KBRA Announces New Captive Rating Service

Kroll Bond Rating Agency (KBRA) is a full-service financial strength rating company established in 2010. In the aftermath of the financial crisis in 2008, KBRA determined there was a need for new standards in assessing risk and improving the accuracy and transparency of ratings. KBRA has more than 200 employees and offices in New York, New York; Dresher, Pennsylvania; Frederick, Maryland; and Dublin, Ireland. Its experienced analysts have published more than 7,500 ratings across a broad array of asset classes. KBRA strives to provide the investment community with the products and tools needed to make informed investment decisions. The company is registered with the Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

In 2016, KBRA decided to expand its credit rating offering to the captive insurance market. In doing so, KBRA is seeking to offer captive insurers an alternative to the model-driven process employed by other rating agencies. Captive.com recently sat down with Senior Director of Business Development Tina Bukow, top management, and KBRA's insurance specialists to discuss this new initiative.

Q.—Tell us about the insurance team you are assembling here at KBRA.

First, I think it is important to note that right from the top we start with a strong knowledge base. The president and CEO of KBRA, Jim Nadler, has an extensive insurance and rating agency background from time spent with GenRe (New England Asset Management), Fitch, and Standard & Poor's. As for the insurance vertical proper, the goal was to onboard the best and brightest talent in the industry and we continue to do just that.

Currently, our dedicated insurance analytic team includes a staff of well-accredited analysts with decades of combined experience rating solely insurance companies on both the PC [property-casualty] and life insurance side. Their experience comes from lengthy tenures at A.M. Best, Moody's, and Marsh, with progressive experience from analyst to officer to committee cochair.

Captivewise, our most recent analytic hire boasts a long and respected career in the ART [alternative risk transfer] markets and is due to onboard in late May. Alternative risk (e.g., captives, RRGs [risk retention groups], reinsurance) will be the focus for this role. We are very excited about this hire and know the market will be, as well. Stay tuned for that announcement over the next few weeks!

As for future hires, ... KBRA is committed to the insurance initiative and to stellar customer service. We know that part of this commitment is proper resources, and we are positioned to staff as necessary to maintain those commitments ... best and brightest!

Q.—How are you hoping to differentiate yourself from existing competitors in the market?

One very important differentiator is our rating approach. We do not rely on a proprietary capital model to derive a rating. It is obvious that companies, investors, and the entire industry continue to become more and more innovative and, in our opinion, a model-driven approach no longer provides an accurate view of a company to its equally savvy constituents. As you cited earlier, one of KBRA's goals from inception was to "establish new standards for assessing risk," and we have done just that. We believe the time has come to do a true and thorough financial analysis based on a company's unique characteristics and how they fit its unique business model. This alone resounds with captives as they truly are unique and should be treated as such. It comes down to more analytics—less plug and play.

Another difference is having the ability to evaluate the parent. This is a tremendous advantage to the captive and truly provides us with a well-rounded understanding of the entity.

We also have no size bias, legacy issues, or seasoning requirements. Small, large, newly established, long established, … our methodology does not discriminate or penalize for any of the above. In addition, we have internal expertise to rate corporate credits, which means we do not need to rely on other agencies' ratings when we look at a captive's parent.

There are several other areas as well, as mentioned above, … we believe in and provide stellar customer service. Timely, accurate, and transparent … another tenet of our being. A company may not always like the rating outcome, but we guarantee service, a completely transparent process, and companies will understand why and how the outcome was reached.

I could definitely go on … reports and research, which, incidentally, are free of charge on our website. Then, of course, there are our commercial terms …; obviously, those must be discussed in a private forum.

Q.—Can you walk us through your rating methodology and how it differs from current offerings?

First, our methodology titled "Global Insurer and Insurance Holding Company Rating Methodology" can be found on the Kroll Bond Rating Agency website and is our overarching criteria for all insurance ratings. KBRA's insurance rating methodology is a true combination of quantitative and qualitative analytics. The quantitative portion is based on analysis of key financial ratios relative to peers, parental support, and companies of similar creditworthiness. Again, KBRA does not utilize a capital model, as we believe it limits true financial analysis. Other agencies seem to rely heavily on their models, despite knowing the drawbacks of model-based analysis in general and in particular for captives. KBRA puts more emphasis on the qualitative portion of the analysis—that is, the experience of the management team, risk management practices, quality of distribution, etc. We will meet with each captive insurance company we rate, in their home office, as part of the interactive process. This greatly enhances the analytical team's understanding of the organization, how it operates, and how it integrates with the risk strategy of the parent.

Another difference is having the ability to rate the parent. This is a tremendous advantage to the captive and truly provides us with a well-rounded understanding of the entity.

We are comfortable rating a captive higher than its parent—if the credit metrics warrant. We also take a more realistic approach on lines of credit and loanbacks, factoring in access to capital and the organization's overall financial flexibility. We understand that captives, single-parent in particular, are not profit centers, and we take that into consideration when performing our analysis.

Our process is extremely streamlined! A company will receive its rating at or before the promised delivery date. Additionally, the fact that KBRA does not have legacy ratings helps us avoid implementing a size bias. We believe smaller companies can be highly rated if they have excellent knowledge of their market(s); a sustainable, profitable operating profile; and a solid working relationship with the parent or sponsors. Our ratings are based on a company's unique characteristics, which is in turn reflected by our custom-tailored reports for each enterprise.

Q.—For captive insurers, how would they go about seeking a rating from KBRA?

A call to our business development team, Sted Dowd or me, would be the first step (see the KBRA website for phone numbers). We will review the process with the company, discuss commercial terms, and review what is necessary from both a business development and an analytic standpoint. Lastly, we will introduce the contact to our rating team—rest assured, a company will not come through the process without having a complete understanding of expectations and obligations, for both sides: company as well as KBRA. It really is all about dialogue, not monologue!

Q.—How long does the rating process take, and can you give us a rough estimate of the costs involved?

Generally, the process takes 6 to 8 weeks and is very interactive. Our commitment to customer service provides for flexibility with that timeline. We will work with a company's timeline as best we can but will never compromise the process. That goes back to expectations…. If you have a specific timing need, it will be discussed and laid out: data submission, meeting dates, etc.

As for cost, all I can say in a public forum is that our commercial terms are simple and very palatable. Sted or I would be delighted to discuss our terms offline with interested parties....

Q.—What other services are you offering that might be of interest to captive insurers?

KBRA is a full-service credit rating agency covering:

• Re/Insurance
• Corporates
• Structured finance/ILS [insurance-linked securities]
• Funds
• Financial institutions
• Public finance
• Financial guaranty
• Project finance
• Sovereigns

Q.—Will you be exhibiting at the various captive conferences and, if so, where?

Absolutely! While we will be present at many of the captive conferences, so far, this year, we will have a booth in Vermont at the VCIA [Vermont Captive Insurance Association] Annual Conference and in Bermuda at the Bermuda Captive Conference.

Q.—Any other takeaways you'd like our Captive.com readers to know about?

Yes, a few.

First, our rating approach makes complete sense for captives. We understand captives are unique, and we are committed to treating them as such!

In addition, when captives or members of the captive industry find themselves in NYC, we encourage them to consider including a visit to KBRA in their itinerary. Our team (executive, business development, and analytic) welcomes the opportunity to host members of the industry. Our door is always open, and we are happy to discuss plans, answer questions, and have roundtable discussions on industry insights.... We are completely transparent from the top down!

Also, definitely call to check on our commercial terms....

And, lastly, stay tuned for the news of our new hire; ... remember, best and brightest!