Property and casualty insurer Tower Group Inc.’s (TWGP) reported third quarter 2011 operating loss of 38 cents per share, substantially worse than the Zacks Consensus Estimate of a loss of 17 cents. Results also contrasted unfavorably with the prior-year quarter's earnings of 65 cents.
Lower-than-expected results came on the back of a huge catastrophe charge of $39.1 million (after-tax), partly mitigated by higher revenues and a lower share count due to share buybacks.
The New York-based company posted total revenue of $455.2 million, higher than the Zacks Consensus Estimate of $421 million and also up 7.5% year over year, reflecting an increase in premiums written, higher net investment income, partially offset by lower net realized investment gains, and commission and fee income.
Gross premiums written increased 16% year over year to $519.1 million, owing to the acquisition of OneBeacon’s personal lines business in 2010, expansion into niche specialty markets, territorial expansion and new organic growth initiatives.
Net investment income for the reported quarter improved 7.2% year over year to $31.4 million owing to a higher invested asset base, but was partially offset by low investment yield.
Total commission and fee income shrank 27% year over year to $10.2 million. Interest expense increased $2.4 million for the three months ended September 30, 2011, compared with the same period in 2010, due to the issuance of senior convertible notes in 2010.
The net combined ratio rose to 109.9% from 96.8%, led by deterioration in net loss ratio to 75.0% from 61.1% in the prior-year quarter, modestly offset by an improvement in expense ratio to 34.9% from 35.7% last year.
Segment Performance
Tower’s Commercial segment witnessed a 31.4% rise in gross premium written to $310. This growth was primarily attributable to the renewal rights transactions entered into during November 2010 and January 2011 for the commercial automobile and workers compensation as well as the new initiatives at Tower’s customized solutions and assumed reinsurance units.
The Personal segment’s gross written premiums decreased 12% year over year to $149.2 million, led by Tower’s decision to not renew certain businesses obtained in the One Beacon personal Lines (OBPL) acquisition, partly offset by modest organic growth in the homeowners business.
The Insurance Services segment’s revenues declined 10.4% year over year to $8.1 million, led by lower management fees earned by Tower for underwriting, claims, investment management and other services provided to the Reciprocal Exchanges, pursuant to a management services agreement with the Reciprocal Exchanges.
Book value was $25.19 per share at the end of the quarter, up 0.9% from the year end level of $25.19 per share. Operating return on equity was a negative 6.3% compared with positive 11.3% in the prior year quarter. Tower paid cash dividends of 18.75 cents per share during the quarter and 50 cents per share year to date.
Tower’s third quarter results clearly reflect the damage done by Hurricane Irene. This represents the company’s first quarterly loss since the company went public in 2004. Other insurers who took a hit from Irene include The Travelers Companies, Inc. (TRV), Assurant Inc. (AIZ), Cincinnati Financial Corp. (CINF), The Chubb Corp. (CB) and W.R. Berkley Corp. (WRB).
Coming back to Tower, a closer look at the results reveal that the company is benefiting from a lower expense ratio, strong organic growth from newly created businesses and a slightly positively trending insurance pricing in certain lines of business. However, a low interest rate environment, exposure to catastrophe-prone areas and an overall soft insurance market are some of the near term headwinds.
We maintain our Underperform recommendation on the shares of Tower Group. The stock also retains a Zacks #4 Rank, which translates into a short-term Sell rating.
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