KBRA Affirms Ratings for Clear Blue Financial Holdings, LLC and Subsidiaries; Removes Watch Developing Status
1 Dec 2023 | New York
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 Watch Developing status has been removed and the Outlook is Stable on all ratings.
The ratings reflect Clear Blue’s experienced management team, sound capitalization relative to risks, and an efficient corporate structure with significant unregulated cash flow that supports growth, interest expense, and shareholder dividends. Financial leverage had been conservative, but bonds issued to retire outstanding debt and to support operating company growth led to a net increase in debt and a related increase in leverage to 37% at YE2021 from 20% at YE2020. As of YE2022, the ratio remained at 37%, but was expected to return to historical levels in the near-term. Interest is amply covered by unregulated cash flow from the service companies. Clear Blue has developed a strong market position over the years, which it expects to maintain. The ratings are also supported by strong enterprise risk management that continues to mature.
Balancing these credit strengths is Clear Blue’s business model that relies heavily on reinsurance, creating counterparty credit risk and the need to continuously renew appropriately structured treaties at an efficient cost. Changes in the market environment have led the company to use an increasing amount of unrated reinsurance, a factor that led to an enhanced framework for reinsurance credit risk management, including the development of a dedicated credit risk department. This past summer, Clear Blue's exposure to Vesttoo/China Construction Bank became a credit challenge - albeit one that the company quickly and materially addressed. Further, as Clear Blue continues to increase its underwriting leverage, the need for increased diversification of high quality or collateralized reinsurers becomes more important. In the past, Clear Blue developed concentration risks that gave rise to property catastrophe exposure. Over recent years, there have been improvements in certain concentration-related metrics, although over this past year there was an uptick in PMLs. Catastrophe risk is mitigated through a variety of initiatives, including the purchase of catastrophe covers for excess losses. The company is also exposed to key person risk but is focused on deepening its bench.
The removal of the Watch Developing status reflects the steps taken by management to address the Vestoo matter as quickly as possible, including (i) securing new or additional reinsurance for active Vesttoo-impacted programs, (ii) putting protections place for Vesttoo-impacted run-off programs, (iii) accessing approximately $50 million of resources for downstreaming as capital contributions to its writing companies, and (iv) managing to the favorable resolution of the status of its fronting market-required carrier ratings, including a stable outlook. Just under half of the $50 million of additional capital for the writing companies is coming from Clear Blue’s service companies, and the rest derives from the combination of a new $10 million equity investment by Pine Brook in CBFH (downstreamed to CBSIC in mid-November 2023) and a $15 million drawing by CBFH on a bank line of credit (downstreamed to CBSIC in mid-November 2023).
The Stable Outlook reflects KBRA’s expectation that Clear Blue will continue to execute its business plan while maintaining sound capitalization and leverage metrics, growing in a prudent and profitable manner, retaining key members of its management team, and maintaining an effective reinsurance program. Further, the Stable Outlook reflects Clear Blue’s enhanced risk management procedures, and an expectation that its reputation and market position will remain largely intact.
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