On Aug 28, 2013, Zacks Investment Research downgraded
Tower Group International Ltd.
) to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold).
Why the Downgrade?
Earnings estimates forTower Group have been trending down
since management postponed its second quarter results early this
month, which was followed by a rating downgrade by ratings agency
Although this property-casualty insurer delivered positive
earnings surprises in 3 of the last 4 quarters, the average beat
stands at a negative 3.2%. Additionally, Tower Group
underperformed the year-to-date Nasdaq index, which posed a 11.1%
increase against a negative return of 16.4% for the company.
While the company was supposed to release its second-quarter
2013 results on Aug 8, 2013, it postponed it due to the legal and
other predicaments arising from allocation of reserve charges,
goodwill and certain taxes.
However, management's projection of pre-tax prior-year loss
reserve charge of approximately $60 million to $110 million has
raised concerns as it may weigh heavily on the bottom line,
resulting in a loss of 80−85 cents per share in the
second-quarter. Further, increased reserve charges create
uncertainty regarding the reserve leverage in future.
As a result, earlier this month, A.M. Best has put Tower Group
and its subsidiaries under the radar with negative outlook until
the ratings agency gain more clarity over the mounting reserve
charges. Such actions not only hurt the company's market goodwill
but also pose additional financial risks.
The dissolution of the acquisition of American Safety
Reinsurance Ltd. (ASRe) from Fairfax Financial Holdings Ltd., in
Aug 2013, further locked a value-added business opportunity for
Tower Group's newly formed Tower Re specialty reinsurance
business. The $59 million deal could have expanded the company
network and underwriting capacities.
The Zacks Consensus Estimate for 2013 plunged 51.3% to $1.09
per share in the last 30 days. Moreover, the 2014 earnings
estimate is pegged at $2.56, down 6.2% in the last 30 days.
Meanwhile, no upward revision in estimates was witnessed for both
Moreover, the Most Accurate Estimate for Tower Group's 2014
earnings stands at $2.34 a share, resulting in a negative
Earnings ESP (Read:
Zacks Earnings ESP: A Better Method
) of 8.6%.
Other Stocks to Consider
While we prefer to avoid Tower Group at present, other stocks
that are outperforming in the insurance sector include
HCI Group Inc.
EMC Insurance Group Inc.
). All these stocks carry a Zacks Rank #1 (Strong Buy).
EMC INSURANCE (EMCI): Free Stock Analysis
HCI GROUP INC (HCI): Free Stock Analysis
EVEREST RE LTD (RE): Free Stock Analysis
TOWER GRP INTL (TWGP): Free Stock Analysis
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