Lo, how the mighty have fallen.

Let’s take a step back and see the full stock chart.

My, but Tower Group [TWGP] was a juggernaut in its time, but I never bought it or sold it.� Let me explain:

In 2005 my boss at the hedge fund came to me and said, “Why don’t we own Tower Group?� One of my friends owns it and says it is the greatest company in insurance.”

Me: “They are a new company underwriting in tough lines, with a weird reinsurance agreement from a small Bermuda company.� They are growing too fast, and I doubt they are as profitable as they claim.”

Boss: “Well, should we short them then?”

Me: “I don’t think shorting into strength is smart, so no.� We should do nothing here.” (After a little more, boss leaves, probably annoyed at me because I recommended no action.� He was a man of action!� I am a prudent risk-taker, and very selective about when I short.)

As an analyst of insurance stocks, I was always skeptical of Tower Group for three reasons:

The acquisitive nature of Tower Group. The rapid growth in premiums, 52% per year over the last 10 years — no insurance company can successfully grow that rapidly in a mature market. Odd reinsurance agreements that made me wonder.

But by the time I ceased being a buy side analyst for a hedge fund in 2007, there was nothing to make me short Tower Group, much as I did not like it.� And so, I stopped following the company, because it is much easier to look only for companies to be long.� (TWGP remained on my “consider shorting” list till the end of 2007.)

I stopped following it.� Had I been following it, I would have noted the unusual strengthening of reserves for losses from prior year business (Page F-32, worth $69 Million) from the 10-K filed on 3/4/2013.� Someone selling on that day or soon after would have received something in the $18s/share vs. $4s/share now.� Large reserve strengthenings are often a harbinger of greater reserve strengthenings to come.

After their writedown, Tower Group was downgraded by the rating agencies to the degree that few will buy new insurance or reinsurance from them.� Further, they are seeking a buyer, and the buyers are skittish.

Thus, the company is probably in runoff. Runoff means there are no more new premiums, and the company aims to pay all legitimate claims until it closes its doors, hopefully leaving the equity investors a little.� Unless you are an expert, I would avoid taking any action here.� It is quite possible that reserves were set fraudulently, and that we have been given as much as the market can absorb in losses.� It’s also possible that the third-party actuaries have given a conservative view of reserves, and things get better from here.

I feature this company tonight to indicate how fraught with uncertainty it is to invest in insurance stocks, particularly those that grow premiums fast — that is usually a negative sign.

I have no idea where Tower Group goes from here, but they are a poster child for past fast growth and weak reserving.

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