Standard & Poor’s Ratings Services reported that it lowered its long-term counterparty credit and insurer financial strength ratings on Switzerland-based reinsurer Converium AG and its main operating subsidiaries (collectively referred to as Converium) to “A-” from “A.”
In addition, S&P lowered its long-term counterparty credit and senior unsecured debt ratings on Converium Holdings (North America) Inc. to “BBB-” from “BBB,” and junior subordinated debt rating on Converium Finance S.A. to “BBB” from “BBB+.” At the same time, all ratings were placed on CreditWatch with negative implications.
“The downgrade reflects Converium’s announcement today that its 2004 results will fall materially short of expectations primarily due to a need to significantly strengthen U.S. Casualty reserves,” stated S&P credit analyst Marcus Rivaldi in the announcement. “This has resulted in a negative reassessment of the group’s operating performance, its capital adequacy, and the credibility of management by Standard & Poor’s,” he added.
The CreditWatch placement reflects the uncertainty as to the final extent of the reserve strengthening and likelihood that capital will be successfully raised in order to restore capital adequacy to a level consistent with a strong rating,” stated S&P credit analyst Stephen Searby.
Converium reported that based on internal analyses, reserves may need to be strengthened by up to $400 million. Furthermore, it announced that it had commissioned an independent firm of consulting actuaries to conduct a comprehensive review of reserves, the results of which are expected by September 2004. As a result, S&P cannot rule out at this stage that the final cost of strengthening may be higher than $400 million. The reserve strengthening, relating to the group’s North American operations for underwriting years 1997-2001, means that the group will not now meet S&P’s expectations for 2004 of a group combined ratio of less than 95 percent and an ROR in excess of 11 percent.
Based on a $400 million deficiency, Converium’s consolidated capital adequacy position would fall to a level consistent with a “BBB” rating. Converium also announced impairments to deferred tax assets and goodwill totaling $383 million, which will affect reported earnings and capital for 2004, although they will have no impact on S&P’s capital adequacy modeling for the group. The group has at this stage not presented firm plans as to how it will recapitalize itself.
S&P plans to discuss with Converium the various issues that the company’s announcement raises with regard to management control, and in particular the corporate governance surrounding reserving issues. S&P had previously understood that U.S. liability reserve strengthening would be contained by reserve releases on the more recent underwriting years and especially from short-tail classes of business and therefore have a moderate impact on earnings.
S&P expects to resolve the Creditwatch during September 2004 when the outcome of the independent actuarial review will be known and the potential for capital raising will be clearer.
“A successful replenishment of capital will likely result in an affirmation of the rating at “A-,” although a negative outlook may be retained,” Rivaldi said.
A failure to replenish capital may result in a further lowering of the ratings, although they are likely to remain in the “BBB” category, with the possible exception of the senior unsecured debt issued by Converium Holdings (North America) Inc.
S&P will also reassess the status (currently core) of Converium Reinsurance (North America) Inc. in the Converium group. This could result in a lowering of the rating on Converium Reinsurance (North America) Inc. below that of the other core companies.
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