Best Affirms CastlePoint’s Ratings

March 29, 2007

A.M. Best Co. has affirmed the financial strength rating (FSR) of “A-” (Excellent) and the issuer credit rating (ICR) of “a-” of Bermuda’s CastlePoint Reinsurance Company Limited (CPRe). Best also assigned an FSR of “A-” (Excellent) and an ICR of “a-” to the New York-based CastlePoint Insurance Company (CPIC), and an ICR of “bbb-” to the Bermuda company CastlePoint Holdings LTD (CPHL). The outlook for all ratings is stable.

The rating actions follow the “additional financial flexibility derived through CPHL’s successful initial public offering, which raised $117 million,” said Best (See IJ web site March 26). “This capitalization is in addition to the near $265 million that CPHL raised in a private placement offering in April 2006.”

In an additional analysis best noted that the “affirmation of CPRe’s ratings reflect its strong risk-adjusted capitalization, historically profitable core book of businesses assumed from Tower Group, Inc. (Tower) (New York, NY) and its experienced management team. Additionally, through the first year of operations, CPRe operated within the parameters of the business plan presented to A.M. Best during last year’s initial rating process. In 2007, CPRe increased its third-party assumed writings on the January 1 renewal date, but CPRe still derives the majority of its business from Tower.”

However, Best indicated that “CPRe’s revenue concentration, which could lead to potential correlation risk, execution risk in meeting its five-year business plan and the risks associated with accurately pricing new business,” could constitute offsetting factors. “The company may also face increasing competition in its selected market segments from new entrants and established carriers competing for business.

“The ratings assigned to CPIC take into consideration the approximate $80 million of contributed capital during the first quarter of 2007; the expectation of CPIC maintaining adequate risk-adjusted capitalization during its first five years of operation; and the anticipated favorable operating results and access to profitable revenue streams through the planned pooling arrangements with Tower. An experienced management team has been hired to write both traditional and non-traditional program business in the United States. CPIC intends to target short-tail, low catastrophe-exposed risks. All program business will be managed by CPIC’s immediate parent company, CastlePoint Management Corp. (Delaware).

“Somewhat offsetting these favorable attributes are CPIC’s reliance on Tower for a significant amount of its revenue base in its early years of operation, the execution risk of meeting its five-year business plan and the risks associated with accurately pricing new business in light of increased market competition. The majority of CPIC’s capital was sourced by net proceeds from two 30-year trust preferred securities issued by CastlePoint Management.”

Best said it “believes that CPIC’s capital is impacted by this subordination, but these concerns are largely mitigated by the fact that the trust securities are ultimately guaranteed by CPHL, and the company plans to cover the interest expense of the trust preferred securities through non-insurance earnings and support from CPHL.”

Finally, Best noted that “CPHL, the ultimate parent of CPRe and CPIC was sponsored by Tower. As CPHL’s initial investor, Tower currently owns approximately 9.0 percent of CPHL shares on a fully-diluted basis. Financial leverage, although supportive of the current rating level, is at the high-end of the acceptable range for new company formations. However, interest coverage measures are projected to be favorable during the five-year plan.

“Tower has produced solid underwriting results as evidenced by a five-year statutory combined ratio of 88.2 percent. However, A.M. Best believes that both CPRE and CPIC’s results could be impacted by Tower’s appetite for growth and acquisitions, as well as its exposure to catastrophes due to its revenue concentration in New York City. A.M. Best will closely monitor the flow of business to CPRe and CPIC from Tower as well as CPRe’s and CPIC’s capital flows to ensure that there is no material deviations from projections used to establish these ratings.”

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