Converium to Sell No. American Operations to National Indemnity; S&P, A.M. Best Comment

October 18, 2006

Swiss-based reinsurer Converium AG has reached agreement with National Indemnity, a Berkshire Hathaway company, to sell its North American operations for $295 million comprised of $95 million in cash and $200 million in assumption of debt.

Converium said it “has not provided any guarantee or indemnity in respect of the reserves of the North American operations. The transaction is subject to regulatory approvals and customary closing conditions.”

The reaction for the rating agencies was immediate and positive. Standard & Poor’s Ratings Services placed its “BBB+” long-term counterparty credit and insurer financial strength ratings on Converium and its operating entities, Converium
R├╝ckversicherung (Deutschland) AG and Converium Insurance (U.K.) Ltd., on CreditWatch with positive implications. S&P also placed its “BB+” long-term counterparty credit rating on Converium Holdings (North America) Inc. (CHNA) on CreditWatch positive, and affirmed its ‘R’ long-term counterparty credit and insurer financial strength ratings on Converium Reinsurance (North America) Inc. (CRNA).

A.M. Best placed its financial strength rating (FSR) of “B-” (Fair) and the issuer credit rating (ICR) of “bb-” on CRNA) and the FSR of “B” (Fair) and the ICR of “bb” of Converium Insurance (North America) Inc. (CINA) under review with positive implications. Best also placed the ICR of “b-” and the debt rating of “b-” on $200 million 7.125% senior unsecured notes, due 2023 of Converium Holdings (North America) Inc. (CHNA) under review with positive implications.

Converium’s CEO Inga Beale commented: “With this transaction we have successfully delivered on our promise to achieve finality regarding Converium’s US operations through a clean-cut sale. We can now fully concentrate on building Converium’s future, with our business strategy focused on markets outside the US.

“I would like to thank the North American team for an excellent job in running-off and commuting a major portion of Converium’s North American liabilities prior to today’s announcement. Our North American colleagues have exceeded expectations both in terms of the pace and the profitability of our run-off operations.”

The deal should bring to a close a tumultuous period for Converium. In 2004 it was hit by what its then CEO Dirk Lohmann called a “perfect storm” – heavy losses, reserve strengthening, ratings downgrades (below “A”) – stemming mostly from its North American operations (See: https://www.insurancejournal.com/magazines/west/2004/09/20/features/46622.htm.
Ultimately Converium, which was formed following the spin-off of Zurich Financial’s reinsurance operations in 2001, closed its North American operations to new business, and began to run off most of them.

The Company noted that when the sale is finalized it will “reduce its exposure significantly as National Indemnity Company will assume all of the North American operations’ reinsurance liabilities ($1.06 billion as of June 30, 2006) as well as $200 million of debt issued by Converium Holdings (North America) Inc.” It also indicated that the sale “will result in a decrease in shareholders’ equity of $135 million.”

CFO Paolo De Martin stressed the importance to the Company of regaining its “A” ratings. “Even after adjusting the June 30, 2006 shareholders’ equity to $1.66 billion to account for the sale, we maintain a strong financial position, while further de-risking our balance sheet,” he stated. “The clean-cut agreement to sell our North American operations meets a crucial condition for an improved financial strength rating.”

S&P indicated another positive outcome from the deal. It said the CreditWatch listing also reflects its “belief that there is now a higher probability that Converium will in the short term successfully settle with regulators in respect of transactions subject to regulatory inquiries at a cost that is not material.”

The rating agency added that when, “the achievement of such a settlement becomes certain, Standard & Poor’s will raise its counterparty credit and insurer financial strength ratings on Converium AG and its guaranteed operating entities to ‘A-‘ and remove the ratings from CreditWatch.”

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