KBRA Assigns Ratings to Converge RE II and Converge Holdings Inc.
By: Kroll Bond Rating Agency (KBRA)
December 21, 2018
New York, NY
KBRA Assigns Ratings to Converge RE II and Converge Holdings Inc.
Kroll Bond RatingAgency (KBRA) assignsan insurance financial  strength  rating  (IFSR)  of  A-to Converge  RE  II  (Converge  RE).  Licensed  in  2017, Converge RE  isa Puerto  RicoClass  5International  Insurerspecializing  in  life  and  annuity reinsurance. KBRA also assignsan issuer rating of BBB-to Converge Holdings Inc. (Converge Holdings), the holding company for Converge RE. The Outlook for both ratings is Stable.The assignedratings reflect Converge RE’s sound initial capitalization,the  life  and  annuity business  assumed  to  date,  experienced  management  team  and  strong  asset/liability management framework to ensure sufficient liquidity to cover projected cashflows. Converge RE’s business plan is to target middle market U.S. life companies with investment guidelines compatible with its investment strategy. Converge RE’s domicile gives it a unique competitive advantage over offshore reinsurers in that primaryU.S. life companies in
Compacting States receive full credit for reinsurance from Converge RE due to Puerto Rico’s membership in the Interstate Insurance Product Regulation Compact Agreement as well as the NAIC. Converge RE’s business plan capitalizes on current  trends  in  the  U.S.  life  and  annuity  market  and optimally  leverages  management  experience  and  relationships  in  the  industry.  Moreover, Converge RE employsdisciplined underwriting by  eschewing transactions that do not align with its targeted risk profile. Converge RE is owned by David Lichtenstein, Chairman and CEO of the Lightstone Group, a commercial real estate investment enterprise he founded in 1988. Mr. Lichtenstein has pledged his continuedsupportofConvergeRE’sgrowth strategybeyond its  current  capitalization withanadditional  capital  commitment  letter.Lightstone  views Converge RE as an integral part of its long-termgrowth strategy. The ratingsreflect KBRA’s expectation  that  sufficient  capital  will  be  infused  into  Converge  RE  as transactions  are consummated.
Balancing these strengths are Converge RE’s limited operating history,  execution risk as a recently formed  reinsurer  in  a  competitive  market,  and  its non-traditional investment strategy, which is more illiquid than a traditionalapproach.KBRA notes that Converge RE’s investment strategyis to invest a portion of its assets in real estate equity and loansmanaged by Lightstone(up to 30%), balanced by a fixed income allocation of at least 60% managed by  Western  Asset  Management,  a  global  asset  manager  with  over  $420  billion  of  AUM  at September 30, 2018. To date, Converge RE has consummated transactions involving life and annuity blocks as well as flow business.KBRA observes that Converge RE has yet to generate earnings as the company is still ramping up operations. The company’s strategy is to assume blocks of annuitiesand other asset-intensive mortality business that arelong-tailedwith low volatility and predictable cashflows.The Stable Outlook reflects KBRA’s expectation that Converge RE will continue to maintain sound  capitalization  via  needed/scheduled  payments  under  the  promissory  note  while judiciouslyexecuting its business plan. Additionally, KBRA expects Converge RE to retain its management team and board as well as maintain sufficient liquidity to cover projected liability cash flows.
A rating upgrade in the near to medium term is not expected. For the longer term, successful execution  of  its  business  plan,  continued  favorable  capital  trends,  maintenance  of  sound financial flexibility,sustained growth in earnings,and the absence of any liquidity events could result  in  positive  momentum.Lack  of  timely  and/or  adequate  capital  contributions from Converge RE’s owner,departureof a  key member of the management team,or a liquidity event requiring sale of assets into a distressed market could result in a negative rating action.

The ratings are based on KBRA’s Global Insurer & Insurance Holding Company Rating Methodologypublished on October 10, 2017. A full report will soon be available on
Analytical Contacts:
Carol Pierce, Director
(646) 731-3307
Andrew Edelsberg, Managing Director
(646) 731-2371
Donna Halverstadt, Managing Director
(646) 731-3352

About KBRA and KBRA EuropeKBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by  the  Ontario  Securities  Commission  for  issuers  of  asset-backed  securities  to  file  a  short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the  European  Securities  and  Markets  Authority  (ESMA).  Kroll  Bond  Rating  Agency  Europe Limited is registered with ESMA as a CRA.
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