New reserve charge prompts downgrades for Tower

Troubled insurer Tower Group and its subsidiaries have been downgraded by AM Best following its recent disclosure of a new $63 million reserve charge in its delayed results covering the fourth quarter of 2013.

Tower US Pool (Tower) and CastlePoint Reinsurance Company (Bermuda), subsidiaries of the group, have had their financial strength ratings (FSR) cut to C++ from B and issuer credit ratings (ICR) to b from bb.

The rating agency also downgraded the ICR of Tower Group International (TWGP) to cc from b- and the same downgrade applies to the debt rating on its $150 million 5 percent senior unsecured convertible notes due September of 2014. All ratings are under review with developing implications.

AM Best said the rating actions take into consideration the company’s recent $63 million of prior year reserve development, further reductions in GAAP shareholders’ equity as well as ongoing declines in statutory policyholders’ surplus and risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR). These rating factors are in addition to the diminished shareholders’ equity and reserve actions already taken by TWGP during the year.

It added that its rating actions also take into account the material adverse impact these charges have on all of TWGP’s entities in terms of their ability to operate as going concerns.

In addition, these rating downgrades reflect the group’s significantly elevated financial leverage, constrained liquidity and heightened uncertainty around TWGP’s ability to repay its senior debt holders in the event its pending merger with ACP Re does not occur. Continued delays in TWGP reporting its quarterly filings are another concern, AM Best said.

It also explained that the ratings will remain under review pending the planned merger with ACP Re, which is expected to close in the summer of 2014, but has a merger termination date of November 15, 2014. The under review with developing implications status acknowledges the potential benefits to be garnered from the transaction, as well as the potential downside from any additional adverse reserve development (in the event that the merger does not close) or any unforeseen event that might occur up until the close of the transaction. Additionally, the ratings could be downgraded further if certain events and/or unforeseen circumstances occur, which could cause the merger to fall through.