We are downgrading our recommendation on shares of
Tower Group Inc.
) to 'Underperform' from 'Neutral' following the
disappointing second quarter results, which was due to a charge
related to reserve strengthening and weather-related losses.
The company reported an operating loss of 39 cents per share.
While it bettered the Zacks Consensus Estimate for a loss of 41
cents, it was down from last year's operating earnings of 63 cents.
ASSURANT INC (AIZ): Free Stock Analysis Report
CHUBB CORP (CB): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
TOWER GROUP INC (TWGP): Free Stock Analysis
To read this article on Zacks.com click here.
We also remain on the sidelines because of the huge execution risk
associated with the recently announced merger transaction with
Tower also has a substantial exposure to catastrophe losses. Though
it has reduced the number of polices in Massachusetts and Rhode
Island, we believe it is exposed to high catastrophe losses in the
Northeast region of the U.S., inducing earnings volatility.
Also, a weak investment yield continues to be a concern for Tower.
In response to this environment, management implemented a strategy
to purchase dividend paying common stocks to enhance investment
income. The company is also evaluating alternative investment
classes to further enhance investment income. Though management is
trying different ways to offset pressure from a low interest rate,
we are not sure whether the company will be successful with this
On the positive side, Tower will gain substantial scale and size
advantages upon successful completion of the merger, enabling it to
access three major insurance markets: the U.S., Bermuda and London.
The company also anticipates that the merger will add to earnings,
with 2013 operating earnings per share improving by approximately
4% - 6%.
Tower's inorganic and organic growth initiatives undertaken over
the recent years are also bearing fruit. This was witnessed when
premiums written increased by 14.9% to $538 million in the second
But again we cannot ignore that the highly competitive property and
casualty environment, which is characterized by significant price
competition, will keep pressure on top line growth.
Tower currently retains a Zacks #5 Rank, which translates into a
short-term Strong Sell rating. Its peers,
The Travelers Companies Inc
), are carrying our 'Neutral' recommendation currently.