NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) assigns an insurance financial strength rating of A- with a Stable Outlook to Knighthead Annuity & Life Assurance Company (Knighthead Annuity). Knighthead Annuity provides fixed annuity products to a non-U.S. client base, sold by regulated financial institutions, and provides reinsurance solutions of similar products to U.S.-based insurers.
The rating reflects Knighthead Annuity’s sound capitalization, experienced management team, and comprehensive risk management framework for managing its growing presence in the offshore fixed annuity market. Established in 2014, Knighthead Annuity is based in the Cayman Islands, a jurisdiction whose laws provide contract holders specific asset protection, enabling clients to invest in a stable currency outside their home country and minimize foreign tax liability. The company offers straightforward fixed annuity products through an expanding distribution system of well-known U.S.-based financial institutions that have historically been constrained with respect to international business. Knighthead Annuity has established detailed procedures around anti-money laundering and know your customer requirements, including conducting risk-based audits of its distribution firms to ensure compliance with contract and law. These are encompassed in the firm’s robust risk management framework, along with extensive scenario testing done regularly to monitor the company’s key risks – interest rate risk and investment risk.
For its core fixed annuity business, the insurer utilizes an event-driven investment strategy that comprises a broad array of long and short credit positions across a range of financial instruments including bonds, bank debt, convertibles, credit default swaps and equities. Investment management is performed by Knighthead Capital Management, LLC, a respected SEC-registered investment manager based in New York City. Knighthead Capital is highly reputable and with 10 years of operating history, can clearly demonstrate its investment track record, operational expertise and adherence to all regulatory requirements. This investment strategy – combined with Knighthead Annuity’s disciplined approach to pricing and spread management – has yielded favorable operating results since 2016. For its reinsurance business, the insurer utilizes a more traditional investment portfolio, including investment grade bonds, high-yield bonds and first lien mortgages, depending on the admitted asset requirements of the ceding company’s state of domicile. Going forward, KBRA anticipates more enhanced operating trends through the recent addition of flow reinsurance business, which diversifies Knighthead Annuity’s risk profile and increases the predictability of investment returns.
Balancing these strengths is the company’s product concentration in interest-sensitive liabilities, its limited operating history, and its non-traditional investment strategy for the core direct business, which can produce more volatile operating results than a conventional approach. As a fixed annuity writer, Knighthead Annuity is exposed to disintermediation risk if interest rates were to spike. KBRA notes that the company’s inforce block retains considerable surrender charge protection and market value adjustments. Additionally, KBRA believes Knighthead Annuity’s growth plans are fairly aggressive and may necessitate future capital infusions to keep pace with similarly-rated organizations with more diversified liability profiles and more conservative investment portfolios. KBRA recognizes the breadth and financial wherewithal of Knighthead’s diversified shareholder base; however, there is no formal commitment to invest additional capital, if needed. Additionally, the U.S. life reinsurance space is highly competitive and led by several large, diversified global organizations with sizable balance sheets and strong franchises. Knighthead Annuity may be challenged to execute meaningful reinsurance transactions that will contribute material long-term earnings on a consistent basis.
The ratings are based on KBRA’s Global Insurer & Insurance Holding Company Rating Methodology, published on October 10, 2017.
A detailed rating report for Knighthead Annuity will soon be available on www.kbra.com.
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