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Tower Group, Inc. (TWGP)

TWGP

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Tower Group, Inc.'s (TWGP) third quarter 2011 operating loss came in substantially worse than the Zacks Consensus Estimate of a loss of $0.17, led by a huge catastrophe charge, but partly mitigated by higher revenues and a lower share count due to share buybacks. Low insurance rates in commercial property and homeowners lines of business will restrict overall premium growth going forward.

Also, a low interest rate environment will keep a lid on investment earnings. The quantitative Zacks Rank for Tower Group is currently #4, indicating a downward directional pressure on the shares over the near term.

Our six-month target price of $20.00 equates to about 13.6x our earnings estimate for 2011. We view the $0.75 per share annual dividend as secure, implying a total negative return of about 8.0% over that period, which is consistent with our Underperform recommendation on the shares.

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