Tower Group Inc.
) is very close to closing its merger with Canopius Bermuda, as
the insurer has received all the necessary insurance regulatory
Tower has also restated its 10Q filing for all three reported
quarters this year, along with restating 10K for the year 2011.
Tower is restating a particular item of $3.1 million which has
been recorded as a reduction to tax expense in Tower's report on
Form 10-Q for the period ended March 31, 2012. The item has been
recorded as a reduction to goodwill. In addition to this major
accounting adjustment, the company has made other minor
adjustments to its financial adjustments which will however, not
materially affect the earnings per share or book value per share
for Tower's shareholders.
Coming back to the transaction, 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 enable it to access the three major world
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 targeting
small-sized commercial businesses to encompassing a broad range
of commercial business products. These include specialty lines,
and a separate unit dedicated to personal 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
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Tower is experiencing favorable pricing trends besides
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 Rank #4 (Sell). We are however,
maintaining our Neutral recommendation on the stock. Some
of its peers
The Travelers Companies Inc.
) also carry our long term Neutral recommendation.