Fitch Drops Tower Group Rating Another Notch to ‘B’ as RBC Ratios Fall

January 3, 2014

Fitch Ratings announced Thursday that it downgraded the insurer financial strength ratings of the operating subsidiaries of Tower Group International, Ltd.’s to “B” from “BB.”

In October 2013, following a round of loss reserve and goodwill charges impacting second-quarter 2013 earnings, Fitch initially cut the financial strength ratings of the operating units from “A-” to “BB.”

“Tower’s inability to timely produce accurate financial statements has led Fitch to consider its level of corporate governance to be ineffective,” Fitch said, in a Thursday’s announcement, explaining that the latest downgrade reacts to Fitch’s review of Tower’s third quarter 2013 statutory financial statement filings and recent GAAP disclosures revealing an additional $75-105 million in third-quarter 2013 GAAP adverse reserve development on top of the $364 million previously taken in the first half of the year.

Fitch said that most of the adverse reserve development originates from Tower’s growth in program business via acquisitions during the soft market in long-tailed lines of business coupled with inadequate internal controls relating to the loss reserving process.

Fitch also noted that the most recent adverse reserve charges raise rating agency concerns that some of the U.S. operating subsidiaries have Risk-Based Capital (RBC) ratios below the Company Action Level. Fitch reports that in Bermuda, Tower Reinsurance Limited’s (TRL) solvency ratio is below that of the minimums established by the Bermuda Monetary Authority but that the company is working with the BMA to transfer certain assets of another Bermuda subsidiary to cure the TRL deficiencies.

“Since Fitch’s last review in October 2013, the [rating] agency believes Tower’s competitive position has been substantially reduced and has material concerns about Tower’s ability to maintain current business,” the Fitch statement said.

The rating announcement notes that while Tower has engaged an investment bank to explore strategic alternatives, no alternatives have been publicly announced to date.

Fitch also noted that Tower was able to liquidate a holding company investment in December 2013, using the proceeds to pay off the $70 million in bank debt that would have matured in early 2014. But while Tower was able to eliminate this near-term liquidity concern, Tower management has not publicly stated any plans to adequately address the $150 million in senior unsecured debt that comes due in September 2014, Fitch said, adding that current holding company resources are insufficient to completely satisfy the obligation.

Fitch said that while a buyout from a “materially stronger parent” or a successful refinancing of the upcoming debt maturity could prompt an upgrade, downward rating triggers include further adverse reserve development, the inability to maintain U.S.-based operating company RBC ratios above the Company Action Level, and the inability to meet financial obligations of the holding company.

Source: Fitch Ratings

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