Tower Group (NASDAQ: TWGP )
Halloween came early for shareholders of property and casualty insure
r Tower Group after an absolutely frightening past two months. Over that time, Tower Group delayed its second-quarter filing after discovering the need to readjust its loss reserves. The two-month wait dealt investors a much worse-than-expected $365 million capital reserve charge, and a whopping $215 million goodwill writedown. What's left is a company with a lot of potential for both optimists and short-sellers.
The case for bears is pretty simple. With Tower Group's hands tied behind its back with the need to shore up its capital position, it was forced to turn to the reinsurance market, and cede some of its policy revenue in exchange for the capital safety of its remaining insurance lines, which include workers compensation and auto insurance. With ratings agency Fitch downgrading Tower's credit rating, its ability to underwrite new business could be in question.
However, there's another side to this story. With Tower's massive losses now out in the open, they can hopefully be put in the rearview mirror, and Tower can get back to what insurers do best: boosting premiums to cover their costs. Understandably, Tower is going to be working with a smaller profit potential following its reinsurance agreements, and it may find near-term underwriting tougher to come by, but I feel confident that the company can be profitable on an annual basis as early as next year. This is what led me to take a position in Tower Group recently in my own portfolio -- as well as its forward P/E of just eight.
I certainly don't expect the company to pay a dividend anytime soon, nor do I expect a rebound back to $25; however, I feel that, once Tower does report, this will be trading well below its book value, and could easily rebound 50% or more. I'm certainly a realist, and aware that the negatives could easily outweigh my long position; but it's a gamble I'm willing to take and, potentially, a reason you should add this stock to your Watchlist.