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On Jan 6, 2014, we downgraded our recommendation on Tower Group International, Inc. (TWGP - Analyst Report) to Underperform from Neutral reflecting concerns regarding a number of negative issues confronting the company. These include mounting losses, reserve shortfall, job cuts, selling stake in Canopius and cancellation of the previously announced acquisition of American Safety Reinsurance, Ltd. (ASRe). Tower Group presently carries 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. Last month, the company disclosed that it needs to add $75–$105 million to its reserves in the third quarter of 2013 to cover up for losses related to workers’ compensation, commercial liability and commercial auto policies.  In Oct 2013, 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.

Tower Group experienced significant losses and reductions of statutory surplus in its insurance subsidiaries in the first half of 2013, and there are currently no commitments or assurances to raise additional capital, execute strategic alternatives or liquidate certain investments at prices sufficient to repay the outstanding balance under its credit facility.  Until the completion of a definitive executable plan to remedy statutory capital deficiencies and repay the credit facility, there is substantial doubt about the company's ability to continue as a going concern.

In 2013, Tower Group delayed reporting its financial results as it was caught up in calculating its reserve shortfall and settling other issues. Moreover, the company 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, in Dec 2013, the rating agency A.M. Best lowered Tower Group’s issuer credit rating to ‘B’ from ‘B++’ and maintained its negative outlook.

The Zacks Consensus Estimate also witnessed downward revisions. For 2013, it stands at a loss per share of $4.43, widening from a loss per share of $4.07, 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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