Forsyth Barr says a long New Zealand summer has warmed up expectations for upcoming half-year financial results from general insurer Tower which will be announced on the 20th of May.
Analysts James Lindsay and Will Twiss said in a Forsyth Barr report on Thursday that thanks to a stretch of benign weather, Tower would benefit from minimal large event costs and materially below trend business-as-usual (BAU) claims.
They expect Tower to report an underlying profit of close to $60 million for the six months to the 31st March. This would bring it close to the bottom end of Tower’s profit guidance for the entire 2025 financial year.
In February Tower said it had revised its full-year profit after tax (NPAT) expectations for the 2025 financial year to between $60 million and $70 million from the previously advised range of between $50 million and $60 million.
“A favourable first-half 2025 result will likely open the door to further capital returns or special dividends, and means dividends will now almost certainly be fully imputed from second-half 2025,” Lindsay and Twiss said.
However, this assumes full utilisation of the insurer’s $50 million large events allowance.
“We now factor in $28 million of large events allowance for full-year 2025, which may still prove conservative given large events have historically been heavily weighted to first-half periods,” the pair said.
Lindsay and Twiss have estimated that only $3 million of Tower's large events allowance had been used on the Dunedin floods that occurred in October 2024.
‘A long-standing overhang’
Lindsay and Twiss also said the sale of Bain Capital’s stake in Tower this week has removed “a long-standing overhang and improving liquidity ahead of a likely NZX50 index weight increase in June 2025”. Tower joined the NZX50 in 2024.
Bain Capital was Tower’s biggest shareholder, having bought a 19.9% stake in the general insurer back in 2018 which it sold this week for almost $89 million.
Tower went into a trading halt on Monday after telling the market it had been advised Bain Capital was undertaking a process to “seek offers of demand” for its Tower shareholding.
The general insurer then told the NZX on Tuesday it had received confirmation from Bain Capital that its full shareholding of 68.3 million shares had been allocated to investors which weren't named.
Bain Capital’s 68.3 million shares were sold for the fixed price of $1.30 per share which came to $88.8 million. Forsyth Barr and Goldman Sachs New Zealand were the joint lead managers of the sale.
It’s around $34.9 million more than what Bain Capital paid for the shareholding back in 2018 when Bain bought it off Vero Insurance, a subsidiary of rival general insurer Suncorp. Bain Capital paid $53.9 million for the almost 20% stake in 2018.
Tower’s share price was down 2.1% to $1.37 on Thursday afternoon.
Lindsay and Twiss said Tower is trading about 20% below its 10-year price to earnings (PE) average.
“This is despite: (1) significantly improved scale, (2) reduced business risk, and (3) upside risk to consensus earnings due to conservative large events provisioning,” they said.
“While we remain cautious on the insurance cycle, investors are well compensated for the risk of softer premium growth—particularly with Tower offering a cash yield of ~9%,” the pair said.
Tower revealed during its record full-year 2024 results in November 2024 that it's planning to target annual premium growth of between 10% to 15% through to 2027.
Tower made $595 million in Gross Written Premium (GWP) during its 2024 financial year, up 15% from the $527 million in GWP reported in the 2023-year. GWP is the total amount of premiums collected.
The insurer also reported $83.5 million in NPAT during the 2024-year, up from $7.6 million in the 2023-year. Tower’s 2023 full-year profit was hit by the Auckland Anniversary floods and Cyclone Gabrielle.
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