A worrying announcement from Tower Group International (TWGP) sparked a minor sell off in early Monday trading action, as investors feared that any negative news could potentially jeopardize an acquisition that is set to save the beleaguered insurer from going completely under water.
The announcement in question stated that Tower Group had sent a request for confirmation that ACP Re still intended to buy them out at $2.50 a share, as the firm had earlier said they intended to do. However, ACP has a litany of opt-out clauses to fall back on lest they think Tower Group is not as solvent as they claimed.
This is not a wild claim concerning the Bermuda-based insurer. Tower Group has had a storied year, to say the least, losing more than 80 percent of its value following a laundry list of setbacks.
Earnings Report Delays and Massive Losses
The company’s troubles began with a delayed earnings report in the second quarter of 2013, with Tower Group hinting that loss reserves would be magnitudes more severe than originally anticipated. That earnings report was delayed again, and while the final release of the report did reveal losses were bad, but not as catastrophic as expected, the damage had already been done.
However, it wasn’t just the present and future investors had to take into account concerning the company. Tower Group had also previously been forced to revise its 2011 and 2012 fiscal year reports, showing that losses were wider in the past than previously reported.
Tower Group has at times showed signs of recovery. A considerable amount of losses accrued by the company stemmed from payouts associated with property coverage in areas hit by Hurricane Sandy. Although the losses from the disaster were severe, if an insurance company can recover from such the company from a resulting rise in premiums.
ACP’s offer to scoop up Tower Group sent shares back up, relatively speaking, although ACP was understandably cautious in the perusal of the insurer. Their offer of $2.50 for Tower Group was a reduction of a previous $3 a share offer. ACP also was able to secure an opt-out clause should Tower Group’s profile prove too risky.
In response to the Tower Group inquiry, ACP merely stated that the company “reserves all its rights under the Merger Agreement, with respect to the matters referenced in your letter or otherwise.” That is, that ACP hasn’t made up their mind yet, but following through on the buyout is entirely up to them.
Volatility in Near Future for TWGP
While Tower Group sits in limbo, awaiting a buyout and resulting cash injection that will shore up the massive capital shortfall, the company stock should continue to whipsaw. The current price point of $1.80 is entirely untenable, and splits the difference between the two ultimate outcomes of the ACP deal.
On one hand, if ACP does indeed commit fully to the buyout, shares of Tower Group will undoubtedly rise back to the $2.50 level, as shareholders of record will be guaranteed at least as much. On the other hand, if the deal falls through Tower Group will almost certainly fall even lower. Although shares are currently at their all-time low, Tower Group lacks a second serious offer for their company, and if the ACP deal falls through the threat of insolvency is very real.
No analyst has yet assigned a price target of zero, or otherwise called for Tower Group shares to become completely worthless. However, with losses mounting, Tower Group would much rather find a buyer sooner rather than later.