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In an effort to penetrate further into the surety insurance line of business, property and casualty insurer, Tower Group Inc. (TWGP - Analyst Report) has made an investment of $7 million through 8.5% convertible debentures in Cinium Financial Services Corp.

Cinium is a closely held company specializing in the surety insurance business. The convertible debentures will provide the company with ownership of specified percentage, upon their conversion due in 2026.

Earlier during the year, Tower Group entered into an agreement with Cinium. Per the agreement, Cinium would underwrite Surety business on behalf of Tower Insurance Company of New York and its affiliate CastlePoint National Insurance Company, both subsidiaries of Tower Group.

In a separate development, A.M. Best affirmed the company’s issuer credit ratings (“ICR”) of “bbb-” and debt ratings of “bbb-” on $142.5 million 5.00% senior convertible notes due 2014. The ratings carry a stable outlook.

The rating agency favorably views the acquisitions made by Tower Group over the last few years, enabling the company to diversify its business mix. In 2011, the company acquired the renewal rights to the middle market commercial package and commercial automobile business underwritten through the NAV PAC division of Navigators Group, Inc. Tower’s acquisition of OneBeacon Insurance Group, Ltd.’s personal line of business, completed in July 2010, has also been viewed favorably by the rating agency.  The acquisition has expanded the company’s Personal lines business. In 2009, it acquired CastlePoint, Hermitage and Specialty Underwriters Alliance, which helped the company to expand outside Northeast and accounted for a major chunk of its business.  

Adequate loss reserves, solid capitalization, moderate leverage, strong operating performance and disciplined underwriting are some of the other positives for the company.

The offsetting factors to the ratings include the execution risk associated with the company’s recent investment in Canopius. Other concerning factors include the still soft property and casualty market, intense competition and business concentration in northeast U.S. Though the company has successfully integrated past acquisitions, uncertainties prevail in terms of seamless integration of future acquisitions, given the challenging economic scenario at present.

The rating action also included the affirmation of financial strength ratings (“FSR”) of A- and ICR of “a-“of CastlePoint Reinsurance Company, Ltd. backed by a stable outlook. The rating agency acknowledges CPRe’s vital role within Tower Group as a provider of captive reinsurance. CastlePoint’s solid capitalization and profitable operating performance also aids the ratings.  

A.M. Best has assigned each of Tower Group’s subsidiaries –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 and Massachusetts Homeland Insurance Company –a financial strength rating of A- (Excellent), which is the fourth highest of fifteen rating levels. The ICRs of “a-“ of these subsidiaries have also been affirmed. The outlook on all the ratings is stable.

Factors, which are likely to thwart Tower’s ratings, include weakening of capital position and a decline in operating performance. However, an upward revision to the rating may come on the back of consistent solid operating performance and maintenance of strong capital performance.

Tower currently retains a Zacks # 4 Rank, which translates into a short-term Sell rating. However, considering the fundamentals, we are maintaining our long-term Neutral recommendation on the shares. It competes with Assurant Inc. (AIZ - Analyst Report), The Travelers Companies Inc. (TRV - Analyst Report), and Chubb Corp. (CB - Analyst Report).

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