KBRA Affirms Ratings for Converge RE II and Converge Holdings LLC

KBRA affirms the A- insurance financial strength rating (IFSR) for Converge RE II and the BBB- issuer rating for Converge Holdings LLC. The Outlook for both ratings is Stable.

Key Credit Considerations

The ratings reflect Converge RE’s adequate capitalization and financial flexibility, strong liquidity profile, financial operating results which are trending favorably, and a seasoned management team. Converge RE remains well above its minimum statutory solvency requirement. Reported shareholder’s equity demonstrated material year-over-year growth in 2023. Converge RE’s balance sheet is enhanced by financial flexibility, which includes funds still available under the secured promissory note which supports the company’s existing liabilities and near-term growth plans. General and funds withheld accounts’ liquid assets continue to grow in line with increasing liability risk. Financial results across the last two years reflect favorable asset performance and returns, namely driven by valuations across its allocations to real estate equity positions as well as disciplined underwriting in which assumed liabilities have performed in-line with expectations. Converge RE’s management team has a deep understanding of both asset-intensive life and annuity reinsurance business and real estate equity and debt investments.

Balancing these strengths are a lack of earnings diversification, limited market profile and scale, and key insurance person risk. Earnings are concentrated in a small, but expanding, number of treaty counterparties, all of whom cede asset-intensive life and annuity risk to Converge RE. While results are trending favorably, Converge RE has not yet attained sufficient scale to consistently generate capital internally to support its growth. The company is also exposed to some key insurance person risk due to its lean staff. While KBRA observes recent executive and employee turnover, the impact on strategy, operations, financial performance, and overall risk profile has been minimal and Converge RE continues to leverage support and management resources of Lightstone.

Rating Sensitivities

Consistent internal generation of capital over the medium term, diversification across a larger number of counterparties, and attainment of sustainable business scale without adverse impact on the company’s risk profile may result in positive rating action.

Elevated investment and/or reserve leverage, decline in credit quality or amount of collateral securing the promissory note, and a material negative variance of actual results to forecast presented to KBRA could result in negative rating action.

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Methodologies