Advertisement
U.S. markets open in 8 hours 9 minutes
  • S&P Futures

    5,208.00
    -6.75 (-0.13%)
     
  • Dow Futures

    39,212.00
    -11.00 (-0.03%)
     
  • Nasdaq Futures

    18,177.00
    -54.50 (-0.30%)
     
  • Russell 2000 Futures

    2,047.30
    -2.50 (-0.12%)
     
  • Crude Oil

    82.57
    -0.15 (-0.18%)
     
  • Gold

    2,162.20
    -2.10 (-0.10%)
     
  • Silver

    25.30
    +0.03 (+0.12%)
     
  • EUR/USD

    1.0871
    -0.0006 (-0.05%)
     
  • 10-Yr Bond

    4.3400
    0.0000 (0.00%)
     
  • Vix

    14.33
    -0.08 (-0.56%)
     
  • GBP/USD

    1.2716
    -0.0012 (-0.10%)
     
  • USD/JPY

    150.1570
    +1.0590 (+0.71%)
     
  • Bitcoin USD

    65,178.10
    -3,121.73 (-4.57%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,722.55
    -4.87 (-0.06%)
     
  • Nikkei 225

    39,850.48
    +110.08 (+0.28%)
     

Tower Group Still Faces Negative Rating Action by A.M. Best

Tower Group International, Ltd. (TWGP) has received an adverse rating action from the rating agency A.M. Best. The issuer credit rating (:ICR) of the troubled insurer was pushed down to “c” from “cc”. In addition, the rating agency downgraded the financial strength ratings (:FSR) to C from C++ and the ICR to “ccc” from “b” of the pooled and reinsured members of Tower US Pool (Tower) and CastlePoint Reinsurance Company, Limited (Bermuda).

Additionally, the ICR of $150 million par 5.00% senior unsecured convertible notes due Sept 14, 2014, for the intermediate holding company, Tower Group, Inc. was also lowered to “c” from “cc”. A.M. Best has maintained a developing outlook on all the ratings.

On May 9, 2014, A.M. Best lowered the FSR of each of Tower’s insurance subsidiaries to C++” from “B” , as well as ICR of each of Tower’s insurance subsidiaries from “bb” to “b”. Moreover, in the same month, Fitch withdrew all ratings on Tower and its operating subsidiaries due to lack of robust data to maintain the ratings.

This rating action by A.M.Best is driven by $106 million of net loss reported by the company in its recent 10Q sec filing for the three months ended Jun 30, 2014. The report also reflected shareholders deficit of $11 million.

A.M.Best’s developing outlook signals that a positive or a negative rating action may follow depending on further developments. A positive rating action is likely if the pending merger with ACP Re concludes successfully giving Tower Group International a fresh lease of life. A negative rating action will be likely in case the merger with ACP Re does not close prior to Sep 15, 2014, the maturity date of the $150 million notes, since the company will not have adequate liquidity to pay principal and accrued interest that would be due to holders of the notes on that date.

Tower Group faced these adverse rating actions after it ended up in a muddle of accounting fallacy. The hale and hearty company was diagnosed with a huge reserve shortfall in Jun 2013. In a soft insurance market, when the insurance rates were very low, the company tried an inorganic way to grow through acquisitions, paying little heed to maintaining adequate reserve in long-tailed products for the accident years 2008–2011.

The company had a serious reserve shortfall in workers’ compensation, commercial liability and commercial auto business lines. Significant losses and reduction of statutory surplus in its insurance subsidiaries ensued, leaving the company paralyzed to run its business.

These adverse rating actions, in combination with other items that have impacted the company in 2013, may result in a significant decrease in the amount of premiums the insurance subsidiaries are able to write. The company had gross written premiums of $609.5 million and $1,040.6 million in the six months ended Jun 30, 2014 and 2013, respectively.

Tower Group International carries a Zacks Rank #4 (Sell) and can be categorized as a stock to stay away from. Better-ranked stocks worth considering include AmTrust Financial Services, Inc. (AFSI), Global Indemnity plc (GBLI) and Endurance Specialty Holdings Ltd. (ENH). All these stocks sport a Zacks Rank # 1 (Strong Buy).

Read the Full Research Report on TWGP
Read the Full Research Report on AFSI
Read the Full Research Report on ENH
Read the Full Research Report on GBLI


Zacks Investment Research

Advertisement