Ronald Gift Mullins talks to the management at Converium about changes in the industry, and how the reinsurer is adapting

Though Converium has only been operating as an entity for little more than two years, its tag line, 'The Next Re Generation', asserts it aims to set the future standard for the reinsurance industry.Commenting on the market's stability, Dirk Lohmann, Converium's CEO, said: "I think it is important that if you think about our industry, there are very few names that have been around consistently for a long period of time. Few of the names on lists of the top ten reinsurers 20 years ago, or 25 years ago, or even 15 years ago, a lot of those names aren't here any more. Our objective really is to become a lasting, solid institution in this industry."Converium emerged from the fusion of a number of reinsurance operations and companies owned or partly owned by Zurich Financial Services. In 1998, Mr Lohmann, then CEO of Zurich's reinsurance business, started the process of creating an organisation with global management and strategies. While the group was formally organised on 1 October 2001, an initial public offering on 11 December 2001 enabled the company to successfully disengage itself from its former parent and write business as an independent reinsurer.Depending on what figures are used, Converium ranks in the top ten global reinsurers. However, Mr Lohmann said that where Converium ranks is less important than how "we compete with the larger players for the available reinsurance offerings. Our capacity may be less than some of the top five reinsurers, but we have specific methods of marketing and underwriting and very bright people to make this company successful."Frank Schaar, President for Standard Property & Casualty Reinsurance, Converium, said that over the past few years there have been some profound changes in how primary insurance companies place their reinsurance business.For example, he said, consider continental Europe. "The primary insurers used to place their business with a handful of reinsurance companies, based on personal and long-standing relationships. But risk management is becoming more and more important and, due to the collapse of Gerling Re and some other reinsurance companies that are suffering, corporate risk managers are considering carefully how to spread risk further."At last year's Rendez-vous de Septembre in Monte Carlo, Mr Lohmann recalled that the management of different insurers admitted they had previously not given much thought to their reinsurance counterparty risk. "They said they knew the rules for how much they could invest in any one bond or equity, but they never really thought about how to parcel out their reinsurance.Now, they're looking at it more thoroughly, and asking themselves, 'How much can we actually have with one party, even if it's a good name?'."Consequently, many insurers are diversifying their risk. "They're not spreading it over a hundred names,"Mr Lohmann said, "but they're going from two to four or five core reinsurers and that's one of the areas where I think Converium is clearly positioned to profit."

Converium character"It's all in our method of operating - call it the Converium character -- that makes us different, because if you look at the global players, they're not really global companies, they're multinational companies.They're sitting on islands, their local offices," Mr Lohmann said. "There are a number of instances where we've been in competition with one of the very top reinsurance groups. How can we compete with these people?We only have 800 staff, they have 8,000 or more. The answer is, we're not competing with them, we're competing with their local office. This levels the competition. Each Converium office has the capability to leverage all the knowledge and expertise drawn globally from across the company for the benefit of that one client."There are also short decision chains. Underwriters and managers can make decisions so that they can actually represent Converium appropriately in front of the customer. "Customers don't like people who are messengers," Mr Schaar said. "They want somebody who they can sit across the table with and negotiate and get a decision."Diversification of risk is the current buzzword in the insurance world, but more importantly, according to Mr Schaar, risk managers and insurers are seeking reinsurers that speak the client's language, who understand the local requirements. "Starting in late 2002, we saw a rapid increase in our market penetration in certain markets and with the next renewal period coming in late 2003," he said, "there are great signs that we can further enlarge our business."While Converium works with a number of small- and medium-sized and regional carriers, it also writes the business of the large multinationals such as AIG. "In the specialty areas, working with a limit of five or ten million dollars of exposure is meaningful for anyone, even the big guys," said Mr Lohmann. "And it may not even require that big a line. It's more the ability to understand the risk that the customer has and to assist him in managing that risk, which is important. So I would say capacity size, as a simple rule of thumb, is not really a big competitive issue."

Strong growthIn the third quarter of 2003, the company had strong new business growth in specialties. "Specialty business has been growing at a 36% rate and the standard property and casualty business has been growing at about 20%," Mr Lohmann said, "and that's because there are more opportunities in some of the specialty lines."Converium is one of the top reinsurers in the aviation business, among the top five in the credit and surety business, and a strong force in professional liability, particularly medical malpractice. In the UK, it has a joint venture with the Medical Defence Union (MDU), a group formed in 1885 to indemnify doctors. In 2000, Converium began issuing policies to the members of the MDU for medical claims. "We are in a joint venture with the MDU," Mr Lohmann said, "and together we have about 55% of the doctors in private practice. It is a very unique and different method of doing business from many of our peers."In its two years of operations, Converium had gross premiums written of $3.5bn for 2002, and in the first nine months of 2003 had $3.2bn gross premiums. In 2002, nine months gross premiums written were $2.5bn. In the 2003 nine-month period, Converium reported net profits of $128.9m, compared with $26m for the 2002 similar period. Year-end 2002 net profits were $106.8m.A major factor in the more than $100m increase in net profits in the nine-month period of 2003 compared with 2002 is that "we didn't have any earnings drag for prior years reserve development," Mr Lohmann explained."In our third quarter of 2002, we announced a $58m reserve strengthening from the 1997-2000 period, a period that still is, for many reinsurers, a problematic era. And in that third quarter we had losses from flooding in Europe of about $50m. Also, in the first half of 2002, as the equity markets started to make their deep decline, we suffered some asset impairments, which, of course, impacted net income and that did not happen in 2003.It's been really stable."Increasingly, reinsurers are demanding more data about the risks they are being asked to reinsure. This need for more data may be related to the increased uncertainty in the world, or just a reflection of market conditions.Mr Lohmann believes the reason reinsurers are asking for and getting more information today is "a reflection of the tougher market environment we're in. If a client wants a good price, a fair price for its exposure, data has to be forthcoming. Otherwise, the lack of data increases uncertainty.Consequently, the reinsurer has to load for that uncertainty and the client ends up paying for it. I don't think it's something that has to do with 9/11, it's more a question of where we are in the cycle, the availability of capacity, and underwriting standards have tightened up. In a soft market, you could ask for the data and the client may say, 'Well, why do you want it, nobody else is asking for it. By the way, you're already overplaced 150%. Do you want this business or don't you?' Frankly, if Converium is the only one that's asking for this information and we get this attitude, we better stop discussions right away and get off. It's a clear sign, if you will, of the market going soft."

How the mighty have fallenIn August 2003, AM Best affirmed the financial strength of 'A' for Converium Group and its core subsidiaries. "The ratings," AM Best stated, "are based on Converium's excellent capitalisation, improving performance, enhanced profile in certain reinsurance classes and conservative investment strategy...Converium has successfully raised its profile in liability reinsurance written outside North America and in certain specialty lines, including aviation and space, agribusiness and other weather-related products."Mr Schaar said that the 'A' rating enables Converium to compete with the largest reinsurers that because of downgrades in 2003, are now members of the 'A' club."Clearly, the rating plays a role," Mr Lohmann said, "but it's not the same as it was, say, three or four years ago when it was essential to have a double A or a triple A to do business with some companies. The world has changed. There remains only one reinsurance group rated by Standard & Poor's that is triple A. I do not think that some of those that have come down from that high S&P 'AAA' level will ever come back to it because most of the reinsurers are public companies today. They're publicly traded and they have to live with the tension of satisfying the clients, satisfying the agencies and also satisfying the shareholders, and a triple A rating is only given to you if you have excess capital. Shareholders don't want excess capital. They want that returned to them."With such a wholesale lowering of reinsurers' ratings in 2003, primary insurers are increasingly concerned about the solvency and commitment of reinsurers. Mr Lohmann thinks customers are concerned about the viability of the enterprise that they're reinsuring with: "Will this company be around in three to five years? Does it have a sustainable business model?Does it actually have the necessary access to capital if it needs to raise capital? We've seen a number of companies that were subsidiaries of groups or divisions of large composites and when they hit a bump, the parent questions whether reinsurance is really part of its core business and that sector is closed down or sold. Consider the exits of Hartford Re and CNA Re."

Future trends?The hard market appears to continue for another year, but its strength may ebb as the year advances. Influences such as reduced capacity or increased levels of hazard could maintain higher rates and less favourable terms.But according to Mr Schaar, it's still a favourable business. "In certain markets, rates are levelling off, but we keep up the level of sufficiency on our policies." He estimates that while rates are adequate for most lines, "we still have a way to go with casualty, overall I would say increases of 10% to 15%."Mr Lohmann said he perceives that there are some areas that are still under a lot of stress, such as surety, and the amount of capacity available for that line has been shrinking rapidly. "In the professional indemnity area, it really depends on the individual line," he said. "Malpractice for doctors in some states is almost impossible to get coverage. In other states increases are moderate. Hospital professional business shows the same sort of situation; some places the rate increases are not just double, but triple digit. There's been lots of increases in the directors' and officers' line, which has been under considerable stress since the post-Enron era."

A prudent approachPerhaps supporting the traditional view of the Swiss personality as conservative, Converium was somewhat understated when revealing its 2003 full-year results in February. Although the Swiss reinsurer was reporting gross premiums written of $4.22bn for the year, a 19% increase on 2002, and net income of $185.1m for 2003, compared to $106.8m for the previous year, a cautious note was being sounded."Two years after our IPO we are established as a leading independent reinsurer whose voice is heard by the industry," said Converium Chief Financial Officer Martin Kauer. "Looking about, we have achieved an awful lot, but we have to prove first and foremost to ourselves and to the outside world that the Converium model makes sense economically."The previous year's results had been "disturbed by reserve strengthening," he said, but by contrast, "2003 is the first year with a decent net bottom line. It's our first real strong year, but we need to have more years like that." His aim is to keep the investors content on a quarter-by-quarter basis, though the somewhat mixed reaction by the investment analyst community may well be, at least partly, a product of the guarded way in which the 2003 results were released. William Hawkins, insurance analyst for Fox-Pitt, Kelton Ltd, felt this was likely to be the case. In a note issued following Converium's analysts' meeting, he wrote: "We reiterate our conclusion that the post-results sell-off in Converium reflects more the style of the presentation of the results than the substance of issues in the business... we are comfortable that it represents very solid value (the best of the reinsurers at least) and would be an ideal downside hedge in an otherwise growth-orientated financials portfolio."Certainly the Swiss restraint is also being shown in the management of the company's portfolio. "We believe in cycle management," explained executive vice president for specialty lines Benjamin Gentsch. "We are monitoring by line and geographic market where the business stands." Overall, he characterised the current market conditions as "generally on the top, flattening out - it's a mature market." In fact, in certain lines he has been noting a fall in rates, and particularly for airlines business, certain pieces of business have now gone below the level at which Converium is prepared to play. It is cheaper, explained Mr Gentsch, to have an underwriter twiddling his thumbs than write business which is underrated, and therefore possibly a lot more expensive in the long run.Converium is also writing less excess of loss business, since the market has come down, but is buying more retro excess of loss cover since capacity is now available at less than $400m. "It is acceptable security," said Mr Gentsch, "and quite often collateralised."By contrast, the reinsurer is focusing on credit and surety business, particularly now ERC Frankona has come out of the sector, concentrating the market, and other professional lines such as E&O, D&O and medical malpractice. Agribusiness is another area in which Converium expects to see substantial growth, and it is currently looking at extending its portfolio from its core US business to Europe, hiring underwriters for its European business.Nevertheless, the bottom line remains Converium's caution. "The key element is that we have to prove that the Converium business model makes sense, quarter by quarter," reiterated Mr Kauer. "The cost of capital matters."By Sarah Goddard, Editor of Global Reinsurance.Ronald Gift Mullins is an insurance journalist based in New York City.