Converium Boosts Reserves $385 Million

"The issue here is not the U.S. market in general," he said, noting that Converium has significantly improved pricing and its diversification of U.S. businesses in recent years. "As long as we can achieve what we feel is a technically adequate return, we will continue to be present in the U.S. reinsurance market?of crucial importance to any reinsurer seeking a globally diversified book of business."

One week after warning of an impending reserve charge of up to $400 million for U.S. casualty business, the reinsurer officially announced that a $384.7 million reserve boost would mean an overall net loss of $660 million to its second-quarter bottom line.

The reserve boost was primarily related to underwriting years 1997-2001. Lines principally involved are professional liability, umbrella, and excess and surplus lines casualty, which accounted for $265 million of the $384.7 million increase.

On the heels of a $43 million reserve hike in the first quarter, and reserve additions of $148.5 million in 2002 and $123.6 million in 2001, the latest increase in the second quarter brings adverse development in recent years on U.S. casualty reinsurance to a $668.5 million total, Converium said.

The reserve hike is based on a detailed internal review consisting of underwriting reviews of more than 50 percent of the treaties written in years prompting the charge, claims audits and actuarial analysis, Converium said. It does not contemplate the recommendations of an outside actuary which Converium has hired to do an independent study.

Converium said it expects the third-party actuarial study to be completed within the next few weeks.

The company said that the reserve strengthening would trigger impairments on the balance sheet of Converium Reinsurance (North America). Specifically, because of the historical lack of earnings of that legal entity and the impact of this reserve increase, Converium management has decided to fully write off $270 million of deferred tax assets and $94 million of goodwill.

The reserves and impairments obscure the "sound performance of recent underwriting years," said Martin Kauer, Converium chief financial officer.

Without the impairments and the reserves charge, Converium would have reported a net profit of $89 million for the quarter, instead of a net loss of $660 million, he noted. Also, without the reserve charge, Converium would have had a second-quarter combined ratio of 97.2, instead of a combined ratio of 140.5.

Converium said it is exploring options to maintain strong capitalization, including capital raising activities targeting an increase of $250-to-$400 million. Among strategies being taken to reduce capital consumption are changes in investment strategies (such as lower investments in equities), which are expected to reduce capital requirements by $125 million. Mr. Kauer said Converium is also working on "retrospective and prospective reinsurance solutions" aimed at reducing capital requirements $100 million.

To protect future profitability, Converium said it will create a runoff unit for business written in underwriting years 2001 and prior.

The Zug, Switzerland-based reinsurer also said U.S. businesses that it will work to reduce writings in are capital-intensive areas such as reinsurance for national account writers of lead umbrella and excess and surplus lines.

"Even though we've considerably enhanced the capabilities of our underwriting team, I personally think that [these lines] are just recipes for trouble long term. Currently that business is performing well, but it's often the business where rate cuts come first, and I'd rather get out at the top then at the bottom," Mr. Lohmann said.

Explaining the reference to national accounts, he said it means that Converium is reinsuring ceding companies that write across the United States through delegated underwriters in the field.

"They write difficult lines through say 15 branches across the country, and we're supposed to judge the underwriting capability of the people we reinsure. When you have that [amount] of delegated underwriting in the field, it becomes very difficult for the reinsurer to monitor and control," he said. "It's difficult for the company to do," he added, characterizing lead umbrella on national accounts and E&S on major national accounts as the toughest lines to underwrite.

"I'll be honest, there are a lot of good underwriters in this industry, but there aren't enough?And if I'm going to give my pen to reinsure somebody, I want to make sure I know exactly whose got the pen on those classes of business."

Noting that Converium is also reducing writings in the excess commercial automobile area?mainly fleet trucks?he said that bodily injury claim inflation is running too high and the market is not pricing enough for that.

Like umbrella and E&S business, professional liability and general liability also required substantial reserve additions, but Mr. Lohmann said that in these areas, new pricing tools and capabilities enable Converium to better access and select risk.

"Better underwriting, coupled with better pricing, are the first two steps toward insuring that the risk of negative surprises are reduced."

Converium also said it will significantly reduce writing in directors and officer liability because of weakening market conditions.