Troubled Swiss reinsurer Converium has unveiled a long-awaited survival plan – and confirmed that banks will underwrite a desperately needed capital increase.
The company said on Tuesday that a syndicate of banks would underwrite its plans to plug a gaping hole in reserves by injecting SFr533 million ($420 million) of new capital.
But the company's share price lost further ground, falling by about ten per cent in early afternoon trading at the stock exchange to SFr17.65 from Monday's close of SFr19.55.
The proposal is due to be approved at a shareholders’ meeting in Zurich later on Tuesday.
Analyst René Locher of Kepler Equities said the support from the banks would “definitely help Converium” to win the backing of its shareholders for the restructuring proposal.
The announcement ends growing fears that financiers might turn their backs on the troubled firm, whose stock has lost two-thirds of its value in the space of a year.
Dirk Lohmann, the company's chief executive, said on Tuesday that the reinsurer would cut up to 600 jobs over the next two years in Europe, Asia and Latin America, and shed almost two-thirds of its 210-strong workforce in the United States.
In a separate statement on Monday, Converium ended rumours of a possible takeover or alliance, saying it intended to scale down operations but would remain independent.
The company said it would focus in future on Europe, Asia and Latin America, regions “where its franchise remains strong”.
Converium estimates that its North American business will shrink by at least $1 billion next year, following a decision not to take on any new customers.
Overall, the company predicts that total gross written premiums for 2005 will reach roughly half this year’s volume, but predicts that “profitable growth” will resume in 2006.
The latest announcements follow a decision by rating agency Standard & Poor’s to upgrade Converium’s rating from BBB to BBB+.
Rating agencies, such as Standard & Poor’s and Moody’s, assign ratings to the bonds and shares of individual companies, based on their assessment of risk and creditworthiness.
Generally speaking, the higher the rating, the lower the risk of default.
High ratings (A or above) are considered essential for reinsurance companies if they want to win new business – or maintain the backing of banks for moves such as a new share issue.
Reinsurers are seen as particularly vulnerable to a ratings drop because of the high-risk nature of their own business – they essentially provide insurance cover for insurance companies.
For example, reinsurance plays a critical, though behind-the-scenes, role in the financial management of natural disaster losses.
The Standard & Poor’s upgrading is conditional on approval of the capital increase plan at Tuesday’s shareholders’ meeting.
The new shares will be issued at a nominal value of just SFr5, or half the nominal value of existing shares.
The nominal value is independent of the market value, which is determined by supply and demand and investor confidence on any given day.
However, a company whose shares are traded for less than – or near to – their nominal value is a prime candidate for a takeover, on the grounds that it is worth less than the sum of its assets.
In early trading on Tuesday, existing Converium shares – with a nominal value of SFr10 – were trading at just over SFr17.
They have fallen from an annual high of SFr70, in the wake of a series of negative financial announcements and accusations of poor management.
swissinfo with agencies
Converium confirmed on Tuesday that banks would underwrite its planned capital increase, which will plug reserves to the tune of SFr533 million ($420 million).
It also quashed rumours of a possible takeover, saying it intends to continue operating independently.
A shareholders’ meeting later on Tuesday is set to approve the capital increase.
Converium, one of the top ten reinsurers worldwide, intends to concentrate on smaller markets outside North America.
It had to rethink its strategy after the share price collapsed and its credit rating was downgraded.
Reinsurers, which offer insurance to insurance companies, need top marks from rating agencies to attract new business.