Daily ShareChat: Tower

By Jenny Ruth

Wednesday 8th June 2011

Tower's first-half underlying result of $18.7 million, excluding the $7.5 million charge relating to the Christchurch earthquake and the discount rate effect, was about $2.5 million below his expectations, says John Cairn, an analyst at Forsyth Barr.

The discount rate effect - which resulted in a $5.7 million charge - relates to valuing individual life risk policy liabilities.

Nevertheless, Tower remains in a robust financial position with net cash of $106.8 million and it expects its gross exposure to the Christchurch earthquake will be about $350 million which will be covered by its reinsurance arrangements, Cairns says.

He is leaving his forecasts unchanged until reinsuarance rates are finalised by July this year. "Once the new rates are set, Tower will attempt to recover increased reinsurance rates through higher premiums," Cairns says.

"Whilst there is ongoing uncertainty over reinsurance markets in the short term, it is important to bear in mine reinsurance markets are cyclical, traditionally following a five-year cycle," he says.

Tower is continuing to make operational improvements across its three business units and is pursuing a number of initiatives to drive organic growth, targeting cross-marketing opportunities in its branch network and tied distribution network.

"The potential divestment by GPG of its 35% stake could trigger a full or partial takeover. We see value in Tower around current levels ($1.79)." Cairns values the shares at $2.28.

Recommendation: Accumulate.

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