-- Following the restatement of accounts, shareholders' equity as
of June 30, 2005 increases by US$ 69.3 million to US$ 1,717.5
million.
-- For the third quarter of 2005, Converium reports a net loss
of US$ 6.9 million. For the nine months ended September 30,
2005, Converium reports net income of US$ 34.5 million.
-- Shareholders' equity at September 30, 2005 is US$ 1,697.3 million.
ZUG, Switzerland, Dec. 19, 2005 (PRIMEZONE) -- Converium Holding AG (NYSE:CHR):
Restatement of accounts
On November 4, 2005, Converium announced its plan to restate prior period financial statements. This decision was taken in light of findings of an extensive internal review, overseen by the Audit Committee with the assistance of independent outside counsel, launched against the backdrop of ongoing investigations by regulators and governmental authorities into non-traditional insurance and reinsurance products. The internal review addresses issues arising from the ongoing governmental inquiries and Converium's own decision to review certain additional items.
As a result of the review, Converium will restate its prior financial information for periods through 2004, as well as for each of the quarters from March 31, 2003 through June 30, 2005. Converium today provides unaudited restated financial information for its December 31, 2004 and June 30, 2005 balance sheets. The Company expects to report in full on the effects of the restatement on its previously reported financial information in the near future.
The restatement resulted in an increase to previously reported shareholders' equity as of June 30, 2005 of US$ 69.3 million to US$ 1,717.5 million and an increase as of December 31, 2004 of US$ 14.6 million to US$ 1,734.8 million. Additional details pertaining to restatement amounts as of December 31, 2004 and June 30, 2005 are provided in Attachment 2. Although the impact of the restatement on shareholders' equity as of June 30, 2005 is positive, shareholders' equity for certain periods prior to December 2004 will decrease materially.
As a result of the restatement, any previously published financial statements and information should not be viewed as a basis of comparison to the results presented today and should no longer be relied upon. Converium will file an amended Form 20-F reflecting the restatement adjustments and their impact on previous disclosures and financial statements. Further, the previously published financial statements should be considered unaudited until the amended Form 20-F is filed and PricewaterhouseCoopers Ltd. completes its re-audit and re-issues its Report of the Independent Group Auditors with respect to the financial statements included therein.
While more detailed information will be provided when the restated financial information for all periods is provided, the following summary information is presented at this time:
-- As a result of the internal review Converium has concluded that a number of transactions previously accounted for as reinsurance were accounted for incorrectly under the requirements of FAS 113 ("Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts"). As a result, the financial information relating to these transactions was restated to be recorded as deposits or on a retroactive basis, as appropriate.
In some cases, these transactions involved written or oral agreements, understandings or discussions relating to risk expectations that were not appropriately reflected in the accounting treatment at the time of origination. Arrangements of this type would have reduced or eliminated the anticipated risk transfer on which the original accounting was based. In other cases, the internal review did not conclusively establish whether such arrangements existed but the restatement was deemed advisable in light of evidence suggesting a reasonable possibility of such arrangements.
This resulted in a decrease of shareholders' equity as of June 30, 2005 of US$ 49.8 million.
-- The restatement with respect to the accounting for income taxes resulted principally from corrections of the valuation allowance against deferred taxes recorded in 2004 because of the substantial losses incurred that year. This resulted in an increase of shareholders' equity as of June 30, 2005 of US$ 126.6 million.
-- The adjustments reflected in the restatement will also include the correction of certain unrelated entries. This resulted in a decrease of shareholders' equity as of June 30, 2005 of US$ 7.5 million.
After discussing the findings of the review with independent outside counsel, Converium's Audit Committee determined that the recommended accounting corrections were appropriate and authorized the restatement.
As previously reported in our 2004 Form 20-F, management and our external auditors informed the Audit Committee that they had identified certain matters that constituted material weaknesses in Converium's internal control environment as at December 31, 2004. In addition, the Audit Committee has subsequently identified material weaknesses in internal controls designed (i) to ensure that the underwriting and risk transfer analysis reflects all relevant elements of contractual relationships entered into by the Company and (ii) to account for income taxes. The Company is taking actions to address weaknesses in its internal control environment.
As reported before, Converium has received subpoenas and informal inquiries from certain governmental authorities with respect to non-traditional insurance and reinsurance products. The Company is in the process of sharing the results of its internal review with relevant authorities and will continue to respond to all regulatory inquiries, as appropriate.
Although the internal review was extensive, the ongoing governmental inquiries, or other developments, could result in further restatements of Converium's financial results in the future.
Peter C. Colombo, Chairman of the Board of Directors and the Audit Committee, commented: "The Audit Committee believes that Converium's internal review was comprehensive and thorough. Based on the review, we now feel comfortable publishing important data such as our most recent equity position and relevant details pertaining to the third quarter of 2005. As anticipated, the restatement had a positive impact on Converium's June 30, 2005 shareholders' equity."
Peter C. Colombo added: "Based on our rigorous internal review, we do not have any reason to believe that there are any other transactions that require restatement. Of course, we cannot exclude the possibility that further action will be necessary as the governmental inquires will continue and we intend to cooperate with the regulators."
Financial results of the three and nine months ended September 30, 2005
Key metrics (in US$, unless noted)
Three months Nine months
ended ended
September 30, September 30,
2005 2005(a)
-- Gross premiums written 482.6 1,618.9
-- Net premiums written 432.4 1,501.2
-- Net premiums earned 605.2 1,941.7
-- Total investment result 70.5 238.8
-- (Loss) income before taxes -1.3 45.5
-- Net (loss) income -6.9 34.5
-- Basic (loss) earnings per share -0.05 0.24
-- Annualized return on shareholders'
equity -1.6% 2.7%
-- Ongoing non-life loss ratio(b) 89.7% 79.6%
-- Ongoing non-life underwriting expense
ratio(b) 15.3% 20.3%
-- Ongoing non-life administration expense
ratio(b) 5.9% 6.6%
-- Ongoing non-life combined ratio(b) 110.9% 106.5%
-- Pre-tax operating income(c) 22.1 98.0
-- Average annualized total investment
income yield (pre-tax) 3.6% 4.0%
(a) Reflects the effects of the restatement
The table below shows the reconciliation to pre-tax operating income for the three and nine months ended September 30, 2005:
Three months ended Nine months ended
September 30, 2005 September 30, 2005
Pre-tax operating income 22.1 98.0
Net realized capital (losses) gains -6.4 -8.1
Amortization of intangible assets -7.5 -21.3
Restructuring costs -9.5 -23.1
(Loss) income before taxes -1.3 45.5
Converium produces a close to break-even result for the third quarter
For the third quarter of 2005, Converium reported a loss before taxes of US$ 1.3 million, a pre-tax operating income of US$ 22.1 million and a net loss of US$ 6.9 million. The third quarter of 2005 was impacted by the U.S. hurricanes and European floods in the amount of US$ 74.2 million and costs of US$ 9.5 million associated with our organizational and operational restructuring. Offsetting this was the positive impact of the commutations carried out in the third quarter of 2005 in the amount of US$ 39.0 million as well as net positive development of prior years' loss reserves in the amount of US$ 11.3 million. In addition, the quarter was positively impacted by the reduction of administration expenses due to the realization of cost management measures adopted early in 2005 as well as solid investment results. In the third quarter of 2005 Converium recorded gross premiums written, net premiums written, and net premiums earned of US$ 482.6 million, US$ 432.4 million and US$ 605.2 million, respectively, which were in line with expectations. The premium figures reflect the reduction in business volume caused by the placement of Converium Reinsurance (North America) Inc. (CRNA) into orderly run-off in 2004 and the impact of the ratings downgrades in the same year.
Overall, Converium continues to believe that its gross premiums written target of approximately US$ 2.0 billion for the 2005 calendar year is achievable.
Converium's shareholders' equity amounted to US$ 1,697.3 million as of September 30, 2005 as compared to US$ 1,717.5 million restated as of June 30, 2005. The decrease reflects the net loss for the third quarter as well as effects due to currency translations and unrealized capital losses.
Noticeable impact of natural catastrophes
For the third quarter of 2005, the non-life combined ratio for Converium's ongoing operations was 110.9% (including an administration expense ratio of 5.9%). For the nine months ended September 30, 2005, the non-life combined ratio for the ongoing operations was 106.5% (including an administration expense ratio of 6.6%).
In the third quarter of 2005, Converium recorded losses from Hurricane Katrina, Hurricane Rita, Hurricanes Dennis and Emily and the European floods with an estimated total net impact of US$ 37.5 million, US$ 10.0 million, US$ 2.3 million and US$ 24.4 million, respectively. The ongoing non-life combined ratio excluding the impact of the hurricanes and the European floods would have been 97.8% for the third quarter of 2005, which excludes US$ 11.4 million of losses related to Hurricane Katrina that were recorded in the Run-Off segment.
Based on preliminary estimates, Converium expects its losses for Hurricane Wilma, which occurred in the fourth quarter of 2005, to be in the range of US$ 25.0 million to US$ 35.0 million.
Favorable loss reserve development
In the third quarter of 2005 Converium recorded net positive development of prior years' loss reserves of US$ 11.3 million, which resulted in overall net positive development of US$ 15.0 million for the nine months ended September 30, 2005. For the third quarter of 2005, net positive development of US$ 23.7 million was recorded in the Company's ongoing operations, which primarily consisted of US$ 31.4 million of net positive development within the Property line of business and was partially offset by US$ 16.5 million of net strengthening within the General Third Party Liability line of business. In the Run-Off segment, net strengthening of prior years' loss reserves of US$ 12.4 million was recorded for the third quarter of 2005, which primarily consisted of US$ 5.8 million of net positive development in the Property line of business and was offset by US$ 14.6 million of net strengthening within the General Third Party Liability line of business.
Converium believes that the continuing stability of its aggregate prior years' loss reserve position reflects the adequacy of prior reserving actions. CRNA run-off on track; commutations target to be exceeded
For the nine months ended September 30, 2005, CRNA's net loss reserves have decreased by US$ 443.5 million, including the effects of commutations and other settlements. The commutations resulted in a positive contribution of US$ 39.0 million to net income in the third quarter of 2005. Since December 31, 2004 net loss reserves at CRNA have declined to approximately US$ 1.3 billion. In light of further commutations carried out in the fourth quarter of 2005, Converium will exceed its previously stated target of commuting or otherwise settling CRNA liabilities of approximately US$ 500 million for the full year 2005. Progress in trimming cost base
In the third quarter of 2005, the administration expense ratio for the ongoing non-life business (excluding Corporate Center segment costs) was 5.9%. Other operating and administration expenses for the Company were US$ 40.3 million, a decrease of US$ 10.1 million or 20.0% compared to the second quarter of 2005.
As expected, the cost management measures initiated in March 2005 have taken effect in the third quarter of 2005. The Company reaffirms that it will continue to incur certain expenses which it considers crucial investments in order to expedite its rebound following the restoration of its financial strength ratings and to accelerate the recovery of its market position.
Solid investment result
In the third quarter of 2005, Converium generated a total investment result of US$ 70.5 million or an average annualized total investment income yield (pre-tax) of 3.6%. Net investment income for the third quarter of 2005 was US$ 76.9 million. Converium's third quarter 2005 investment results reflect the realization of capital losses due to the liquidation of investments to support the Company's third quarter commutation efforts.
Terry Clarke, CEO, said: "Converium's operating recovery has continued in the third quarter. We have absorbed significant catastrophe losses, and yet achieved a close to break-even result. Our capital base continues to be strong after a quarter which has been the costliest ever for the global insurance and reinsurance industry. As anticipated, our equity position as of June 30, 2005 was positively impacted by the restatement of accounts."
Mr. Clarke added: "We are also pleased with the pace of the North American run-off, which exceeds our targets, as well as with the sizeable reduction of administrative expenses."
Converium has made it a policy not to provide any quarterly or annual earnings guidance and it will not update any past outlook for full year earnings. It will however continue to provide investors with perspectives on its value drivers, its strategic initiatives and those factors critical to understanding its business and operating environment.
About Converium
Converium is an independent international multi-line reinsurer known for its innovation, professionalism and service. Today Converium employs about 600 people in 20 offices around the globe and is organized into four business segments: Standard Property & Casualty Reinsurance, Specialty Lines and Life & Health Reinsurance, which are based principally on ongoing global lines of business, as well as the Run-Off segment, which primarily comprises the business from Converium Reinsurance (North America) Inc., excluding the US originated aviation business portfolio. Converium has a "BBB+" rating (outlook stable) from Standard & Poor's and a "B++" rating (outlook stable) from A.M. Best Company.
Important Disclaimer
This document contains forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. It contains forward-looking statements and information relating to the Company's financial condition, results of operations, business, strategy and plans, based on currently available information. These statements are often, but not always, made through the use of words or phrases such as 'seek to', 'expects', 'should continue', 'believes', 'anticipates', 'estimates' and 'intends'. The specific forward-looking statements cover, among other matters, the Company's internal review and related restatement, the reinsurance market, the Company's operating results, the rating environment and the prospect for improving results and expense reductions. Such statements are inherently subject to certain risks and uncertainties. Actual future results and trends could differ materially from those set forth in such statements due to various factors. Such factors include the impact of our ratings downgrade or a further lowering or loss of one of our financial strength ratings; the impact of the restatement on our ratings and client relationships; uncertainties of assumptions used in our reserving process; risk associated with implementing our business strategies and our capital improvement measures and the run-off of our North American business; cyclicality of the reinsurance industry; the occurrence of natural and man-made catastrophic events with a frequency or severity exceeding our estimates; acts of terrorism and acts of war; changes in economic conditions, including interest and currency rate conditions that could affect our investment portfolio; actions of competitors, including industry consolidation and development of competing financial products; a decrease in the level of demand for our reinsurance or increased competition in our industries or markets; a loss of our key employees or executive officers without suitable replacements being recruited within a suitable period of time; our ability to address material weaknesses we have identified in our internal control environment; political risks in the countries in which we operate or in which we reinsure risks; the passage of additional legislation or the promulgation of new regulation in a jurisdiction in which we or our clients operate or where our subsidiaries are organized; the effect on us and the insurance industry as a result of the investigations being carried out by the U.S. Securities and Exchange Commission, New York's Attorney General and other governmental authorities; changes in our investment results due to the changed composition of our invested assets or changes in our investment policy; failure of our retrocessional reinsurers to honor their obligations or changes in the credit worthiness of our reinsurers; our failure to prevail in any current or future arbitration or litigation; and extraordinary events affecting our clients, such as bankruptcies and liquidations , and other risks and uncertainties, including those detailed in the Company's filings with the U.S. Securities and Exchange Commission and the SWX Swiss Exchange. The Company does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Attachment 1
Selected third quarter financial results
Basis of preparation
The unaudited interim financial information for Converium Holding Ltd and subsidiaries ("Converium" or "the Company") has been prepared on the basis of United States generally accepted accounting principles for interim financial information. Accordingly, such financial information does not reflect all the information required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ended December 31, 2005, as interim results may be affected by several factors including, but not limited to, changes in the economic environment and catastrophic losses. Financial information for the year ended December 31, 2004 and the period ended June 30, 2005 has been restated and the interim financial information for the nine months ended September 30, 2005 reflects the effects of the restatement. A summary of the restatement effects is included below:
-- As a result of the internal review Converium has concluded that a number of transactions previously accounted for as reinsurance were accounted for incorrectly under the requirements of FAS 113 ("Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts"). As a result, the financial information relating to these transactions was restated to be recorded as deposits or on a retroactive basis, as appropriate.
-- The restatement with respect to the accounting for income taxes resulted principally from corrections of the valuation allowance against deferred taxes recorded in 2004 because of the substantial losses incurred that year.
-- The adjustments reflected in the restatement also include the correction of certain unrelated entries.
The impact of the above items on shareholders' equity at December 31, 2004 is shown on the "Consolidated statement of changes in shareholders' equity".
In addition, certain reclassifications have been made to prior year amounts to conform to current year's presentation.
As a result of the restatement, any previously published financial statements and information should not be viewed as a basis of comparison to the results presented today and should no longer be relied upon. Converium will file an amended Form 20-F reflecting the restatement adjustments and their impact on previous disclosures and financial statements. Further, the previously published financial statements should be considered unaudited until the amended Form 20-F is filed and PricewaterhouseCoopers Ltd completes its re-audit and re-issues its Report of the Independent Group Auditors with respect to the financial statements included therein.
Attachment 1 (cont'd)
Selected third quarter financial results
Consolidated statements of income Three months Nine months
(Unaudited) ended ended
In US$ million, unless noted September 30, September 30,
2005 2005(d)
Revenues
Gross premiums written 482.6 1,618.9
Less ceded premiums written -50.2 -117.7
Net premiums written 432.4 1,501.2
Net change in unearned premiums 172.8 440.5
Net premiums earned 605.2 1,941.7
Net investment income 76.9 246.9
Net realized capital (losses) gains -6.4 -8.1
Other income (loss) 3.0 -2.4
Total revenues 678.7 2,178.1
Benefits, losses and expenses
Losses, loss adjustment expenses and life
benefits -492.1 -1,488.6
Underwriting acquisition costs -122.9 -428.4
Other operating and administration
expenses -40.3 -147.6
Interest expense -7.7 -23.6
Amortization of intangible assets -7.5 -21.3
Restructuring costs -9.5 -23.1
Total benefits, losses and expenses -680.0 -2,132.6
(Loss) income before taxes -1.3 45.5
Income tax expense -5.6 -11.0
Net (loss) income -6.9 34.5
Basic (loss) earnings per share (US$) -0.05 0.24
(d)Reflects the effects of the restatement
Attachment 1 (cont'd)
Selected third quarter financial results
Consolidated condensed balance sheets September 30, December 31,
(Unaudited) 2005(e) 2004
Restated
In US$ million, unless noted
Invested assets
Held-to-maturity securities:
Fixed maturities 803.2 850.4
Available-for-sale securities:
Fixed maturities 4,606.7 4,834.8
Equity securities 442.2 399.4
Other investments 252.7 279.2
Short-term investments 72.2 117.3
Total investments 6,177.0 6,481.1
Funds Withheld Asset 1,111.0 1,305.1
Total invested assets 7,288.0 7,786.2
Other assets
Cash and cash equivalents 317.9 680.9
Premiums receivables:
Current 523.8 401.7
Accrued 989.9 1,413.1
Reserves for unearned premiums, retro 39.9 55.2
Reinsurance assets:
Underwriting reserves 882.7 937.9
Insurance balances receivable 57.0 139.3
Funds held by reinsureds 1,616.8 1,737.7
Non-risk transfer reinsurance assets 182.3 170.4
Deferred policy acquisition costs 331.2 482.7
Deferred income taxes 89.2 79.8
Other assets 360.9 358.6
Total assets 12,679.6 14,243.5
Liabilities
Reinsurance liabilities
Loss and loss adjustment expenses, gross 8,102.1 8,908.3
Future life benefits, gross 399.0 407.1
Reinsurance balance payable 406.0 566.1
Reserves for unearned premiums, gross 746.2 1,247.7
Other reinsurance liabilities 123.6 73.6
Funds held under reinsurance contracts 191.4 194.8
Non-risk transfer reinsurance liabilities 310.5 356.5
Deferred income taxes 94.9 81.8
Accrued expenses and other liabilities 217.4 281.7
Debt 391.2 391.1
Total liabilities 10,982.3 12,508.7
Total shareholders' equity 1,697.3 1,734.8
Total liabilities and shareholders' equity 12,679.6 14,243.5
(e)Reflects the effects of the restatement
Note: Details of the equity section of the balance sheet and the related changes in equity will be available when the Company reports in full on the effects of the restatement on its previously reported financial information.
Attachment 1 (cont'd)
Consolidated statement of changes in shareholders' Total equity equity (Unaudited) In US$ million, unless noted Balance, December 31, 2004 (as previously reported) 1,720.2 Reinsurance transactions -109.3 Taxation adjustments 130.7 Other items -6.8 Balance, December 31, 2004 (restated)(f) 1,734.8 Net income 34.5 Change in net unrealized gains (losses) on investments, net of taxes 11.8 Translation adjustments -86.8 Total comprehensive loss -40.5 Purchases of common shares -1.5 Net amortization of stock compensation 4.5 Balance, September 30, 2005 1,697.3 Consolidated statement of changes in shareholders' Total equity equity (Unaudited) In US$ million, unless noted Balance, June 30, 2005 (restated)(f) 1,717.5 Net loss -6.9 Change in net unrealized gains (losses) on investments, net of taxes -2.6 Translation adjustments -11.6 Total comprehensive loss -21.1 Net amortization of stock compensation 0.9 Balance, September 30, 2005 1,697.3 (f)Reflects the effects of the restatement
Note: Details of the changes in equity will be available when theCompany reports in full on the effects of the restatement on itspreviously reported financial information.
Attachment 2
Summary of impact of restatement
Consolidated balance As of June 30, 2005 As of December 31,
sheets 2004
(Unaudited)
As
In US$ million, unless As previously As previously As
noted reported restated reported restated
Invested asset
Held-to-maturity securities:
Fixed maturities 819.9 819.9 850.4 850.4
Available-for-sale securities:
Fixed maturities 4,951.1 4,951.1 4,834.8 4,834.8
Equity securities 419.4 419.4 399.4 399.4
Other investments 254.3 252.3 281.4 279.2
Short-term investments 81.5 81.5 117.3 117.3
Total investments 6,526.2 6,524.2 6,483.3 6,481.1
Funds Withheld Asset 1,159.2 1,159.2 1,305.1 1,305.1
Total invested assets 7,685.4 7,683.4 7,788.4 7,786.2
Other assets
Cash and cash equivalents 281.4 281.4 680.9 680.9
Premiums receivables:
Current 331.9 368.5 416.5 401.7
Accrued 1,279.0 1,287.5 1,395.5 1,413.1
Reserves for unearned
premiums, retro 83.6 44.1 111.6 55.2
Reinsurance assets:
Underwriting reserves 940.8 930.5 1,226.2 937.9
Insurance balances receivable 390.9 332.9 233.5 139.3
Funds held by reinsureds 1,609.4 1,615.9 1,721.3 1,737.7
Non-risk transfer
reinsurance assets 139.1 180.6 137.0 170.4
Deferred policy
acquisition costs 334.7 334.0 484.7 482.7
Deferred income taxes 70.2 88.3 78.3 79.8
Other assets 346.3 382.5 335.4 358.6
Total assets 13,492.7 13,529.6 14,609.3 14,243.5
Liabilities
Reinsurance liabilities
Loss and loss adjustment
expenses, gross 8,266.8 8,416.1 8,915.6 8,908.3
Future life benefits, gross 398.9 398.9 407.1 407.1
Reinsurance balance payable 528.8 469.4 585.9 566.1
Reserves for unearned
premiums, gross 971.8 922.2 1,312.3 1,247.7
Other reinsurance liabilities 173.2 385.7 110.4 73.6
Funds held under
reinsurance contracts 445.8 201.8 379.3 194.8
Non-risk transfer
reinsurance liabilities 311.3 319.5 348.5 356.5
Deferred income taxes 145.0 95.3 157.2 81.8
Accrued expenses and other
liabilities 211.7 211.9 281.7 281.7
Debt 391.2 391.3 391.1 391.1
Total liabilities 11,844.5 11,812.1 2,889.1 12,508.7
Total shareholders' equity 1,648.2 1,717.5 1,720.2 1,734.8
Total liabilities and
shareholders' equity 13,492.7 13,529.6 14,609.3 14,243.5
Note: Details of the equity section of the balance sheet and therelated changes in equity will be available when the Company reportsin full on the effects of the restatement on its previously reportedfinancial information.
(b) The ongoing non-life ratios exclude the cost of the Corporate Center as well as the U.S. Run-Off. As opposed to other reinsurers, Converium calculates its non-life administration expense ratio based on net premiums written rather than net premiums earned. Using the alternative methodology based on net premiums earned would result in a non-life administration expense ratio for the third quarter of 4.1%.
(c) Pre-tax operating income (loss) is defined as income (loss) before taxes excluding net realized capital (losses) gains, amortization of intangible assets and restructuring costs.