New Castle Re Formed; Best Assigns ‘A-‘ Rating, Comments

Citadel Investment Group, a hedge fund that manages around $12 billion, has formed a new Bermuda-based reinsurer, New Castle Re, with an initial capitalization of $500 million. A.M. Best promptly assigned the new entrant a coveted financial strength rating of “A-” (Excellent) and an issuer credit rating of “a-” and assigned a stable outlook.

“The investors in New Castle Re are funds managed by Citadel Investment Group L.L.C., one of the world’s largest alternative investment firms,” Best noted. “New Castle Re will operate independently as a Bermuda-based property catastrophe company, offering clients coverage on a worldwide basis through the broker market.”

Best said its “initial rating reflects New Castle’s solid capitalization, experienced management team as well as financial and administrative support provided by Citadel. In addition to meeting A.M. Best’s previously established requirements for new company formations, the initial rating assignment of New Castle Re also reflects the company’s ability to meet A.M. Best’s stricter risk-based capital requirements for property catastrophe companies. These more stringent requirements, which could result in fewer initial ratings in the Excellent range, require a more conservative level of risk-based capital to support a company’s assigned rating. Additionally, New Castle Re’s risk-based capital will be further enhanced by a support agreement from its investors.”

The rating agency also notes that New Castle Re “plans to provide property-per-risk, workers’ comp catastrophe and terrorism coverage in addition to its core property catastrophe line of business. Planned geographic areas of coverage include the United States, United Kingdom, Japan, Caribbean and Pacific Rim.”

The company is headed by CEO Christopher R. McKeown, who has over twenty years of experience in the reinsurance/insurance industry. Best noted that “until last year, Mr. McKeown was president and chief executive officer of ACE Tempest Reinsurance Company and is currently president and chief executive officer of CIG Reinsurance Company (CIG Re), Citadel’s existing insurance franchise (not rated by A.M. Best). New Castle Re’s operating strategy will complement CIG Re’s profile as a Bermuda-based property catastrophe reinsurance writer offering clients coverage on a fully collateralized basis.”

Best notes, however, that the new company will face challenges, initially being “susceptible to low frequency, high severity events.” Best also said it “anticipates that New Castle Re will be challenged by increased competition from both established companies and potential new start-ups seeking to enter the industry.”

In a broader analysis, Best indicated that “the additional capacity brought to the market could dampen expected returns if pricing of reinsurance coverage fails to meet anticipated levels. Furthermore, the ability of New Castle Re to effectively build and retain market acceptance will only be proven over time.”