We are reiterating our Neutral recommendation on the shares of
Tower Group Inc.
). The benefits of organic growth, acquisitions and favorable
pricing trends are dwarfed by low interest rate and exposure to
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We view Tower's merger with Canopius Bermuda as a significant
step towards the company's strategic objective of establishing an
efficient global specialty insurance platform. The acquisition
will add scale and size to the company and will enable it to
access the world's three major insurance markets, the U.S.,
Bermuda and London. Tower currently expects that the merger will
add to 2013 operating earnings per share by approximately 4%-6%.
Tower Group focused on an acquisition-driven growth plan in 2009
and 2010, since the market conditions at that time did not
provide substantial organic growth. To this effect, the company
made a series of strategic acquisitions. These acquisitions have
increased the company's gross premiums making Tower one of the
top 50 insurance companies in the United States.
Apart from inorganic growth, currently Tower is focusing on
growing organically. For this, it created two new business units
- customized solutions and assumed reinsurance, which have
already contributed significantly to the company's organic
growth. It is also expanding its business platform from one
primarily focused on small-sized commercial business to one
encompassing a broad range of commercial business products,
including specialty lines, and a separate unit dedicated to
personal care lines. Management has also made several key senior
level recruitments to improve its internal business development,
product development and corporate marketing capabilities. We
believe that this initiative will continue to generate organic
growth going forward.
Tower is also experiencing favorable pricing trends. It has been
implementing a plan to drive meaningful rate increases, rather
than simply non-renewing unprofitable business.
However, low interest rate and exposure to catastrophe losses
will remain near term headwinds.
Tower currently retains a Zacks # 4 Rank, which translates into a
short-term Sell rating. Some of its peers
The Travelers Companies Inc.
) also carry our long term Neutral recommendation.