Tower Tumbles on Insurer’s Reserve Shortfall, Impairment

Tower Group International Ltd. (TWGP) fell the most since its 2004 initial public offering after the insurer determined it had to add to reserves and recorded an impairment of goodwill.

The shares plunged 41 percent to $4.39 in New York trading. The Bermuda-based company had dropped 53 percent this year before today. Volume was about 22 million shares, compared with an average of less than 800,000 over the past year.

Tower is increasing reserves for lines including workers’ compensation and commercial auto coverage by $365 million, following a review of how much it set aside to cover losses from 2009 to 2011, the insurer said yesterday in a statement after the close of regular trading. The company will also take a goodwill impairment charge of $215 million, tied to its commercial and specialty and reinsurance segments.

“The charge is at the high end of investor expectations and reduces statutory capital,” Randy Binner, an analyst at FBR Capital Markets, said today in a research note. He cut his price target to $7 from $17.

Tower said yesterday that it’s reviewing a “range of strategic options” and JPMorgan Chase & Co. (JPM) is its lead financial adviser. The “strategic options” phrase is Wall Street shorthand for deals that could include a capital injection, the divestiture of assets or the sale of an entire company.

Fitch Ratings yesterday cut Tower’s rating six steps to B from BBB, citing “a material weakening in the insurer’s financial profile.” Tower said yesterday’s announcement reflected a review of finances through June 30, and full second-quarter results will be disclosed when an evaluation is complete.

“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,” the insurer said in its statement.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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