Tower Faces Rising Earthquake Claims Costs Despite Upgraded Profit Outlook
Tower Limited has raised its FY25 underlying NPAT guidance to $70m–$80m, citing better-than-expected claims experience and favorable weather, while revising premium growth and expense ratio forecasts.
- Underlying NPAT guidance increased to $70m–$80m from $50m–$60m
- Gross written premiums growth forecast revised to 7%–12%
- Management expense ratio guidance raised to below 31% from below 29%
- Combined operating ratio expected between 82% and 84%
- Reported profit impacted by increased earthquake claims provisions and remediation costs
Tower’s Upgraded Profit Outlook
Tower Limited (ASX/NZX: TWR) has updated its FY25 earnings guidance, lifting its underlying net profit after tax (NPAT) forecast to a range of $70 million to $80 million, up from the prior $50 million to $60 million. This upward revision reflects a combination of better-than-expected business-as-usual claims performance and a prolonged period of favourable weather conditions, which have reduced claims frequency and severity across its portfolio.
The insurer’s improved claims experience is a notable development in a sector often challenged by unpredictable natural hazards. Tower recorded one large event in FY25 so far, a storm in Dunedin in October with an estimated cost of $3 million, just above the threshold for a large event. Despite this, overall claims have remained subdued, contributing to the positive revision.
Premium Growth and Expense Ratio Adjustments
Alongside the profit upgrade, Tower has revised its gross written premiums (GWP) growth guidance to a mid-single digit range of 7% to 12%. This adjustment reflects a competitive New Zealand insurance market, with a portfolio shift towards lower-risk homes and a reduction in new motor insurance policies. While premium growth remains positive, the insurer acknowledges the impact of market dynamics and customer behaviour on its top-line expansion.
Management expense ratio (MER) guidance has been increased to below 31%, up from the previous target of below 29%. This change is attributed to ongoing investments in strategic initiatives aimed at enhancing operational efficiencies and strengthening the business for medium-term growth. Although the MER is tracking above target currently, Tower expects these investments to yield benefits that will reduce expenses over time.
Combined Operating Ratio and Non-Underlying Costs
Tower expects its combined operating ratio (COR) to be within the range of 82% to 84%, indicating solid underwriting discipline and cost management. However, the reported profit will face headwinds from additional non-underlying costs, including customer remediation efforts and increased provisions related to earthquake claims in Canterbury.
The insurer highlighted the ongoing challenge posed by historic Canterbury earthquake claims, which continue to affect the industry 15 years after the events. Factors such as reopened claims, inflationary pressures on repairs, and external complexities have led to an unexpected rise in provisions. Tower’s exposure to these claims underscores the long-tail nature of natural disaster liabilities in the New Zealand insurance market.
Looking Ahead
Tower plans to provide further details on its financial performance and the impact of these provisions at its half-year results announcement scheduled for May 20, 2025. Investors will be keen to see how the insurer balances growth ambitions with risk management in a competitive and evolving market environment.
Bottom Line?
Tower’s upgraded guidance signals resilience but underscores ongoing natural hazard risks and strategic investment costs.
Questions in the middle?
- How will Tower’s strategic investments impact expense ratios and profitability in the medium term?
- What is the potential scale and timeline for Canterbury earthquake claims provisions to affect future earnings?
- How will competitive pressures in New Zealand’s insurance market influence Tower’s premium growth and customer retention?
