KBRA Affirms Ratings for Converge RE II and Converge Holdings LLC
20 Sep 2023 | New York
KBRA affirms the A- insurance financial strength rating (IFSR) of Converge RE II and the BBB- issuer rating of 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, seasoned management team, and financial operating results which are trending favorably. Converge RE remains comfortably above its minimum statutory solvency requirement. Reported shareholders’ equity demonstrated strong year-over-year growth in 2022. 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 medium-term growth plans. General and funds withheld accounts’ liquid assets continue to grow in line with increasing liability risk. 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 elevated investment and reserve leverage, a lack of earnings diversification, limited market profile and scale, and key insurance person risk. Earnings are concentrated in a small 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, which is somewhat magnified by the recent departure of its Chief Executive Officer, partially offset by the addition of senior roles in business development, actuarial and controller functions over the last twelve months.
Rating Sensitivities
Consistent internal generation of capital over the medium term, diversification across a larger pool of counterparties, attainment of sustainable business scale, and reduced investment and/or reserve leverage may result in positive rating action.
Further elevated investment and/or reserve leverage, decline in credit quality or amount of collateral securing the note, and material negative variance of actual results to forecast presented to KBRA could result in negative rating action.
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