Tower Group International, Ltd. announced reserve and goodwill charges representing over 60 percent of year-end 2012 shareholder’s equity Monday, prompting Fitch Ratings to cut the financial strength ratings of the operating units from “A-” to “BB.”

Announcing a $365 million boost to loss reserves as of June 30, 2013 and a non-cash goodwill impairment charge of roughly $215 million for the second quarter of 2013, Tower also said that the company’s board of directors is reviewing a range of strategic options with its lead financial advisor, JP Morgan Securities LLC.

The reserve charge, determined with the assistance of its independent actuarial consultants, is primarily for accident years 2009 through 2011 in commercial insurance lines of business, including workers compensation, commercial multi-peril, commercial auto and other liability lines, Tower said in a statement. The statement also noted that approximately $185 million of the $365 million figure is attributable to its U.S. insurance subsidiaries.

Based on financial information available on Tower’s website, the total amount of reserve strengthening is nearly 20 percent of reserves held at Dec. 31, 2012.

The magnitude of the overall reserve strengthening charge is higher than a range of figures—$60 million to $110 million pre-tax—that Tower said it anticipated when it announced the independent actuarial review and a delay of its second-quarter 10-Q filing with the Securities and Exchange Commission back in August. The August announcements caused Fitch to place Tower’s ratings on Rating Watch, and also caused rating agency A.M. Best to place its “A-” rating of the financial strength of Tower’s operating subsidiaries under review with negative implications.

In Monday’s statement, Tower said the $365 million figure reflects adverse loss emergence, coupled with changes in judgment.

During 2012, Tower also took after-tax charges totaling $50.9 million to increase prior-year reserves, information on Tower’s website reveals.

“Since 2010, Tower 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,” Tower said in Monday’s announcement.

Separately, in its ratings announcement, Fitch noted Tower’s “inability to effectively place adequate controls on the loss reserving process,” and also the fact that Tower’s announcement of potential charges on Aug. 7 was followed by other events that “have led to a material weakening in the insurer’s financial profile.” Fitch pointed to a drop in the company’s share price and the lack of new capital raising, adding that the rating agency is concerned that the company’s “competitive position has been materially damaged, negatively impacting the company’s financial flexibility and ability to write new business.”

In addition to cutting the financial strength ratings, Fitch also downgraded Tower Group International, Ltd.’s Issuer Default Rating (IDR) to “B” from “BBB.”

The ratings remain on Rating Watch Negative pending the company’s exploration of strategic alternatives, Fitch said.

Explaining the multi-notch downgrades, Fitch said the magnitude of the second-quarter charges was large enough to cause several key ratios to fall well outside of previously established ratings downgrade triggers, adding that the combined charges equate to approximately 63 percent of year-end 2012 shareholders’ equity.

Fitch said the majority of the reserve development relates to business acquired during the Specialty Underwriters Alliance, Inc. (SUA) acquisition, which Tower acquired in 2009.

Specialty Underwriters wrote niche specialty business including tow trucks, professional employer organizations, public entities, and contractors, the company said at the time of the acquisition.

Tower has been involved in a string of deals in recent years, including the latest—its merger with Canopius Holdings Bermuda Limited, which closed in March—as well as prior renewal rights deals (with Navigators in 2011 and AequiCap Program Administrators, for example in 2009 and 2010) and the acquisition of OneBeacon’s Personal Lines Business in 2010.

Fitch said the Rating Watch Negative reflects the potential that ratings could be lowered further depending upon the company’s ability to seek strategic alternatives and future reserve development.

In its announcement, Tower said the goodwill impairment charge of approximately $215 million for the second quarter of 2013, represents all goodwill associated with its commercial and specialty and reinsurance segments, but added that Tower 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.

Late last month, Tower announced it had entered into reinsurance deals with three reinsurers designed to enhance Tower’s financial flexibility.

Sources: Tower Group International, Ltd., Fitch Ratings