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Tower Group Inc. (TWGP - Analyst Report) is very close to closing its merger with Canopius Bermuda, as the insurer has received all the necessary insurance regulatory approvals.

Tower has also restated its 10Q filing for all three reported quarters this year, along with restating 10K for the year 2011.

Tower is restating a particular item of $3.1 million which has been recorded as a reduction to tax expense in Tower’s report on Form 10-Q for the period ended March 31, 2012. The item has been recorded as a reduction to goodwill. In addition to this major accounting adjustment, the company has made other minor adjustments to its financial adjustments which will however, not materially affect the earnings per share or book value per share for Tower’s shareholders.

Coming back to the transaction, 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 enable it to access the three major world 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 targeting small-sized commercial businesses to encompassing a broad range of commercial business products. These include specialty lines, and a separate unit dedicated to personal 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 experiencing favorable pricing trends besides 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 Rank #4 (Sell). We are however, maintaining our Neutral recommendation on the stock.  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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