Strong Fundamentals, Attractive Valuation: Tower’s (ASX: TWR) Winning Combination

Key Takeaways: We’re initiating coverage on Tower Limited (ASX: TWR) with a Long-Term Buy rating and a $1.60 target price, based on its strong turnaround story and solid income profile. Tower’s profitability is improving, thanks to upgraded FY25 earnings guidance, disciplined underwriting, and a smart digital-led strategy that’s driving real efficiencies. The dividend yield of 5.9%–7.4% looks sustainable, backed by strong capital and reinsurance protection. Despite all this progress, the market still values Tower at a steep discount to peers like IAG and Suncorp. With a forward P/E around 6x and plenty of upside to fair value, we think Tower offers an attractive mix of income and value for long-term investors. --- We initiate coverage on Tower Limited (ASX: TWR) with a Long-Term “Buy” rating and a price target of $1.60. Tower is a well-capitalised New Zealand-based general insurer with improving operating fundamentals, a strong income profile, and a digital-led strategy driving sustainable efficiencies. We believe the market is undervaluing its earnings momentum and capital return potential. TWR currently trades at a price-to-earnings (P/E) ratio of 6.5x–7.3x and a price-to-book (P/B) ratio of 1.3x–1.4x. These multiples are materially below larger regional peers such as IAG (P/E 15x–22x; P/B 2.4x–2.9x) and Suncorp (ASX: SUN) (P/E 15x–18x; P/B 1.4x–1.8x). We believe this reflects an overly cautious view of Tower’s Pacific exposure and historical catastrophe losses. However, with FY24 marking a clear recovery in performance and FY25 underlying NPAT guidance upgraded, we see scope for a valuation re-rating as execution continues. Solid Income Profile Tower offers a strong dividend yield of 5.9%–7.4%, based on FY24–FY25 forecasts. Its dividend policy targets a 60%–80% payout of adjusted earnings, with the FY24 dividend of NZ 9.5 cents per share representing a 55% payout. Dividend payments were resumed in FY22 following a conservative capital management approach in the wake of significant FY23 catastrophe claims. We view the dividend as sustainable, underpinned by: - Upgraded FY25 earnings guidance, reflecting favourable claims trends and improved underwriting. - A robust capital position, with an A- financial strength rating from AM Best. - NZ$45 million capital return underway, further supporting shareholder yield. - Well-structured reinsurance programs, which reduce volatility and limit catastrophe exposure. Strategic Growth & Efficiency Tower’s digital-first model, anchored by its “My Tower” platform, is driving tangible operational improvements. In FY24, 63% of NZ retail policies were sold through digital channels, with a target of 80% digital transactions by FY27. This positions Tower as a leader in direct-to-consumer insurance in New Zealand, with a growing customer base of over 300,000. Key efficiency initiatives include: (1) Targeting a management expense ratio (MER) below 31% in FY25 (down from 31.4% in FY24), and below 26% by FY27. (2) Enhanced risk-based pricing and underwriting discipline, improving loss ratios by better segmenting catastrophe-prone and high-risk portfolios. (3) Strategic partnerships (e.g. Kiwibank, Trade Me) that drive efficient distribution without large acquisition costs. These efforts aim to improve the combined operating ratio (COR), expand margins, and lift return on equity (ROE) over the medium term. That said, Tower Limited is a compelling income and value opportunity in the Australasian insurance sector. With improving profitability, a strong dividend profile, and a disciplined digital-led strategy, we believe the current valuation fails to reflect its turnaround momentum. Our $1.60 price target represents fair value based on relative and intrinsic metrics, and we reiterate our Long-Term Buy rating for investors seeking resilient income and re-rating potential.

Guidance Upgrade Shows Strong Claims Management and Underwriting Discipline Tower upgraded its FY25 earnings guidance, lifting its underlying NPAT forecast to NZ$70 million–NZ$80 million, up from NZ$60 million–NZ$70 million. That’s a meaningful upgrade and shows that strong claims performance is carrying through. Interestingly, this came despite Tower lowering its GWP growth outlook to “mid-single digit” territory (down from the previous 7%–12%) due to more competition and softer average premiums. Even so, the combined operating ratio (COR) improved to 82%–84%, and while the MER rose slightly to below 31%, that’s largely due to accelerated investment. The key message? Tower’s profitability is improving even in a more competitive environment. Dividend Profile Back on Track, With Strong Support from Capital Strength Tower reinstated dividends in FY24 after pausing them in FY23, delivering a full-year payout of 9.5 cents, or about a 55% payout ratio. That’s a positive signal. With a target payout ratio of 60%–80%, and based on the upgraded FY25 NPAT guidance, we estimate earnings per share of about NZ$0.219. This implies a dividend range of 4.2 to 5.6 cents, giving investors a yield of around 5.9%–7.4%—which looks quite sustainable. Tower is well-capitalised, with a 212% solvency ratio at the NZ parent level, comfortably above regulatory minimums. AM Best has reaffirmed its A- (Excellent) credit rating, highlighting the group’s strong capital position. Plus, with reinsurance cover of NZ$800 million for two major events and NZ$85 million for a third, Tower is well protected from catastrophe volatility. Valuation Is Still Cheap Compared to Peers, Even with Earnings Upgrades Even after the guidance upgrade, Tower is trading at a forward P/E of around 6.1x. That’s a steep discount to larger peers like IAG and Suncorp, which trade between 15x and 22x. On a price-to-book basis, Tower sits around 1.3x–1.4x, again well below IAG’s 2.4x–2.9x and more or less in line with Suncorp. Considering the stronger dividend yield, improving profitability, and capital strength, we see clear upside. Our AUD $1.60 target price is based on a forward P/E of 8.0x applied to FY25 EPS of AUD $0.20. A price-to-book multiple of 1.6x also supports this valuation, and the dividend discount model adds further weight to the case. Focused on Margin Expansion, Digital Capability, and Strategic Partnerships Tower’s strategy is focused on doing more with what it has, improving margins, building digital scale, and deepening customer relationships. Its My Tower digital platform is gaining traction, and partnerships with the likes of Trade Me and Kiwibank are helping extend its reach in New Zealand. GWP growth may be slowing a bit, but the goal here isn’t to chase volume, it’s to grow profitably. Internal cost control and product innovation are helping to push the MER lower and improve overall efficiency. All in all, Tower ticks a lot of boxes for income-focused investors. It’s paying a healthy dividend, underpinned by strong earnings and capital, and it’s trading at a deep discount to peers. The company has clearly turned a corner after the challenges of FY23, and the improvement in claims performance and underwriting discipline is real. With a forward P/E of just over 6x, a sustainable yield near 7%, and multiple valuation supports pointing to upside, we think Tower offers compelling value. We reiterate our Long-Term Buy rating and AUD $1.60 target price.