A.M. Best Downgrades Ratings of Tower Group International and Its Subsidiaries

A.M. Best has downgraded the financial strength ratings (FSR) to C++ (Marginal) from B (Fair) and issuer credit ratings (ICR) to "b" from "bb" of the pooled and reinsured members of the Tower US Pool (Tower) and CastlePoint Reinsurance Company, Ltd. (Bermuda).

Concurrently, A.M. Best has downgraded the ICR to "cc" from "b-" and the debt rating on the $150 million par 5.00 percent senior unsecured convertible notes due September of 2014, for the intermediate holding company, Tower Group, Inc. Additionally, A.M. Best has downgraded the ICR to "cc" from "b-" of the ultimate parent, Tower Group International, Ltd. (TWGP) (Bermuda) [NASDAQ:TWGP]. All ratings are under review with developing implications. All companies are headquartered in New York, NY, unless otherwise specified. (See below for detailed listing of the companies and ratings.)

The rating actions take into consideration TWGP's most recent Securities and Exchange Commission 10K filing, which included an additional $63 million of prior year reserve development, further reductions in GAAP shareholders' equity as well as ongoing declines in statutory policyholders' surplus and risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR). These rating factors are in addition to the diminished shareholders' equity and reserve actions already taken by TWGP during the year.

These rating actions also consider the material adverse impact these charges had on all of TWGP's entities in terms of their ability to operate as going concerns.

In addition, these rating downgrades reflect the group's significantly elevated financial leverage, constrained liquidity and heightened uncertainty around TWGP's ability to repay its senior debt holders in the event its pending merger with ACP Re Ltd. (ACP Re) (Bermuda) does not occur. Continued delays in TWGP reporting its quarterly filings are another concern.

The ratings will remain under review pending the planned merger with ACP Re, which is expected to close in the summer of 2014, but has a merger termination date of November 15. The under review with developing implications status acknowledges the potential benefits to be garnered from the transaction, as well as the potential downside from any additional adverse reserve development (in the event that the merger does not close) or any unforeseen event that might occur up until the close of the transaction. Additionally, the ratings could be downgraded further if certain events and/or unforeseen circumstances occur, which could cause the merger to fall through.

The FSR of B (Fair) has been downgraded to C++ (Marginal) and the ICRs have been downgraded to "b" from "bb" for the following pooled and reinsured members of Tower US Pool:

-CastlePoint Insurance Company

-CastlePoint National Insurance Company

-Tower Insurance Company of New York

-Tower National Insurance Company

-Preserver Insurance 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 methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is an insurance rating and information source.

More information:

www.ambest.com.

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