AM Best has removed from under review with negative implications and affirmed Credit Ratings of Clear Blue Insurance Group Members, noting that the fronting carrier has managed to replace reinsurance capacity and raise $25mn in capital following the Vesttoo scandal.
Clear Blue’s ratings were placed under review with negative implications on July 25, 2023, as a result of the uncertainty surrounding the firm’s ability to rely on certain letters of credit (LOC) posted to back reinsurance in Vesttoo-related transactions.
Of particular concern was the potential balance sheet implications, in addition to the execution and timing risk associated with replacing capacity or letters of credit, AM Best noted.
AM Best has maintained Clear Blue’s – and its property/casualty subsidiaries – Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “a-” (Excellent). The outlook assigned to these ratings is stable.
According to the rating agency, these ratings reflect the group’s balance sheet strength, which AM Best has assessed as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).
Following allegations of fraudulent collateral issues at Vesttoo, Clear Blue announced that it would no longer be using the insurtech as reinsurance capacity on new or renewal programs.
Over the past few months, Clear Blue has successfully moved active programs to either new reinsurers or reinsurers on its existing panels took higher percentages, AM Best explained.
All of these contracts have been signed and are fully collateralized. All “run-off” programs which remain in place are collateralized by funds held in cash from written premium. However, additional collateral on these programs above the funds held has not been replaced.
To solidify its balance sheet, Clear Blue has recently managed to raise $25mn in capital, $15mn of which was funded by a line of credit at the holding company and an additional $10mn funded by an equity infusion from Pine Brook.
Given these capital initiatives, the fronting carrier’s ability to replace capacity on active programs and the relatively modest financial losses, AM Best continues to assess the company’s balance sheet strength level as very strong, according to the agency.
“From an ERM perspective, AM Best notes it has become evident through documents associated with Vesttoo’s bankruptcy filing that fraud was at the heart of this episode. In response to this fraud, Clear Blue has implemented more rigorous procedures around securing, documenting and confirming letters of credit. AM Best believes these actions to be appropriate,” the rating agency stated.
Adding: “The performance of the retained run-off programs remains uncertain and could potentially impact Clear Blue financially and operationally. The stable outlook that has been assigned reflects AM Best’s view that the actions taken by Clear Blue should continue to mitigate the potential negative impacts. However, if this view were to change, AM Best may need to take negative rating action.”
