OLDWICK, NJ – (BUSINESS WIRE) –AM Best has removed from under review with developing implications and downgraded the Financial Strength Rating (FSR) to B (Fair) from B + (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb +” (Fair) from “ bbb- ”(Good) of Capacity Insurance Company (Capacity) (Sunrise, FL). The outlook assigned to the FSR is stable, while the outlook assigned to the Long-Term ICR is negative.
The Credit Ratings (Rating) reflect Capacity’s balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).
The rating downgrades are due to AM Best’s reassessment of Capacity’s overall balance sheet strength. The rating actions reflect AM Best’s concerns regarding weaker risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), which is assessed currently as strong, and a capital structure that consists primarily of a surplus note. Although Capacity’s surplus was generally flat as of year-end 2021 vs. The prior year, its risk-adjusted capitalization deteriorated considerably. The shift is a product of a higher loss reserve position and larger net probable maximum losses, specifically in the tail. Furthermore, a million 7 million surplus note (due in 2029) was issued in early 2022 and represents the bulk of the $ 8.4 million in surplus reported by Capacity at year-end 2021. The company also reported $ 6.4 million in adverse loss reserve development in 2021, stemming primarily from segments Capacity no longer participates in and efforts of management to rightsize current reserves to subdue future deficiencies.
The negative outlook of the Long-Term ICR reflects pressure on Capacity’s operating performance, which is assessed as adequate currently. Capacity reported consecutive years of volatile results; However, in part, performance in 2021 reflects the impact of corrective actions. Management decided to exit the driving forces of volatility, namely Texas business and certain segments of convenience stores and gas stations. These pockets account for a material amount of the adverse loss reserve development reported in 2021 without the associated premium, as the lines were discontinued. Management has outlined more favorable expectations of future performance, with the portfolio honed to more desirable go-forward classes within Florida; However, the impact of corrective actions remains uncertain.
The ERM assessment remains appropriate; However, the program’s effectiveness will continue to be evaluated as it pertains to Capacity’s shifting risk appetite and ongoing risk management initiatives.
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