Tower Group’s (TWGP) operating income was $17.8 million or 39 cents per share, missing the Zacks Consensus Estimate of 48 cents per share. Results missed due to greater-than-anticipated catastrophe losses, partially offset by increased premiums earned. Tower earned 84 cents per share during the same period last year.

Total premiums written increased 34.4% year over year to $283.9 million. The four acquisitions — CastlePoint, Specialty Underwriters, Hermitage and AequiCap — made last year contributed $99.3 million in gross written premiums. Consolidated revenues increased 51.5% year over year to $303.5 million.

Tower experienced a large number of claims as a result of the Northeast storm during March. These storm losses were the most significant catastrophe losses that the company has experienced during its 20-year history. The actual storm losses of $12 million came in above management’s prior estimate of $7.2 million to $9.1 million.

Combined ratio, which measures underwriting profitability, worsened to 96.8% from 86.7% in the prior-year quarter. The recent catastrophe added 6.5% to the combined ratio.

Results by Segment

The strength of Tower’s core business is also reflected in the renewal retention rate, which was very strong for the quarter with 80% in Commercial lines and 90% for Personal lines.

The Specialty business segment generated $70.2 million of gross premiums as compared to $29.1 million in the prior-year period. Continued growth in this business segment is expected with the SUA acquisition, which will create a separate and distinct underwriting infrastructure.

Total revenue in the Insurance Services segment were down 87% year over year to $600,000, led mainly by a reduction in business produced on behalf of CastlePoint Insurance Company.

Net investment income increased 59.5% year over year to $23.2 million, due to higher invested assets coupled with increased yields.

As a result of the CastlePoint and SUA acquisitions, both of which were acquired under stock transactions, shareholders’ equity increased to $1.1 billion as of March 31, 2010 from $335 million as of year-end 2008. Book value per share also increased to $23.88 from $14.36 over the same time frame.

2010 Outlook

Considering the reported catastrophe loss and the closure of the OneBeacon Personal Lines Division, management expects second quarter 2010 operating earnings per share to be in a range of 55 cents to 60 cents. For full-year 2010, operating earnings per share is expected to be in a range between $2.60 and $2.70.

As with all other property and casualty insurers, Tower Group is facing a soft insurance market. Thus, in the light of current market conditions, the company is expanding inorganically. The acquisitions made last year have broadened its commercial business lines and specialty business. Moreover with the pending acquisition of OneBeacon the company further expects to expand its personal lines product offering.
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