S&P Lowers TICNY Rating; Company Views Action as Misleading

Standard & Poor’s Ratings Services said it has lowered its counterparty credit and financial strength ratings on Tower Insurance Co. of New York (“Tower”) to ‘BB+’ from ‘BBB-‘.

At the same time, Tower Group, Inc. (NASDAQ: TWGP) announced that it has withdrawn from the Standard & Poor’s (“S&P”) Rating process for Tower Insurance Company of New York (“TICNY”), one of its operating subsidiaries.

“The downgrade reflects Tower’s significantly increased risk appetite, weak corporate governance, weak enterprise risk management, and substantially reduced capital adequacy,” Said Standard & Poor’s credit analyst Siddhartha Ghosh.

However Tower Group announced in a written statement that TICNY recently requested S&P to withdraw the ‘BBB-‘ rating assigned to TICNY because it does not utilize the S&P rating in conducting its business. Tower Group said that following TICNY’s request for a ratings withdrawal, S&P announced a final rating which lowered the company’s rating, but that TICNY did not request this final rating nor did it participate fully in the final rating process.

“Our decision to withdraw the S&P rating was due to the fact that we rely exclusively on our A.M. Best rating to conduct business,” said Michael H. Lee, president and CEO of Tower Group Inc. “As a result, we do not view S&P’s recent rating action taken after our request for withdrawal to be material.”

Tower’s insurance company subsidiaries, TICNY and Tower National Insurance Company, are rated “A-” (Excellent) by A.M. Best.

Since TICNY management chose not to fully participate in the S&P ratings process, TICNY believes that the final rating contains several inaccurate, incomplete and misleading statements.

S&P’s rating notice said that corporate governance concerns at Tower center on the potential conflicts of interest arising from Lee’s dual role as head of both Tower and Castlepoint Holdings Ltd., a newly created Bermuda-based reinsurer. Lee holds the positions of CEO and chairman of both companies simultaneously. Among the potential conflicts S&P noted are: service agreements negotiated between the two firms and compensation to Lee that gives more or less incentive to place varying amounts of time and care at one company or the other. While Lee’s knowledge and experience contribute significantly to Tower’s success, conflicts of interest are real, according to S&P.

Tower Group responded that all decisions on material matters between TICNY and CastlePoint Holdings Ltd. and its subsidiaries are subject to approval from independent board members, and negotiated terms require independent review.

Nevertheless, the negative rating factors noted by S&P are mitigated slightly by the company’s historically good operating earnings, the rating agency said. “The company’s average combined ratio was a strong 88.3 percent over the past five years (2002-2006), when the industry experienced very favorable pricing and underwriting conditions.”

“Tower’s risk appetite is high. The company’s natural catastrophe exposures increased significantly in the last year,” said S&P’s Ghosh. “These increased exposures magnify the significance of the company’s governance and risk management weaknesses.”

TICNY says that the company’s risk appetite has not changed. TICNY’s business continues to focus on low to moderate hazard risks with an average premium per policy size of approximately $3,000, the company said. In addition, TICNY’s property catastrophe exposure has recently decreased by 30 percent due to its arrangement with CastlePoint Holdings Ltd., the company said.

S&P also noted that it believes Tower’s enterprise risk management is viewed as weak. The recent increase in risk tolerance is well above prior expectations for the rating. In addition, the company has a key-man risk related to its CEO, Michael Lee.

But TICNY commented that its enterprise risk management capabilities represent a key competitive strength. TICNY has extensive processes in place to manage risks on a cross-functional basis, the company said in a statement.

Additionally, TICNY noted that capital adequacy is at record levels. TICNY’s and Tower National Insurance Company’s surplus has increased by 59 percent to $210 million at year end 2006 from the prior year, according to the company.

Source: Standard & Poor’s, Tower Group