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Converium's $385m reserve increase in July sent its financial strength ratings tumbling and its share price plummeting by 60%. It now faces a race to protect its rating and restore confidence before the renewal season. Reactions reports.
Swiss reinsurer Converium shocked the market on July 20 when it announced that it would strengthen reserves for US casualty business by up to $400m. Rating agencies and shareholders took the news badly. The big four rating agencies took action on Converium's ratings and the company's share price almost halved on the day of the announcement.
AM Best and Standard & Poor's (S&P) both downgraded the company's financial strength ratings to A- from A. Moody's put the group's A2 financial strength rating on review. And Fitch, which does not rate Converium's financial strength interactively, downgraded the company's long-term rating to BBB- from BBB+ and put it on negative rating watch.
Converium's share price closed at SFr62.05 ($49.61) on July 19, the day before the announcement. The closing price on July 20, after the announcement, was SFr33.25.
The eventual size of the reserve boost was $384.7m, announced on July 27 with a second-quarter loss of $660m. This translated into a $594.3m loss for the first half of the year. This compares with a net profit of $59.1m for the second quarter of 2003 and a profit of $84.6m for the first half of 2003. The group's non-life combined ratio increased to 106.1% for the first half of this year, from 92% for the same period last year.
The reserve boost was responsible for a large part of the loss. It also forced the company to write off a deferred tax asset of $269.8m and goodwill of $94m, both of which were on Converium Re North America's balance sheet.
Commentators believe shareholders' and rating agencies' alarmed reaction to the reserve increase stemmed more from the size of the charge than the fact that the company had taken another hit on US casualty business written between 1997 and 2001. AM Best says it was expecting further reserve increases for the business but the hit to profits was well above its expectations.
There was also no warning from the company that there was such a big hole in its reserves. The...