For a company that has seen downgrades, restatements and regulatory investigations in its recent history, all fingers are crossed at Converium that a return to the "A" ranks is imminent in 2007, discovers Nick Thorpe.

In the year since she took the helm at Converium, chief executive officer Inga Beale has helped steer the company away from the rocky shores of post-downgrade oblivion and back out into the sea of opportunity. Since splitting from parent company Zurich back in 1997, Converium has ridden the reinsurance wave through times of "A" rated, profitable growth through to the darker seas of regulatory investigations and painful downgrades.

Converium is one of the few reinsurers that has been struck off the "A" list by rating agencies and survived to tell the tale, SCOR being the other most obvious example. But 2007 has heralded a return to form of sorts with early indications of a successful renewals, a profitable 2006 and plenty of signs that it could be close to regaining its coveted "A" rating. The woes of 2004 now seem like a long time ago.

Young gun

Once part of the Zurich family, Converium was born out of an amalgamation of various reinsurance entities within the financial services group in 1997. A successful initial public offering in December 2001 followed the establishment of offices around the world, including Paris, London, Kuala Lumpur and Sydney. Over time the company has focused its business on the European, Middle Eastern and Asia Pacific markets, although there are plans to expand the business into new markets such as Latin America. Despite the current excitement in the reinsurance industry about opportunities in China, Beale remained cautious about future plans there. "We are curious about the Chinese market but there is so much changing so fast - we want to be sure that we understand the pressures and pricing before making any significant business decisions," she said. "We lost considerable volume in Australia due to the strict regulation surrounding 'A' rated companies but we have been growing the business back in Taiwan, India and Malaysia."

The reinsurer is organised into three main business segments - property and casualty making up 50% of gross written premiums (GWP), specialty lines including credit & surety and marine & energy accounting for 34% of GWP, with life and health taking the remaining 16% of business. Within these business areas, the company is diversified across a number of lines of business. Property accounts for the largest proportion (25%) with life & disability, aviation, professional non-life liability, general third party liability and motor all accounting for 12-13% each. Lines such as agribusiness, engineering, marine & energy, workers' compensation and accident & health all account for 3% or less.

Downward spiral

Converium suffered every reinsurer's nightmare in the summer of 2004 when Standard & Poor's downgraded the company from an "A-" to the much-lamented "BBB". The reinsurer's problems began in July 2004 when a profits warning was issued on its second quarter results. Stock in the company immediately plummeted by more than 50% and S&P cut Converium's rating from "A" to "A-". The downgrade to "BBB" occurred six weeks later on 10 September 2004. The problems stemmed from the company's US casualty operations, which incurred far steeper than forecast losses between 1997 and 2001, leading to a massive shortfall of around $390m.

The rating downgrade triggered substantial cancellations and share reductions. During the 1 January 2005 renewals the company's continued focus on underwriting profitability caused it to decline about 5% of renewable business, although this was partially offset by premium growth of $282m due to rate increases as well as new or restructured business. With Terry Clarke taking over the reigns from former CEO Dirk Lohman in February, the company embarked upon a focused journey to recovery. Cost cutting exercises reduced the company's global workforce by around 270 and strict underwriting standards, coupled with a management overhaul, saw rating agencies soften their stance on the company somewhat.

Converium posted a net income of $68.7m in 2005, a far cry from the $582.5m net loss reported in 2004, despite a pre-tax impact of $164.8m resulting from major natural catastrophes including Continental European floods and Hurricanes Katrina, Rita and Wilma. The figure, by all accounts, should have been higher but a reduction in the overall business volume following the 2004 rating downgrades hindered business growth and, when combined with the financial hangover from a busy catastrophe season in 2005, stalled a potential recovery. As Beale points out, 2005 was yet another harsh lesson for the industry: "The unprecedented string of natural catastrophes experienced in 2005 has served as a reminder that we are in the business of risk."

The ratings downgrades were also largely responsible for an almost 50% reduction in gross written premiums in 2005, down to $1.99bn from $3.98bn in 2004. Net written premiums in standard property and casualty decreased by $638.5m (46.6%) whilst speciality lines decreased by 52.9%, or $827.6m. Life and health saw the smallest decrease, falling just 2.2% or $6.8m. The non-life combined ratio was up again to 107.2% from 106.1% in 2004 and 91.9% in 2003.

The reinsurer saw a strong set of results in the third quarter of 2006, however, where it recorded a net income of $54.3m, a treaty business retention rate of 141% and a non-life combined ratio of 99%. Net income for the nine months ended 30 September 2006 was $178.4m, some $110m more than the whole of 2005. After the restatement issues of the previous year, and coupled with the benign hurricane season of 2006 and its likely positive effects, there is a sense of cautious optimism within the company. On 7 September 2006, AM Best affirmed its "B " (very good) rating on Converium and revised its outlook to positive. "Converium has reported another quarter of impressive financial performance," Beale said of the 2006 Q3 results. "The results primarily reflect strong current-year underwriting performance, highlighting the quality of our book of business ... (and) demonstrates once more the sustainability of the company's rebound. We remain confident that Converium will be awarded a better financial strength rating in the near future."

A significant step towards Converium's recovery was the decision last year to sell the company's North American operations. Confirmed in October 2006, the sale of Converium Reinsurance North America to National Indemnity, a Berkshire Hathaway company, for $295m represented a major decision to back away from the North American market by the company. The sale included the complete disposal of all North American reinsurance liabilities, although the company still writes some lines in the market. "I have been working towards an upgrade since I took over at Converium in February 2006," said Beale. "Our aim was to finalise the North American issue as quickly and cleanly as possible."

S&P placed Converium on rating watch positive on 17 October 2006 following the completion of the sale, adding that it would finally raise its ratings on Converium to "A-" once the company had successfully settled the ongoing regulatory enquiries into reinsurance transactions by the company in 2004 and 2005.

Learning curve

The downturn that Converium experienced in 2004 has led to some important lessons being learnt for the company. Converium prides itself on its "strong franchise" throughout the world and points to this as one of the reasons it has been able ride out the downgrade. The company also puts much of its success down to transparency with clients and stakeholders alike. "You can never underestimate how long it takes to build up a relationship of trust," confirms Beale. "We have striven to emphasise the value of transparency and have come to understand how important franchise is. A transparent balance sheet will earn immeasurable trust from clients." She also mentions that a policy of openness is vital to organisations in the same position operating in a business-to-business environment. "Open communication is very important - every stakeholder and shareholder should be able to see where the numbers come from."

Beale is quick to dismiss talk of possible acquisition activity after several analysts suggested that the company's improved operational and financial outlook could make it a takeover target. "Converium is focusing on remaining a standalone reinsurer," Beale confirmed. "We have made the decision not to be a big US player, avoiding liability business, and considering our strong client support in our major markets and, increasingly South America, our future as an independent reinsurer looks strong."

It is likely the company also enjoyed a successful 1 January 2007 renewals, although this was difficult to verify at the time of going to press. The company did confirm that it saw strong support from existing clients during the renewals and that it expects to improve its combined ratio due to a shift of business mix towards non-proportional business and the strong impact of the attractive US property catastrophe market. Overall, Converium expects its premium volume to be at least stable through 2007.

- Nick Thorpe is senior reporter at Global Reinsurance.

Converium Inga Beale, chief executive officer

Inga Beale assumed the position of chief executive officer of Converium as of 1 February 2006. Prior to that she was responsible for property and casualty business throughout Continental Europe, Middle East and Africa for GE Insurance Solutions from 2003 and in 2004 was appointed president and chairman of the board of Frankona Re in Munich. Beale began her career at the Prudential Assurance in London in 1982 as a specialist reinsurance underwriter and later became an associate of the Chartered Insurance Institute in 1987.