KBRA Affirms Ratings of Kuvare Holdings and Key Operating Subsidiaries and Removes Watch Developing Status
25 Jul 2024 | New York
KBRA affirms the BBB issuer rating of Kuvare UK Holdings Limited and Kuvare US Holdings, Inc. (KUS), the BBB- long term credit rating of KUS’ $225 preferred shares due 2051 and the A insurance financial strength ratings (IFSRs) of Guaranty Income Life Insurance Company and United Life Insurance Company, all with a Negative Outlook. KBRA also affirms the A- IFSR ratings for Kuvare Life Re Ltd. and Lincoln Benefit Life Company with a Stable Outlook. KBRA removes the Watch Developing status from all ratings. Collectively the companies are referred to as Kuvare.
The removal of the Watch Developing status follows the closing of the sale of Kuvare Insurance Services LP (dba Kuvare Asset Management), a Kuvare-related entity, to Blue Owl Capital Inc. (NYSE: OWL) on July 1, 2024. KBRA believes that the investment management agreement (IMA) executed by Kuvare with Blue Owl to replace the previous IMA with Kuvare Asset Management provides enhanced capabilities while continuing to provide Kuvare with adequate control over investment guidelines, strategic asset allocation, asset liability management and risk oversight activities. KBRA notes Kuvare’s hiring of appropriate staff to oversee the Blue Owl relationship and to manage retained assets that are not subject to the IMA.
The Negative Outlooks for all entities, except KLR and LBL, as well as KUS’ preferred shares reflect KBRA’s expectation that planned new business growth across the Kuvare organization will continue to create earnings and capital strain at GILICO and ULIC which exceeds internally generated capital and necessitate an ongoing need to source capital externally. Over recent years, the growth in debt has significantly outpaced the growth in common equity and led to increased financial leverage at KUS which may reduce the company’s ability to support its current rate of growth.
The Stable Outlooks for KLR and LBL reflect KBRA’s expectation that the companies will maintain sound capitalization while continuing to build the reinsurance book of business with transactions across a broader geographic footprint. The Outlooks also reflect KBRA’s expectation that the reinsurance businesses will continue to maintain a high credit quality, liquid investment portfolio that is well duration matched to its reserves. For KLR, the Outlook also reflects KBRA’s expectation that KLR will maintain regulatory approval to use the Scenario Based Approach (SBA) for loss reserving.
Key Credit Considerations
The ratings reflect sound risk adjusted capitalization at the operating companies, the proven ability of the holding companies to raise capital to support growth, continued distribution expansion and product enhancements, and generally high credit quality, diversified investment portfolios. LBL and KLR portfolios are high credit quality while the portfolios of GILICO and ULIC are solid credit quality relative to industry averages.
Balancing these strengths are challenges to certain financial results, elevated financial as well as reinsurance leverage, a high proportion of interest-sensitive reserves, and a highly competitive market environment. Kuvare’s strong new business origination has created earnings and capital strain which, in turn, has created the need for external capital given that internally generated capital has not kept pace with growth. Kuvare makes extensive use of both internal and external reinsurance, thereby elevating reinsurance leverage relative to peers. External reinsurance exposures are typically to high credit quality counterparties or collateralized, although there are some notable concentrations with both internal and external reinsurers. Overall, the trend over the recent past has been toward writing/assuming more interest-sensitive business. While the (re)insurance marketplace for fixed and fixed indexed annuities is large, it is also competitive and includes many players, some of which are larger, have greater resources, and benefit from well-known brands.
Rating Sensitivities
A higher proportion of common equity in the capital structure, supported by a larger portion of internally generated capital, reduced financial leverage and robust cash coverage at KUS, reduced volatility in earnings and profitability ratios, material positive variance to risk-based capital ratio targets and a more balanced life and annuity business mix could result in a 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 cash coverage at KUS, material realized investment losses or deterioration in the quality or performance of the investment portfolios, more highly concentrated interest-sensitive business mix, material negative variance to risk-based capital ratio targets or departure of a core management team member could result in a negative rating action.
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