S&P Downgrade Seals Fate Of Converium U.S.

S&P, which had lowered the rating to "A-minus" in July when Converium first revealed that it would need to boost reserves on U.S. casualty business nearly $400 million, announced the further downgrade on Sept. 10?only two days before the start of the Rendez-Vous.

The alternative to "acting prior to the event is to not act," which is "not very healthy," Steven Dreyer, North American practice leader for S&P's insurance ratings division in New York, told National Underwriter here.

A week before the S&P action, both A.M. Best and Moody's also announced downgrades, with the Best rating falling to "B-double-plus" from "A-minus" on Sept. 1, and the Moody's rating dropping to Baa1 from A2 on Aug. 31. At the same time, on Sept. 1, S&P lowered the rating of a U.S. operation, Converium Reinsurance (North America), to "double-B-plus" from "A," while keeping the group rating on CreditWatch.

All three actions came when Converium announced that an independent actuarial study estimated a further reserve deficiency (of $213 million) and that it would raise capital, buy stop-loss protection, and put CRNA into runoff.

Several senior staff members of Converium still attended the Rendez-Vous despite the downgrades.

In a statement issued on Sept. 10, Converium said the latest S&P downgrade, with the Best downgrade, caused it to change its business plan. Under the new plan, it will put both its U.S. operations into runoff, and put proceeds from a proposed capital raising into its European operations, instead of Converium Insurance (North America) Inc., its second U.S. operation.

Mr. Dreyer said the rating agency is well aware of the reinsurance gathering and took the timing of an announcement into consideration when making its decision about the downgrade.

"The main driver for the timing is the company's reserve addition," he said. "That, obviously was not under our control. They precipitated that." He added, "Last year we would be sitting here having a discussion about Munich Re." (Last year, S&P downgraded Munich Re to "A-plus" from "double A-minus" prior to the Rendez-Vous.)

He noted that the rating agency tries to look at "what unresolved ratings we have coming into an event like this and do our best to resolve those as quickly as we can."

Mr. Dreyer said that S&P analysts considered Converium's capital raising initiatives. (Converium announced that the $420 million proposed capital increase was underwritten by a syndicate of banks on Sept. 3.) But the dominant issue was the company's franchise issue, he said.

Mr. Dreyer said S&P had come to the conclusion prior to Sept. 10 that even if the capital were to be raised, credibility was an issue. "What we had heard about the credibility issue?the franchise, the loyalty of the customer base?was sufficient question to lead us to believe this was a 'triple-B' type of company, not an 'A' company, compared with other companies that we rate."

Converium's rating was lowered to a base level of "triple-B" and will be raised to a "triple-B-plus" if the company successful raising capital, he noted.

Mr. Dreyer said there is a chance Converium may pull itself back up. "I think there is a fair amount of goodwill in Europe about Converium," he said. "The feeling is that they do have good management and they have strong underwriters."

Other companies have gone below the "A" range and survived. The Swiss reinsurer SCOR is "a good example of that," he added.