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Property and casualty insurer Tower Group International, Inc. (TWGP - Analyst Report) has amended the terms of its alliance with ACP Re Ltd., a Bermuda-based reinsurance company. The alliance, which was announced in Jan 2014, is seen as a strategic endgame by Tower Group.
 
The most significant change is that Tower Group’s shareholders will be now get $2.50 in cash compared to the prior agreement of $3.00 per share cash payment. Other amendments include reduction in termination fee. As per the old deal, if Tower Group backs out it would have to pay ACP Re a certain amount of its transaction expenses, subject to a $2 million cap, as well as a termination fee of $8.18 million. The amount of reduction in the termination fee was, however, not disclosed. 
 
The time limit for finalization of the merger has also been extended. While the merger was previously expected to close by the summer of 2014, now shareholders have time till Nov 15, to vote and wrap up the deal.  
 
Other amendments include exclusion of material adverse result of Tower’s operations or deterioration of its financial condition resulting from new business, operating expenses and reserve insufficiency.   Any adverse effect that already disclosed by Tower in its previous SEC filing has also been excluded. The condition that more than 15% of shareholders of Tower Group should not disagree to the merger has also been relaxed. The amendment has also eased the capital maintenance regulation for Tower.  
 
Going back, the merger was sought by Tower Group after it ran into trouble following huge reserve shortfall. The company had miscalculated the magnitude of reserve required for policies related to workers’ compensation, commercial liability and commercial auto.  
 
It comes as a great surprise to us that a company that was so hale and hearty had to resort to a merger to save itself. While on the surface level the company seemed to be doing well, reserve inadequacy had spelt trouble for quite some time.  The company took remedial measures such as selling of stake in Canopius Group Ltd.; reducing workforce by about 10% and dissolution of the scheduled acquisition of ASRe from Fairfax Financial Holdingsto improve its financial position and reduce expenses, these did not bear fruit. 
 
Tower Group currently carries a Zacks Rank #3 (Hold). Better-ranked stocks include Alleghany Corp. (Y - Snapshot Report), AmTrust Financial Services, Inc. (AFSI - Snapshot Report) and Aspen Insurance Holdings Ltd. (AHL - Snapshot Report), all with a Zacks Rank #1 (Strong Buy).

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