Swiss reinsurer Converium has made another step in its recovery and sold its loss- making North American unit which nearly led the company to collapse two years ago.
The Zurich-based firm will sell its US business for $95 million (SFr120 million) to National Indemnity Company, part of the Berkshire Hathaway group, and pass on $200 million of debts.
Converium issued a profit warning and had to lay off hundreds of workers after it "over-estimated" premium income to the tune of $500 million (SFr634 million) – mainly in its North American operations – in 2004.
The company was forced to raise $420 million in new capital to plug the hole and chief executive Dirk Lohmann was ousted after it posted a $760.8 million loss that year. His successor, Terry Clarke, lasted less than a year in the job.
In March of this year Converium restated its financial results from 1998 to the middle of 2005. The company's difficulties have also sparked an investigation by the US Securities and Exchange Commission (SEC) that is still ongoing.
But Converium has been guided into calmer waters by current CEO Inga Beale despite suffering heavy losses in last year's storms in Europe and the US. The firm posted a better than expected net profit of $68.7 million (SFr87 million) in 2005.
"With this transaction we have successfully delivered on our promise to achieve finality regarding Converium's US operations through a clean-cut sale," Beale commented on Tuesday's agreed sale.
"We can now fully concentrate on building Converium's future, with our business strategy focused on markets outside the US."
Zurich Cantonal Bank Georg Marti told swissinfo that the sell-off represents a major step in Converium's bid to regain the single-A credit rating it lost in 2004. The Standard & Poor rating is a benchmark performance indicator and is seen as essential to stay alive in the industry.
"Converium have known for some time that to get back their single-A rating they had to sell off its US business and resolve the SEC investigation," Marti said.
"They have taken one big step towards establishing a new basis, but they are only half way there. It is essential to have a single-A rating to get new business in some countries."
National Indemnity Company will assume all of Converium's $1.06 billion reinsurance liabilities in the US. Converium calculates that the sale will result in a $135 million decrease in shareholders' equity.
More details of the transaction will be released on November 7 when Converium releases its third quarter results.
swissinfo, Matthew Allen and agencies
Gross premiums written in 2005: $1.994 billion.
Ongoing non-life combined ratio: 107.2%.
Total investment return: $312 million.
Net income: $68.7 million.
Earnings per share: $0.47
Return on equity: 4%.
Total invested assets plus cash: $7.281 billion.
In March 2001, Zurich Financial Services announced that it would exit the reinsurance business by way of a spin-off or an IPO, leading to the creation of Converium.
In October 2003, Converium introduced a new management structure centred on global functional areas, replacing an organizational structure previously based on geography.
Due to higher than expected US losses, primarily related to the underwriting years 1997 to 2001, Converium bolstered its reserves in 2004.