S&P Affirms Converium Ratings, Revises Outlook to Negative

October 24, 2002

Standard & Poor’s Ratings Services announced that it has revised its outlook on Switzerland’s Converium Group to negative from stable, while reaffirming its single-‘A’-plus long-term counterparty credit and insurer financial strength ratings.

The major companies involved are the parent, Converium AG, Converium Reinsurance (North America) Inc. and Converium Ruckversicherung (Deutschland) AG. S&P also reaffirmed its triple-‘B’-plus long-term counterparty credit and senior unsecured debt ratings on Converium Holdings (North America) Inc. The Group was formed last year by the spin-off of Zurich Financial Services’ reinsurance operations into a separate entity.

“The outlook revision reflects continued volatility in the capital markets and Converium’s expected net premium growth in 2002, but it is not necessarily a precursor to a downgrade,” stated S&P credit analyst Stephen Searby. “The rating affirmation reflects Converium’s strong prospective underwriting profitability and strong business position.”

S&P indicated that the main reason for changing Converium’s outlook to negative is the “continued volatility in the capital markets,” that in its opinion “has adversely affected investors’ appetite for small and midsize insurance capital issues.” This has affected Converium’s financial flexibility in that it’s become more difficult to raise new capital when required.

The volatility has also contributed to realized and unrealized losses in Converium’s investment portfolio. “The group reported realized and unrealized investment losses of $61.3 million and $76.3 million, respectively, for the first six months of 2002,” said the bulletin.

As is the case with most other reinsurers premiums have been rising. Converium’s are up 33 percent. S&P noted that “While a significant proportion of the growth arises from pure rate increases on existing business–implying a lower increase in exposure–some is new business to the group.”

It indicated, however, that this in turn requires more retention, and that, “as a result, it now appears less likely that management will be able to maintain prospective risk-based capitalization (according to Standard & Poor’s capital adequacy model) in the double-‘A’ range in the medium term.”
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“Action to increase risk-based capitalization, or a significant improvement in investment market conditions, could result in the outlook on Converium again being revised to stable in the short term,” Searby indicated. S&P also said it expected Converium’s underwriting profitability “to be strong in 2002 and 2003, and this will underpin risk-based capitalization.”

It noted in conclusion that, Converium reported a combined ratio of 101% and an ROR of 5.7% for the first six months of 2002, but that “Beyond 2003, sustainability of this strong profitability, both for Converium and for the rest of the reinsurance industry, is less certain.”

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