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When I was a junior in college, I used to work the door at Sigma Nu fraternity parties. Now working the door had its drawbacks. You don’t get to dance and party with all of your friends, and if there ever was a fight, you had to throw someone out of the fraternity house (recommended method is grabbing someone from behind by the belt with one hand, and the collar of their shirt with the other and doing a 1,2.3 heave-ho to see how far they can fly). The upside to working the door was that, even though we weren’t supposed to, we’d charge a cover at the door. It was variable pricing depending on how much of a loser the person was who wanted to come to the party (of course women were free). Usually by the end of my door shift, I had a nice little wad of cash in my pocket which was to be used for emergency repairs or some other catastrophic event that may have resulted from the party. If nothing bad happened at the party, then we would make a Roy’s run and eat roast beef and chicken.
Now I don’t mean to oversimplify things, but an insurance company works much the same way.
Throughout 2005 (before Katrina), the insurance industry was showing marked improvement in claim trends. After Katrina, investors bid up stock prices in insurance companies with the expectation of higher insurance premiums carrying the day. These investors were rewarded as the property-casualty industry produced double digit net income growth. Of course all of this was precursor padding for the next catastrophe….which never came. “Look Ma! No hurricanes!â€
2005 was dominated by record losses from hurricanes Katrina, Rita, and Wilma. Nevertheless, the industry showed resilience. Underwriting discipline and the benefits of reinsurance preserved the industry’s surplus and profitability. Going forward, the realization of higher catastrophe exposures increased capital requirements and property premium rates. However, if there are no catastrophies, what do the insurance companies do with all of that money? Keg Party?
Insurers and reinsurers worldwide bore a record USD 83 billion of total insured property catastrophic losses, with Hurricane Katrina alone estimated at USD 45 billion. US P&C insurers are expected to pay USD 58 billion losses for last year’s natural catastrophes
The industry’s ROE for 2005 was 11.6 percent; for 2006, the ROE is likely to be around 11 percent. In the aftermath of the hurricane season, the pace of premium growth is likely to pick up slightly as commercial property prices firm.
“Look Ma! No hurricanes!â€
Ok..now what are the insurance companies going to do with all of this money? Invest it? Oh by the way, the market is at an all time high. Maybe the money that was invested got big and fat like the wad of cash in my pocket from working the door. Hmmm..do we detect a trend here? Roy’s Run!
Today I bought TWGP at $35.38/share. I will sell it in 4 – 6 weeks at $41.05/share. Here is why I like TWGP.
TWGP stock is up over 100% in the last 12 months yet its PE is only 23 (vs. a market PE of 21). It’s forward PE is even better, at a mere 14. Look at this beautiful chart:
Through its subsidiaries Tower Insurance Company of New York, Tower National Insurance Company and Tower Risk Management Corporation, Tower Group offers a broad range of specialized property and casualty insurance products and services to small to mid-sized businesses such as retail and wholesale stores, grocery stores, restaurants, artisan contractors and residential buildings. Personal lines products currently focus on modestly valued homes and dwellings. Both of the company's two subsidiaries are rated A-(Excellent) by A.M. Best Company.
So is there anything more boring than insurance? Probably not..but what makes TWGP so interesting? Ask Ace Frehley:
Many years since I was here, on the street I was passin my time away
To the left and to the right, buildings towering to the sky
Its outta sight in the dead of night
Here I am, and in this city, with a fistful of dollars
And baby, youd better believe
Chorus:
Im back, back in the new york groove
Im back, back in the new york groove
Im back, back in the new york groove
Back in the new york groove, in the new york groove
In the back of my cadillac
A wicked lady, sittin by my side, sayin where are we?
Stop at third and forty-three, exit to the night
Its gonna be ecstacy, this place was meant for me
Feels so good tonight, who cares about tomorrow
So baby, youd better believe
Chorus
Im back, back in the new york groove
When it comes to selling insurance to the New York City’s neighborhood small storefront businesses, many insurance firms don’t see the upside in the aggravation. However this is Tower Group’s bread and butter.
Tower is just the right size to take on this business. The big guys don’t want to deal with the headache and the little guys aren’t well enough capitalized to diversify the inherent risk or have the basic infrastructure to operate efficiently. Tower's average commercial premium policy is about $2,000, There's not much competition for these small policies because they are difficult to process cost effectively. This is consistent with their hedgehog strategy: Target select market segments that they believe are underserved, and therefore provide them with the best opportunity to obtain favorable policy terms, conditions and pricing.
With the capital from its recent IPO, Tower has been able to write more of its own insurance business rather than farm it out to reinsurers and other carriers. This lets the company fund more of the risk itself and keep premium fees in-house. Tower is already ramping up its city expertise to spread current and future product lines to urban areas in New Jersey. They also have plans for Massachusetts and Pennsylvania (two other states I have lived in). Additional available capital generates more investment income as well (did I already mention that the Dow is at an all time high?)
Tower favors low risk and low severity policies which makes them a safe actuarial bet, despite it not being as big as the behemoths Prudential and AllState. They generally target customers that have a reduced potential for loss severity and that are not normally exposed to long-tailed, complex or contingent risks, such as products liability, asbestos or environmental claims.
The underwriting strategy for controlling their loss ratio is to seek diversification in their products and an appropriate business mix for any given year, emphasizing profitable lines of business and minimizing unprofitable lines. Tower monitors the actual loss ratio throughout the year on a regular basis. If any line of business fails to meet its target loss ratio, a cross functional team comprised of personnel from all departments meet to develop a corrective action plan.
For over a decade, Tower Group Companies has been consistently meeting the insurance needs of individuals and businesses. Recently, TWGP was recognized as “Company of the Year†by its producers for commitment and service to the tri-state region. Tower Group Companies develops its products in response to the needs of customers and changing market conditions. Their business development team works closely with producers to quickly define and deliver new and enhanced products to meet the changing needs of customers.
Great company right…does it make money? Whoooooo! Does it ever. It has grown its revenues and earnings successively for each of the last 5 years.
In 2005, following the successful IPO on the NASDQ in 2004, the company increased Total Premiums (gross premiums written and services premiums produced) by 45% to $335 million. In August of this year Tower Group reported a 158% increase in its second quarter 2006 net income, $0.61 per diluted share as compared to $0.42 per diluted share for the first six months of 2005.
Tower Group's revenue growth (63.96 percent) is way above its earnings growth (36.68 percent). In testing its earnings stability, one need only look at the fact that TWGP has a positive current quarterly EPS, a positive EPS for the quarter one year ago, and a positive growth rate for the current quarter's earnings compared to the same quarter a year ago and the long term EPS growth rate.
In addition, the EPS growth for the current quarter is greater than the prior three quarters, EPS growth for the current quarter is greater than the historical growth rate, and earnings have increased each year for the last five years. Unlike larger insurers, Tower doesn't build scale in a segment unless it can be assured it will make positive underwriting margins for the next three or four years. This “insures†continued earnings growth given stable macroeconomic conditions. Tower Group exceeded their net income guidance each quarter in 2005 to achieve an ROE of 18.4%.
When TWGP ended 2005, they had a 29% increase in the number of policies written. On top of the number of policies, the rates increased over 6%. Let’s do the math..increased volume times increased margins = increased earnings earnings earnings. Combine that with the fact that investment allocations in 2005 were increased in equities and higher yielding fixed income assets.
ANAL-ysts have “insured†that TWGP will earn $1.62/share this year on $317 MM of revenue. For 2007, they project earnings of $2.42/share on $398 MM of revenue. Now the good news is that even the ANAL-ysts project growth in Tower’s business. Heck, if you take the ANAL-ysts $2.42 projection for 2007 and multiply it by today’s PE of 23, you get $55/share. Pretty darned good. I’ll go one better. Based on the fact that TWGP’s earnings will be positively influenced by investment income and inflated premiums relative to losses, $$$MR. MARKET$$$ sees next quarter’s earnings coming in at $0.71/share and the following quarter at $0.74/share which makes 2006 earnings $2.38/share. So I think that TWGP will hit ANAL-ysts projected earnings, only a lot sooner. This means I’ll see the stock price get to my desired target in the next month or two.
What’s even cooler is that their CEO is a relative of Bruce Lee. I don’t want to get him mad at me but her’e what Michael Lee said about his company:
“Our second quarter results established new records for both revenue and earnings as reflected by our increasing return on equity. During the quarter, we achieved strong growth in gross and net premiums earned and investment income while continuing to maintain a disciplined underwriting approach. In addition, we eliminated our exposure to reinsurance recoverables from an unrated reinsurer at favorable terms to further strengthen our balance sheet. This was also our first quarter with CastlePoint Re as our quota share reinsurer, and this relationship further strengthened our business model by supporting our growth and improving our return on average equity to the upper end of our target range for the year.â€
This company is on fire! There is no need to extinguish either because profits dead ahead are insured.
Did you like this write-up? Email me back and let me know. If you really liked it, send it on to 3 friends. The WORLD needs to heed the calling of $$$MR. MARKET$$$.
I am HUGE!!
$$$MR. MARKET$$$
Now I don’t mean to oversimplify things, but an insurance company works much the same way.
Throughout 2005 (before Katrina), the insurance industry was showing marked improvement in claim trends. After Katrina, investors bid up stock prices in insurance companies with the expectation of higher insurance premiums carrying the day. These investors were rewarded as the property-casualty industry produced double digit net income growth. Of course all of this was precursor padding for the next catastrophe….which never came. “Look Ma! No hurricanes!â€
2005 was dominated by record losses from hurricanes Katrina, Rita, and Wilma. Nevertheless, the industry showed resilience. Underwriting discipline and the benefits of reinsurance preserved the industry’s surplus and profitability. Going forward, the realization of higher catastrophe exposures increased capital requirements and property premium rates. However, if there are no catastrophies, what do the insurance companies do with all of that money? Keg Party?
Insurers and reinsurers worldwide bore a record USD 83 billion of total insured property catastrophic losses, with Hurricane Katrina alone estimated at USD 45 billion. US P&C insurers are expected to pay USD 58 billion losses for last year’s natural catastrophes
The industry’s ROE for 2005 was 11.6 percent; for 2006, the ROE is likely to be around 11 percent. In the aftermath of the hurricane season, the pace of premium growth is likely to pick up slightly as commercial property prices firm.
“Look Ma! No hurricanes!â€
Ok..now what are the insurance companies going to do with all of this money? Invest it? Oh by the way, the market is at an all time high. Maybe the money that was invested got big and fat like the wad of cash in my pocket from working the door. Hmmm..do we detect a trend here? Roy’s Run!
Today I bought TWGP at $35.38/share. I will sell it in 4 – 6 weeks at $41.05/share. Here is why I like TWGP.
TWGP stock is up over 100% in the last 12 months yet its PE is only 23 (vs. a market PE of 21). It’s forward PE is even better, at a mere 14. Look at this beautiful chart:
Through its subsidiaries Tower Insurance Company of New York, Tower National Insurance Company and Tower Risk Management Corporation, Tower Group offers a broad range of specialized property and casualty insurance products and services to small to mid-sized businesses such as retail and wholesale stores, grocery stores, restaurants, artisan contractors and residential buildings. Personal lines products currently focus on modestly valued homes and dwellings. Both of the company's two subsidiaries are rated A-(Excellent) by A.M. Best Company.
So is there anything more boring than insurance? Probably not..but what makes TWGP so interesting? Ask Ace Frehley:
Many years since I was here, on the street I was passin my time away
To the left and to the right, buildings towering to the sky
Its outta sight in the dead of night
Here I am, and in this city, with a fistful of dollars
And baby, youd better believe
Chorus:
Im back, back in the new york groove
Im back, back in the new york groove
Im back, back in the new york groove
Back in the new york groove, in the new york groove
In the back of my cadillac
A wicked lady, sittin by my side, sayin where are we?
Stop at third and forty-three, exit to the night
Its gonna be ecstacy, this place was meant for me
Feels so good tonight, who cares about tomorrow
So baby, youd better believe
Chorus
Im back, back in the new york groove
When it comes to selling insurance to the New York City’s neighborhood small storefront businesses, many insurance firms don’t see the upside in the aggravation. However this is Tower Group’s bread and butter.
Tower is just the right size to take on this business. The big guys don’t want to deal with the headache and the little guys aren’t well enough capitalized to diversify the inherent risk or have the basic infrastructure to operate efficiently. Tower's average commercial premium policy is about $2,000, There's not much competition for these small policies because they are difficult to process cost effectively. This is consistent with their hedgehog strategy: Target select market segments that they believe are underserved, and therefore provide them with the best opportunity to obtain favorable policy terms, conditions and pricing.
With the capital from its recent IPO, Tower has been able to write more of its own insurance business rather than farm it out to reinsurers and other carriers. This lets the company fund more of the risk itself and keep premium fees in-house. Tower is already ramping up its city expertise to spread current and future product lines to urban areas in New Jersey. They also have plans for Massachusetts and Pennsylvania (two other states I have lived in). Additional available capital generates more investment income as well (did I already mention that the Dow is at an all time high?)
Tower favors low risk and low severity policies which makes them a safe actuarial bet, despite it not being as big as the behemoths Prudential and AllState. They generally target customers that have a reduced potential for loss severity and that are not normally exposed to long-tailed, complex or contingent risks, such as products liability, asbestos or environmental claims.
The underwriting strategy for controlling their loss ratio is to seek diversification in their products and an appropriate business mix for any given year, emphasizing profitable lines of business and minimizing unprofitable lines. Tower monitors the actual loss ratio throughout the year on a regular basis. If any line of business fails to meet its target loss ratio, a cross functional team comprised of personnel from all departments meet to develop a corrective action plan.
For over a decade, Tower Group Companies has been consistently meeting the insurance needs of individuals and businesses. Recently, TWGP was recognized as “Company of the Year†by its producers for commitment and service to the tri-state region. Tower Group Companies develops its products in response to the needs of customers and changing market conditions. Their business development team works closely with producers to quickly define and deliver new and enhanced products to meet the changing needs of customers.
Great company right…does it make money? Whoooooo! Does it ever. It has grown its revenues and earnings successively for each of the last 5 years.
In 2005, following the successful IPO on the NASDQ in 2004, the company increased Total Premiums (gross premiums written and services premiums produced) by 45% to $335 million. In August of this year Tower Group reported a 158% increase in its second quarter 2006 net income, $0.61 per diluted share as compared to $0.42 per diluted share for the first six months of 2005.
Tower Group's revenue growth (63.96 percent) is way above its earnings growth (36.68 percent). In testing its earnings stability, one need only look at the fact that TWGP has a positive current quarterly EPS, a positive EPS for the quarter one year ago, and a positive growth rate for the current quarter's earnings compared to the same quarter a year ago and the long term EPS growth rate.
In addition, the EPS growth for the current quarter is greater than the prior three quarters, EPS growth for the current quarter is greater than the historical growth rate, and earnings have increased each year for the last five years. Unlike larger insurers, Tower doesn't build scale in a segment unless it can be assured it will make positive underwriting margins for the next three or four years. This “insures†continued earnings growth given stable macroeconomic conditions. Tower Group exceeded their net income guidance each quarter in 2005 to achieve an ROE of 18.4%.
When TWGP ended 2005, they had a 29% increase in the number of policies written. On top of the number of policies, the rates increased over 6%. Let’s do the math..increased volume times increased margins = increased earnings earnings earnings. Combine that with the fact that investment allocations in 2005 were increased in equities and higher yielding fixed income assets.
ANAL-ysts have “insured†that TWGP will earn $1.62/share this year on $317 MM of revenue. For 2007, they project earnings of $2.42/share on $398 MM of revenue. Now the good news is that even the ANAL-ysts project growth in Tower’s business. Heck, if you take the ANAL-ysts $2.42 projection for 2007 and multiply it by today’s PE of 23, you get $55/share. Pretty darned good. I’ll go one better. Based on the fact that TWGP’s earnings will be positively influenced by investment income and inflated premiums relative to losses, $$$MR. MARKET$$$ sees next quarter’s earnings coming in at $0.71/share and the following quarter at $0.74/share which makes 2006 earnings $2.38/share. So I think that TWGP will hit ANAL-ysts projected earnings, only a lot sooner. This means I’ll see the stock price get to my desired target in the next month or two.
What’s even cooler is that their CEO is a relative of Bruce Lee. I don’t want to get him mad at me but her’e what Michael Lee said about his company:
“Our second quarter results established new records for both revenue and earnings as reflected by our increasing return on equity. During the quarter, we achieved strong growth in gross and net premiums earned and investment income while continuing to maintain a disciplined underwriting approach. In addition, we eliminated our exposure to reinsurance recoverables from an unrated reinsurer at favorable terms to further strengthen our balance sheet. This was also our first quarter with CastlePoint Re as our quota share reinsurer, and this relationship further strengthened our business model by supporting our growth and improving our return on average equity to the upper end of our target range for the year.â€
This company is on fire! There is no need to extinguish either because profits dead ahead are insured.
Did you like this write-up? Email me back and let me know. If you really liked it, send it on to 3 friends. The WORLD needs to heed the calling of $$$MR. MARKET$$$.
I am HUGE!!
$$$MR. MARKET$$$
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