Tower Group, CastlePoint to buy Hermitage for $135 million

BANGALORE (Reuters) - Reinsurer CastlePoint Holdings Ltd CPHL.O, which is selling itself to Tower Group Inc (TWGP.O), said it will buy privately held Hermitage Insurance Group Inc for about $135 million in cash.

The acquisition will help CastlePoint boost its presence in eastern United States and expand footage among small commercial customers, the company said. Hermitage sells insurance products to through its subsidiaries, Hermitage Insurance Company and Kodiak Insurance Company.

"I think that its a really good acquisition. It explains why they were buying CastlePoint. You are basically getting 150 new retail agents and there is no overlap in business so it will all be new business in new areas," Raj Sharma, an analyst with Polestar Investment Res LLC.

Insurance firms have suffered in the recent past due to falling rates and lower income from its investment portfolio. Many analysts expect the industry to consolidate in the near term as valuations become attractive.

Sharma added that he expects Tower Group to make another acquisition as a lot of insurers are trading cheap.

As part of the deal, CastlePoint will pay Hermitage, a subsidiary of Brookfield Asset Management Inc, $27 million in cash plus the adjusted closing book value of Hermitage, a specialty property and casualty insurance holding company.

Tower Group, which had sponsored CastlePoint's formation, agreed to buy-out CastlePoint for about $490 million earlier this month.

Tower expects to close both the deals in December.

Tower maintained its 2008 earnings outlook of $2.90 to $3.00 per share. It still sees 2009 earnings of $3.20 to $3.40 a share, but said the Hermitage deal is expected to increase its earnings towards the upper end of the range.

Shares of CastlePoint were trading up more than a percent at $10.80, while Tower Group shares were flat at $20.04 in afternoon trade on the Nasdaq.

(Editing by Dinesh Nair)