Zacks_Analysts' Blog : Tower Estimates 3Q Cat Loss - Analyst Blog

Property and casualty insurer Tower Group, Inc. (TWGP) has announced its estimate for third quarter 2011 catastrophe loss. The company expects a total pre-tax loss to the tune of $50–$60 million from hurricane Irene and bad weather in the Northeast U.S.

In the previous quarter, Tower incurred an after-tax weather-related loss of $4.6 million or 11 cents per share from the April-May storm.

Catastrophe losses adversely affect the loss ratio, a component of combined ratio, which measures an insurer’s profitability. Tower Group’s combined ratio was 94.5% at the end of second quarter 2011, down 40 basis points year over year. Management has increased its 2011 loss ratio in view of the severe storms and tornadoes that occurred during the first half of the year.

Tower generates a substantial portion of its revenues from the Northeastern United States. Though the company has reduced the number of policies in Massachusetts and Rhode Island, we believe it runs a high catastrophe exposure in these regions. Thus, Tower Group’s fiscal 2011 third quarter results will expectedly suffer by 80–95 cents. 

Nevertheless, management is seeing significant growth opportunities in the reinsurance and risk-sharing business unit due to the favorable pricing trend in the reinsurance market after the significant industry catastrophe losses suffered during the first half of this year. During the last quarter, management stated that it was pleased with the progress it made by successfully participating in covers for several reinsurers and Lloyd's syndicates.

Based on this progress, it established the reinsurance and risk-sharing practice as a separate business unit. The unit generated roughly $30 million of annualized writings during the first 6 months of 2011 and expects strong growth for the remainder of the year. Management believes that Tower’s entry into this market was opportunistic and well timed and expects it to improve the risk-adjusted return on overall business.

Other property and casualty insurers who suffered from bad weather during the third quarter include Assurant Inc. (AIZ), which has forecasted a pre-tax cat loss of $80 million to $85 million, and The Chubb Corp. (CB), which sees a significantly high catastrophe loss of $400 million to $475 million pre-tax.

Tower is slated to release its third quarter earnings on November 7, 2011 after the market closes. The Zacks Consensus estimates earnings of 20 cents for the third quarter, which would translate into an expected earnings growth of 19.33%. Tower currently holds a Zacks #3 Rank, implying a Hold rating over the short-term (1-3 months).