A.M. Best Co. announced that it has assigned a financial strength rating (FSR) of “A-” (Excellent) and an issuer credit rating of “a-” to Bermuda-based CastlePoint Reinsurance Company Ltd. with a stable outlook.
“The ratings reflect CastlePoint Re’s strong risk-adjusted capitalization, historically profitable core book of businesses assumed from its sponsoring company, Tower Group Companies (Tower), and experienced management team,” said Best. “Somewhat offsetting these strengths are the group’s revenue concentration, execution risk of meeting its five-year business plan and the risks associated with accurately pricing new business.”
Best said the stable outlook reflects CastlePoint Re’s projected capitalization, which is consistent with Best’s treatment of “start-up” entities, “and the expectation that management will operate in the manner that is consistent with the business plan presented to A.M. Best.”
Best noted: “CastlePoint Re is a wholly-owned subsidiary of CastlePoint Holdings, Ltd., a newly-formed Bermuda-based holding company that was recently capitalized with $265 million of equity raised in a private offering. CastlePoint Re will operate as a Bermudan-based reinsurance carrier providing quota share reinsurance coverages to the insurance operations of Tower.
“The company also plans on offering third party quota share reinsurance and expects to assume business related to specialty programs. Typical targets for third party reinsurance for CastlePoint Re are expected to be insurance companies with surplus positions below $100 million that predominantly write short-tailed, low severity commercial and personal lines business. Management has indicated that program business is expected to demonstrate the same characteristics with regard to underlying risks of prospective reinsurance partners. CastlePoint Re also expects to write excess business but at nominal levels as compared to quota share.”
Best also indicated that it has “stress tested CastlePoint Re’s pro forma capitalization under various scenarios, and the company’s capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) analysis remains within the superior range over a five-year period. CastlePoint Re’s initial results are expected to benefit from deriving the majority of its business in early years from a quota share agreement with Tower.
“Tower has produced solid underwriting results as evidenced by its five-year average statutory combined ratio of 87.6 percent, which vastly outperforms industry averages.” However, Best also said it “believes that CastlePoint Re’s results could be impacted by Tower’s growth and exposure to catastrophes due to its business concentration in New York City. Additionally, through an expense sharing agreement, CastlePoint Management Holdings, a wholly-owned subsidiary of CastlePoint Holdings, will utilize Tower’s systems to write specialty program business.”
Best said it would “closely monitor the flow of business between CastlePoint Re and its sponsor to ensure there are no material deviations from projections utilized to establish this rating.”
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