Swiss reinsurer Converium AG has apparently weathered what its CFO Martin Kauer called “a perfect summer storm.” The company successfully closed its capital raising initiative with the sale of $420 million worth of new shares.
Kauer, speaking at the European Insurance Summit Conference in Vienna last week, was philosophical about the reaction of the rating agencies to the troubles the company has faced since it announced the need to strengthen U.S. reserves by over $300 million last July. “Rating agencies are a reality,” he said, “and we have to live with them.”
In an entertaining and well organized presentation, Kauer pointed out the differences in capital models and other considerations applicable to the rating agencies, whose main concern he noted is to “advise cedents [on a reinsurer’s] ability to pay claims,” and the models used by the companies themselves. “Our capital model is never finalized, “said Kauer. “It’s always evolving.”
At the time he spoke Standard & Poor’s had taken no action on Converium’s ratings, which had fallen below “A-” to “BBB.” Shortly after the announcement that the capital raising initiative had been completed, S&P raised the ratings to “BBB+.” Converium issued a statement indicating that it was pleased about the decision. It indicated that the higher rating would “help the Company’s efforts to preserve its franchise in its European, Asian and Latin American target markets and to retain key commercial relationships.”
In another reaction, A.M. Best announced that its “B++” (Very Good) financial strength rating and “bbb+” issuer credit rating on Converium and all debt ratings “remain unchanged” following the successful completion of the rights issue. Best said it had “already factored into the last rating action taken on Converium AG on September 29, 2004 (see press release) at which time the CHF 533 million (USD 420 million) rights issue was fully underwritten.”
The difference, as S&P’s Barry Hancock pointed out in an earlier presentation at the Summit, between “A-” and “BBB+” isn’t all that great (the big break is between triple-B and double-B). Nevertheless, it can have serious consequences, as cedents, especially in the U.S., put “triggers” in their contracts that allow them to remove business from a reinsurer whose ratings fall below S&P’s (or Best’s) “A” rating levels.
U.K. auto insurer Admiral PLC did exactly that. Two days before Converium’s capital raising was finalized the company announced that it would no longer reinsure new contracts with Converium. Both Kauer and Hancock agreed that using the ratings as a trigger often produces an unfair result, but they also noted that there isn’t much that can be done about it.
Commenting briefly on Converium in a question and answer session after Kauer’s presentation, Hancock said, “capital models are only a starting point [in calculating ratings], we also consider, management strategy, business plans and where the franchise is going.”
At this point Converium is still below “A” grade, which limits to a considerable extent its opportunities to rebuild its business.