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We are reiterating our Neutral recommendation on the shares of Tower Group Inc. (TWGP - Analyst Report). The benefits of organic growth, acquisitions and favorable pricing trends are dwarfed by low interest rate and exposure to catastrophe losses.

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 will enable it to access the world’s three major 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 one primarily focused on small-sized commercial business to one encompassing a broad range of commercial business products, including specialty lines, and a separate unit dedicated to personal care 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 forward.

Tower is also experiencing favorable pricing trends. It has been 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 # 4 Rank, which translates into a short-term Sell rating. Some of its peers Assurant Inc. (AIZ - Analyst Report), The Travelers Companies Inc. (TRV - Analyst Report), and Chubb Corp. (CB - Analyst Report) also carry our long term Neutral recommendation.

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