Insurance might not be the most exciting sector, but for certain investors, boring is beautiful. The consistent cash flow, disciplined risk management, and long-term stability that well-run insurance companies provide are exactly what make them attractive in any market environment.
Tower Limited (ASX: TWR), though operating on a smaller scale, embodies these principles with its strong financial performance and strategic focus on innovation and efficiency. As an ASX-listed insurer with deep roots in New Zealand, Tower has recently upgraded its profit guidance, driven by improved claims performance and premium growth. This highlights the company’s ability to capitalise on market opportunities.
As Tower continues to innovate and optimise its operations, it stands out as a compelling investment opportunity within the insurance sector, offering a mix of stability and potential for growth.
Who is Tower?
Tower has a rich history that spans over 150 years.
Founded in 1869 as the Government Life Insurance Office, Tower has grown from a government-backed entity into New Zealand’s only Kiwi-owned and operated general insurer. The company’s deep roots in New Zealand are complemented by a strong presence across the Pacific, including Fiji, Tonga, Samoa, American Samoa, and the Cook Islands. Tower supports customers across diverse geographies with a comprehensive range of insurance products, including cover for homes, vehicles, contents, and businesses.
Tower’s evolution from a mutual association to a publicly listed company in 1999 listing on both the Australian and New Zealand stock exchanges in September 1999.
In November 2006, Tower’s New Zealand and Australian businesses were separated with the approval of its shareholders and the High Court.
As Tower continues to innovate, it remains focused on developing and providing market-leading benefits. The company’s commitment to growth and innovation positions it well for the future, as it continues to adapt to the evolving needs of its customers.
What’s Happened Recently?
We were particularly impressed by Tower’s strong first half results for 2024 reported back in May.
Underlying profit of NZD $36.6 million marked a significant turnaround from the previous period’s loss, driven by improved business-as-usual claims performance, premium growth, and enhanced operational efficiencies. The 20% increase in gross written premium (GWP) to NZD $291 million, alongside a reduction in the management expense, highlights Tower’s effective cost management and ability to navigate challenging market conditions. The company also announced a dividend of NZD $0.03 per share.
Another interesting marker to keep an eye on is the large weather events in New Zealand.
Most years, there are large weather events in the country which Tower provides for with a NZD provision of $45m. So far in 2024 (fingers crossed) there have been no major weather events hit New Zealand. With their financial year ending in September if there were nothing to occur over the next 2 months, that $45 million provision would be added back into the company’s profit and add $32 million after tax to the bottom line. Assuming this comes to fruition it would put the company on an earnings multiple of 5 which is much lower than the sector which trades on a multiple of around 12 to 13 times.
We also note that at the end of 2023 the company announced a strategic review.
Supported by its 20% shareholder Bain Capital, the review was put in place to explore options to optimise its capital structure and maximise value to Tower shareholders. What we like about this is the potential for corporate activity, particularly on the back of recent strong results.
Third Upgrade to Guidance
Tower recently announced upgraded profit guidance reflecting the company’s continued strong performance.
The insurer now anticipates an underlying net profit after tax (NPAT) exceeding $45 million for the financial year ending 30 September 2024, up from the previously projected $40 million. This marks the third upgrade to guidance since April.
The improved business-as-usual claims performance, driven by targeted underwriting actions and unusually mild weather in New Zealand, along with expected gross written premium (GWP) growth at or above the top end of the 10% to 15% range, reinforces our positive outlook on the company.
This updated guidance assumes full utilisation of the FY24 large events allowance which is conservatively set at $45m. As mentioned earlier, no large events have been recorded in the financial year to date. Any unused portion of the large events allowance at year end will increase underlying NPAT to improve the full year result.
Tower’s conservative approach to its large events allowance further strengthens its position, with potential for additional NPAT growth if large events remain absent.
The TAMIM Takeaway
Tower Limited’s combination of a rich heritage and forward-looking strategy positions it as a company to watch in the insurance sector.
The business’s recent run of strong financial results, supported by its upgrades to profit guidance, is an example of the company’s operational excellence and effective risk management. We are particularly encouraged by Tower’s disciplined approach to underwriting and cost management, which has not only improved profitability but also positioned the company to capitalise on favourable weather conditions this year. With a strategic review underway and there’s also potential for corporate activity that could unlock further value for shareholders.
Trading at a low earnings multiple compared to its peers, Tower offers a compelling blend of stability, growth potential, and value, making it an attractive investment opportunity in today’s market.
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Disclaimer: Tower Limited (ASX: TWR) is held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
