On Jun 27, 2014, Zacks Investment Research downgraded
Tower Group International, Ltd.
) to a Zacks Rank #4 (Sell).
Why the Downgrade?
Over the past one year, Tower Group's share price tanked 90.0%,
reflecting pessimism toward the stock that has been mired in
mounting losses, reserve shortfall, job cuts, resignation of the
company's president and CEO Michael Lee, litigations, ineffective
corporate governance, and continuous delay in reporting financial
results. The company filed its quarterly earnings in Jun 19, 2014
only after receiving a notice from Nasdaq.
The most recently filed first-quarter results revealed a 65.1%
year-over-year decline in total revenue. A significant decline in
net premiums earned, though offset by an increase in ceding
commission revenues, was primarily responsible for this decline. In
addition, downgrades by rating agencies took a toll on the
Tower Group, which was hale and hearty till early last year, was
diagnosed with a huge reserve shortfall in Jun 2013. In a soft
insurance market, when the insurance rates were very low, the
company tried an inorganic way to grow through acquisitions, paying
little heed to maintaining adequate reserve in long-tailed products
for the accident years 2008-2011. Consequently, the company,
experienced a serious reserve shortfall in workers' compensation,
commercial liability and commercial auto business lines, which
caused significant losses and reduction of statutory surplus in its
insurance subsidiaries and left the company paralyzed to run its
Faced with inability to repay debt and continue normal operations,
in Jan 2014, Tower Group opted to merge itself with ACP Re Ltd., a
Bermuda-based reinsurance company, as a strategic end game to save
Tower Group is now busy trying out ways to service $150 million of
debt, which is due in Sep 2014, if the deal with ACP Re falls
As the company opened a can of worms, rating agencies A.M. Best Co.
as well as Fitch Ratings lowered Tower Group's ratings and
maintained their negative outlook. Strong ratings from agencies are
vital for writing business in the insurance industry and negative
rating actions hamper a company's business. Tower Group is no
exception to this regard.
The estimate revision over the stock also retells the sad story.
Over the past 60 days, a downtrend was palpable in the estimate
revisions for 2014 and 2015. The Zacks Consensus Estimate for 2014
stands at a loss of 35 cents per share, which is worse than the
loss estimate of 13 cents per share. For 2015, the loss per share
estimate has widened to 25 cents from the prior estimate of a loss
of 5 cent per share.
Other Stocks to Consider
While we prefer to avoid Tower Group at present, better-ranked
stocks in the insurance sector include
AmTrust Financial Services, Inc.
Endurance Specialty Holdings Ltd.
Federated National Holding Company
). All these stocks sport a Zacks Rank #1 (Strong Buy).
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