Fitch Ratings has undertaken a rating action on
Tower Group, Inc.
). As an outcome, the rating agency reiterated the 'BBB' Issuer
Default Rating (IDR) of the holding company and the 'A' Insurer
Financial Strength (IFS) ratings of its operating subsidiaries.
The ratings have been given a stable outlook, which implies no
significant change in factors driving a rating change in the near
The rating reaffirmation comes on the back of Tower's adequate
loss reserves, solid capitalization, strong operating
performance, disciplined underwriting and a well-diversified
However, the company has a more than average exposure to
catastrophe loss, because of its business concentration in the
regions of New York, New Jersey, and Massachusetts which account
for more than 2/3rd of total direct written premiums. Despite a
presence in cat prone areas the company has been able to manage
well overall. Only Hurricane Sandy and Irene have caused a
significant loss to the company so far. Since the company has a
cat exposure it increases its dependence on reinsurers who
require timely claim payments.
Regarding adverse reserve development, the rating agency notes
that the company has so far has a modest adverse reserve
development. The company however, made $70.9 million of addition
to its reserves as it suffered loss from commercial insurance
written in 2009 - 2011.
The rating agency is, however, confident that the company will
not have to take similar action in the near term as the company
will be able to generate profits through its operations. Also
capital issued on account of a merger with Canopious Holdings
Bermuda Limited will help reserve strengthening.
The rating agency also took into consideration Tower's pending
merger with Canopius Bermuda. The merger will create an efficient
global, diversified specialty insurance company that will support
the company's long-term expansion plans.
The transaction is expected to improve Tower's profitability and
earnings strength. Via the merger, Tower will gain access to the
Bermuda platform which would provide competitive advantage to
support growth opportunities in U.S. and international
Factors which are likely to thwart Tower's ratings include
weakening of capital position and a decline in operating
performance, spike in leverage ratio above 30%, adverse reserve
development of more than 5% of previous year surplus, and
execution risk associated with any large merger made by the
company, if any.
However, an upward revision to the rating may come on the back of
consistent solid operating performance and maintenance of strong
capital performance and decline in cat exposure.
Other insurance companies carrying an investment grade rating
from Fitch are
The Chubb Corp.
W.R. Berkley Corp.
Tower Group retains a Zacks Rank # 2 (Buy).
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