OLDWICK, N.J.–(BUSINESS WIRE)–AM Best has upgraded the Financial Strength Rating to A- (Excellent) from B++ (Good) and the Long-Term Issuer Credit Ratings to “a-” from “bbb+” of Knighthead Annuity & Life Assurance Company (Knighthead Annuity) (Cayman Islands). The outlook of these Credit Ratings (ratings) has been revised to stable from positive.

The ratings reflect Knighthead Annuity’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The rating upgrades reflect the continued execution on Knighthead Annuity’s initial business strategy, the expansion of its business profile through reinsurance assumption agreements, and further development of its ERM program. Since the company’s inception in 2014, Knighthead Annuity has demonstrated its ability to sustain premium growth in its core direct business by expanding its product offerings and continually adding distribution partners. Moreover, the addition of a reinsurance assumption strategy provides Knighthead Annuity access to the U.S. annuity market, diversifies its source of premiums, and is expected to reduce earnings volatility over the long term.

Knighthead Annuity’s risk-adjusted capitalization remains assessed in the strongest category, but has declined as the company deploys capital into growing its direct and reinsurance businesses. However, the balance sheet strength is offset partially by the long/short investment strategy utilized on its core annuity sales, which AM Best views as higher risk due to the concentrated positions and the inherent volatility of returns and the impact on earnings and equity. Additionally, the investment portfolio follows a total return strategy that creates the potential for liquidity and duration mismatches against the company’s interest sensitive liability profile. AM Best notes that the assets supporting the company’s reinsurance liabilities follow a more traditional, long-term investment strategy, which maintain favorable asset liability duration matching, and is expected to reduce overall volatility as it builds scale. Operating performance has been supported by the strong growth in premiums from its direct and reinsurance assumption businesses, although AM Best expects reported earnings to be volatile due the fair value reporting of its invested assets and policyholder liabilities.

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