OLDWICK, N.J.–(BUSINESS WIRE)–AM Best has downgraded the Financial Strength Rating (FSR) to C- (Weak) from C++ (Marginal) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “cc” from “b+” of American Millennium Insurance Company (AMIC) (Bridgewater, NJ), a wholly owned subsidiary of Citadel Reinsurance Company Limited (Citadel Re) (Hamilton, Bermuda). Additionally, AM Best has downgraded the FSR to B (Fair) from B++ (Good) and the Long-Term ICR to “bb” from “bbb+” of Citadel Re. AM Best has maintained the under review with negative implications status on these Credit Ratings (ratings).
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).
The ratings of Citadel Re reflect its balance sheet strength, which AM Best assesses as adequate, as well as its marginal operating performance, neutral business profile and marginal ERM.
These rating actions result from persistent net underwriting losses that continued into the second half of 2020 and negatively impacted AMIC’s risk-adjusted capitalization. These unanticipated losses relate to higher-than-expected loss costs and adverse loss reserve development related to two commercial auto programs – both discontinued and placed into run-off in 2018. As a consequence, the impact of these unanticipated losses (net of reinsurance) has resulted in a significant deterioration of surplus and notably, risk-based capital (RBC) levels that are likely to prompt state regulatory action.
AMIC’s ratings also contemplate the willingness of its parent, Citadel Re, to support AMIC. However, Citadel Re’s ability to support AMIC in the near term has diminished and hence the reduction in parental lift. 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. As a result, AM Best has revised its balance sheet strength assessment level of Citadel Re to adequate from strong. The potential for further adverse reserve development at AMIC also is embedded in the balance sheet strength assessment of Citadel Re. Additionally, AM Best has revised downward Citadel Re’s ERM assessment to marginal to be in sync with its subsidiary AMIC. This revision also considers the role of leadership at the enterprise level and concerns related to governance, risk awareness and risk management oversight at AMIC. This also considers leadership’s inability to control and stem losses in a timely fashion.
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 recapitalize AMIC’s balance sheet, and has taken steps to reorganize its legacy run-off operations in a more effective manner. These actions include the appointment of a former executive to oversee and direct the reorganization, and a review of the reserves by an external actuary in the latter part of 2020. While the internal reorganization could take time, AM Best anticipates the external capital solution to be completed in the near term. Management expects that its capital raise will significantly improve AMIC’s risk–adjusted capitalization.
The maintaining of the under review with negative implications status reflects the execution risk related to the strategic alternatives to be undertaken by management to recapitalize AMIC’s surplus levels and to stem future loss reserve development and any related impact to Citadel Re.
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 recapitalize AMIC’s balance sheet to a level more commensurate with historical levels and to the minimum required regulatory level prescribed by RBC guidelines. Management expects this to be implemented, resolved and executed within the next 60 days. 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. The negative implications status suggests that if these initiatives do not materialize, 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. The negative implications for AMIC considers the pending regulatory pressures and the uncertainty related to AMIC as a going concern.
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