Tower and CastlePoint to Acquire Hermitage Insurance Group
August 27 2008 - 9:13AM
Business Wire
Tower Group, Inc. (�Tower�; NASDAQ: TWGP) and CastlePoint Holdings,
Ltd. (�CastlePoint�; NASDAQ: CPHL) have announced today that
CastlePoint Reinsurance Company, Ltd., a Bermuda-based subsidiary
of CastlePoint, has entered into a definitive agreement to acquire
HIG, Inc. (�Hermitage�). CastlePoint will pay the seller, a
subsidiary of Brookfield Asset Management Inc., $27 million in cash
plus the adjusted closing book value of Hermitage. The total cash
consideration is expected to be approximately $135 million with no
external financing required. On August 5, 2008, Tower entered into
a definitive agreement to acquire CastlePoint and they expect to
close that transaction in early December 2008. Tower and
CastlePoint expect that the acquisition of Hermitage will close in
late December 2008, after the closing of the Tower-CastlePoint
acquisition. Hermitage Overview Hermitage is a specialty property
and casualty insurance holding company offering both admitted and
excess and surplus (�E&S�) products to small commercial
customers throughout the eastern United States. Hermitage has two
operating subsidiaries: Hermitage Insurance Company and Kodiak
Insurance Company. The Hermitage transaction represents the
acquisition of a profitable book of business and an E&S lines
platform covering 29 states and the District of Columbia. The
Hermitage subsidiaries also have admitted licenses in 10 states.
The Hermitage transaction will provide access to 150 new retail
agents in the Southeast who have no overlap with CastlePoint�s or
Tower�s existing producers and will also further strengthen
CastlePoint�s and Tower�s wholesale distribution in the eastern
U.S. Hermitage is expected to produce approximately $100 million in
gross written premiums for 2008, and its net loss ratio is 52.3%
through the first six months of 2008. The transaction is expected
to be slightly accretive to earnings per share in 2009 for both
Tower and CastlePoint on a combined or standalone basis. Michael H.
Lee, Chairman and CEO of both Tower and CastlePoint, stated, �The
Hermitage acquisition reinforces the post-CastlePoint acquisition
strategy that we outlined when we announced the acquisition of
CastlePoint by Tower on August 5th. Through this transaction, Tower
and CastlePoint will be able to acquire a very profitable business
similar to Tower�s business by utilizing CastlePoint�s capital. In
addition, CastlePoint will be able to shift more of CastlePoint
Reinsurance Company�s capital from reinsurance to insurance in
response to current market conditions. The transaction further
supports Tower�s national expansion plans by focusing on
underserved market segments through wholesale agents while
expanding its retail distribution system in the Southeast.� Tower
Acquisition of Renewal Rights and Operating Assets if Tower�s
Acquisition of CastlePoint is not Consummated or is Delayed: Tower
and CastlePoint also entered into a separate agreement pursuant to
which, following CastlePoint�s acquisition of Hermitage as outlined
above for $135 million, Tower has agreed to buy Hermitage�s
operating assets including rights to policy renewals and producer
appointments from CastlePoint for $16 million in cash. Tower and
CastlePoint do not expect to consummate this renewal rights
transaction unless Tower�s acquisition of CastlePoint is not
consummated or is delayed. If this renewal rights transaction were
to close, Tower and CastlePoint have also agreed to extend all of
the reinsurance, management and service agreements between the two
companies or their respective subsidiaries for one additional year
upon their expiration, currently scheduled for March 31, 2010, at
commission and management fee terms which have been set to
approximate current market terms, provided that, under certain
limited circumstances, the extension will be for 6 months. Upon the
sale of the operating assets to Tower, CastlePoint will retain
Hermitage�s financial assets including capital in the operating
insurance companies, insurance licenses, loss reserves and unearned
premium reserves. In addition, Tower�s managing general agency,
Tower Risk Management, will manage Hermitage�s operating insurance
companies on behalf of CastlePoint based upon the terms of existing
management and service agreements between Tower and CastlePoint. If
this renewal rights transaction were to be consummated, it would
benefit each of Tower and CastlePoint on a standalone basis. Tower
would be able to expand its wholesale and retail agency
distribution and increase its management fee income from managing
the Hermitage business. CastlePoint would be able to more
effectively deploy its capital by shifting from reinsurance to
primary insurance underwriting and by increasing business from
Tower through its insurance risk sharing solution rather than its
quota share reinsurance solution. Further, as noted above,
CastlePoint would benefit from the one year extension of its
agreements with Tower whereby Tower reinsures a substantial portion
of its profitable brokerage business with CastlePoint through a
quota share agreement and a risk sharing agreement. The terms of
this transaction between Tower and CastlePoint were negotiated and
approved by the independent board members of both companies. The
transactions between Hermitage and CastlePoint and those between
Tower and CastlePoint, including any ancillary agreements, are
subject to customary regulatory approvals. 2008 and 2009 Earnings
Guidance: The Hermitage acquisition will not affect Tower�s
earnings guidance for 2008. Therefore, Tower is maintaining its
diluted earnings per share guidance to be in the range of $2.90 to
$3.00 for the full year 2008. Tower expects the Hermitage
acquisition will be accretive to its shareholders in 2009 after
Tower completes the acquisitions of CastlePoint and Hermitage. Both
transactions are expected to close in December 2008. Tower is
maintaining its diluted earnings per share guidance for 2009 in the
range of $3.20 to $3.40 that was provided on August 5th, but Tower
expects the Hermitage acquisition to increase its earnings towards
the upper end of that range. Investor Call and Presentation Tower
and CastlePoint will jointly host a conference call today at 2:00
P.M. (Eastern Time) to discuss the transaction. The Call-in number
is: 877-545-1488; international 719-325-4942. This conference call
will also be broadcast live over the Internet. To access the
presentation and a listen-only webcast over the Internet, please
visit the Investor Information section of Tower�s website,
www.twrgrp.com, or CastlePoint�s website, www.castlepoint.bm, or
use these links: http://investor.twrgrp.com/events.cfm or
http://ir.castlepoint.bm/events.cfm Please access the website at
least 15 minutes prior to the call to register and to download any
necessary audio software. If you are unable to participate during
the live conference call, a listen-only webcast will be archived in
the Investor Information section of both companies� websites. About
Tower Tower offers property and casualty insurance products and
services through its operating subsidiaries. Its insurance company
subsidiaries offer insurance products to individuals and small to
medium-sized businesses. Tower�s insurance services subsidiaries
provide underwriting, claims and reinsurance brokerage services to
other insurance companies. About CastlePoint CastlePoint, a
Bermuda-based holding company, through its subsidiaries,
CastlePoint Reinsurance Company, CastlePoint Management Corp., and
CastlePoint Insurance Company, provides property and casualty
insurance and reinsurance business solutions, products and services
to small insurance companies and program underwriting agents in the
United States. Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. This press release or
any other written or oral statements made by or on behalf of
CastlePoint and Tower may include forward-looking statements that
reflect CastlePoint�s and Tower�s current views with respect to
future events and financial performance. All statements other than
statements of historical fact included in this press release are
forward-looking statements. Forward-looking statements can
generally be identified by the use of forward-looking terminology
such as �may,� �will,� �plan,� �expect,� �project,� �intend,�
�estimate,� �anticipate,� �believe� or �continue� or their negative
or variations or similar terminology. All forward-looking
statements address matters that involve risks and uncertainties.
Accordingly, there are or will be important factors that could
cause the actual results of CastlePoint, Tower, Hermitage and the
combined companies to differ materially from those indicated in
these statements. The following factors, among others, could cause
or contribute to such material differences: the ability to obtain
governmental approvals or rulings on or regarding the Hermitage
transactions or the Tower-CastlePoint merger on the proposed terms
and schedule; the failure of the shareholders of CastlePoint or the
stockholders of Tower to approve the Tower-CastlePoint merger; the
failure to satisfy the closing conditions to the Hermitage
acquisition or the Tower-CastlePoint merger; the risk that the
businesses will not be integrated successfully or that such
integration may be more difficult, time-consuming or costly than
expected; the risk that the revenue opportunities, cost savings and
other anticipated synergies from the Hermitage acquisition or the
Tower-CastlePoint merger may not be fully realized or may take
longer to realize than expected; disruption from the Hermitage
acquisition or the Tower-CastlePoint merger making it difficult to
maintain relationships with customers, employees, brokers and
managing general agents; the risk that the U.S. or Bermuda tax
authorities may view the tax treatment of the Hermitage acquisition
or Tower-CastlePoint merger and/or the other transactions
contemplated by the Hermitage stock purchase agreement or the
Tower-CastlePoint merger agreement differently from CastlePoint and
Tower�s tax advisors; costs relating to the transactions;
ineffectiveness or obsolescence of the business strategy due to
changes in current or future market conditions; increased
competition on the basis of pricing, capacity, coverage terms or
other factors; greater frequency or severity of claims and loss
activity, including as a result of natural or man-made catastrophic
events, than the underwriting, reserving or investment practices of
Hermitage, CastlePoint or Tower anticipate based on historical
experience or industry data; the ability to obtain necessary
governmental licenses; the ability to hire and retain executive
officers and other key personnel; the effects of acts of terrorism
or war; developments in the world's financial and capital markets
that adversely affect the performance of Hermitage�s, CastlePoint�s
and Tower�s investments; changes in regulations or laws applicable
to Hermitage, CastlePoint, Tower and their respective subsidiaries,
brokers or customers, including tax laws in Bermuda and the United
States; acceptance of products and services, including new products
and services; changes in the availability, cost or quality of
reinsurance and failure of Hermitage�s, CastlePoint�s or Tower�s
reinsurers to pay claims timely or at all; decreased demand for
Hermitage�s, CastlePoint�s or Tower�s insurance or reinsurance
products; the effects of mergers, acquisitions and divestitures in
the insurance and reinsurance sectors; changes in rating agency
policies or practices; changes in legal theories of liability under
Hermitage�s, CastlePoint�s and Tower�s insurance policies or the
policies that it reinsures; changes in accounting policies or
practices; and changes in general economic conditions, including
inflation and other factors. Forward-looking statements speak only
as of the date on which they are made, and the assumptions
underlying our pro forma projections and/or earnings guidance could
prove incorrect due to, among other things, the foregoing factors,
and neither CastlePoint nor Tower undertake any obligation to
update publicly or revise any forward-looking statement, whether as
a result of new information, future developments or otherwise.
Additional Information Although the acquisition of Hermitage by
CastlePoint and sale of Hermitage operating assets by CastlePoint
to Tower is not subject to approval by either Tower or CastlePoint
shareholders, information regarding the transaction will be
included in the joint proxy statement/prospectus regarding the
proposed Tower-CastlePoint merger. Shareholders of Tower and
CastlePoint are urged to read the joint proxy statement/prospectus
regarding the proposed Tower-CastlePoint merger when it becomes
available because it will contain important information.
Shareholders will be able to obtain a free copy of the joint proxy
statement/prospectus, as well as other filings containing
information about Tower and CastlePoint, without charge, at the
Securities Exchange Commission�s Internet site (www.sec.gov).
Copies of the joint proxy statement/prospectus and the filings with
the Securities and Exchange Commission that will be incorporated by
reference in the joint proxy statement/prospectus can also be
obtained, without charge, by accessing the companies� websites:
http://www.twrgrp.com/ or http://www.castlepoint.bm/ Tower and
CastlePoint, their respective directors and executive officers and
other persons may be deemed to be participants in the solicitations
of proxies from the shareholders of Tower and/or CastlePoint in
respect of the proposed Tower-CastlePoint merger. Information
regarding Tower�s directors and executive officers is available in
its proxy statement filed with the Securities and Exchange
Commission by Tower on April 11, 2008, and information regarding
CastlePoint�s directors and executive officers is available in it
proxy statement filed with the Securities and Exchange Commission
by CastlePoint on April 29, 2008. Additional information regarding
the participants in the proxy solicitation and a description of
their direct and indirect interests, by security holdings or
otherwise, will be contained in the joint proxy
statement/prospectus when it becomes available. This press release
shall not constitute an offer to sell or the solicitation of an
offer to sell or the solicitation of an offer to buy any
securities, nor shall there be any sale of securities in any
jurisdiction in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the
securities laws of such jurisdiction. No offering of securities
shall be made except by means of a joint proxy statement/prospectus
meeting the requirements of Section 10 of the Securities Act of
1933, as amended. For more information visit Tower's website at
http://www.twrgrp.com/. or CastlePoint�s website at:
http://www.castlepoint.bm/ CPHL-F
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