KBRA Affirms Ratings for Knighthead Annuity

KBRA affirms the A insurance financial strength rating (IFSR) of Knighthead Annuity & Life Assurance Company (Knighthead Annuity). KBRA also affirms the BBB+ debt rating on Knighthead Annuity’s $50 million prescribed capital notes (subordinate unsecured debt) due 2042. The Outlook for both ratings is Stable.

Key Credit Considerations

The ratings reflect Knighthead Annuity’s strong capital position, conservative leverage, and sound liquidity and asset/liability management. At year-end 2024, US GAAP equity totaled $672.7 million, a 28% increase year-over-year, driven by strong net income and a capital contribution to support continued growth over the medium term. Total capital, including $50 million of eligible hybrid instruments, is well above the company’s Cayman Islands Monetary Authority (CIMA) prescribed capital requirement. Reserve and investment leverage ratios remained well below benchmarks. Liquidity is supported by appropriate cash balances on the direct business and a high allocation to liquid investment-grade public and private securities on the reinsurance portfolio. Asset duration is slightly shorter than liabilities with asset convexity about a month shorter than liabilities. The investment portfolio includes a diversified mix of public and private credit, structured assets, and commercial mortgage loans, with approximately 42% of Knighthead Annuity assets allocated to cash or publicly traded fixed income. Investment outperformance relative to relevant benchmarks reflects consistent, successful execution of the strategy, which KBRA views favorably.

In 2024, the non-US direct business saw record production of $452 million, supported by a growing distribution network. The company also maintains access to institutional equity and debt, providing financial flexibility for future growth. Risk management practices remained strong, including enterprise-wide control testing and regular third-party audits. The management team remained stable in 2024, with continued investment in functional depth and operational infrastructure.

Knighthead reported US GAAP net income of $153.8 million in 2024, driven by investment performance. Adjusted for fair value movements in liability credit risk, non-GAAP adjusted net income totaled $78.2 million. While reported results remain subject to valuation-related volatility, adjusted earnings have been consistently positive over the past five years, which KBRA views favorably.

Balancing these strengths are earnings volatility tied to the fair value accounting treatment of reinsurance liabilities. Although the company reported record net income in 2024, historical results have fluctuated significantly year-over-year. Knighthead’s business profile also remains concentrated in spread-based fixed annuity products, with 75% of liabilities linked to U.S. policyholders. While non-US direct premium has grown and new distribution partnerships were added in 2024, product and geographic diversification remained limited. Reinsurance flow premiums declined year-over-year primarily due to pricing discipline and selective underwriting amid increased competition in the U.S. asset-intensive reinsurance market.

Rating Sensitivities

Greater balance sheet scale and scope of operations, greater product and non-US geographic diversification, and consistent generation of non-GAAP adjusted net income could result in positive rating action.

A material adverse shift in risk profile, capital erosion due to asset impairments or outsized growth, or the loss of key management personnel without suitable replacements could result in negative rating action.

Knighthead Annuity offers fixed and fixed indexed annuities to a non-US client base through regulated U.S. and global financial institutions and reinsures similar liabilities from U.S.-domiciled cedants. The company is domiciled in the Cayman Islands and holds a Class D license from the Cayman Islands Monetary Authority.

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