Tower Group, Inc. (TWGP) - Bear of the Day

We are downgrading our recommendation on Tower Group, Inc. (TWGP) to Underperform from Neutral as we think that a lower interest rate environment and higher expense ratio due OneBeacon’s Personal Lines system integration, as well as other systems-related initiatives, will suppress earnings in the near term.

The company’s fourth quarter 2010 earnings were ahead of the Zacks Consensus estimate, aided by a significant increase in Tower’s Personal Lines business and its continued expansion into the Specialty Commercial business. However, a soft insurance market and exposure to catastrophe prone areas are some of the headwinds.

Our six-month target price of $21.00 equates to about 7.6x our earnings estimate for 2011. We view the $0.50 per share annual dividend as secure, implying a total negative return of about 9.1% over that period, which is consistent with our Underperform recommendation on the shares.
 
TOWER GROUP INC (TWGP): Free Stock Analysis Report
 
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