Following the recent merger announcement of Tower Group International, Inc. with ACP Re Ltd., rating agency A.M. Best Co. sprung into action, putting under review the ratings of both the companies.
Tower Group International opted to merge itself with ACP Re Ltd., a Bermuda-based reinsurance company, as a strategic end game to save itself after suffering from serious reserve shortfall in workers’ compensation, commercial liability and commercial auto business lines. The deal, valued at $172.1 million, will see Tower Group’s shareholder getting $3.00 in cash for each share held.
As a part of the merger agreement, AmTrust Financial Services, Inc. (AFSI - Snapshot Report), (whose founder established a trust, which is the controlling stake holder in ACP Re) will buy Tower Group's renewal rights and the assets in its commercial lines business, for about $125 million.
The financial strength rating (FSR) of A- and issuer credit rating (ICR) of “a-” of ACP Re Ltd has been put under review with negative implications by A.M. Best. The rating action comes on the back of the concern regarding integration risk on the part of ACP Re. The rating agency is also unsure about the adequacy of loss reserves related to the business acquired from Tower Group International, which has tself suffered serious adverse reserve development in the past.
Despite grave concerns, the rating agency has confidence in ACP Re given its integration track record and feels that the company’s management is apt enough to handle the newly acquired business.
A.M.Best will remain watchful until the acquisition consummates and will take further rating action on information received from the company’s management.
As for Tower Group International, A.M. Best has maintained the under review status on the FSR of ‘B’ and ICR of “bb” of the pooled and reinsured members of the Tower US Pool; the ICR of “b-” and the debt rating of “b-” on $145.4 million 5.00% senior convertible notes due 2014 of Tower Group; the FSR of B and ICR of “bb” of CastlePoint Reinsurance Company, Ltd. and the ICR of “b-” of Tower Group International.
A.M. Best has revised the outlook on all these ratings to developing from negative, reflecting potential synergies that might flow from the merger with ACP Re, as well as any negative developments from additional reserve deficiency or any other event that might adversely affect the deal.
The rating agency believes that the merger will ease Tower Group’s capital strain allowing it to enjoy capital flexibility. Further rating action from A.M.Best depends upon the closure of the deal. A positive rating action might follow if the merger closes smoothly on time. However, if the deal does not transpire as originally perceived then negative rating action can be seen.
While we prefer to avoid Tower Group International with a Zacks Rank #5 (Strong Sell) at present, better-ranked stocks in the insurance sector worth considering include Allied World Assurance Company Holdings, AG (AWH - Snapshot Report) and Aspen Insurance Holdings Ltd. (AHL - Snapshot Report). Both these stocks sport a Zacks Rank #1 (Strong Buy).