Best Affirms Tower Group’s ‘A-‘ Ratings

April 2, 2010

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of the New York-based Tower Group Companies and its pooled and reinsured members. Best also affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Bermuda-based CastlePoint Reinsurance Company, Ltd. (CPRe) and the ICR of “bbb-” of Tower Group, Inc. (TWGP). The outlook for all of the ratings is stable.

“These ratings follow TWGP’s fourth quarter earnings announcement and takes into consideration the group’s full-year 2009 results, its supportive capitalization, strong historical operating performance and ability to grow and diversify through acquisition,” Best explained.

“A key part of TWGP’s future growth strategy includes seeking out new complementary business opportunities by way of mergers and acquisitions either through renewal rights transactions or company acquisitions. In 2009, TWGP completed the acquisition of CastlePoint Holdings, Inc., HIG, Inc., and Specialty Underwriters’ Alliance, Inc. Over the past year, these acquisitions have dramatically expanded the scope and breadth of Tower’s product offering, distribution channels, and geographic footprint.”

This strategy has been successful so far, Best indicated, but the rating agency pointed out that the “execution risk associated with any future acquisitions remains a concern, as it pertains to integration difficulties, unforeseen claims emergence and an undue diversion of management’s time and resources.”

In addition Best noted that this “expansion strategy can no longer be financed by CPRe, whose capital is currently being used for internal reinsurance purposes in support of Tower. Any future acquisitions are likely to require external financing, which may not be available when needed. Additional offsetting factors include operating in a highly competitive environment characterized by significant pricing competition, the effects from adverse economic conditions and the substantial amount of business derived from the north-eastern United States.”

Although Tower has been hit by the north-eastern storms, Best said its ratings “take into consideration Tower’s solid earnings prospects for full-year 2010, as well as its pending acquisition of OneBeacon Insurance Group, Ltd.’s personal lines business, which was announced by TWGP in February [See IJ web site –]. The transaction involves the acquisition of two insurance companies, two management companies, certain renewal rights and other associated interests. This transaction is subject to customary closing conditions and regulatory approvals and is expected to close at the end of second quarter 2010.”

Best said its ratings of CPRe recognize its “strategic role within the group, its supportive risk-adjusted capitalization and profitable operating results through its reinsurance agreement with Tower. CPRe modified its business strategy following its acquisition by TWGP in 2009 by not renewing its third party reinsurance business. As a consequence, CPRe effectively becomes a captive reinsurer of Tower and a key provider of internal reinsurance capacity now and in the foreseeable future.”

TWGP maintains moderate financial leverage with a debt-to-total capital of 18.2 percent at December 31, 2009. TWGP’s $235.1 million of debt consists of trust preferred subordinated debentures with an average maturity of 25 years.

Best summarized the companies and the rating actions as follows:
The FSR of A- (Excellent) and ICRs of “a-” have been affirmed for Tower Group Companies and its following pooled and reinsured members:
— CastlePoint Insurance Company
— CastlePoint National Insurance Company
— Tower Insurance Company of New York
— Tower National Insurance Company
— Preserver Insurance Company
— Mountain Valley Indemnity Company
— North East Insurance Company
— Hermitage Insurance Company
— CastlePoint Florida Insurance Company
— Kodiak Insurance Company

Source: A.M. Best –

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