NZX-listed insurer Tower is now signalling the possibility of making a full year loss, as inflation, motor crime and supply chain issues mount on top of the existing hits from adverse weather events earlier in the year.
Tower now says that for the year ending September 30, 2023 its guidance range has been revised to between an underlying loss of $2 million and an underlying profit of $3 million. This is down from the guidance issued in May 2023, which was for an underlying profit of between $8 million and $13 million. And that May guidance had itself been down from an earlier estimated range of $18 million to $23 million underlying profit.
Later in May Tower had reported a loss for the first half of the year. The company paid no half-year dividend and said then that it would make a decision about a full year dividend when the full year result is announced.
The latest update from Tower on Wednesday made no reference to dividends.
Chief executive Blair Turnbull said inflation, motor crime and supply chain issues had continued to worsen over the third quarter (Q3), with the average cost of motor claims increasing by 20% year on year to circa $3,400.
"Despite increasing motor insurance premiums by an average of 26% in the past year, Tower’s claims ratio excluding large events has deteriorated to 55% at 30 June 2023, from 52% at 31 March 2023. Persistent wet weather and other factors are also resulting in motor and house claims frequency above historical norms."
He said in conjunction with implementing additional rating increases, Tower is further tightening its risk selection; automating claims management processes; and working closely with suppliers to manage rising costs.
"It takes 12 months for the full impact of rating and underwriting actions to be seen as they take effect as insurance policies are renewed."
Following the Auckland floods on May 9 and revisions to estimates for Cyclones Judy and Kevin in Vanuatu, large events costs are now $39.5 million (excluding costs of reinstating reinsurance cover), leaving $10.5 million of Tower’s $50 million large events allowance for the remainder of the year to September 30.
"Tower has now settled more than 50% of the claims received from January’s Auckland and Upper North Island weather event and Cyclone Gabrielle. The insurer has implemented a dedicated event response function and scaled up its Fiji-based resourcing to ensure remaining large event claims are resolved efficiently," Turnbull said..
At the end of Q3, year to date Gross Written Premiums (GWP) were up 16.5% on the prior year (excluding Tower PNG), to $385 million.
"Accordingly, Tower maintains its guidance for GWP growth in a range of between 15% and 20%."
Turnbull said Tower’s expense ratio has improved to 34% at end of Q3, versus 36% for the same period last year, due to efficiencies from digitisation and diligent cost control.
Tower’s estimated solvency ratio as at June 30, 2023 is 134%, up from 125% at March 31, 2023.
10 Comments
I think you're buying into the established model too much. The fundamental principle of insurance is that you pay a premium based on the likelihood of any event occurring. Even 1:1000 year events are factored into the calculation although these have been a very minor amount until recently. The big issue here though is that insurance companies have become profit making gold mines, as their model work on the principle that any funds not paid out in any one year are identified as profit. So even though that 1:1000 year event might not have happened in any one year, the unused income is not put aside in a growing pool to pay for those inevitable major events. Instead re-insurance is used to cover the risk. But the costs of reinsurance are skyrocketing now, as those companies are getting burnt too by the same model being applied. This is plain and simple greed.
My view is that any insurance company should be retaining a significant portion of unused income to build a pool of funds to cover the bad years. In time this would reduce their reinsurance costs, but may also create an opportunity to be a re-insurer for other business's.
Good insight there, yes it seems bizarre to just create another layer of insurance to take non-paid funds as profit after expenses. Follows the general trend of deregulation over the last 50years, when the proverbial hits the fan, changes are made and tweaks, new rules, layers etc to make it seem ok when really it simply covers up the underlying issue.
Well written and I agree. A short term profit taking model is not sustainable nor best for the community. Banks are required to hold certain cover, I wonder if government could do a similar thing with insurance or would they just vacate our small market? They would certainly threaten that, I am sure. I also think Tower are now regularly using the 1:1000 year event assessment for methodical cherry picking. Interesting Tower can put up premiums an average of 26% and still make losses. My personal experience of Tower this year was so bad with premiums (one increase was 400%!), that I terminated 7 expensive policies with them and went with NZI instead, for a lot less. That’s having been with Tower since they took over National Mutual decades ago. Of course my long loyalty as a customer made no difference at all, but I was surprised my low claims rate and the low risk of other expensive policies made no difference.
People not abiding by the road rules, factored largely by policing road rules should be held to account as well though. Additionally, old cars being imported from japan with terrible safety, and low excess can be held into account. If my excess was $400 in Australia I would be paying triple what I pay here.
This is largely down to a bad weather year combined with inflation challenges, but I'm surprised Tower are so vulnerable. Even if they have increased their premium rates by 25% hardly any of that increase will be earned yet but a 55% loss ratio on motor is not so bad even for a direct company. There is a real risk that they will overshoot the mark with large premium increases like this which for a small company will impact their policy count.
Suspect their issue is risk tolerance and risk selection issues which is strategic and tactical underwriting failures and this must go much further than their motor book as clearly that isn't the major driver of their bottom line constantly failing to meet expectations.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.