OneBeacon Selling Personal Lines Business to Tower Group

February 3, 2010

Massachusetts-based OneBeacon Insurance Group has agreed to sell its personal lines business to Tower Group Inc. in a deal that comprises two affiliate insurers and two reciprocal insurance exchanges in New York and New Jersey.

The agreement calls for New York-based Tower to pay $78 million to acquire Massachusetts Homeland Insurance Co. and York Insurance Co. of Maine as well as New Jersey Skylands Management and Adirondack AIF, the attorneys-in-fact for the reciprocal insurers Skylands Insurance Co. and Adirondack Insurance Exchange.

The transaction is valued at around $180 million and is expected to close at the end of the second quarter.

Net written premium for the affected books was approximately $420 million in 2009.

Tower said the combination will create a separate and distinct business segment with annualized premiums written and managed of approximately $700 million. Tower expects to hire the majority of OneBeacon’s personal lines employees and plans to use OneBeacon’s products and systems.

OneBeacon CEO Mike Miller said the transaction “will complete OneBeacon’s transformation into a specialty company. We have had great success with our specialty teams since 2001 and we are excited about our future profitability and growth in those markets.”

OneBeacon will retain all of its specialty lines including the collector car and boat business produced through Hagerty Insurance and the personal lines assigned risk business written through AutoOne.

Miller said the sale will “free up significant capital” and reduce the insurer’s catastrophe exposure.

Michael Lee, president and CEO of Tower, said the transaction will strengthen its personal lines offerings and generate additional fee income from the management of the reciprocals.

The deal expands Tower’s suite of personal lines insurance products to include private passenger automobile, homeowners, umbrella, and the signature package product, OneChoice CustomPac, which provides customers with one policy for all of their homeowners, auto and umbrella needs.

Lee said Tower gains access to more than 900 retail agencies in the Northeast and the potential for cross-selling of non-personal lines products to new agents through Tower’s existing companies. It also potentially expands Tower’s personal lines product offerings to territories outside the Northeast and into market segments such as non-standard auto and alternative distribution sources.

OneBeacon recently sold the renewal rights on about $400 million in small and middle market commercial business to The Hanover Insurance Group Inc.

Within the past year OneBeacon has boosted its specialty insurance portfolio by targeting design professionals, health care institutions, nonprofits and realtors among other segments. In 2008, it acquired a California managing agency specializing in the entertainment, sports and leisure industries.

Tower has also been furthering its reach into specialty insurance markets. Last June, it acquired an Illinois specialty writer and in 2008 it bought Bermuda-based Hermitage Insurance.

Standard & Poor’s Ratings Services placed its ‘BBB’ counterparty credit ratings on OneBeacon and its Bermuda-based holding company White Mountains Insurance Group Ltd. on CreditWatch with negative implications.

“We believe the intended sale of OneBeacon’s personal lines operations, which had $420 million in net premiums written in 2009, along with OneBeacon’s Dec. 3, announcement of the renewal rights transaction of its non-specialty commercial lines business to Hanover Insurance Group Inc., represents a significant change in OneBeacon’s business profile,” said Standard & Poor’s credit analyst Laline Carvalho.

Carvalho said the two sales will result in OneBeacon’s net premiums written dropping by about 50 percent as it pursues its strategy of becoming a specialty-focused company. “In our view, this change in OneBeacon’s business profile is significant and represents a meaningful reduction in OneBeacon’s diversification by product lines and by sources of overall operating profitability compared to prior years,” she said.

A.M. Best Co., commenting on the Tower deal, said the financial strength ratings of ‘A-‘ (Excellent) and issuer credit ratings of “a-” for Tower Group Cos., its pooled members and Bermuda-based CastlePoint Reinsurance Co. Ltd. are unchanged.

Best also indicated that the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Tower’s recently acquired CastlePoint National Insurance Co. (formerly SUA Insurance Co.) of Chicago, “remain under review with positive implications, pending regulatory approval of its inclusion into the Tower Group Companies pool.”

Best also said the credit rating of “bbb-” the holding company Tower Group Inc. is also unchanged.

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