A.M. Best Co. has commented that the issuer credit rating (ICR) and debt ratings of Tower Group, Inc. (TWGP), as well as the financial strength rating and ICRs of its insurance subsidiaries are unchanged.
Best made the announcement following TWGP's second quarter pre-earnings announcement and its planned agreement with Canopius Group Limited to exercise its option (under a master transaction agreement) to acquire Canopius Group's intermediate holding company subsidiary, Canopius Holdings Bermuda, Limited, along with its insurance company subsidiary, Canopius Bermuda Limited, in an exchange for TWGP stock."
"Under the plans of this merger, Canopius Bermuda is expected to acquire all shares of TWGP's common stock, which will subsequently be regarded as a reverse merger, with TWGP becoming the acquiring entity and ultimate parent under applicable accounting principles," Best explained, adding that it does not rate Canopius Group Limited and its affiliates.
Best also pointed out that the "merger is part of a Master Transaction Agreement between TWGP and Canopius Group previously announced on April 25, 2012, whereby TWGP agreed to initially invest approximately $75 million to acquire a 10.7 percent stake in Canopius Group. This is subject to the closing of Canopius Group's acquisition of Omega Insurance Holdings Limited (Omega). Under this same Master Transaction Agreement, Canopius Group also has committed to assist TWGP with the establishment of a presence at Lloyd's (subject to required approvals)."
Best cited the "fluid nature of this transaction, the number of contingencies involved and the options afforded to TWGP and its shareholders," which it said created "several uncertainties" in the execution of the transaction itself. However, Best also noted that over the years, "TWGP has a strong track record and has demonstrated success in acquiring and integrating companies. The transaction is subject to shareholder and regulatory approvals and is expected to close late in the fourth quarter of 2012, at the earliest." Best will continue to monitor TWGP's progress in executing this transaction.
"The ratings of TWGP and its subsidiaries were previously affirmed on June 12, 2012," Best continued. "The affirmations at that time also referenced the execution risk associated with any future endeavors, including the recently announced investment in Canopius Group, which as mentioned previously, is subject to the completion of Canopius Group's acquisition of Omega.
"Additional concerns include the recent reserve charge taken in the second quarter of 2012, TWGP's accelerated involvement in the Lloyd's market and the challenges of operating in a highly competitive environment vis a vis significant price competition. TWGP also generates a substantial amount of business from the northeastern region of the United States.
"As of March 31, 2012, TWGP maintains moderate financial leverage with debt to capital of 29.1 percent and debt-to-tangible capital of 38.7 percent, including capital in the reciprocal exchanges. While future acquisitions may increase financial leverage at TWGP, it is expected that TWGP will maintain financial leverage and coverage ratios that remain within A.M. Best's guidelines for its ratings."
Source: A.M. Best
admin 06 Aug, 2012
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