In two announcements, AmTrust Financial Services said it would acquire renewals rights for Tower Group International’s commercial lines business for $125 million, and Tower said it entered into a $172 million merger agreement with Bermuda reinsurer ACP Re Ltd.
The controlling shareholder of ACP Re, a Bermuda- based reinsurer, is a trust established by the founder of AmTrust, Maiden Holdings, Ltd. and National General.
AmTrust also said that National General Holdings Corp., a specialty personal lines property/casualty insurer, agreed to acquire the renewal rights and assets of the personal lines insurance operations of Tower.
Pursuant to the terms of the merger deal with ACP Re, each outstanding share of Tower’s common stock, par value $0.01 per share, will be converted into the right to receive $3.00 in cash with an aggregate value of approximately $172.1 million (following the settlement of all outstanding equity awards).
Tower said it entered into the merger agreement with ACP Re and a wholly-owned subsidiary of ACP Re on Jan. 3, 2014. The deal calls for the subsidiary to “merge with and into Tower.” Tower will be the surviving corporation and a wholly owned subsidiary of ACP Re.
The deal is expected to close by the summer of 2014.
Renewal Rights and Reinsurance
In connection with the ACP Re agreement, AmTrust said it agreed to acquire the renewal rights and assets of Tower’s commercial lines insurance operations.
In addition, AmTrust has reached agreement with several Tower subsidiaries to enter into a 100 percent quota-share reinsurance agreement and provide a cut-through endorsement on most of Tower’s commercial lines business in-force policies, and on new and renewal commercial business.
AmTrust has also obtained a 10-day option to reinsure, on a prospective basis, not less than 60 percent of the approximately $290 million unearned premium reserve relating to commercial lines business, the company said, noting that it expects to exercise the option and to prospectively reinsure most of the business included in the unearned premium reserve.
The cut-through, when approved, will be effective as of Jan. 1, 2014.
[A cut-through provides that, in the event of the insolvency of the insurance company, the amount of any loss which the insurance company would have recovered from the reinsurer will be paid instead directly to the policyholder, claimant, or other payee, as specified by the endorsement, by the reinsurer. ]
AmTrust will pay a 20 percent ceding commission to Tower on all Tower premium subject to the cut-through arrangement.
In AmTrust’s statement, Barry Zyskind, president and CEO, said: “We are confident the addition of Tower’s small commercial insurance business will enhance the company’s [AmTrust’s] value. The reinsurance agreement and cut-through endorsement along with similar actions undertaken by National General are designed to stabilize and secure Tower’s business and allow Tower’s agents, brokers and policyholders to rely on the financial strength of AmTrust and National General to stand behind Tower’s new, renewal and in-force policies.”
AmTrust said that when the merger of Tower with ACP Re’s subsidiary is complete, AmTrust expects to acquire the assets necessary to support the commercial lines business, including several of Tower’s domestic insurance companies, the commercial lines business renewal rights, the systems, books and records required to effectively conduct the commercial lines business.
AmTrust also has the right to offer employment to certain Tower employees engaged in conducting Tower’s commercial lines business.
“We expect that the Tower book of business will further establish AmTrust as a market leader in the small commercial insurance business,” Zyskind said.
The Tower statement said that the controlling shareholder of ACP Re has provided to Tower a guarantee for the payment of the merger consideration.
In addition, ACP Re’s obligation to consummate the merger is subject to the non-occurrence of any material adverse effect on Tower. The statement said the obligation is also conditioned on “the absence of any insolvency-related event affecting Tower.”
The transaction is also conditioned on holders of not more than 15 percent of Tower’s common stock dissenting to the merger.
Michael H. Lee, chairman, president and CEO of Tower, who beneficially owns approximately 4.2 percent of the stock of Tower as of January 3, 2014, has agreed to vote his shares in favor of the merger.
If the deal is terminated under certain circumstances, Tower will be obligated to reimburse ACP Re for some of its transaction expenses, subject to a cap of $2 million, and to pay ACP Re a termination fee of $8.18 million, net of any transaction expenses it has reimbursed.
The lead financial advisor to Tower on this transaction was J.P. Morgan Securities LLC. Tower also received financial advice from BofA Merrill Lynch.
Guggenheim Securities, LLC is acting as a financial advisor to AmTrust Financial Services, Inc.
Sources: Tower Group International, Ltd., AmTrust Financial Services, Inc.