Tower Reports a Penny Ahead

Property and casualty insurer Tower Group Inc. (TWGP - Analyst Report) reported fourth quarter 2011 operating earnings of 63 cents per share, a penny ahead of the Zacks Consensus Estimate. Results, however, compared unfavorably with the prior-year quarter's earnings of 80 cents. Earnings benefited fromhigher revenue as well as lower share count.

The New York-based company posted total revenue of $454.9 million, up 8.4% year over year. The growth was primarily due to increased net premiums earned and higher net investment income.

Gross premiums written amounted to $434.3 million, almost unchanged relative to the prior-year quarter. Organic growth of 6% in the quarter was offset by the commutation of an assumed reinsurance agreement.

Net investment income for the reported quarter improved 8.0% year over year to $32.1 million owing to a higher invested asset base, partially offset by low investment yield.

Total commission and fee income was up 3.5% year over year to $11.7 million. The net loss ratio was 64.9% compared with 59.9% in the prior-year quarter.

For the full year 2011, operating earnings per share was $1.37, in line with the Zacks Consensus Estimate. Full year revenues were $1.6 billion, up 23% year over year.

Segment Performance

Tower’s Commercial segment witnessed a 5.3% decline in gross premium written to $255 million.

The Personal segment’s gross written premiums increased 9.1% year over year to $125.4 million, owing to 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 revenues declined 21.8% year over year to $7.9 million, due to lower management fee 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 per share of $26.37 as of December 31, 2011 represents an increase of 4.7% since year end 2010. Operating return on equity was 9.6% compared with12.8% in the prior-year quarter.

2012 Guidance

Tower expects to report operating earnings between $2.60–$2.70 per share in 2012.

Tower results reveal that the company is benefiting from a lower expense ratio, strong organic growth from newly-created businesses and slightly positive trends in insurance pricing in certain lines of business. A major tailwind for the company is the favorable pricing trend, which is expected to continue in 2012. However, a low interest rate environment, exposure to catastrophe-prone areas and an overall soft insurance market are some of the near-term headwinds.

Tower competes with other property and casualty insurers, the Chubb Corp. (CB - Analyst Report), The Travelers Companies, Inc. (TRV - Analyst Report).