N.Y.’s Tower Group to Acquire Rest of Bermuda’s CastlePoint

August 5, 2008

New York-based insurer Tower Group, Inc. has agreed to acquire Bermuda reinsurer CastlePoint in a transaction valued at approximately $490 million.

The deal will allow Tower to shift some of its reinsurance to other carriers at more favorable terms and allow Tower to offer CastlePoint’s programs and reinsurance services.

Under the terms of the agreement, based on yesterday’s closing stock price for Tower of $23.09, CastlePoint shareholders would receive a combination of Tower common stock and cash equal to $12.68 per CastlePoint share.

Following the acquisition, Tower will continue to trade on NASDAQ under Tower’s existing ticker symbol TWGP and CastlePoint will be delisted.

CastlePoint is valued in the transaction at a 1.16 times CastlePoint’s book value at March 31, 2008, and a 42.8 percent premium to CastlePoint’s closing price yesterday.

Tower offers property and casualty insurance products and services through its operating subsidiaries. Tower’s insurance services subsidiaries provide underwriting, claims and reinsurance brokerage services to other insurance companies.

CastlePoint, a Bermuda-based holding company, through its subsidiaries, CastlePoint Reinsurance Co., CastlePoint Management Corp., and CastlePoint Insurance Co., provides property and casualty insurance and reinsurance business solutions, products and services to small insurance companies and program underwriting agents in the United States.

The combined gross premiums written projected to be in a range of $1.1 to $1.2 billion.

Tower already owns 6.7 percent of CastlePoint.

The acquisition is not expected to require any external financing.

The transaction is expected to close in December 2008, subject to customary closing conditions, including the approval by Tower and CastlePoint shareholders, as well as certain regulatory approvals.

After this transaction, Tower and CastlePoint expect to continue conducting business at the same business locations by utilizing their respective business platforms and corporate names. However, this transaction will result in CastlePoint being a controlled foreign corporation subject to U.S. taxation.

Tower said it will continue to focus on underwriting its brokerage business through retail and wholesale agents and CastlePoint will continue to provide its programs, risk sharing and reinsurance services to its program underwriting and insurance company clients.

In addition, CastlePoint’s three independent board members will join Tower’s Board to comprise seven independent and two executive members.

Michael H. Lee will remain the chairman and CEO of the combined organization and CastlePoint’s senior management team will be combined with Tower’s senior management team.

Lee said the combination of the two companies provides Tower with the ability to utilize CastlePoint’s capital more efficiently and simplify its corporate structure.

“In contrast to the market conditions at the time of CastlePoint’s formation in April 2006, changes in the reinsurance market that now benefit primary companies provide Tower with the opportunity to shift its quota share reinsurance program currently placed with CastlePoint to other reinsurers on more favorable terms and conditions. By doing so, Tower can significantly increase its own capital base and access additional underwriting capacity from other reinsurers to support Tower’s growth opportunities in higher margin segments, especially through strategic acquisitions,” Lee said.

Also, by combining with CastlePoint, Tower will be able to further diversify its business platform through CastlePoint’s program and reinsurance businesses.

Both Tower and CastlePoint formed special committees consisting solely of independent directors to evaluate and negotiate the terms of a strategic combination between the two companies. Tower’s special committee retained Lazard Frères & Co. LLC as its independent financial advisor and Debevoise & Plimpton LLP as its independent legal advisor. CastlePoint’s special committee retained Goldman, Sachs & Co. as its independent financial advisor and Sullivan & Cromwell LLP as its independent legal advisor.

Sources: Tower group


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