A.M. Best Rates Tower Group, ACP Re - Analyst Blog
January 13 2014 - 6:50PM
Zacks
Following the recent merger announcement of Tower Group
International, Inc. (TWGP) 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 held.
As a part of the merger agreement, AmTrust Financial
Services, Inc. (AFSI), (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 million.
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 business.
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 (AWH) and Aspen
Insurance Holdings Ltd. (AHL). Both these stocks sport a
Zacks Rank #1 (Strong Buy).
AMTRUST FIN SVC (AFSI): Free Stock Analysis Report
ASPEN INS HLDGS (AHL): Free Stock Analysis Report
ALLIED WORLD AS (AWH): Free Stock Analysis Report
TOWER GRP INTL (TWGP): Free Stock Analysis Report
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