Tower Group International this week announced the sale of itsstake in Canopius Group Limited for $69.7 million to pay off a $70million bank line, and also reported additional reservecharges in some commercial lines including workers'compensation.

Fitch ratings says the announced reserve charges for the thirdquarter of between $75 million and $105 million are in the samelines — workers' comp, commercial multi-peril liability, otherliability and commercial auto liability — on which the company tookreserve charges of over $300 million in the secondquarter.

Due in large part to those reserve charges, Tower reported a second-quarter net loss of $507.3 million, announceda workforce reduction, and issued a statement casting doubt on its“ability to continue as a going concern.”

A Nov. 15 letter issued to business partners by Tower Presidentand CEO Michael H. Lee, though, stated Lee's belief that thecompany would be able to meet all of its obligations, “including toour policyholders as well as our lenders.”

Fitch says the sale of Tower's 10.7% equity stake in Canopius toBregal Capital LLP, and Tower's statement that it will use theproceeds to pay its outstanding $70 million bank line, “is afavorable development.”

Tower had acquired the 10.7% stake in Canopius in August 2012for $71.5 million. Canopius was sold yesterday toJapan's NKSJ Holdings.

Fitch adds, “[Tower's] next maturing debt obligation is $150million of 5% convertible senior notes due Sept. 15, 2014.”

The ratings agency says it will review Tower's ratings againonce the company files its third-quarter GAAP and statutorystatements.

Fitch downgraded Tower's insurer financial strength rating to BBfrom A- in October after Tower announced the reserve charges it wastaking for the second quarter.

Tower's Challenges and Options

Following Tower's previous statements about continuing as agoing concern and Lee's letter stating his optimism that thecompany will indeed meet its obligations, Fitch Director GerryGlombicki told PC360 that Tower likely feels it can emerge from itsdifficulties, as Lee states, but as it did not have immediateconcrete access to liquidity, it issued statements saying so.

He said Tower had three different classes of debt: the bank-loanfacility — which Tower has now paid off with its sale of itsCanopious stake — the $150 million of senior convertible debt duein September 2014, and $235 million in “very long-term”subordinated debt that is due beginning in 2033.

Glombicki said Tower's issue is one of liquidity. To servicedebt, he said, the largest source of funds would be dividends fromsubsidiaries, but those units can only send the money to the parentcompany if they meet certain requirements, and each state has itsown dividend laws.

That uncertainty about the immediate availability of thosefunds, Glombicki said, is what led to statements last month aboutthe company having no concrete assurances or commitments to getliquidity immediately.

He said the company's statements and Lee's letter essentially isTower saying that it believes it will be fine, and that it hasplans to address the liquidity issues, but there is nothingconcrete in place; the company would have to disclose if therewas.

Glombicki said Tower has three options it can pursue. First, hesaid the company could sell to a “white knight” who would come inand provide liquidity. This option is “nice and clean,” he said,but Tower's problems would be inherited by the new company.

Additionally, Glombicki said a “white knight”would not want to pay a lot for the company, and management may notwant to accept a low value if it feels the issues are only a“temporary blip.”

The second option would be to sell parts of the company,Glombicki said. He said Tower would get capital in this case, butthen would not get fee income from the sold parts. He also saidTower might not get full value if it can't find the right buyersright away.

Tower's sale of its Canopius stake to pay off the bank creditfacility would be consistent with this strategy.

The third option for Tower, Glombicki said, would be to getadditional partners to come in — possibly a hedge fund.

Tower did not respond to a request for comment.