Standard & Poor’s Ratings Services announced that it has affirmed its “BBB+” long-term counterparty credit and insurer financial strength ratings on Swiss-based reinsurer Converium AG and the guaranteed operating entities of the Converium group.
S&P has also removed all of the ratings from its CreditWatch, where they had been placed with negative implications on Nov. 4, 2005, and has assigned a stable outlook.
S&P noted that the resolution of the CreditWatch placement “follows the publication of the group’s unaudited restated financial information for its Dec. 31, 2004, and June 30, 2005, balance sheets and third-quarter 2005 results.” (See IJ Website Dec.20)
S&P said the figures contained in the results have confirmed its “view on prospective strong group capitalization—there being an increase in unaudited shareholders’ equity reported for June 30, 2005—and good operating performance.” In addition S&P indicated that it “believes that the restatement will not have a negative impact on group financing arrangements or on Converium’s ability to retain the support of its key European client base and key staff.
“The ratings continue to reflect Converium’s good competitive position (notwithstanding franchise damage resulting from Converium placing its U.S. operations into run-off in 2004 and the reinsurance industry’s relatively low barriers to entry); good earnings prospects; and strong capital adequacy.”
However, S&P noted that “these positive factors are partially offset by cost overhang issues and reduced although continuing uncertainty that exists over the composition of the group’s leadership, despite the recent appointment of a new CEO.”
The report indicates that despite the financial difficulties of 2004, the group has maintained the support of key European cedents. “The material use of a direct distribution model and strategic investments provide important sources of competitive strength,” S&P explained, “although this is partially offset by industry factors such as relatively low barriers to entry.”
The rating agency also noted the following significant factors
— Good prospective non-life operating performance is supported by continuing attractive underwriting conditions and a cost base that has been reconfigured to deal with materially lower premium levels (as reflected in an expected administrative expense ratio of approximately 6.5 percent in 2006).
— Capital adequacy is strong prospectively, due to the fresh equity invested during 2004, substantially reduced premium income, a relatively more stable aggregate reserve position, and a commitment from management to conserve capital within the ongoing European legal entities. This is despite Standard & Poor’s considering a number of scenarios involving reserve strengthening up to the level of Converium Reinsurance (North America) Inc.’s (CRNA; R/—/—) surplus.
— Since 2004, there has been significant uncertainty surrounding the composition of Converium’s board and executive committee. Standard & Poor’s believes this has been negative, providing at the very least a distraction for the business, but is comforted by the recent appointment of a new CEO. While the appointment is not expected to result in wholesale changes to strategy or broader leadership, Standard & Poor’s still considers it likely that there may be further modifications.
Commenting on Converium’s stable outlook S&P cited the following expectations:
— Converium will maintain the support of key European cedents, reflected in total gross premiums written of approximately $2.0 billion in 2005, remaining relatively stable for 2006;
— Group operational and underwriting capabilities will be maintained through the largely successful retention of key staff globally;
— Continuing operations will post a combined ratio of 108 percent-110 percent and ROR of about 2 percent-4 percent for 2005, with significant improvement in 2006 (combined ratio below 102 percent and ROR above 8 percent);
— Legacy liabilities will not materially affect the underwriting performance of the group’s continuing operations; and
— Sanction from regulators following the recent restatement will not be material.
Moreover, S&P indicated that the “outlook could be revised to positive following one or more of:
— The satisfactory resolution of remaining outstanding issues surrounding the composition of the group’s leadership;
— There being the potential for further material operating performance progress after 2006; and/or
— The integrity of revised reserve levels and controls being proven by the successful run-off or sale of CRNA.
On the other hand, S&P indicated that the ratings outlook “could be revised to negative following one or more of:
— Converium losing the support of its key European client base;
— Converium seeing significant loss of key staff; and/or
— Material legacy reserve strengthening being required, particularly within ongoing operations.
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