Tower Group Acquired by ACP Re for $2.50 a Share in Cash

Tower Group International, Ltd. has finally been acquired by ACP Re, Ltd., a Bermuda-based reinsurance company.

Each share of the company was converted into the right to receive $2.50 in cash.

The deal, which was announced in January this year, carried a lot of uncertainty.In May, the terms were amended to lower the cash payment per share to $2.50 from $3.00 agreed to earlier. The time limit for closure of the deal was also extended to November from the summer of 2014.

The merger makes perfect sense as it will not only pay off the current shareholders, but will also shape a brighter future for the company.

Tower Group contemplated getting acquired by ACP Re viewing it as a strategic end game to save itself after committing serious accounting fallacies.

The company was diagnosed with a huge reserve shortfall in Jun 2013. In a soft insurance market, when insurance rates were very low, the company tried an inorganic way to grow through acquisitions, paying little heed to maintaining adequate reserve in long-tailed products for the accident years 2008–2011.

The company had a serious reserve shortfall in workers’ compensation, commercial liability and commercial auto business lines. Significant losses and reduction of statutory surplus in its insurance subsidiaries ensued, leaving the company paralyzed to run its business.

Following the acquisition, we believe the rating agencies will positively revise their ratings and outlook on Tower Group. The rating agencies Fitch and A.M. Best have downgraded the insurer’s key ratings by multiple notches apart from having a negative outlook on them for the recent months. These rating actions made it all the more difficult for Tower Group to generate new business since high grade ratings are the key to writing business for an insurer.

Recently, A.M.Best commented that a positive rating action is likely if the pending merger with ACP Re concludes successfully on scheduled time, giving Tower Group International a fresh lease of life.

As a result of the merger, the stock of Tower Group will no longer trade on the stock exchange.

Some stocks worth considering include AmTrust Financial Services, Inc. (AFSI), Federated National Holding Company (FNHC) and Mercury General Corporation (MCY), National General Holdings Corp. (NGHC). All these stocks sport a Zacks Rank #1 (Strong Buy).