Tower Group, Inc. (NASDAQ:TWGP)

CAPS Rating: 3 out of 5

Through its subsidiaries, the Company offers a range of property and casualty insurance products and services to small to mid-sized businesses and to individuals in New York, New Jersey, Massachusetts and Pennsylvania.

Recs

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Player Avatar NetscribeFinancl (< 20) Submitted: 2/28/2007 8:47:26 AM : Outperform Start Price: $29.56 TWGP Score: -138.23

Tower Group offers property and casualty insurance products and services through its insurance companies and other services subsidiary. The strategy of the organization has been to target select market segments that are underserved and provide them the best opportunities like favorable policy terms, conditions and pricing.

Tower Group finished the year 2006 with net premiums up 36.2% to $224 million with favorable loss ratio and declining expense ratio. Though the industry is characterized by increasing catastrophe premium cost, the company owes its success to discipline underwriting practices, unique marketing approach and robust distribution system. The renewal retention rate has been excellent with 91% for personal lines and 85% for commercial lines.

The group has resorted to a hybrid business model that facilitates revenues through sources of underwriting and investment from it own capital base on one side and commission income from premium transfer on the other. For this it has an understanding with CastlePoint whereby it transfers 50% of its total premium to it in return for commissions. For the year ending 2006 it had ceded $155.2 million to CastlePoint Reinsurance representing 38% of gross premiums.

Additional capital has been raised in the form of common shares and preferred securities to finance the acquisition of Preserver Insurance Group. The deal seems to be a strategic fit as it gains access to the targets 300 retail agencies with minimal over lap representing excellent potential for cross selling. Moreover, it has helped it improve its return of equity at 22.2% with the efficient business process.

Huge potential is seen in the home business with hardening market conditions and are well positioned to grow its property business in the northeast region. Territorial expansion still remains one of the key priorities as in 2006 where the acquisition of Preserver helped it gross premiums of $17.9 million from the New Jersey and Massachusetts region. The company remains open to acquisition with an aim of gaining access to local markets through new distribution channel and product offering. Endorsing the same, Tower represents huge growth potential, thereby making itself a good pick for the coming year.

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