On Jun 27, 2014, Zacks Investment Research downgraded Tower Group International, Ltd. (TWGP) to a Zacks Rank #4 (Sell).
Why the Downgrade?
Over the past one year, Tower Group’s share price tanked 90.0%, reflecting pessimism toward the stock that has been mired in mounting losses, reserve shortfall, job cuts, resignation of the company’s president and CEO Michael Lee, litigations, ineffective corporate governance, and continuous delay in reporting financial results. The company filed its quarterly earnings in Jun 19, 2014 only after receiving a notice from Nasdaq.
The most recently filed first-quarter results revealed a 65.1% year-over-year decline in total revenue. A significant decline in net premiums earned, though offset by an increase in ceding commission revenues, was primarily responsible for this decline. In addition, downgrades by rating agencies took a toll on the company’s business.
Tower Group, which was hale and hearty till early last year, was diagnosed with a huge reserve shortfall in Jun 2013. In a soft insurance market, when the insurance rates were very low, the company tried an inorganic way to grow through acquisitions, paying little heed to maintaining adequate reserve in long-tailed products for the accident years 2008–2011. Consequently, the company, experienced a serious reserve shortfall in workers’ compensation, commercial liability and commercial auto business lines, which caused significant losses and reduction of statutory surplus in its insurance subsidiaries and left the company paralyzed to run its business.
Faced with inability to repay debt and continue normal operations, in Jan 2014, Tower Group opted to merge itself with ACP Re Ltd., a Bermuda-based reinsurance company, as a strategic end game to save itself.
Tower Group is now busy trying out ways to service $150 million of debt, which is due in Sep 2014, if the deal with ACP Re falls apart.
As the company opened a can of worms, rating agencies A.M. Best Co. as well as Fitch Ratings lowered Tower Group’s ratings and maintained their negative outlook. Strong ratings from agencies are vital for writing business in the insurance industry and negative rating actions hamper a company’s business. Tower Group is no exception to this regard.
The estimate revision over the stock also retells the sad story. Over the past 60 days, a downtrend was palpable in the estimate revisions for 2014 and 2015. The Zacks Consensus Estimate for 2014 stands at a loss of 35 cents per share, which is worse than the loss estimate of 13 cents per share. For 2015, the loss per share estimate has widened to 25 cents from the prior estimate of a loss of 5 cent per share.
Other Stocks to Consider
While we prefer to avoid Tower Group at present, better-ranked stocks in the insurance sector include AmTrust Financial Services, Inc. (AFSI), Endurance Specialty Holdings Ltd. (ENH) and Federated National Holding Company (FNHC). All these stocks sport a Zacks Rank #1 (Strong Buy).
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