in surplus at AMIC also has negatively impacted the balance sheet strength of its parent, Citadel Re.” 

AM Best said it had revised downward Citadel Re’s ERM assessment to marginal to be in sync with its subsidiary AMIC. 

“In addition to providing additional capital support and retroactive reinsurance earlier in the year, Citadel Re’s management is in the process of developing initiatives to recapitalise AMIC’s balance sheet, and has taken steps to reorganise its legacy run-off operations in a more effective manner,” AM Best said. 

It has appointed a former executive to oversee and direct AMIC’s reorganisation, and authorised a review of its reserves by an external actuary. “While the internal reorganisation could take time, AM Best anticipates the external capital solution to be completed in the near term,” it said. “Management expects that its capital raise will significantly improve AMIC’s risk–adjusted capitalisation.”

The ratings will remain under review pending further discussions between AM Best and Citadel Re’s management regarding its strategic alternatives and its need to recapitalise AMIC’s balance sheet, the rating agency noted. 

“The ratings of Citadel Re will remain under review pending receipt and review of the company’s year-end 2020 financial statements and the pending capital raise,” it added. “The negative implications status suggests that if these initiatives do not materialise, or if the timing of these initiatives are delayed and/or further adverse reserve development emerges, AMIC and Citadel Re’s ratings could be lowered further.” 

Citadel Re, AMIC, American Millennium Insurance Company, AM Best

Bermuda Re