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On Aug 28, 2013, Zacks Investment Research downgraded Tower Group International Ltd. to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold).

Why the Downgrade?

Earnings estimates forTower Group have been trending down since management postponed its second quarter results early this month, which was followed by a rating downgrade by ratings agency −A.M. Best.

Although this property-casualty insurer delivered positive earnings surprises in 3 of the last 4 quarters, the average beat stands at a negative 3.2%. Additionally, Tower Group underperformed the year-to-date Nasdaq index, which posed a 11.1% increase against a negative return of 16.4% for the company.

While the company was supposed to release its second-quarter 2013 results on Aug 8, 2013, it postponed it due to the legal and other predicaments arising from allocation of reserve charges, goodwill and certain taxes.

However, management’s projection of pre-tax prior-year loss reserve charge of approximately $60 million to $110 million has raised concerns as it may weigh heavily on the bottom line, resulting in a loss of 80−85 cents per share in the second-quarter. Further, increased reserve charges create uncertainty regarding the reserve leverage in future.

As a result, earlier this month, A.M. Best has put Tower Group and its subsidiaries under the radar with negative outlook until the ratings agency gain more clarity over the mounting reserve charges. Such actions not only hurt the company’s market goodwill but also pose additional financial risks.

The dissolution of the acquisition of American Safety Reinsurance Ltd. (ASRe) from Fairfax Financial Holdings Ltd., in Aug 2013, further locked a value-added business opportunity for Tower Group’s newly formed Tower Re specialty reinsurance business. The $59 million deal could have expanded the company network and underwriting capacities.

The Zacks Consensus Estimate for 2013 plunged 51.3% to $1.09 per share in the last 30 days. Moreover, the 2014 earnings estimate is pegged at $2.56, down 6.2% in the last 30 days. Meanwhile, no upward revision in estimates was witnessed for both the years.

Moreover, the Most Accurate Estimate for Tower Group’s 2014 earnings stands at $2.34 a share, resulting in a negative Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of 8.6%.

Other Stocks to Consider

While we prefer to avoid Tower Group at present, other stocks that are outperforming in the insurance sector include Everest Re (RE - Analyst Report), HCI Group Inc. (HCI - Snapshot Report) and EMC Insurance Group Inc. (EMCI - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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