KBRA Downgrades Kuvare’s Issuer, Debt and US Operating Companies Ratings and Affirms Kuvare Life Re Ltd.’s Rating

KBRA downgrades the insurance financial strength ratings (IFSRs) of Guaranty Income Life Insurance Company (GILICO) and United Life Insurance Company (ULIC) to A- from A and changes the Outlooks from Negative to Stable. KBRA also downgrades the IFSR of Lincoln Benefit Life Company (LBL) to BBB+ from A- and changes the Outlook from Stable to Negative. Additionally, KBRA affirms the A- IFSR of Kuvare Life Re Ltd. (KLR) with a Stable Outlook. In addition, KBRA downgrades the issuer ratings of Kuvare UK Holdings Limited (KUK) and Kuvare US Holdings, Inc. (KUS) to BBB- from BBB and changes the Outlooks from Negative to Stable. KBRA also downgrades the debt rating on KUS’ $225 million Fixed Rate Reset Cumulative Preferred Stock due 2051 to BB from BBB- and changes the Outlook from Negative to Stable. Collectively, the companies are referred to as Kuvare.

The downgrades for GILICO and ULIC reflect earnings and capital strain due to strong growth, lack of robust internal capital generation to date, elevated reinsurance leverage, lower than benchmark RBC base targets, and reduced RBC stress targets. The downgrade of LBL reflects the negative capital impact of its captive insurance company, lowered RBC base and stress targets, and Kuvare’s decision to place the company in run-off rather than continue to use it as a vehicle for reinsurance transactions. The downgrades of the holding companies reflect the downgrades of the operating companies, and the wider notching on the preferred stock rating reflects continued elevated leverage at KUS.

The change in Outlook from Negative to Stable for GILICO and ULIC reflects KBRA’s expectation that following the downgrades, GILICO and ULIC will maintain sound capitalization while continuing to prudently grow Kuvare's retail business. The change in Outlook from Stable to Negative for LBL reflects KBRA’s expectation that following the downgrade, the capital needs of the ULSG book ceded to its captive insurance company may continue to put downward pressure on the rating over the medium term. The change in Outlook from Negative to Stable for KUK, KUS and KUS’ debt reflects KBRA’s expectation that following the downgrades, the companies will maintain financial leverage and coverage in line with current rating levels.

Key Credit Considerations

The ratings reflect continued sales growth, generally solid credit quality investment portfolios, a solid retail market position, the financial and operational support of Blue Owl Capital, Inc. (NYSE: OWL), sound risk-adjusted capitalization at the operating companies, and ongoing capital raising at the holding companies. Retail segment sales growth has been driven by expansion in the independent marketing organization and financial institution distribution channels as well as ongoing product enhancements and competitive interest crediting rates. Institutional segment growth has most recently come from Asian cedents. KBRA believes that the investment portfolios are well diversified, with the institutional segment portfolio demonstrating high credit quality while the retail segment portfolios demonstrate solid credit quality relative to benchmarks. In a rapidly growing and competitive market environment, the retail segment has established a top 20 market position. Maintaining this position is dependent on the holding companies’ ability to source additional capital for continued sales growth. The operating companies benefit from Blue Owl’s investment expertise and expanded asset management capabilities. In addition to purchasing Kuvare Asset Management, Blue Owl purchased $250 million preferred shares from KUK and entered into a capital maintenance agreement that provides up to $175 million capital support to KUK’s operating companies. The retail operating companies have reported risk-based capital (RBC) ratios in the range of 350% - 400% for the last two years, but KBRA notes that management’s target RBC is below those of similarly fast-growing annuity writers. Further, over the past year management’s RBC stress targets were lowered at the retail and run-off companies and LBL’s target RBC was lowered as well. KLR was above its minimum Bermuda solvency capital requirement (BSCR), with no change in targets despite negative pressure from the new BSCR regime. The holding companies have a demonstrated track record of raising capital that has been deployed throughout the organization to support the operating companies. Based on KUS’ consolidated audited financial statements, debt (including the dated preferred stock) as a percentage of total capital at KUS has increased consistently from 25.4% at the end of 2018 to 61.1% at the end of 2023. KBRA notes that KUK provides an unsecured guarantee for payment of dividends and redemptions on KUS’ preferred stock. The improvement (albeit to a still elevated level of 47.4%) as of June 30, 2024 was driven by the impact of the equity proceeds from the transaction with Blue Owl. However, KBRA believes that financial leverage will remain high as Kuvare executes different strategies to support the near-term capital needs of its operating companies.

Balancing these strengths are challenges to Kuvare’s US statutory financial results, a high proportion of interest sensitive reserves, elevated reinsurance leverage and competition from larger, stronger competitors with well-known brands. Over the recent past, Kuvare’s retail segment’s rapid growth in production volumes has created earnings and capital strain that has required external funding given that internal capital generation has not kept pace with new business origination. The establishment of redundant ULSG reserves has required ongoing, material capital contributions from LBL to its captive insurer. Given Kuvare’s retail strategy and increasing ULSG reserves over the medium term, KBRA believes that US statutory financial results will remain pressured. Kuvare has a high proportion of interest sensitive reserves which, depending on the interest rate environment, expose the company to disintermediation risk or spread compression. Kuvare utilizes significant amounts of both internal and external reinsurance to execute its business strategy, creating elevated reinsurance leverage compared to benchmarks. While the (re)insurance marketplace for fixed and fixed index annuities is large, it is also competitive and includes many established players, some of whom are financially stronger, have greater operational resources, and benefit from well-known brands.

Rating Sensitivities

Over the medium term an upgrade is not expected. However, a higher portion of common equity in the capital structure, supported by a larger portion of internally generated capital; reduced financial leverage and robust interest coverage; reduced volatility in earnings and profitability ratios; material positive variance in RBC/BSCR and/or higher capital targets; and/or a more balanced life/annuity business mix, including less concentration in interest sensitive business could result in positive rating action. Significant deterioration in risk profile; a lower proportion of common equity in the capital structure and/or a declining portion of internally generated capital; higher financial leverage or a material decline in interest coverage; more highly concentrated interest sensitive business mix; material negative variance in RBC/BSCR or furthering lowering of targets; and/or departure of a core management team member without a suitable replacement could result in negative rating action.

Kuvare was founded in 2015. Kuvare looks to deliver asset accumulation, protection and service solutions to the middle market and other underserved segments of the life and annuity market. The company manages its operations across three insurance operating segments: Retail (GILICO and ULIC), Institutional (KLR), and Run-off (LBL), complemented by Ignite Partners, a fee-based services and technology business, and Kuvare Strategic Investments.

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