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Fitch Ratings has undertaken a rating action on Tower Group, Inc. (TWGP - Analyst Report). 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 term.  

The rating reaffirmation comes on the back of Tower’s adequate loss reserves, solid capitalization, strong operating performance, disciplined underwriting and a well-diversified investment portfolio.

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 markets.    

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 Assurant Inc. (AIZ - Analyst Report), The Chubb Corp. (CB - Analyst Report), W.R. Berkley Corp. (WRB - Analyst Report).

Tower Group retains a Zacks Rank # 2 (Buy). 

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