Tower Expansion To Add Hermitage For $135 Million

New York-based Tower Group Inc., which is acquiring CastlePoint Holdings Ltd. in Bermuda, said today that a CastlePoint subsidiary will acquire White Plains, N.Y.-based Hermitage Insurance for $135 million.

The announcement from Tower and CastlePoint said the purchase is being made by CastlePoint Reinsurance Company Ltd. and Hermitage (HIG Inc.), a commercial insurer and subsidiary of Brookfield Asset Management.

CastlePoint will pay $27 million in cash plus the adjusted closing book value of Hermitage. The total cash consideration is expected to be approximately $135 million with no external financing required, the companies said.

Tower's agreement to acquire CastlePoint for $490 million was announced on Aug. 5. The companies said they expect an early December closing will be followed in late December with completion of the Hermitage deal.

Hermitage was described as a specialty property and casualty insurance holding company offering both admitted and excess and surplus products to small commercial customers throughout the eastern United States.

Hermitage has two operating subsidiaries: Hermitage Insurance Company and Kodiak Insurance Company.

According to the acquisition announcement, Hermitage has a profitable book of business and an excess and surplus lines platform covering 29 states and the District of Columbia. The Hermitage subsidiaries also have admitted licenses in 10 states.

The companies said the Hermitage transaction will provide access to 150 new retail agents in the Southeast who have no overlap with CastlePoint's or Tower's existing producers, and will also further strengthen CastlePoint's and Tower's wholesale distribution in the eastern United States.

The acquisition is expected to produce approximately $100 million in gross written premiums for 2008, and its net loss ratio is 52.3 percent through the first six months of this year, said Tower and CastlePoint.

They added that the transaction is expected to be slightly accretive to earnings per share in 2009 for both Tower and CastlePoint on a combined or standalone basis.

Michael H. Lee, chairman and chief executive officer of both Tower and CastlePoint, said in a statement that the Hermitage acquisition reinforces a growth strategy outlined when the CastlePoint acquisition was announced.

Tower and CastlePoint, by adding Heritage, according to Mr. Lee, will acquire a profitable business similar to Tower's by utilizing CastlePoint's capital.

In addition, he said, "CastlePoint will be able to shift more of CastlePoint Reinsurance Company's capital from reinsurance to insurance in response to current market conditions. The transaction further supports Tower's national expansion plans by focusing on underserved market segments through wholesale agents while expanding its retail distribution system in the Southeast."

A separate Tower and CastlePoint agreement to follow the Hermitage acquisition completion will see Tower buy Hermitage's operating assets--including rights to policy renewals and producer appointments from CastlePoint--for $16 million in cash.

The companies said they do not expect to consummate this renewal rights transaction unless Tower's acquisition of CastlePoint is not consummated or is delayed.

The acquisition of Hermitage by CastlePoint and sale of Hermitage operating assets by CastlePoint to Tower is not subject to approval by either Tower or CastlePoint shareholders.

The companies said the Hermitage acquisition will not affect Tower's 2008 earnings guidance of diluted earnings per share in the range of $2.90 to $3 for the full year.

Tower and CastlePoint set an afternoon conference call to discuss the transaction.