Tower Group Pens Reinsurance, Pooling, Expense Pact with CastlePoint

April 5, 2006

Tower Group, Inc. in New York has entered into a strategic relationship with CastlePoint Holdings, Ltd.,a Bermuda-based holding company that it has sponsored.

The move gives Tower reinsurance backing, additional underwriting capacity and flexibility to take advantage of opportunities in acquisitions and new markets, according to Michael Lee, chairman, chief executive officer and president of CastlePoint Holdings, Ltd. and Tower Group, Inc.

Lee will serve as chairman, chief executive officer and president of CastlePoint Holdings, Ltd. and Tower Group, Inc. In addition, Joel S. Weiner, senior vice president for Strategic Planning; Robert Hedges, vice president for Home Office Underwriting and Joseph P. Beitz, managing vice president of Programs have resigned from Tower to assume positions at CastlePoint. In addition, Greg T. Doyle has joined CastlePoint’s board and has resigned from Tower’s board.

CastlePoint has been capitalized with $265 million and is now able to provide reinsurance, insurance products and insurance company services to the property and casualty insurance industry.

In connection with its strategic relationship with CastlePoint, Tower Group, Inc. said it intends to enter into a multi-year quota share reinsurance agreement with CastlePoint Reinsurance Company, Ltd., a wholly owned subsidiary of the holding company, and multi-year insurance risk sharing or pooling agreements with one or more insurance companies that CastlePoint or one of its subsidiaries plans to acquire in the future.

Until one or more such companies are acquired, CastlePoint Management Corp., a wholly owned subsidiary of CastlePoint, plans to produce certain business utilizing Tower’s insurance company subsidiaries.

“Our strategic relationship with CastlePoint represents an important milestone in our history that significantly strengthens our business model. It allows us to utilize reinsurance and other insurance companies to provide additional underwriting capacity in addition to our own capital to support our premium growth as well as generate commission and fee income to augment our return on equity,” Lee said.

“This relationship will allow us to take advantage of growth opportunities from various sources, including from territorial expansion and potential acquisitions, while giving us the flexibility to effectively manage our capital to maximize shareholder value. This strategic initiative is especially important given the uncertainty in the reinsurance market created by the regulatory scrutiny concerning the use of finite reinsurance and the reduced availability of traditional quota share reinsurance and insurance risk sharing capacity.”

The deal also allows Tower to enter additional specialty lines. Lee added that “our relationship with CastlePoint also allows us to maintain focus on the brokerage business that we have historically underwritten utilizing our underwriting staff through our retail and wholesale agents as well as program business for limited classes of business that we began writing in 2005. We will also be able to participate in specialty program business for classes of business that we have not historically written through our relationship with CastlePoint. In addition, through our expense sharing and servicing agreement with CastlePoint, we will be able to realize greater economies of scale. Finally, our investment will enable us to continue to participate in the performance of the business we cede to or pool with CastlePoint.”

Tower has agreed to enter into the following arrangements with the reinsurance and insurance subsidiaries of CastlePoint to strengthen Tower’s business model:

— Reinsurance agreements with CastlePoint Re. Tower is currently experiencing significant growth opportunities from the brokerage business that it has historically written and program business that it has began writing in 2005. To effectively manage this growth opportunity efficiently, Tower and CastlePoint have agreed to establish three business pools as previously announced: (i) the brokerage business pool comprised of the business historically written utilizing Tower’s own underwriting staff through retail and wholesale agents; (ii) the traditional program business pool comprised of limited classes of business that Tower has historically written; and (iii) the specialty program business pool which represents all industry classes of business other than traditional program business that Tower elects to manage. Tower will initially cede 30% of the premiums and losses on both brokerage business and traditional program business to CastlePoint Re pursuant to three-year quota share reinsurance agreements. Additionally, CastlePoint Re will reinsure up to 85% of the business written by Tower’s insurance companies for CastlePoint Management Corp., including specialty program business. Finally, CastlePoint Re will reinsure up to 50% of Tower’s first multi-line layer, first property excess layer and first workers’ compensation excess layer under Tower’s 2006 reinsurance program.

— Pooling Agreements with CastlePoint Holdings, Ltd.’s insurance company subsidiaries. Tower will act as a pool manager for the brokerage and traditional program business pools while CastlePoint will act as a pool manager for the specialty program business pool. Tower and CastlePoint will participate in these pools in different percentages, providing additional capacity for Tower to focus on its brokerage business and traditional program business while still participating in a portion of the specialty program business. Until such time as CastlePoint or CastlePoint Re acquires one or more insurance company subsidiaries, CastlePoint Management Corp. plans to produce specialty program business or enter into pooling agreements with other insurance companies utilizing Tower’s insurance company subsidiaries. A substantial percentage of this business will then be reinsured by CastlePoint Re.

— Expense Sharing and Servicing Agreement. CastlePoint Management Corp. will enter into a service and expense sharing agreement with Tower’s insurance companies which will provide various insurance company services offered by Tower, such as claims, policy administration, technology, underwriting and risk management services. This agreement will enable Tower to leverage its infrastructure and will generate additional fee income for Tower from third party clients.

— Investment for Tower. On February 6, 2006, Tower invested $15 million in CastlePoint to become its sole shareholder. Tower’s ownership is 8.6% in light of the capitalization of CastlePoint. In addition, Tower has been issued a warrant to purchase an additional 3.7% of CastlePoint’s common shares.

Source: Tower Group

Topics Carriers Agencies Excess Surplus Underwriting Reinsurance

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