Tower’s planning to increase its provisions for Canterbury earthquake-related claims costs by more than $20 million.
The insurance company made the announcement this morning, as the NZX and ASX lifted the halt on the trading of its shares.
Trading was halted on Wednesday, when the insurer said it was “reviewing its Canterbury provisions and related matters,” as it prepared its financial accounts for the six months ended March 31. These accounts are due to be released on May 26.
In a statement released today, Tower said the Canterbury rebuild is essentially costing it more than it anticipated. Repair and rebuild costs are higher, there are delays on construction, and there are increased costs associated with settling complex claims associated with multi-unit buildings.
The company won’t disclose how much its provisions for quake-related claims are worth, but says it will increase these provisions by between $20.9 million and $22.4 million post-tax.
Looking at the company's financial statements for the year ended September 2014, you can see that a year after the 2011 quakes, Tower estimated its total claims cost was $117 million.
This estimate jumped to $136 million two years after the quakes and $137 million three years after the quakes. Given the quake provision increase announced today, it’s likely this figure will make a substantial jump this year.
Accountant and insurance commentator, Cameron Preston, says Tower essentially has no money left in its reinsurance kitty, so has to tap into its shareholders’ kitty, to pay for quake-related claims.
Preston says; “Tower’s normal profit this year will be completely eaten up by this Canterbury provision increase, hence the share price falls this morning and trading halt.”
Tower’s share price sat at $2.24 last Friday, dropped to $2.17 when the trading halt was announced on Wednesday, slumped to $2.15 when trading resumed this morning, and picked up to $2.19 this afternoon. Tower’s share price has consistently risen over the year, and is still higher than it was a year ago.
Preston says; “Tower recently [on April 15] bought some special reinsurance [worth $50 million] to try to protect itself from "long tail" losses, however this is not normal reinsurance and will be very expensive.
“I imagine it will have a high excess, as it’s essentially like buying insurance for an accident after the accident happened. This isn’t very cheap.
“But this is a sign of how desperate the company is.”
Tower says it still intends to continue its “capital management programme”, which involves buying $34 million of its own shares. It will reveal more information on this when its accounts are released on May 26.
In spite of all this, Tower doesn’t expect it’ll have to increase its solvency reserves.
Tower held at least $135 million above the solvency level required by the Reserve Bank at the end of the 2014 financial year, and it says it still held about $110 million more than required as at March 31.
It says; “Following review of the company’s unaudited management accounts for the six month period ending 31 March 2015, Tower anticipates its general insurance underlying net profit after tax, which excludes the impacts of the Canterbury earthquakes, will be between $17 million and $18 million.
“The anticipated improved earnings result has been supported by premium rate increases, growth in Pacific earnings and investment earnings, in a benign claims environment.”