On Friday, Tower announced a second-quarter loss of more than $0.5 billion, with previously disclosed reserve and goodwill charges contributing to the result. The company also said it is cutting roughly 140 jobs in its commercial lines underwriting unit and operations.
Net loss attributable to common shareholders for the second quarter of 2013 was $507.3 million, or $8.88 per share, compared to a net loss of $16.8 million, or 39 cents per share, in the second quarter of 2012.
Tower shareholders’ equity was $579.2 million at June 30, 2013, compared with $950.1 million at December 31, 2012.
In total, net written premiums in the quarter dropped 18 percent to $360.9 million, with the specialty and reinsurance segment experiencing the steepest drop of 27 percent. Commercial lines premiums fell 16 percent, while personal lines premiums dropped nearly 10 percent.
The overall combined ratio for second-quarter 2013 was 140.7 compared to 104.8 for second-quarter 2012. Only the personal lines segment showed an underwriting profit with the combined ratio coming in at 83.1.
As previously reported, Tower’s second-quarter results included the impact of reserve strengthening of $326.7 million. With the assistance of its independent actuarial consultants, the company performed a comprehensive review to determine the amount of the reserve boost. Tower also made restatement adjustments of $37.4 million to reserves as of Dec. 31, 2012.
Tower said the reserve strengthening arose primarily from accident years 2008-2011 within the workers compensation, commercial multi-peril liability, other liability and commercial auto liability lines of business.
The reserve strengthening was viewed by Tower as an event or circumstance that required the company to perform a detailed quantitative analysis of whether its recorded goodwill was impaired. As a result of this analysis, Tower reported a non-cash goodwill impairment charge of $214.0 million for the second-quarter 2013, representing all goodwill associated with its commercial Insurance reporting unit at Jan. 1, 2013.
As of June 30, 2013, all of Tower’s remaining goodwill of $55.5 million is associated with the personal insurance segment, Tower said in Friday’s statement.
Expense Control Initiative
On Oct. 7, 2013, Tower announced that its board of directors is reviewing a range of strategic options with its lead financial advisor, JPMorgan Securities LLC. While this process continues, Tower said it is implementing an expense control initiative to streamline its operations and focus resources on its most profitable lines of business.
A workforce reduction affecting approximately 10 percent of the total employee population (of approximately 1,400) is part of this initiative, Tower disclosed, adding that the areas most significantly impacted by the reduction in force are commercial lines underwriting as well as operations.
This workforce reduction is expected to result in annualized cost savings of roughly $21.0 million.
Status of Alternatives
Noting that the company experienced significant losses and reductions of statutory surplus in its insurance subsidiaries in the first half of 2013, Tower said “there are currently no commitments or assurances to raise additional capital, execute strategic alternatives or to liquidate certain investments at prices sufficient to repay the outstanding balance under its credit facility.”
Reiterating information provided earlier this month, Tower also said that “there can be no guarantees that the company will be able to remedy current statutory capital deficiencies in certain insurance subsidiaries or maintain adequate levels of statutory capital in the future.
“Until the completion of a definitive executable plan to remedy statutory capital deficiencies and repay the credit facility, there is substantial doubt about the company’s ability to continue as a going concern,” Tower said, repeating a disclosure first communicated on Nov. 14.
In a letter to valued business partners on Nov. 15, however, Michael H. Lee, chairman, president and chief executive officer, said that Tower was bound by accounting rules to issue the press release indicating the doubtful going-concern status even though the company believes that it will repay $70 million of borrowings under a credit facility due May 30, 2014—essentially because there are no binding commitments for sales or capital raises which Tower continues to pursue.
In the second-quarter earnings statement Friday, Lee said, “We are deeply disappointed by our second quarter operating results, including the significant reserve charge as well as the delay in our financial reporting.”
Commenting that Tower began to re-underwrite the business tied to the reserve charges during 2010, Lee reported that the type of business that contributed to the reserve strengthening comprised 39 percent of Tower’s business in 2008, but represented just 3 percent in the first half of 2013.
While the board continues to review various strategic options, “management is continuing to address the challenges presented by the current situation,” Lee said in the latest statement. “The recent downgrades in our ratings from A.M. Best and other rating agencies represent a new challenge to us. To manage this, we are continuing to underwrite our core business of homeowners and small commercial business that are less ratings-sensitive, and evaluating various options to retain certain of our ratings sensitive business by placing it with other highly rated insurance companies.”
Source: Tower Group International, Ltd.