Tower Group Inc.’s (TWGP) second quarter 2011 operating income of 63 cents per share missed the Zacks Consensus Estimate by a penny but grew 24% year over year.
Lower-than-expected results came on the back of huge catastrophe charge, partly mitigated by higher revenues and a lower share count due to share buyback. After-tax losses from these events amounted to $4.6 million or 11 cents per share. The company did not incur any catastrophe loss (cat loss) in the prior-year quarter.
Total revenue surged 40% year over year to $436.3 million, reflecting an increase in premiums written, higher net realized investment gains, and improved net investment income as well as better commission and fee income.
Gross premiums written leaped 41% year over year to $467.9 million owing to the acquisition of OneBeacon’s personal lines business in 2010, the expansion into the specialty niche markets, territorial expansion and new organic growth initiatives.
Net investment income for the reported quarter improved 33% year over year to $31.8 million owing to higher invested asset base, but was partially offset by low investment yield. Total commission and fee income jumped 36.3% year over year to $13.2 million.
Interest expense increased $3.0 million for the three months ended June 30, 2011, compared with the same period in 2010.
Segment Performance
Tower’s Commercial segment witnessed a 12.9% rise in gross premium written to $315.9. 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 net combined ratio improved 520 basis points from the year-ago quarter to 93.8% due to lower underwriting expense ratios.
The Personal segment’s gross written premiums increased significantly by 62% year over year to $84.8 million. The acquisition of OneBeacon Personal Lines accounted for much of this increase. While the acquisition has enhanced the segment’s product capability and scale, it has also provided a more diversified product mix.
The Insurance Services segment’s revenues soared to $7.6 million from $0.3 million in the prior-year quarter. The hike is attributable to management fees of $7.7 million 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, which measures net worth, increased 8% year over year to $23.98 per share. Operating return on equity increased to 9.9% in the reported quarter from 9.4% in the prior-year quarter.
2011Outlook
Based on severe weather-related activity in the first half of 2011, Tower expects operating earnings per share to trail at the lower end of its earlier projection of $2.70–$2.90.
Although heavy cat losses were incurred during the second quarter, Tower’s results represent a significant increase in its Personal Lines business and continued expansion of its Specialty Commercial business. Acquisitions over the past two and half years have successfully broadened the company’s Commercial and Specialty as well as Personal Lines portfolios. Moreover, the January acquisition of NAV PAC would further strengthen its Commercial segment. Also a strong balance sheet and favorable credit ratings add to the positives. However, a soft insurance market and exposure to catastrophe-prone areas are some of the headwinds bothering the company.
New York-based Tower Group Inc.competes with American International Group, Inc. (AIG) and Aviva plc (AV).
The stock of Tower carries a Zacks Rank # 4, which translates into a ‘Sell’ rating over the short-term (1-3 months). Also over the longer time horizon (6+ months), we rate the shares “Underperform".
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