Best Affirms Converium’s ‘B++’ Rating; Outlook Raised to Positive

Close, but no cigar, more or less describes A.M. Best’s affirmation of the financial strength rating – “B++” (Very Good) – and the issuer credit rating (ICR) – “bbb+” – of Swiss-based reinsurer Converium AG and its main subsidiaries. Best assigned the same ratings in 2005 (See IJ Website Oct. 26, 2005). However, this time Best revised its outlook for all of the ratings to positive from stable, indicating that Converium might finally regain its “A” rating, which it lost in 2004 (go to: www.insurancejournal.com/magazines/west/2004/09/20/features/46622.htm for further information).

Best said its “rating action reflects Converium’s improving risk-adjusted capitalization, increasing net income and recovering business profile, as well as the election of several new directors to the board and the appointment of new executive management team members filling vacant positions, despite a remaining—albeit smaller—potential for reserve deficiencies.”

Best expects Converium’s risk-adjusted capitalization to continue to improve over the next two years “due to its stronger net income, continued moderate dividend policy and the placing of its North American subsidiary (CRNA) into run-off in 2004.” However Best said that “despite Converium’s actions and the large reduction in liabilities in North America due to the run-off of CRNA, there is still potential for adverse reserve development in the run-off business and the continuing professional liability business.” This could be mitigated if Converium succeeds in selling off CRNA.(See also related article in National section)

Converium’s “business profile” has shown “continuing improvement,” according to Best, with “strong gross premium growth in 2007. The growth stems mainly from regaining property and casualty and, to a lesser extent, specialty business generated from clients that were lost in recent years following the downgrade of the company’s rating. Converium will continue to benefit from strong revenue streams through its long-term relationships with the Medical Defense Union (MDU) and Global Aerospace Managers Limited (GAUM).”

Best also “expects Converium’s net income to continue to strongly improve in 2006 and 2007.” But the report notes that the Group “continues to assume long-tail business with high combined ratios resulting in continuing negative underwriting results, which the group expects to be offset by investment returns. However, the combined ratio is expected to improve to approximately 102 percent in 2007 from 108 percent in 2006 due to the combined effect of strong underwriting returns from the regained business, continuing favorable rate development in the non-life market and significant scale effects.”

Concerning the recent management changes, Best noted: “Converium appointed new members to its executive management team filling all vacant positions and elected several new directors to the board. The appointments and the subsequent communication of the strategic plans for Converium ended a period of uncertainty regarding the future strategic direction of the group.”