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Converium hopes sale of U.S. operations will boost rating

Posted On: Oct. 22, 2006 12:00 AM CST

ZUG, Switzerland—The $295 million sale of Converium Holding Ltd.'s North American reinsurance operations to a unit of Berkshire Hathaway Inc. is likely to pave the way for the Swiss company to achieve its stated aim of regaining an A-range financial strength rating, and the deal is good value for Berkshire Hathaway, experts say.

Zug, Switzerland-based Converium announced last week that it would sell its U.S. operations, which are in runoff, to National Indemnity Co. for $95 million in cash and $200 million debt. Converium will not provide any indemnity or guarantee of the reserves of the operations.

Converium said in a statement that the deal would significantly reduce its exposures, as National Indemnity will assume all of Converium's North American operations' reinsurance liabilities--which stood at $1.06 billion at June 30, 2006--as well as $200 million of debt issued by Converium Holdings (North America) Inc.

Converium said it expected the transaction would reduce its shareholders' equity by $135 million to $1.66 billion.

"With this transaction, we have successfully delivered on our promise to achieve finality regarding Converium's U.S. operations through a clean-cut sale," Inga Beale, Converium's chief executive officer said in a statement.

Converium placed its North American reinsurance operations into runoff after it was downgraded by rating agencies following large losses in 2004. That loss was caused largely by reserve increases for U.S. casualty business written between 1997 and 2001.

Standard & Poor's Corp. said it had placed its BBB+ ratings of Converium on positive credit watch after the announcement of the proposed sale.

Moody's Investors Service Inc. also announced it had placed its Baa1 financial strength rating of Converium "on review for possible upgrade" in the wake of the reinsurer's announcement.

Fitch Ratings Ltd. said it placed its BBB- rating of Converium on a positive watch and said that on completion of the deal, the rating is likely to be affirmed or upgraded by two notches.

"I think it's a positive for Converium," said Donald Thorpe, senior director of Fitch Ratings in Chicago. "It removes the overhang from Converium. There was concern the liabilities would grow and that there would be further losses from the U.S. operations. Now Converium has insured against that."

A.M. Best Co. Inc. said its B++ rating of Converium remained unchanged after the proposed sale announcement, but said the deal could have a positive impact on the group's risk-adjusted capitalization.

The deal also is a good one for Berkshire Hathaway, experts said.

Berkshire Hathaway has extensive experience managing runoff operations, which bodes well for its ability to manage the Converium assets, analysts say.

"Berkshire's skills will be helpful in extracting value here," said Bruce Ballentine, lead analyst on Berkshire Hathaway for New York-based Moody's.

Even if the liabilities grow, Berkshire Hathaway hopes they will take long enough to pay to overcome the losses in investment income, said Fitch's Mr. Thorpe.