On Jan 6, 2014, we downgraded our recommendation on
Tower Group International, Inc.
) to Underperform from Neutral reflecting concerns regarding a
number of negative issues confronting the company. These include
mounting losses, reserve shortfall, job cuts, selling stake in
Canopius and cancellation of the previously announced acquisition
of American Safety Reinsurance, Ltd. (ASRe). Tower Group
presently carries a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Tower Group has recently come across several headwinds that have
largely impacted the company's performance. Last month, the
company disclosed that it needs to add $75-$105 million to its
reserves in the third quarter of 2013 to cover up for losses
related to workers' compensation, commercial liability and
commercial auto policies. In Oct 2013, Tower Group
increased its reserves by about $365 million in order to make up
for losses incurred from 2009 to 2011. The company is also
cutting down on its expenses by $21 million per year by slashing
10% of its staff count.
Tower Group experienced significant losses and reductions of
statutory surplus in its insurance subsidiaries in the first half
of 2013, and there are currently no commitments or assurances to
raise additional capital, execute strategic alternatives or
liquidate certain investments at prices sufficient to repay the
outstanding balance under its credit facility. Until the
completion of a definitive executable plan to remedy statutory
capital deficiencies and repay the credit facility, there is
substantial doubt about the company's ability to continue as a
In 2013, Tower Group delayed reporting its financial results as
it was caught up in calculating its reserve shortfall and
settling other issues. Moreover, the company sold its stake in
Canopius Group Ltd. and used the proceeds to fully repay a $70
million outstanding credit facility from
Bank of America Corp.
In addition, in Dec 2013, the rating agency A.M. Best lowered
Tower Group's issuer credit rating to 'B' from 'B++' and
maintained its negative outlook.
The Zacks Consensus Estimate also witnessed downward revisions.
For 2013, it stands at a loss per share of $4.43, widening from a
loss per share of $4.07, 60 days ago. Moreover, the 2014 earnings
estimate is pegged at 54 cents per share, down 67% in the last 60
Other Stocks to Consider
While we prefer to avoid Tower Group at present, better-ranked
stocks in the insurance sector include
Allied World Assurance Company Holdings, AG
AmTrust Financial Services, Inc.
). Both these stocks sport a Zacks Rank #1 (Strong Buy).
AMTRUST FIN SVC (AFSI): Free Stock Analysis
ALLIED WORLD AS (AWH): Free Stock Analysis
BANK OF AMER CP (BAC): Free Stock Analysis
TOWER GRP INTL (TWGP): Free Stock Analysis
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