We are downgrading our recommendation on Tower Group (TWGP) to Underperform. Tower Group is embarking on an aggressive geographic expansion plan at a time of intensifying competition and rate softening in the broader property-casualty market. Entering several new markets poses uncertainty, and we are concerned that the company could under-price unfamiliar risks.
Tower generates a substantial portion of its revenues from the Northeast United States, an area which is significantly prone to catastrophes. It has incurred losses from the recent catastrophes in this area.
Our six-month target price of $21.00 equates to about 7.4X our earnings estimate for 2010. We view the $0.28 per share annual dividend as secure, implying a negative total return of about 8.0% over that period.Zacks Investment Research
