Downgrade of Tower Group to B++ Likely to Have Further Negative Effects: A.M. Best

A.M. Best Co. announced Tuesday that the rating agency has downgraded the financial strength rating of members of Tower Group to B++ (Good) from A- (Excellent), one day after the company itself announced a $365 million loss reserve charge.

Best also cut issuer credit ratings (ICR) for the same members of the Tower US Pool (listed below)—to “bbb” from “a-“—taking similar actions on the FSR and ICR of CastlePoint Reinsurance Company, Ltd.

Additionally, A.M. Best has assigned an ICR of “bb” to the ultimate parent, Tower Group International, Ltd.

All companies are under review with negative implications, the rating agency said in its announcement, noting that the status, in part, reflects the potential negative impacts of the downgrade itself—competitive challenges and possible actions by reinsurers and lenders.

Explaining the downgrade action, Best notes that the reserve charge indicated by Tower on Monday is well in excess of a $60-$110 million range initially indicated by the insurer in an August 8 press release. In addition, Tower is taking a goodwill impairment charge of $215 million as a result of the reserve actions already taken.

In addition to considering the magnitude of the charges and their “material adverse impact on Tower’s risk-adjusted capitalization,” Best said the rating actions also consider “the reduced financial flexibility” given the delay in Tower’s earnings announcement which has fueled a “decline in shareholder confidence and the corresponding decline in share price.”

The Best actions come despite Tower’s efforts to enhance financial flexibility by entering into some reinsurance deals late last month, which the rating agency acknowledged in its announcement. “Considering the broad disparity between Tower’s reserve guidance in August and the actual reserve charge taken, A.M. Best believes Tower will be challenged to restore shareholder confidence, both in the near and long term,” the rating announcement says.

“Once well-regarded for its mergers and acquisitions strategy, equally important is the consequential impact this reserve charge has on Tower’s business model, business profile and earnings prospects going forward.”

On the plus side, Best notes that Tower actually now has an adequate level of risk-adjusted capitalization and that the group has been reunderwriting its book of business since 2011.

“Management is confident in its earnings prospects and believes future underwriting results (excluding prior years) should be more reflective of Tower’s core business, which continues to outperform P/C industry norms,” the rating announcement says.

Still Best is assigning negative rating implications, pointing to the potential for more negative reserve news and fallout from the ratings downgrade itself. In the words of the Best statement, “Despite management’s sentiment, the negative rating implications assigned to Tower reflect the potential for further adverse reserve development, increased competitive challenges and due to the ratings downgrade, potential actions taken by third-party reinsurers and lenders.”

Best said there is a “reasonable likelihood” that the ratings or outlook could be downgraded or revised going forward.

Action Summary

The FSR has been downgraded to B++ (Good) from A- (Excellent) and the ICRs to “bbb+” from “a-” for the following pooled and reinsured members of Tower US Pool: