OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating (FSR) to C++ (Marginal) from B+ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “b+” from “bbb-” 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 placed these Credit Ratings (ratings) under review with negative implications. Concurrently, AM Best has placed under review with negative implications the FSR of B++ (Good) and the Long-Term ICR of “bbb+” of Citadel Re.
The ratings of AMIC reflect its balance sheet strength, which AM Best categorizes as very weak, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.
These rating actions follow AMIC’s second-quarter 2020 results, which resulted in year-to-date underwriting and operating losses that were well outside of management’s expectations. These extraordinary losses stem from 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. While reinsurance will play a key role in absorbing the majority of these losses, the scope and magnitude of the development was such that the net loss for the quarter depleted surplus by more than 30%, resulting in lower-than-expected risk-adjusted capital, including those prescribed under statutory risk-based capital (RBC) guidelines. As a result, AM Best has revised its assessment of AMIC’s capitalization and overall balance sheet strength to very weak from weak.
While the surplus size of AMIC is small relative to that of Citadel Re, the scale of AMIC’s surplus loss also has negatively impacted the consolidated balance sheet strength of its parent, Citadel Re; however, its balance sheet assessment remains as strong. The potential for further adverse reserve development also is embedded in the balance sheet strength assessment of Citadel Re and AMIC. Additionally, AM Best has revised downward AMIC’s enterprise risk management assessment to marginal, given the magnitude of the loss development, potential weaknesses in AMIC’s internal audit functions, management’s failure to acknowledge and recognize the problems in a more timely fashion and a risk appetite that proved to be well outside of AMIC’s modest capital base.
AMIC’s ratings also contemplate a substantial amount of implied support from its parent, Citadel Re. Citadel Re’s management is in the process of developing initiatives to recapitalize AMIC’s balance sheet, and plans to reorganize its legacy run-off operations in a more effective manner. While the internal reorganization could take time, it is expected that AMIC’s statutory surplus will be largely replenished by Citadel Re during the remainder of year through additional capital support and retroactive reinsurance.
The under review with negative implications status reflects AM Best's ongoing concerns regarding AMIC’s current capital position, management’s ability to stem future loss reserve development and any shortcomings in Citadel Re’s anticipated recapitalization of AMIC from a RBC and Best’s Capital Adequacy Ratio (BCAR) perspective.
The ratings will remain under review pending further discussions between AM Best and Citadel Re’s management regarding its plans to refine AMIC’s business strategy and its more immediate plans to recapitalize AMIC's balance sheet to a level more commensurate with year-end 2019 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 negative implications suggest that if these initiatives do not materialize, or if the timing of these initiatives are protracted and/or further adverse reserve development emerges, AMIC's ratings could be lowered further.
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