Following the recent merger announcement of T
ower 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
As a part of the merger agreement,
AmTrust Financial Services, Inc.
), (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
AMTRUST FIN SVC (AFSI): Free Stock Analysis
ASPEN INS HLDGS (AHL): Free Stock Analysis
ALLIED WORLD AS (AWH): Free Stock Analysis
TOWER GRP INTL (TWGP): Free Stock Analysis
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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
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
Aspen Insurance Holdings Ltd. (
). Both these stocks sport a Zacks Rank #1 (Strong Buy).