Tower Group International says there is “substantial doubt about [its] ability to continue as a going concern” after reporting a $507.3 million 2013 second-quarter net loss due in large part to over $300 million in reserve strengthening reported last month.

The Hamilton, Bermuda-based insurer also says it will cut its workforce by 10 percent as part of an initiative to “streamline its operations and focus resources on its most profitable lines of business.”

Tower Group announced it was taking a $214 million goodwill impairment charge in October when the company reported that it needed to strengthen reserves by about $326.7 million primarily for accident years 2008-2011.

The insurer says the reserve strengthening relates mostly to the workers' compensation, commercial multi-peril liability, other liability and commercial auto liability lines of business.

Tower Group says it “experienced significant losses and reductions of statutory surplus in its insurance subsidiaries in the first half of 2013 and there are currently no commitments or assurances to raise additional capital, execute strategic alternatives or to liquidate certain investments at prices sufficient to repay the outstanding balance under its credit facility.”

The company adds it cannot guarantee it will “be able to remedy current statutory capital deficiencies in certain insurance subsidiaries or maintain adequate levels of statutory capital in the future.”

Michael H. Lee, president and CEO, says in a statement, “We are deeply disappointed by our second quarter operating results, including the significant reserve charge as well as the delay in our financial reporting.”

In a Nov. 15 letter to business partners, Lee stated his belief that the company will be able to meet all of its obligations, “including to our policyholders as well as our lenders.”

He said, “Because applicable accounting rules require that there be a binding commitment for such sales of assets and raising of capital to meet the required liquidity test, we were required to include in the release the statement that 'there is substantial doubt about the Company's ability to continue as a going concern.'

Lee added in the letter, “It is our belief that but for the current absence of a binding commitment with respect to potential asset sales or capital raising, the proceeds of which would be used to repay the debt obligations, we would not be subject to the 'going concern' qualification.”

In his statement regarding the company's second-quarter results, Lee maintained that current business is “performing well” thanks to a re-underwriting of certain types of business in addition to rate increases in other segments.

Last month, A.M. Best downgraded Tower Group to “B++” from “A-” after the reserve shortfall came to light.

Lee says, “The recent downgrades in our ratings from A.M. Best and other rating agencies represent a new challenge to us. To manage this, we are continuing to underwrite our core business of homeowners and small commercial business that are less ratings sensitive, and evaluating various options to retain certain of our ratings sensitive business by placing it with other highly rated insurance companies.”

The workforce reduction will affect about 140 of Tower Group's 1,400 employees, and is expected to result in annualized cost savings of approximately $21 million.

Special Reports /

Tower Group Reserve Charges Cast Doubt on Future, Lead to Job Cuts

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