On April 8, 2014, we issued an updated research report on Tower Group International, Ltd. .
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This Bermuda-based property and casualty insurer is facing a number of negative issues. These include mounting losses, reserve shortfall, job cuts, selling of stake in Canopius and the cancellation of the previously announced acquisition of American Safety Reinsurance, Ltd. (ASRe).
Recently, Tower Group incurred much wider-than-expected loss reserve charges. These reserve charges relate to losses from workers’ compensation, commercial liability and commercial multi-peril liability, and auto policies written in 2008-2011. Such high reserves charges at the company make us skeptical about the fate of the company going forward.
Tower Group experienced significant losses and reductions of statutory surplus in its insurance subsidiaries during 2013. There are currently no commitments or assurances from the company to raise additional capital, execute strategic alternatives or liquidate certain investments to repay the outstanding balance under its credit facility. In addition, there is no guarantee that Tower Group will be able to remedy the current statutory capital deficiencies in certain insurance subsidiaries or maintain adequate levels of statutory capital in the future.
Additionally, Tower Group also called off the scheduled acquisition of ASRe from Fairfax Financial Holdings Ltd., in Aug 2013. This move limited the business opportunity for Tower Group’s newly formed Tower Re specialty reinsurance business.
In order to repay its credit facility of $70 million from Bank of America Corp. (BAC - Analyst Report) , Tower Group sold its stake in Canopius, which could have otherwise established an efficient global specialty insurance platform for the company by enabling it to access three of the world’s major insurance markets, viz. the U.S., Bermuda and London. This sell-out closed the new business opportunity and dismissed the potential synergies expected from the deal.
As a strategic endgame, to pull itself out of the mounting trouble, in early January this year, the company sought an alliance with ACP Re Ltd., a Bermuda-based reinsurance company, in a deal value at $172.1 million. The transaction is expected to close in the summer of 2014 and is contingent on customary approvals from the insurance regulator.
Tower Group presently carries a Zacks Rank #4 (Sell). Investors interested in the property and casualty insurance industry may consider stocks like Alleghany Corp. (Y - Snapshot Report) and Platinum Underwriters Holdings . All these stocks sport a Zacks Rank #1 (Strong Buy).