Half Year Report 2005
Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the period ending June 30, 2005
CONVERIUM HOLDING AG
(Translation of registrants name into English)
Baarerstrasse 8
CH-6300 Zug
Switzerland
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form
20-F or Form 40-F.
Form 20-F o Form 40-F o
Indicate by check mark whether the registrant by furnishing the information contained in this
Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934.
Yes o No o
If Yes is marked, indicate the file number assigned to the registrant in connection with
Rule 12g3-2(b): 82-Not Applicable
Investor information
Transfer Agent & Registrar
For American Depository Shares (ADS) traded on the New York Stock Exchange:
The Bank of New York
Corporate Trust Office
101 Barclay Street
New York, NY 10286
USA
Telephone +1 646 885 3300
Auditors
PricewaterhouseCoopers Ltd
Stampfenbachstrasse 73
P.O. Box 634
8035 Zurich
Switzerland
Telephone +41 44 630 1111
Fax +41 44 630 1115
Stock Trading
Converium Holding AG common shares are traded on the SWX Swiss Exchange under the trading symbol
CHRN and as ADS (0.5 of a common share) on the New York Stock Exchange under the trading symbol
CHR.
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First half year of 2005 |
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SWX Swiss Exchange (CHF) |
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High |
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12.50 |
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Low |
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9.00 |
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New York Stock Exchange (USD) |
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High |
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5.20 |
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Low |
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3.59 |
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First quarter of 2005 |
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SWX Swiss Exchange (CHF) |
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High |
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12.20 |
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Low |
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10.05 |
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New York Stock Exchange (USD) |
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High |
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5.18 |
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Low |
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4.44 |
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Second quarter of 2005 |
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SWX Swiss Exchange (CHF) |
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High |
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12.50 |
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Low |
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9.00 |
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New York Stock Exchange (USD) |
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High |
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5.20 |
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Low |
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3.59 |
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First listed
December 11, 2001 SWX Swiss Exchange and New York Stock Exchange.
Investor Relations Contact
Zuzana Drozd
Head of Investor Relations
Phone +41 44 639 9120
E-mail zuzana.drozd@converium.com
3
Financial highlights
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Three months ended June 30 |
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Six months ended June 30 |
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(US$ million, except per share information) |
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2005 |
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2004 |
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2005 |
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2004 |
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Gross premiums written |
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362.0 |
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1,027.6 |
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1,079.5 |
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2,411.2 |
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Net premiums written |
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330.9 |
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948.8 |
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1,035.8 |
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2,247.4 |
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Net premiums earned |
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612.8 |
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1,009.9 |
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1,301.6 |
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2,002.9 |
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Total investment results |
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86.8 |
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89.2 |
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168.3 |
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171.0 |
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Income (loss) before taxes |
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49.2 |
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-381.9 |
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-16.4 |
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-295.5 |
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Net income (loss) |
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70.8 |
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-660.0 |
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9.0 |
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-594.3 |
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Basic earnings (loss) per share1 |
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0.48 |
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-8.32 |
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0.06 |
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-7.49 |
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Annualized return on shareholders equity2 |
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17.9 |
% |
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-120.9 |
% |
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1.1 |
% |
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-57.1 |
% |
Ongoing non-life loss ratio3 |
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73.4 |
% |
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82.3 |
% |
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80.6 |
% |
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75.9 |
% |
Ongoing non-life underwriting expense ratio3 |
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20.2 |
% |
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21.8 |
% |
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21.1 |
% |
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21.2 |
% |
Ongoing non-life administration expense ratio3 |
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8.8 |
% |
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4.6 |
% |
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7.2 |
% |
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3.6 |
% |
Ongoing non-life combined ratio3 |
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102.4 |
% |
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108.7 |
% |
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108.9 |
% |
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100.7 |
% |
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June 30 |
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Dec. 31 |
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2005 |
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2004 |
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Total shareholders equity |
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1,648.2 |
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1,720.2 |
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Total underwriting reserves, net of reinsurance |
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8,751.0 |
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9,983.1 |
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Total invested assets |
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7,685.4 |
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7,788.4 |
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Book value per share |
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11.26 |
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11.76 |
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1 |
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For the three and six months ended June 30, 2004, the figures have been restated
to reflect the effect of the Rights Offering that occurred in October 2004. |
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2 |
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Defined as net income (loss) divided by shareholders equity at the beginning of the
period, annualized. For the three-month period, the shareholders equity at March 31 of the
respective year is used and for the six-month period, the shareholders equity at December 31
of the prior year is used. |
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3 |
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Ongoing non-life business represents the aggregation of Standard Property & Casualty
Reinsurance and Specialty Lines, as these are both non-life segments, the aggregation of which
management considers meaningful in understanding the current performance of Converium. This
measure excludes the non-life business contained within the Run-Off segment in line with
managements desire to monitor this segment on a stand-alone basis. The aggregation of the
Life & Health Reinsurance segment with the ongoing non-life business is referred to as total
ongoing business. |
4
Letter from the Chief Executive Officer
Dear shareholders,
I am pleased to report that your reinsurer has returned to a path of
stability and profitability following last years developments.
The Converium brand remains recognized and respected in key markets
around the world. Our ambitions have proved resilient, our talents
tenacious, and our resolve sufficient to see Converium survive and,
ultimately, prosper.
This testifies to our strong business relationships and the markets
demand for a mid-sized reinsurer. The vast majority of Converiums
historic customers from outside North America are still our clients.
Some have reduced the extent of their transactions with us, but,
crucially, the relationships themselves remain intact.
I am convinced that Converium is well positioned to regain
its market position. However, we are not waiting passively
for this to occur. Customers confidence in the Company is
evident, and increases with every passing day. It builds as
our Client Relationship Managers explain the whole story:
Converiums solvency levels are reaching new highs. The Company has made progress towards stabilization and reports profits again. We continue to
strive to earn the rating agencies recognition of our inherent financial strength, another
critical ingredient of recovery.
The path ahead
Upon my appointment as Chief Executive Officer of Converium, I set out a roadmap to recovery.
During the first six months of 2005 we have made significant progress in our journey down that
road, backed by the decision of the Board of Directors to reaffirm Converiums intention to
continue as a stand-alone entity operating as an international, multi-line reinsurer.
During this period we have matched the size of the organization to our current portfolio and
prospects, with relevant cost savings on the horizon. We have examined and fine-tuned the types of
business we underwrite going forward. However, we have resolved to stick to our existing business
strategy, which has proved effective in our target markets of Europe, Asia and Latin America.
Meanwhile, we continue to manage the run-off of our North American operations to the benefit of all
stakeholders.
Equally important, your management is nurturing an internal culture where participation in
decision-making is embedded throughout Converium. Continued retention of key staff is a high
priority.
The severe winter storm Erwin, which swept across northern Europe from January 7 to 9, had a
negative impact on the first quarter result. Losses related to the storm added 6.1 percentage
points to the ongoing non-life combined ratio for the first quarter, although the event fell well
within modeled loss scenarios, and serves to remind us that Converium is in the risk business.
The financial benefits of expense reduction initiatives embarked upon in March are not yet
apparent. However, almost all of the cost savings achieved should crystallize by year end. We
continue to monitor our administration expense ratio for ongoing operations and into 2006.
The first quarter result was a disappointment, although Converiums underlying technical
performance was sound. The bottom line, in addition to Erwin and administrative expenses, was
marred by the US GAAP accounting impact arising from the commutation of a major retrocession
agreement. However, the transaction was economically neutral, and has not affected Converiums
actual long-term financial performance.
Renewed success
Against these developments, Converiums success during the major renewal periods in the first half
of the year was certainly encouraging. Outside the US, almost 90% of treaty direct client
relationships were maintained during the January 1 renewal, as were 56% of treaty broker
relationships. This performance played out marginally better than expected, illustrating just how
well Converiums Client Relationship Managers know their clients.
Equally satisfying was Converiums renewal performance in Asia at April 1. Clients proved loyal,
especially in Japan, where Converiums market share remains relatively high. Technically adequate
rates were achieved despite rising competition from
5
new entrants. Rating-sensitive Australia was the only Asia-Pacific market where more than half our
client relationships fell away. However, we remain confident that these relationships can be
rebuilt once a satisfactory rating level has been earned. In the recent renewals, Converiums
stringent pricing and underwriting standards were not compromised in order to achieve successful
renewals. The July renewals further confirm the established trend of the previous renewals this
year and Converiums franchise proves resilient and robust.
The overall outcome of the renewals in the first half of 2005 shows clearly that despite
Converiums letter-rating, our business partners understand that the Company is fiscally robust.
They realize that Converium is not destined to become another reinsurance casualty. On the
contrary, your reinsurer returned to stability and profitability in the second quarter of 2005.
Our experience during that period marks a third consecutive quarter of relative reserve stability.
In addition, no major catastrophes occurred in the second quarter of 2005, and the underwriting
result is positive.
Our financial expectations have been met through careful and responsible underwriting, despite
slight market price deterioration in certain lines of business. Our positive technical performance
has been bolstered by satisfactory returns from a strong investment base. I am confident that
diligent pursuit of the roadmap to recovery promises a medium-term resumption of the creation of
attractive shareholder returns by Converium.
Rejuvenation
I welcome to the Board of Directors Dr Markus Dennler, former member of the Executive Board of
Credit Suisse Financial Services and Chief Executive Officer responsible for the global operational
Life & Pensions business, and Rudolf Kellenberger, former Deputy Chief Executive Officer of Swiss
Re. Elected at the Annual General Meeting on April 12, 2005, their experience, input and fresh
insights have already been invaluable over the recent months.
I applaud the faith, loyalty and effort of Converiums hard-working staff, who have weathered what
has certainly been a difficult period for our Company. Finally, I thank our valued clients and
broker partners for their understanding and support during this time. Theirs is the final,
essential component of our renewed success.
Yours sincerely,
Terry G. Clarke
Chief Executive Officer
6
The Converium share
The Converium share and ADS
In the first half of 2005 Converium shares and ADSs
under-performed both the European and the US Insurance Index.
Converiums shareholder split remained well diversified
geographically; UK, US and Swiss institutional investors each
held nearly 30% of Converiums shares.
See note 1
See note 1
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Converium Ordinary Shares* |
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-87.3 |
% |
Bloomberg European Insurance Index* |
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-36.3 |
% |
Swiss Market Index* |
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-1.2 |
% |
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Converium ADSs** |
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-83.6 |
% |
Bloomberg US Insurance Index** |
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7.6 |
% |
Dow Jones Industrial Index** |
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3.9 |
% |
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* |
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underlying figures in CHF |
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** |
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underlying figures in US$ |
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Converium Ordinary Shares* |
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2.0 |
% |
Bloomberg European Insurance Index* |
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4.4 |
% |
Swiss Market Index* |
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8.4 |
% |
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Converium ADSs** |
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-9.8 |
% |
Bloomberg US Insurance Index** |
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0.0 |
% |
Dow Jones Industrial Index** |
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-4.2 |
% |
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* |
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underlying figures in CHF |
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** |
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underlying figures in US$ |
1) |
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A different scale is used for the 2005 performance reflecting the relatively minor movements of
the Converium share and ADS. |
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Key share data for 2005 |
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Shares registered as at June 30, 2005 |
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146,689,462 |
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SWX Swiss Exchange |
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Share price as at June 30, 2005 in CHF |
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10.40 |
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Year High in CHF |
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12.50 |
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Year Low in CHF |
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9.00 |
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Average daily trading volume in 2005 |
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1,618,303 |
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Market capitalization
as at June 30, 2005 in CHF |
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1,525,570,405 |
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Book value per share
as at June 30, 2005 in CHF |
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14.43 |
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New York Stock Exchange |
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ADS price as at June 30, 2005 in US$ |
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4.03 |
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Year High in US$ |
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5.20 |
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Year Low in US$ |
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3.59 |
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Major shareholders
In accordance with the notification requirements as set by
the SWX Swiss Exchange, the following significant share
holdings were notified to Converium Holding AG as of June 30,
2005:
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Odey Asset Management LLP, London, United Kingdom:
11.2% (date of notification: March 4, 2005) |
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Dodge & Cox, San Francisco, United States: 5.04% (date
of notification: June 22, 2005) |
8
Managements
discussion and analysis
of financial condition and results of operations
The following discussion and analysis should be read in conjunction with our financial
statements, including the related notes to those financial statements. This discussion contains
forward-looking statements that involve risks and uncertainties and actual results may differ
materially from the results described or implied by these forward-looking statements. See
Cautionary note regarding forward-looking statements.
Overview
Converium Holding AG and subsidiaries (Converium) is an international reinsurer whose
business operations are recognized for innovation, professionalism and service. We believe we are
accepted as a professional reinsurer for all major lines of non-life and life reinsurance in
Europe, Asia-Pacific and Latin America. We actively seek to develop efficient and effective
reinsurance solutions to complement our target clients business plans and needs. We focus on core
underwriting skills and on developing close client relationships while honoring our and our
clients relationships with intermediaries.
We offer a broad range of mostly traditional non-life and life reinsurance products to help our
target clients efficiently and effectively manage capital and risks. In non-life reinsurance, our
lines of business are General Third Party Liability, Motor, Personal Accident (assumed from
non-life insurers), Property, Agribusiness, Aviation & Space, Credit & Surety, Engineering, Marine
& Energy, Professional Liability and other Special Liability and Workers Compensation. In Life &
Health Reinsurance, our lines of business are Life and Disability reinsurance, including quota
share, surplus coverage and financing contracts, and Accident and Health.
In 2004, we placed Converium Reinsurance (North America) Inc. (CRNA) into orderly run-off, which
resulted in the discontinuation of writing reinsurance from offices located in North America. We
continue to service remaining contracts issued by CRNA until they expire or are terminated. We are
actively commuting CRNAs liabilities wherever appropriate. We still offer reinsurance for
attractive US-originated business, which is underwritten and managed through Converium AG, Zurich.
In the first quarter of 2005, Converium formally adopted a change to the reporting line of the
management of its North American operations. This change was introduced to reflect the placement
of CRNA into orderly run-off and managements desire to monitor this business on a stand-alone
basis. Therefore, Converiums business is now organized around three ongoing operating segments:
Standard
Property & Casualty Reinsurance, Specialty Lines and Life & Health Reinsurance, which are based
principally on global lines of business, in addition to a Run-Off segment. The Run-Off segment
includes all business; both life and non-life, originating from CRNA and Converium Insurance (North
America) Inc. (CINA), excluding the US originated aviation business. In addition to the four
segments financial results, the Corporate Center carries certain administration expenses, such as
costs of the Board of Directors, the Global Executive Committee, and other corporate functions as
well as other expenses not allocated to the operating segments. As well as reporting individual
segment results, management also presents the aggregation of Standard Property & Casualty
Reinsurance and Specialty Lines, referred to later in this discussion as ongoing non-life business,
as these are both non-life segments, the aggregation of which management considers meaningful in
understanding the performance of Converium. This measure excludes the non-life business contained
within the Run-Off segment in line with managements desire to monitor this segment on a
stand-alone basis. The aggregation of the Life & Health Reinsurance segment with the ongoing
non-life business is referred to as total ongoing business.
Results of operations
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Three months ended June 30 |
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Six months ended June 30 |
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(US$ million) |
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2005 |
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2004 |
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2005 |
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2004 |
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Income (loss) before taxes |
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49.2 |
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-381.9 |
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-16.4 |
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-295.5 |
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Net realized capital (losses) gains |
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-1.0 |
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12.5 |
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-1.7 |
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21.7 |
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Impairment of goodwill |
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-94.0 |
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-94.0 |
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Amortization of intangible assets |
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-7.0 |
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-0.8 |
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-14.0 |
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-1.5 |
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Restructuring costs |
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-3.5 |
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-13.6 |
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Pre-tax operating income (loss)1 |
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60.7 |
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-299.6 |
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12.9 |
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-221.7 |
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Net income (loss) |
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70.8 |
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-660.0 |
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9.0 |
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-594.3 |
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1 |
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For the three and six months ended June 30, 2004, respectively, US$ 0.8 million and US$ 1.5 million have been reclassified from investment income to
amortization of intangible assets, which resulted in a change in pre-tax operating income for 2004. |
We reported net income for the three and six months ended June 30, 2005 as compared to net loss
for the same periods in 2004. The second quarter of 2005 exhibited solid underwriting results for
our ongoing business, supported by net positive development of prior years loss reserves in the
amount of US$ 6.7 million, the absence of major catastrophic events and a strong investment result.
For the six months ended June 30, 2005, our result includes the recognition of a net loss of US$
32.5 million from winter storm Erwin, the commutation of certain retrocession contracts which had a
negative effect of US$ 40.0 million, net strengthening of prior years loss reserves of US$ 3.7
million and costs of US$ 13.6 million associated with our
9
Managements
discussion and analysis
of financial condition and results of operations (continued)
organizational and operational restructuring. The 2004 results were primarily driven by net
reserve strengthening of prior years loss reserves and a related increase in income tax expense
due to the establishment of a full valuation allowance against the net deferred tax assets from our
North American operations and the impairment of goodwill. Our resulting ongoing non-life combined
ratio was 102.4% and 108.9% for the three and six months ended June 30, 2005, compared to 108.7%
and 100.7% for the same periods of 2004.
We reported pre-tax operating income (defined as income (loss) before taxes, net realized capital
(losses) gains, impairment of goodwill, amortization of intangible assets and restructuring costs)
for the three and six months ended June 30, 2005 as compared to a pre-tax operating loss for the
same periods in 2004. We use pre-tax operating results to measure the performance of our underlying
reinsurance operations without the influence of realized gains and losses from the sale of
investments, or other non-operating items such as goodwill, impairment and restructuring costs.
For the three months ended June 30, 2005, gross premiums written decreased 64.8%, net premiums
written decreased 65.1% and net premiums earned decreased 39.3% compared to the same period in
2004. For the six months ended June 30, 2005, gross premiums written decreased 55.2%, net premiums
written decreased 53.9% and net premiums earned decreased 35.0% compared to the same period in
2004. The decrease in gross and net premiums written was caused by the placement of CRNA into
orderly run-off and the ratings downgrades, both of which occurred in 2004, resulting in clients
canceling their business or reducing their shares with us. In addition, due to the seasonality
involved with the renewal of our business in different markets, we generally record the largest
share of our premium volume in the first quarter of a given year and approximately half of our
annual premium volume is recorded by the end of the second quarter of a given year. Despite the
decrease in overall premium volume, for the three months ended June 30, 2005, there was still
growth in the Agribusiness, Aviation and Accident and Health lines of business. For the six months
ended June 30, 2005, the Agribusiness line of business experienced growth in premium volume. The
growth over the three and six months ended June 30, 2005 resulted from increased shares in existing
business and new client relationships.
We had net realized capital losses of US$ 1.0 million for the three months ended June 30, 2005
versus net realized capital gains of US$ 12.5 million for the same period in 2004. For the six
months ended June 30, 2005 we had net realized capital losses of US$ 1.7 million as compared to net
realized capital gains of US$ 21.7 million for the same period in 2004. During the second quarter
of 2004, we realized
approximately US$ 16.0 million of realized capital gains on the sale of certain equity investments
to adjust our asset allocation to reduce investment risks.
Other loss for the three and six months ended June 30, 2005 was US$ 1.5 million and US$ 9.3
million, respectively, as compared to other income of US$ 5.4 and US$ 8.1 million for the same
periods of 2004.
The components of net income (loss) are described below.
Reinsurance results
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% change |
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% change |
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Three months ended June 30 |
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2005 over |
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Six months ended June 30 |
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2005 over |
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(US$ million) |
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2005 |
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2004 |
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2004 |
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2005 |
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2004 |
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2004 |
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Gross premiums written |
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362.0 |
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1,027.6 |
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-64.8 |
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1,079.5 |
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2,411.2 |
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-55.2 |
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Net premiums written |
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330.9 |
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|
948.8 |
|
|
|
-65.1 |
|
|
|
1,035.8 |
|
|
|
2,247.4 |
|
|
|
-53.9 |
|
Net premiums earned |
|
|
612.8 |
|
|
|
1,009.9 |
|
|
|
-39.3 |
|
|
|
1,301.6 |
|
|
|
2,002.9 |
|
|
|
-35.0 |
|
Gross and net premiums written decreased for the three and six months ended June 30, 2005 over the
same periods in 2004 largely due to the reduction in business volume caused by the placement of
CRNA into orderly run-off and the ratings downgrades, both of which occurred in 2004, resulting in
clients canceling their business or reducing their shares with us. In addition, due to the
seasonality involved with the renewal of our business in different markets, we generally record the
largest share of our premium volume in the first quarter of a given year and approximately half of
our annual premium volume is recorded by the end of the second quarter of a given year.
For the three months ended June 30, 2005, net premiums written in Standard Property & Casualty
Reinsurance decreased by US$ 212.4 million, or 83.1%, Specialty Lines decreased by US$ 117.7
million, or 33.9% and net premiums written in the Life & Health Reinsurance segment decreased by
US$ 1.5 million, or 2.6%. For the six months ended June 30, 2005, net premiums written in Standard
Property & Casualty Reinsurance decreased by US$ 408.9 million, or 47.8% and Specialty Lines
decreased by US$ 285.7 million, or 42.6%, while net premiums written in the Life & Health
Reinsurance segment grew by US$ 1.1 million, or 0.7%. Although the Specialty Lines segment
experienced a decrease in net premiums written, we successfully renewed the significant business
with our strategic partner, Medical Defence Union (MDU). On a consolidated basis we ceded 8.6%
and 7.7% of our gross premiums written for the three months ended June 30, 2005 and 2004,
respectively and 4.0% and 6.8% for the six months ended June 30, 2005 and 2004, respectively.
10
Managements
discussion and analysis
of financial condition and results of operations (continued)
Net premiums earned for the three and six months ended June 30, 2005 decreased at a slower rate
than the corresponding net premiums written as premiums are still being earned from business
written in prior underwriting years.
See Business development for further information by line of business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
Three months ended June 30 |
|
|
2005 over |
|
|
Six months ended June 30 |
|
|
2005 over |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Losses, loss adjustment expenses
and life benefits |
|
|
-449.3 |
|
|
|
-1,103.8 |
|
|
|
-59.3 |
|
|
|
-1,035.1 |
|
|
|
-1,824.7 |
|
|
|
-43.3 |
|
Ongoing non-life loss ratio
(to net premiums earned) |
|
|
73.4 |
% |
|
|
82.3 |
% |
|
-8.9 |
pts |
|
|
80.6 |
% |
|
|
75.9 |
% |
|
4.7 |
pts |
Our losses, loss adjustment expenses and life benefits incurred decreased for the three months
ended June 30, 2005 as compared to the same period of 2004, supported by net positive development
of prior years loss reserves in the amount of US$ 6.7 million, of which US$ 3.1 million were
related to the Run-Off segment, and the absence of major catastrophic events. For the six months
ended June 30, 2005, our losses, loss adjustment expenses and life benefits incurred decreased
while our ongoing non-life loss ratio increased. The first half of 2005 was impacted by Winter
Storm Erwin, which resulted in pre-tax net losses in the amount of US$ 32.5 million, the
commutation of certain retrocession contracts with a negative effect on losses of US$ 38.7 million
and net strengthening of prior years loss reserves in the amount of US$ 3.7 million, of which US$
13.3 million were related to the Run-Off segment. The results for the three and six months ended
June 30, 2004 were driven by the significant adverse development of prior years loss reserves that
was recorded in the first half of 2004 on our US casualty reinsurance lines in the amount of US$
430.7 million.
Reserve development
For the three months ended June 30, 2005, we recorded net positive development of prior years
loss reserves in the amount of US$ 6.7 million, which resulted in an overall net strengthening of
prior years loss reserves of US$ 3.7 million for the first half of 2005. The development of prior
years loss reserves for the three months ended June 30, 2005 includes US$ 6.9 million of net
strengthening in the Standard Property & Casualty Reinsurance segment and net positive development
of US$ 10.5 million and US$ 3.1 million in the Specialty Lines and Run-Off segments, respectively.
The development of prior years loss reserve for the first half of 2005 consisted of net positive
development of US$ 3.3 million in the Standard Property & Casualty Reinsurance segment and US$ 6.3
million in the Specialty Lines segment, offset by net strengthening of prior years loss reserves
of US$ 13.3 million in the Run-Off segment.
In the first half of 2005, we were also impacted by net strengthening of prior years loss reserves
of US$ 15.3 million from the US/Caribbean hurricanes that occurred in late 2004, of which US$ 11.8
million impacted the Standard Property & Casualty Reinsurance segment and US$ 3.5 million impacted
the Specialty Lines segment. This net strengthening is included in the net strengthening of prior
years loss reserves shown above.
As a result of the reserve volatility of old underwriting years and the adverse loss-reporting
trend that continued throughout the early part of 2004, we recorded net strengthening of prior
years loss reserves in the amount of US$ 387.7 million for the three months ended June 30, 2004,
which resulted in an overall net strengthening of prior years loss reserves of US$ 430.7 million
for the first half of 2004. The development of prior years loss reserves for the three months
ended June 30, 2004 includes net strengthening of US$ 5.1 million in the Standard Property &
Casualty Reinsurance segment, US$ 51.3 million in the Specialty Lines segment and US$ 331.3 in the
Run-Off segment. The development of prior years loss reserves for the first half of 2004,
consisted of net strengthening of prior years loss reserves of US$ 1.1 million in the Standard
Property & Casualty Reinsurance segment, US$ 32.2 million in the Specialty Lines segment and US$
397.4 million in the Run-Off segment.
Our net loss for the September 11th terrorist attacks is capped at US$ 289.2 million by Zurich
Financial Services.
Retrocessional risk management
As part of our risk management process we regularly evaluate the recoverability of our
reinsurance assets taking into account all public domain information including the current rating
of our retrocessionaires. If there are genuine concerns about a retrocessionaires ability to pay
future claims we may enter into negotiations to commute the retrocessionaires obligations in
respect of future claims. In this type of transaction the reinsurance recoverables which are
included in underwriting reserves on the balance sheet and reflect the full nominal value of
expected future claims recoveries are reduced to zero in exchange for commutation payments, which
reflect the time value of money on the commuted reserves in question. In such a transaction we
suffer an underwriting loss in the quarter that the transaction takes place due to the value of the
discount in respect of future expected cash flows, but avoid future concerns about the
recoverability of our reinsurance assets including potential bad debt provisions. Additionally, we
will benefit from additional investment income on cash received and/or reduced interest expense
related to any funds held balance.
11
Managements
discussion and analysis
of financial condition and results of operations
(continued)
As a result of this risk management monitoring process, we reached a decision in the first
quarter of 2005 to commute the obligations of one of our retrocessionaires due to the
deterioration of that companys rating and concerns about its future ownership and prospects. This
led to the commutation of certain retrocession contracts with reinsurance recoverables in the
amount of US$ 100.1 million for a commutation settlement of US$ 60.1 million, which generated a
negative impact of US$ 40.0 million on the net results in the first half of 2005, US$ 38.7 million
of which is in losses. In the second quarter of 2005, our risk management monitoring process did
not result in any such retrocession commutations.
Commutations
Based on the developments of 2004, we placed CRNA into orderly run-off and started to implement
and execute a commutation strategy. Commutations can accelerate the realization of profit inherent
in long-tail reserves by crystallizing outstanding claims reserves into payments, which are
discounted to reflect the time value of money. Since commutation payments essentially reflect a
discounted present value of estimated future cash flows, future investment income earned is
expected to decline as the assets backing those reserves are liquidated to make payments. As of
June 30, 2005, we have not yet concluded and legally bound further material commutations with our
cedents; however we continue to vigorously execute our approved commutation strategy and follow
our commutation objectives. Under US GAAP accounting, we are not
permitted to recognize benefit from commutations until they are legally bound.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
Three months ended June 30 |
|
|
2005 over |
|
|
Six months ended June 30 |
|
|
2005 over |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Underwriting acquisition costs |
|
|
-130.9 |
|
|
|
-224.3 |
|
|
|
-41.6 |
|
|
|
-291.3 |
|
|
|
-433.4 |
|
|
|
-32.8 |
|
Operating and administration
expenses |
|
|
-50.2 |
|
|
|
-54.7 |
|
|
|
-8.2 |
|
|
|
-107.1 |
|
|
|
-107.3 |
|
|
|
-0.2 |
|
Ongoing non-life underwriting
expense ratio (to net premiums
earned) |
|
|
20.2 |
% |
|
|
21.8 |
% |
|
|
-1.6 |
pts |
|
|
21.1 |
% |
|
|
21.2 |
% |
|
|
-0.1 |
pts |
|
Ongoing non-life administration
expense ratio (to net premiums
written) |
|
|
8.8 |
% |
|
|
4.6 |
% |
|
|
4.2 |
pts |
|
|
7.2 |
% |
|
|
3.6 |
% |
|
|
3.6 |
pt |
|
Underwriting acquisition costs primarily relate to commissions on treaty and individual risk
business. For the three and six months ended June 30, 2005 our underwriting acquisition costs
decreased and our ongoing non-life underwriting expense ratio remained relatively stable.
Underwriting expenses have decreased as a result of the reduction in overall business volume;
however premiums are still being earned from business written in prior underwriting years.
Offsetting this decrease is the fact that our mix of business has shifted from non-proportional to
proportional, which generally carries higher underwriting expenses.
Operating and administration expenses decreased for the three months ended June 30, 2005 versus the
same period in 2004 and remained flat for the six months ended June 30, 2005 as compared to the
same period in 2004. Our operating and administration expenses in 2005 are only partially
reflective of the cost management measures implemented in the first quarter of 2005 and were
primarily offset by the costs resulting from staff retention plans and expenses which we consider
necessary to expedite a rapid and effective rebound. The ongoing non-life administration expense
ratio increased for the three and six months ended June 30, 2005 as compared to the same periods of
2004 as our cost management measures referred to above are not fully reflected in our cost base and
because of the significant reduction in net premiums written.
12
Managements
discussion and analysis
of financial condition and results of operations
(continued)
Investment results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
62.1 |
|
|
|
47.8 |
|
|
|
116.0 |
|
|
|
94.0 |
|
Equity securities |
|
|
2.7 |
|
|
|
7.1 |
|
|
|
3.9 |
|
|
|
9.2 |
|
Funds Withheld Asset |
|
|
16.2 |
|
|
|
19.0 |
|
|
|
33.1 |
|
|
|
39.3 |
|
Other, net of expenses |
|
|
6.8 |
|
|
|
2.8 |
|
|
|
17.0 |
|
|
|
6.8 |
|
Net investment income |
|
|
87.8 |
|
|
|
76.7 |
|
|
|
170.0 |
|
|
|
149.3 |
|
Average annualized net investment income yield (pre-tax) |
|
|
4.4 |
% |
|
|
3.8 |
% |
|
|
4.1 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital (losses) gains |
|
|
-1.0 |
|
|
|
12.5 |
|
|
|
-1.7 |
|
|
|
21.7 |
|
Total investment results |
|
|
86.8 |
|
|
|
89.2 |
|
|
|
168.3 |
|
|
|
171.0 |
|
Average annualized total investment income yield (pre-tax) |
|
|
4.3 |
% |
|
|
4.5 |
% |
|
|
4.1 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) (pre-tax) |
|
|
81.9 |
|
|
|
-139.2 |
|
|
|
27.7 |
|
|
|
-76.9 |
|
Total investment return (pre-tax) |
|
|
168.7 |
|
|
|
-50.0 |
|
|
|
196.0 |
|
|
|
94.1 |
|
Average annualized total investment return (pre-tax) |
|
|
8.4 |
% |
|
|
-2.5 |
% |
|
|
4.8 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total invested assets (including cash and cash equivalents) |
|
|
8,070.9 |
|
|
|
7,964.5 |
|
|
|
8,218.1 |
|
|
|
7,868.0 |
|
Investment results are an important part of our overall profitability. Our net investment income
increased for the three and six months ended June 30, 2005 as compared to the same periods in 2004.
The increase largely resulted from moderate growth in total investments over 2004, as well as an
allocation shift from equity securities to fixed income securities in mid-2004. In 2005, we have a
higher allocation to relatively high-yielding fixed income securities, particularly in the United
Kingdom.
Our average annualized net investment income yield (pre-tax) was 4.4% and 4.1% for the three and
six months ended June 30, 2005, as compared to 3.8% for both of the same periods of 2004. Yields
are calculated based on the average of beginning and ending investment balances (including cash
and cash equivalents).
An increasing component of net investment income arises from income received on business written on
a funds withheld basis such as certain Lloyds transactions. As these assets are reported under
funds held by reinsureds and do not form part of the average total invested assets, there is a
consequent increase in the reported average annualized net investment income yield (pre-tax). If
this component is excluded from net investment income, the average annualized net investment income
yield (pre-tax) would be 4.2% and 3.9% for the three and six months ended June 30 2005, as compared
to 3.8% and 3.7% for the same periods of 2004.
We had net realized capital losses of US$ 1.0 million for the three months ended June 30, 2005
versus net realized capital gains of US$ 12.5 million for the same period in 2004. For the six
months ended June 30, 2005 we had net realized capital losses of US$ 1.7 million as compared to net
realized capital gains of US$ 21.7 million for the same period in 2004. Our second quarter and
half year 2004 results were driven by the realization of approximately US$ 16.0 million of realized
capital gain on the sale of certain equity investments to adjust our asset allocation to reduce
investment risks.
Our average annualized total investment income yield (pre-tax) was 4.3% and 4.1% for the three and
six months ended June 30, 2005, versus 4.5% and 4.3% for the same periods of 2004, as we realized
US$ 21.7 million of net realized capital gains for the first half of 2004.
Our average annualized total investment return (pre-tax) was 8.4% and 4.8% for the three and six
months ended June 30, 2005 as compared to -2.5% and 2.4% for the same periods of 2004. The total
return for the quarter was positively impacted by declining long-term yields and strong European
stock markets, which triggered positive changes in the unrealized capital gain and loss positions.
We recorded US$ 4.9 million and US$ 2.6 million of impairment charges for the six months ended June
30, 2005 and 2004, respectively.
13
Managements
discussion and analysis
of financial condition and results of operations
(continued)
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Other (loss) income |
|
|
-1.5 |
|
|
|
5.4 |
|
|
|
-9.3 |
|
|
|
8.1 |
|
Interest expense |
|
|
-8.0 |
|
|
|
-8.8 |
|
|
|
-15.9 |
|
|
|
-16.6 |
|
Impairment of goodwill |
|
|
|
|
|
|
-94.0 |
|
|
|
|
|
|
|
-94.0 |
|
Amortization of intangible assets |
|
|
-7.0 |
|
|
|
-0.8 |
|
|
|
-14.0 |
|
|
|
-1.5 |
|
Restructuring costs |
|
|
-3.5 |
|
|
|
|
|
|
|
-13.6 |
|
|
|
|
|
Income tax benefit (expense) |
|
|
21.6 |
|
|
|
-278.1 |
|
|
|
25.4 |
|
|
|
-298.8 |
|
Other (loss) income: Other loss for the three months ended June 30, 2005 was US$ 1.5 million as
compared to other income of US$ 5.4 million for the same period of 2004. For the six months ended
June 30, 2005, other loss was US$ 9.3 million as com-pared to other income of US$ 8.1 million for
the same period of 2004. The increase in other loss for the first half of 2005 is primarily driven
by US$ 3.0 million of amortization related to our Helix 04 catastrophe cover, a charge of US$ 2.4
million related to the impairment of our usufruct agreements with the co-owners of SATEC and US$
1.3 million related to the commutation of certain retrocession contracts. The 2004 other income
reflects a benefit of approximately US$ 10.0 million related to the release of a reserve for
uncollectible reinsurance recoverables.
Interest expense: Interest expense remained relatively stable for the three and six months ended
June 30, 2005 as compared to the same periods in 2004. This expense includes the April 2005
interest payment on CRNAs 7 1/8% senior debt note. Prior to this interest payment, Converium
Holdings (North America) Inc. received a capital contribution from Converium AG. In addition, the
interest expense includes the interest payment for the Guaranteed Subordinated Notes.
Impairment of goodwill: Impairment of goodwill was nil for the three and six months ended June 30,
2005 as compared to US$ 94.0 million for the same periods in 2004.
SFAS No. 142, Goodwill and Other Intangible Assets, requires impairment testing of goodwill
annually or more regularly if any event or change in business circumstances occurs which would
indicate that the carrying value of goodwill may be impaired. Due to the reserving actions taken in
the second quarter of 2004 in respect of prior year development in business written in North
America, and a subsequent decision to take a full valuation allowance against the net deferred tax
asset at CRNA, a goodwill impairment test was conducted to assess the fair value of the reporting
units at that date. As a result of this assessment, an impairment charge of US$ 94.0 million was
recorded in the second quarter of 2004.
Amortization of intangible assets: Amortization of intangible assets was US$ 7.0 million and US$
14.0 million for the three and six months ended June 30, 2005 as compared to US$ 0.8 million and
US$ 1.5 million for the same periods in 2004. This amortization relates to the intangible asset
for Global Aerospace Underwriting Managers Limited (GAUM).
Restructuring costs: The reduction of premium volume required an adjustment of our cost base
globally going forward. Consequently, we notified certain of our employees that their employment
would be terminated. We recorded restructuring costs of US$ 3.5 million and US$ 13.6 million for
the three and six months ended June 30, 2005, respectively, related to these global cost management
measures.
In addition, as a result of the global restructuring, a decision was made in January 2005 to vacate
our primary office space in New York, New York and consolidate in our Stamford, Connecticut office
space. We expect the transfer to be effective within the third quarter of 2005, resulting in
additional restructuring costs. Office space in Zurich is also under review, which could result in
additional restructuring costs in future quarters.
Income tax benefit (expense): We recorded an income tax benefit of US$ 21.6 million and US$ 25.4
million for the three and six months ended June 30, 2005, respectively. Over the past year, we have
established a full valuation allowance against existing tax losses carried forward in our primary
locations, resulting in minimal current income tax expense relating to pre-tax income. Therefore
tax benefits and expenses are primarily driven by the development of existing deferred tax assets
and liabilities, which are established to reflect differences in the tax accounting rules of local
jurisdictions and US GAAP accounting.
In the second quarter of 2005, our income tax benefit resulted from the reduction of deferred
acquisition costs (DAC), caused by the decline in our overall non-life premium volume, and
certain timing differences related to the recognition of investment gains and losses.
14
Managements discussion and analysis
of financial condition and results of operations
(continued)
In the first half of 2005, our income tax benefit resulted from the positive effect of a
reduction of DAC, the effect of certain timing differences related to the recognition of investment
gains and losses, and certain other deferred tax liability reductions, offset by a reduction in the
profit allocated to the Bermuda branch and an increase of the valuation allowance on existing
losses carried forward.
Our consolidated income tax expense for the three and six months ended June 30, 2004 reflected an
additional expense of US$ 269.8 million, related to the establishment of a full valuation allowance
against the net deferred income tax balances previously carried at CRNA.
Business development
Converiums business is organized around three ongoing operating segments: Standard Property &
Casualty Reinsurance, Specialty Lines and Life & Health Reinsurance, which are based principally on
global lines of business, in addition to a Run-Off segment. The Run-Off segment includes all
business originating from CRNA and CINA, excluding the US originated aviation business. In addition
to the four segments financial results, the Corporate Center carries certain administration
expenses, such as costs of the Board of Directors, the Global Executive Committee, and other
corporate functions as well as other expenses not allocated to the operating segments. Prior year
figures have been restated to reflect the new segment reporting structure.
The following table compares Converiums segment results for the three and six months ended June
30, 2005 and 2004 and reconciles segment results to income (loss) before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Segment income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Property & Casualty Reinsurance |
|
|
32.5 |
|
|
|
22.0 |
|
|
|
34.9 |
|
|
|
69.0 |
|
Specialty Lines |
|
|
41.3 |
|
|
|
-10.6 |
|
|
|
11.7 |
|
|
|
37.4 |
|
Life & Health Reinsurance |
|
|
0.3 |
|
|
|
1.9 |
|
|
|
6.5 |
|
|
|
3.4 |
|
Run-Off |
|
|
6.9 |
|
|
|
-289.6 |
|
|
|
2.3 |
|
|
|
-284.2 |
|
Corporate Center |
|
|
-11.8 |
|
|
|
-7.4 |
|
|
|
-19.0 |
|
|
|
-17.1 |
|
Total segment income (loss) |
|
|
69.2 |
|
|
|
-283.7 |
|
|
|
36.4 |
|
|
|
-191.5 |
|
Other (loss) income |
|
|
-1.5 |
|
|
|
5.4 |
|
|
|
-9.3 |
|
|
|
8.1 |
|
Interest expense |
|
|
-8.0 |
|
|
|
-8.8 |
|
|
|
-15.9 |
|
|
|
-16.6 |
|
Impairment of goodwill |
|
|
|
|
|
|
-94.0 |
|
|
|
|
|
|
|
-94.0 |
|
Amortization of intangible assets |
|
|
-7.0 |
|
|
|
-0.8 |
|
|
|
-14.0 |
|
|
|
-1.5 |
|
Restructuring costs |
|
|
-3.5 |
|
|
|
|
|
|
|
-13.6 |
|
|
|
|
|
Net income (loss) before taxes |
|
|
49.2 |
|
|
|
-381.9 |
|
|
|
-16.4 |
|
|
|
-295.5 |
|
Standard Property & Casualty Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
Three months ended June 30 |
|
|
2005 over |
|
|
Six months ended June 30 |
|
|
2005 over |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Gross premiums written |
|
|
47.9 |
|
|
|
284.5 |
|
|
|
-83.2 |
|
|
|
460.4 |
|
|
|
918.4 |
|
|
|
-49.9 |
|
Net premiums written |
|
|
43.3 |
|
|
|
255.7 |
|
|
|
-83.1 |
|
|
|
446.2 |
|
|
|
855.1 |
|
|
|
-47.8 |
|
Net premiums earned |
|
|
178.9 |
|
|
|
334.5 |
|
|
|
-46.5 |
|
|
|
420.9 |
|
|
|
706.5 |
|
|
|
-40.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment results |
|
|
30.8 |
|
|
|
28.8 |
|
|
|
|
|
|
|
57.8 |
|
|
|
55.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
|
|
32.5 |
|
|
|
22.0 |
|
|
|
|
|
|
|
34.9 |
|
|
|
69.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
74.8 |
% |
|
|
74.2 |
% |
|
|
|
|
|
|
78.0 |
% |
|
|
71.7 |
% |
|
|
|
|
Underwriting expense ratio |
|
|
17.3 |
% |
|
|
22.8 |
% |
|
|
|
|
|
|
20.0 |
% |
|
|
21.2 |
% |
|
|
|
|
Administration expense ratio |
|
|
28.6 |
% |
|
|
6.6 |
% |
|
|
|
|
|
|
7.0 |
% |
|
|
4.2 |
% |
|
|
|
|
Combined ratio |
|
|
120.7 |
% |
|
|
103.6 |
% |
|
|
|
|
|
|
105.0 |
% |
|
|
97.1 |
% |
|
|
|
|
Retention ratio (net premiums written
divided by gross premiums written) |
|
|
90.4 |
% |
|
|
89.9 |
% |
|
|
|
|
|
|
96.9 |
% |
|
|
93.1 |
% |
|
|
|
|
15
Managements discussion and analysis
of financial condition and results of operations
(continued)
Standard Property & Casualty Reinsurance reported segment income for the three and six months
ended June 30, 2005 and 2004. These results were primarily attributable to the following:
|
|
A solid underwriting performance supported by net positive development of prior
years loss reserves of US$ 3.3 million in the first half of 2005 and the absence of major
catastrophic events in the second quarter of 2005. For the second quarter of 2005, the
Standard Property & Casualty Reinsurance segment recorded net strengthening of prior
years loss reserves of US$ 6.9 million primarily related to strengthening within the
Motor line of business (US$ 17.9 million), which was partially offset by positive
development within the Property line of business (US$ 17.6 million). Included within the
US$ 17.6 million positive development for the Property line of business was a
strengthening of US$ 4.4 million (US$ 11.8 million year-to-date) related to the
US/Caribbean hurricanes that occurred in late 2004. For the three and six months ended
June 30, 2004, US$ 5.1 million and US$ 1.1 million, respectively of net reserve
strengthening was recorded. |
|
|
|
For the three months ended June 30, 2005, the loss ratio remained relatively flat as
compared to the same period of 2004.
The impact of winter storm Erwin, which resulted in net pre-tax losses in the amount of US$
32.5 million, net of US$ 3.0 million in reinstatement premium, during the first quarter of
2005, added 7.7 percentage points to the loss ratio for the six months ended June 30, 2005. |
|
|
|
Strong investment results for the three and six months ended June 30, 2005 as
compared to the same periods of 2004. |
For the three months ended June 30, 2005, gross premiums written decreased 83.2% to US$ 47.9
million, net premiums written decreased 83.1% to US$ 43.3 million and net premiums earned
decreased 46.5% to US$ 178.9 million. For the six months ended June 30, 2005, gross premiums
written decreased 49.9% to US$ 460.4 million, net premiums written decreased 47.8% to US$ 446.2
million and net premiums earned decreased 40.4% to US$ 420.9 million. Premium volume for the three
and six months ended June 30, 2005 was impacted by the ratings downgrades that occurred in 2004,
which resulted in clients canceling their business or reducing their shares with us. In addition,
due to the seasonality involved with the renewal of our business in different markets, we generally
record the largest share of our premium volume in the first quarter of a given year and
approximately half of our annual premium volume is recorded by the end of the second quarter of a
given year. For the six months ended June 30, 2005, the reduction in net premiums written in the
Standard Property & Casualty Reinsurance segment by line of business included:
|
|
Motor (decreased by 60.7% or US$ 195.1 million to US$ 126.5 million), largely
reflecting reduced writings
in the France and United Kingdom books of business due to profitability considerations as
well as cancellation of business due to ratings down- grades in 2004; |
|
|
|
Property (decreased by 16.9% or US$ 53.3 million to US$ 262.0 million), largely
reflecting reduced writings due to the ratings downgrades in 2004; |
|
|
|
General Third Party Liability (decreased by 76.1% or US$ 146.4 million to US$ 46.0
million), which decreased due to revisions to premium estimates on our London Market
North America and United Kingdom book of business; and |
|
|
|
Personal accident (assumed from non-life insurers) (decreased by 54.7% or US$ 14.1
million to US$ 11.7 million), which decreased as a result of the cancellation or
non-renewal of business and reduced shares in current business due to the ratings
downgrades in 2004. |
Our underwriting expense ratio decreased for the second quarter of 2005 due to our Lloyds
participations, which form an increasing share of the Standard Property & Casualty Reinsurance
segment. Due to the way the Lloyds business is reported to us, this premium is accounted for net
of acquisition costs so that as the proportion of business from this source rises we see a
corresponding fall in the acquisition cost ratio.
Our administration expense ratio increased significantly for the second quarter of 2005, as our
cost management measures are not fully reflected in our cost base and because of the significant
reduction in net premiums written.
16
Managements discussion and analysis
of financial condition and results of operations
(continued)
Specialty Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
Three months ended June 30 |
|
|
2005 over |
|
|
Six months ended June 30 |
|
|
2005 over |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Gross premiums written |
|
|
247.3 |
|
|
|
375.2 |
|
|
|
-34.1 |
|
|
|
401.8 |
|
|
|
723.0 |
|
|
|
-44.4 |
|
Net premiums written |
|
|
229.5 |
|
|
|
347.2 |
|
|
|
-33.9 |
|
|
|
384.9 |
|
|
|
670.6 |
|
|
|
-42.6 |
|
Net premiums earned |
|
|
327.3 |
|
|
|
300.3 |
|
|
|
9.0 |
|
|
|
619.7 |
|
|
|
582.3 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment results |
|
|
34.9 |
|
|
|
36.3 |
|
|
|
|
|
|
|
65.9 |
|
|
|
69.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
|
41.3 |
|
|
|
-10.6 |
|
|
|
|
|
|
|
11.7 |
|
|
|
37.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
72.7 |
% |
|
|
91.4 |
% |
|
|
|
|
|
|
82.4 |
% |
|
|
81.0 |
% |
|
|
|
|
Underwriting expense ratio |
|
|
21.8 |
% |
|
|
20.6 |
% |
|
|
|
|
|
|
21.8 |
% |
|
|
21.2 |
% |
|
|
|
|
Administration expense ratio |
|
|
5.1 |
% |
|
|
3.1 |
% |
|
|
|
|
|
|
7.4 |
% |
|
|
2.9 |
% |
|
|
|
|
Combined ratio |
|
|
99.6 |
% |
|
|
115.1 |
% |
|
|
|
|
|
|
111.6 |
% |
|
|
105.1 |
% |
|
|
|
|
Retention ratio (net premiums written
divided by gross premiums written) |
|
|
92.8 |
% |
|
|
92.5 |
% |
|
|
|
|
|
|
95.8 |
% |
|
|
92.8 |
% |
|
|
|
|
Specialty Lines reported segment income for the three and six months ended June 30, 2005 as
compared to a segment loss for the three months ended June 30, 2004 and a segment income for the
six months ended June 30, 2004. These results were primarily attributable to the following:
|
|
A solid underwriting performance supported by US$ 10.5 million of net positive
development of prior years loss reserves in the second quarter of 2005, which was
primarily driven by positive development within the Aviation line of business (US$ 19.5
million) and was partially offset by net strengthening within additional lines of business
within the segment. The net positive development for the quarter resulted in the Specialty
Lines segment recording net positive development of US$ 6.3 million for the first half of
2005. In the second quarter of 2004, US$ 51.3 million of net strengthening of prior years
loss reserves was recorded, which resulted in 2004 year-to-date net strengthening of prior
years loss reserves in the amount of US$ 32.2
million. |
|
|
|
The commutation of certain retrocession contracts which had a negative effect on
losses of US$ 38.7 million during the first quarter of 2005. |
|
|
|
Strong investment results for the three and six months ended June 30, 2005 as
compared to the same periods of 2004. |
For the three months ended June 30, 2005, gross premiums written decreased 34.1% to US$ 247.3
million, net premiums written decreased 33.9% to US$ 229.5 million and net premiums earned
increased 9.0% to US$ 327.3 million. For the six months ended June 30, 2005, gross premiums written
decreased 44.4% to US$ 401.8 million, net premiums written decreased 42.6% to US$ 384.9 million and
net premiums earned increased 6.4% to US$ 619.7 million. Premium volume for the three and six
months ended June 30, 2005 was impacted by the ratings downgrades that occurred in 2004, which
resulted in clients canceling their business or reducing their shares with us. For the six months
ended June 30, 2005, the reduction in net premiums written in the Specialty Line segment by line
of business included:
|
|
Aviation & Space (decreased by 31.5% or US$
59.8 million to US$ 129.9 million); |
|
|
Credit & Surety (decreased by 69.2% or US$
69.4 million to US$ 30.9 million); |
|
|
Professional Liability and other Special Liability (decreased by 45.5% or US$ 97.6
million to US$ 116.8 million); |
|
|
Engineering (decreased by 39.6% or US$ 29.6 million to
US$ 45.2 million); |
|
|
Marine & Energy (decreased by 25.8% or
US$13.9 million to US$ 40.0 million); and |
|
|
Workers Compensation (decreased by 97.3% or US$ 32.3 million to US$ 0.9 million),
which in addition to the affects of the ratings downgrades that occurred in 2004,
decreased due to the non-renewal of two large contracts. |
These decreases were offset by an increase in net premiums written in the Agribusiness line of
business, which increased by US$ 17.0 million to US$ 21.2 million. Additionally, in Specialty
Lines, we successfully renewed the significant business with our strategic partner, MDU.
17
Managements discussion and analysis
of financial condition and results of operations
(continued)
Our underwriting expense ratio increased for the six months ended June 30, 2005 from 21.2% to
21.8% due to the change in the business mix, which has shifted from non-proportional to
proportional, and the additional fronting commission of the GAUM business due to the ratings
downgrades in 2004.
Our administration expense ratio increased for the six months ended June 30, 2005 from 2.7% to
7.4%, as our cost management measures are not fully reflected in our cost base and because of the
significant reduction in net premiums written.
Life & Health Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
Three months ended June 30 |
|
|
2005 over |
|
|
Six months ended June 30 |
|
|
2005 over |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Gross premiums written |
|
|
59.3 |
|
|
|
70.6 |
|
|
|
-16.0 |
|
|
|
176.4 |
|
|
|
189.8 |
|
|
|
-7.1 |
|
Net premiums written |
|
|
55.7 |
|
|
|
57.2 |
|
|
|
-2.6 |
|
|
|
169.5 |
|
|
|
168.4 |
|
|
|
0.7 |
|
Net premiums earned |
|
|
74.1 |
|
|
|
83.6 |
|
|
|
-11.4 |
|
|
|
155.2 |
|
|
|
151.3 |
|
|
|
2.6 |
|
|
Total investment results |
|
|
6.5 |
|
|
|
5.2 |
|
|
|
|
|
|
|
12.5 |
|
|
|
9.9 |
|
|
|
|
|
|
Segment income |
|
|
0.3 |
|
|
|
1.9 |
|
|
|
|
|
|
|
6.5 |
|
|
|
3.4 |
|
|
|
|
|
|
Underwriting expense ratio |
|
|
25.4 |
% |
|
|
25.5 |
% |
|
|
|
|
|
|
29.6 |
% |
|
|
22.0 |
% |
|
|
|
|
Administration expense ratio |
|
|
7.4 |
% |
|
|
7.7 |
% |
|
|
|
|
|
|
4.8 |
% |
|
|
4.4 |
% |
|
|
|
|
Retention ratio (net premiums written
divided by gross premiums written) |
|
|
93.9 |
% |
|
|
81.0 |
% |
|
|
|
|
|
|
96.1 |
% |
|
|
88.7 |
% |
|
|
|
|
Life & Health Reinsurance reported segment income for the three months and six months ended June
30, 2005 and 2004. The segment income in 2005 was primarily attributable to the expansion of
existing reinsurance transactions in Continental Europe, which was partially offset by negative
development of US$ 1.5 million in the first quarter of 2005 related to the tsunami that occurred in
late 2004.
Technical result for the three months ended June 30, 2005 was US$ 1.5 million compared to US$ 4.1
million for the same period in 2004. The technical result for the six months ended June 30, 2005
was US$ 8.1 million compared to US$ 5.4 million for the same period in 2004. Technical result is
defined as net premiums earned minus losses, loss adjustment expenses and life benefits minus
underwriting acquistiion costs plus technical interest.
The decrease in segment income and technical result for the second quarter of 2005 was primarily
driven by our decision to non-renew two large contracts as well as updated cedent information
pertaining to our European and Latin American markets.
For the three months ended June 30, 2005, gross premiums written decreased 16.0% to US$ 59.3
million, net premiums written decreased 2.6% to US$ 55.7 million and net premiums earned decreased
11.4% to US$ 74.1 million. For the six months ended June 30, 2005, gross premiums written decreased
7.1% to US$ 176.4 million, net premiums written increased 0.7% to US$ 169.5 million and net
premiums earned increased 2.6% to US$ 155.2 million.
For the six months ended June 30, 2005, net premiums written growth in the Life & Health
Reinsurance segment was primarily within the Life and Disability reinsurance line of business
which increased by 8.5% or US$ 10.3 million to US$ 132.2 million primarily due to the expansion of
existing reinsurance transactions as well new business being written. This increase was offset by a
decrease of 20.0% or US$ 9.3 million in net premiums written to US$ 37.3 million in the Accident
and Health line of business due to the cancellation of contracts where the overall performance was
not in-line with our profitability targets as well as the impact of the ratings downgrades that
occurred in 2004.
Run-Off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
Three months ended June 30 |
|
|
2005 over |
|
|
Six months ended June 30 |
|
|
2005 over |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Gross premiums written |
|
|
7.5 |
|
|
|
297.3 |
|
|
|
-97.5 |
|
|
|
40.9 |
|
|
|
580.0 |
|
|
|
-92.9 |
|
Net premiums written |
|
|
2.4 |
|
|
|
288.7 |
|
|
|
-99.2 |
|
|
|
35.2 |
|
|
|
553.3 |
|
|
|
-93.6 |
|
Net premiums earned |
|
|
32.5 |
|
|
|
291.5 |
|
|
|
-88.9 |
|
|
|
105.8 |
|
|
|
562.8 |
|
|
|
-81.2 |
|
|
Total investment results |
|
|
14.6 |
|
|
|
18.9 |
|
|
|
|
|
|
|
32.1 |
|
|
|
36.3 |
|
|
|
|
|
|
Segment income (loss) |
|
|
6.9 |
|
|
|
-289.6 |
|
|
|
|
|
|
|
2.3 |
|
|
|
-284.2 |
|
|
|
|
|
18
Managements
discussion and analysis
of financial condition and results of operations (continued)
The Run-Off segment reported segment income of US$ 6.9 million and US$ 2.3 million for the
three and six months ended June 30, 2005, respectively, versus a segment loss for the same periods
of 2004. In the second quarter of 2005, the Run-Off segment recorded US$ 3.1 million of net
positive development of prior years loss reserves, which resulted in net strengthening of prior
years loss reserves of US$ 13.3 million in the first half of 2005. In the second quarter of 2004
the Run-Off segment strengthened prior years loss reserves by US$ 331.3 million, primarily within
the Professional Liability and other Special Liability and General Third Party Liability lines of
business, which resulted in US$ 397.4 million of net reserve strengthening of prior years loss
reserves in the first half of 2004.
Corporate Center
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
|
|
|
|
|
|
|
% change |
|
|
|
Three months ended June 30 |
|
|
2005 over |
|
|
Six months ended June 30 |
|
|
2005 over |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Operating and administration
expenses |
|
|
-11.8 |
|
|
|
-7.4 |
|
|
|
59.5 |
|
|
|
-19.0 |
|
|
|
-17.1 |
|
|
|
11.1 |
|
The Corporate Center carries certain administration expenses, such as costs of the Board of
Directors, the Global Executive Committee, and other corporate functions as well as other expenses
not allocated to the operating segments. The Corporate Center costs increased for the three and six
months ended June 30, 2005 as compared to the comparable periods of 2004 due to increased legal,
audit and consulting fees related to our organizational and operational restructuring.
Financial Condition and Liquidity
Invested assets
As of June 30, 2005 and December 31, 2004, total invested assets (excluding cash and cash equivalents) were US$ 7.7 billion
and US$ 7.8 billion respectively.
As of June 30, 2005, Converium reported total investments including cash and cash equivalents and excluding the Funds Withheld Asset of US$ 6,807.6 million. Of this total, certain amounts were pledged as follows: (i) US$ 1,098.5 million were pledged
as collateral relating to outstanding letters of credit of US$ 989.6 million (these outstanding letters of credit are related to the
US$ 1.6 billion Syndicated Letter of Credit Facility), (ii) US$ 959.8 million were pledged as collateral relating to other irrevocable letters of credit, (iii) US$ 231.5 million were pledged primarily as deposits with
cedents, (iv) US$ 282.3 million were
deposited in trust or with regulatory authorities or states, and (v) US$ 554.6 million were pledged to support Converium internal reinsurance transactions.
In order to better match cash flow profiles and liquidity constraints for potential commutations, during the first half of 2005,
we aligned the investment portfolio in our North American operations to reflect the run-off situation. We lowered our exposure to mortgage-backed securities and replaced them with asset-backed securities and commercial mortgage-backed securities,
which have less interest rate sensitivity than current investments but still offer attractive yields.
Our asset mix, including cash and cash equivalents, consisted of the following at June 30, 2005 and December 31, 2004:
Asset class
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 |
|
As of Dec. 31, 2004 |
Fixed maturity securities (including the Funds Withheld Asset) |
|
|
87.0 |
% |
|
|
82.5 |
% |
Equity securities 1 |
|
|
4.0 |
% |
|
|
3.6 |
% |
Cash and short-term investments |
|
|
4.6 |
% |
|
|
9.4 |
% |
Real estate and other1, 2 |
|
|
4.4 |
% |
|
|
4.5 |
% |
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
1 |
|
PSP Swiss Property AG is included in Real estate and other with a market value of
US$ 98.8 million as of June 30, 2005 and US$ 98.9 million as of December 31, 2004. |
|
2 |
|
Included in the caption real estate and other are investments in funds of hedge funds,
which had a carrying value of US$ 103.3 million as of June 30, 2005 and US$ 102.5 million as
of December 31, 2004. |
19
Managements discussion and analysis
of financial condition and results of operations (continued)
Fixed maturities
As of June 30, 2005, our fixed maturities portfolio, excluding the Funds Withheld Asset (described
more fully below), had a carrying value of US$ 5.8 billion and represented 72.4% of our total
investment portfolio including cash and cash equivalents (87.0% including the Funds Withheld
Asset). This represents an increase in carrying value of US$ 85.8 million, or 1.5%, from December
31, 2004. This increase is driven by the purchase of additional investments, as well as by a
decrease in unrealized losses caused by interest rate decreases that occurred in the second quarter
of 2005.
We invest in government, agency and corporate fixed income securities of issuers from around the
world that meet our liquidity and credit standards. We place an emphasis on investing in listed
fixed income securities that we believe to be liquid.
The table below presents the composition of our fixed income securities portfolio, excluding
short-term investments, based on carrying value by scheduled maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(US$ million) |
|
Estimated fair value |
|
|
% of total |
|
|
Carrying value |
|
|
% of total |
|
As of June 30, 2005 |
|
Available-for-sale (AFS) |
|
|
AFS |
|
|
Held-to-maturity (HTM) |
|
|
HTM |
|
Less than one year |
|
|
225.1 |
|
|
|
4.6 |
|
|
|
30.5 |
|
|
|
3.7 |
|
One year through five years |
|
|
2,911.5 |
|
|
|
58.8 |
|
|
|
489.2 |
|
|
|
59.7 |
|
Five years through ten years |
|
|
1,009.9 |
|
|
|
20.4 |
|
|
|
278.9 |
|
|
|
34.0 |
|
Over ten years |
|
|
86.2 |
|
|
|
1.7 |
|
|
|
21.3 |
|
|
|
2.6 |
|
Subtotal |
|
|
4,232.7 |
|
|
|
85.5 |
|
|
|
819.9 |
|
|
|
100.0 |
|
Mortgage and asset-backed securities |
|
|
555.7 |
|
|
|
11.2 |
|
|
|
|
|
|
|
|
|
Unit trust bonds |
|
|
162.7 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
Total as of June 30, 2005 |
|
|
4,951.1 |
|
|
|
100.0 |
|
|
|
819.9 |
|
|
|
100.0 |
|
Most of our fixed income securities are rated by Standard & Poors, Moodys or similar rating
agencies. As of June 30, 2005, approximately 96.4% of our fixed income securities portfolio was
invested in securities rated A or better by these agencies and approximately 83.0% was invested in
AAA/Aaa rated securities.
The table below presents the composition of our fixed income securities portfolio by rating, using
the lower of these ratings for any security where there is a split rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(US$ million) |
|
Estimated fair value |
|
|
% of total |
|
|
Carrying value |
|
|
% of total |
|
As of June 30, 2005 |
|
Available-for-sale (AFS) |
|
|
AFS |
|
|
Held-to-maturity (HTM) |
|
|
HTM |
|
AAA/Aaa |
|
|
3,994.4 |
|
|
|
80.7 |
|
|
|
794.9 |
|
|
|
97.0 |
|
AA/Aa2 |
|
|
442.3 |
|
|
|
8.9 |
|
|
|
14.3 |
|
|
|
1.7 |
|
A/A2 |
|
|
308.7 |
|
|
|
6.2 |
|
|
|
10.7 |
|
|
|
1.3 |
|
BBB/Baa2 |
|
|
92.2 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
BB |
|
|
7.5 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
Not rated* |
|
|
106.0 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
Total as of June 30, 2005 |
|
|
4,951.1 |
|
|
|
100.0 |
|
|
|
819.9 |
|
|
|
100.0 |
|
|
|
|
* |
|
Includes US$ 81.9 million private collateralized loans issued by German banks with a credit
rating equivalent to S&P AAA. |
20
Managements discussion and analysis
of financial condition and results of operations
(continued)
Equity securities
As of June 30, 2005, our equity securities portfolio had a carrying value of US$ 419.4 million
(including PSP Swiss Property AG). This represents an increase in carrying value of US$ 20.0
million, or 5.0%, from December 31, 2004, which was mainly driven by purchases of equity securities
in the first quarter of 2005. Equity securities were approximately 4.0% and 3.5% of our total
investment portfolio as of June 30, 2005 and December 31, 2004, respectively, including cash and
cash equivalents and excluding PSP Swiss Property AG.
Substantially our entire equity portfolio consists of listed securities held directly or through
funds. All the equity portfolios are in developed markets. As experienced in recent years, the
equity markets around the world can produce highly volatile and significantly varied results due to
local and worldwide economic and political conditions.
Funds Withheld Asset
The transfer of certain historical reinsurance business to Converium was affected as of July 1,
2001 by means of the Quota Share Retrocession Agreement with Zurich Financial Services. In
addition, on that date, the Funds Withheld Asset was established. Its initial balance was set to
match the net balance of the liabilities, less the premium receivables (including outstanding
collectible balances and reinsurance deposits) on the business to which the Quota Share
Retrocession Agreement applies. As of June 30, 2005, the Funds Withheld Asset was US$ 1,159.2
million. The decrease of US$ 145.9 million over December 31, 2004 was substantially due to paid
claims.
The table below shows the distribution of the Funds Withheld Asset by currency as of June 30, 2005
and December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 |
|
As of December 31,
2004 |
US dollar |
|
|
43 |
% |
|
|
41 |
% |
UK pound |
|
|
28 |
% |
|
|
29 |
% |
Euro |
|
|
24 |
% |
|
|
25 |
% |
Swiss franc |
|
|
3 |
% |
|
|
2 |
% |
Japanese yen |
|
|
2 |
% |
|
|
3 |
% |
Total |
|
|
100 |
% |
|
|
100 |
% |
Weighted average interest rate |
|
|
5.4 |
% |
|
|
5.4 |
% |
In general, the Funds Withheld Asset is reduced by paid claims, profit commissions, amounts paid to
maintain the retrocession agreements and other amounts paid on the business subject to the Quota
Share Retrocession Agreement, and is increased by premiums (less premium refunds), salvage and
subrogation, recoveries under retrocession agreements, profit commissions and other amounts
received for the business subject to the Quota Share Retrocession Agreement. The balance of the
Funds Withheld Asset will decrease over time. However, business historically written on the Zurich
Insurance Company (ZIC) and Zurich International (Bermuda) Ltd (ZIB) balance sheets was written
on the Converium balance sheet and continued to be renewed, where it met Converiums profitability
targets. As a result, we will generate operating cash flow from the new and renewal business
written by Converium, which we expect to at least partially offset reductions of the balance of the
Funds Withheld Asset.
Short-term investments
Our short-term investment portfolio includes investments in fixed-term deposits and fiduciary
investments. These investments generally have maturities of between three months and one year. As
of June 30, 2005, we had short-term investments with a carrying value of US$ 81.5 million,
representing 1.0% of our total investment portfolio, including cash and cash equivalents.
Short-term investments at December 31, 2004 were US$ 117.3 million or 1.4% of our total investment
portfolio, including cash and cash equivalents.
Real estate and other investments
At June 30, 2005, we had real estate held for investment of US$ 152.0 million, consisting primarily
of investments in residential and commercial rental properties located in Switzerland and indirect
real estate in the Eurozone. Our real estate portfolio represented 1.9% of our total investment
portfolio, including cash and cash equivalents. At December 31, 2004, we had real estate held for
investment of US$ 147.9 million, which represented 1.7% of our total investment portfolio,
including cash and cash equivalents.
In addition to these properties, Converium owns a 4.9% participation in PSP Swiss Property AG (an
indirect real estate investment, included in equity securities) with a market value of US$ 98.8
million as of June 30, 2005 and US$ 98.9 million as of December 31, 2004.
As of June 30, 2005 and December 31, 2004, we had US$ 103.3 million and US$ 102.5 million,
respectively in funds of hedge funds. These investments are included under the caption Other
investments in the balance sheet.
21
Managements discussion and analysis
of financial condition and results of operations (continued)
Premiums receivable
We had premiums receivable of US$ 1,610.9 million at June 30, 2005 compared to US$ 2,145.5 million
at December 31, 2004, a decrease of US$ 534.6 million, or 24.9%. This decrease is primarily due to
the reduction in business volume. Premiums receivable include those currently due, as well as
deferred premiums receivable, which is comprised primarily of accruals on premium balances which
have not yet been reported and which are not contractually due to be paid until some time in the
future. Current premiums receivable represented 20.6% and 19.4% of total premiums receivable at
June 30, 2005 and December 31, 2004, respectively, and accrued premiums receivable represented
79.4% and 80.6%, respectively. Allowances of US$ 32.9 million have been recorded for estimated
uncollectible receivables and reinsurance recoverables at June 30, 2005, compared to US$ 40.6
million at December 31, 2004. See Footnote 7 for additional information regarding retrocessional
risk management.
Reinsurance assets
Retrocessional reinsurance arrangements generally do not relieve Converium from its direct
obligations to its reinsureds. Thus, a credit exposure exists with respect to reinsurance ceded to
the extent that any retrocessionaire is unable or unwilling to meet the obligations assumed under
the retrocessional agreements. Converium held US$ 708.8 million in collateral as security under
related retrocessional agreements in the form of deposits, securities and/or letters of credit at
June 30, 2005.
As of June 30, 2005, we had reinsurance recoverables from retrocessionaires of approximately US$
1,415.3 million on paid and unpaid losses and loss adjustment expenses, unearned premium reserves
and future life benefits balances, compared to US$ 1,571.3 million at December 31, 2004.
Gross loss and loss adjustment expense reserves and future life benefits
We had gross loss and loss adjustment expense reserves of US$ 8,266.8 million at June 30, 2005,
compared to US$ 7,503.7 million at December 31, 2004. Gross reserves for future life benefits were
US$ 398.9 million at June 30, 2005, compared to US$ 407.1 million at December 31, 2004.
22
Managements discussion and analysis
of financial condition and results of operations (continued)
Shareholders equity
As of June 30, 2005, we had total shareholders equity of US$ 1,648.2 million (US$ 11.26 per
share) compared to US$ 1,720.2 million (US$ 11.76 per share) as of December 31, 2004, a decrease of
US$ 72.0 million (US$ 0.50 per share). This decrease is mainly comprised of a reduction in the net
balances of unrealized gains and losses on investments, net of taxes, of US$ 15.6 million due to
the developments in the financial markets in the first half of 2005 and a reduction in cumulative
translation adjustments of US$ 67.8 million due to the strengthening of the US dollar against our
other major currencies such as the British pound, Swiss franc and Euro. Book value is calculated
using shares outstanding at the end of the period.
Cash flows and liquidity sources
(US$ million)
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30 |
|
|
|
2005 |
|
|
2004 |
|
Cash (used in) provided by operating activities |
|
|
-37.6 |
|
|
|
442.5 |
|
Cash and cash equivalents decreased by US$ 399.5 million to US$ 281.4 million as of June 30, 2005
from US$ 680.9 million as of December 31, 2004. Our cash position decreased due the deployment of
operating cash into fixed maturity securities.
Our cash flows from operating activities result principally from premiums, collections on losses
recoverable and investment income, net of paid losses, acquisition costs and underwriting expenses.
Our cash used in operating activities was
US$ 37.6 million for the six months ended June 30, 2005
as compared to cash provided by US$ 442.5 million for the six months ended June 30, 2004, a
decrease of US$ 480.1 million, or 108.5%. This decrease was due to a reduction in overall business
volume.
Critical accounting policies
Our consolidated financial statements include amounts that, either by their nature or due to
requirements of accounting principles generally accepted in the United States (US GAAP), are
determined using best estimates and assumptions. While we believe that the amounts included in our
consolidated financial statements reflect our best judgment, actual amounts could ultimately differ
materially from those currently presented in our consolidated financial statements. We believe the
items that require the most subjective and complex estimates are:
|
|
Unpaid loss and loss adjustment expense reserves; |
|
|
|
Collectibility of reinsurance recoverables, including bad debt provisions; |
|
|
|
Impairments to the carrying value of individual investments within our investment portfolio; |
|
|
|
The valuation allowances against our net deferred tax assets; |
|
|
|
Impairments of goodwill and other intangible assets; and |
|
|
|
Assessment of risk transfer for certain structured reinsurance contracts. |
More information regarding the estimates and assumptions required to arrive at the amounts recorded
is included in the section entitled Critical Accounting Policies in our Managements Discussion
and Analysis of Financial Condition and Results of Operations in our
2004 Annual Report.
23
Managements
discussion and analysis
of financial condition and results of operations
(continued)
Cautionary note regarding forward-looking statements
This Managements discussion and analysis of financial condition and results of operations
contains certain forward-looking statements. Forward-looking statements are necessarily based on
estimates and assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which, with respect to future business
decisions, are subject to change. These uncertainties and contingencies can affect actual results
and could cause actual results to differ materially from those expressed in any forward-looking
statements.
In particular, statements using words such as expect, anticipate, intend, believe or words
of similar import generally involve forward-looking statements. In light of the risks and
uncertainties inherent in all future projections, the inclusion of forward-looking statements
should not be considered a representation by us that our objectives or plans will be achieved.
Numerous factors could cause our actual results to differ materially from those in any
forward-looking statements, including the following:
|
|
The impact of the ratings changes and a further lowering or loss of one of our financial strength ratings; |
|
|
Uncertainties of assumptions used in our reserving process; |
|
|
Risks associated with implementing our business strategies and our capital
improvement measures and the run off 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; |
|
|
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 impact of the SEC and New York Attorney Generals investigations of the insurance
industry; |
|
|
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; |
|
|
Failure to prevail in any current or future arbitration or litigation; and |
|
|
Extraordinary events affecting our clients, such as bankruptcies and liquidations. |
The factors listed above should not be construed as exhaustive. We cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those described in any forward-looking statements. Except
as otherwise required by law, we undertake no obligation to publicly release any future revisions
we may make to forward-looking statements to reflect subsequent events or circumstances or to
reflect the occurrence of unanticipated events.
The Company 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, provide investors with a
perspective on its value drivers, its strategic initiatives and those factors critical to
understanding its business and operating environment.
24
Converium Holding AG and Subsidiaries
Interim statements of income (loss) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(US$ million, except per share information) |
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
|
362.0 |
|
|
|
1,027.6 |
|
|
|
1,079.5 |
|
|
|
2,411.2 |
|
Less ceded premiums written |
|
|
-31.1 |
|
|
|
-78.8 |
|
|
|
-43.7 |
|
|
|
-163.8 |
|
Net premiums written |
|
|
330.9 |
|
|
|
948.8 |
|
|
|
1,035.8 |
|
|
|
2,247.4 |
|
Net change in unearned premiums |
|
|
281.9 |
|
|
|
61.1 |
|
|
|
265.8 |
|
|
|
-244.5 |
|
Net premiums earned |
|
|
612.8 |
|
|
|
1,009.9 |
|
|
|
1,301.6 |
|
|
|
2,002.9 |
|
Net investment income |
|
|
87.8 |
|
|
|
76.7 |
|
|
|
170.0 |
|
|
|
149.3 |
|
Net realized capital (losses) gains |
|
|
-1.0 |
|
|
|
12.5 |
|
|
|
-1.7 |
|
|
|
21.7 |
|
Other (loss) income |
|
|
-1.5 |
|
|
|
5.4 |
|
|
|
-9.3 |
|
|
|
8.1 |
|
Total revenues |
|
|
698.1 |
|
|
|
1,104.5 |
|
|
|
1,460.6 |
|
|
|
2,182.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, loss adjustment expenses and life benefits |
|
|
-449.3 |
|
|
|
-1,103.8 |
|
|
|
-1,035.1 |
|
|
|
-1,824.7 |
|
Underwriting acquisition costs |
|
|
-130.9 |
|
|
|
-224.3 |
|
|
|
-291.3 |
|
|
|
-433.4 |
|
Other operating and administration expenses |
|
|
-50.2 |
|
|
|
-54.7 |
|
|
|
-107.1 |
|
|
|
-107.3 |
|
Interest expense |
|
|
-8.0 |
|
|
|
-8.8 |
|
|
|
-15.9 |
|
|
|
-16.6 |
|
Impairment of goodwill |
|
|
|
|
|
|
-94.0 |
|
|
|
|
|
|
|
-94.0 |
|
Amortization of intangible assets |
|
|
-7.0 |
|
|
|
-0.8 |
|
|
|
-14.0 |
|
|
|
-1.5 |
|
Restructuring costs |
|
|
-3.5 |
|
|
|
|
|
|
|
-13.6 |
|
|
|
|
|
Total benefits, losses and expenses |
|
|
-648.9 |
|
|
|
-1,486.4 |
|
|
|
-1,477.0 |
|
|
|
-2,477.5 |
|
Income (loss) before taxes |
|
|
49.2 |
|
|
|
-381.9 |
|
|
|
-16.4 |
|
|
|
-295.5 |
|
Income tax benefit (expense) |
|
|
-21.6 |
|
|
|
-278.1 |
|
|
|
25.4 |
|
|
|
-298.8 |
|
Net income (loss) |
|
|
70.8 |
|
|
|
-660.0 |
|
|
|
9.0 |
|
|
|
-594.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
0.48 |
|
|
|
-8.32 |
|
|
|
0.06 |
|
|
|
-7.49 |
|
Diluted earnings (loss) per share |
|
|
0.48 |
|
|
|
-8.32 |
|
|
|
0.06 |
|
|
|
-7.49 |
|
The notes to the interim financial statements are an integral part of these financial statements.
25
Converium Holding AG and Subsidiaries
Interim balance sheets
|
|
|
|
|
|
|
|
|
(US$ million, except share information) |
|
June 30, 2005 |
|
|
Dec. 31, 2004 |
|
|
|
(unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Invested assets |
|
|
|
|
|
|
|
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
819.9 |
|
|
|
850.4 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
4,951.1 |
|
|
|
4,834.8 |
|
Equity securities |
|
|
419.4 |
|
|
|
399.4 |
|
Other investments |
|
|
254.3 |
|
|
|
281.4 |
|
Short-term investments |
|
|
81.5 |
|
|
|
117.3 |
|
Total investments |
|
|
6,526.2 |
|
|
|
6,483.3 |
|
Funds Withheld Asset |
|
|
1,159.2 |
|
|
|
1,305.1 |
|
Total invested assets |
|
|
7,685.4 |
|
|
|
7,788.4 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
281.4 |
|
|
|
680.9 |
|
Premiums receivable: |
|
|
|
|
|
|
|
|
Current |
|
|
331.9 |
|
|
|
416.5 |
|
Accrued |
|
|
1,279.0 |
|
|
|
1,729.0 |
|
Reserves for unearned premiums, retro |
|
|
83.6 |
|
|
|
111.6 |
|
Reinsurance assets: |
|
|
|
|
|
|
|
|
Underwriting reserves |
|
|
940.8 |
|
|
|
1,226.2 |
|
Insurance balances receivable |
|
|
390.9 |
|
|
|
233.5 |
|
Funds held by reinsureds |
|
|
1,609.4 |
|
|
|
1,721.3 |
|
Non-risk transfer reinsurance assets |
|
|
139.1 |
|
|
|
137.0 |
|
Deferred policy acquisition costs |
|
|
334.7 |
|
|
|
484.7 |
|
Deferred income taxes |
|
|
70.2 |
|
|
|
78.3 |
|
Other assets |
|
|
346.3 |
|
|
|
335.4 |
|
Total assets |
|
|
13,492.7 |
|
|
|
14,942.8 |
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Reinsurance liabilities
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses, gross |
|
|
8,266.8 |
|
|
|
8,915.6 |
|
Future life benefits, gross |
|
|
398.9 |
|
|
|
407.1 |
|
Reinsurance balances payable |
|
|
528.8 |
|
|
|
919.4 |
|
Reserves for unearned premiums, gross |
|
|
971.8 |
|
|
|
1,312.3 |
|
Other reinsurance liabilities |
|
|
173.2 |
|
|
|
110.4 |
|
Funds held under reinsurance contracts |
|
|
445.8 |
|
|
|
379.3 |
|
Deferred income taxes |
|
|
311.3 |
|
|
|
348.5 |
|
Non risk transfer reinsurance liabilities |
|
|
145.0 |
|
|
|
157.2 |
|
Accrued expenses and other liabilities |
|
|
211.7 |
|
|
|
281.7 |
|
Debt |
|
|
391.2 |
|
|
|
391.1 |
|
Total liabilities |
|
|
11,844.5 |
|
|
|
13,222.6 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Common stock CHF 5 nominal value, 146,689,462 and 146,689,462 shares issued,
respectively (146,330,942 and 146,272,886 shares outstanding, respectively) |
|
|
554.9 |
|
|
|
554.9 |
|
Additional paid-in capital |
|
|
1,423.1 |
|
|
|
1,430.6 |
|
Treasury stock (358,520 and 416,576 shares, respectively) |
|
|
-2.0 |
|
|
|
-7.7 |
|
Unearned stock compensation |
|
|
-4.4 |
|
|
|
-7.5 |
|
Total accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
-5.6 |
|
|
|
-6.7 |
|
Net unrealized gains on investments, net of taxes |
|
|
101.1 |
|
|
|
116.7 |
|
Cumulative translation adjustments |
|
|
126.3 |
|
|
|
194.1 |
|
Total accumulated other comprehensive income |
|
|
221.8 |
|
|
|
304.1 |
|
Retained deficit |
|
|
-545.2 |
|
|
|
-554.2 |
|
Total shareholders equity |
|
|
1,648.2 |
|
|
|
1,720.2 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
13,492.7 |
|
|
|
14,942.8 |
|
The notes to the interim financial statements are an integral part of these financial statements.
26
Converium Holding AG and Subsidiaries
Interim statements of cash flows (unaudited)
|
|
|
|
|
|
|
|
|
(US$ million) |
|
Six months ended June 30 |
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
9.0 |
|
|
|
-594.3 |
|
|
|
|
|
|
|
|
|
|
Adjustments for |
|
|
|
|
|
|
|
|
Net realized capital losses (gains) on investments |
|
|
1.7 |
|
|
|
-21.7 |
|
Amortization of premium/discount |
|
|
27.4 |
|
|
|
28.7 |
|
Depreciation and amortization |
|
|
21.8 |
|
|
|
12.2 |
|
Deferred income tax (benefit) expense |
|
|
-8.5 |
|
|
|
|
|
Impairment of goodwill and deferred tax assets |
|
|
|
|
|
|
363.8 |
|
Total adjustments |
|
|
42.4 |
|
|
|
383.0 |
|
|
|
|
|
|
|
|
|
|
Changes in operational assets and liabilities |
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
|
117.0 |
|
|
|
-43.9 |
|
Reinsurance assets |
|
|
115.8 |
|
|
|
102.6 |
|
Reserves for unearned premium, retro |
|
|
26.2 |
|
|
|
28.0 |
|
Funds held by reinsureds |
|
|
-8.0 |
|
|
|
-204.6 |
|
Funds Withheld Asset |
|
|
80.4 |
|
|
|
157.0 |
|
Premiums receivable |
|
|
321.7 |
|
|
|
-272.7 |
|
Non-risk transfer reinsurance assets |
|
|
-2.1 |
|
|
|
|
|
Unearned premiums, gross |
|
|
-284.1 |
|
|
|
219.5 |
|
Losses and loss adjustment expenses, gross |
|
|
-322.4 |
|
|
|
707.8 |
|
Future life benefits, gross |
|
|
19.2 |
|
|
|
21.1 |
|
Reinsurance balances payable |
|
|
-225.7 |
|
|
|
187.8 |
|
Funds held under reinsurance contracts |
|
|
90.5 |
|
|
|
-41.0 |
|
Other reinsurance liabilities |
|
|
70.5 |
|
|
|
-90.7 |
|
Non-risk transfer reinsurance liabilities |
|
|
-2.2 |
|
|
|
-9.7 |
|
Income taxes, net |
|
|
|
|
|
|
-10.2 |
|
Net changes in all other operational assets and liabilities |
|
|
-85.8 |
|
|
|
-97.2 |
|
Total changes in operational assets and liabilities |
|
|
-89.0 |
|
|
|
653.8 |
|
Cash (used in) provided by operating activities |
|
|
-37.6 |
|
|
|
442.5 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of fixed maturities held-to-maturity |
|
|
|
|
|
|
-92.7 |
|
Proceeds from sales and maturities of fixed maturities available-for-sale |
|
|
1,859.1 |
|
|
|
1,629.2 |
|
Purchases of fixed maturities available-for-sale |
|
|
-2,280.9 |
|
|
|
-1,994.8 |
|
Cash flows from investing activities (fixed maturities) |
|
|
-421.8 |
|
|
|
-458.3 |
|
Proceeds from sales of equity securities |
|
|
26.6 |
|
|
|
449.2 |
|
Purchases of equity securities |
|
|
-50.6 |
|
|
|
-520.9 |
|
Cash flows from investing activities (equity securities) |
|
|
-24.0 |
|
|
|
-71.7 |
|
Net increase in short-term investments |
|
|
59.4 |
|
|
|
-9.1 |
|
Proceeds from sales of other assets |
|
|
9.4 |
|
|
|
23.1 |
|
Purchases of other assets |
|
|
-28.9 |
|
|
|
-51.6 |
|
Cash flows from investing activities (other) |
|
|
39.9 |
|
|
|
-37.6 |
|
Net cash used in investing activities |
|
|
-405.9 |
|
|
|
-567.6 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Purchases of common shares |
|
|
-1.5 |
|
|
|
-4.9 |
|
Dividends to shareholders |
|
|
|
|
|
|
-47.9 |
|
Net cash used in financing activities |
|
|
-1.5 |
|
|
|
-52.8 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
45.5 |
|
|
|
2.6 |
|
Change in cash and cash equivalents |
|
|
-399.5 |
|
|
|
-175.3 |
|
Cash and cash equivalents as of January 1 |
|
|
680.9 |
|
|
|
255.5 |
|
Cash and cash equivalents as of June 30 |
|
|
281.4 |
|
|
|
80.2 |
|
The notes to the interim financial statements are an integral part of these financial statements.
27
Converium Holding AG and Subsidiaries
Consolidated
statements of changes in shareholders equity
(unaudited)
(US$ million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
stock |
|
|
other |
|
|
|
|
|
|
|
|
|
Common |
|
|
paid-in |
|
|
Treasury |
|
|
compen- |
|
|
comprehensive |
|
|
Retained |
|
|
Total |
|
|
|
stock |
|
|
capital |
|
|
stock |
|
|
sation |
|
|
income |
|
|
deficit |
|
|
equity |
|
Balance, December 31, 2004 |
|
|
554.9 |
|
|
|
1,430.6 |
|
|
|
-7.7 |
|
|
|
-7.5 |
|
|
|
304.1 |
|
|
|
-554.2 |
|
|
|
1,720.2 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.0 |
|
|
|
9.0 |
|
Change in net unrealized gains
(losses) on investments, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-15.6 |
|
|
|
|
|
|
|
-15.6 |
|
Translation adjustments |
|
|
|
|
|
|
-0.9 |
|
|
|
|
|
|
|
|
|
|
|
-66.7 |
|
|
|
|
|
|
|
-67.6 |
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-74.2 |
|
Purchases of common shares |
|
|
|
|
|
|
|
|
|
|
-1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1.5 |
|
Releases of common shares from treasury |
|
|
|
|
|
|
-7.2 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amortization of stock compensation |
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
3.7 |
|
Balance, June 30, 2005 |
|
|
554.9 |
|
|
|
1,423.1 |
|
|
|
-2.0 |
|
|
|
-4.4 |
|
|
|
221.8 |
|
|
|
-545.2 |
|
|
|
1,648.2 |
|
The notes to the interim financial statements are an integral part of these financial
statements.
28
Converium Holding AG and Subsidiaries
Notes to the interim financial statements (unaudited)
Schedule of segment data
(US$ million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Property & |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Casualty Reinsurance |
|
|
Specialty Lines |
|
|
Non-life consolidated |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Three months ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
|
47.9 |
|
|
|
284.5 |
|
|
|
247.3 |
|
|
|
375.2 |
|
|
|
295.2 |
|
|
|
659.7 |
|
Less ceded premiums written |
|
|
-4.6 |
|
|
|
-28.8 |
|
|
|
-17.8 |
|
|
|
-28.0 |
|
|
|
-22.4 |
|
|
|
-56.8 |
|
Net premiums written |
|
|
43.3 |
|
|
|
255.7 |
|
|
|
229.5 |
|
|
|
347.2 |
|
|
|
272.8 |
|
|
|
602.9 |
|
Net change in unearned premiums |
|
|
135.6 |
|
|
|
78.8 |
|
|
|
97.8 |
|
|
|
-46.9 |
|
|
|
233.4 |
|
|
|
31.9 |
|
Net premiums earned |
|
|
178.9 |
|
|
|
334.5 |
|
|
|
327.3 |
|
|
|
300.3 |
|
|
|
506.2 |
|
|
|
634.8 |
|
Total investment results |
|
|
30.8 |
|
|
|
28.8 |
|
|
|
34.9 |
|
|
|
36.3 |
|
|
|
65.7 |
|
|
|
65.1 |
|
Revenues |
|
|
209.7 |
|
|
|
363.3 |
|
|
|
362.2 |
|
|
|
336.6 |
|
|
|
571.9 |
|
|
|
699.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, loss adjustment expenses and life benefits |
|
|
-133.8 |
|
|
|
-248.1 |
|
|
|
-238.0 |
|
|
|
-274.4 |
|
|
|
-371.8 |
|
|
|
-522.5 |
|
Underwriting acquisition costs |
|
|
-31.0 |
|
|
|
-76.3 |
|
|
|
-71.3 |
|
|
|
-62.0 |
|
|
|
-102.3 |
|
|
|
-138.3 |
|
Other operating and administration expenses |
|
|
-12.4 |
|
|
|
-16.9 |
|
|
|
-11.6 |
|
|
|
-10.8 |
|
|
|
-24.0 |
|
|
|
-27.7 |
|
Benefits, losses and expenses |
|
|
-177.2 |
|
|
|
-341.3 |
|
|
|
-320.9 |
|
|
|
-347.2 |
|
|
|
-498.1 |
|
|
|
-688.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
|
32.5 |
|
|
|
22.0 |
|
|
|
41.3 |
|
|
|
-10.6 |
|
|
|
73.8 |
|
|
|
11.4 |
|
Other (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio (Losses divided by net premiums earned) |
|
|
74.8 |
% |
|
|
74.2 |
% |
|
|
72.7 |
% |
|
|
91.4 |
% |
|
|
73.4 |
% |
|
|
82.3 |
% |
Underwriting expense ratio (Underwriting acquisition
costs divided by net premiums earned) |
|
|
17.3 |
% |
|
|
22.8 |
% |
|
|
21.8 |
% |
|
|
20.6 |
% |
|
|
20.2 |
% |
|
|
21.8 |
% |
Administration expense ratio (Other operating and
administration expenses divided by net premiums written) |
|
|
28.6 |
% |
|
|
6.6 |
% |
|
|
5.1 |
% |
|
|
3.1 |
% |
|
|
8.8 |
% |
|
|
4.6 |
% |
Combined ratio (Sum of the loss, underwriting expense
and administration expense ratios) |
|
|
120.7 |
% |
|
|
103.6 |
% |
|
|
99.6 |
% |
|
|
115.1 |
% |
|
|
102.4 |
% |
|
|
108.7 |
% |
|
|
|
** |
|
Run-Off is comprised of business formerly reported in all three of the ongoing business
segments. The prior year figures have been restated to reflect the revised segment structure. |
29
Converium Holding AG and Subsidiaries
Notes to the interim financial statements (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life & Health Reinsurance |
|
|
Total On-Going Business |
|
|
**Run-off |
|
|
Corporate Center |
|
|
Total consolidated |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
59.3 |
|
|
|
70.6 |
|
|
|
354.5 |
|
|
|
730.3 |
|
|
|
7.5 |
|
|
|
297.3 |
|
|
|
|
|
|
|
|
|
|
|
362.0 |
|
|
|
1,027.6 |
|
|
-3.6 |
|
|
|
-13.4 |
|
|
|
-26.0 |
|
|
|
-70.2 |
|
|
|
-5.1 |
|
|
|
-8.6 |
|
|
|
|
|
|
|
|
|
|
|
-31.1 |
|
|
|
-78.8 |
|
|
55.7 |
|
|
|
57.2 |
|
|
|
328.5 |
|
|
|
660.1 |
|
|
|
2.4 |
|
|
|
288.7 |
|
|
|
|
|
|
|
|
|
|
|
330.9 |
|
|
|
948.8 |
|
|
18.4 |
|
|
|
26.4 |
|
|
|
251.8 |
|
|
|
58.3 |
|
|
|
30.1 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
281.9 |
|
|
|
61.1 |
|
|
74.1 |
|
|
|
83.6 |
|
|
|
580.3 |
|
|
|
718.4 |
|
|
|
32.5 |
|
|
|
291.5 |
|
|
|
|
|
|
|
|
|
|
|
612.8 |
|
|
|
1,009.9 |
|
|
6.5 |
|
|
|
5.2 |
|
|
|
72.2 |
|
|
|
70.3 |
|
|
|
14.6 |
|
|
|
18.9 |
|
|
|
|
|
|
|
|
|
|
|
86.8 |
|
|
|
89.2 |
|
|
80.6 |
|
|
|
88.8 |
|
|
|
652.5 |
|
|
|
788.7 |
|
|
|
47.1 |
|
|
|
310.4 |
|
|
|
|
|
|
|
|
|
|
|
699.6 |
|
|
|
1,099.1 |
|
|
|
|
-57.4 |
|
|
|
-61.2 |
|
|
|
-429.2 |
|
|
|
-583.7 |
|
|
|
-20.1 |
|
|
|
520.1 |
|
|
|
|
|
|
|
|
|
|
|
-449.3 |
|
|
|
-1,103.8 |
|
|
-18.8 |
|
|
|
-21.3 |
|
|
|
-121.1 |
|
|
|
-159.6 |
|
|
|
-9.8 |
|
|
|
-64.7 |
|
|
|
|
|
|
|
|
|
|
|
-130.9 |
|
|
|
-224.3 |
|
|
|
-4.1 |
|
|
|
-4.4 |
|
|
|
-28.1 |
|
|
|
-32.1 |
|
|
|
-10.3 |
|
|
|
-15.2 |
|
|
|
-11.8 |
|
|
|
-7.4 |
|
|
|
-50.2 |
|
|
|
-54.7 |
|
|
-80.3 |
|
|
|
-86.9 |
|
|
|
-578.4 |
|
|
|
-775.4 |
|
|
|
-40.2 |
|
|
|
-600.0 |
|
|
|
-11.8 |
|
|
|
-7.4 |
|
|
|
-630.4 |
|
|
|
-1,382.8 |
|
|
|
0.3 |
|
|
|
1.9 |
|
|
|
74.1 |
|
|
|
13.3 |
|
|
|
6.9 |
|
|
|
-289.6 |
|
|
|
-11.8 |
|
|
|
-7.4 |
|
|
|
69.2 |
|
|
|
-283.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1.5 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-8.0 |
|
|
|
-8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-94.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-7.0 |
|
|
|
-0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49.2 |
|
|
|
-381.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.6 |
|
|
|
-278.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.8 |
|
|
|
-660.0 |
|
|
|
|
|
|
|
|
|
|
|
|
25.4 |
% |
|
|
25.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.4 |
% |
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Converium Holding AG and Subsidiaries
Notes to the interim financial statements (unaudited)
Schedule of segment data
(US$ million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Property & |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
Casualty Reinsurance |
|
|
|
Specialty Lines |
|
|
|
Non-life consolidated |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Six months ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
|
460.4 |
|
|
|
918.4 |
|
|
|
401.8 |
|
|
|
723.0 |
|
|
|
862.2 |
|
|
|
1,641.4 |
|
Less ceded premiums written |
|
|
-14.2 |
|
|
|
-63.3 |
|
|
|
-16.9 |
|
|
|
-52.4 |
|
|
|
-31.1 |
|
|
|
-115.7 |
|
Net premiums written |
|
|
446.2 |
|
|
|
855.1 |
|
|
|
384.9 |
|
|
|
670.6 |
|
|
|
831.1 |
|
|
|
1,525.7 |
|
Net change in unearned premiums |
|
|
-25.3 |
|
|
|
-148.6 |
|
|
|
234.8 |
|
|
|
-88.3 |
|
|
|
209.5 |
|
|
|
-236.9 |
|
Net premiums earned |
|
|
420.9 |
|
|
|
706.5 |
|
|
|
619.7 |
|
|
|
582.3 |
|
|
|
1,040.6 |
|
|
|
1,288.8 |
|
Total investment results |
|
|
57.8 |
|
|
|
55.2 |
|
|
|
65.9 |
|
|
|
69.6 |
|
|
|
123.7 |
|
|
|
124.8 |
|
Revenues |
|
|
478.7 |
|
|
|
761.7 |
|
|
|
685.6 |
|
|
|
651.9 |
|
|
|
1,164.3 |
|
|
|
1,413.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, loss adjustment expenses and life benefits |
|
|
-328.1 |
|
|
|
-506.9 |
|
|
|
-510.5 |
|
|
|
-471.4 |
|
|
|
-838.6 |
|
|
|
-978.3 |
|
Underwriting acquisition costs |
|
|
-84.3 |
|
|
|
-149.9 |
|
|
|
-135.1 |
|
|
|
-123.7 |
|
|
|
-219.4 |
|
|
|
-273.6 |
|
Other operating and administration expenses |
|
|
-31.4 |
|
|
|
-35.9 |
|
|
|
-28.3 |
|
|
|
-19.4 |
|
|
|
-59.7 |
|
|
|
-55.3 |
|
Benefits, losses and expenses |
|
|
-443.8 |
|
|
|
-629.7 |
|
|
|
-673.9 |
|
|
|
-614.5 |
|
|
|
-1,117.7 |
|
|
|
-1,307.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
|
34.9 |
|
|
|
69.0 |
|
|
|
11.7 |
|
|
|
37.4 |
|
|
|
46.6 |
|
|
|
106.4 |
|
Other (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
assets underwriting reserves |
|
|
229.9 |
|
|
|
|
|
|
|
265.8 |
|
|
|
|
|
|
|
495.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses, gross |
|
|
2,777.0 |
|
|
|
|
|
|
|
3,057.6 |
|
|
|
|
|
|
|
5,834.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future life benefits, gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio (Losses divided by net premiums earned) |
|
|
78.0 |
% |
|
|
71.7 |
% |
|
|
82.4 |
% |
|
|
81.0 |
% |
|
|
80.6 |
% |
|
|
75.9 |
% |
Underwriting expense ratio (Underwriting acquisition
costs divided by net premiums earned) |
|
|
20.0 |
% |
|
|
21.2 |
% |
|
|
21.8 |
% |
|
|
21.2 |
% |
|
|
21.1 |
% |
|
|
21.2 |
% |
Administration expense ratio (Other operating and
administration expenses divided by net premiums written) |
|
|
7.0 |
% |
|
|
4.2 |
% |
|
|
7.4 |
% |
|
|
2.9 |
% |
|
|
7.2 |
% |
|
|
3.6 |
% |
Combined ratio (Sum of the loss, underwriting expense
and administration expense ratios) |
|
|
105.0 |
% |
|
|
97.1 |
% |
|
|
111.6 |
% |
|
|
105.1 |
% |
|
|
108.9 |
% |
|
|
100.7 |
% |
|
|
|
* |
|
US$ 13.6 million has been expensed related to the costs associated with global
restructurings, of which US$ 5.4 million were attributable to the Standard Property &
Casualty Reinsurance segment, US$ 5.9 million were attributable to the Specialty Lines
segment, US$ 1.7 million were attributable to the Life & Health Reinsurance segment and
US$ 0.6 million were attributable to the Run-Off segment. |
|
** |
|
Run-Off is comprised of business formerly reported in all three of the ongoing
business segments. The prior year figures have been restated to reflect the revised
segment structure. |
31
Converium Holding AG and Subsidiaries
Notes to the interim financial statements (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life & Health Reinsurance |
|
|
|
Total On-Going Business |
|
|
|
**Run-off |
|
|
|
Corporate Center |
|
|
|
Total consolidated |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
176.4 |
|
|
|
189.8 |
|
|
|
1,038.6 |
|
|
|
1,831.2 |
|
|
|
40.9 |
|
|
|
580.0 |
|
|
|
|
|
|
|
|
|
|
|
1,079.5 |
|
|
|
2,411.2 |
|
-6.9 |
|
|
|
-21.4 |
|
|
|
-38.0 |
|
|
|
-137.1 |
|
|
|
-5.7 |
|
|
|
-26.7 |
|
|
|
|
|
|
|
|
|
|
|
-43.7 |
|
|
|
-163.8 |
|
169.5 |
|
|
|
168.4 |
|
|
|
1,000.6 |
|
|
|
1,694.1 |
|
|
|
35.2 |
|
|
|
553.3 |
|
|
|
|
|
|
|
|
|
|
|
1,035.8 |
|
|
|
2,247.4 |
|
-14.3 |
|
|
|
-17.1 |
|
|
|
195.2 |
|
|
|
-254.0 |
|
|
|
70.6 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
265.8 |
|
|
|
-244.5 |
|
155.2 |
|
|
|
151.3 |
|
|
|
1,195.8 |
|
|
|
1,440.1 |
|
|
|
105.8 |
|
|
|
562.8 |
|
|
|
|
|
|
|
|
|
|
|
1,301.6 |
|
|
|
2,002.9 |
|
12.5 |
|
|
|
9.9 |
|
|
|
136.2 |
|
|
|
134.7 |
|
|
|
32.1 |
|
|
|
36.3 |
|
|
|
|
|
|
|
|
|
|
|
168.3 |
|
|
|
171.0 |
|
167.7 |
|
|
|
161.2 |
|
|
|
1,332.0 |
|
|
|
1,574.8 |
|
|
|
137.9 |
|
|
|
599.1 |
|
|
|
|
|
|
|
|
|
|
|
1,469.9 |
|
|
|
2,173.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-107.2 |
|
|
|
-117.1 |
|
|
|
-945.8 |
|
|
|
-1,095.4 |
|
|
|
-89.3 |
|
|
|
-729.3 |
|
|
|
|
|
|
|
|
|
|
|
-1,035.1 |
|
|
|
-1,824.7 |
|
-45.9 |
|
|
|
-33.3 |
|
|
|
-265.3 |
|
|
|
-306.9 |
|
|
|
-26.0 |
|
|
|
-126.5 |
|
|
|
|
|
|
|
|
|
|
|
-291.3 |
|
|
|
-433.4 |
|
|
-8.1 |
|
|
|
-7.4 |
|
|
|
-67.8 |
|
|
|
-62.7 |
|
|
|
-20.3 |
|
|
|
-27.5 |
|
|
|
-19.0 |
|
|
|
-17.1 |
|
|
|
-107.1 |
|
|
|
-107.3 |
|
-161.2 |
|
|
|
-157.8 |
|
|
|
-1,278.9 |
|
|
|
-1,465.0 |
|
|
|
-135.6 |
|
|
|
-883.3 |
|
|
|
-19.0 |
|
|
|
-17.1 |
|
|
|
-1,433.5 |
|
|
|
-2,365.4 |
|
|
6.5 |
|
|
|
3.4 |
|
|
|
53.1 |
|
|
|
109.8 |
|
|
|
2.3 |
|
|
|
-284.2 |
|
|
|
-19.0 |
|
|
|
-17.1 |
|
|
|
36.4 |
|
|
|
-191.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-9.3 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-15.9 |
|
|
|
-16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-94.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14.0 |
|
|
|
-1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*-13.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-16.4 |
|
|
|
-295.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.4 |
|
|
|
-298.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.0 |
|
|
|
-594.3 |
|
|
|
|
|
55.8 |
|
|
|
|
|
|
|
551.5 |
|
|
|
|
|
|
|
389.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
940.8 |
|
|
|
|
|
|
|
261.5 |
|
|
|
|
|
|
|
6,096.1 |
|
|
|
|
|
|
|
2,170.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,266.8 |
|
|
|
|
|
|
398.9 |
|
|
|
|
|
|
|
398.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.6 |
% |
|
|
22.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.8 |
% |
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Converium Holding AG and Subsidiaries
Notes to
the interim financial statements (unauditedcontinued)
1. Basis of preparation
The interim financial statements for Converium Holding AG and subsidiaries (Converium or the
Company) have been prepared on the basis of United States generally accepted accounting principles
for interim financial information. Accordingly, such financial statements do not include all the
information and footnotes 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. These interim financial statements should be read in
conjunction with the audited financial statements of Converium for the year ended December 31,
2004.
In the first quarter of 2005, Converium formally adopted a change to the reporting line of the
management of its North American operations. This change was introduced to reflect the placement of
Converium Reinsurance (North America) Inc. (CRNA) into orderly run-off and managements desire to
monitor this business on a stand-alone basis. Therefore, Converiums business is now organized
around three ongoing operating segments: Standard Property & Casualty Reinsurance, Specialty Lines
and Life & Health Reinsurance, which are based principally on global lines of business, in addition
to a Run-Off segment. The Run-Off segment includes all business: both life and non-life,
originating from CRNA and Converium Insurance (North America) Inc.,
excluding the US origianated
aviation business. In addition to the four segments financial results, the Corporate Center
carries certain administration expenses, such as costs of the Board of Directors, the Global
Executive Committee and other corporate functions as well as other expenses not allocated to
operating segments. As well as reporting individual segment results, management also presents the
aggregation of Standard Property & Casualty Reinsurance and Specialty Lines, referred to later in
the financial statements as ongoing non-life business, as these are both non-life segments, the
aggregation of which management considers meaningful in understanding the performance of Converium.
This measure excludes the non-life business contained within the Run-Off segment in line with
managements desire to monitor this segment on a stand-alone basis. The aggregation of the Life &
Health Reinsurance segment with the ongoing non-life business is referred to as total ongoing
business.
Reclassification
In the second quarter of 2005, Converium refined its chart of accounts to enhance the presentation
of the line items within its financial statements. Certain reclassifications have been made to
prior year amounts to conform to current years presentation.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the reporting period.
Therefore, actual results could differ from those
estimates.
The most significant estimates include those used in determining reserves for non-life loss and
loss adjustment expenses, premium accruals and deferred policy acquisition costs, reinsurance
recoverables, impairments, income taxes, and commitments and contingencies.
2. New accounting pronouncements
The following new standards have been or will be required to be adopted by Converium in the
future:
SFAS 123 (revised 2004), Share-Based Payment
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. This
Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees. This Statement establishes
standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entitys equity instruments
or that may be settled by the issuance of those equity instruments. This Statement focuses
primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. For public entities, this Statement is effective as of the
beginning of the next fiscal year that begins after June 15, 2005. As Converium has already
adopted the standards of SFAS No.123, this statement is not expected to have a material impact on
the financial condition or results of operations.
EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on EITF Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.
EITF Issue No. 03-1 was effective for periods beginning after June 15, 2004 and adopts a three-step
impairment model for securities within its scope. In September 2004, the FASB staff issued
clarifying guidance for comment in FASB Staff Position (FSP) EITF Issue No. 03-1-a,
Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1 (FSP Issue
No. 03-1-a) and subsequently EITF Issue 03-1-b which delay the implementation of the impairment
measurement and recognition guidance contained in paragraphs 10 through 20 of EITF Issue No. 03-1.
33
Converium Holding AG and Subsidiaries
Notes to the interim financial statements (unauditedcontinued)
The delay in the recognition and measurement guidance contained in EITF 03-1 paragraphs 10
through 20 could potentially result in the recognition of unrealized losses, including those
declines in value that are attributable to interest rate movements, as other-than-temporary
impairments, except those deemed to be minor in nature. The amount of impairments to be
recognized, if any, will depend on the final standard, market conditions and managements intent
and ability to hold securities with unrealized losses at the time of the impairment evaluation. The
delay in issuance of EITF Issue No. 03-1 does not suspend the requirement to recognize
other-than-temporary-impairments. In the interim period the Company has applied existing
authoritative guidance.
FASB Staff Position (FSP) FIN 46(R)-5, Implicit Variable Interests Under FASB Interpretation No.
46(R)
In March 2005, the FASB issued FASB Staff Position (FSP) FIN 46(R)-5, Implicit Variable Interests
Under FASB Interpretation No. 46(R), which requires an enterprise to consider whether it holds an
implicit variable interest in a Variable Interest Entity (VIE) and what effect this may have on
the calculation of expected losses and residual returns of the VIE and the determination of which
party, if any, is considered the primary beneficiary of the VIE. This statement was adopted for the
first quarterly reporting period beginning after March 3, 2005 and did not have a material impact on
the Companys financial condition or results of operations.
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47,
(FIN 47) Accounting for Conditional Asset Retirement Obligations which clarifies the term
conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset
Retirement Obligations. FIN 47 will result in (a) more consistent recognition of liabilities
relating to asset retirement obligations, (b) more information about expected future cash outflows
associated with those obligations, and (c) more information about investments in long-lived assets
because additional asset retirement costs will be recognized as part of the carrying amounts of the
assets. FIN 47 is effective for the fiscal years ending after December 15, 2005 but is not expected
to have a material impact on the Companys financial condition or results of operations.
SFAS 154, Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which
replaces APB Opinion No 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary changes in accounting
prinicples and changes the requirements for accounting for, and reporting of, a change in
accounting principle. This Statement will be effective for fiscal years beginning after December
15, 2005.
EITF Issue No. 04-5, Determining Wheter a General Partner, or the General Partners as a Group,
Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights
In June 2005, the FASB ratified the Emerging Issues Task Force (EITF) Issue No. 04-5,
Determining Wheter a General Partner, or the General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain Rights. The EITF reached a
consensus that a sole general partner is presumed to control a limited partnership (or similar
entity) and should consolidate the limited partnership unless (1) the limited partners possess
substantive kick-out rights or (2) the limited partners possess substantive participating rights
similar to the rights described in EITF Issue No. 96-16, Investors Accounting for an Investee
When the Investor has a majority of the Voting Interest but the Minority Shareholder or
Shareholders Have Certain Approval or Veto Rights. This issue was effective for all new and
modified agreements, upon the FASBs ratification in June 2005. For pre-existing agreements that
are not modified, the consensus is effective as of the beginning of the first fiscal reporting
period beginning after December 15, 2005. This issue is not expected to have a material impact on
the Companys financial condition or results of operations.
3. Restructuring costs
The reduction of premium volume required an adjustment of Converiums cost base globally going
forward. Consequently, Converium notified certain of its employees that their employment would be
terminated. Converium recorded restructuring costs of US$ 3.5 million and US$ 13.6 million for the
three and six months ended June 30, 2005, respectively, related to these global cost management
measures. For the six months ended June 30, 2005, US$ 5.4 million were attributable to the
Standard Property & Casualty Reinsurance segment, US$ 5.9 million were attributable to the
Specialty Lines segment, US$ 1.7 million were attributable to the Life & Health Reinsurance
segment and US$ 0.6 million were attributable to the Run-Off segment.
In addition, as a result of the global restructuring, a decision was made in January 2005 to vacate
Converiums primary office space in New York, New York and consolidate in its Stamford, Connecticut
office space. Converium expects the transfer to be effective within the third quarter of 2005,
resulting in additional restructuring costs. Office space in Zurich is also under review, which
could also result in additional restructuring costs in future quarters.
34
Converium Holding AG and Subsidiaries
Notes to
the interim financial statements (unauditedcontinued)
4. Foreign currency translation and transactions
Table 4.1 summarizes the principal exchange rates that have been used for translation purposes
(US dollar per foreign currency unit). Net realized gains (losses) on foreign currency transactions
were immaterial for the three and six months ended June 30, 2005 and 2004, respectively.
Table 4.1
Exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of income (loss) |
|
|
|
Balance sheets |
|
|
and cash flows |
|
|
|
June 30, 2005 |
|
|
December 31, 2004 |
|
|
June 30, 2005 |
|
|
June 30, 2004 |
|
UK pound |
|
|
1.7925 |
|
|
|
1.9199 |
|
|
|
1.8737 |
|
|
|
1.8220 |
|
Euro |
|
|
1.2107 |
|
|
|
1.3593 |
|
|
|
1.2857 |
|
|
|
1.2275 |
|
100 Japanese yen |
|
|
0.9025 |
|
|
|
0.9759 |
|
|
|
0.9439 |
|
|
|
0.9226 |
|
Danish krone |
|
|
0.1625 |
|
|
|
0.1827 |
|
|
|
0.1727 |
|
|
|
0.1649 |
|
Swiss franc |
|
|
0.7806 |
|
|
|
0.8794 |
|
|
|
0.8314 |
|
|
|
0.7904 |
|
5. Invested assets and investment income
Table 5.1
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
62.1 |
|
|
|
47.8 |
|
|
|
116.0 |
|
|
|
94.0 |
|
Equity securities |
|
|
2.7 |
|
|
|
7.1 |
|
|
|
3.9 |
|
|
|
9.2 |
|
Short-term investments and cash and cash equivalents |
|
|
3.8 |
|
|
|
1.2 |
|
|
|
7.1 |
|
|
|
2.2 |
|
Real estate |
|
|
2.3 |
|
|
|
2.3 |
|
|
|
4.7 |
|
|
|
4.7 |
|
Other |
|
|
4.5 |
|
|
|
2.0 |
|
|
|
11.2 |
|
|
|
6.0 |
|
Funds Withheld Asset |
|
|
16.2 |
|
|
|
19.0 |
|
|
|
33.1 |
|
|
|
39.3 |
|
Total investment income |
|
|
91.6 |
|
|
|
79.4 |
|
|
|
176.0 |
|
|
|
155.4 |
|
Investment expenses |
|
|
- 3.0 |
|
|
|
- 2.4 |
|
|
|
- 4.7 |
|
|
|
- 5.4 |
|
Real estate expenses |
|
|
- 0.8 |
|
|
|
- 0.3 |
|
|
|
- 1.3 |
|
|
|
- 0.7 |
|
Net Total investment income |
|
|
87.8 |
|
|
|
76.7 |
|
|
|
170.0 |
|
|
|
149.3 |
|
Table 5.2
Net realized capital (losses) gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains |
|
|
4.0 |
|
|
|
4.0 |
|
|
|
8.9 |
|
|
|
8.6 |
|
Realized capital losses |
|
|
- 4.9 |
|
|
|
- 6.2 |
|
|
|
- 8.5 |
|
|
|
- 7.4 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains |
|
|
1.7 |
|
|
|
17.4 |
|
|
|
1.8 |
|
|
|
25.9 |
|
Realized capital losses |
|
|
- 0.1 |
|
|
|
|
|
|
|
- 0.7 |
|
|
|
- 0.8 |
|
Write-down of impaired investments |
|
|
- 2.8 |
|
|
|
- 1.5 |
|
|
|
- 4.9 |
|
|
|
- 2.6 |
|
Other |
|
|
1.1 |
|
|
|
- 1.2 |
|
|
|
1.7 |
|
|
|
- 2.0 |
|
Net realized capital (losses) gains |
|
|
- 1.0 |
|
|
|
12.5 |
|
|
|
- 1.7 |
|
|
|
21.7 |
|
As of June 30, 2005, Converium reported total investments including cash and cash equivalents and
excluding the Funds Withheld Asset of US$ 6,807.6 million. Of this total, certain amounts were
pledged as follows: (i) US$ 1,098.5 million were pledged as collateral relating to outstanding
letters of credit of US$ 989.6 million (these outstanding letters of credit are related to the US$
1.6 billion Syndicated Letter of Credit Facility), (ii) US$ 959.8 million were pledged as
collateral relating to other irrevocable letters of credit, (iii) US$ 231.5 million were pledged
primarily as deposits with cedents, (iv) US$ 282.3 million were deposited in trust or with
regulatory authorities or states, and (v) US$ 554.6 million were pledged to support Converium
internal reinsurance transactions.
35
Converium Holding AG and Subsidiaries
Notes to the interim
financial statements (unauditedcontinued)
Table 5.3
Investments in fixed maturities and equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(US$ million) |
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
amortized cost |
|
|
unrealized gains |
|
|
unrealized losses |
|
|
fair value |
|
|
|
June 30 |
|
|
Dec. 31 |
|
|
June 30 |
|
|
Dec. 31 |
|
|
June 30 |
|
|
Dec. 31 |
|
|
June 30 |
|
|
Dec. 31 |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transferred in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government |
|
|
409.7 |
|
|
|
414.2 |
|
|
|
0.5 |
|
|
|
|
|
|
|
- 11.6 |
|
|
|
- 11.3 |
|
|
|
398.6 |
|
|
|
402.9 |
|
Other governments |
|
|
13.5 |
|
|
|
15.3 |
|
|
|
1.0 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
14.5 |
|
|
|
15.8 |
|
Newly invested: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government |
|
|
169.6 |
|
|
|
170.1 |
|
|
|
2.0 |
|
|
|
0.9 |
|
|
|
- 0.3 |
|
|
|
- 0.2 |
|
|
|
171.3 |
|
|
|
170.8 |
|
Other governments |
|
|
227.1 |
|
|
|
250.8 |
|
|
|
7.6 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
234.7 |
|
|
|
254.5 |
|
Total held-to-maturity |
|
|
819.9 |
|
|
|
850.4 |
|
|
|
11.1 |
|
|
|
5.1 |
|
|
|
- 11.9 |
|
|
|
- 11.5 |
|
|
|
819.1 |
|
|
|
844.0 |
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government |
|
|
1,823.3 |
|
|
|
1,765.6 |
|
|
|
14.7 |
|
|
|
9.1 |
|
|
|
- 12.9 |
|
|
|
- 11.6 |
|
|
|
1,825.1 |
|
|
|
1,763.1 |
|
Other governments |
|
|
1,710.5 |
|
|
|
1,769.3 |
|
|
|
29.1 |
|
|
|
15.7 |
|
|
|
- 4.7 |
|
|
|
- 2.0 |
|
|
|
1,734.9 |
|
|
|
1,783.0 |
|
Corporate and other debt securities |
|
|
823.6 |
|
|
|
661.1 |
|
|
|
13.7 |
|
|
|
13.4 |
|
|
|
- 1.9 |
|
|
|
- 2.4 |
|
|
|
835.4 |
|
|
|
672.1 |
|
Mortgage and asset-backed securities |
|
|
555.2 |
|
|
|
612.2 |
|
|
|
3.1 |
|
|
|
5.7 |
|
|
|
- 2.6 |
|
|
|
- 1.3 |
|
|
|
555.7 |
|
|
|
616.6 |
|
Total |
|
|
4,912.6 |
|
|
|
4,808.2 |
|
|
|
60.6 |
|
|
|
43.9 |
|
|
|
- 22.1 |
|
|
|
- 17.3 |
|
|
|
4,951.1 |
|
|
|
4,834.8 |
|
Equity securities |
|
|
332.1 |
|
|
|
328.9 |
|
|
|
88.9 |
|
|
|
73.0 |
|
|
|
- 1.6 |
|
|
|
- 2.5 |
|
|
|
419.4 |
|
|
|
399.4 |
|
Total available-for-sale |
|
|
5,244.7 |
|
|
|
5,137.1 |
|
|
|
149.5 |
|
|
|
116.9 |
|
|
|
- 23.7 |
|
|
|
- 19.8 |
|
|
|
5,370.5 |
|
|
|
5,243.3 |
|
6. Goodwill and other intangible assets
Goodwill was US$ 49.5 million and US$ 49.2 million, at June 30, 2005 and December 31, 2004,
respectively.
At June 30, 2005 and December 31, 2004, the current carried value of goodwill associated with the
30.1% stake in Global Aerospace Underwriting Managers Limited (GAUM) remained constant at GBP
13.1 million (US$ 25.2 million). Of the remaining balance of goodwill as of June 30, 2005 and
December 31, 2004, US$ 24.0 million related to Converium AGs 49.9% strategic investment in the
Medical Defence Union Services Ltd (MDUSL) executed during 2000.
SFAS 142, Goodwill and Other Intangible Assets, requires impairment testing of goodwill
annually or more regularly if any event or change in business circumstances occurs which would
indicate that the carrying value of goodwill may be impaired. SFAS 142 also requires that useful
lives for intangible assets other than goodwill be reassessed and the remaining amortization
periods be adjusted accordingly. Goodwill and other intangible assets are included in the balance
sheet under the caption Other assets.
Other intangible assets were GBP 3.8 million (US$ 7.6 million) and GBP 11.2 million (US$ 20.6
million) as at June 30, 2005 and December 31, 2004, respectively, which relate to customer related
intangible assets associated with the 30.1% investment in GAUM.
In the light of changing business circumstances associated with Converiums S&P ratings downgrade
in the third quarter of 2004, Converium entered into fronting agreements with Munich Re and
National Indemnity in order to support and sustain the aviation business from GAUM. These fronting
agreements currently extend to September 30, 2005 with no contractual guarantee that they will be
extended beyond that date. In view of this fact, during the fourth quarter of 2004 Converium
reassessed the remaining useful life of the intangible asset to correspond with the date of
cessation of the existing fronting agreements. As a result of this change the intangible asset
amortization charge for the second quarter of 2005 is GBP 3.7 million (US$ 7.0 million) compared
to a GBP 0.4 million (US$ 0.8 million) charge for the second quarter of 2004.
36
Converium Holding AG and Subsidiaries
Notes to
the interim financial statements (unauditedcontinued)
7. Losses and loss adjustment expenses
Reserve development
For the three months ended June 30, 2005, Converium recorded net positive development of prior
years loss reserves in the amount of US$ 6.7 million, which resulted in an overall net
strengthening of prior years loss reserves of US$ 3.7 million for the first half of 2005. The
development of prior years loss reserves for the three months ended June 30, 2005 includes US$ 6.9
million of net strengthening in the Standard Property & Casualty Reinsurance segment primarily
related to strengthening within the Motor line of business (US$ 17.9 million), which was offset by
positive development within the Property line of business (US$ 17.6 million). The Specialty Lines
segment experienced net positive development of US$ 10.5 million primarily driven by positive
development within the Aviation line of business (US$ 19.5 million), which was partially offset by
net strengthening within additional lines of business within the segment. In addition, the Run-Off
segment experienced US$ 3.1 million in net positive development. The development of prior years
loss reserve for the first half of 2005 consisted of net positive development of US$ 3.3 million
in the Standard Property & Casualty Reinsurance segment and US$ 6.3 million in the Specialty Lines
segment, offset by net strengthening of prior years loss reserves of US$ 13.3 million in the
Run-Off segment.
As a result of the reserve volatility of old underwriting years and the adverse loss-reporting
trend that continued throughout the early part of 2004, Converium recorded net strengthening of
prior years loss reserves in the amount of US$ 387.7 million for the three months ended June 30,
2004, which resulted in an overall net strengthening of prior years loss reserves of US$ 430.7
million for the first half of 2004. The development of prior years loss reserves for the three
months ended June 30, 2004 includes net strengthening of US$ 5.1 million in the Standard Property &
Casualty Reinsurance segment, US$ 51.3 million in the Specialty Lines segment and US$ 331.3 in the
Run-Off segment. The development of prior years loss reserves for the first half of 2004,
consisted of net strengthening of prior years loss reserves of US$ 1.1 million in the Standard
Property & Casualty Reinsurance segment, US$ 32.2 million
in the Specialty Lines segment and US$ 397.4 million in the Run-Off segment.
Natural catastrophes
Winter storm Erwin which swept across Northern Europe in January 2005 resulted in net pre-tax
losses for Converium in the amount of US$ 32.5 million, net of US$ 3.0 million in reinstatement
premium, all of which impacted the first quarter of 2005 result of the Standard Property & Casualty
Reinsurance segment. The second quarter of 2005 was absent any major natural catastrophes.
In the first half of 2005, Converium was also impacted by net strengthening of prior years loss
reserves of US$ 15.3 million from the US/Caribbean hurricanes that occurred in late 2004, of which
US$ 11.8 million impacted the Standard Property & Casualty Reinsurance segment and US$ 3.5 million
impacted the Specialty Lines segment. This net strengthening is included in the net strengthening
of prior years loss reserves shown above.
Retrocessional risk management
As a result of its risk management monitoring process, Converium reached a decision in the first
quarter of 2005 to commute the obligations of one of its retrocessionaires due to deterioration in
that companys rating and concerns about the future ownership and prospects of the company. As a
result Converium commuted certain retrocession contracts with reinsurance recoverables in the
amount of US$ 100.1 million for a commutation settlement of US$ 60.1 million, which generated a
negative impact of US$ 40.0 million on the net results in the first quarter of 2005, US$ 38.7
million of which is in losses. In the second quarter of 2005, our risk management monitoring
process did not result in any such retrocession commutations.
8. Guaranteed Minimum Death Benefit (GMDB)
Converium assumed certain retrocession liability with regard to Guaranteed Minimum Death
Benefit (GMDB) features attached to variable annuity policies written in the United States. These
treaties are all in run-off and cover in total 1.4 million policies that were issued mainly in the
late 1990s and that incorporate various benefit types originating from different primary
insurers. Claims occur in the event of death if a policy is in-the-money, which means that the
GMDB exceeds the account balance. Under these circumstances, the difference between the GMDB and
the account balance or the GMDB and the cash surrender value becomes due, depending on the
definition of the underlying reinsurance agreements.
The following types of Guaranteed Minimum Death Benefits are covered:
|
|
Return of premium: The GMDB is the amount of total deposits adjusted for partial
withdrawals, if any. |
|
|
Ratchet: After a given number of years, the GMDB is adjusted to the current account
balance, if greater. Most common is a 1-year ratchet, meaning that the GMDB is adjusted
annually on the policys anniversary date. |
|
|
Rollup: The GMDB increases each year from the initial premium adjusted for later
deposits and partial withdrawals by a fixed percentage. Rollup guarantees reinsured under
Converiums agreements grant an annual accumulation percentage between 3% and 7%. In many
products, especially for higher rollup percentages, an upper limit applies (e.g. 200% of
the paid policyholder premium adjusted for later deposits and partial withdrawals). |
37
Converium Holding AG and Subsidiaries
Notes to
the interim financial statements (unauditedcontinued)
|
|
Reset: After a given number of years, the GMDB is adjusted to the current account balance.
This means that the GMDB can be reduced but often not below the paid-up premium (adjusted for
later deposits and partial withdrawals). |
|
|
Combinations of the above. |
Guarantees that increase over the time are, for a majority of the assumed business, only applied up
to a certain age (e.g. 85). For the majority of the portfolio, a maximum death benefit age exists
and as a consequence, Converium will be off the risk afterwards.
Converium does not hold any contract holder funds. These assets remain with the originating ceding
companies.
The GMDB liability is determined each period based on the information provided by Converiums
ceding companies. The current account value, the guaranteed death benefit and details of the
covered benefit types are taken into consideration for the evaluation of the net amount at risk
(NAR) and the expected future liability. The liability according to SOP 03-1 is estimated at the
end of the reporting period.
For the evaluation of the liabilities, Converium uses an actuarial model that considers 1,000
stochastically generated investment performance scenarios. The mean performance assumed for
equities is 9.6% and the mean performance for other investment types such as bonds and cash
deposits varies between 4.8% and 5.7%. The corresponding volatility assumptions are 18.3% and 1.5%
to 2.2%, respectively. The discount rate used in the model is stochastically generated in line with
the other investment scenarios and takes into consideration the current yield level. It is assumed
to be an average of 5.7% over the long run. The mortality assumption is 100% of the Annuity 2000
table. Lapse rates vary by duration and range from 6.5% to 20%. Partial withdrawals, either applied
pro-rata or on a dollar-for-dollar basis according to the policy conditions, are also considered in
the modeling. The corresponding parameter, reflecting the on-average withdrawn amount of the
account value, varies by duration and is assumed to range from 2.4% to 7.5% per annum.
As of June 30, 2005, the following values were estimated as described above:
Table 8.1
(US$ million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOP 03-1 |
|
Guarantee type |
|
Average age |
|
|
GMDB |
|
|
Account Value |
|
|
NAR |
|
|
Reserve |
|
Ratchet |
|
|
65.9 |
|
|
|
1,963.4 |
|
|
|
1,660.5 |
|
|
|
357.5 |
|
|
|
24.6 |
|
Rollup |
|
|
70.6 |
|
|
|
565.4 |
|
|
|
387.5 |
|
|
|
184.2 |
|
|
|
23.1 |
|
Rollup & ratchet |
|
|
66.7 |
|
|
|
24.0 |
|
|
|
19.4 |
|
|
|
6.3 |
|
|
|
0.4 |
|
Return of premium |
|
|
63.8 |
|
|
|
20.2 |
|
|
|
20.3 |
|
|
|
2.2 |
|
|
|
0.1 |
|
Reset |
|
|
59.1 |
|
|
|
273.6 |
|
|
|
289.7 |
|
|
|
18.5 |
|
|
|
1.1 |
|
Reset & return of premium |
|
|
60.7 |
|
|
|
123.7 |
|
|
|
122.8 |
|
|
|
8.6 |
|
|
|
0.5 |
|
Total |
|
|
67.1 |
|
|
|
2,970.3 |
|
|
|
2,500.2 |
|
|
|
577.3 |
|
|
|
49.8 |
|
The table below shows the cash flow and claim reserves balances for the periods shown:
Table 8.2
(US$ million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Received reinsurance premium, net of commission and brokerage |
|
|
1.0 |
|
|
|
0.8 |
|
|
|
2.1 |
|
|
|
2.1 |
|
Paid losses |
|
|
2.9 |
|
|
|
2.3 |
|
|
|
6.1 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 |
|
|
As of December 31, 2004 |
|
Claim reserves (including case reserves and IBNR) |
|
|
6.4 |
|
|
|
4.9 |
|
9. Income taxes
Converium recorded an income tax benefit of US$ 21.6 million and US$ 25.4 million for the three
and six months ended June 30, 2005, respectively. Over the past year, Converium has established a
full valuation allowance against existing tax losses carried forward in its primary locations,
resulting in minimal current income tax expense relating to pre-tax income. Therefore tax benefits
and expenses are primarily driven by the development of existing deferred tax assets and
liabilities, which are established to reflect differences in the tax accounting rules of local
jurisdictions and US GAAP accounting.
38
Converium Holding AG and Subsidiaries
Notes to
the interim financial statements (unauditedcontinued)
In the second quarter of 2005, Converiums income tax benefit resulted from the reduction of
deferred acquisition costs (DAC), caused by the decline in its overall non-life premium volume,
and certain timing differences related to the recognition of investment gains and losses.
In the first half of 2005, Converiums income tax benefit resulted from the positive effect of a
reduction of DAC, the effect of certain timing differences related to the recognition of investment
gains and losses, and certain other deferred tax liability reductions, offset by a reduction in the
profit allocated to the Bermuda branch and an increase of the valuation allowance on existing
losses carried forward.
Converiums consolidated income tax expense for the three and six months ended June 30, 2004
reflected an additional expense of US$ 269.8 million, related to the establishment of a full
valuation allowance against the net deferred income tax balances previously carried at CRNA.
10. Employee benefits
The following table shows the net periodic benefit expense for the three and six months ended
June 30, 2005 and 2004.
Table 10.1
Net periodic benefit expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
(US$ million) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
|
2.1 |
|
|
|
2.1 |
|
|
|
4.3 |
|
|
|
4.4 |
|
Interest cost |
|
|
0.9 |
|
|
|
0.7 |
|
|
|
1.8 |
|
|
|
1.5 |
|
Expected return on plan assets |
|
|
- 0.9 |
|
|
|
- 0.8 |
|
|
|
- 1.9 |
|
|
|
- 1.6 |
|
Employee contributions |
|
|
- 0.8 |
|
|
|
- 0.8 |
|
|
|
- 1.6 |
|
|
|
- 1.6 |
|
Amortization of actuarial losses |
|
|
0.2 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Amortization of past service cost |
|
|
- 0.1 |
|
|
|
|
|
|
|
- 0.2 |
|
|
|
- 0.1 |
|
Net periodic benefit expense |
|
|
1.4 |
|
|
|
1.2 |
|
|
|
2.8 |
|
|
|
2.6 |
|
The expected future cash flow in 2005 to be paid by Converium in respect of pension plans at June
30, 2005 was as follows:
Table 10.2
Expected future cash flow
(US$ million)
|
|
|
|
|
Employer contributions |
|
|
|
|
2005 (estimate)
|
|
|
|
5.0 |
11. Related party transactions
SATEC
In 2002, Converium acquired a 48% participation in SATEC, a leading global space-underwriting
agency based in Venice, Italy. As part of this transaction Converium entered into usufruct
agreements with the co-owners of SATEC regarding some of their participation rights in the company.
Following a review of the current business circumstances in conjunction with the company in the
second quarter of 2005, Converium has recorded a further impairment charge of US$ 2.4 million in
respect of the usufruct agreements. An impairment charge of US$ 2.5 million was recorded in respect
of the usufruct agreements in the fourth quarter of 2004. This latest impairment charge has led to
the full impairment of the usufruct agreements in the accounting records of Converium.
12. Commitments and contingencies
Converium Rückversicherung (Deutschland) AG, Germany had an outstanding commitment of Euro 30
million (US$ 36.4 million) to fund an investment in a Morgan Stanley Real Estate Fund (Eurozone
Office Fund), a Fonds Commun de Placement under Luxembourg Law. The manager called this commitment
during the commitment period. The capital called totaled Euro 30.0 million (US$ 36.4 million),
which resulted in no remaining commitment.
39
Converium Holding AG and Subsidiaries
Notes to
the interim financial statements (unauditedcontinued)
Superior National Matters
On January 6 and January 7, 2005, CRNA and CINA, respectively, entered into a Settlement Agreement
and Mutual Release (the Settlement Agreement) with the California Insurance Commissioner (the
Commissioner) relating to the January 16, 2002 complaint that the Commissioner filed against a
subsidiary of ZFS, Centre Insurance Company (CIC) and affiliates, as well as CRNA and CINA. The
Commissioner had initiated this action in Superior Court of the State of California, County of Los
Angeles, on behalf of the Superior National Insurance Companies in Liquidation (SNICL).
The complaint alleged several counts, including voidable preferences and fraudulent transfers, the
recovery of transfers totaling US$ 202.9 million, damages for breach of contract in the amount of
US$ 59.8 million, additional damages in an amount to be proved at trial, and punitive damages. The
overwhelming bulk of the damages sought appeared to arise out of CIC transactions, not CRNA or CINA
transactions. As part of the transactions which effectively spun-off CRNA and CINA from ZFS, ZFS
agreed to indemnify CRNA and CINA for liabilities arising out of or related to the assets not
assumed by or transferred to CRNA and CINA in the separation from ZFS. The principal claim brought
against CRNA appeared to arise from CRNAs commutation of certain reinsurance obligations. In that
connection, however, while the complaint did in fact reference the commutation, the payment
involved was a commutation payment made by CRNA, not to CRNA. As best as could be discerned, the
liquidator was apparently claiming that the amount paid by CRNA was inadequate consideration for
the reinsurance obligations commuted and thus this commutation constituted a fraudulent transfer.
All the claims, though, were never well defined and no discovery was ever undertaken to better
elucidate them.
Neither CRNA nor CINA shall pay any amounts whatsoever in exchange for the full and final discharge
of liabilities, as set forth in the Settlement Agreement, that the Commissioner has granted to both
companies. Instead, CIC shall be making the full payment that will provide the complete release to
CRNA and CINA, as well as all other parties in the complaint. At a hearing on February 17, 2005,
the Settlement Agreement was approved by the court presiding over the liquidation of the estates of
SNICL. On April 18, 2005 the settlement was deemed final and on or about May 18, 2005 payments
required of parties under the Settlement Agreement (which did not include CRNA or CINA), were made.
A dismissal of the case was entered by the court on June 1, 2005.
U.S. Life Insurance Company arbitration
The arbitration initiated on November 29, 1999 by U.S. Life Insurance Company (U.S. Life) against
Superior National Insurance Company in Liquidation (SNICIL), CINA and CIC, which was previously
reported, has been settled as between U.S. Life and CINA. The settlement in January 2005 followed a
December 2004 decision of the arbitration panel to reject U.S. Lifes claim for rescission and to
instead reform the reinsurance treaty provided by U.S. Life to a 90% quota share as opposed to a
100% quota share. U.S. Life and CINA agreed to settle the matter with a full and final commutation
of the treaty in exchange for a commutation payment by U.S. Life.
Canada Life
On December 21, 2001, The Canada Life Assurance Company, Toronto (Canada Life), brought an action
against Converium Rückversicherung (Deutschland) AG (Converium Germany) in the US District Court
of the Southern District of New York. Canada Life alleged that Converium Germany breached certain
quota share retrocession agreements with Canada Life by failing to indemnify its full percentage
of Canada Lifes September 11th losses and by failing to post an US$ 82.4 million letter of credit
for its liability pursuant to the ISA facilities underlying agreements. Converium Germany is
disputing this claim on the grounds that its liability under the pertinent contracts is limited and
is also raising other contracts defenses. In its decision of April 11, 2002, the US District Court
of the Southern District of New York dismissed Canada Lifes action, ruling that The Air
Transportation Safety and System Stabilization Act, which Canada Life claimed to give the court
jurisdiction over the subject matter, is not applicable. The court ruled that the Act applies
broadly to the actions filed by individual victims of the September 11th attacks but does not
apply to disputes among reinsurers. The Second Circuit Court of Appeal affirmed the dismissal. As a
result of the decision of the US District Court of the Southern District of New York, Converium
Germany sent Canada Life a request to arbitrate. Following the organizational meeting of the
arbitrators on October 8, 2003, the discovery and deposition began. The hearing is expected to
take place in the third quarter of 2005. Meanwhile, the arbitration panel ordered Converium
Germany to post pre-award security in the form of a Letter of Credit in the amount of US$ 66.0
million, which Converium Germany has complied with. Since then, the hearing has taken place in the
time between July 11 and July 22, 2005, and it is expected that the panel will issue an arbitration
award once they have concluded their deliberations.
Converium Germany has fully reserved this claim. However, arrangements entered into with Zurich
Financial Services provide for the claim to be covered by the agreed-to cap for September 11th
related losses provided to us by Zurich Financial Services in conjunction with Converiums Initial
Public Offering.
Class Action Lawsuits
On July 14, 2005, Judge Mukasey of the U.S. District Court for the Southern District of New York
approved a stipulation entered into among the parties to consolidate Meyer v. Converium Holding AG,
et al., 04 Civ. 7897 (MBM), a class action lawsuit against Converium and certain of its officers
and directors, with the related class actions pending before it (i.e., case nos. 04 Civ. 8038, 04
Civ. 8060, 04 Civ. 8295, 04 Civ. 8994 & 04 Civ. 9479) (collectively, the Meyers Cases). The
approved stipulation further appoints putative class members the Public Employees Retirement
System of Mississippi and Avalon Holdings
40
Inc. as lead plaintiffs, and the law firms of Bernstein Litowitz Berger & Grossman LLP, Cohen
Milstein, Haufeld & Toll, P.L.L.C. and Spector, Roseman & Kodroff P.C. as lead counsel. Rubin v.
Converium Holding AG, et al., 05 Civ. 3871 (MBM), a related state court action, has been removed to
federal court and assigned to Judge Mukasey.
MBIA
On March 8, 2005, MBIA Inc. (MBIA) issued a press release stating that MBIAs audit committee
undertook an investigation to determine whether there was an oral agreement with MBIA under which
MBIA would replace Axa Re Finance as a reinsurer to CRNA by no later than October 2005. The press
release stated that it appears likely that such an agreement or understanding with Axa Re Finance
was made in 1998. Thereafter, on April 19, 2005, CRNA received subpoenas from the U.S. Securities
and Exchange Commission and the Office of the New York Attorney General seeking documents related
to certain transactions between CRNA and MBIA.
In view of the industry investigations and the events relating to MBIA described above, we have
engaged counsel to assist us in a review and analysis of certain of our reinsurance transactions,
including the MBIA transactions. We are fully cooperating with the governmental authorities in
connection with their investigation. The impact of our ongoing review and analysis and the ongoing
regulatory investigations on us is uncertain, and there can be no assurance as to whether or not
the outcome of such investigations will have a material impact on Converium.
13. Regulation
United States
As a result of the reserve strengthening Converium recorded in the second quarter of 2004 and the
placement of CRNA into orderly run-off, the Connecticut Insurance Department (the Department) has
implemented additional financial monitoring of CRNA. CRNA has entered into a letter of
understanding with the Department pursuant to which CRNA will be prevented from taking a number of
actions without first obtaining the Departments approval. The restrictions will continue until
March 15, 2006, at which time the Department will reassess the financial condition of CRNA.
14. Earnings (loss) per share
Converium Holding AG has purchased 200,000 shares for the six months ended June 30, 2005
related to share-based compensation plans.
The following shows the components of the earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
(US$ million, except per share information) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) |
|
|
70.8 |
|
|
|
- 660.0 |
|
|
|
9.0 |
|
|
|
- 594.3 |
|
Average basic shares outstanding (millions) |
|
|
146.4 |
|
|
|
39.8 |
|
|
|
146.4 |
|
|
|
39.8 |
|
Average diluted shares outstanding (millions) |
|
|
147.7 |
|
|
|
40.5 |
|
|
|
147.6 |
|
|
|
40.5 |
|
Basic earnings (loss) per share |
|
|
0.48 |
|
|
|
- 8.32 |
|
|
|
0.06 |
|
|
|
- 7.49 |
|
Diluted earnings (loss) per share |
|
|
0.48 |
|
|
|
- 8.32 |
|
|
|
0.06 |
|
|
|
- 7.49 |
|
The earnings per share calculation is based on an adjusted number of average shares outstanding
(reflecting the Rights Offering that occurred in October 2004) and the June 30, 2004 amounts have
been restated accordingly.
Diluted earnings (loss) per share is computed similar to basic earnings per share except that the
weighted average shares outstanding is increased, if dilutive, to include potential common shares,
such as shares from non-vested stock grants and the assumed exercise of stock options.
15. Subsequent events
Subsequent to the close of the second quarter of 2005, there have been several natural
catastrophic events which have occurred including, Hurricane Dennis, Eastern European floods and
Japanese earthquakes as well as the recent terrorist incidents in both London and Egypt and the
plane crash in Toronto, which will ultimately impact the insurance industry as a whole and which
may directly impact the financial results of Converium. Converium is currently closely reviewing
its portfolio of business to identify any potential losses arising from these incidents. Based on
initial reports, Converium does not expect its combined losses from the above events to exceed US$
20.0 million.
Converium Holding AG
Baarerstrasse 8
6300 Zug
Switzerland
Phone +41 44 639 9335
Fax +41 44 639 9334
Converium AG
General Guisan-Quai 26
P.O. Box
8022 Zurich
Switzerland
Phone +41 44 639 9393
Fax +41 44 639 9090
Converium Rückversicherung (Deutschland) AG
Clever Strasse 36
50668 Cologne
Germany
Phone +49 221 539 0
Fax +49 221 539 2022
www.converium.com
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
CONVERIUM HOLDING AG |
|
|
|
|
|
|
|
By:
|
|
/s/ Terry Clarke
|
|
|
|
|
Name: Terry Clarke |
|
|
|
|
Title: Chief Executive Officer, Converium Holding AG |
|
|
|
|
|
|
|
By:
|
|
/s/ Andreas Zdrenyk
|
|
|
|
|
Name: Andreas Zdrenyk |
|
|
|
|
Title: Chief Financial Officer, Converium Holding AG |
|
|
|
|
|
|
|
Date:
|
|
August 9, 2005 |
|
|