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On Jan 2, 2014, Zacks Investment Research downgraded Tower Group International Ltd. (TWGP - Analyst Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Tower Group has recently come across several headwinds that have largely impacted the company’s performance. These include mounting losses, reserve shortfall, job cuts, and cancellation of the previously announced acquisition of American Safety Reinsurance, Ltd. (ASRe).

Last month, the company disclosed that it needs to add $75–$105 million to its reserve in the third quarter to cover up for losses related to workers’ compensation, commercial liability and commercial auto policies.  In October, Tower Group increased its reserves by about $365 million in order to make up for losses incurred from 2009 to 2011. The company is also cutting down on its expenses by $21 million per year by slashing 10% of its staff count.

In 2013, the company delayed reporting its financial results as it was caught up in calculating its reserve shortfall and settling other issues. Moreover, Tower Group sold its stake in Canopius Group Ltd. and used the proceeds to fully repay a $70 million outstanding credit facility from Bank of America Corp. (BAC - Analyst Report)

In addition, during Dec 2013, the rating agency A.M. Best lowered the company’s issuer credit rating to ‘B’ from ‘B++’ and maintained its negative outlook.

The dissolution of the scheduled acquisition of 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’s network and underwriting capacities.

The Zacks Consensus Estimate also witnessed downward revisions. For 2013, it stands at a loss per share of $4.43, wider from a loss per share of $4.07 incurred 60 days ago. Moreover, the 2014 earnings estimate is pegged at 54 cents per share, down 67% in the last 60 days.

Other Stocks to Consider

While we prefer to avoid Tower Group at present, better-ranked stocks in the insurance sector include Allied World Assurance Company Holdings, AG (AWH - Snapshot Report) and AmTrust Financial Services, Inc. (AFSI - Snapshot Report). Both these stocks sport a Zacks Rank #1 (Strong Buy).


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