TWR - Tower Insurance

[BlackPeter]

TWR's performance is mainly down to El Nino vs La Nina

Well, El Niño seems to make things worse in NZ (i.e. worsening the impact of climate change). So yes, likely more big events during El Niño. The problem with this statement is: We all know the next El Niño will come, but nobody knows when (months or years?). So - we better be prepared and the insurance companies better keep sufficient reserves, whatever sufficient means (we will know after the event). 

[Basil]

FB have released latest report

Stock performances and valuation
Over the last three months, the listed Australasian insurance sector has produced solid stock performances. TWR leapt +47%, SUN rose +8%, IAG moved +7% higher, and QBE ended up +2%. Over twelve months, TWR (+115%), SUN (+30%), IAG (+29%), and QBE (+7%) have all risen as the industry has benefitted from a strong rates cycle, mild weather and robust investment returns.�������������� TWR trades at 8.7x 12-month forward earnings (including NZ$50m of large events allowance), a discount to its own history and its Australasian insurance peers (median PE multiple of 17.4x).

Thanks for sharing and I am sure there will be much debate about why going forward, "this time it's different", (in my opinion the most dangerous phrase in the investor lexicon).

Can any long-term investor share any insights as to why performance in the years prior to 2023, (we all know about the major weather events that year) was so lackluster?  Why couldn't Tower previously in all those earlier years get their management act together and set insurance prices that gave a decent return on capital?   I'm genuinely interested in this but don't have the time to read through multiple annual books of excuses, otherwise known as annual reports.

[BlackPeter]

Thanks for sharing and I am sure there will be much debate about why going forward, "this time it's different", (in my opinion the most dangerous phrase in the investor lexicon).

Can any long-term investor share any insights as to why performance in the years prior to 2023, (we all know about the major weather events that year) was so lackluster?  Why couldn't Tower previously in all those earlier years get their management act together and set insurance prices that gave a decent return on capital?   I'm genuinely interested in this but don't have the time to read through multiple annual books of excuses, otherwise known as annual reports.

Not really a follower of Tower, but here what I remember:

They seem to have a lot of business on the islands (no, not talking about North and South) ... and for some reasons this didn't always go well.

They had their fair share of earth quake related problems

I remember their name being called various times in the context of litigation and FMA inquests. A google search might show more.

During the three decades I am living in NZ, they never made it even on the shortlist for any of our insurances. I assume they sell mainly through brokers to people who are unable or unwilling to do their own research.

They have a long history of disappointing share holders as well as customers. As some posters tend to  say: "The past is the best guide to the future"?

But hey - maybe it all changed overnight. I don't know, but some of the current holders might ...

[winner (n)]

FB have released latest report

Stock performances and valuation
Over the last three months, the listed Australasian insurance sector has produced solid stock performances. TWR leapt +47%, SUN rose +8%, IAG moved +7% higher, and QBE ended up +2%. Over twelve months, TWR (+115%), SUN (+30%), IAG (+29%), and QBE (+7%) have all risen as the industry has benefitted from a strong rates cycle, mild weather and robust investment returns.�������������� TWR trades at 8.7x 12-month forward earnings (including NZ$50m of large events allowance), a discount to its own history and its Australasian insurance peers (median PE multiple of 17.4x).

with due respect to the guys at Forbar using 'peers' multiples for (dual listed) TWR is rather mischievous and somewhat a lazy approach

Methinks those guys know full well that TWR will never ever trade at a PE of 17.4x...... but it makes for a good story that keeps their clients happy

Even if the E part fell to 5 cents 17x is a big stretch and then only priced on hope that the 5 quickly turns to 10

[Scooter]

Thanks for sharing and I am sure there will be much debate about why going forward, "this time it's different", (in my opinion the most dangerous phrase in the investor lexicon).

Can any long-term investor share any insights as to why performance in the years prior to 2023, (we all know about the major weather events that year) was so lackluster?  Why couldn't Tower previously in all those earlier years get their management act together and set insurance prices that gave a decent return on capital?   I'm genuinely interested in this but don't have the time to read through multiple annual books of excuses, otherwise known as annual reports.

Does this mean yourve sold part or all of your holding Basil

[Basil]

Does this mean yourve sold part or all of your holding Basil

See post #207 Scooter.  I am sure if you read that, the answer will become self-evident. 

[LoungeLizard]

Thanks for sharing and I am sure there will be much debate about why going forward, "this time it's different", (in my opinion the most dangerous phrase in the investor lexicon).

Can any long-term investor share any insights as to why performance in the years prior to 2023, (we all know about the major weather events that year) was so lackluster?  Why couldn't Tower previously in all those earlier years get their management act together and set insurance prices that gave a decent return on capital?  I'm genuinely interested in this but don't have the time to read through multiple annual books of excuses, otherwise known as annual reports.

I'm a current, but not long term holder, but my take on TWR's lackluster years is that they basically suffered disproportionately as a being a small fish in a big pond. They didn't have the economies of scale to keep costs or premiums down and, being small, the Christchurch earthquake and various bad weather events, also affected them disproportionately.

By all accounts they weren't that well managed either - the computer system upgrade took an age and as noted, their pacific island business didn't do that well either.

I think the current environment suits them much better. All insurance companies are charging more - 20-30% more - and this suits the smaller outfits like TWR, who can't normally compete on price. Going forward, without a catastrophically bad year that exceeds their very high re-insurance levels, the current level of excess profits will become "normal" and shareholder returns are likely to be very, very good.

BUt...in this industry, a bad year doesn't just mean lower profits and dividends, it means a loss and no dividends, from which it takes a year or more to bounce back from. TWR is the very definition of a boom and bust stock. As said, I think the SP has got room to move upwards yet, but for risk averse investors like myself I don't see it as a long term hold, despite the compelling metrics.

[winner (n)]

What's going to happen to the share price when they return this 12 cents?

[LoungeLizard]

What's going to happen to the share price when they return this 12 cents?

Yeah, there's still some good things to come, but my feeling is that people/institutions are selling down, taking profits/removing risk,  and we may see a retracement in the next week or two. Then as divvy day and the capital return get closer people might be tempted back in and the SP go back to current levels, maybe beyond. $1.50 seems a bit hopeful now, but you never know.
 But, as ever, I could be completely wrong and TWR may become a $2 stock as some seem to think. 

[Poet]

I think it will be interesting when TWR returns the 12c per share.

Now that TWR is in NZX50 when TWR cancels (let's say) 10% of the shares on issue then either the share price will rise by circa 10% to reflect the increased EPS due to the lower number of shares on issue or those index funds are going to have to buy another circa 10% of their pre-capital-return shareholdings to maintain the correct proportion of TWR shares in their portfolios. Probably a combination of the two effects. Either way it's a win for independent holders. Capital return plus shareprice gain.

[LoungeLizard]

I think it will be interesting when TWR returns the 12c per share.

Now that TWR is in NZX50 when TWR cancels (let's say) 10% of the shares on issue then either the share price will rise by circa 10% to reflect the increased EPS due to the lower number of shares on issue or those index funds are going to have to buy another circa 10% of their pre-capital-return shareholdings to maintain the correct proportion of TWR shares in their portfolios. Probably a combination of the two effects. Either way it's a win for independent holders. Capital return plus shareprice gain.

Yep, can't dispute your logic there, Poet. It might well turn out that way, so I'm considering my usual fall-back position when undecided - sell half/ keep half.

[Scooter]

See post #207 Scooter.  I am sure if you read that, the answer will become self-evident. 

I'm going to take that as a yes. 😁

[Basil]

I think it will be interesting when TWR returns the 12c per share.

Now that TWR is in NZX50 when TWR cancels (let's say) 10% of the shares on issue then either the share price will rise by circa 10% to reflect the increased EPS due to the lower number of shares on issue or those index funds are going to have to buy another circa 10% of their pre-capital-return shareholdings to maintain the correct proportion of TWR shares in their portfolios. Probably a combination of the two effects. Either way it's a win for independent holders. Capital return plus shareprice gain.

Buying shares back lowers the free float market cap if the price stays the same.  In theory the remaining shares should rise due to the increased eps but the market is not always an efficient pricing mechanism and the buy-back money has to come from somewhere so presumably their term deposit ledger will be $45m lower next year, along with much lower term deposit rates so it's not going to be entirely eps accretive by any means, in line with the percentage of shares bought back.

I can envisage a scenario which I really hope doesn't happen, where we have another horrendous summer like 2023 with two so called one in one-hundred-year extreme events, the shares tank and the free float market cap resulting from extreme weather events and the capital return, is lowered enough to get booted out of the NZX50 index.  Very unlikely, but it is one plausible scenario, nonetheless.

[bulltrap]

I think it will be interesting when TWR returns the 12c per share.

Now that TWR is in NZX50 when TWR cancels (let's say) 10% of the shares on issue then either the share price will rise by circa 10% to reflect the increased EPS due to the lower number of shares on issue or those index funds are going to have to buy another circa 10% of their pre-capital-return shareholdings to maintain the correct proportion of TWR shares in their portfolios. Probably a combination of the two effects. Either way it's a win for independent holders. Capital return plus shareprice gain.

Adding my take on this, since I'm already reading up on how the indexes work...

If we're talking about the market re-rating TWR up by 10%, it's the same as any day-to-day price fluctuation, and the index funds don't have to buy more. The share price change affects the value of the shares they already hold, by just the right amount to track the index.

Similarly for corporate actions, index funds shouldn't have to go the market to adjust their holdings in that particular company. Instead, any capital inflow or outflow gets spread across the whole index. So, most of the TWR payout gets reinvested in the larger indexed companies, very little in TWR itself.

As an aside, for regular dividends too, the payout doesn't get reinvested in the company that yielded it, but rather is 'reinvested across the index' or paid out as a dividend by the index fund. So I gather index funds don't necessarily utilise DRPs, and if they do, the DRP discount is effectively free money for them - it doesn't stay in the fund since that would put the fund ahead of the index.

[Poet]

Adding my take on this, since I'm already reading up on how the indexes work...

If we're talking about the market re-rating TWR up by 10%, it's the same as any day-to-day price fluctuation, and the index funds don't have to buy more. The share price change affects the value of the shares they already hold, by just the right amount to track the index.

Similarly for corporate actions, index funds shouldn't have to go the market to adjust their holdings in that particular company. Instead, any capital inflow or outflow gets spread across the whole index. So, most of the TWR payout gets reinvested in the larger indexed companies, very little in TWR itself.

As an aside, for regular dividends too, the payout doesn't get reinvested in the company that yielded it, but rather is 'reinvested across the index' or paid out as a dividend by the index fund. So I gather index funds don't necessarily utilise DRPs, and if they do, the DRP discount is effectively free money for them - it doesn't stay in the fund since that would put the fund ahead of the index.

Yes, you are absolutely right - if the market rerates TWR by 10% then the index funds are sweet, nothing to do.
I was interested in the scenario where the market didn't rerate the shares and came to the conclusion that in that event, the index funds would have to purchase extra shares to maintain the appropriate weighting (at least until and if, the TWR index weighting was rebalanced at a quarterly rebalance date). In that case, the index buying would cause an increase in share price.