Best Affirms Converium’s ‘B++’ Ratings

October 26, 2005

So near, and yet so far. A.M. Best Co. announced that it has affirmed the financial strength rating of “B++” (Very Good) and issuer credit rating of “bbb+” of Swiss-based Converium AG and its main subsidiaries, collectively referred to as Converium Group or Converium. The outlook for all ratings remains stable.

While not quite back to “A” status, Converium’s ratings seem to have stabilized. Both A.M. Best and Standard & Poor’ downgraded the Company (See IJ Website July 18 and 21, 2004) following large losses in the North American market and substantial reserve strengthening.

“Converium’s ratings reflect its very good risk-adjusted capitalisation, a gradual anticipated recovery in performance and good client retention in its core markets in Continental Europe,” said Best. “Offsetting factors are the continuing potential for reserve volatility and some uncertainty as to strategic direction caused by the absence of permanent executive managers in certain key roles within the company.”

Best said it anticipates that Converium will “maintain very good risk-adjusted capitalisation” in 2005 and 2006, ” supported by reduced business volumes and contributions from net retained earnings.” However, Best is still concerned that “the company’s risk-adjusted capitalisation is adversely affected by the potential for volatility in its reserves, despite the substantial reserve additions made in 2004 and the company’s successful commutations programme. With the ratio of net technical reserves to non-life net premiums written likely to increase sharply to over 450 percent in 2005 (up from 284 percent in 2004), a relatively modest reserve movement has the potential to have a significant impact on the company’s performance.”

According to Best’s analysis Converium is likely to return to profit in 2005 in the region of $ 40 million, “reflecting an improvement in its non-life loss ratio to approximately 80 percent-85 percent, down from 90.3 percent in 2004.” However, Best also noted that Converium’s performance could be adversely affected “by a marked increase in its operating expense ratio to nearly 40 percent in 2005, driven by a reduction in consolidated net premiums written of 45 percent to approximately USD 2 billion.”

Best said that for 2006 it “believes that the benefits of Converium’s cost reduction programme will lead to a decrease in the company’s operating expenses to a more manageable level (anticipated reduction to between 30 percent-35 percent).” It also noted that the “high hurricane activity in 2005 is unlikely to have a major impact on Converium, reflecting the company’s reduced exposure outside the United States.”

Converium maintains strong relationships with its clients, Best indicated – “87 percent of direct client relationships retained through the 2004-2005 renewal season.” It also noted: ” Converium’s involvement with business written through the Medical Defence Union and Global Aerospace Managers Ltd in the United Kingdom is expected to continue, with these two sources of business likely to form approximately 50 percent of the company’s specialty account gross premium written in 2005.”

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