TWR - Tower Insurance

[Arbroath]

Craigs insert latest note

While policy growth remained strong (+9% home / +3% motor), rating pressure, particularly in the home category appears to have worsened in recent months. Subsequently, the Group has reduced its GWP growth guidance range for FY26 from a range of 5% to 10%, to "low single-digit" (CIPe 5.2%).
Despite GWP growth headwinds, we see this as another steady result for TWR. The Group (i) has maintained its FY26 uNPAT guidance range of $55m to $65m (CIPe $57m), (ii) holds a strong B/S (solvency ratio of 143%), and (iii) is continuing to prove up the benefits of its risk-based pricing capabilities. That said, with a 5cps (fully imputed) interim dividend announced (below CIPe at 6cps), and the rate environment softening, we expect the stock to trade flat to down today

How do Craig's stick with GWP growth forecast of 5.2% when the company are saying low sing le digits and at the HY have delivered 1%...just doesn't seem credible. IMHO they'll be lucky to deliver flat GWp fo the FY

[Basil]

Forbar revised price target $2.30 and Craigs $2.08.

Average forecast dividend of the two brokers for FY26 is 13 cps fully imputed.
Any unused part of the $45m weather provision will be on top of that.  If its $15m unused, after tax that amounts to 3 cps extra.  16 cps fully imputed in a bad weather year = 16/0.72 22.22 cps gross = 11.9% gross yield at $1.87.  Important to note that's based on using $30m of their $45m and Tower are adamant the 10 year average use is $15m.

Kiwibank client service provision kicked in this month and Westpac commences in July.

I'm happy to hold for ongoing dividend income which both brokerages are predicting will increase nicely again by FY28. (average 14.75 cps) + any unused provisioning which averages 5.9 cps.

Looking at the prospective gross yield for FY28, (assuming an average weather year)
Ordinary dividend forecast (average of 2 brokers 14.75 CPS + average unused provisioning $30m less tax = 21.6m / 364.3m shares = 5.93 cps = total fully imputed dividend of 20.68 CPS/ 0.72 = gross dividend of 28.72 cps / 187 = prospective FY28 gross yield of 15.4% at $1.87 , (noting also $1.87 is trading cum the 5 cps divvy due next month.

Disc: Holding ~ 11% portfolio allocation for very high prospective future dividend income.

[Left Field]

The deal to service Westpac customers kicks into gear this half. That'll be accretive to GWP this year and strongly accretive in FY27.

There is also new relationship with KIWI bank that will benefit the second half figs.

"Two key growth initiatives will commence in the second half of FY26: a partnership with
Westpac to offer general insurance products to its retail customers, and a back-book referral
arrangement enabling Tower to offer insurance products to a group of Kiwibank customers."

So very likely that the second half will be better than the first.

That said, since the 1HFY26 results I've reduced my holding by 20% (was overweight) taken profits off the table and now better positioned with a revised DCA sitting at $0.70c

[lorraina]

I too have sold down some Tower.
Sold a few more today to add to my AFT after reading Forbar research on them this morning.
Forbar have eps ;
2026 13.4 cps 2027 19.2 cps 2028 25.2 cps,2029 33.4 cps.
EPS growth........43.28%................31.25%..........32,5%..........Average 35,67%
ASB have current PE at 27.4  .so 27.4 divided by Growth 35.67 gives a PEG of .768 which is well under 1.

[Dolcile]

I was very underwhelmed by the HY and sold my entire position yesterday. I don't like surprises like the $11m after tax customer remediation cost.

[entrep]

I was very underwhelmed by the HY and sold my entire position yesterday. I don't like surprises like the $11m after tax customer remediation cost.

Was it purely the $11m surprise or other things you spotted?

[Basil]

Nobody likes surprises but it's hopefully now done and dusted and amounts to 3 cents per share.

[Southern Lad]

Presumably the $10.9m after tax includes an accrual for a (non tax deductible) penalty from the FMA?  Last penalty was $7m, presumably a repeat offender can't expect much sympathy from the Regulator or the Courts.

While unwelcome, I see it very much as a legacy issue.  The removal of multi policy discounts with effect from 1 January 2026 reduces the risk of similar issues in the future, although I note the latest issue doesn't specifically relate to multi policy discounts.  Hopefully there aren't too many more legacy issues waiting to be discovered.

A valid question as to why there wasn't a pre results announcement highlighting the issue.  Arguably price sensitive.

[Dolcile]

The headline messaging of "strong performance" was a real stretch and I don't like it when I start seeing words like that which don't reconcile to the actual metrics.

Profit is down materially (both reported and underlying), claims and expense ratios are up, and the combined ratio has deteriorated quite a bit. They do call out things like weather events and investment volatility, which are fair, but even stripping those out the underlying earnings are still significantly weaker year-on-year.

That said, it's not all negative. Customer growth is solid, retention is slightly up, and capital/solvency looks health.

But those positives don't really offset the fact that pricing appears to be softening, claims costs are rising, and growth is coming through at lower average premiums.

The remediation piece was the tipping point. A ~$10.9m after-tax charge that seems tied to legacy system and process issues — and is still ongoing — doesn't feel entirely like a clean "one-off". I'd have expected clearer signaling ahead of the result.  See Turners, they clearly flagged a non-cash write down well ahead of the reported results.  As an owner (now ex-owner) I don't like being kept in the dark!

Calling it a "strong" result feels a bit optimistic relative to the direction of the core metrics.

Still a good business but I'm happy to move the capital on to another longer term opportunity.

[alkebab]

Presumably the $10.9m after tax includes an accrual for a (non tax deductible) penalty from the FMA?  Last penalty was $7m, presumably a repeat offender can't expect much sympathy from the Regulator or the Courts.

While unwelcome, I see it very much as a legacy issue.  The removal of multi policy discounts with effect from 1 January 2026 reduces the risk of similar issues in the future, although I note the latest issue doesn't specifically relate to multi policy discounts.  Hopefully there aren't too many more legacy issues waiting to be discovered.

A valid question as to why there wasn't a pre results announcement highlighting the issue.  Arguably price sensitive.

This was mentioned in an announcement back in December. The $7 million fine was already accounted for, but perhaps not the $11 million in costs etc, which we just learnt was included in 1H FY26.

https://www.nzx.com/announcements/464218

[Southern Lad]

Alkebab, I'm surmising that the latest instance of overcharging might lead to further action by the FMA and therefore an additional fine.  I wonder if TWR has included an expected additional fine in the latest charge.

Agree the December 2025 fine was expensed in the September 2025 financial year.

[Shareguy]

I had also been selling down prior to the result. Always good to look at other opportunities. Still going to be a good divi stock going forward as Basil highlights, so will continue to hold.

[Basil]

Its not just a super high yield stock, there's forecast growth too.  Additionally I think their advertising program is quite creative and I like their new approach in their add's of highlighting Tower is a Kiwi company.

It seems to me the multi party discount fiasco is behind us now, (the ~ $11m was highlighted in the December announcement) and hopefully there's no more legacy issues going forward.

Comparative Metrics according to Forbar at $1.92, (I have reworked them for a share price of $1.815 which is the theoretical ex divvy price on 10 June, because the market is forward looking and the 5 cent fully imputed interim dividend is more or less imminently payable)

Tower..... 1 year forward PE 9.8, two years forward PE 8.7 (assumes full use of $45m large event provision)
IAG......... 1 year forward PE 16.8 two years forward PE 16.1
Suncorp 1 year forward PE 15.3 two years forward PE 14.2
QBE....... 1 year forward PE 12.3, two years forward PE 11.8

Quite obviously TWR is extremely cheap relative to its peer group but their forecasts as noted above assume full use of the extreme weather provision and Tower have previously said their 10 year average utilization is only $15m
If they use the average and $30m before tax is available to add to earnings, worth 5.9 cps Tower's forward PE's numbers become 7.8 and 6.7 ! Compared to its peer group those metrics look absurdly cheap and remember this is for a company that both analysts are projecting is growing earnings over the forecast years ahead.

IAG have been in the media recently bleating louder than a lamb lost from its mother about the number of storms in N.Z. so hopefully this is precursor to them softening customers up for premium increases.  Maybe we are at peak competitive pressure with premiums now ?  Maybe that's just wishful thinking, time will tell.

Clearly Tower is not without risk but the forward metrics are extremely cheap and the forward yield compellingly high.  Its probably also worth noting that only Tower out of its peer group can pay fully imputed dividends to N.Z. residents.  I think the quite recent change to fully imputed dividends is a real game changer for dividend hounds.

[Plata]

I think some caution is warranted here. Yes the westpac and kiwibank deals may trigger a step change in GWP growth going forward. However, part of the bull case here relies on the idea that tower can charge lower premiums (reducing GWP growth) but lower its risk using savvy risk based pricing, and in doing so reduce % of GWP paid out in claims. What this result showed us house cost per claim (severity) has pretty consistently risen faster than general inflation since H22 and accelerated this half. On top of this, no GWP growth in real terms.

That being said I think the risk/reward here is better than most of the NZX50 and I'm happy to hold. I'd consider adding if it breaks down into the 1.70s. Interested to see what the salt long short fund thinks, this is one of their biggest positions.