Privately-held Bermuda-based reinsurer ACP Re Ltd. will acquire100% of the outstanding stock of Tower Group International for $3per share—an aggregate value of about $172.1 million—and mergeTower with one of its subsidiaries, pending shareholder andregulatory approval, according to statements.

Additionally, New York-based AmTrust Financial Services willacquire the renewal rights and assets of Tower Group’s commerciallines insurance operations, and specialty personal-lines insurerNational General Holdings Corp. (NGHC), also based in New York,will acquire the renewal rights and assets of Tower Group’spersonal lines insurance operations, according to AmTrust.

As part of the merger with ACP Re, Tower will be “the survivingcorporation in the merger and a wholly owned subsidiary of ACP Re,”says Tower in its statement. The merger agreement was unanimouslyapproved by the boards of both Tower and ACP Re.

Michael H. Lee, chairman, president and CEO of Tower,beneficially owns approximately 4.2% of the issued and outstandingcommon stock of Tower, and has agreed to vote his shares in favorof the merger.

The transaction is expected to close by the summer of 2014.

Tower also says several of its subsidiaries have entered intocut-through reinsurance agreements with AmTrust and NGHC, “pursuantto which, subject to receipt of necessary regulatory approvals, asubsidiary of AmTrust and a subsidiary of NGHC will reinsureTower's new and renewal commercial lines or personal linespolicies, as applicable, and have each acquired a 10-day option toreinsure on a prospective basis not less than 60% of the unearnedpremium reserve relating to Tower's in-force commercial-lines orpersonal-lines business, as the case may be.”

Tower says it will receive a 20% ceding commission from AmTrustor NGHC on all Tower premiums that are subject to the cut-throughreinsurance agreements.

AmTrust President and CEO Barry Zyskind says in a statement,“The reinsurance agreement and cut-through endorsement, along withsimilar actions undertaken by National General, are designed tostabilize and secure Tower's business and allow Tower's agents,brokers and policyholders to rely on the financial strength ofAmTrust and National General to stand behind Tower's new, renewaland in-force policies.”

Fitch Ratings Director Gerry Glombicki explains the arrangementby noting that cuts to Tower’s ratings were causing some difficultyin writing business. When a company drops below an A- rating fromA.M. Best, he says, agents must disclose that to clients through aletter.

Such a scenario is not a “death blow,” says Glombicki, notingthat plenty of companies have a rating under A- and are doing fine,but the lower the ratings go, the tougher time a company has, hesays. Tower, after being downgraded to B++ by A.M. Best in October, was downgraded againto B in December.

To help resolve the issue, Glombicki says AmTrust and NGHC willwrite the business while Tower gets a fee. Buying renewal rights,says Glombicki, is essentially buying a “relationship asset.” Towerhas value with the customers it has, he says, and that is whatAmTrust and NGHC are buying.

AmTrust says that, upon the completion of the Tower-ACP Remerger, AmTrust expects to “acquire the assets necessary to supportthe commercial-lines business,” including several of Tower'sdomestic insurance companies, the commercial-lines business renewalrights as well as systems, books, records and the right to offeremployment to Tower employees that deal with the commercial-linesbusiness.

The total purchase price for the commercial-lines business isexpected to be about $125 million, says AmTrust.

Zyskind adds, “We expect that the Tower book of business willfurther establish AmTrust as a market leader in the smallcommercial-insurance business. We look forward to integratingTower's commercial-insurance operations into our organization.”

The controlling shareholder of ACP Re is a trust established bythe founder of AmTrust, Maiden Holdings, Ltd. and NGHC.

Tower’s Struggles

Tower enters into the merger after a series of ratings-agencydowngrades related to second- and third-quarter reserve chargesannounced by the company.

In October 2013, A.M. Best and Fitchdowngraded Tower after the company announced it was taking reservecharges of over $300 million related to its workers’ compensation,commercial multi-peril liability, other liability and commercialauto liability lines of business.

Tower announced its second-quarter results at the end of November—a$507.3 million net loss.

The company had issued statements casting doubt about its“ability to continue as a going concern,” but Lee, in a Nov. 15letter issued to business partners, stated his belief that thecompany would be able to meet all of its obligations, “including toour policyholders as well as our lenders.”

Last month, Tower announced additional reserve charges of between $75 million and $105million in the same lines of business, prompting Fitch and A.M.Best to downgrade the company again.

Tower was struggling with gaining concrete access to liquidityin order to deal with three classes of debt, Glombicki told PC360after Tower announced its second-quarter results. The first classwas a $70 million bank-loan facility, which Tower paid off through the sale of its stake in Canopius Group lastmonth. The second class is $150 million in a senior convertiblenote, which is due in September 2014.

The remaining debt is longer term subordinated debt that is duebeginning in 2033.

Glombicki notes that by acquiring 100% of the outstanding stock,ACP Re is assuming all of Tower’s assets and liabilities, includingthe remaining classes of debt. He adds that there have not been alot of public disclosures on the deal because ACP Re is privatelyowned.