Best Downgrades Tower Group International and Subs Ratings

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A.M. Best has downgraded the financial strength ratings (FSR) to ‘C++’ (Marginal) from ‘B’ (Fair) and issuer credit ratings (ICR) to “b” from “bb” of the pooled and reinsured members of the Tower US Pool and Bermuda-based CastlePoint Reinsurance Company, Ltd.

Best also downgraded the ICR to “cc” from “b-” and the debt rating on the $150 million par 5.00 percent senior unsecured convertible notes due September of 2014, for the intermediate holding company, Tower Group, Inc., as well as the ICR to “cc” from “b-” of the ultimate parent, Tower Group International, Ltd. (TWGP).

Best has also placed all of the ratings are under review with developing implications. All companies are headquartered in New York, NY, unless otherwise specified.

“The rating actions take into consideration TWGP’s most recent Securities and Exchange Commission 10K filing, which included an additional $63 million of prior year reserve development, further reductions in GAAP shareholders’ equity as well as ongoing declines in statutory policyholders’ surplus and risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR),” the report explained. “These rating factors are in addition to the diminished shareholders’ equity and reserve actions already taken by TWGP during the year.”

In addition Best noted that the “rating actions also consider the material adverse impact these charges had on all of TWGP’s entities in terms of their ability to operate as going concerns. These rating downgrades reflect the group’s significantly elevated financial leverage, constrained liquidity and heightened uncertainty around TWGP’s ability to repay its senior debt holders in the event its pending merger with ACP Re Ltd. (ACP Re) (Bermuda) does not occur. Continued delays in TWGP reporting its quarterly filings are another concern.”

Best said the “ratings will remain under review pending the planned merger with ACP Re, which is expected to close in the summer of 2014, but has a merger termination date of November 15, 2014.

“The under review with developing implications status acknowledges the potential benefits to be garnered from the transaction, as well as the potential downside from any additional adverse reserve development (in the event that the merger does not close) or any unforeseen event that might occur up until the close of the transaction. Additionally, the ratings could be downgraded further if certain events and/or unforeseen circumstances occur, which could cause the merger to fall through.”

Best summarized the subsidiary companies affected by its ratings actions as follows:

The FSR of ‘B’ (Fair) has been downgraded to ‘C++’ (Marginal) and the ICRs have been downgraded to “b” from “bb” for the following pooled and reinsured members of Tower US Pool: