Converium Posts Narrow Q3 Loss on Reserve Strengthening

October 28, 2002

The Swiss-based Converium Group, the world’s 8th largest reinsurer, reported a pre-tax operating loss of $71.2 million for the three months ended September 30, compared to a pre-tax operating loss of $344.7 million for the same period in 2001. It posted a $5.6 million net after tax loss for the period, compared to a net loss of $299.4 million for the third quarter of 2001.

The results were impacted by the $59.6 million in additional reserves Converium set aside in the third quarter to cover additional losses in the U.S. for its automotive and medical reinsurance business, and in Germany to cover this summer’s floods. Additional reserves for the 9-month period now total $84 million.

The company posted pre-tax operating income (realized capital gains/losses are excluded) of $32.5 million for the nine months ended September 30. “This represents an increase of US$ 403.3 million compared to the pre-tax operating loss US$ 370.8 million for the same period of 2001,” said the bulletin. After-tax net income increased by $385.9 million to $26.0 million for the 9 months ended September 30, 2002, compared to a net loss of $359.9 million for the first nine months of 2001. The loss figures should be considered in the light of the Sept. 11 attacks, however.

Converium’s report summarized the six main events that impacted on its earnings during the third quarter as follows:
(1) strong performance in non-life underwriting;
(2) the floods in Eastern Europe and Germany in August;
(3) ongoing turmoil in the capital markets and the restructuring of our investment portfolios;
(4) continued impressive performance of Converium Zurich;
(5) the recognition of reserve developments of prior years recorded by Converium North America and Converium Cologne, and
(6) our life operations.

The report took a generally positive outlook, noting among other factors that “The re-underwriting and the restructuring of the underwriting process pay off. The non-life combined ratio was 100.9% (excluding prior years’ developments) for the nine months ended, and 104.8% (including prior years’ developments) for the nine months ended September 30, 2002.”

CEO Dirk Lohmann observed that, while the reserve increases presented “a challenge that I would rather not have to face,” Converium was in fact making an appropriate response to a problem shared by many other companies. He indicated that the company was “facing pressure from prior years and contracts that from an underwriting standpoint we left long behind us.” He recognized, however, that “it is the nature of our business that problems surface with a significant time lag.” He added that, “We are proactively addressing the issues, and taking the pertinent measures to solve them. ”

Lohmann stressed that “Our current business, particularly our specialty lines such as aviation, accident & health, agribusiness and professional indemnity, is performing excellently. In addition, the outlook for the reinsurance industry in 2003 continues to look good with a continued hardening of markets, increasing demand and increasing prices. Converium is making excellent progress in positioning the group within various markets in which it operates. Converium is being well received and sought out by existing and new clients.”

In a conference call discussion of the results Reuters News Agency reported that CFO Martin Kauer said that Converium expects to finance future growth by issuing debt or other “non-dilutive” instruments. “We are in the process of reviewing the options,” he said in reference to recent rating agency remarks about Converium’s low gearing, and indicated that “we still have a substantial capacity for debt.”

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