Tower Group International has fired PricewaterhouseCoopers as its accounting firm, six months after announcing it would restate previously filed financial statements for 2011 and 2012 due to “inadvertent mistakes.” The move comes in the wake of Tower’s disclosure late last year of “substantial doubt about the company’s ability to continue as a going concern.”
BDO is Tower’s new public accounting firm as of the 2014 first quarter (ending March 31), the company disclosed in a recent regulatory filing.
Tower, which is in the midst of a proposed merger and is now fielding an unsolicited buyout offer, didn’t explain specifically why it let PwC go, although it didn’t assign any blame to the firm per se.
“During the fiscal years ended December 31, 2013 and 2012, and the subsequent period through May 9, 2014, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of PwC, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the consolidated financial statements for such years,” Tower said in its regulatory filing.
Back in November 2013, Tower disclosed that the financial restatements stem from mistakes over the classification of insurance premiums by line of business used in the loss reserving process. As well, the troubled insurer said that its management had concluded “material weaknesses” in the “internal control over financial reporting relating to the company’s loss reserving and premiums receivable reconciliation process,” and that “substantial doubt about the company’s ability to continue as a going concern.”
Tower, in its filing announcing the change in accountants, said it has authorized PwC to respond to any inquiries BDO makes in the matter.
On May 9, A.M. Best downgraded Tower’s financial strength ratings for the third time in recent months, citing another in a string of prior-year reserve charges—this one for $63 million—and concerns over its financial liquidity and the risk that it is overextended financially.
A few days later, on May 13, Fitch Ratings announced a downgrade as well, cutting the the insurer financial strength (IFS) ratings of Tower’s operating subsidiaries to ‘CCC’ from ‘B,’ and subsequently withdrawing all the ratings including the ‘CC’ issuer default rating (IDR) of the parent, due to insufficient information.
At the time of withdrawal, all ratings were on Rating Watch Evolving due to the planned merger with ACP Re, Ltd., Fitch noted.
In January, Tower Group announced a merger agreement with ACP Re, initially valued at $172 million, but both parties have amended their deal, in part, to reduce the termination fee Tower would pay if the merger agreement falls apart.
Like Best, Fitch noted the additional reserve charge of $63 million disclosed in the company’s 2013 GAAP financials. Coming on top of the previously announced charges of $470 million, Fitch said the additional strengthening was outside of expectations for the previous rating.
In addition, the latest Tower GAAP filing reported that six U.S. based operating companies had NAIC risk based capital (RBC) below the Company Action Level established by regulators, and two Bermuda based operations capital solvency ratios below minimum thresholds set by Bermuda regulators as of year-end 2013, Fitch said. A cut-through reinsurance transaction effective Jan. 1, 2014 materially improved the capital position of many of these companies.
Fitch noted that Tower has a $150 million debt maturity on Sept. 15, 2014, which the rating agency does not believe that Tower has the ability to meet using its own financial resources. While a merger with ACP Re may provide Tower the resources to meet the maturity, Fitch said it does not rate ACP Re and therefore cannot form an opinion on this.
Another element of the ongoing Tower Group saga kicked in just this week, with Eastern European insurer Euroins. Insurance Group (EIG) making an unsolicited $3.75 per share bid to snatch up Tower and “recapitalize it to industry norms.” Tower has rejected that offer.
Hollmer is editor for www.CarrierManagement.com, where this article first appeared.
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