Moody’s Investors Service announced that it has downgraded to A2, from A1, the insurance financial strength rating (IFSR) of Converium AG and its U.S. and German subsidiaries-Converium Reinsurance (North America) Inc. and Converium Ruckversicherung (Deutschland) AG. It also confirmed the Baa1 rating of the $197million in senior notes issued by Zurich Reinsurance Centre Holdings, Inc. All the ratings were given a “stable” outlook.
Moody’s said the downgrade of Converium’s IFSR reflects its “concerns regarding the potential for earnings volatility at a time that Converium’s interest expense and financial leverage are increasing. The restrained prospects for investment returns in an environment of lower interest rates and depressed equity markets is, in Moody’s view, an additional factor that may subdue earnings.”
The rating agency also noted that recent financial results reflect “adverse development on loss reserves as well as net realised and unrealized investment losses.” Earnings in relation to fixed charges have weakened and Converium’s dependence for 95 percent of its premium income from the non-life sector remains a problem according to Moody’s.
It recognized that Converium “intends to grow its life book,” but that it still accounts for only around 5 percent of net premiums and has produced disappointing results with a year-to date loss of $7.8 million
Moody’s indicated that a further consideration for the rating decision was the additional $84 million the company has booked in reserves so far this year, and its intention to take an additional charge of $70.3 million during the fourth quarter of 2002. The company also increased its reserves by $123.6 million in 2001 and $65.4 million in 2000.
“Converium experienced increased losses in a range of lines including miscellaneous professional liability (nursing homes), automobile excess, medical excess, umbrella and miscellaneous casualty,” said the bulletin. Moody’s went on to note that “most of the related contracts were not renewed in 2000 and 2001 and that Converium continues to actively reunderwrite its non-life book. Furthermore, Moody’s also expects Converium’s non-life combined ratio, which stood at 104.8% for the nine months ended 30 September, 2002 to show an improving trend as the book continues repricing, barring major catastrophic losses or additional loss adjustment expenses.”
The report also stated that the company had “significant” capitalization, and should be in a position to profit from current rate hikes in the reinsurance market. It also has an agreement with Zurich Financial Services, its former parent, limiting WTC losses to $289 million, and a sound retrocessional program. Moody’s also believes Converium, as one of the 10 largest global reinsurers “stands to benefit from the current weakness of some medium-sized reinsurers.”
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