Tower Group, Inc. announce the closing of its merger with Canopius Holdings Bermuda Limited at the close of trading on the NASDAQ yesterday.The company said that upon closing, Tower will become an indirect wholly-owned subsidiary of Canopius Bermuda, which will change its name to Tower Group International, Ltd.Tower’s President and CEO Michael Lee said, “After working diligently on the merger with Canopius Bermuda for more than one year, we are very pleased with the successful completion of this transformative and strategically important transaction.“As a result of the merger, we will create an efficient Bermuda-domiciled holding company structure that will combine Tower’s businesses with certain of Canopius’s reinsurance business and give us access to US, Bermuda and Lloyd’s markets,” he said.“From a strategic standpoint, we believe this merger will position Tower to build a profitable, diversified international specialty business that has the potential to create substantial long-term value for our stockholders,” Mr Lee continued.Upon news of the merger’s closing, Fitch Ratings announced it has affirmed Tower’s ‘BBB’ Issuer Default Rating (IDR) and assigned a ‘BBB’ IDR to the new ultimate holding company, Tower Group International, Ltd.Fitch has also affirmed the Insurer Financial Strength (IFS) ratings at ‘A-’ for Tower’s operating subsidiaries. The company says the rating outlook is stable.In a statement, Fitch said the decision follows Tower’s announcement that it has successfully merged into Canopious Holdings Bermuda Limited.Tower received majority of shareholder approval on its Tuesday vote and received $217 million in additional equity as a consequence of the merger.“Tower’s debt to capital and debt to tangible capital ratio was 33 percent and 44 percent respectively at year-end 2012. However, with the additional $217 million in equity raised pro forma financial leverage and tangible financial decline to 28 percent and 37 percent respectively,” Fitch said in a statement.The ratings firm said the rationale for the affirmation includes Fitch’s expectation “that Tower will return to historical profitability levels in the near future, multi-tiered approach to underwriting, history of modest reserve development, and a well diversified investment portfolio that has an average credit rating of ‘A+’,” a statement from the firm said.Also factored in to Fitch’s rating rationale is the company’s appetite for growth, complex organisational structure, and an elevated catastrophe profile given the company’s concentration in New York, New Jersey, and Massachusetts markets where approximately 70 percent of total direct written premiums are derived.“Fitch views this transaction as potentially favourable if executed properly as it creates a larger, more geographically diverse business platform with access to three major insurance markets: US, Bermuda, and the Lloyds markets, in addition to an international holding company,” Fitch said.“This broader diversification is expected to enhance profitability and provide a sufficient source of capital to support Tower’s US growth.“This structure will allow Tower to take advantage of the lower tax rate afforded by the holding company’s Bermuda domicile. Similar to many Bermuda (re) insurers, this approach exposes Tower to any changes in US tax laws that would reduce or eliminate tax advantages on business generated in the US but reinsured to affiliated offshore companies,” the agency said.Fitch said it recognises that historical catastrophe losses have been modest at Tower, but Hurricane Sandy and Hurricane Irene produced significant pretax net catastrophe related losses of approximately $120 million and $52 million respectively. Tower recorded a net after tax loss of $80.1 million from Sandy, which excludes $7.2 million in losses from the reciprocals.The agency said Tower’s geographical concentration of Northeast property related premiums leaves the company more susceptible to tail event risk than most peers. In particular, in a large catastrophe event Tower is heavily dependent on reinsurers in its catastrophe programme providing timely payments.“Adverse reserve development was historically modestly favourable at Tower. However, Tower took $70.9 million in pretax reserve strengthening for full-year 2012. The majority of the reserve development comes from commercial insurance in accident years 2009-2011 and pertain to various programs, most of which have been terminated,” Fitch said.“Fitch notes that the reserve development is outside of ratings expectations and coupled with Hurricane Sandy losses is of sufficient magnitude to cause financial leverage and interest coverage downgrade triggers to be exceeded,” the statement read.Fitch went on to say it anticipates that Tower will reverse this trend over the next 12-18 months through profitable operations and possibly from capital raise related to merger in Canopious Holdings Bermuda Limited.