Tower Lags Est, Revs Up

Property and casualty insurer, Tower Group Inc. ( TWGP - Analyst Report ) reported second quarter 2012 operating loss of 39 cents per share, 2 cents lower the Zacks Consensus Estimate loss of 41 cents. In the year-ago quarter, the company had reported operating earnings of 63 cents per share. The lower-than-expected results were due to a charge related to reserve strengthening and weather-related losses.

The New York-based insurer posted total revenue of $506.1 million, up 16% year over year. The growth was primarily attributable to increased net premiums earned.

Gross premiums written were $537.6 million, up 15% year over year,

Net investment income for the reported quarter remained unchanged against the year-ago level of $31.8 million.

Total expenses were $531.7 million, surging 35% year over year.

The net loss ratio was 76.0% in the quarter under review, compared with 61.2% recorded in the comparable quarter last year.

Net combined ratio, a measure of underwriting profitability, declined to 110.8% from 94.9% in the prior-year quarter.

Segment Performance

Tower’s Commercial segment witnessed a 16.3% hike in net premium written to $343.7 million. Total revenues for the segment increased 27% year over year to $342.9 million.

The Personal segment’s net written premiums escalated 6.7% year over year to $103.3 million.

The Insurance Services segment revenues surged 22.2% year over year to $9.3 million, attributable to mounted management fee as well as higher other revenue.

Book value per share was $26.53 at June 30, 2012 compared to $26.37 at December 31, 2011.

2012 Guidance

Tower reiterated its fiscal 2012 operating earnings guidance range of $1.45 - $1.55 and anticipates 2013 operating earnings per share to be in a range of $2.85 - $3.05.

During the quarter, Tower announced a merger with Canopius’ Bermuda operations. This merger will result in huge benefits for Tower and will further help it gain access to Bermuda and Lloyd’s markets.

Tower’s results reveal that the company is benefiting from strong organic growth from newly-created businesses and from 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, such as Chubb Corp. ( CB - Analyst Report ) , and The Travelers Companies, Inc. ( TRV - Analyst Report ) .

Tower Group currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on its shares.