KBRA Affirms the Ratings of Clear Blue Financial Holdings, LLC and Subsidiaries

KBRA affirms the BBB- Issuer Rating for Clear Blue Financial Holdings, LLC, the BBB- debt rating for the $65 million of 5.375% senior unsecured notes due 2028, and the A- IFSRs for Clear Blue Specialty Insurance Company, Clear Blue Insurance Company, Rock Ridge Insurance Company, and Highlander Specialty Insurance Company. The Outlook is Stable on all ratings.

The ratings reflect Clear Blue’s experienced management team, sound capitalization, and an efficient corporate structure with significant unregulated cash flow that supports growth and covers interest expense. Clear Blue has developed a strong market position over the years, which it expects to maintain. Since inception, Clear Blue has focused intently on governance and risk management, and its ERM program continues to mature. As of YE2023, financial leverage was 35% and is expected to trend down toward more conservative historical levels in the near term. Interest is amply covered by unregulated cash flow from the service companies.

Balancing these credit strengths is Clear Blue’s business model that relies heavily on reinsurance, which gives rise to counterparty credit risk and the need to continuously renew appropriately structured treaties at an efficient cost. As underwriting leverage increased over the years, the need for increased diversification of reinsurers became more important. Further, while underwriting leverage was increasing, changes in the market environment also led the company to use an increasing amount of reinsurance with unrated counterparties, a factor that led to an enhanced framework for reinsurance credit risk management, including the development of a dedicated credit risk department. Historically, Clear Blue had also developed concentration risks in certain programs that gave rise to property catastrophe exposure. Catastrophe risk is mitigated through a variety of initiatives, including the purchase of catastrophe covers for excess losses. During 2023, Clear Blue’s concentrated exposure to Vesttoo/China Construction Bank became a credit challenge – albeit one that the company quickly and materially addressed. In KBRA’s view, Clear Blue has leveraged lessons learned to strengthen ERM processes related to the use of unauthorized reinsurers and for accepting LOCs and trusts while simultaneously continuing to expand its franchise. The company is also exposed to key person risk but has been deepening its talent bench.

Factors that could positively impact the ratings include sustained growth in earnings and capital, prudent management of underwriting leverage and reinsurer and bank counterparty credit risk, significant diversification of premium and reinsurance counterparties, or maintenance or enhancement of well-defined market position.

Factors that could negatively impact the ratings include material adverse change in risk profile, significant decline in earnings or balance sheet strength, departure of key members of the management team, rapid material increases in underwriting leverage, inability to maintain an effective reinsurance program and or inability to collect from reinsurers, lack of progress in diversifying program/premium/reinsurer concentrations, or a discontinuation of the pooling arrangement.

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