Fitch Revises Tower Group's Rating Watch Status to Evolving

Fitch Ratings has revised the Rating Watch status of Tower Group International, Ltd. (TWGP or Tower) to Rating Watch Evolving from Rating Watch Negative following the announcement of a planned merger with a subsidiary of ACP Re, Ltd. (ACP Re) for $172.1 million. Fitch does not rate ACP Re. This transaction is expected to close in the summer of 2014 and is subject to various regulatory approvals. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

ACP Re is a Bermuda-based reinsurance company whose controlling shareholder is a trust established by the founder of AmTrust Financial Services, Inc. (AmTrust), National General Holdings Corporation (NGHC) and Maiden Holdings, Ltd. The transaction is structured in such a way that Tower will be the surviving corporation as a wholly-owned subsidiary of ACP Re.

The Evolving Watch reflects that the ratings could go up if the merger closes; however, ratings could be lowered if the merger does not occur and Tower is unsuccessful in addressing upcoming debt maturity or if additional reserve deficiencies develop.

This merger has the potential to provide sufficient liquidity to reduce near-term holding company obligations and capital concerns at Tower's operating companies in regard to regulatory capital ratios. However, little public information is available on ACP Re.

On Jan. 2, 2014, Fitch downgraded Tower's rating follows a review of Tower's third quarter 2013 (3Q'13) statutory financial statement filings and GAAP disclosures. The company will likely incur an additional approximately $105 million in 3Q'13 GAAP adverse reserve development on top of the $364 million previously taken in the first half of 2013.

With the most recent adverse reserve charges, Fitch has concerns that some of the U.S. operating subsidiaries have risk based capital (RBC) ratios below the Company Action Level. In Bermuda, Tower Reinsurance Limited's (TRL) solvency ratio is below that of the minimums established by the Bermuda Monetary Authority (BMA) but Tower is working with the BMA to transfer certain assets of another Bermuda subsidiary to cure the deficiencies at TRL.

The majority of the reserve development has been centered in accident years 2008-2011 for workers' compensation, commercial multi-peril liability, other liability, and commercial auto liability. Most of the adverse reserve development originates from Tower's growth in program business via acquisitions during the soft market in long-tailed lines of business coupled with inadequate internal controls relating to the loss reserving process.

Tower's inability to produce accurate financial statements in a timely fashion has led Fitch to consider its level of corporate governance to be ineffective.

While Fitch aspires to develop specific bespoke recovery estimates for IDR ratings of 'B+' or lower, the agency was not able to arrive at a robust Recovery Rating (RR) for Tower for several reasons including: the high risk of litigation, the rapid deterioration in reserves, ineffective corporate governance, and untimely public updates of financial information. For these reasons, Fitch has determined this is a limitation of the issue ratings and is using standard notching of 'RR5' for the $150 million senior convertible note due in September 2014.

RATING SENSITIVITIES

The following is a list of key rating triggers that could lead to a ratings downgrade:

--Failure to close the proposed merger on disclosed terms;

--Further adverse reserve development or announcement of additional losses by the company;

--Inability to have U.S.-based operating company RBC ratios above the Company Action Level and Bermuda-based operations capital solvency ratios above minimum threshold set by BMA;

--Inability to meet financial obligations of the operating or holding company.

The following is a list of key rating triggers that could lead to the ratings being upgraded:

--Closing of the transaction on stated terms;

--A successful refinancing of the upcoming debt maturity.

Fitch has revised the Rating Watch status of the following ratings to Evolving from Negative:

Tower Group International, Ltd.

--IDR of 'CC'.

Tower Group, Inc.

--IDR of 'CC';

--5% senior convertible debt rating of 'C/RR5'.

Tower Insurance Company of New York

Tower National Insurance Company

Preserver Insurance Company

CastlePoint National Insurance Company

York Insurance Company of Maine

Hermitage Insurance Company

CastlePoint Florida Insurance Company

North East Insurance Company

Massachusetts Homeland Insurance Company

CastlePoint Insurance Company

Kodiak Insurance Company

--IFS ratings of 'B'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813415

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Fitch Ratings
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Gerald B. Glombicki, CPA, [phone]
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