Tower Gains on Higher Revenues - Analyst Blog

Tower Group’s (TWGP) second quarter operating income of 57 cents per share was a penny ahead of the Zacks Consensus Estimate of 56 cents. Earnings dipped to almost the mid-guidance range of 55 cents to 60 cents. Results were aided by higher premiums earned. Tower earned 73 cents per share during the same period last year.

Revenues of $311.8 million were way ahead of the Zacks Consensus Estimate of $284.0 million. On a year-over-year basis, revenues rose 22% led by an increase in premiums written, higher commissions and fee income, and improved net investment income.

Including net realized gains on investments of $3.4 million and acquisition costs of $0.4 million, net income came in $25.3 million, down 14.2% from $29.5 million in the prior-year quarter. On a per-share basis, net income declined 16% to 63 cents.

Gross premiums written increased 27.3% year over year to $331.8 million. Much of the increase in total premiums was primarily the result of the acquisition of Specialty Underwriters’ Alliance (“SUA”), which added approximately $31.5 million of premium during the quarter.

Consolidated combined ratio increased 840 basis points to 93% from 84.6% in the prior-year quarter, primarily led by an increase in loss ratio in the Specialty segment, which was affected by higher integration costs related to the SUA acquisition.

Tower’s Brokerage Insurance segment posted a 5.4% year-over-year decline in revenues to $191.8 million, led by a decline in premiums earned, partially offset by an increase in ceding commission revenues and policy billing fees. Combined ratio also increased 300 basis points to 88.5%.

The Specialty Business segment revenues multiplied more than 2.5 times to $90.6 million from $34.7 million in the prior-year quarter, primarily led by higher premiums earned from the SUA acquisition. However, combined ratio increased substantially to 102.1% from 80.0% last year, signifying an underwriting loss. The increase in combined ratio was due to elevated reorganization costs associated with the SUA acquisition.

Tower’s Insurance Services segment revenues witnessed a turnaround in revenues to a positive $251 million compared with a loss of $200 million last year.

Net investment income increased 37.4% year over year to $23.9 million due to higher invested assets, partially offset by modestly lower yields. Book value per share also increased 18.5% to $24.81.

Strong capital helped Tower to increase quarterly dividends by 78.6% from 7 cents per share to 12.5 cents.

Tower spent $39.7 million for buying back stock in the quarter and has repurchased 2.2 million shares since the initiation of buyback program in March 2010. Management expects to continue to the buyback activity aggressively going forward.

2010 Outlook

Management expects third quarter 2010 operating earnings per share to be in a range of 75 cents to 80 cents. For the full-year 2010, the operating earnings per share estimate range has been trimmed to $2.55−$2.65 from the previous range of $2.60−$2.70.

As with all other property and casualty insurers, Tower Group is also facing a soft insurance market. In light of current market conditions, the company is expanding inorganically. It made four acquisitions in 2009, thereby broadening its commercial and specialty business lines. During the reported quarter, Tower completed the acquisition of the Personal Lines division of OneBeacon Insurance Group, which will aid in expanding Tower’s own Personal Lines segment.

Tower is also focusing on capital management strategy, which includes dividend payment and share repurchases. Management is open to alliances that would further strengthen and diversify the company’s business model.
 
TOWER GROUP INC (TWGP): Free Stock Analysis Report
 
Zacks Investment Research