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A.M. Best Revises Outlook to Positive for Tower Group, Inc. and Its Subsidiaries

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  Published in Business and Finance on Wednesday, June 1st 2011 at 21:20 GMT by Market Wire

OLDWICK, N.J.--([ BUSINESS WIRE ])--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 aa-a of the Tower US Pool (Tower) and its pooled and reinsured members. Concurrently, A.M. Best has revised the outlook to positive from stable and affirmed the ICR of abbb-a of the parent company, Tower Group, Inc. (TWGP) (NASDAQ: TWGP) and the debt rating of abbb-a on $139.8 million 5.00% senior convertible notes due 2014. In addition, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of aa-a of CastlePoint Reinsurance Company, Ltd. (CPRe) (Bermuda). The outlook for these ratings is stable. All companies are headquartered in New York, NY, unless otherwise specified. (See below for a detailed listing of the companies and ratings.)

"A.M. Besta™s Ratings & the Treatment of Debt."

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

A key part of TWGPa™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. (AequiCap).In 2009, TWGP completed the acquisition of CastlePoint Holdings, LTD., HIG, Inc., Specialty Underwritersa™ Alliance, Inc. and the renewal rights to the workersa™ compensation business of AequiCap. These recent acquisitions have dramatically expanded the scope and breadth of Towera™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 A.M. Besta™s guidelines for its ratings.

While TWGP is successful to date, the execution risk associated with any future acquisitions remains a concern, as it pertains to integration costs, unforeseen claims emergence and an undue diversion of managementa™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.

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% and debt-to-tangible capital of 36.0%, including capital in the reciprocal exchanges. TWGPa™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.

The FSR of A- (Excellent) and ICR of aa-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

The principal methodology used in determining these ratings is [ Besta™s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition ], which provides a comprehensive explanation of A.M. Besta™s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: aRisk Management and the Rating Process for Insurance Companiesa; aUnderstanding BCAR for Property/Casualty Insurersa; a[ Rating Members of Insurance Groups ]a; aCatastrophe Risk Management Incorporated Within the Rating Analysisa; aNatural Catastrophe Stress Test Methodologya; and a[ A.M. Besta™s Ratings & the Treatment of Debt ].a Methodologies can be found at [ www.ambest.com/ratings/methodology ].

Founded in 1899, A.M. Best Company is the worlda™s oldest and most authoritative insurance rating and information source. For more information, visit [ www.ambest.com ].

Copyright © 2011 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.