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But Converium faces race to recapitalise

Last month's shock $385mn US casualty reserves bolstering and profits warning fed through to hit reinsurer Converium's half year results hard, with a second quarter operating loss of $300mn and net loss of $660mn taking the year-to-date figures to $223mn and $594mn losses respectively.

This contrasts with the $88mn operating profit and $85mn net profit the Zurich-based company reported at the halfway stage of 2003.

With round robin ratings downgrades, and a plummeting share price, the reinsurer has much to do to restore market confidence. And with the news that major shareholder Fidelity International had dumped two-thirds of its holding in the group, the race is on to prove that Converium won't be this year's SCOR - or worse - as Monte Carlo, Baden-Baden and the renewals season loom.

Top of the priority list is the goal of improving the group's capital position, with tangible equity down $409mn since the last year-end. A week after the profits warning, in its 27 July earnings release, Converium detailed a number of actions designed to "de-leverage and de-risk" its balance sheet.

It said it would cut back its equity investment portfolio and reclassify government bonds to free up $125mn capital requirements for investment risks, as well as seeking retro and future reinsurance solutions to mitigate premium and reserving risks.

Plans are also afoot to raise additional capital to bolster the balance sheet, with an increase of between $250mn and $400mn targeted, depending on the results of an external actuarial study due for completion at the end of August.

On the operating side, Converium said it intends to set up a run-off operation for legacy exposures arising from the period leading up to and including 2001, and will actively pursue a commutation strategy. And in the US, Converium will significantly scale back its involvement in highly volatile capital-intensive business, specifically the umbrella and excess & surplus lines that blighted 1997-2001 figures.

Since Converium, formerly Zurich Re, was spun-off from Zurich Financial Services in a 2001 IPO, reserve strengthening has become a regular occurrence. Property casualty funds have now been increased in 2001, 2002 and 2004, with life reserves bolstered in 2001, 2002 and 2003.

Despite relatively strong underlying performance, with six month gross premiums written up 9 percent to $2.4bn and non-life combined ratio excluding prior year developments improving 4.1 points to 94.2 percent year-on-year, the share price hovers around SFr25, more than SFr35 down on preannouncement levels, and doubts are being expressed about Converium's management.

Ratings agencies reacted swiftly to the reinsurer's profits warning, with AM Best and Standard & Poor's downgrading financial strength ratings from A to A- with negative implications.

In a statement, S&P revealed its concerns, commenting: "(S&P) will discuss with Converium the various issues that [the] announcement raises with regard to management control, and in particular the corporate governance surrounding reserving issues."

"Standard & Poor's had previously understood that US liability reserve strengthening would be contained by reserve releases on the more recent underwriting years and especially from short-tail classes of business and therefore have a moderate impact on earnings."

Equity analysts amplified concerns over the group's management, as Rene Locher of Zurich-based Kepler Equites reportedly revealed: "My clients are telling me they've lost trust in management, and when the market has lost faith in management, it usually means that management is going to change eventually."

Locher compared the current situation at Converium with that at French reinsurer SCOR two years ago. SCOR's shares plummeted some 70 percent after investor confidence in chairman and chief executive Jacques Blondeau wilted as a result of profit warnings and capital increases. Blondeau was axed and Denis Kessler took over.

Pascal Seidner of Zuercher Kantonalbank echoed the view. "I don't think it's wholly unwarranted that some people are calling for management to step down, because surely the existence of these problems has been known about for longer than three months."

Although a number of analysts back Converium to successfully raise capital, and the road-showing CEO Dirk Lohmann asserts his company is by no means alone in facing US legacy issues, without the institutional support enjoyed by SCOR in its time of need, the group looks to be facing a renewals season of discontent.

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