New disclosures lead to downgrades for Tower

AM Best has downgraded troubled insurer Tower Group’s FSR from B (Fair) to C++ (Marginal).

The rating is under review pending the firms’ merger with ACP Re.

The rating actions take into consideration TWGP's most recent securities and exchange commission 10K filing, which included an additional $63 million of prior year reserve development, further reductions in GAAP shareholders' equity as well as ongoing declines in statutory policyholders' surplus and risk-adjusted capitalization.

The pooled and reinsured members of the Tower US Pool and Bermuda-based CastlePoint reinsurance company also had their ICR downgraded from ‘BB’ to ‘B’ by the rating agency.

Additionally, A.M. Best has downgraded the ICR to ‘cc’ from ‘b-‘of the ultimate parent, Tower Group International, headquartered in New York, NY.  All ratings are under review with developing implications.

These rating factors are in addition to the diminished shareholders' equity and reserve actions already taken by TWGP during the year.

These decisions also consider the material adverse impact these charges had on all of TWGP's entities in terms of their ability to operate as going concerns.

Furthermore, these rating downgrades reflect the group's significantly elevated financial leverage, constrained liquidity and heightened uncertainty around TWGP's ability to repay its senior debt holders in the event its pending merger with ACP Re does not occur. Continued delays in TWGP reporting its quarterly filings are another concern.

The ratings will remain under review pending the planned merger with ACP Re, which is expected to close in the summer of 2014, but has a merger termination date of November 15th, 2014.

The ‘under review with developing implications’ status acknowledges the potential benefits to be garnered from the transaction, as well as the potential downside from any additional adverse reserve development (in the event that the merger does not close) or any unforeseen event that might occur up until the close of the transaction.

Worst case scenario, the ratings could be downgraded further if certain events and/or unforeseen circumstances occur, which could cause the merger to fall through.