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Last week, Tower Group Inc. (TWGP - Analyst Report) announced that its merger agreement with Canopius Bermuda Holding Limited is progressing as expected. Further, the transaction is likely to culminate by the first quarter of 2013.

The company entered into this transaction in July 2012, in order to expand globally – in the U.S., London and Bermuda – and regain the Bermuda platform. The merger will form an efficient, globally diversified specialty insurance company, supporting Tower’s long-term expansion plans.

The transaction is expected to improve Tower’s profitability and earnings strength. By regaining the Bermuda platform, Tower expects to increase its ROE range to 13%–15% within 2 years of the merger. The transaction is projected to be 5% accretive to the EPS in the first full year and in the mid-teens range in the second full year. Stockholders’ equity will increase through the merger to support growth resulting from the new business platform.

An access to the Bermuda platform would provide competitive advantage to Tower for supporting growth opportunities in the U.S. and international markets. The company expects a combined gross premium written of $2.3 billion in 2013, taking into account business accretion from Canopius.    

Following the merger, Tower’s Assumed Reinsurance business will be underwritten from the Bermuda office, utilizing the staff acquired from the merger with Canopius, supplemented by other Bermuda personnel. New businesses will also be created using the Bermuda platform.

In the U.S., Tower will continue to focus on building commercial, specialty and personal lines business with continuing reinsurance support from Bermuda-based reinsurance affiliate. The company will also continue to participate in Lloyd’s business through ownership in and expanded reinsurance relationship with Canopius and support other Lloyd’s syndicates.

Tower is well positioned to achieve its long-term goals such as transforming into a national insurance company; developing a robust platform of commercial, specialty and personal lines; expanding business model to enhance profitability; improving systems, infrastructure and redesigning organizational structure to support growth; and finally recording an ROE that exceeds a target of 10%–14% by 2014.

Tower currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. We also have long-term ‘Neutral’ recommendation on the company shares. The company’s peers, Assurant Inc. (AIZ - Analyst Report), The Travelers Companies Inc. (TRV - Analyst Report), and Chubb Corp. (CB - Analyst Report) also carry our long term ‘Neutral’ recommendation.

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