Tower Group Inc.’s (TWGP) first quarter 2011 operating income of 49 cents per share beat the Zacks Consensus Estimate by 3 cents and also grew 69% year over year.
Better-than-expected results came on the back of higher revenues. Earnings were also aided by a lower share count due to share buybacks. However, the quarter’s operating income was impacted by unusually severe weather-related claims.
After-tax losses from these events amounted to $9.8 million or $0.23 per share, slightly less than the $12.0 million or $0.27 per share recorded in the first quarter of 2010.
Revenue of $430.5 million was ahead of the Zacks Consensus Estimate of $383 million. On a year-over-year basis, revenues rose 42%, reflecting an increase in premiums written, higher net realized investment gains, and improved net investment income, partially offset by lower commission and fee income.
Gross premiums written surged 38% year over year to $389.5 million, led by the acquisition of OneBeacon’s personal lines business in 2010, expansion into specialty niche markets, territorial expansion and new organic growth initiatives.
Net investment income for the reported quarter improved 40% year over year to $32.4 million owing to higher invested asset base, but was partially offset by low investment yield.
SegmentPerformance
Tower’s Commercial segment witnessed an 8.1% spike in net premium earned to $251.8 million and a 14.4% increase in premium written to $251.1 million. As the company continued to maintain pricing and underwriting discipline, premium volume declined and market conditions became more competitive, with some of the program businesses not meeting the company’s underwriting standards.
The net combined ratio deteriorated 500 basis points from the year-ago quarter to 98.0% due to higher loss ratios.
The Personal segment’s gross written premiums increased about 3.5 times to $126.5 million compared with $35.7 million in the comparable period of 2010. The acquisition of OneBeacon Personal Lines accounted for much of this increase. The acquisition has not only enhanced the segment’s product capability and scale, but has also provided a more diversified product mix.
The Insurance Services segment’s revenues soared to $7.3 million from $0.5 million. The increase was attributable to management fees of $6.7 million earned by Tower for underwriting, claims, investment management and other services provided to Reciprocal Exchanges, pursuant to a management services agreement with Reciprocal Exchanges.
2011 Outlook
Management reiterated its 2011 earnings per share (EPS) guidance range of $2.70 to $2.90. Management expects 2011 earnings to be negatively impacted by a continuing decline in the yield on its investment portfolio.
New York-based Tower competes with American International Group, Inc. (AIG) and Aviva plc (AV).
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