Best Revises Tower Group and Subs Outlook to Positive; Affirms Ratings

June 3, 2011

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of the Tower US Pool and its pooled and reinsured members.

Best also revised the outlook to positive from stable and affirmed the ICR of “bbb-” of the parent company, Tower Group, Inc. (TWGP) , as well as the debt rating of “bbb-” on $139.8 million 5.00 percent senior convertible notes due 2014.

In addition, Best affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Bermuda-based CastlePoint Reinsurance Company, Ltd. (CPRe).

The outlook for these ratings is stable. All companies are headquartered in New York, NY, unless otherwise specified.

Tower’s revised outlook reflects its “consistently favorable underwriting results, supportive capitalization and successful execution of its strategy to grow and diversify via acquisitions,” Best explained. The ratings also take into consideration Tower’s “favorable earnings prospects for 2011, which will benefit from full-year results from its July 2010 acquisition of OneBeacon Insurance Group, Ltd.’s personal lines business.”

Best also noted that a “key part of TWGP’s growth strategy includes seeking out new complementary business opportunities by way of mergers and acquisitions either through renewal rights transactions or company acquisitions. In 2011, TWGP acquired the renewal rights to the middle market commercial package and commercial automobile business underwritten through the NAV PAC division of Navigators Group, Inc.

“In 2010, TWGP completed the acquisition of the personal lines division of OneBeacon and the renewal rights to the commercial automobile business of AequiCap Program Administrators Inc.

“In 2009, TWGP completed the acquisition of CastlePoint Holdings, LTD., HIG, Inc., Specialty Underwriters’ Alliance, Inc. and the renewal rights to the workers’ compensation business of AequiCap.”

Best said the recent acquisitions have “dramatically expanded the scope and breadth of Tower’s product offering, distribution channels and geographic footprint. Any future acquisitions are likely to require external financing, which may increase financial leverage at TWGP. It is expected that TWGP will maintain financial leverage and coverage ratios that remain within Best’s guidelines for its ratings.”

Best’s analysis, however expressed some concerns about the “execution risk associated with any future acquisitions, … as it pertains to integration costs, unforeseen claims emergence and an undue diversion of management’s time and resources. Additional offsetting rating 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 northeastern United States.”

Best added that the “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. Since its acquisition by TWGP in 2009, CPRe has stopped writing unaffiliated new business and now focuses exclusively on providing quota share reinsurance to Tower.

“As of March 31, 2011, TWGP maintains moderate financial leverage with a debt-to-total capital of 26.9 percent and debt-to-tangible capital of 36.0 percent, including capital in the reciprocal exchanges. TWGP’s $391.9 million of debt consists of $235.1 million trust preferred subordinated debentures, $139.8 million of senior convertible debt and $17.0 million outstanding under its bank credit facility.”

Best summarized its rating actions as follows:
The FSR of ‘A-‘ (Excellent) and ICR of “a-” have been affirmed for Tower US Pool 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
— York Insurance Company of Maine
— Massachusetts Homeland Insurance Company

Source: A.M. Best

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