Tower Group To Bolster Loss Reserves, Incur Impairment Charge; Stock Tumbles

(RTTNews) - Insurance company Tower Group International, Ltd. (TWGP) said Monday that it expects to add $365 million to its loss reserves and also record a goodwill impairment charge of about $215 million in the second quarter. The company's shares tumbled almost 26 percent in extended trades following the announcement.

Further, Tower Group said that its board of directors is reviewing a range of strategic options with its lead financial advisor, JP Morgan Securities LLC.

Bermuda-based Tower Group noted that following a comprehensive review of its loss reserves as of June 30, 2013, it expects to strengthen its loss reserves by about $365 million. This includes about $185 million attributable to the company's U.S. insurance subsidiaries, primarily for accident years 2009 through 2011 in commercial insurance lines of business.

The commercial insurance lines of business include 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.

Tower Group noted that since 2010, it has been shifting its business mix, significantly de-emphasizing the lines that contributed to the reserve strengthening and modifying its book of commercial lines business.

According to Tower Group, the non-cash goodwill impairment charge of about $215 million represents all goodwill associated with its commercial as well as specialty and reinsurance segments. The company 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.

Tower Group noted that its U.S. insurance subsidiaries continue to maintain risk based capital levels in excess of those required by their respective domiciliary states. The company expects to announce its full results for the second quarter immediately after the conclusion of management's evaluation of the results.

Separately, Fitch Ratings said it has downgraded Tower Group's issuer default rating to 'B' from 'BBB' and the insurer financial strength ratings of the company's operating subsidiaries to 'BB' from 'A-'.

According to Fitch, all ratings remain on "rating watch negative" pending the company's exploration of strategic alternatives. The ratings agency added that the rating actions follows Tower Group's plan to strengthen its loss reserves and incur a goodwill impairment charge.

In a statement, Fitch Ratings said, "The company's inability to effectively place adequate controls on the loss reserving process where potential charges were first announced on Aug. 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."

Further, Fitch noted that the majority of Tower Group's reserve development came from accident years 2008 to 2011, primarily emanating from business acquired during the company's acquisition of Specialty Underwriters Alliance Inc. in 2009.

In early August, Tower Group said it has postponed the release of its financial results for the second quarter after it concluded that additional time was needed to review matters relating to the estimate of its loss reserves as well as allocation of goodwill and certain tax accounts. Following the news, shares of Tower Group stock fell almost 25 percent the following day.

Tower Group also said in mid-August that it terminated a previously announced deal to acquire American Safety Reinsurance, Ltd., the Bermuda-based reinsurance unit of American Safety Insurance Holdings, Ltd., from Fairfax Financial Holdings Ltd.

TWGP closed Monday's regular trading session at $7.41, down $0.22 or 2.88 percent on a volume of 3.36 million shares. In after-hours, the stock further declined $1.91 or 25.78 percent to $5.50.