Moody's has placed the ratings for Converium under review for possible downgrade following the company's profit warning on its second quarter results.
Moody's said the final amount of reserve strengthening for Converium's US casualty lines remained uncertain as the company was awaiting the conclusion of an independent review of its reserving.
Converium announced reserve strengthening of up to $400m, which could trigger net impairments of up to $289m of deferred tax assets and $94m of goodwill, said Moody's.
Moody's said the reserve strengthening would bring its 1997-2001 gross loss ratios for US casualty reinsurance business to levels in line with the average gross loss ratios reported by its broker market reinsurance competitors.
But it said Converium's gross loss ratios remained below those of the direct market reinsurers, which suggested that the company may experience further adverse development on its US casualty reinsurance loss reserves.
To maintain its current ratings, Converium would need either to reinforce its capital base, or to reduce its operating leverage to levels compatible with a single-A rating by selling major operating subsidiaries, discontinuing certain lines of business or, to a far lesser extent, reducing the investment risk, said the ratings agency.
In absence of such actions, Moody's would expect to lower the ratings by at least one notch. The rating agency noted that any secondary offering of common shares could be challenging in the short term, due to the sharp decline of the stock price following Converium's announcement.
Moody's said it expected to conclude its review process once the full details on the nature of the reserve charge became available.
The following ratings have been placed on review for a possible downgrade:
· Converium AG -- insurance financial strength rating of A2,
· Converium Reinsurance (North America) Inc - insurance financial strength rating of A2,
· Converium Rueckversicherung (Deutschland) AG - insurance financial strength rating of A2,
· $200m 7.125% unsubordinated senior notes due October 2023 originally issued by Zurich Reinsurance Centre Holdings, Inc and assumed by Converium Holdings (North America) Inc. - senior debt rating of Baa1,
· $200m 8.25% guaranteed subordinated notes due December 2032 (callable in 2007) issued by Converium Finance SA, a wholly-owned subsidiary of Converium Holding AG - subordinated debt rating of Baa1.
