KBRA Assigns Ratings to Obsidian

NEW YORK--()--Kroll Bond Rating Agency (KBRA) assigns an issuer rating of BBB- to Obsidian Insurance Holdings, Inc. (OIH), as well as insurance financial strength ratings (IFSRs) of A- to its subsidiaries Obsidian Insurance Company (OIC) and Obsidian Specialty Insurance Company (OSIC). OIH along with its subsidiaries referred to as Obsidian. Obsidian is a start-up insurance fronting platform focused on the U.S. property-casualty and specialty markets. The Outlook on all ratings is Stable.

The ratings reflect the management team’s considerable experience and demonstrated competencies in the insurance and reinsurance industries, including experience in MGA management. They also possess extensive relationships with major reinsurance intermediaries as well as directly with the leadership teams of many MGAs. The ratings also reflect an attractive market opportunity in a primarily fee-based business with a sound and reasonable business plan. Over a five-year projection horizon, forecast gross premium leverage moves from conservative initially to moderate for a fronting carrier as the business ramps up. Obsidian’s conservative investment philosophy focuses on investment grade fixed income securities and requires a minimum of 5% of the portfolio in cash or equivalents, and cash and fixed income must exceed 90% of the portfolio. Currently the average credit quality of the portfolio is AA-. Obsidian is backed by Genstar, a financial sponsor with significant experience in the insurance and insurance-related space. In addition to providing capital, Genstar also contributes consultative advice and industry relationships to the company. Certain members of the executive management team are minority owners.

Offsetting these credit strengths are the inherent material execution risks associated with any start-up operation, key executive risk, untested risk management, and a business model reliant on reinsurance. While management is still in the process of standing-up the business, it has reached terms with a number of programs, and may sign some of these programs over coming months. Key executive risk resides within the business plans’ reliance on the significant expertise and relationships of senior management and limited bench strength. A partial mitigant to key executive risk is the ability of certain managers to fill roles other than the ones they currently fulfill. In addition, the management team and Genstar have extensive industry relationships that would facilitate the identification of candidates to fill any vacated roles. KBRA views Obsidian’s risk management philosophy and culture as strong, but it is untested and certain policies and tools remain under development or yet to be formalized. Risk management will also be important for managing the company’s exposures under expected risk retention. Risk management is expected to mature over time. The heavy reliance on reinsurance gives rise to counterparty credit risk, as well as to an ongoing challenge to consistently execute appropriate reinsurance contracts as new programs are on-boarded and any existing ones renewed. Another credit weakness is Obsidian’s limited financial flexibility and related uncertainty of future cash flow to service an expected debt issue beyond initial cash reserves held at the holding company.

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Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe is registered with ESMA as a CRA.

Contacts

Analytical

Donna Halverstadt, Managing Director (Lead Analyst)
+1 (646) 731-3352
dhalverstadt@kbra.com

Fred DeLeon, Senior Director
+1 (646) 731-2352
fdeleon@kbra.com

Peter Giacone, Managing Director (Rating Committee Chair)
+1 (646) 731-2407
pgiacone@kbra.com

Business Development

Tina Bukow, Managing Director
+1 (646) 731-2368
tbukow@kbra.com

Contacts

Analytical

Donna Halverstadt, Managing Director (Lead Analyst)
+1 (646) 731-3352
dhalverstadt@kbra.com

Fred DeLeon, Senior Director
+1 (646) 731-2352
fdeleon@kbra.com

Peter Giacone, Managing Director (Rating Committee Chair)
+1 (646) 731-2407
pgiacone@kbra.com

Business Development

Tina Bukow, Managing Director
+1 (646) 731-2368
tbukow@kbra.com