Clear Blue’s $45 million surplus note gets KBRA BBB preliminary rating to support growth

By David Bull

May 19 - (The Insurer) - KBRA has assigned a preliminary rating of BBB with a stable outlook to surplus notes totaling an estimated $45 million issued by Clear Blue carrier subsidiaries that will support a strong growth pipeline, after the fronting carrier secured support from investors that include life insurers.

Sources with knowledge of the situation said that backers for the capital infusion include a number of life insurance companies on a syndicated deal.

Ratings agency KBRA, which rates Clear Blue Specialty Insurance Company with a financial strength of A-minus, didn’t provide details of the size of the surplus notes issued or investors, but confirmed they will be issued by Clear Blue Specialty Insurance Company.

It added that the surplus notes are “deeply subordinated” with payments on them subject to prior approval of the Texas department of insurance.

Although the notes are being issued by Clear Blue Specialty Insurance Company, the group’s carrier subsidiaries operate on an intercompany pooling arrangement with a reinsurance agreement that includes joint and several liability for one another.

The carriers operate in all 50 states with admitted licenses in those states and Puerto Rico.

They write program business including distinct books of commercial auto, homeowners, commercial property and general liability business that is produced MGAs, KBRA said in a statement.

It added that aside from any limits or gaps in Clear Blue’s quota share reinsurance, all the risk associated with its business is ceded to unaffiliated reinsurance companies or its captive Clear Blue Re, which in turn cedes to a panel of reinsurers.

Program Manager previously reported that the privately placed deal was heavily oversubscribed, with orders trimmed back and proceeds expected to be used to support a strong pipeline of program deals as the fronting carrier continues on its growth trajectory in 2025.

A surplus note is a debt security specifically issued by an insurance company to raise capital and sit at the bottom of an insurer’s capital structure, as they are subordinated to all policyholder and creditor claims.

Surplus notes are treated as equity for statutory accounting purposes, but as debt under U.S. GAAP, with interest payments and principal repayments requiring prior regulatory approval.

Insurance companies typically use surplus notes to raise capital while maintaining the tax efficiency of fixed-income debt instruments.