WHY WE LIKE IT

The company has appeared on our radar because it seems very cheap. It trades on a forecast PE of about 5 times versus its competitors of 8 or 9 times. The reason is its big exposure to the Canterbury earthquakes in 2010 and 2011. The group has a relatively small capital base of NZ$141m (A$135m) which has been reduced by increased provisioning. Late in November the group announced that it's working to spin off this troubled liability. If it can do this, the stock will get re-rated, but it will occur with a capital raising. Investing in Tower is similar to investing in a biotech; it's a binary bet, although it must also be said that it's in nobody's interest for this insurer to go down the gurgler.

WHAT'S NEW?

There is about NZ$150m in outstanding claims relating to Canterbury. Tower is working with the Reserve Bank of New Zealand to assess the capital requirements for the proposed spin off or 'Run Off Co' which the company believes will involve a capital injection. It says that it is investigating potential sources for capital. A decision by the RBNZ should be made by the group's AGM in March, but one analyst notes that currently only about NZ$39m could be put into Run Off from existing reserves, plus the company is owed receivables of about NZ$100m, but these are subject to court action.