Bermudian niche reinsurer Citadel Re is looking at options to recapitalize its US subsidiary American Millennium Insurance Company (AMIC) after a downgrade from AM Best in response to “extraordinary” Q2 losses on two commercial auto programs that are now in run-off.

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In a statement today, AM Best said it had downgraded New Jersey-based AMIC’s financial strength ratings from B++ to C++ and its credit ratings from bbb- to b+.

The firm put those ratings and the B++ financial strength ratings and bbb+ credit ratings of its parent Citadel Re under review with negative implications.

AMIC is focused on the transportation industry and, according to its website, insures a “large market share” of New Jersey’s taxis and limousines. It is also a niche writer of trucking business in the state.

Its parent Citadel Re is a Class 3A Bermudian company that is part of Citadel Risk, which as in addition to owning insurance entities has a rent a captive facility and provides back office services to the (re)insurance sector as well as run-off services.

The agency said the rating actions follow AMIC’s second quarter 2020 results which led to 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,” said AM Best.

It said that, while reinsurance will play a key role in absorbing the majority of the losses, the scope and magnitude of the development was such that the net loss for the quarter depleted surplus by more than 30 percent.

That led to lower-than-expected risk-adjusted capital, including that prescribed by statutory risk-based guidelines.

“As a result, AM Best has revised its assessment of AMIC’s capitalization and overall balance sheet strength to very weak from weak,” the statement continued.

According to statutory filings, AMIC’s capital and surplus dropped from $9.03mn to $5.77mn over the first six months of 2020.

AM Best said that while the size of AMIC’s surplus is small relative to that of its parent, Citadel Re’s consolidated balance sheet strength had been impacted by the scale of the hit to the transportation insurer.

ERM downgrade

The ratings agency said that, while potential further adverse development is already embedded into its assessment of both companies, it has revised downward AMIC’s enterprise risk management assessment to marginal because of the size of the loss development.

Other factors in the ERM revision include the potential weakness in the carrier’s internal audit functions, the failure of management to recognize the problems in a more timely fashion, and a risk appetite that proved to be “well outside of AMIC’s modest capital base”, said the firm.

In the note, AM Best said its ratings contemplate a “substantial amount” of implied support from Citadel Re and noted that the Bermudian parent is in the process of developing initiatives to recapitalize the balance sheet of its subsidiary.

It also 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,” said AM Best.

Citadel management expects the subsidiary to be recapitalized within the next 60 days, said the ratings agency. It added that the under review status will remain in place pending further discussions with the company’s management over plans to refine AMIC’s business strategy as well as the recap.