Best Puts Tower Group ‘Under Review with Negative Implications’

A.M. Best Co. has placed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer ratings (ICR) of “a-” of Tower Group Companies and its members, Tower Insurance Company of New York and Tower National Insurance Company (TNIC) under review with negative implications. Best also placed the ICR of “bbb-” of the holding company, Tower Group, Inc. (TWGP) under review with negative implications.

Best took the actions following the announcement that TWGP has entered into a stock purchasing agreement to purchase Bermuda-based CastlePoint Holdings, LTD in a stock-for-stock agreement [See related article].

In Best’s opinion, “there is execution risk involved with integrating this transaction, completing the finalized internal and external agreements and re-allocating capital among the members of the final overall structure,” said the announcement.

Best explained: “Tower sponsored the formation of CastlePoint in 2006. In addition to the initial investment from Tower, CastlePoint raised approximately $250 million in a 2006 private equity offering and completed its initial public offering in 2007 by raising nearly $115 million. As of year-end 2007, Tower owned 6.6 percent of CastlePoint stock. Tower has ceded considerable business to CastlePoint since 2006, while CastlePoint has added third party accounts that constituted nearly 30 percent of its overall premium revenue.” Best indicated that, “although Tower will essentially regain control of business that it has written directly,” it remains concerned because “Tower is an active acquirer of insurance companies and established books of business, as its writings have significantly increased over the most recent five-year period.

“Offsetting these factors are Tower’s excellent risk-adjusted capitalization, very strong operating results and moderate financial leverage at the holding company.”

Best indicated the ratings are likely to remain under review pending the regulatory approval of this transaction, which is expected to occur in late 2008 or early 2009. Should the transaction close as presented, Best said it “expects to affirm the ratings of Tower’s operating insurance companies.”

In addition Best noted that, if the deal closes, it “should significantly increase Tower’s capitalization and simplify its current organizational structure by combining the two companies and eliminating the dual chief executive officer (CEO) role of Michael Lee, who currently is CEO of both TWGP and CastlePoint.

“Alternatively, if the transaction does not close and both companies continue with their original business plans as presented to A.M Best, the ratings for both companies are expected to be affirmed. However, if there are significant changes in the final transaction, A.M. Best will evaluate the group’s business strategy and capitalization for all rated entities to assess any potential impact.”

In a related action Best upgraded its rating on the Preserver group (See Ratings Roundup).

Source: A.M. Best – www.ambest.com