Swiss reinsurer Converium has restated its annual results for the seven years from 1998 to 2004, and its results from each of the quarters from March 31, 2003 to June 30, 2005. This follows the company's restatement of its Dec. 31, 2004 and June 30, 2005 balance sheets on Dec. 19, 2005. It first revealed its intention to restate its results on Nov. 4, 2005.
The bulk of the restatements were made because Converium had incorrectly accounted for certain transactions as reinsurance. The transactions did not contain enough risk transfer to qualify as reinsurance and so had to be accounted for as deposits.
Converium discovered the errors in an internal review of its reinsurance transactions. The review was prompted by the New York attorney general and the U.S. Securities and Exchange Commission's investigation of contracts entered into between U.S. subsidiary Converium Re North America and financial guarantee insurer MBIA. This is part of the wider probe into non-traditional reinsurance contracts. Converium is still under investigation.
The restatements themselves were relatively small. Over the seven years, they reduced Converium's net income by $103.1 million. The adjustments also reduced the firm's Dec. 31 2004 shareholders' equity by $111.1 million.
As such, the restatements are not a big worry to analysts. "I was concerned when it was first announced but the impact was not material compared with other announcements the company has had to make in the past couple of years," says Frank Stoffel, analyst at investment bank WestLB Equity Markets.
Of greater concern, says Stoffel, is a section of Converium's press release indicating the possibility of further restatements.
"Converium is fully cooperating with the governmental authorities, and is in the process of sharing the results of its internal review with the relevant authorities. Although the internal review was extensive, the ongoing governmental inquiries, or other developments, could result in further restatements of Converium's financial results in the future and could have a material adverse effect on Converium," the statement says.
"There was a much more cautious tone in the press release," says Stoffel. "I would like to know whether this statement has substance or whether it is a typical phrase lawyers asked to be put in."
Stoffel says the confusion was made worse because at the analyst presentation, the company refused to comment further about the restatements because of the continuing SEC investigation.
"If a company announces that it has made restatements but that it doesn't know whether there will be any further effects given the current investigation, that does not result in increased confidence, especially if the company cannot comment on where that statement is coming from," says Stoffel.
