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Converium announces further job losses

Downsize this – in future, Converium will be a lot smaller Keystone

Struggling Swiss reinsurance group Converium, which has announced heavier-than-expected losses for 2004, says it will have to cut more jobs to survive.

Senior management told a news conference in Zurich that about 140 redundancies could be expected outside the United States by the end of 2005, including roughly 80 at the company’s Zurich headquarters.

In addition, US staffing levels are expected to drop from about 220 in August 2004 to around 90 in March 2005, as Converium proceeds with the closure of its stand-alone North American business.

As of end 2004, Converium employed about 700 people worldwide, roughly half of them in Switzerland.

But executive vice president Benjamin Gentsch told swissinfo that the company also intended to hire new staff before long, as and when necessary.

The announcement came shortly after Converium published its 2004 annual results, revealing a loss of $760.8 million (SFr886.7 million).

The figure was worse than market expectations, but the company indicated that it did not expect any further nasty surprises – and would continue to operate as an independent, if considerably smaller, reinsurer.

Ready for the rebound?

Newly appointed CEO Terry Clarke said Converium viewed 2005 as a “year of transition”, during which it would “rebuild credibility with stakeholders, including rating agencies”.

He said 2006 was targeted as the year in which the company would restore cost-competitiveness and “prepare for a rebound”.

Clarke said gross written premiums (revenue), which had already dropped nearly ten per cent to $3.84 billion in 2004, were expected to fall to just over $2 billion this year as the firm focused on its new core markets outside North America.

He said Converium was now aiming for “strategic continuity, based on successful renewals, operational prudence and accuracy”.

Its future main markets would be Europe, Asia-Pacific and Latin America, with the North American region served “selectively” from Zurich.

Future customers would be primarily small to medium-sized insurance companies, regional or specialised firms, mutual and cooperative organisations and “partnership-oriented” professional reinsurance buyers.

However, when asked whether the company might now become a takeover target, he said this could not be ruled out – particularly given its current low market valuation.

Chain of events

Clarke said the closure of the stand-alone US business was now well on track, following the appointment of a president and CEO in November to “manage a solvent and orderly run-off”.

Regarding the chain of events that led to the 2004 capital crisis, he told swissinfo that the company had “over-estimated” total final premium income over a period of several years, “primarily in the non North American area”.

He said it was in the nature of the reinsurance business that final premium income figures from individual contracts were often not known until three or four years later – once all related claims had been settled.

As a result, Converium was forced to raise $420 million in new capital last year to plug a gap in its loss reserves, which was discovered in July, triggering a flood of credit rating downgrades.

The rating downgrades had “triggered a number of termination clauses in contracts”, particularly in North American markets, resulting in the loss of “substantial amounts” of business and the forced closure of the US operation.

He added that US markets were particularly volatile at the moment due to the number of ongoing class action suits affecting various industry sectors – particularly the tobacco industry.

“One of the reasons we are trying to commute our North American business as quickly as possible is to remove the additional uncertainty connected with [this] litigation,” said Clarke.

Time to go

Clarke added that Converium was moving to address two “material weaknesses” that had recently been identified in its “internal control environment”.

On the one hand – job cuts notwithstanding – the company needed to “train or recruit suitably qualified individuals to fill the knowledge and experience gaps within the financial accounting and reporting function”.

On the other, Converium had identified a “failure in the operation of internal key controls over the initiation of reinsurance and financial accounting data”.

This year has seen the abrupt departure of both the company’s chief financial officer and – less than a week ago – chief executive Dirk Lohmann.

Regarding Lohmann’s departure, Clarke confirmed that he had been sacked.

“The board has been reviewing the management over a period and came to the decision that it was time to part company with Dirk Lohmann,” said Clarke.

He gave no further details.

swissinfo, Chris Lewis in Zurich

Converium lost $760.8 billion in 2004, based on gross written premiums of $3.84 billion.
The main impact on profit was the need to strengthen loss reserves for previous years by $578.1 million.
The key combined ratio for non-life insurance business was 118.2%.
A figure over 100% indicates an insurer is losing money (ignoring investment gains).

Converium says it will have to get rid of more than a third of its 700 employees worldwide.

Around 130 jobs will go in North America and a further 140 elsewhere, including 80 at its headquarters in Zurich.

But new CEO Terry Clarke says the worst is hopefully over for the struggling company, which is now set to “prepare itself for the rebound”.

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SWI - a branch of Swiss Broadcasting Corporation SRG SSR