Ronald Gift Mullins looks at Converium and finds a company that has been through some tough times but believes there are better times ahead
"I've accepted this job and I wouldn't have if I had not expected to succeed," declared Terry G Clarke, the new chief executive officer of Converium as of 24 February 2005.
Considering the difficult deficiencies, discontent and disruption he has to overcome to return the Swiss-based reinsurer to profitability, he faces a daunting task.
Though less than four years old, Converium had a near-death experience in the second quarter of 2004 when the company dropped a bombshell - a short fall in reserving of $384.7m in its North American operation. This hefty strengthening, followed by additional reserving of almost $100m, represented about one quarter of the company's equity capital.
These extraordinary charges, along with losses amounting to $154.5m from hurricanes, typhoons and the South Asia tsunami, produced a net loss of $761m for 2004, compared with a net profit of $185m in 2003, a swing of close to $1bn.
The fall out from the unexpected under-reserving came swiftly. The stock plummeted by almost 50%. Standard & Poor's, AM Best and Fitch rapidly slashed their "A" range ratings of Converium, which "triggered substantial cancellations and share reductions," the reinsurer said in a statement.
Adding to the turmoil, the Swiss stock exchange said it was conducting an investigation into claims of insider trading in shares of Converium prior to the revelation of the reserve deficit. The Security and Exchange Commission in the US also began examining possible insider trading. Further, a number of class action law suits were begun in the US alleging Converium had insufficient loss reserves and thus earnings and assets were overstated.
No blame per se
And if these heavy disruptions were not enough, in late February 2005, the Converium board of directors announced that Terry Clarke, who had been on the reinsurer's board since 2002 and managing director since September 2004, would take over as CEO, replacing Dirk Lohmann, who had headed the company since its formation in October 2001.
The decision to replace Mr Lohmann was a board decision, Mr Clarke advised, as the directors believed it was necessary to put the past behind, and start a new life with a new CEO. It also felt that a major change in senior management would help restore stakeholder confidence and management credibility.
"A new era, a new management were required," Mr Clarke said. In an unusual board decision, Mr Clarke will remain on the board of directors but will not be involved with any of its committees. It is common practice in European companies for the CEO not to be a board member, but the opposite in the US.
Before Mr Clarke became CEO, Mr Lohmann had placed Converium Reinsurance (North America) into run-off. According to reports, he said the reason for the massive increase in reserves in the second quarter 2004 came from bad underwriting practices for the years 1997 to 2001 by the North American subsidiary. He believed that most of these problems arose before Converium was spun off from Zurich Financial Services Group. With the loss of North American premiums and other reductions in its business, Converium's gross premiums could drop by half in 2005.
Mr Clarke said that at the time of the IPO which launched Converium in late 2001, he was managing principal of Tillinghast's North America practice prior to retiring at the end of 2001. Tillinghast performed a reserve assessment of the North American business prior to it becoming part of Converium.
"As far as the assessment of the reserves by Tillinghast," he asserted, "I was not involved in the analysis, but at the time of the IPO the reserves were accurately assessed, based on the best estimates available. The trouble is that much of the business was long tail and it is an area where you have to base your future predictions on history.
"As the business became more mature and additional information became available such as the enhanced disclosure of US cedents for the underwriting years from 1997 to 2001, it allowed the risks to be judged more accurately. No one is held to blame for the short fall of reserving per se."
He mentioned that the implementation of new organisational practices introduced in October 2003 facilitated the detection of the need for additional reserving. As an example of the revised organisation, all actuaries now report to the global chief risk officer and an underwriting technical service department is in place. Mr Clarke said that Converium's overall prior-year reserve position appears to have stabilised in the fourth quarter of 2004.
Faced with quickly replenishing its capital base, Converium's board of directors considered a range of strategic options, which included a capital increase, a partnership, a strategic investment, or a combination these.
Taking bold action, in October 2004, it offered a discounted rights issue of 106,683,245 new registered shares at a discounted issue price of CHF5.00 per share to existing shareholders to raise about $420m. The offering was successful and replaced the lost capacity, bringing the level up to about what it was at year-end 2002.
The tumult and travails of 2004 now behind it, in February 2005 Converium announced it had renewed an average of 63% of its non life property/casualty (P/C) treaty business representing about $1.24bn in premiums and said there was a further $714m up for renewal later in 2005. The reinsurer predicted that for 2005 it would have premium volume for both non-life and life business of approximately $2.35bn.
Mr Clarke said Converium's global strategy is to apply strict underwriting standards and focus on profitability instead of top-line results within the clearly defined parameters of standard property & casualty reinsurance, specialty lines and life & health reinsurance.
"We will supply coverage for all lines of P/C business, except umbrella and excess & surplus business due to reduced writing of North American business which will limit writing of workers' compensation.
"We will focus on property/casualty markets in which we have a track record of building profitable businesses and a strong franchise among our customers," he said, "such as in Europe, Asia-Pacific and Latin America. There will be no writing of reinsurance from offices located in North America, but reinsurance will be offered for attractive US-originated business through our European and Bermudian operations."
"Encouraging, in spite of the overall loss for 2004," Mr Clarke said, "is if the results were adjusted for the reserve actions, reductions of ultimate premium estimates and the losses from hurricane, typhoons and the tsunami, the non-life combined ratio was 96.1%. This is clear evidence of a continuing favourable performance of recent underwriting years."
"Specialty lines' strategy is to develop specialty businesses in which Converium can position itself as a market leader and can effectively leverage its intellectual assets in risk analysis, structuring, product design and risk modelling. Converium possesses superior underwriting and structuring capabilities in certain speciality areas and we will continue to reinforce and develop our joint venture relationships such as GAUM in global aviation insurance, Satec in global space insurance, MDU in UK medical malpractice insurance and our corporate name at Lloyd's.
"The life & health reinsurance segment's strategy is to increase the stability of Converium's income by growing in major key markets, which are Germany, Italy and France; and markets with significant potential for future opportunities," he said, "including Switzerland, Austria, Denmark, Poland and the Czech Republic."
Without the North American operation, Converium has less broker-sourced business. "Most of the business is direct in Europe," Mr Clarke said. "In Germany, it is 90% direct, in France it is mostly brokers led, but overall it is about 65% direct outside the US."
But he added that even with the broker-led business "we develop and insist on very close contact with our clients. When we reinsure a company, we are reinsuring the management. We visit the client and have direct and close knowledge of the client's operations."
Taking care of business
"Our goal now is to rebuild the long-term value of Converium's franchise and the creation of a leaner structure within a reasonable amount of time," Mr Clarke said. "We have implemented a plan which is designed to cut our budgeted annual administrative expenses for our ongoing operations to a ratio of approximately 6.5% of net premiums written in 2006."
As part of cutting expenses, the company has already reduced its work force by 140 personnel as of year-end 2004, plus 130 have been cut from the North American company, leaving some 100 employees there to manage the run-off.
"As business is shrunk we will reduce more in North America," he said. "At the moment, we are aggressively commuting the business as we go forward. We want to have a self-contained operation so we can get it off the balance sheet as we run off the business or perhaps sell it."
The company's loss of its "A" range rating from the agencies has hindered its capacity to write certain lines of business and a goal of Mr Clarke's is to regain that "A" range. "Of course, we were not happy with the reduction. No one was happy," he said.
"Very unfortunate that it happened. One of my priorities is to do everything I can to restore the level we think is appropriate. Rating agencies use factors other than capital to rate a company. They use their own computer models to evaluate an enterprise. Capital is important, but also creditability of management and stable results are important. Rating agencies do not like surprises. My job is to insure that we have controls in place that will not produce any more surprises. Basically we are $2bn in premium, with $2bn in supporting capital."
As a step toward achieving the "A" rating, in October 2004, Standard & Poor's upgraded the credit and financial strength rating of Converium to "BBB+" from "BBB" and gave a favourable forecast for the Swiss reinsurer after the company successfully raised $420m in capital.
Although the rating agency did not award Converium an "A" rating, the upgrade was generally considered an indication that the company has overcome its recent financial difficulties.
The company in a statement said the rating action will help Converium's efforts to preserve its franchise in its European, Asian and Latin American target markets and to retain key commercial relationships.
Other pending matters
In regard to writing of finite insurance, Mr Clarke said the company was involved somewhat, "but very modestly indeed." He wondered if the definition of finite insurance changes with the situation. "The goal posts have moved on finite. It may be judged to be right at a certain period of time, but viewed differently now."
Converium has co-operated fully with the SWX Swiss Exchange's investigation into possible insider trading ahead of the company's 20 July 2004, announcement of an increase of $385m in reserves.
"The inquiry by the SWX Swiss Exchange," a spokesperson for Converium said, "has been answered to their satisfaction and has not been further pursued." The US Securities and Exchange Commission's investigation has not released its findings according to the same spokesperson.
The seven class action lawsuits filed against Converium in New York allege that the reinsurer failed to disclose certain facts to shareholders including that it maintained inadequate loss reserves in its North America subsidiary, announced reserve increases that were insufficient, and as a result of the understatement of loss reserves, earnings and assets were overstated.
The lawsuits claim to represent shareholders who acquired Converium stock between 11 December 2001, and 20 July 2004. The reinsurer said it intends to defend the lawsuits vigorously, but since these actions are in the preliminary phases, the timing and outcome of these matters are not currently predictable.
A Long Way to Go
At the company's annual meeting on 12 April 2005, Mr Clarke stated that there is still a long way to go, "but I am optimistic that we will succeed in restoring the standing of Converium as a mid-sized, but respected player in the competitive world of leading reinsurance companies."
He strongly concluded: "I will turn this company around with the help of staff. I would not have taken on this challenge if I didn't think we could succeed."
- Ronald Gift Mullins is a freelance journalist based in New York, USA.
Converium Terry G Clarke
Terry G Clarke was appointed as chief executive officer of Converium on 24 February 2005. Commenting on the decision, chairman of the board of directors, Peter C Colombo, said, "the board believes that a management change is necessary to bring about a long-term cultural transformation and restore stakeholder confidence in the company."
Mr Clarke became a member of the board in 2002 and was appointed managing director in September 2004, where his role was to "actively support" his predecessor Dirk Lohmann and the members of the Global Executive Committee to improve the communication to the board and the decision-making process.
Prior to joining Converium, Mr Clarke was the managing principal for the North American practice of Tillinghast-Towers Perrin, an actuarial consulting firm, where he consulted to the insurance industry. Prior to joining Tillinghast, he was a member of senior management of the Norwich Winterthur Group in the United Kingdom. Mr Clarke is a Fellow of the Institute of Actuaries.