As a result of the forced sale of the Tower Group, two related insurance groups may benefit in the expansion of their operations in Massachusetts. Both AmTrust Financial Services and the National General Insurance Group are acquiring the insurance assets of the Tower Group for about three dollars per share through the use of a Bermuda reinsurer that is owned by a trust in which these companies have a substantial interest.
Although National General is one of the largest automobile insurers in the United States, its new trade name obscures its past history. During the restructuring of General Motors in March 2010, the Company acquired GMAC Insurance and Motors Insurance and until July 1, 2013, marketed its insurance products using the “GMAC Insurance” brand name and logo.
As of today, National General operates 13 insurance subsidiaries and is admitted in all 50 states and offers personal auto, RV, motorcycle and commercial auto as well as accident and supplemental health insurance products. The company, however, does not presently directly offer automobile insurance in Massachusetts. In fact, presently more that seventy percent of the company’s gross premiums came from just six states: North Carolina (25.5%); New York (13.7%); California (13.3%), Florida (9.1%), Virginia (5.5%) and Michigan (5.5).
The geographic distribution of this business may change fairly rapidly with regard to Massachusetts since as part of the Tower sale, National General is to acquire Tower’s personal lines business, which includes one Massachusetts domiciled personal lines insurer along with its renewal rights, systems, books and records as well as the right to offer employment to certain Tower employees engaged in the conduct of the personal lines business.
In the same transaction, AmTrust Financial Services will be acquiring Tower’s commercial lines business, which includes one Massachusetts domiciled commercial lines insurer along with its renewal rights, systems, books and records as well as the right to offer employment to certain Tower employees engaged in the conduct of its commercial lines business.
Towers’ Massachusetts companies
Started in New York in 1990, the Tower Group’s initial IPO in October of 2004, was priced at $8.50 per share. The stated business model was to acquire shell companies and then to expand them through acquisition and program businesses with an initial focus in the New York area, New Jersey, and the Northeastern states.
By 2005, Tower Group already had entered into the Massachusetts marketplace through its purchase of the North American Lumber Insurance Company. The purchased was from a court appointed receiver of the North American Lumber Insurance Company shell for a little over $1 million dollars and included nine active state licenses. By 2007, the shell now renamed the Tower National Insurance Company, was licensed in 25 states and by 2009, was writing over $10 million in commercial premium in Massachusetts alone.
In 2010, the Tower Group conducted its biggest deal in Massachusetts when it bought OneBeacon’s personal lines business. The deal had Tower acquire four insurers, one of which was Massachusetts Homeland Insurance, with all the attendant systems and operations, for a total package price of $180 million. Once completed, the acquisition added over $420 million to Tower’s premium book.
Surprise reserve charges from acquisitions put Tower Group on the block.
For all intents and purposes, Tower Group’s acquisition model seemed to be working. Its stock price, after an initial dip, following the public offering, consistently 
stayed above the $15 a share mark, even through the worst of the financial crisis. As of 2013, Tower was still acquiring companies.
On July 31, 2013, Tower’s stock hovered at just over $22 per share, just before the bottom fell out. On August 8th, the company issued a press release indicating that reserves would be strengthened and that the expected balance sheet hit was in the $60-$110 million range.
In October 2013, however, both A.M. Best and Fitch downgraded Tower after the company announced it was actually taking reserve charges of over $365 million related to its workers’ compensation, commercial multi-peril liability, and other liability and commercial auto liability lines of business.
In November, Tower finally announced its 2013 second quarter results showing a $507.3 million net loss. The chart to the right tracks the trajectory of Tower’s stock price during that period from July to December 2013.
A merger in name only
On January 6, 2014, ACP RE, Ltd., a Bermuda reinsurer, and the Tower Group announced, that they were merging. While the legal description of the transaction is technically correct, in reality, the Tower group and its subsidiary insurance companies will be merged into a yet unformed subsidiary of ACP. The substance of the deal is a sale in which the renewal rights for both the commercial lines and personal lines held by the various Tower Group subsidiaries will be sold to AmTrust Financial Services and the National General Insurance Group, respectively. In preparation for the sale, both AmTrust and National General have entered into 100% cut through reinsurance agreements effective January 1st, on a substantial portion of the existing books of business in the Tower Group companies.
While ACP Re sports a Best rating of A-, A.M. Best did place this rating under review with negative implications after the announcement of its proposed acquisition of the Tower Group.
Presently, Massachusetts Homeland Insurance has approximately 125 agents with less than one percent of the personal lines automobile insurance market in Massachusetts.
If National General enters the Massachusetts automobile insurance market through its acquisition of Massachusetts Homeland Insurance’s personal lines business, one may see a rapid expansion of Massachusetts Homeland’s market share and agency appointments. Agency Checklists will keep its readers posted on any further developments.
