Tower Group International Ltd. announced Nov. 14 that it is restating previously filed audited annual consolidated financial statements for 2011 and 2012, which are contained in Tower’s March 31, 2013 10-K annual report for 2012.
Such financial statements “should no longer be relied upon,” the company said, attributing the revision to “inadvertent mistakes” in the classification of insurance premiums by line of business used in the loss reserving process.
Although the correction of these errors does not increase the previously announced charge of roughly $365 million, Tower’s management “has concluded…that material weaknesses exist in internal control over financial reporting related to the company’s loss reserving and premiums receivable reconciliation processes.”
Tower also said that “there is substantial doubt about the company’s ability to continue as a going concern.”
In addition to the 2011 and 2012 statements, Tower will also revise its previously filed audited annual consolidated financial statements for the year ended Dec. 31, 2010 contained in the 2012 annual report, the company announced.
Giving some background about the restatements, Tower said: “Following management review of the matter with the audit committee of Tower’s board of directors, and upon management’s recommendation, the audit committee reached the conclusion on Nov. 7, 2013 that previously issued financial statements of the company covering one or more periods for which the company is required to provide financial statements need to be revised or restated and/or may no longer be relied upon because of the inadvertent mistakes….”
The statement said that the audit committee authorized the company’s chief financial officer and principal accounting officer to consult with an independent accounting firm to determine which specific financial statements should be revised or restated. The officers reached their conclusions on Nov. 12 and advised the board of their determination.
On Oct. 7, the company previously determined and announced that its June 30, 2013 loss reserves were strengthened by approximately $365 million. During a subsequent review of its reserve analyses for prior years, Tower determined that inadvertent mistakes in classification of insurance premiums by line of business used in the loss reserving process resulted in:
- An increase in the loss and loss adjustment expenses by $9.6 million, $21.7 million and $5.7 million for the years ended Dec. 31, 2012, 2011 and 2010, respectively.
- A decrease in the reinsurance recoverables on unpaid losses asset balance by $37.0 million, $27.4 million and $5.7 million as of Dec. 31, 2012, 2011 and 2010, respectively.
In Thursday’s statement, Tower said it was not aware of these and other inadvertent mistakes when it announced the Oct. 7, 2013 reserve charge and also stated that “the correction of these errors does not increase the previously announced charge of approximately $365 million.”
Referring to management’s conclusion that internal controls over the loss reserving and premiums receivable reconciliation processes had “material weaknesses,” Tower said it has “now concluded its internal control over financial reporting was not effective as of Dec. 31, 2012 and disclosure controls procedures were not effective as of Dec. 31, 2012.”
“A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis,” the statement explains.
Tower expects to file restated 2012 and second-quarter 2013 statements “as soon as practicable,” and to report third-quarter results soon after.
Thursday’s statement included a preliminary summary balance sheet as of June 30, 2013, showing shareholders’ equity of $580 million as of June 30.
Commenting on the status of the board’s review of strategic alternatives, however, the company issued the following statement:
“On October 7, 2013, Tower announced that its board of directors is reviewing a range of strategic options with its lead financial advisor, JP Morgan Securities LLC.
The company experienced significant losses and reductions of statutory surplus in its insurance subsidiaries in 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. Until the completion of a definitive executable plan to repay the credit facility, there is substantial doubt about the company’s ability to continue as a going concern.”
This article originally appeared on CarrierManagement.com
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