Daily ShareChat: Tower

By Jenny Ruth

Thursday 9th December 2010

Tower produced a solid annual result with the general insurance business delivering a whopping 27% growth in underlying profit, underpinned by a significant reduction in claims costs as a result of strong underwriting and improved claims management practices, says David Ellis at Aegis Equities Research which is owned by Morningstar.

"Management did not provide any guidance but said 'market conditions will continue to be challenging and uncertain.' In light of the tough macroeconomic environment we are lowering our financial 2011 forecast to $57 million from $60 million," Ellis says.

"We think price increases in both (general insurance) and health businesses, coupled with higher margins in the investments business, will drive growth this year."

He doesn't think Tower will find any suitable acquisitions that meet its investment criteria.

Although the company has performed consistently since it was spun out from the Australian operations, its share price has been lacklustre. "We think this boils down to lack of confidence in the company or perhaps the management in delivering longer-term returns," Ellis says.

The New Zealand insurance and investment products markets have historically shown lower growth than in Australia and, barring health, Tower's competitive position is weak.

"Competition remains fierce, but so does the potential for growth, given significant levels of under-insurance. New management in place is intent on improving Tower's brand image and has had some success so far."

Recommendation: Hold.

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