Sarah Goddard takes a look at Converium.
In some ways, Converium is a paradox. It could be argued that it is one of the newest reinsurers around - it started under its present name in 2001, and floated on the Swiss and New York Stock Exchanges in the December of that year. At the same time, its history as the reinsurance arm of Zurich Financial Services means it could be argued that it is one of the oldest reinsurers in the business, with its roots reaching back into 1872, the year Zurich Insurance Co was formed to provide reinsurance for Schweiz Insurance.
Most likely, its history from the late 1990s onwards is the most relevant in trying to understand the Converium of today, one of the top ten reinsurers in the world, listed on both the Swiss and New York stock exchanges, but strongly insisting it is a global - rather than headquartered - organisation.
In 1997, Zurich Financial Services brought in Dirk Lohmann, at that time a member of the executive board of management at Hannover Re, to become CEO of its reinsurance operation in Zurich and of German subsidiary, Zurich Ruckversicherung (Koln) AG. As part of his remit, Mr Lohmann started the integration of Zurich's somewhat diverse reinsurance businesses, which spanned the world from Buenos Aires to Tokyo, via New York and London.
The following year saw Mr Lohmann step up to the position of CEO of the whole reinsurance business, taking over from Steven Gluckstern who had originally founded Centre and is now, inter alia, a founding managing director of Azimuth Alternative Asset Management in the US Virgin Islands. Globalisation of the reinsurance business was the aim, and during 2000, new offices were opened across the world, including Labuan, Paris, Kuala Lumpur and Sydney, as part of the preparation for what was, the following year, to become the spin-off of the reinsurance business and the launch of Converium.
In March 2001, the official line runs, Rolf Huppi, CEO and chairman of Zurich Financial Services, decided that ZFS should focus on core lines of business - a strategy which excluded the assumed reinsurance operations. So it was decided that the reinsurance arm - Zurich Re - would be demerged from the rest of the business. It was rebranded early in September 2001, and an IPO took place three months later.
But beneath this straightforward explanation lay rather more turbulent waters. As Martin Kauer, Group Chief Financial Officer of Converium Ltd, explained, it had become obvious early that year that the reinsurance arm could not fit into Mr Huppi's vision of the `new Zurich'. That vision required three changes in the business: increased client numbers; increased numbers of products per client; and an increase in client contact. As Mr Kauer pointed out, this initiative was more suited to the operations of a general insurer rather than a reinsurance operation, "so within Zurich Re, we started to think whether had the right shareholder or should we explore opportunities in the marketplace," he said. Zurich Re's management came up with a number of different scenarios for the future of the business, which they presented to Mr Huppi, ranging from placing the business into run-off to floating the business off in an IPO. According to Mr Kauer, "Huppi wanted to do Old Boys Club deal with boys next door" - Swiss Re. While the Zurich Re management "had a dream" to demerge from ZFS as soon as possible and become an independent company.
"Every once in a while you have a lucky day," said Mr Kauer. "Swiss Re was looking to integrate Bavaria Re, therefore weren't really receptive, but Huppi wasn't a guy to give up that quickly - he was looking for a quick trade sale." At one stage French SCOR was in the picture, and it revised its offer on at least one occasion, but moving ownership did not appear to appeal to Dirk Lohmann's crew. So the Zurich Re management sold the idea of spinning off shares to ZFS shareholders, effectively offering Mr Huppi a fall-back position. With the waning interests in reinsurers, and no perfect match apparently on the table, that fall-back became increasingly attractive - and then 9/11. "Then everyone knew the dream is over," said Mr Kauer. "We looked at charts post-Andrew, and saw then the market picked up after two weeks. Maybe this time it was now the Domesday scenario or maybe it would recover when the dust settled." A month later, Zurich Re was officially operating as Converium. Although still part of ZFS at that time, the holding company, Converium Holding Ltd, and the Swiss operating company, Converium Ltd, had received additional capital contributions, while the transfer of share equity of the Cologne-based Zurich Re operation, as well as ownership of overseas offices, had been completed at the end of September. At inception, Converium carried an A+ rating from Standard & Poor's and an A rating from AM Best.
The next major stage was the IPO, a dream which, according to Mr Kauer, had had a "zero" chance of happening at the beginning of 2001. It was, he said, the fastest NYSE registration ever for an overseas registrant, and took place on 11 December, 2001, when 35m shares, priced at CHF82 per share and $24.59 per American Depositary Share were placed with investors. "Converium is still a dream that came true before the end of 2001," said Mr Kauer.
But what was the dream? First, to move away from "a parent who hated us," said Mr Kauer, and formulate a corporate culture more in tune with an international reinsurance organisation. In addition, he explained, "we wanted to prove against all odds that it was possible to implement and enhance and maintain a global organisation." Despite the listings in both Zurich and New York, Converium aims at a "global culture, not a local culture," one in which there is no perceived headquarters, or a specifically `national' culture across the organisation. "We have a certain history that we want to prove to the outside world that we are able to run a successful reinsurance group," said Mr Kauer. "It should be more fun to work at Converium - success is fun... economic success goes hand-in-hand with having fun at work."
Converium wants to move away from the conventions of the reinsurance sector, not for change's sake but because, in Mr Kauer's words, "it is one of few industries which is still run the same way as in the 17th century," with most of the major players wanting to keep the status quo.
But that's not to say that the industry is antiquated in every way. "In the reinsurance industry, a big big big issue is that you cannot outsmart your competitors - there are smart guys out there. Instead, we have to make the access to the intelligence of the people easier, and take them out of their ivory towers," said Mr Kauer. To this end, Converium keeps the structure pretty flat, he said, for example, having their "two or three" earthquake scientists "as close to the business as possible." The aim of structuring a corporate culture in which everybody is "sitting in the same boat, pulling in the same direction," but being unfettered by the demands of a corporate headquarters and instead operating on a hub basis is, he said, the dream.
To fulfil that dream does take a certain sort of person, and it is attitude rather than skills that seems to matter to Converium. "Skills you can always learn," said Mr Kauer, "but if someone doesn't get on in a certain corporate culture, it doesn't work." That certain sort of person needs to be able to operate in an environment short on organisational charts but long on a "multidimensional matrix". In this set-up, underwriting decisions are approved by "a different set of eyes ... to make sure there are no stupid mistakes." And if such a mistake should slip through the net, the protagonist "should be honoured" rather than vilified, "particularly if they learn something for the company." That knowledge and experience can then be shared with others in the company, to prevent similar mistakes being made in the future and to improve the models upon which Converium operates. On the property/catastrophe side, Converium uses models partly from providers and partly developed in-house. "All regular systems are on proprietary software," said Mr Kauer.
There is, however, a downside to the global approach. "Although we are more global than many others, we are not a global organisation yet," commented Mr Kauer. Partly this is through the problems of provisions by service providers. For example, there is no organisation able to offer a truly global custodian platform, he pointed out, instead the offerings effectively being local services from a global brand. "One of disadvantages is that the outside world not able to fulfil our requirements."
It is difficult to dispute that Converium's launch in late 2001 was apposite timing. But how much of its success was the post-September 11 shine of the reinsurance sector rather than the strength of what is, after all, the revamped Zurich Re operations? S&P does not agree with Converium's claim that it is an AA reinsurer, a viewpoint which Mr Kauer commented was possibly because S&P "did not understand the dream," but the recent results announced by the company have met with fairly warm approval when the were issued in February.
The headline figures of $3.3bn premiums written in 2002 (up 33.8% on 2001), a non-life combined ratio of 104.2% for the year (2001: 129.0%), and net income of $106.8m for the year, all helped push up the reinsurer's stock price by 3% on the day they were announced.
Converium renewed around 70% of the renewable non-life business at 1/1/2003, seeing increases of around 30% on the book. The 30% that was not renewed was because "the underlying business did not meet our stringent performance standards or because the treaties were restructured from a proportional to a non-proportional basis," explained the Converium results statement. The non-renewed business was more than offset by new business at renewals, and "the aggregate impact of improved rates, increased shares and new business, offset by cancellations, resulted in premium growth of more than 20% on renewable premiums," according to the results statement.
Alongside the hardening market has been a repositioning of market participants. Several well-known - and smaller - names have exited the sector altogether, leaving opportunities for others in their wake. And although new capital has entered, this has been targeted at the international catastrophe arena, and towards established markets such as the UK and US. "The influence of these new markets in traditionally direct markets (such as continental Europe) and in the specialty lines of business has been very limited. Converium Group has emerged as one of the few players with the required local presence, intimate market and specialty knowledge to address the needs in these market segments," according to the results statement.
Specifically, the aviation and space business contributed $370.2m in net premiums for 2002, compared to $181.0m in 2001, and a technical result of $64.3m, compared to -$167.9m the previous year. This sector is sufficiently interesting to Converium that it took a 25% shareholding in Global Aerospace Underwriting Managers Ltd (GAUM) in November last year, with the agreement that Converium would take a 25% share in the pools managed by GAUM from the beginning of this year. Up to that point, Converium had indirectly reinsured 9% of the pools managed by GAUM, and Mr Lohmann said at the time, "This investment confirms our commitment to the reinsurance of aviation and aerospace risks and further strengthens our position in the top echelon of aviation reinsurers." It now sits alongside Berkshire Hathaway and Munich Re as the two other 25% pool members, with Royal & Sun Alliance taking 9.25%, Tokyo Marine and Fire taking 9% and Mitsui Sumitomo accounting for the balance.
The good news on Converium's aviation business was counterbalanced by its need to make additional provisions of $148.5m across the group. This comprised $137.2m strengthening at Converium North America and $31.1m at Converium Cologne, though they were offset by a positive reserve development at Converium Zurich of $19.8m. In addition, Converium strengthened reserves for a closed block of long-term variable annuity business by $15.6m, following the downward trend in the equity markets.
Nevertheless, Mr Krauer was bullish about Converium's future performance, and ascribed his positive stance to three factors. Firstly, he said, there is no bad old years problem - "no massive deterioration of old losses." This is partly due to a Zurich stop loss treaty which means Converium's WTC-related losses are capped. Next, Converium has a strong and committed capital base. This includes substantial investments by Fidelity International Ltd, which holds 10.06%, Wellington Management Co LLP with 7.68% and Putnam Investment Management LLC and The Putnam Advisory Co which together hold 5.074%. Finally, according to Mr Kauer, Converium's future strength also rests on the organisation "making fewer mistakes than the others", and doing this through realising the dream. "Capital and talent are the most important factors in our industry: we try to position Converium in the respective markets in a way that gives us the best access to these two crucial factors," he said. "For us, financial analysts are multiplicators of our message to a broader audience, particularly our current and future owners, as well as information gatekeepers ... we try as hard as we can to be as open, trustworthy, transparent, and responsive as possible - even in difficult situations, such as the reserve actions last Fall. Our clear goal is to set new standards within the reinsurance industry when it comes to showing the real key value drivers of the profitability as well as their developments. We also firmly believe, that our story, the Converium story, is very solid - marginal asbestos exposure, the September 11 cap, strong underwriting discipline, strong capitalisation, p&c pure play, to name a few."
Converium's future is inextricably tied with that of the reinsurance industry, which is without any doubt still in the throes of a massive shake-out and reorganisation. Benjamin Gentsch, CEO Converium Zurich, felt that the reinsurance sector is an important and highly regarded industry. "Our customers operate under the same difficult financial market conditions that we do; they are just as affected by the reduced returns on their investments," he pointed out. "In fact, the image of the industry has even improved slightly, because the reinsurance capacity having been reduced, the customers have less of a choice among reinsurers and therefore have a tendency to value the remaining powerful players even more highly than before. The trend towards pure professional reinsurance companies will get even stronger.
"Among investors, confidence in our share is better than in that of our competitors," he continued. "So far, our share has outperformed almost all other reinsurance shares and also many shares from the financial sector. That's no consolation, but it is a positive indicator."
By Sarah Goddard
Sarah Goddard is the editor of