Converium restates to fix finite problems

More changes in the works

Business Insurance
December 26, 2005

ZUG, Switzerland—Converium Holding Ltd.'s restatement of financial reports to reclassify certain finite transactions as deposits will go some way to reassure cedents about the reinsurer's future, but questions hanging over the company remain, observers say.

The restatement last week of shareholders' equity figures for 2004 and the first nine months of 2005 resulted in only modest changes to the company's capital position, they say.

But other restatements are looming that could still concern cedents of the Zug, Switzerland-based reinsurer, they say.

Converium last week said that an unspecified number of transactions previously accounted for as reinsurance had been restated to be recorded as deposits. After conducting a previously announced internal review, the reinsurer concluded that the transactions in question did not include sufficient risk transfer to be accounted for as reinsurance. The review was prompted by regulatory investigations into the transactions.

"In some cases, these transactions involved written or oral agreements, understandings or discussions relating to risk expectations that were not appropriately reflected in the accounting treatment at the time of origination," Converium said in a statement.

The restatement resulted in Converium reporting a $69.3 million increase in shareholders' equity for the year to June 2005, to $1.72 billion, and a $14.6 million increase in shareholders' equity for 2004 to $1.73 billion.

The reinsurer also noted that it would restate shareholders' equity figures for each of the quarters from March 31, 2003, through June 30, 2005, and said that this restatement could "materially" decrease shareholders' equity figures for some periods.

Fitch Ratings said last week that its BBB- rating on Converium would remain on rating watch with negative implications in the wake of the restatement. Fitch was one of several rating agencies that downgraded Converium to a B level rating last year after it announced large reserves increases.

In a statement, the rating agency said that it "takes comfort from the absolute level of capitalization reported by Converium at June 30, 2005," but said that it would await the further slated restatements in order to determine "the true underlying volatility of the group's business."

"Fitch is concerned that regulators have historically focused their attention on companies that have restated their accounts, and, as such, Fitch believes that Converium could potentially face an increased risk of fines and/or shareholder actions," it said.

Chris Waterman, senior director in Fitch's insurance group in London, said it was important for Converium's franchise that it reported some information about the restatements ahead of the renewal season in order to reassure cedents.

However, Mr. Waterman said that, given that the company plans to make further restatements, cedents and brokers may still be leery of placing business with Converium during the Jan. 1, 2006, renewal season.

Converium's announcement likely will be sufficient to reassure current and potential clients about its capital position ahead of the renewal season, said Tim Dawson, an analyst at Helvea S.A. in Lausanne, Switzerland.

And cedents will be reassured that the company's shareholders' equity position was not drastically altered by the restatements announced last week, he said.

The restatement announcement does raise questions about the company, however, Mr. Dawson said, including the matter of how efficient internal controls at Converium were in the past.

Ben Cohen, an analyst at UBS Ltd. in London, said that Converium has not yet provided much information on the restatements, so it is difficult to assess how internal controls at the company have changed to avoid such incidents in future.

Cedents have been beginning to think that Converium had "turned a corner" after its recent troubles, noted one reinsurance broker who asked not to be named. Provided that the financial impact on the company of the restatements yet to be announced is not severe, the developments probably will not significantly impact the company's standing with cedents, he said.

Following Converium's announcement, Standard & Poor's Corp. affirmed its BBB+ rating on the reinsurer.

Marcus Rivaldi, a credit analyst at S&P in London, said in a statement that "we believe 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."

In its delayed report of third-quarter results last week, Converium reported a net loss of $6.9 million, due mainly to recent catastrophe losses and restructuring costs. For the first nine months of 2005, Converium posted profits of $34.5 million.

1994-2006 by Crain Communications Inc.

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