Tower Group Down to Underperform - Analyst Blog

By
A A A

On May 23, we are downgraded our recommendation on the shares of Tower Group International Ltd . ( TWGP ) to Underperform from Neutral on account of significant execution risk associated with the recently closed merger with Canopius.

Other Factors affecting the Downgrade

Tower generates a substantial portion of its revenues from Northeast United States, an area which is significantly vulnerable to catastrophes. Though Tower has reduced the number of polices in Massachusetts and Rhode Island, we believe the company runs a high catastrophe exposure in the region. Moreover, due to severe catastrophic events in the first half of the year, reinsurance rates might experience upward pressure, and thus the company's operating margin could be suppressed in the upcoming months.

Weaker investment yield continues to be a concern for Tower. In response to this environment, management had implemented a strategy to purchase dividend paying common stocks during the fourth quarter of 2012 to enhance investment income. The company is also evaluating alternative investment classes to further enhance the investment income. Though management is trying out ways to offset pressure from low interest rates, we are not sure as to how successful this strategy will be.

Like other insurers, Tower has been affected by the soft property and casualty insurance market. Management believes that reduced capitalization, decreased new business ventures, increased business declines as well as negligible new home ownership will reduce the demand for small commercial and personal lines policies. Moreover, low pricing in homeowners and commercial property lines of business will restrict overall premium growth.

Other Insurers That Warrant a Look

Other stocks in the insurance sector Hanover Insurance Group Ltd . ( THG ), Monteplier Re Holdings Ltd . ( MRH ), Global Indemnity plc ( GBLI ) all carrying Zacks Rank #1 (Strong Buy) are worth considering.



GLOBAL INDEMNTY (GBLI): Free Stock Analysis Report

MONTPELIER RE (MRH): Free Stock Analysis Report

HANOVER INSURAN (THG): Free Stock Analysis Report

TOWER GRP INTL (TWGP): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: GBLI , MRH , THG , TWGP

Zacks.com

Zacks.com

More from Zacks.com:

Related Videos

Stocks

Referenced

Most Active by Volume

100,376,898
  • $17.62 ▲ 0.51%
83,231,837
  • $25.62 ▲ 1.91%
75,739,329
  • $111.78 ▼ 0.77%
65,297,937
  • $36.37 ▼ 1.76%
59,053,093
  • $47.66 ▲ 0.29%
53,482,350
  • $2.59 ▼ 0.38%
51,504,284
  • $7.34 ▲ 2.37%
51,434,656
  • $8.14 ▲ 6.96%
As of 12/19/2014, 04:15 PM


Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com