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 capitalization, conservative leverage metrics, strong liquidity profile, tight asset/liability matching (ALM), financial flexibility and access to capital, comprehensive risk management framework, seasoned management team, unique position in its chosen markets and diversified distribution channels. At the end of 2023, the company was in full compliance with regulatory capital requirements as well as its internal target. The company has grown capital at a 19.19% CAGR over the past five years and maintains conservative financial, investment and reserve leverage. Knighthead Annuity maintains material cash balances to support its direct annuity business. At the end of 2023, the company’s reinsurance assets were well matched to liabilities with asset convexity marginally below liability convexity by slightly more than one month. During 2023, Knighthead Annuity’s parent holding company raised approximately $570 million. KBRA believes that Knighthead Annuity has demonstrated its ability to access the capital it needs to support its planned growth over the medium term. The company has a robust risk management program that is embedded across the organization and is periodically audited by independent third parties to identify deficiencies and incorporate best practices. Management has broad knowledge of annuity products as well as extensive experience in complementary areas of the financial services industry. Despite a new carrier entering the fixed and fixed indexed annuity market for non-US taxpayers, Knighthead Annuity remains the market leader. The company has successfully closed on several flow reinsurance transactions and has a robust pipeline of future opportunities. Knighthead Annuity maintains distribution partnerships with over seventy financial institutions in the bank and broker dealer channel, primarily in the US. Expansion into offshore wealth management centers is ongoing to broaden and diversify distribution channels. Reinsurance business is sourced directly through management contacts within the industry and indirectly through major reinsurance brokers. Balancing these strengths are reported results that can be volatile and concentrated earnings sources. In 2023, Knighthead Annuity reported GAAP net income of $48.8 million (2022: $239.3 million net loss). Reported results can be skewed by the GAAP accounting treatment of reinsurance loss reserves under ASC 825 Fair Value Accounting whereby unrealized fair value changes in the credit risk component of loss reserves is reported separately in other comprehensive income rather than as an offset to the associated current period expense. On a non-GAAP adjusted basis, the company produced $14 million (2022: $3.7 million) in net income, driven by higher net investment revenues and negligible changes in reserves due to flat interest rates throughout the year. Whether on a reported or adjusted basis, KBRA expects volatility in year-over-year results due to the company’s investment strategy that supports its direct annuity business. Knighthead Annuity only writes fixed and fixed indexed annuities which exposes the company to spread compression during periods of falling interest rates and disintermediation risk during periods of rising interest rates. Slightly more than 80% of the company’s annuity exposure emanates from the US.

Rating Sensitivities

Improved earnings and distribution diversification as well as consistent generation of non-GAAP adjusted operating and net income could result in a positive rating action.

A material change in risk profile, revenue growth that materially outstrips capital growth, meaningful asset impairments or the departure of key members of the management team could result in a negative rating action.

Knighthead Annuity provides fixed and fixed indexed annuities to an international client base, sold by regulated US and global financial institutions, and reinsures similar liabilities ceded by companies domiciled in the US. The company is domiciled in the Cayman Islands and holds a Class D reinsurer license from the Cayman Islands Monetary Authority.

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