S&P Ups Outlook on Converium to Positive as Capital Strengthening Appears Likely

September 28, 2004

Swiss-based reinsurer Converium AG received the first good news on its ratings since July, when Standard & Poor’s Ratings Services announced that it has revised to positive from developing its CreditWatch implications on its “BBB” long-term counterparty credit and insurer financial strength ratings.

S&P noted, however, that “all other ratings remain on CreditWatch with developing implications,” where they’ve been since July 20, 2004. Although S&P had originally assigned a “negative” outlook to the CreditWatch, it revised this to “developing” on Sept. 10. The rating agency expects to resolve the CreditWatch placement by mid-October 2004.

S&P specifically noted that, ahead of an extraordinary general meeting to be held on Sept. 28, 2004, Converium’s Board has proposed that shareholders approve a capital increase of up to $400 million (net of costs). “If capital is raised in line with the board of directors’ proposals, and barring any material unforeseen event, Standard & Poor’s expects to raise its long-term ratings on Converium AG to ‘BBB+’, and its long-term junior subordinated debt rating on guaranteed subsidiary Converium Finance S.A. to ‘BBB-‘,” indicated S&P credit analyst Marcus Rivaldi. He also noted: “Additional potential upside exists for the ratings on Converium Rückversicherung (Deutschland) AG and Converium (U.K.) Ltd. (strategically important operations of the Converium group) should Converium AG issue to these subsidiaries an acceptably worded guarantee.” Such a guarantee would allow S&P to rate the subsidiaries in line with Converium AG.

S&P noted, however, that a potential downside risk remains, “should the planned capital raising fail or fall short of the proposed amount, and subsequently the group fails to retain the support of its key cedents and brokers.” In that event S&P said it was nonetheless probable that “given its current secure capitalization, the ratings on Converium AG would likely remain at ‘BBB’, but would be assigned a negative outlook.

“The downside risk in the ratings on Converium Rückversicherung (Deutschland) AG and Converium (U.K.) Ltd. relates to a potential failure to provide the aforementioned guarantees.”

S&P also noted that a failure to raise the additioanl capital might be even more severe on Converium Holdings (North America) Inc., which is being run-off. In line with that decision the Group’s main North American operating company, Converium Reinsurance (North America) Inc. (R/–/–), has entered into a letter of understanding with the Connecticut Insurance Department.

“The rating is currently predicated on support from the European franchise and the group’s incentive to service its capital market obligations,” S&P continued. “Were the capital not to be raised as planned, Standard & Poor’s believes that the likelihood of the entire Converium group going into run-off would increase, and the incentive to support the debt obligations of Converium Reinsurance (North America) Inc. would correspondingly diminish.”

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