Shares in Swiss reinsurer Converium plunged by more than 50 per cent on Tuesday as the company warned of a deep second-quarter loss.
The company said it might have to ask shareholders for cash to replenish funds drained by rising claims in the United States.
Converium said in a statement that it planned to raise up to $400 million (SFr491.8 million) to cover US casualty claims (third party liability) and was exploring other options for maintaining a strong capital base.
At the end of the trading day on Tuesday, the company's shares stood at SFr33.40, down from Monday’s close of SFr62.05.
They had earlier fallen to an all-time low of SFr27.30.
This wiped $1 billion off its market value, with credit rating agency Standard and Poor's lowering its long-term rating on Converium to A- from A.
An S&P credit analyst commented that the downgrade reflected Tuesday's company announcement that results would fall "materially short of expectations".
Dirk Lohmann, the company’s chief executive, had earlier said in an interview that the second-quarter loss would be “deeply negative” and would have an impact on the company’s market value. He declined to give further details about the loss.
“We are considering not only a capital increase but also other measures which would alleviate the need for capital,” he added.
The profit warning hurt the share price of other reinsurers with substantial business in the US, including Swiss Re, Munich Re of Germany and France’s Scor.
“It is a disappointment and a big surprise,” commented Roger Degen, an analyst with private bankers Lombard Odier Darier Hentsch.
“For me, the question is whether it is specific to Converium or an industry-wide issue… This is a big surprise for the analyst community,” he added.
Analyst Georg Marti at Zurich Cantonal Bank described the strengthening of the reinsurer’s reserves as “massive” and cut his rating on the shares.
The reserve additions will lead to a $289 million tax charge and force the Zurich-based company to take a $94 million write-down on goodwill.
Converium, which split from Zurich Financial Services in 2001, said it had commissioned a leading firm of consulting actuaries to conduct a “comprehensive and detailed” external review.
“I am personally leading this comprehensive review… Let me stress that I am absolutely determined to put an end to this US casualty reserving saga,” said Lohmann.
“Although the latest set of reserve increases is a disappointment for all stakeholders, our ongoing business is performing well and our franchises in the global reinsurance business markets remain strong,” he added.
The company’s chief financial officer, Martin Kauer, said in an interview that the cash call should not affect future earnings, “assuming we deal with this issue once and for all.”
Converium is due to announce its first-half results on July 27.
swissinfo with agencies
Converium posted net income of $65.7 million (SFr81 million) in the first quarter.
Converium has a staff of 800 in 22 offices around the globe.
Shares in Swiss reinsurer Converium took a hammering on Tuesday after the announcement that the company would suffer a major second-quarter loss.
It has been caused by higher-than-expected claims in the United States casualty business (third party liability).
Converium may raise capital through a rights offer after adding up to $400 million to reserves.