UPDATED: Tower shares gain on souped-up dividend, first half underlying earnings rise

UPDATED: Tower [NZX: TWR] shares rose to a month-high after the general insurer hiked its interim dividend and confirmed an on-market share buyback after lifting first-half earnings 36 percent on rising premiums and fewer claims. 

The stock jumped as high as $2.22 and was recently up 4.3 percent at $2.20 after the Auckland-based insurer reported underlying profit of $17.9 million in the six months ended March 31 from $13.1 million a year earlier. Gross written premiums rose 4.9 percent to $145.9 million, while favourable weather across New Zealand and the Pacific helped cut the insurer's claims ratio to 44.5 percent from 50.4 percent a year earlier. 

Chairman Michael Stiassny confirmed plans to implement an on-market share buyback of up to $34 million, or 10 percent of Tower's stock, which he says will commence shortly. The board declared an unimputed interim dividend of 8.5 cents per share, payable on June 30, with a June 12 record date. 

"The result is at the higher end of earlier guidance, and the 8.5 cents per share dividend is well-up on the previous payment," says Grant Williamson, a director at Hamilton Hindin Greene in Christchurch. "The underlying earnings show a nice increase on the back of premium increases." 

Auckland-based Tower reported a net loss of $4.9 million, or 2.99 cents per share, compared to a profit of $13.1 million, or 4.96 cents, a year earlier. The insurer increased provisioning for costs associated with the Canterbury quakes by $22.6 million, slightly above the top of the forecast range flagged earlier this month, as projected rebuild costs rose due to labour and material shortages and higher building costs. That pushed the insurer's projected claim expense above its $325 million reinsurance limit for the major 2011 event. 

The company signalled earlier this month it will face higher claims expenses from the Canterbury rebuild, reflecting an industry-wide increase in costs and delays for repair and rebuild work, higher costs of complex multi-unit claims, and a clearer understanding of where claim costs fall between Tower and reinsurers. That increased cost was also captured in the Reserve Bank's recent financial stability report, which raised its estimate for industry claims to between $33 billion and $38 billion from a previous range of $32 billion to $37 billion. 

The insurer settled 94 percent of all claims relating to the Canterbury rebuild as at April 30, and is carrying $51 million in capital above its minimum solvency requirements under the central bank's prudential regime. 

"We are pleased with the improvement in our underlying general insurance profit over the past six months," chief executive David Hancock says. "We have been busy implementing our growth strategy: transforming our customer interactions to drive revenue and efficiency, building our digital capability to take us into new distribution channels, and increasing our strong position in the Pacific Rim." 

Tower is looking to latch on to its 140-year history of providing insurance across the Pacific to access largely greenfield opportunities in Papua New Guinea, Fiji and the Solomon Islands, and it plans to launch in Vanuatu later this year. 

The company entered into an alliance partnership with Trade Me, which Hancock says will be target distribution, without being more specific. 

Tower didn't provide full-year earnings guidance, though Hancock says second-half performance is typically similar than the first six months of the financial year. 

The company says the insurance industry will see growth in reinsurance costs following the Canterbury quakes which will put upward pressure on premiums, and technology advances provide opportunities to improve service while reducing costs. 

Tower anticipates consolidation in the sector to continue, and it will participate where there is benefit to shareholders, though Hancock says the insurer is primarily targeting organic growth. 

(BusinessDesk)