On Monday, September 15, 2014, two Massachusetts insurers, Tower National Insurance Company (“Tower National”) and Homeland Insurance Company (“Homeland”) gained a new lease on their corporate lives. That was the day their parent company, Tower Group, ceased to exist as a publicly traded company and merged with ACP Re.
ACP Re is a Bermuda-based reinsurance company. The controlling shareholder of ACP Re is a trust established by the founder of AmTrust Financial Services, Inc., National General Holdings Corporation and Maiden Holdings, Ltd.
As a result of the merger and acquisition, ACP Re became the sole shareholder of the surviving company, Tower Group, and the indirect owner of one hundred percent of the issued and outstanding stock of Tower National and Massachusetts Homeland.
Tower Group shareholders lose 90% in merger
As Agency Checklists’ article, “With its Purchase of Tower Group, Can GMAC Insurance Become a Market Factor in Massachusetts?”, reported, on July 31, 2013, Tower’s stock hovered at just over $22 per share. Then the company announced a charge of up to $110 million to strengthen reserves and the Tower Group’s publicly traded shares tanked.
As a result of its capital impairment, Tower Group sought merger partners and made a merger agreement with ACP Re in January, 2014 that was finally approved on August 6, 2014 by Tower Group’s shareholders.
The final liquidation price in the merger of $2.50 per share meant Tower Group’s shares lost 90% of their value in 14 months.
Tower Group’s financials deteriorated before the merger and the Division of Insurance expedited the required hearing
Tower National was incorporated in Massachusetts in 1983, to offer commercial and personal lines property and casualty insurance, while Homeland was incorporated in Massachusetts in 1981, to write primarily personal lines. Tower Group acquired the company in 2010.
Since Homeland and Tower National are Massachusetts domestic Homeland and Tower National the merger and acquisition of control by ACP Re required a public hearing and approval by the Division of Insurance under G. L. c. 175, §206B.
The final required forms under the statute were not submitted until August 7, 2014. The Commissioner of insurance appointed a special working group that evaluated the proposed acquisition.
The working group worked under pressure from the deteriorating financial condition of the Tower Group. The company had reported a $106 million loss resulting and a negative stockholder equity of $11 million. A.M. Best downgraded the company on August 28, 2014 to C (Weak) from C++ (Marginal) because of the uncertainty of the company’s ability to repay $150 million in senior unsecured debt in the event its pending merger with ACP Re did not occur on or before Sept. 15, 2014.
The working group, however, acted quickly to evaluate the proposed merger and issued a notice of hearing on August 20, 2014, scheduling the statutorily required hearing for September 5, 2014.
Division hears that the merger and acquisition will not affect Homeland’s and Tower National’s employees
At the hearing on September 5, 2014, Jeffrey Weissmann, Vice-President and General Counsel of ACP Re, appeared and testified as to the entire scope of the transactions associated with the merger and acquisition by which ACP Re would acquire the Tower Group’s insurer subsidiaries.
Attorney Weissmann testified that ACP Re’s affiliates, National General Holdings, Inc. (“National General”) and AmTrust Financial Services, Inc. (“AmTrust”) would administer Homeland’s and Tower National’s existing policies, handle claims on those policies, and prospectively manage and reinsure new business that Homeland and Tower National write.
ACP Re’s General Counsel also testified that the merger and acquisition would enable National General and AmTrust to obtain significant commercial lines and personal lines books of business as well as a group of experienced employees. These approximately 120 Homeland and Tower National’s employees in Massachusetts would continue as employees after the merger and handle Homeland’s and Tower National’s business together with experienced National General and AmTrust employees.
Homeland and Tower National testified in favor because ACP Re would retain their employees and agency plant in Massachusetts
William E. Hitselberger, Executive Vice-President and Chief Financial Officer of the Tower Group, as well as of, testified in favor of the merger.
He pointed out that the Homeland and Tower National had already reinsured all of their business with ACP Re affiliates, thus providing a stable market for their customers. Mr. Hitselberger also testified that the merger would reduce, if not, eliminate the Homeland’s and Tower National’s operating losses and create a more stable statutory capital base for Homeland and Tower National.
As a result, the merger Homeland and Tower National would be owned by a strong, experienced parent, whose affiliates will hire most of the employees who presently service Homeland’s and Tower National’s policies.
Additionally, Mr. Hitselberger testified that ACP Re or its affiliates intended to continue Homeland’s and Tower National’s present employees and the appointments of virtually all the Homeland and Tower National current Massachusetts agents.
Merger closes on the deadline with the Division of Insurance’s approval
The Division’s hearing officers only took five days to issue a 10 page decision conditionally approving ACP Re’s acquisition of control of Homeland and Tower National. The approval’s conditions were that the others states involved, including New York, issue similar approvals before the merger date of September 15.
These approvals were issued and the merger went forward on September 15th in time to avoid a default by the Tower Group on its debt obligations and the likely cancellation of the merger.
What happens next?
Following the merger, National General, prospectively, will manage and reinsure Homeland’s and Tower National’s personal lines business and AmTrust will, prospectively, manage and reinsure their commercial lines business.
National General does not presently have a presence in Massachusetts. AmTrust does write property and casualty insurance in Massachusetts, principally workers’ compensation, commercial lines, and warranty products.
In its press release on the merger, AmTrust stated that it had acquired the renewal rights to Tower Group’s commercial lines and that, “For the first six months of 2014, Tower’s Commercial Lines Business generated over $400 million in premium for AmTrust.” The President and CEO of AmTrust stated, “AmTrust is confident that it has the expertise, capital strength and technology to help grow the premium and profit potential of Tower’s Commercial Lines Business. This Business strategically expands AmTrust’s platform, enhancing our company’s ability to benefit from attractive business opportunities and further build shareholder value.”
The Chairman and CEO of National General, Michael Karfunkel, called the personal lines acquisition, “a compelling opportunity” that will give National General “a broader mix, including homeowners and umbrella coverage; an enhanced geographic footprint; and added competitive strength with the ability to bundle several personal lines P/C products.”
As part of the opportunity acquired, Mister Kaufman listed that National General:
- Acquired the rights for new and renewal business for the Tower Personal Lines Insurance Operations, which produced $433.1 million in gross written premiums in 2013.
- Acquired the Attorney-in-Facts that manage two Reciprocal Exchanges (Adirondack Insurance Exchange and New Jersey Skylands Insurance Association) which produced $223.0 million of gross written premiums in 2013.
- Has had access to the Tower Personal Lines book under the Cut-Through Reinsurance Agreement, which was effective as of January 1, 2014.
The acquisition may also be an opportunity for Massachusetts independent agents. Both National General and AmTrust are well capitalized companies that have to be looking at the Tower Group acquisition as a way to gain market share in Massachusetts.
To read the Division of Insurance decision click here: In The Matter of the Acquisition of Control of Tower National Insurance Company and Massachusetts Homeland Insurance Company by Acp Re, Ltd.