Rating agencies punish Tower after reserve hike
Two rating agencies have downgraded Tower Group International following its announcement that it needs to strengthen loss reserves by approximately $365 million and will write down $214 million in goodwill in conjunction with its delayed second quarter 2013 earnings release.
The group concluded a review of its reserves this week. The final increase was significantly greater than the $60 million-$110 million it suggested might be required in a press release issued in August.
The biggest portion of the increase, some $185 million, is attributable to its US insurance subsidiaries, primarily for accident years 2009 through 2011 in commercial insurance lines of business, including workers' compensation, commercial multi-peril, commercial auto and other liability lines. The reserve strengthening reflects adverse loss emergence, coupled with changes in judgment, including actuarial factors, the company said.
Since 2010, Tower has been shifting its business mix, significantly de-emphasising the lines that contributed to the reserve strengthening and modifying its book of commercial lines business, the company said.
In addition, Tower expects to report a non-cash goodwill impairment charge of approximately $215 million for the second quarter of 2013, representing all goodwill associated with its commercial and specialty and reinsurance segments.
Tower said it is completing its evaluation of other intangible assets associated with its commercial and specialty and reinsurance segments, as well as the goodwill associated with its personal lines segment.
AM Best has downgraded the financial strength rating to B++ (Good) from A- (Excellent) of the pooled and reinsured members of the Tower US Pool (Tower) and it has downgraded the debt rating of this and other parts of the group. All companies are under review with negative implications.
“These rating actions consider the magnitude of the charges taken and the material adverse impact on Tower's risk-adjusted capitalisation, financial leverage, liquidity and coverage ratios,” the rating agency said.
“In addition, the ratings consider the reduced financial flexibility given the delay in earnings, the decline in shareholder confidence and the corresponding decline in share price.
“Once well regarded for its mergers and acquisitions strategy, equally important is the consequential impact this reserve charge has on Tower's business model, business profile and earnings prospects going forward.
“Considering the broad disparity between Tower's reserve guidance in August and the actual reserve charge taken, AM Best believes Tower will be challenged to restore shareholder confidence, both in the near and long term.”
Fitch Ratings has downgraded Tower's operating subsidiaries' Insurer Financial Strength (IFS) ratings to 'BB' from 'A-' and Tower Group International's Issuer Default Rating (IDR) to 'B' from 'BBB'. All ratings remain on Rating Watch Negative pending the company's exploration of strategic alternatives.
“Fitch's rating actions follow Tower's announcement today that it will be taking $364 million in adverse reserve development and writing down $214 million in goodwill in conjunction with its delayed second quarter 2013 earnings release.
“The company has also announced that it has engaged investment bankers to explore strategic alternatives. The company's inability to effectively place adequate controls on the loss reserving process where potential charges were first announced on August 7 followed by additional events, including a drop in the company's share price and the lack of new capital raising, have led to a material weakening in the insurer's financial profile.
“Further, Fitch is concerned that TWGP's competitive position has been materially damaged, negatively impacting the company's financial flexibility and ability to write new business.”
