Pine Brook-backed fronting specialist Clear Blue has added a second non-admitted insurer to its stable and reorganized its subsidiaries into a stacking structure to share pooled capital as it looks to offer differentiated products and programs across multiple carriers, The Insurer understands.
The group is also believed to be looking to add capital to Condado Re, the segregated cell insurance company it cedes a portion of certain programs to, as it looks to expand its risk taking appetite in competition with the hybrid fronting carriers in the market.
Highlander Specialty Insurance Company received its certificate of authority from the Illinois Department of Insurance on 30 June and is thought to be in the process of securing an AM Best rating in line with the A- Clear Blue and its other subsidiaries have in place.
The new E&S carrier adds to non-admitted entity Clear Blue Specialty Insurance Company and admitted insurers Clear Blue Insurance Company and Rock Ridge Insurance Company.
The restructure sees the four companies stacked underneath Puerto Rico-domiciled parent Clear Blue Financial Holdings (CBFH).
Stacking effectively allows the four operating companies to share the estimated $114mn policyholders surplus, with a pooling agreement in place between the entities.
Highlander Specialty has already been assigned an A- financial strength rating by Kroll Bond Rating Agency, which has a BBB- rating on debt issued by CBFH.
In a note, Kroll said that similar to Rock Ridge, Highlander Specialty was set up to manage potential channel conflict.
“Clear Blue views having four writing companies with different names as a competitive advantage,” the ratings agency added.
Sources said the additional E&S platform would make it easier for Clear Blue to work with MGAs where there may be some overlap in their programs.
Revised top line projections
The note also pointed to the impact of Covid-19 on Clear Blue’s top line, with lowered 2020 growth projections.
It highlighted shortfalls related to a trucking program, new deals that were declined or delayed and a restaurant general liability program directly impacted by the pandemic.
“However, there are also some programs with a positive variance to original expectations, which somewhat offsets those programs with shortfalls,” said Kroll.
Sources said that despite the impact, top line had held up relatively well, with GWP now expected to be near $750mn despite the Covid-19 headwinds, compared to $586mn in 2019.
They added that Clear Blue had seen strong organic growth including on a number of large programs inked at the end of 2019.
It is thought that the company, which operates with a pure 100 percent fronting model, has a strong pipeline of deals running into 2021.
In its note, Kroll also highlighted Clear Blue’s strategy of diversifying its portfolio of programs and MGA relationships.
Last year it increased its number of MGAs from 12 to 18, increasing the number of programs from 15 to 23 and its reinsurers from 57 to 60. That increased to 18, 25 and 62 respectively in Q1 this year.
As a pure fronting carrier, Clear Blue has a quota share reinsurance contract for each program on its books.
The 100 percent quota shares offload all risk except for so-called extra-contractual obligations (ECOs), which could leave Clear Blue exposures to punitive damages for mistakes by MGAs or third-party administrators.
The fronting carrier purchases a global cover for ECO risk of $5mn xs $5mn, with the retention covered by quota share reinsurers or the E&O policy of the TPA. Clear Blue is currently out in the market for its ECO renewal.
The quota share protects Clear Blue to a 1-in-750 years return period, but the company buys additional reinsurance, including a commercial auto physical damage cat cover and a per risk cover on property programs with larger limits.
The commercial auto physical damage cat cover provides $8mn x $12mn of limit and is due to go to market on its renewal later this year.
Clear Blue also has a reinsurance agreement with segregated cell insurance company Condado Re, which is domiciled in Puerto Rico and owned by an affiliate of Clear Blue’s private equity backer Pine Brook.
According to sources, there are plans to add capital to Condado Re to expand the risk taking appetite of Clear Blue to allow it to match up with the several hybrid fronting carriers that have recently entered the market.
As previously reported, there is a growing desire from some reinsurers for fronting carriers to retain a portion of the underwriting risk to align with their counterparties.
That has led several of the recent entrants to adopt hybrid fronting models where they take a share of the risk - typically in the 5-15 percent range - then quota share the rest to reinsurers.
According to the Kroll note Clear Blue currently cedes between 5 and 15 percent of certain programs to Condado Re.
Clear Blue declined to comment on this article.