Best Downgrades Converium; Moody's Warns

By Susanne Sclafane

NU Online News Service, July 20, 3:30 p.m. EST?One rating firm said it was doing a review and A.M. Best Co. hit Converium AG with a downgrade today after the company announced it might boost reserves on U.S. casualty business as much as $400 million.[@@]

Oldwick, N.J.-based Best changed the financial strength ratings of Converium AG of Switzerland and its rated core subsidiaries (collectively referred to as Converium) to A-minus (excellent) from A (excellent). At the same it has downgraded all issuer credit ratings and related debt issues and placed all ratings under review with negative implications.

Earlier, the London office of Moody's Investors Service said it had placed Converium's A2 financial strength ratings and Baa1 debt ratings on review for possible downgrade.

In its ratings announcement, A.M. Best said it has been factoring further adverse reserve development in its ratings for some time, but the effect of this reserve action will cause second-quarter results to fall below expectations.

Moody's noted that the reserve strengthening currently contemplated by Converium will bring its 1997-2001 gross loss ratios for U.S. casualty reinsurance business to levels in line with the average gross loss ratios reported by its broker market reinsurance competitors.

Moody's added that Converium's gross loss ratios remain below those of the direct market reinsurers, which suggests that the company may experience further adverse development on its U.S. casualty reinsurance loss reserves.

In Moody's opinion, to maintain its current ratings Converium would need either to reinforce its capital base or to reduce its operating leverage to levels compatible with a single-A rating by selling major operating subsidiaries, discontinuing certain lines of business, or, to a far lesser extent, reducing the investment risk.

In absence of such actions, Moody's would expect to lower the ratings by at least one notch.

Moody's also noted that any secondary offering of common shares could be challenging in the short term due to the sharp decline of the stock price following Converium's announcement.

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Best Downgrades Converium; Moody's Warns

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