A.M. Best Downgrades Ratings of Tower Group International, Ltd.’s Subsidiaries and Maintains Under Review Status
A.M. Best Co. has downgraded the financial strength rating (FSR) to B++ (Good) from A- (Excellent) and issuer credit ratings (ICR) to “bbb” from “a-” of the pooled and reinsured members of the Tower US Pool (Tower). Concurrently, A.M. Best has downgraded the ICR and the debt rating on $145.4 million 5.00% senior convertible notes, due 2014 to “bb” from “bbb-” of the intermediate holding company, Tower Group, Inc. A.M. Best also has downgraded the FSR to B++ (Good) from A- (Excellent) and ICR to “bbb” from “a-” of CastlePoint Reinsurance Company, Ltd. (Bermuda). Additionally, A.M. Best has assigned an ICR of “bb” to the ultimate parent, Tower Group International, Ltd. (Bermuda) [NASDAQ:TWGP]. All companies are under review with negative implications and are headquartered in New York, NY, unless otherwise specified. (See below for detailed listing of the companies and ratings.)
These rating actions take into consideration Tower’s most recent announcement in which management plans to strengthen prior year loss reserves by $365 million, well in excess of the $60 million - $110 million initially indicated in its August 8th press release, and take a goodwill impairment charge of $215 million as a result of the reserve actions already taken. These rating actions consider the magnitude of the charges taken and the material adverse impact on Tower’s risk-adjusted capitalization, financial leverage, liquidity and coverage ratios. 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. These rating actions also acknowledge the various reinsurance transactions announced by Tower last week. Considering the broad disparity between Tower’s reserve guidance in August and the actual reserve charge taken, A.M. Best believes Tower will be challenged to restore shareholder confidence, both in the near and long term.
On a positive note, Tower maintains adequate risk adjusted capitalization and has been re-underwriting its book of business since 2011. Management is confident in its earnings prospects and believes future underwriting results (excluding prior years) should be more reflective of Tower’s core business, which continues to outperform p/c industry norms. Despite management’s sentiment, the negative rating implications assigned to Tower reflect the potential for further adverse reserve development, increased competitive challenges and due to the ratings downgrade, potential actions taken by third party reinsurers and lenders.
The ratings will remain under review pending further discussions between A.M. Best and Tower’s management. The negative implications reflect the reasonable likelihood that the ratings and/or outlook could be downgraded and/or revised.
The FSR has been downgraded to B++ (Good) from A- (Excellent) and the ICRs to “bbb+” from “a-” for the following pooled and reinsured members of Tower US Pool: