Fitch Ratings has affirmed Tower Group, Inc.'s (Tower) 'BBB' Issuer Default Rating (IDR). Fitch has also affirmed the 'A-' Insurer Financial Strength (IFS) rating of Tower's operating subsidiaries. A full list of ratings appears at the end of this press release. The Rating Outlook is Stable.
The rating rationale considers Tower's solid historical profitability, multi-tiered approach to underwriting, history of modest loss reserve development, and a well diversified investment portfolio that has an average credit rating of 'AA-'.
Also factored in to Fitch's rating rationale is the company's appetite for growth via acquisitions and an elevated catastrophe profile given the company's concentration in New England and New York markets where approximately 70% of total net written premiums are derived.
Fitch recognizes that historical catastrophe losses were modest at Tower, but 2011 produced significant catastrophe related losses due largely to Hurricane Irene. Tower's geographical concentration of Northeast property related premiums leaves the company more susceptible to tail event risk than most peers. In particular, in a large catastrophe event Tower is heavily dependent on reinsurers in its catastrophe program providing timely payments.
A key component to Tower's underwriting profitability has been the company's multi-tiered approach to underwriting that emphasizes flexibility. This allows Tower to emphasize markets and distribution channels where management feels pricing is strong and not pursue further market penetration in areas where management feels pricing is inadequate. One area of potential downside to this specialty niche focus is that the customization of categories may become too granular and pressure the expense structure.
Tower, including the reciprocals, reported a GAAP calendar year combined ratio of 101.1% and an accident year combined ratio of 102.1% for the nine months ended September 30, 2011. Catastrophe losses accounted for 7.5 percentage points of the 9M2011 combined ratio. This compares favorably to Fitch's GAAP universe average of 105.3% and 13.6 percentage points for catastrophes. Fitch notes that reserve development for Tower has been modestly favorable over the last several years.
Despite completing nine acquisitions over the last nine years, Fitch notes that half of Tower's transactions generated no or negative goodwill. Tower's debt to capital and debt to tangible capital ratio was 28% and 39% respectively at Sept. 30, 2011. Fitch notes that with the change in the agency's rating criteria, Tower's hybrid debt securities no longer receive any equity credit. Earnings based interest coverage was 3.3 times(x) at Sept. 30, 2011, compared with 7.9x for full year 2010.
The following is a list of key rating triggers that could lead to an upgrade:
--Material improvement in the company's catastrophe profile.
--Sustained strong profitability and internal capital formation, especially relative to peers at the current rating level and the industry aggregate, over the business cycle.
The following is a list of key rating triggers that could lead to a downgrade:
--Any large acquisition, defined as approximately 25% - 30% of Tower's net written premium, in the near term or an acquisition that does not complement Tower's current underwriting platform.
--An increase in financial leverage above 30% or a sustained decline in operating earnings-based coverage below 6 - 7x range.
--Significant adverse reserve development relative to peers and industry averages.
Fitch has affirmed the following ratings with a Stable Outlook:
Tower Group, Inc.
--Issuer Default Rating (IDR) at 'BBB';
--5% senior convertible debt rating at 'BBB-'.
Tower Insurance Company of New York
Tower National Insurance Company
Preserver Insurance Company
Mountain Valley Indemnity Company
CastlePoint National Insurance Company
York Insurance Company of Maine
Hermitage Insurance Company
CastlePoint Florida Insurance Company
North East Insurance Company
Massachusetts Homeland Insurance Company
CastlePoint Insurance Company
Kodiak Insurance Company
--Insurer Financial Strength (IFS) rating at 'A-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sep. 22, 2011)
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
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Fitch Ratings
Brian Bertsch, +1-212-908-0549
Media Relations,
New York
brian.bertsch@fitchratings.com
or
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Analyst:
Gerald B. Glombicki, CPA, +1-312-606-2354
Director
Fitch,
Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary
Analyst:
James B. Auden, CFA, +1-312-368-3146
Managing Director
or
Committee
Chairperson:
Andy Davidson, CFA, +1-312-368-3144
Senior
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