Swiss reinsurer Converium has passed a major hurdle in its efforts to reestablish the company’s sagging balance sheet as shareholders approved a $422 million capital increase at an extraordinary general meeting yesterday, Sept.28.
Converium’s bankers (led by CSFB and JP Morgan) had earlier backed the initiative, albeit somewhat reluctantly. The shareholders approved the reduction of the nominal value of the company’s shares from 10 to 5 Swiss francs (from approximately $7.92 to $3.96) and the increase of the share capital by 533,416,225 Swiss francs ($422.6 million) through the issuance of 106,683,245 fully paid registered shares with a nominal value of 5 SwF. Frs. each at an issue price of 5.00 SwF ($3.96) per share.
A company announcement noted: “264 shareholders representing 10,632,726 registered shares or 26.58 percent of the outstanding share capital were present or represented at the Extraordinary General Meeting. The capital increase was accepted by 62.8 percent of the votes cast. The approved capital increase with pre-emptive rights has been fully underwritten, subject to customary conditions, by a syndicate of banks. The subscription period for the rights issue is expected to begin next week.”
In a speech to the shareholders CEO Dirk Lohmann laid out the background that had necessitated the restructuring. He referred to “substantial strengthening of the loss reserves by US$ 384.7 million in the second quarter of 2004 and the ensuing impairments of deferred tax assets to the amount of US$ 269.8 million and goodwill to the amount of US$ 94.0 million,” which had significantly weakened Converium’s balance sheet. He called the capital increase “indispensable for restoring the financial strength of Converium to a suitable level.”
Lohmann also distanced himself from the financial problems, telling the shareholders that “the shortcomings of our former organizational structure, which we inherited from ‘Zurich’, have become evident. All of the specialized functions were conducted locally, so that it was virtually impossible to implement global standards and guidelines. Every legal entity was more or less independent from an operational point of view. Only with the introduction of a global management structure in October 2003 was a globally responsible person appointed for each specialized function.”
He pointed out that the new structure now “provides for an enhanced degree of transparency and clearly defined responsibilities. Indeed, based on the new organizational structure, we were able to react quickly when we found ourselves confronted with increasing loss reports in the second quarter of 2004.”
Converium, currently one of the world’s 10 largest reinsurers, is destined to shrink considerably in the future. Lohmann confirmed that it would discontinue North American-based operations, although it will still write business in the U.S. on a reduced scale from Bermuda and Zurich. “This strategic reorientation will have far-reaching consequences,” he continued. “Converium’s turnover will decrease as a result of the readjusted strategy. This reduction will be most visible in North America, where the underwriting will be discontinued.”
He also noted that Converium expects its reinsurance markets outside of the U.S., to decrease in business volume of up to 40 percent. “For the 2005 underwriting year we are anticipating a reduction by half of the current business volume. The year 2005 will thus be a year of consolidation as well as ‘downsizing.’ Starting in 2006 we expect a recovery of our leading position as a result of the strong capitalization. In this phase we have to keep an eye on costs and adapt them to the changed business volume, since we have to maintain a competitive administration expense ratio.”
Lohmann’s remarks, and the backing of Converium’s banks, seems to indicate that at least for the moment the company intends to work out its problems on its own. Several previous announcements had referred to ongoing negotiations with potential “strategic partners,” but the issue wasn’t pursued at the extraordinary meeting.
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