SCOR, Converium Look Forward To Rendez-Vous

In addition to keeping clients and brokers on board, part of the process of getting to this point for both was to stop writing difficult lines in the United States, such as workers' compensation.

In September 2004, Converium received a "triple-B-plus" financial-strength rating from Standard & Poor's, up from "triple-B."

SCOR, which announced an S&P upgrade from "triple-B-plus" to "A-minus" with a stable outlook on Aug. 1, felt the effects of the upgrade immediately.

"The day after we had our rating back to 'A-minus,' the phone rang," said Godfrey de Colombe, director of public affairs for SCOR in Paris. "It was surprising. So there is an immediate effect of the upgrade."

Mr. de Colombe added: "Monte Carlo is the first round of talks. So you feel the water, basically. It has been tough times and hard work, but it has paid off. And of course, we're glad to go to Monte Carlo this year. The last two years have been not so comfortable."

Marcus Rivaldi, a director with S&P in London, said the two reinsurers have done well at staying vigilant and turning things around.

"I think the difference between the two is that SCOR's problems started a lot earlier than Converium's did. So they are much further down the turnaround track than Converium."

For both, part of the turnaround was to cease writing difficult lines of business in the United States.

Kenneth W. Brandt, who leads the Americas & Asia Pacific business unit of GE Insurance Solutions in San Francisco, said that some U.S. lines of business have proven to be particularly difficult for reinsurers.

Last year, in fact, GE Insurance Solutions boosted reserves $1.55 billion on its U.S. business related to prior-year adverse development, much of it from long-tail casualty exposures.

Like the reinsurers, GE has exited some challenging U.S. risks on the primary side. Just this year, the company sold its Medical Protective business, which insures doctors and dentists, to Berkshire Hathaway. It sold renewal rights for its Alternative Risk hospital book to ACE Medical Risk and rights to its excess workers' compensation business to Safety National Casualty Corp.

"When you think about poor performance and the issues that have arisen over the last decade, it all relates to the U.S. liability market," Mr. Brandt said. "If you match loss-trend growth over the last 15 to 20 years and compare that to the industry premium growth, premium has not kept up with loss trends."

What drives this? he asked.

"You have the most aggressive tort system in the world in the United States, with the most lawyers and probably an environment very willing to look for blame. And that is very hard to price."

He noted that rising medical costs, massive torts and many underpinnings in the United States "probably drive it to be one of the largest markets, but also make it one of the most challenging environments for insurers and reinsurers."

He added: "When we look at the market cycles and we talk about hard market and soft market, one thing's clear: there's never been a soft market for the tort system. It's always been a hard market."

That market, he added, has "always gotten bigger from a plaintiffs' standpoint. So it turns out that it's easier to model a hurricane than it is a lawyer or a jury. So that's the challenge in the United States."

U.S. reinsurers also have had a difficult time writing U.S. business, he said, "but we have a larger presence in the United States. We have more at stake."

U.S. withdrawals at SCOR started in 2001, Mr. Rivaldi explained. SCOR withdrew from program business, health business and most workers' compensation. The company now focuses on small Midwest insurance companies or mutuals, and writes some property.

For example, he said, in 2001, SCOR's gross premium split was 35 percent in Europe, 53 percent in North America and 12 percent in the rest of world. At year-end 2004, Europe was 60 percent, North America was 15 percent and the rest of world was 25 percent.

SCOR also pulled out of the Bermuda market where they had an alternative risk transfer operation, Commercial Risk Partners, he said.

Mr. Rivaldi noted that for SCOR, "it was all about keeping their clients, brokers and shareholders on board while they went through the turnaround." SCOR did this, he said, by raising 1.4 billion euros in fresh equity, strengthening reserves, putting robust management frameworks in place, cutting back their portfolios in some areas and refocusing on "what they were historically strong at–both geographically and by lines of business."

"And they did all that while trying to maintain the franchise and keep the clients and everyone on board–and while keeping the faith with the new management team that they would ultimately pull everything off," he continued.

This massive effort is "pretty impressive when you put it all together. It's a very long list they worked through," Mr. Rivaldi noted. "I can't think of any other examples in the reinsurance world of companies that have made such a comprehensive turnaround and restructuring."

There have been others, he said, though "maybe not faced with such severe strains on their credit ratings." SCOR, he explained, had extra stress because it was moved into the "triple-B" range by all the rating agencies, adding that, "there have been issues at Munich Re, but the rating is still a strong 'A-plus.'" Gen Re, he said, has had its issues, "but with the support of Berkshire Hathaway, the 'triple-A' remains."

SCOR's Mr. de Colombe said the company began its ascent with the appointment of a new chief executive officer, Victor Peignet, who launched a turnaround plan "during the first 10 days of his appointment called 'Back on Track.'"

As part of Mr. Peignet's plan, he said, the company raised total capital of $6 billion euros. It also reoriented underwriting by canceling unprofitable lines that were the source of problems, such as workers' compensation in the United States, and made the decision in 2002 to have an external review of reserves every year by independent auditors, "namely Tillinghast, to guarantee the appropriate level of our reserves."

SCOR said its global premium breakdown currently is 48 percent life and accident and 52 percent p-c, compared to 30 percent life and accident and 70 percent p-c in 2002. After exiting some U.S. business, the company is concentrating on Asia and Europe in the traditional markets. SCOR recently announced representation in Mumbai, India, in the p-c arena.

Mr. de Colombe said the company also needed to resolve a few "legacy issues," one being the World Trade Center trial verdict that claimed two events instead of one. "That went against us," he said. "We had only reserves for one event so we had to reserve $20 million."

Another was "a problem" with a subsidiary in Ireland, Irish Reinsurance Partners. "We got out of that in June," he said.

From 2002 on, the company's main goal has been to retain clients, he said. SCOR explained to clients that the security problem was "only temporary and we are doing everything we must do to get our rating back," he said. "Every three-to-six months, we sent updates."

As a result, he said, the company retained its clients, "but we had only half the amount of business with them. Typically when you underwrite in reinsurance, you are not alone, and the clients decide how much of a percentage to give each reinsurer. So our clients dramatically reduced our share, but we were always in the deal."

So far this year, SCOR reported its gross written premiums for p-c decreased 32 percent to $2,528 euros, or $934.3 million, for the first quarter.

First-quarter net income improved to $39.6 million, compared to $55 million in last year's first quarter. The non-life first-quarter combined ratio was 96.2 percent, compared to 100.1 percent at 2004 year-end and 121.3 percent in 2003.

At Converium, where second-quarter net income was $70.8 million, CEO Terry Clarke said: "I am confident that the second quarter marks a turning point on our way to full recovery. We now start to reap the benefits from the relentless efforts of our staff to put Converium back on track."

"I am very pleased that Converium has swung back to a positive result in the second quarter of 2005," he said.

In first-quarter 2005, the company reported a net loss of $61.8 million, after reporting a $760.8 million bottom-line loss for all of 2004.

"We have seen a favorable development of prior-year loss reserves for both the ongoing and the runoff operation," he said.

Last year, Converium put its U.S. Converium North America unit into runoff but continues to write some U.S. business from Switzerland.

Overall, the encouraging profit result, the company said, reflects a solid technical underwriting performance, supported by the absence of any major catastrophic events and a strong total investment result.

Converium's non-life combined ratio, excluding an administration expense ratio of 8.8 percent, was 93.6 percent–a satisfactory result given the large share of proportional and medium- to long-tail business in its portfolio, the company said in a statement.

Converium's results are only partially reflective of cost-reduction measures initiated in March 2005. Their effects continue to be offset by costs resulting from staff retention plans and expenses that Converium considers vital investments to facilitate a fast rebound, the company said.

Mr. Clarke noted that for the third consecutive quarter, "prior-year reserve movements have been minor. In addition, our ongoing operations, which continue to be affected by a temporarily inflated cost base, remain profitable."

Mr. Rivaldi said that Converium "had a good renewal season last year in terms of their expectations." He noted, however, that "they still lost a lot of income, but it wasn't a complete meltdown situation. In terms of other challenges, they still have work to do."

Pullquote:

"The day after we had our rating back to 'A-minus,' the phone rang," said Godfrey de Colombe, director of public affairs for SCOR in Paris.