Ratings firm AM Best has downgraded the financial strength rating to B (fair) from B+ (good) and issuer credit ratings to “bb” from “bbb-” of Bermuda-based Ability Reinsurance (Bermuda) Ltd and Ability Insurance Company (AIC), collectively referred to as Ability Re. All ratings remain under review with negative implications.According to AM Best, the downgrades reflect AIC’s significant statutory losses incurred year-to-date through September 30, 2012, the ongoing uncertainty regarding pending litigation and a material decline in the absolute capitalisation of AIC. The weakness in its operating results continues to reflect deterioration in its long-term care insurance block which remains largely undiversified as well as increased litigation costs.“Given the magnitude of the losses, Ability Re has reduced financial flexibility,” AM Best said in a statement. “The company is currently exploring strategic solutions, and the ratings will remain under review as AM Best monitors the company’s ultimate litigation risk as well as any changes in its overall strategy.”The ratings of Ability Re were originally placed under review with negative implications on April 16, 2012. The under review action reflected the uncertainty surrounding the ultimate financial impact on the company following a Montana court jury award of roughly $34 million in compensatory and punitive damages to an Ability Re long-term care policyholder. The litigation is currently pending and Ability Re is awaiting the outcome.AIC (formerly known as Medico Life Insurance Company) has been active primarily in the reinsurance or purchase of long term care business (LTC). The company has nearly 50,000 long-term care policies with over $90 million in annual premium. AIC in turn, cedes approximately 75 percent of the long-term care business on a quota share basis to its affiliate, Ability Re Bermuda.