Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR) of Tower Group, Inc. and assigned a 'BBB' IDR to the new ultimate holding company Tower Group International, Ltd. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings at 'A-' for Tower's operating subsidiaries. The rating outlook is stable.
The rating decision follows Tower's announcement that it had successfully merged into Canopious Holdings Bermuda Limited (CHBL) and renamed the holding company to Tower Group International, Ltd. Tower received majority of shareholder approval on its March 12, 2013 vote and received $217 million in additional equity as a consequence of the merger.
Tower's debt to capital and debt to tangible capital ratio was 33 percent and 44 percent respectively at year-end 2012. However, with the additional $217 million in equity raised pro forma financial leverage and tangible financial decline to 28 percent and 37 percent respectively.
Fitch said that it views this transaction as potentially favorable if executed properly as it creates a larger, more geographically diverse business platform with access to three major insurance markets: US, Bermuda, and the Lloyds markets, in addition to an international holding company. This broader diversification is expected to enhance profitability and provide a sufficient source of capital to support Tower's US growth.
This structure will allow Tower to take advantage of the lower tax rate afforded by the holding company's Bermuda domicile. Similar to many Bermuda (re)insurers, this approach exposes Tower to any changes in US tax laws that would reduce or eliminate tax advantages on business generated in the U.S. but reinsured to affiliated offshore companies.
