TWR - Tower Insurance

[Poet]

17.15m shares changed hands today, mostly at the close at $1.40 final match price.  Up about 17 cps (13.8%) on circa $1.23 about a month ago when some dog let the cat out of the bag index inclusion was highly likely in late October.  Interestingly, a 13.8% gain is about the midpoint of what I have come to expect as the average gain from index inclusion, (5-25%) and suggests index inclusion on the prospect of regular quarterly rebalance on the NZX50 which had been talked about a lot already on both forums, had not unduly already affected the share price as of late Sept.

Match price was lower than many expected because of one key point, in my opinion.  You cannot escape the plain fact of the matter that the insurance industry is a business of making money from averaging risk over time so no matter what the company says about increasing premiums in the hope of covering the increased risk of climate change, (getting worse at an exponential rather than a linear rate?), the fact is that average eps over the last 5 years, including this year's great performance has been lackluster.  In fact, in analysis over the weekend, I calculated average eps of only 5.4 cps for the last 7 years notwithstanding this year's cracker performance moved the needle a lot.   How much better or worse average performance is in the next 7 years is frankly anyone's guess, the jury is well and truly out on that one.    Maybe all the work on adjusting risk-based pricing will do the trick and substantially lift eps going forward on average across different weather cycles over the years ahead, or maybe not, only time will tell.

I've got to point out, that the evidence doesn't support 'getting worse at an exponential rather than linear rate' so really, whatever the issues are with TWR past performance, it isn't that.

Here is the last 10 years of gross (that's before re-insurance recoveries) large event claims
FY14   $10m
FY15  $7m
FY16 $12m
FY17 $16m
FY18 $25m
FY19 $0m
FY20 $19m
FY21 $24m
FY22 $25m
FY23 $255m
Fy24 $0m

TWR's actual costs were in all cases, (and especially 2023) substantially lower than the gross costs

Even a cursory inspection will show that this isn't anywhere near an exponential series, and in fact when compared with TWR's gross premium income (around $700m) it doesn't even seem a relevant factor.

The factors that we should be considering are claims ratio and management expense ratio - these have improved substantially over the last few years, primarily IMO due to proper risk management and implementation of more sophisticated and automated software systems. And don't forget swingeing premium increases that the whole industry seems to be embracing,

All only my opinion FWIW

[Basil]

Thanks Poet, I appreciate and respect your opinion and thanks to others for sharing their thoughts on this too.    Maybe not exponential but I don't think the effects are getting worse in a linear manner either.  For one thing, with massive ice shelf melting around the world a lot of methane has been released in recent years exacerbating the effects.   One expert who worked for Metservice for more than 50 years who'd been down to Antartica a few times, (I used to look after his accounts), told me a few years ago when he retired, we're in really deep trouble from ice melting around the globe and the methane release.  Its set up a chain reaction that cannot be stopped.  He went on and told me even if everyone on the planet bought an EV right now, the effects of methane released already and the consequent effects of climate change cannot be reversed...other than through a nuclear winter, and I am sure none of us want that.

Appreciate they've done a lot of work on their systems, pricing and risk management so maybe this time really is different and shareholders can look forward to great returns on their capital going forward, notwithstanding, shall we agree, the increasing effects of climate change.

Who knows for sure though? 2023 was such a shocker and affected the Beagle clan, such that I carry with me and cannot shake, a low level of anxiety the same thing might happen this summer or one summer again soon.  Hopefully that's just a very low-level PTSD or "recency bias" on my part and that anxiety will continue to dissipate over time and something like that won't happen again for another decade or more, preferably never again in my lifetime.

[Poet]

Thanks Poet, I appreciate and respect your opinion and thanks to others for sharing their thoughts on this too.    Maybe not exponential but I don't think the effects are getting worse in a linear manner either.  For one thing, with massive ice shelf melting around the world a lot of methane has been released in recent years exacerbating the effects.   One expert who worked for Metservice for more than 50 years who'd been down to Antartica a few times, (I used to look after his accounts), told me a few years ago when he retired, we're in really deep trouble from ice melting around the globe and the methane release.  Its set up a chain reaction that cannot be stopped.  He went on and told me even if everyone on the planet bought an EV right now, the effects of methane released already and the consequent effects of climate change cannot be reversed...other than through a nuclear winter, and I am sure none of us want that.

Appreciate they've done a lot of work on their systems, pricing and risk management so maybe this time really is different and shareholders can look forward to great returns on their capital going forward, notwithstanding, shall we agree, the increasing effects of climate change.

Who knows for sure though? 2023 was such a shocker and affected the Beagle clan, such that I carry with me and cannot shake, a low level of anxiety the same thing might happen this summer or one summer again soon.  Hopefully that's just a very low-level PTSD or "recency bias" on my part and that anxiety will continue to dissipate over time and something like that won't happen again for another decade or more, preferably never again in my lifetime.

Thanks, I can certainly understand the trauma associated with last year's events, especially if one's family was directly impacted. and there is absolutely no doubt that climate change is real, but in a way doesn't that just reinforce the necessity of insurance and insurance companies and their continuing profitablity?

[Basil]

Thanks, I can certainly understand the trauma associated with last year's events, especially if one's family was directly impacted. and there is absolutely no doubt that climate change is real, but in a way doesn't that just reinforce the necessity of insurance and insurance companies and their continuing profitablity?

Absolutely.  Noted in CNBC presenter discussions around the recent extreme weather event at Tampa in Florida, some American's need to carry four different types of insurance on their property and some of the most risky property is uninsurable.   Maybe headed that way here eventually?  Certainly, I think almost everyone has noticed their insurance costs really spiking up in recent years. 

[LoungeLizard]

Bit of a retracement going on, as predicted. ACC and Salt selling down. Twice as many sellers as buyers. Heading to $1.30 perhaps before things equalise and then wait for the next kick upwards with the divvy/cap return to come.

[Shareguy]

We watch the sp graduly fall since inclusion which was not unexpected. Always good to take profits and I suspect a number of people have used inclusion to sell all or part of thier holding. I spoke to one of my brokers to question my judgement to hold. I'm sitting on a good profit but have concerns going forward. Are the years of poor/ok performance over.  FY24 is going to be a stunner, we know that. Will it continue or is it a one off.

The following comments were made.

The share price has been on an upwards trend due to industry wide improved circumstances. 

Premiums have risen across the board.  Cost of remediation has been dropping rapidly due to competition in the building industry.

2023 had two 100 year major events. 2024 has been so far free of major events. An actuary might say the chances of major events in New Zealand are low for many years to come. I see some comentaters and industry peers are suggesting we are in for more of a settled pattern of weather.

The re insurance will enable more cover at a reduced cost. Craig's think a savings of $4m for FY25 onwards. Craigs note says  that TWR is currently trading on a 38 percent discount to it peers. Historically it's traded on a 25 discount which implies a fair pe of 10.3 which is $1.95 a share.

Apart from death and tax's there is no guarantees and a big event might just be round the corner. I guess it depends on your view point "a glass half full or a glass half empty". Caution is warranted but I'm not convinced that the good news won't continue for a while yet.

I'm going to wait for the FY24 result out next month. Hopefully more good news will be announced. I do note from the 2023 report that apart from the chair insiders have not got a lot of skin in the game.........

Thought this was interesting

https://www.insurancebusinessmag.com/nz/news/breaking-news/is-the-nz-market-looking-good-again-507585.aspx

[LoungeLizard]

Thanks for that Shareguy. I took my own advice and sold down half my holding at $1.39. I've still got a fair bit of skin in the game, so I'm hoping that the big picture analysts are correct. Time (and the weather) will tell.

[Basil]

Alokdhir, other channel Surely 1.15 levels on cards ...as that was a solid resistance on way up ...but results / dividend around can offer support ...
But all know after Index Inclusion they drift for a while till something POSITIVE comes up ...didn't come for HLG / TRA but for Tower its possible ...different beast and different times

Plenty of other examples too, of companies that get included in the index and it adds a significant premium and then that premium corrects back out over a period of time until there's some new material matter announced to generate price pressure. This correction process happens almost every time so shouldn't be a surprise to anyone.   Its declined 10 cents in just 4 trading days since inclusion.  Plenty of water to go under the bridge in terms of the price premium on index inclusion washing itself out in the months ahead.  The process almost always takes months, not days or weeks.

2023 had two 100 year major events. 2024 has been so far free of major events. An actuary might say the chances of major events in New Zealand are low for many years to come. I see some comentaters and industry peers are suggesting we are in for more of a settled pattern of weather.

That retired Metservice guy I referred too at post #226 with all his vast experience told me, you should expect those so called one in one-hundred-year events to happen every second year, perhaps more often.  I really hope he's wrong.  Maybe that's already modelled into their new, much increased premiums now, who knows for sure?  Anyway...best wishes, maybe this time it really is different, and the really compelling fundamentals are so good, a bigger after index inclusion correction is averted...time will tell.

[LoungeLizard]

Great result. All metrics going in the right direction especially NP and dividend (6.5c) at the high end of guidance.
The 45m share buyback should be very positive for EPS and should give the SP a bit of a bump. Barring a catastrophic weather year - which is, of course, the big caveat - TWR look set for another year of bumper profits and healthy returns. Happy to hold until share buyback at least.

[BlackPeter]

Result as per earlier forecast and as expected by market. So - 19.48 cents EPS is a super dooper result for them? And yes, average EPS over the last 9 years was only a measly 2 cents, i.e. this was a really good result for a normally pretty pathetic performer.

Clearly - a market accepting currently ways to high insurance premiums for mediocre service contributed a lot ... but, how long will the lucky streak for holders last?

Share buybacks at too high prices (lets face it - they trade currently, based on their average EPS, on a PE of 74) typically result in prices to drop. Just check what happened at some of IFT's share buybacks ;

Nobody can predict where the hype will go, but it doesn't feel like a party I still would like to join at this point in time. Anyway - good luck to all party goers - just keep the noise down, will you?

[lorraina]

Capital Return - Initial Court Orders Received
16/12/2024, 15:38 NZDT, MKTUPDTE
16 December 2024


Capital Return to Shareholders – Initial Court Orders Received

On 6 September 2024 Tower Limited (Tower) announced a proposed NZ$45m capital return by way of a Court approved scheme of arrangement.

Tower has received initial orders from the Court to, amongst other things, put the capital return to shareholders at its ASM on 11 February 2025 for their consideration and approval. As previously announced on 21 October 2024, IRD approval has already been obtained that no part of the capital return is in lieu of the payment of a dividend.

The scheme will involve Tower's shareholders:
• having one (1) share cancelled for every ten (10) shares
held (together with all rights attaching to those shares)
on the record date. Fractions of a share will be rounded
up or down to the nearest whole number (with 0.5 rounded
down); and
• receiving a cash sum of NZ$1.1858 for each share
cancelled. Australian registered shareholders will
receive these funds in Australian dollars at an exchange
rate approved by Tower on or about the record date and
organised by Tower's share registrar.

The scheme is also subject to the Board, at its sole discretion, remaining satisfied that Tower is complying with solvency and regulatory capital requirements, including under its capital management process requirements, and that it remains prudent to undertake the scheme, in each case, up to the time the scheme is given effect by cancellation of shares, expected to be in March 2025 (Key Scheme Condition).

If shareholder approval is received, Tower intends to seek final orders sanctioning the scheme from the Court. If these final orders are received in mid March 2025 and the Key Scheme Condition is satisfied, payment of the capital return would be made in early April 2025. Exact dates will, however, be confirmed closer to the time of payment.

ENDS

[LoungeLizard]

Are we to assume then that the SP will lift by 10% when the shares are cancelled? Is that a given?

[Poet]

Are we to assume then that the SP will lift by 10% when the shares are cancelled? Is that a given?

it's what you would expect all things being equal (although maybe earnings will be slightly lower given the reduced cash balance)

[LoungeLizard]

it's what you would expect all things being equal (although maybe earnings will be slightly lower given the reduced cash balance)

Cheers. I hope it turns out that way. I must say I am slightly wary. If shareholders (and the company) have 10% less shares in play, then one would also have to assume that the dividend would be lifted accordingly as well? 

[Poet]

Cheers. I hope it turns out that way. I must say I am slightly wary. If shareholders (and the company) have 10% less shares in play, then one would also have to assume that the dividend would be lifted accordingly as well? 

I assume that is the plan. The market capitalisation shouldn't change (well not significantly) after the payout. Actually given they have developed a bit of a habit of paying out surplus cash by way of tax free capital returns, one might even draw some positive inference from this latest payout and re-rate the multiple (which is laughably low ATM)