TWR - Turnaround Insurer?

4 Mar 2018




Found TWR when read 10footinvestor blog. TWE overall return is Positive and still at early stage ~ 12.5%


- historical earthquake liabilities now covered, and

- reinvestment in business capabilities commencing

- trading at or below book value, the downside appears minimal while the upside appears meaningful

- Tower historically has a cost ratio of ~42% which has moved to around 38% recently. So a 3%-6% reduction in costs is significant in context, especially if premiums are also growing.

- Tower thinks a cost ratio below 35% is plausible in the near future, given the scope of improvements, and I think they could go as low as 32% with a proper IT system and >50% online sales (currently 30% of sales are online). IAG’s cost ratio by comparison is around 29%.

- Dividends are expected to recommence in the next 2-3 years and assuming profit is maintained, a 50% payout ratio would be around a 4% yield at a ~60 cents a share.




- Tower has a ~$40m dispute with Peak Re over reinsurance it purchased following the Christchurch quake. Tower basically passed big liabilities off to its reinsurer, who was not all that happy about it. Tower says it is in the right, and I believe them. However (if I understand correctly) if Tower knew with a high degree of probability that its future liabilities were likely to tap that reinsurance, then the contract may be void and Tower would be left with a hole in its balance sheet. Notably Tower hasn’t received the cash from Peak Re yet so protracted litigation here could lead to Tower having to raise more capital or delay paying dividends.

- Earthquakes, cyclones, etc. I think it is almost inconceivable that Tower will not be a much better business in 5 years, howeverthis does not provide it much protection from freak weather events. Their risk pricing and reinsurance will be important and I hope to interview the CEO quite soon on these topics.

- Competitors Suncorp and IAG have about 70% of the market stitched up between them. I think Tower has viable sources of distribution, including via alternative platforms like Airpoints and TradeMe. I don’t see it getting squeezed out of the market, but it is a risk. I see Tower as a viable third competitor to majors that are already coordinating their pricing, according to the NZCC.

- Key man risks. I rate CEO Harding quite highly and his departure would be a concern. I also think that management and the board are unaligned with shareholders which is another key risk. To be fair, they have been very shareholder friendly so far, but on paper their alignment is not great. I have further comments on alignment in my longer piece (link below).

- Sale of cap raising shares. One of the reasons I kept this idea to myself for a while was because I expected a major wash out of shareholders following the recent capital raising at $0.39. That’s basically a 50% profit to anyone who subscribed (I am surprised that some people did not) and in between that and underwriter Goldman I expected major falls in the share price, given low liquidity. I didn’t want to declare I was buying the company at $0.60 and then have to sit through the public collapse in shares (+ the criticism) when it fell to $0.40. While that hasn’t happened to date, there is still a chance that it may.


More details:





Tower Limited is a New Zealand-based company, which is engaged in the provision of general insurance. The Company operates in two geographical segments: New Zealand and the Pacific region. The New Zealand segment consists of general insurance business written in New Zealand. The Pacific Islands segment includes general insurance business with customers in the Pacific Islands written by Tower Insurance Limited subsidiaries and branch operations. The Company offers car insurance, content insurance, house insurance, business insurance, travel insurance and others. Its Other insurances include motorbike insurance, boat insurance and caravan insurance It offers a mobile application, SmartDriver, which help users manage their driving by giving them tips along the way. SmartDriver application collects basic driving information through the sensors within users' smartphone, including the accelerometer and the global positioning system.







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