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

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

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

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

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

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

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

AmTrust says that, upon the completion of the Tower-ACP Re merger, AmTrust expects to “acquire the assets necessary to support the commercial-lines business,” including several of Tower's domestic insurance companies, the commercial-lines business renewal rights as well as systems, books, records and the right to offer employment to Tower employees that deal with the commercial-lines business.

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

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

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

Tower’s Struggles

Tower enters into the merger after a series of ratings-agency downgrades related to second- and third-quarter reserve charges announced by the company.

In October 2013, A.M. Best and Fitch downgraded Tower after the company announced it was taking reserve charges of over $300 million related to its workers’ compensation, commercial multi-peril liability, other liability and commercial auto 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. 15 letter issued to business partners, stated his belief that the company would be able to meet all of its obligations, “including to our policyholders as well as our lenders.”

Last month, Tower announced additional reserve charges of between $75 million and $105 million 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 liquidity in order to deal with three classes of debt, Glombicki told PC360 after Tower announced its second-quarter results. The first class was a $70 million bank-loan facility, which Tower paid off through the sale of its stake in Canopius Group last month. The second class is $150 million in a senior convertible note, which is due in September 2014.

The remaining debt is longer term subordinated debt that is due beginning in 2033.

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