Converium Completes External Reserve Review; Share Issue to Raise $420 Million
Zurich-based Converium Holding AG announced that an external reserve review, conducted by the actuarial consulting firm Tillinghast-Towers Perrin, confirms reserves to be “within a reasonable range of actuarial estimates for the segments reviewed.”
Last July’s announcementof of adverse reserve developments, which have eroded the reinsurer’s capital, prompted the review. Both A.M. Best and Standard & Poor’ downgraded the Converium’s ratings (See IJ Website July 18 and 21). Best noted that the “problem is primarily due to U.S. casualty losses related to the underwriting years 1997 to 2001, which will be bolstered by up to USD 400 million. It will trigger net impairments of up to USD 289 million of deferred tax assets and USD 94 million of goodwill, negatively affecting the balance sheet of Converium Reinsurance (North America) Inc.”
To address that shortfall Converium confirmed: “Against the backdrop of the reserve strengthening of US$ 384.7 million in the second quarter of 2004, the Company announces a share issue of the CHF equivalent of US$ 420 million that will be underwritten, subject to customary conditions, by a syndicate of banks in order to restore the Company’s strong capitalization and protect its franchise.”
Commenting on Tillinghast’s review, of its overall reserve position, Converium said it had concentrated on its Zurich and New York originated businesses, “which amount to $ 6.8 billion and represent 94.9 percent of the company’s total reserves.” It added: Tillinghast “concluded that Converium’s overall net reserves as of June 30, 2004, in total, for the segments reviewed, are below their point estimate, but fall within a range of reasonable actuarial estimates. Tillinghast’s point estimate for the relevant businesses exceeds Converium’s carried reserves as of June 30, 2004 by US$ 212.9 million or by approximately 3.2 percent.” The company also said it was taking the study into account in formulating plans to strengthen its reserve position.
In June Converium announced that it had “commuted US$ 176.8 million in loss reserves related to prior years’ business assumed by its North American operation, Converium Reinsurance (North America) Inc., and is currently in further negotiations “with several clients for offers of commutations, and it is pursuing these diligently.” If successful these would further reduce “the difference between Tillinghast’s point estimate and the Company’s current level of reserves.”
The bulletin also noted that Converium has “entered into a retrospective retrocession agreement with National Indemnity Company, a Standard & Poor’s AAA-rated member of the Berkshire Hathaway group of insurance companies. The retrospective retrocession agreement includes two layers, a US$ 150 million out-of-the-money layer, and a US$ 235 million in-the-money layer. The out-of-the money layer provides an additional US$ 150 million of cover against potential adverse reserve development on the underwriting years 2003 and prior, for all business written by Converium AG, Converium Reinsurance (North America) Inc. and Converium Insurance (North America) Inc.”
The $420 million in additional capital is more than the $250-400 million estimate Converium indicated at the end of July. It plans on submitting the proposal to an Extraordinary General Meeting of shareholders to be held before the end of September, who will be asked to approve the proposed capital increase, and hopes to issue the new shares in October.
The company also said it was taking additional steps to decrease it risk, exposure and it hopes that by restoring its capital adequacy it “expects to preserve a strong financial strength rating, which is a prerequisite for retaining and gaining access to reinsurance business, as it is a key criteria used by clients and intermediaries to assess counterparty risk. A strong financial strength rating is particularly important in some of Converium’s more profitable lines, i.e. in specialty lines such as aviation & space and credit & surety. “
As part of its long-term strategy Converium confirmed it “remains committed to underwriting for profit. As regards pricing, Converium’s after-tax target return for each line of business is 11 percent plus the higher of 4 percent or the local risk-free rate (i.e. at least 15 percent in total) on allocated risk-based capital in each market. Meeting these targets requires a constant management of the underwriting cycle including the avoidance of under-priced business.”
Converium’ also plans to reorganize its North American business to implement changes to the way it is executed. It aims to reduce exposure to highly capital-intensive lines of business in the US, and “will discontinue the local writing of long-tail specialty lines reinsurance from North America. Going forward, these lines will be written using Converium AG, Zurich, and its Bermuda branch as carrier. These steps are expected to result in a reduction of North American gross premium volume by up to US$ 500 million.”
CEO Dirk Lohmann commented: “These organizational changes reflect a series of painful lessons learned from prior year casualty underwriting in the United States. A centralization of underwriting responsibilities for the long-tail specialty lines is expected to facilitate the implementation of rigorous and globally consistent underwriting standards.
“In addition, we believe that this course of action and the proposed changes to the legal entity structure will help ensure that Converium can continue to offer its clients and producers in North America a Converium entity with the highest financial strength rating possible.”
Peter Colombo, Chairman of the Board of Directors, stated: “The Board of Directors has initiated and unanimously approved the course of action taken by management. We believe that the proposed capital increase is in the interest of our shareholders as it will help safeguard Converium’s strong franchise. The planned size of the share issue takes into account an independent assessment of Converium’s reserve position as well as the various measures which reduce the Company’s capital requirements. The Board will carefully monitor the implementation of the comprehensive and balanced set of financial, organizational and strategic measures announced today.”
Converium will hold a conference call for the investment community today, Tuesday, August 31, 2004, to be webcast live on the Internet at www.converium.com. “Please dial in 10 to 15 minutes before and ensure that you have Real Media Player(tm) or Windows Media Player(tm),” said the bulletin.
“For those of you unable to participate actively in this conference call, an audio recording will be available one hour after the event for 24 hours. The number to dial and the access code are as follows:
followed by the access code 450 # A few hours after the event the full webcast with Q&A will be available for a period of one month on www.converium.com,” the bulletin concluded.