An Unlikely Bid for Tower Group

Tower Group logo

Tuesday, a subsidiary of Eurohold Group, Euroins Insurance Group, announced a $3.75 bid for Tower Group.  I think it is bogus.  Here’s why:

  • At the price they are paying, they are offering more than their net worth to buy Tower Group $215MM vs $190MM.
  • They would pay a 2x+ premium over book to buy Tower when they trade at ~70% of book.
  • They have no overlapping lines, geographically.  It would be cheaper for Eurohold to buy a Bermuda shell and poach some talent, if what they want to do is diversify.
  • TWGP isn’t even worth the $2.50 that ACP Re is offering.
  • The language in the “offer” is weaker than that of many “letters of intent” I have read, much less a binding offer.

Now, let me take one step back, and say that the numbers I calculated above derive from documents written in Bulgarian that I have translated mechanically.  I may have made mistakes.

Also, a fool and his money are soon parted.  If Eurohold is foolish, a bid could be made where economics doesn’t matter.  After all of my dealings with foreign insurers, I have seen many ill-thought-out deals.

Kudos to the guy who sold near $3 on Tuesday.  He got the best outcome out of this sordid mess.  Opposite for the one that bought.

As for me, I have no position.  I rarely short, and there is no significant margin of safety in owning TWGP.  The odds of the operating subsidiaries as a group having not enough surplus to exceed the relevant company action level risk based capital  for the group as a whole is not high, but is not zero.  That is the one condition that can break the $2.50 deal with ACP Re.

Now let’s see how the first quarter earnings come in.  That will say a lot.

As an aside, the bonds of Tower Group offer about as much upside, and less downside than the equity does, if the ACP Re deal is the only real deal.

By David Merkel, CFA of alephblog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.