Buffett’s fund to buy Swiss reinsurer’s arm for $295m
Swiss reinsurer Converium has agreed to sell its North American unit to Berkshire Hathaway for $295m including debt, clearing a key hurdle in its quest to achieve a single-A credit rating.
Berkshire Hathaway, the investment company of US billionaire Warren Buffett, would pay $95m in cash and assume $200m in debt through its National Indemnity Company, Converium said on Tuesday.
The North American unit was the main source of Converium’s financial turmoil in ’04, when it was forced to raise emergency capital after discovering a $500m hole in claims reserves and closed down the unit to new business. Selling the operation was one key condition that credit rating agency Standard & Poor’s has set for Converium to return to a single-A rating seen as essential to stay alive in the industry, but which it lost during its ’04 crisis.
Converium now has BBB+ rating from S&P’s — one notch below single-A — with a positive outlook, indicating the rating agency is considering an upgrade. Markets welcomed the news, sending Converium stock up 2.5% to 16.35 francs. But it remains to be seen whether Converium will regain the single-A rating before the start of the key ’07 contract renewals season.
“This does not fundamentally change the situation. It would be good if they got the rating upgrade before the contract renewals in January. But that timing will be a bit tight,” said Georg Marti, insurance analyst at Zuercher Kantonalbank.
The price paid for the unit was low, Marti added, but the main point was that the group had now finally distanced itself from the problems in its US liabilities business, where it can take years before it becomes clear how large claims are.
Converium has to bring a probe by US regulatory authorities to an end as a second condition for a rating upgrade and the company said it was doing everything it could to meet that goal. But the timing was not in its own hands. The US investigation was launched after Converium restated its quarterly figures for previous years to change its accounting for a controversial type of reinsurance contracts that can be used to burnish firms’ numbers.
The North-America sale is subject to regulatory approvals and customary closing conditions, Converium said, adding that Berkshire Hathaway would assume all $1.06bn reinsurance liabilities within the unit.
The sale would result in a decrease in shareholders equity of an estimated $135m, Converium said.
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