Investment firm Forsyth Barr is forecasting an underlying profit of $94 million for general insurer Tower in FY25.
With an improved operating leverage, a lower risk profile and a balance sheet that supports above-market dividend yields and further potential capital returns, the analysts, in a report published last Tuesday, have given the general insurer an 'outperform' ranking.
The investment firm’s ranking of 'outperform' is relative to its other equity security recommendations across its coverage of the New Zealand market. It’s also based on risk-adjusted Estimated Total Returns for these securities - this means a company’s expected returns after it has been adjusted for risks.
Other rankings are 'neutral' and 'underperform'.
Risk-based approach
Tower has been taking a risk-based approach, insuring lower-risk homes and off-risking cars often targeted by thieves, according to the report.
In the report, analysts James Lindsay and Will Twiss say taking this risk-based approach puts Tower in a position to deliver improved profitability and gives them a buffer against weather volatility.
In the first half of 2025, Tower’s house volumes grew 10% but at a flat rate (down 0.4%) which “demonstrates Tower’s ability to attract desirable customers without conceding margin”.
“Motor, where the company intentionally off-risked high-theft models last year, has returned to modest growth as customer losses subsided."
The analysts say: “We view risk-based pricing as Tower’s most defensible competitive edge and the primary enabler of sustainable return on equity at or above 18% through the cycle.”
Alongside this, “favourable weather” helped reduce Tower’s business as usual claims ratio to 38% in the first half of 2025 but the analysts forecast a “more normalised” 48% claims ratio for its FY26 estimates.
“Upcoming sea-surge and landslip models should extend that advantage and keep large-event utilisation below the NZ $50 million allowance we forecast in FY26 and FY27 - the same as in FY25 - at around a 90% confidence interval of sufficiency.”
This $50 million allowance is money set aside by Tower for large-scale events.
“Tower’s pivot to peril-specific, risk-based pricing is now firmly embedded in daily renewal decisions and is reshaping the composition and economics of its personal lines general insurance book.”
Personal lines insurance are products that cover people from things like loss of property, death or injury.
Operating digitally
The analysts say Tower’s management expense ratio (MER) - the insurer’s operating expenses in relation to its assets - should go down to about 30% in FY25.
The insurer is now on a single cloud-based tech stack and more than half of its sales and service calls are done by Tower’s hub in Suva, the capital of Fiji.
According to the report, this means in the first half of 2025:
- 73% of inbound calls were answered at Tower’s Suva service hub at ⅓ to ½ the Auckland cost
- 60% of its new business policies in New Zealand were done online
- 47% of service calls were available digitally
- 94% of car policy changes were available digitally
- 66% of claims were managed without human touch
“That shift reduces manual data capture, minimises dual-keying errors, and shortens settlement times - lowering average claim costs (repairers charge less when approvals are quick and jobs arrive evenly rather than in spikes) and improving customer experience,” the analysts say.
“Alongside significant scale gains from strong GWP growth over the last three to five years, TWR’s digital focus and efficiency initiatives have materially improved its MER."
GWP stands for gross written premium. It is the total amount customers pay for insurance coverage on policies issued by the insurer.
“The improvement in Tower’s MER has underpinned strong profitability gains.”
‘Positive step-change’
Tower reported a record underlying profit of $83.5 million in FY24 and the Forsyth Barr analysts forecast a further increase to $94 million in FY25.
While these results benefit from “benign weather” which is reflected in “moderate claims”, the analysts say “there has been a positive step-change in Tower’s sustainable earnings base”.
“Under normalised weather conditions, we expect Tower to deliver $61.8 million of underlying earnings in FY26.”
“Tower has historically struggled to generate returns that cover its cost of capital … However, returns have improved significantly in recent years as Tower has become a scaled and streamlined insurer.”
The analysts forecast a return on equity of 18.8% in FY27, consistent with Tower’s guidance for 18% or greater.
At this level, Tower’s returns compare favourably with Australasian insurance peers, the analysts say, which have return on equities in the 10% - 16% range”.
Tower finished the first half of 2025 with solvency at 164% (solvency is about how well a business can meet its long-term goals and whether it has more assets than liabilities).
“We consider this a sufficient buffer above the level required for normal operations, with expectations of strong future profitability supporting further capital strengthening.”
With its $50 million large-scale event allowance at a 90% confidence level, “there is significant potential for underutilisation - resulting in upside to profit and dividends”.
Tower’s gross yield is the second highest in the NZ50 and the analysts say they see Tower continuing to offer investors “a compelling risk-adjusted total return profile, with scope for further capital returns or buy-backs should large-event costs remain benign in any given year”.
Softening phase
The pace of growth for insurance premiums has slowed down as New Zealand’s general insurance sector is in the softening phase of its pricing cycle.
Tower’s GWP went up just 4% in the first half of 2025, and the analysts say "it has trimmed its FY25 ambitions from 10% to 15% down to mid-single digits, reflecting softer market pricing".
“It also reflects a deliberate tilt toward lower-risk, lower-premium segments, which we view as prudent.”
Competitive intensity will be the "swing factor", and IAG and Suncorp will be “ramping up above-the-line spending”, the analysts say.
About 81% of New Zealand’s personal lines market is held by IAG, Suncorp and Tower so pricing behaviour among those three will set the tone for industry margins.
Tower’s granular house-level pricing and off-risking of high-exposure clusters has meant its FY25 reinsurance renewal was a success in a tough market, the analysts say.
“Management expects core reinsurance costs to fall from 13.9% of GWP in FY24 to about 11.7% in FY25,” the analysts say. This is not the reinsurance ratio but a percentage of total income.
With global reinsurance pricing beginning to soften, the analysts say this should allow Tower "to secure more cover for less outlay when the FY26 season is negotiated over the coming months".
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