Stock analysts are downbeat about Swiss reinsurer Converium's 2005 results, even though the company returned to profitability after a terrible 2004. The firm made a net profit of $68.7 million for 2005, a big improvement from its $582.5 million net loss in 2004. The profit comes despite $164.8 million in losses from natural catastrophes, including hurricanes Katrina, Rita and Wilma, and winter storm Erwin.
The results were helped by $60.5 million in gains from commutations of liabilities from Converium Re North America, Converium's U.S. run-off business, and a $12.1 million gain from releasing reserves from old accident years. Also, operating expenses fell by 4.1% to $210.8 million, even though the company incurred heavy expenses from restructuring, its internal review of reinsurance contracts, and the resulting restatement of results.
However, the combined ratio for continuing business was 107.2% in 2005, up from 106.1% in 2004. Converium says its underlying combined ratio, which excludes catastrophe losses, reserve releases from old years and non-recurring administrative expenses, was 104.2%. It also expects a 2006 combined ratio for continuing business of 102.5%. It says the business it renewed this year was priced at a combined ratio of 95%. The company expects fronting fees will add two percentage points to this ratio, and administrative expenses a further 5.5 points.
The company is pleased with the results. "Considering that 2005 was one of the worst years for the global reinsurance industry I think it was an excellent result and I think the team should be very pleased," Inga Beale, Converium's new chief executive, told Reactions. "I can stand up and make the results presentation but it was all done before I got here. So credit is due to the team."
Beale believes the improved result is a sign that Converium is on the road to recovery. The company first hit troubles in July 2004 when it discovered a $385 million hole in its reserves. It subsequently lost its A-range ratings from the main rating agencies, hampering its ability to write new business.
"My understanding is that we have turned the corner," says Beale. "We've been through the restatements. It is an immense undertaking to go back and restate all your financials for all those years. We took the reserve action in 2004 and we have shown a stabilisation in 2005 and that, to me, shows the turnaround. Now we are going through to the sustainable part for the future."
Investors were also clearly impressed. The share price increased to SFr15.15 ($11.64) on March 15, the day the results were released, from SFr14.10 the day before. By March 16, the share price had grown even more to SFr16.
But analysts were critical of the results. "Although the numbers were okay, they were nothing special," says one analyst. "As far as I can see, the only reason it made a profit is big realised gains and commutation gains."
Analysts were particularly unimpressed with Converium's 2005 combined ratio. "I thought the underlying combined ratio was pretty weak," says the anonymous analyst.
Stefan Schürmann, analyst at investment bank Chevreux Switzerland, agrees. "The result in 2005 was not very strong," he says. "That is a fairly high combined ratio for more or less the top of the cycle."
The anonymous analyst acknowledges that the net profit is an improvement, but does not think this improvement justifies the valuation the company now has. He says the stock is trading at only a slight discount to its peer group, but the company does not have the performance to match. "The valuation implies that it has got up to industry standards, which isn't the case," he says.
Converium's main short-term goal is to get its A-range rating back from Standard & Poor's by the end of 2006.
This would result in a number of improvements. It could start writing business in countries and lines that demand higher ratings and could also reduce costs. For example, the higher rating would mean Converium would no longer need a fronting arrangement to access the Global Aerospace Underwriting Managers aviation pool.
Analysts say Converium has been positive about the prospects of getting upgraded. But they are not sure this is a good move. "It is one thing to say you want to be positive, but if that stance creates an expectation within the stock market, and the market starts pricing that in, when it doesn't come the effect will be very negative," says the anonymous analyst. He adds: "The company doesn't want to go through another Jan. 1 renewal without an A rating."
Schürmann agrees that the firm has been sanguine about the potential for a rating increase. "That may be a dangerous game," he says. "It is not a done deal." He says that the recent results could make an upgrade less likely. "If I were a rating agency I wouldn't be very pleased about the combined ratio," he says.
Timing could also be a problem. Before Converium can get an upgrade, it has to be put on positive outlook. The anonymous analyst points out that French reinsurer Scor had to wait nine months after S&P assigned it a positive outlook to get an upgrade back to A-. "Using basic maths, if Converium wants to get the upgrade this year, it needed to get the positive outlook a couple of weeks ago," he says.
The results were helped by $60.5 million in gains from commutations of liabilities from Converium Re North America, Converium's U.S. run-off business, and a $12.1 million gain from releasing reserves from old accident years. Also, operating expenses fell by 4.1% to $210.8 million, even though the company incurred heavy expenses from restructuring, its internal review of reinsurance contracts, and the resulting restatement of results.
However, the combined ratio for continuing business was 107.2% in 2005, up from 106.1% in 2004. Converium says its underlying combined ratio, which excludes catastrophe losses, reserve releases from old years and non-recurring administrative expenses, was 104.2%. It also expects a 2006 combined ratio for continuing business of 102.5%. It says the business it renewed this year was priced at a combined ratio of 95%. The company expects fronting fees will add two percentage points to this ratio, and administrative expenses a further 5.5 points.
The company is pleased with the results. "Considering that 2005 was one of the worst years for the global reinsurance industry I think it was an excellent result and I think the team should be very pleased," Inga Beale, Converium's new chief executive, told Reactions. "I can stand up and make the results presentation but it was all done before I got here. So credit is due to the team."
Beale believes the improved result is a sign that Converium is on the road to recovery. The company first hit troubles in July 2004 when it discovered a $385 million hole in its reserves. It subsequently lost its A-range ratings from the main rating agencies, hampering its ability to write new business.
"My understanding is that we have turned the corner," says Beale. "We've been through the restatements. It is an immense undertaking to go back and restate all your financials for all those years. We took the reserve action in 2004 and we have shown a stabilisation in 2005 and that, to me, shows the turnaround. Now we are going through to the sustainable part for the future."
Investors were also clearly impressed. The share price increased to SFr15.15 ($11.64) on March 15, the day the results were released, from SFr14.10 the day before. By March 16, the share price had grown even more to SFr16.
But analysts were critical of the results. "Although the numbers were okay, they were nothing special," says one analyst. "As far as I can see, the only reason it made a profit is big realised gains and commutation gains."
Analysts were particularly unimpressed with Converium's 2005 combined ratio. "I thought the underlying combined ratio was pretty weak," says the anonymous analyst.
Stefan Schürmann, analyst at investment bank Chevreux Switzerland, agrees. "The result in 2005 was not very strong," he says. "That is a fairly high combined ratio for more or less the top of the cycle."
The anonymous analyst acknowledges that the net profit is an improvement, but does not think this improvement justifies the valuation the company now has. He says the stock is trading at only a slight discount to its peer group, but the company does not have the performance to match. "The valuation implies that it has got up to industry standards, which isn't the case," he says.
Converium's main short-term goal is to get its A-range rating back from Standard & Poor's by the end of 2006.
This would result in a number of improvements. It could start writing business in countries and lines that demand higher ratings and could also reduce costs. For example, the higher rating would mean Converium would no longer need a fronting arrangement to access the Global Aerospace Underwriting Managers aviation pool.
Analysts say Converium has been positive about the prospects of getting upgraded. But they are not sure this is a good move. "It is one thing to say you want to be positive, but if that stance creates an expectation within the stock market, and the market starts pricing that in, when it doesn't come the effect will be very negative," says the anonymous analyst. He adds: "The company doesn't want to go through another Jan. 1 renewal without an A rating."
Schürmann agrees that the firm has been sanguine about the potential for a rating increase. "That may be a dangerous game," he says. "It is not a done deal." He says that the recent results could make an upgrade less likely. "If I were a rating agency I wouldn't be very pleased about the combined ratio," he says.
Timing could also be a problem. Before Converium can get an upgrade, it has to be put on positive outlook. The anonymous analyst points out that French reinsurer Scor had to wait nine months after S&P assigned it a positive outlook to get an upgrade back to A-. "Using basic maths, if Converium wants to get the upgrade this year, it needed to get the positive outlook a couple of weeks ago," he says.
