Best Comments on CastlePoint, Hermitage Deal

August 28, 2008

A.M. Best Co. said that all of the ratings and the under review with negative implications status of CastlePoint Insurance Company (CPIC), Bermuda-based CastlePoint Reinsurance Company, Limited (CPRe) and CastlePoint Holdings, LTD (CastlePoint) “remain unchanged following the announcement that it has entered into a definitive agreement to purchase Hermitage Insurance Group, Inc. and its members” (See –

Best noted: “All of CastlePoint’s ratings were placed under review with negative implications following the August 5, 2008 announcement that it was being acquired by Tower Group, Inc. (TWGP) (headquartered in New York, NY). The under review status reflects A.M. Best’s concerns with the strategic change in CastlePoint’s original business plan, the potential re-allocation of capital post-transaction and the execution risks associated with the transaction.”

However, Best indicated that if the transaction closes as planned, it would “greatly reduce” the rating agency’s “concerns regarding CastlePoint’s corporate governance and enterprise risk management. Notably, it will eliminate the dual chief executive officer (CEO) role of Michael Lee, who currently is the CEO of TWGP and CastlePoint.”

Best said that if the transaction closes on the terms currently envisaged by CastlePoint’s management, it “expects to affirm the ratings of CPIC and CPRe. Alternatively, if the transaction does not close and CPIC and CPRe continue with their original business plans as presented to A.M. Best, the ratings for both companies are expected to still be affirmed.”

Best also noted that “since inception, CastlePoint has derived over 70 percent of its revenues from TWGP as its primary reinsurance client. In its first two years of operation, CastlePoint reported combined ratios of 87.5 percent and 88.1 percent in years 2007 and 2006, respectively.”

Best said it “will monitor the closing of this transaction as well as the acquisition of CastlePoint by TWGP and assess the impact of closing on all rated entities’ risk-adjusted capitalization and operational structure.”

Source: A.M. Best –

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