S&P Raises Converium’s Ratings to ‘A-‘; Off CreditWatch; Company Comments

Standard & Poor’s Ratings Services has raised its long-term counterparty credit and insurer financial strength ratings on Swiss-based reinsurer Converium AG and its long-term insurer financial strength ratings on guaranteed operating entities Converium Rueckversicherung (Deutschland) AG and Converium Insurance (U.K.) Ltd. to “A-” from “BBB+.”

S&P also removed the ratings from CreditWatch, where they had been placed with positive implications on Oct. 17, 2006. The outlook on all entities is stable.

“The upgrade reflects our belief that the group (Converium) will eventually settle with regulators on transactions subject to regulatory inquiries, and it will do so at a cost that is not material to our view of group capitalization,” stated S&P credit analyst Marcus Rivaldi.

“This follows analysis of a recent independent study commissioned by Converium of settlements of SEC investigations,” said S&P. “The study examined settlements in more than 100 cases between July 30, 2002, and Feb. 20, 2007. Settlements in cases involving groups with a market capitalization of $5 billion or less ranged from $0-$50 million.”

S&P added that, “although the cost of a settlement is as yet not certain,” It “believes that Converium’s capital adequacy would remain consistent with that of the current rating level, even in the event of a settlement considerably in excess of the upper limit of the indicated historical range.”

The ratings upgrade produced a happy reaction from Converium’s management. Board Chairman Markus Dennler commented: “The restoration of our A-rating marks the full completion of Converium’s turnaround. We thank our shareholders, clients and employees for their support and loyalty throughout challenging times in which Converium was able to demonstrate a uniquely strong and intact client franchise.”

CEO Inga Beale added: “Based on our strong 2006 financial results and our robust franchise, we are now well positioned to capture growth opportunities arising from the upgrade throughout 2007, whilst strictly maintaining our focus on underwriting discipline. Converium has seen a strong support from existing clients during the important January 1, 2007 renewals. We will do everything to ensure that our clients’ trust will continue to be rewarded.”

S&P said the “ratings reflect the group’s strengthened management team and sound infrastructure, strong competitive position, and strong capitalization. These positive factors are partially offset by current earnings that are good but currently lower than what would be expected for the rating as well as the relatively low barriers to entry of the reinsurance industry.”

The stable outlook reflects S&P’s “expectation that the combined ratio for the group will be less than 100 percent in 2007 and the ROR will be in excess of 10 percent. Controlled premium growth is expected over the next couple of years, market conditions permitting. Most growth will be generated by the recovery of shares on existing treaties lost as a result of cedents previously reducing their exposure to the group or from the return of old clients. Capital adequacy, as measured by Standard & Poor’s risk-based model, will remain strong.”

Turning to Converium’s immediate prospects, including what effect the unsolicited offer by France’s SCOR Group (See IJ web site Feb. 19) might have, S&P indicated that an outlook revision to positive “is unlikely in the medium term, and would depend on the group significantly outperforming targets over a sustained period.”

S&P then indicated that the “outlook would likely be revised to negative, however, if one or more of the following events were to occur:
— SCOR S.A. (foreign currency A-/Stable/–, local currency A-/Stable/A-2) is successful in its unsolicited bid, leading to potential integration risks such as Converium seeing significant loss of key staff and/or support from its key European client base.
— Unexpected material legacy costs arise in relation to loss-reserve strengthening, regulatory sanction, or shareholder litigation