Troubled Converium serves up more bad news

Chief executive Dirk Lohmann has plenty of food for thought Keystone Archive

Swiss reinsurer Converium has said it will raise more capital than previously announced to plug a $385 million (SFr491 million) hole in its reserves.

The Zurich-based firm also announced on Tuesday that its reserves needed an additional $100 million top-up.

It is the third disappointment to hit the markets and the company’s share price in the past six weeks.

On July 20 the company issued a profit warning that sent its stock plummeting by more than 50 per cent.

At the same time it also unveiled plans to raise up to $400 million from investors to cover the gap in its reserves left by rising casualty claims in the United States.

Then a week later the reinsurer posted a $660 million second-quarter loss and said it would probably end the year in the red.

More capital, more reserves

Converium will now issue shares worth $420 million – more than its initial estimate – and boost its reserves by a further $100 million.

An independent review by consulting firm Tillinghast-Towers Perrin concluded that Converium’s reserves were $213m below its best estimates.

“To strengthen reserves again is obviously not good at all,” said Rene Locher, an analyst at Kepler Equities. “Moreover, the capital hike was higher than previously expected.”

Converium’s share price closed on Tuesday down more than 10 per cent at SFr25.50. It has fallen almost 60 per cent over the past year.

The reinsurer said it would give further details of the share issue over the coming days.

The capital increase will be underwritten by a banking syndicate led by Credit Suisse First Boston and JP Morgan.

The latest news has once again sparked talk of management changes.

“Management has disappointed and will come under pressure now,” commented one Zurich-based trader.

No management shake-up

But Converium’s chief financial officer Martin Kauer, who only last month said the reinsurer was “adequately reserved”, declined to speculate on any shake-up of the management board.

Peter Colombo, chairman of the board of directors, said the board was fully behind the course of action taken by management.

In addition to the reserves top-up, Converium has bought a so-called stop-loss reinsurance policy worth $150 million in case reserves deteriorate further.

The reinsurer, which ranks among the top ten in the world, added that it would be restructuring its operations in North America and reducing its risk exposure in the US.

Kauer admitted that the company’s full-year results were bound to be affected by the reserves increase but he declined to give a more precise forecast.

“It is certain that this will be an additional burden on the profit and loss account,” he added.

Announcing last month’s second-quarter loss, chief executive Dirk Lohmann said the company would struggle to make a profit in 2004.

swissinfo with agencies

Key facts

July 20: Converium issues profit warning and announces capital increase plans.
July 27: Reinsurer posts $660 million second-quarter loss.
August 31: Converium says it needs more capital and more reserves.
The company wrote $3.827 billion in net reinsurance premiums in 2003.
It employs approximately 850 people in 23 offices across the globe.