California Insurance Commissioner Dave Jones on Thursday took over 10 Tower Group carriers that were recently merged together as Castlepoint National Insurance Co. in what could be the first step toward liquidation.

Dave Jones

The San Francisco Superior Court approved a conservation order giving Jones the authority to take possession of all assets of the Tower Group carriers consolidated as Castlepoint and pay claims and expenses on behalf of the struggling carriers. 

In addition to Castlepoint National Insurance Co., the other carriers of the Tower Group include:

• Castlepoint Insurance Co., headquartered in California.
• Castlepoint Florida Insurance Co.
• Hermitage Insurance Co., headquartered in New York.
• Massachusetts Homeland Insurance Co.
• North East Insurance Co., headquartered in California.
• Tower Insurance Co. of New York.
• Tower National Insurance Co., headquartered in Massachusetts.
• York Insurance Co. of Maine, organized under California law.
• Preserver Insurance Co., domiciled in New Jersey.

“Today’s conservation of Castlepoint National Insurance Co. is the next chapter in the long-running struggles of the Tower Group,” Jones said in a statement. “My department and other regulators around the country have been concerned with the Tower Group’s financial condition for many years, and we have been carefully monitoring Tower to determine if intervention was necessary to make certain Tower would honor their claim commitments. The time for me to intervene to protect policyholders arrived today.”

Tower Group had net income of $91 million in 2009, but after acquiring a number of smaller carriers, it reported net losses of nearly a half-billion dollars for the first half of 2013. 

ACP Re, a reinsurer based in Bermuda, acquired the Tower Group in September 2014. At the same time, AmTrust Financial Services acquired renewal rights to Tower’s commercial lines business through a separate deal with ACP Re.

The California Department of Insurance said the acquisition improved the situation by migrating policy and claims administration to AmTrust, but the deterioration continued and by the end of 2015, Tower Group reported more than $400 million in loss-reserve deficiencies. 

The troubles continued in 2016, with A.M. Best in March placing its financial strength and issuer credit ratings of ACP Re under review because the 10 Tower Group companies failed to submit financial statements for the final quarter of 2015.

When Tower Group reported the loss reserve deficiency, the California Department of Insurance was already working with regulators in five other states as well as owners of ACP Re to develop a plan to consolidate the 10 carriers of the Tower Group into a single entity.

Earlier this year, regulators from California, Florida, Maine, Massachusetts, New Jersey and New York developed a plan approved by ACP Re to consolidate Tower Group carriers under the Castlepoint name, according to the California Department of Insurance's application for a conservation order, filed in San Francisco County Superior Court on Thursday.

“The plan and process of consolidating 10 companies from six states into a single insurer for purposes of conducting a uniform and efficient conservation and liquidation was immensely complicated and challenging,” Jones said.

The department is seeking approval of a conservation and liquidation plan for Castlepoint that will allow guaranty funds throughout the country to assume responsibility for paying the carrier’s claims. During the initial conservation phase, the department said there should be no disruption or delay in the delivery of work comp benefits to injured workers.

The conservation plan would also generate $200 million to pay claims by requiring CastlePoint to execute a series of reinsurance agreements established when ACP Re. acquired Tower Group in 2014.

Holders of policies issued after the acquisition, which are completely reinsured by AmTrust, will receive “cut-through endorsements” that allow them to file claims directly with AmTrust and avoid the conservation and liquidation process entirely.

Castlepoint will be “deconsolidated” from the Tower Group, the California Department of Insurance said.

The conservation order means the court determined Castlepoint is operating in a hazardous financial condition. If it is determined Castlepoint doesn’t have enough money to pay all liabilities, the California Department of Insurance will request the court issue a finding of insolvency and order the company into liquidation.

If it is issued, the liquidation order will trigger guaranty funds in various states to step in and pay covered claims.