Citadel draws line in sand with significant capital raise

A  significant capital injection into two of Citadel Risk’s subsidiaries represents a watershed for the company after some significant challenges including downgrades by AM Best. But it also propels the firm into a “new league” in terms of underwriting opportunities.

That is how two of the company’s senior executives explain the importance of a $35 million cash injection the company has secured. Some $10 million will be used to shore up the balance sheet of US managing general agent (MGA) American Millennium Insurance Company (AMIC), which was downgraded by AM Best in February to C- from C++ following heavy losses on historic business written in Texas between 2016 and 2018.

This cash injection will be complemented by a reinsurance stop loss agreement, which has been put in place to “cap” the AMIC losses which led to the rating downgrade.

A further $25 million has been injected into Citadel’s balance sheet, which, at 30 September 2021, stands at $47.1 million. This will be used to enhance and support the company’s other operations, including its Bermuda reinsurance business Citadel Reinsurance Company Bermuda. The reinsurance unit was downgraded to B from B++ in February.

Tony Weller, group chief executive officer of Citadel Risk, said: “This follows some of the difficulties we had last year. While our reinsurance results were satisfactory, two of the MGAs we backed in Texas suffered some bad losses from historic business. We had some bad luck but the controls were not as good as they should have been.

“This move draws a line under all that. It secures our credibility with stakeholders and reassures regulators, brokers and rating agencies—it makes it easier for all our counterparties.

“But it is a game-changer for us. It almost triples our surplus capital from $20 million to $55 million, and gives us a much better solvency ratio, a much bigger buffer on Solvency II compliance.” Weller said.

In terms of the stop loss agreement, he said this is equally important in offering its stakeholders certainty going forward.

“Because the losses were from prior years, we needed to ensure that we had a clean slate with no question marks over whether this could affect future results. Citadel has always been a profitable company—2020 was an anomaly for us. This gives comfort on the portfolio going forward now,” he explained.

The company’s 2021 first half results indicate that it is indeed returning to profitability. Its consolidated pre-tax profit for the six months to 30 June 2021 was $2.5 million; its consolidated surplus at year end 2021 will be approximately $55 million, with an additional $20 million expected in early 2022.

Resolving challenges

Citadel Risk operates in five areas. At its core, it is a niche reinsurer but it also supports MGAs with reinsurance solution using cell structures in Bermuda, acts as a fronting reinsurer, partners with captives and manages a small among of run-off business using legacy solutions.

Mike Palmer, senior consultant at Citadel Risk Services UK, stressed that the cash injection not only resolves past challenges—it also allows the business to eye opportunity in the future. The new capital changes the reinsurer’s status on Bermuda from a class 3A to a class 3B reinsurer, meaning more doors will open in terms of opportunities.

“We won’t start underwriting big property risks or cat business overnight but it will allow us consider bigger lines—we will move into the next league in terms of the risks we are able to look at,” Palmer said. “I am looking forward to a real opportunity to expand our portfolio. We won’t go into unfamiliar areas but our capacity has slightly restricted us in the past.

“We are already looking at some new opportunities in reinsurance. In addition to this, we may expand our fronting capabilities, look to do more in the legacy space, which represents the roots of this business, and there are some exciting opportunities to work with MGAs seeking capacity after some changes in that market,” he explained.

Weller added that he is looking forward to working again with some clients that were forced to move elsewhere after the downgrade.

“It will be nice to see that as we complete a slow evaluation of where we are and where we want to be as a business. We will be looking at controlled growth.”

Palmer added: “We are very grateful to our existing brokers, clients and partners who have been extremely supportive in what has been a challenging period. It has been a period of change in the market but there are many positives now and we look forward to some interesting times ahead.”

“It has been a tough year for Citadel, and I am extremely pleased to announce this major investment and financial strengthening of the Group’s balance sheet.  The enhanced capital base will allow us to write larger lines and develop AMIC into a wider and more diverse insurance entity,” Weller concluded.

“The group will be preparing new submissions for an immediate rerating with AM Best, and the enhanced capital structure will be a positive uplift. I sincerely thank all our clients and partners for their support during a difficult time and look forward to working with them to explore many new opportunities.”

Tony Weller is group chief executive of Citadel Risk. He can be contacted at: tony.weller@citadelrisk.com

Mike Palmer is lead London consultant of Citadel Risk Services UK. He can be contacted at: mike.palmer@citadelrisk.com