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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 www.kbra.com
Carol Pierce, Director
Andrew Edelsberg, Managing Director
Donna Halverstadt, Managing Director
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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