Best Affirms Tower U.S. Pool and Affiliated Companies Ratings

June 18, 2012

A.M. Best Co. has affirmed the financial strength ratings (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of the pooled and reinsured members of the Tower US Pool. Best also affirmed the ICR of “bbb-” and debt rating of “bbb-” on $142.5 million 5.00 percent senior convertible notes due 2014 of the parent company, Tower Group, Inc. (TWGP).

The outlook for all of the above ratings is positive.

In addition Best affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Bermuda-based CastlePoint Reinsurance Company, Ltd. (CPRe) with stable outlooks, and has withdrawn the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Mountain Valley Indemnity Company (MVIC). All of the companies are headquartered in New York, NY, unless otherwise specified.

The rating affirmations for Tower’s members “reflects their historically strong underwriting results, consistently favorable operating performance, supportive capitalization and diversified business platform,” Best explained.

Best noted that “Tower has been able to expand the scope and breadth of its product offerings, distribution channels and geographic footprint through the successful execution of its mergers and acquisitions strategy, which has included both company acquisitions and renewal rights transactions. While Tower will continue to seek out insurance company acquisitions that fulfill specific corporate objectives, a key part of Tower’s future growth strategy includes the recent launch of an organic growth initiative.

As a partial offsetting factor Best cited “Tower’s execution risk associated with any future endeavors, including the recently announced investment in Canopius. This investment, which is subject to the completion of Canopius’ acquisition of Omega, would accelerate Tower’s involvement with the Lloyd’s market and also provide TWGP the option of combining with the Bermuda reinsurance business currently operated by Canopius.

Additional offsetting rating factors include “operating in a highly competitive environment characterized by significant price competition, the effects from adverse economic conditions and the substantial amount of business derived from the northeastern United States.”

Best said that “as of March 31, 2012, TWGP maintains moderate financial leverage with debt-to-capital of 29.1 percent and debt-to-tangible capital of 38.7 percent, including capital in the reciprocal exchanges. While future acquisitions 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.

“The ratings of CPRe recognize its strategic role within the group as a captive reinsurer, its supportive risk-adjusted capitalization and profitable operating results through its reinsurance agreement with Tower.

“The withdrawal of MVIC’s ratings acknowledges its withdrawal from the Tower US Pool and its recent sale to an unrated affiliate, Adirondack Insurance Exchange.”

In conclusion Best indicated that “key drivers that could lead to positive rating movement include Tower’s ability to meet its financial projections, post strong operating results and maintain solid risk-adjusted capital. Key drivers that could lead to downward rating movement include a deterioration in the organization’s underwriting and/or operating performance, inadequacy of reserves and a decline in risk-adjusted capital.

Best summarized the companies, and the ratings affected by its actions as follows:
The FSR of A- (Excellent) and ICRs of “a-” have been affirmed for the following pooled and reinsured members of Tower US Pool:
CastlePoint Insurance Company
CastlePoint National Insurance Company
Tower Insurance Company of New York
Tower National Insurance Company
Preserver Insurance 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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