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- long-term credit rating (LTCR) for the $65 million 5.375% senior unsecured notes due 2028, the A- IFSRs for Clear Blue Specialty Insurance Company (CBSIC), Clear Blue Insurance Company, Rock Ridge Insurance Company, and Highlander Specialty Insurance Company, and the BBB LTCR for the $45 million 8.75% surplus notes due 2045 issued by CBSIC. The Outlook for all ratings is Stable.

The ratings reflect Clear Blue’s sound capitalization, experienced management team, and an efficient corporate structure with significant unregulated cash flow that provides capital to support growth and covers debt service. Clear Blue has developed a strong market position over the years, which it expects to maintain. Clear Blue’s ERM program continues to mature, most recently with enhancements derived from the review and input of third-party consultants. As of YE2024, consolidated GAAP financial leverage was 33% and is expected to trend down toward more conservative historical levels in coming years. 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 to the need to continuously renew appropriately structured treaties at an efficient cost. As Clear Blue’s 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 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 also had developed concentrations 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. In recent years, Clear Blue has managed its portfolio of programs in a way that led to material declines in its PMLs. In KBRA’s view, Clear Blue leveraged lessons learned during the Vesttoo matter to strengthen its 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 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, unplanned departure of key members of the management team without suitable replacement, rapid material increases in underwriting leverage, inability to maintain an effective reinsurance program and or an inability to collect from reinsurers, lack of progress or deterioration in diversifying program/premium/reinsurer concentrations, or discontinuation of the pooling arrangement.

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