Summit spat: Converium fires back at agencies: S&P downgrades "harmed our franchise," says Converium CFO

Risk & Insurance, Dec, 2004 by Cyril Tuohy

Martin A. Kauer, CFO of Converium, the Swiss reinsurer still licking its financial wounds from credit rating downgrades delivered this summer, took the blame but shot back at the ratings agencies, saying they rely on different capital risk allocation models to guide their analysis.

Converium, rated a single-A reinsurance shop as late as last July, was staring at a triple-B rating in September after it was downgraded by analysts at Standard & Poor's after the company announced higher-than-expected claims on its U.S. property-and-casualty policies from 1997 to 2001. "I blame ourselves as to not being able to explain why we should have better ratings," said Kauer, speaking at the European Insurance Summit in Vienna in October.

The downgrade, the lowest in the company's history, sent the company scouring for another $420 million to shore up its financial position. U.K. auto insurer Admiral Group PLC, scared that the reinsurer might not be able to pay claims, cancelled its contract with Converium. And in the United States, Converium management placed its unit into runoff.

Kauer said he had asked the top 20 or 30 clients in Converium's key markets to write the company to guarantee that they wouldn't abandon it during a difficult period. He also expected the cash infusion to boost the company's rating once again, by one notch.

Converium, which wrote $3.8 billion in net premiums in 2003, is one of the largest reinsurance companies in the world. The lower ratings mean it will cost the reinsurer more to raise additional capital.

Kauer also used the forum, to which he had agreed to come before the company's ratings embarrassment became public, to take a jab at the analysts hired by the agencies to evaluate a company's financial structure.

"Their database is a materially different one than the one we use for our capital model," said Kauer. "We use our capital model to understand the profit of our business." After claiming that S&P "harmed our franchise," he went on to say that the ratings agencies, which collect data from the companies for free and resell it to investors, were based on an untenable business model.

Barry Hancock, managing director of the financial services and ratings services for Standard & Poor's in Frankfurt, insisted the evaluations were fair and impartial. "The rating agencies have provided the markets with reliable independent opinions and will continue to do so," he said.

"Converium doesn't necessarily agree with us," he also said. "Munich Re doesn't necessarily agree with us." Last year S&P downgraded Munich Re, ruffling managerial feathers at the annual gathering of reinsurers in Monaco last September. Still, in the case of Converium, the events of the summer of 2004 sent managers into a tailspin, leaving them with a nasty hangover. "Ratings matter," said Kauer. "It doesn't make any difference if we like it or not."