Higher premium prices and lower claim payouts fail to cover Tower for Canterbury quake claims cost blowout

Higher premium prices and lower claim payouts fail to cover Tower for Canterbury quake claims cost blowout

The hangover from the Canterbury earthquakes has seen Tower suffer a half year loss, despite it growing its underlying profit by 36.4%.

The impact of the Canterbury quakes aside, the company made a general insurance underlying profit of $17.9 million in the six months to March 31st.

It made $4.8 million more than the corresponding previous period, as it charged customers more in premiums, while it paid out proportionately less in claims.

Tower reports receiving 4.9% ($6.7 million) more in gross written premiums, while only paying out 3.9% ($2.1 million) more in claims. 

Yet factoring in the fact the company’s had to increase its provisions for the Canterbury quakes by a whopping $22.6 million (after tax), Tower reports a net loss after tax of $4.9 million.

Quakes still heavy weight on Tower’s shoulders

The cost of the February 2011 quake has exceeded the level of reinsurance cover Tower has, leaving the company to pay the difference itself.

The most recent actuarial review projects this cost to be $35.5 million (before tax) higher than previously estimated.

The company says this is largely due to it receiving new claims. Despite the number of new claims trickling in decreasing, it still received 328 new claims in the first half of the year.

The claims cost blowout can also be attributed to increased costs associated with complicated multi-unit dwelling claims, and an industry-wide increase in repair and rebuild costs and time delays affecting outstanding claims.

The amount of reinsurance Tower’s received currently sits at $682 million.

It has settled and closed 84% of quake claims by value, and 94% by volume, putting it on track to exceeding it’s aim of having 95% of claims (by volume) settled by the end of the year.

Tower says it can’t put dates on when it aims to have the remaining 5% of claims settled by.

Tower earning more and paying less in claims

Quakes aside, the company has reported strong growth.

Tower chief executive David Hancock says, “We’ve been doing a fair bit of work in regard to pricing appropriately for risk, so across the board you would’ve seen some customers have some more significant increases.

“But we don’t expect price growth to be a feature of the market over the next six months, so we’re not expecting prices to increase. They will flatten out.”

As for volumes, Hancock says Tower hasn’t seen an increase in the number of customers it sells its insurance to directly.

He says, “Our big challenge is in the run-off around the ANZ book. That continues to run off, and that’s why we’d like to increase our alliance partnerships."

ANZ ended its 15-year contract with Tower in 2009, whereby Tower provided insurance products to ANZ and National Bank customers. 

“We were very pleased to announce in December that an agreement had been signed which will see Tower become Trade Me’s insurance partner”, Hancock says.

He says there also haven’t been any new major disasters, the company’s had to fork out for.

“Even though we’ve had some strong weather events our claims costs haven’t increased, so that shows real discipline in regards to our underwriting policies.”

Dividends up 30.8% & share buyback too

Tower chairman Michael Stiassny says, “Rising premiums, stabilising reinsurance costs, favourable weather, Pacific policy growth and prudent capital management have supported underlying shareholder returns.

“We are pleased to confirm today our intention to implement an on market share buyback of up to $34 million, or up to 10% of Tower’s issued capital, to commence shortly.”

Stiassny says that in line with Tower’s policy of paying 90-100% of underlying net profit after tax in dividends, the Board will pay a half-year dividend of 8.5 cents per share – an increase of 30.8% on the prior corresponding period.

Tower's shares rose more than 5%.

RBNZ warning insurers not to overcharge for premiums

The Reserve Bank of New Zealand’s recent Financial Stability Report for May, confirms Tower is in a similar position to its competitors.

It says low global interest rates mean global insurers are finding it relatively easy to raise capital and this is pushing down the cost of reinsurance.

“However, lower reinsurance rates are not necessarily fully reflected in retail pricing, as some insurers have been exposed to losses from regional weather events in recent months.

“In this competitive market, it is important that insurers maintain sound underwriting standards so that premiums remain appropriately priced in relation to the risks.”

As for the impact of the Canterbury quakes, the RBNZ says insurers have paid a total of $24 billion in claims.

It says, “Several insurers have significantly increased their estimates for their ultimate costs, which the Reserve Bank now estimates will total $33-38 billion.

“Insurers have been funding increased costs through a combination of reinsurance, reductions in existing capital, and injections of new capital.

“In aggregate, estimated outstanding Canterbury earthquake claims have not reduced by much in recent months, with payments roughly matching increases in estimated ultimate costs.

“The substantial claim amounts still outstanding suggest it will be challenging for insurers to meet their announced target for completing the settlement of all Canterbury earthquake claims within the next year or so.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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"We are pleased to confirm today our intention to implement an on market share buyback of up to $34 million, or up to 10% of Tower’s issued capital, to commence shortly.”

Stiassny says that in line with Tower’s policy of paying 90-100% of underlying net profit after tax in dividends, the Board will pay a half-year dividend of 8.5 cents per share – an increase of 30.8% on the prior corresponding period.

Isn't this the traditional strategy private equity firms execute to hollow out a company with a burden of increasing debt to finance payouts to shareholders?

"It has settled and closed 84% of quake claims by value, and 94% by volume, putting it on track to exceeding it’s aim of having 95% of claims (by volume) settled by the end of the year.

Tower says it can’t put dates on when it aims to have the remaining 5% of claims settled by."
So five years to payout the easy 85% and no publishable idea on the remaining hardest 15% by value.
Why do people still pay insurance to these buggers? How can they in any world, even their own warped ilconcieved one, believe this is fair and just?

That statement is clearly wrong. Here is their published progress as at May 2015 (not March 2015 in which the result out today relates to):

http://www.tower.co.nz/about-us/canterbury-earthquake

Clearly they are trying to double count claims, use claims instead of properties, add low value claims to skew their progress and change the definition of "settled".

Reality is that they are only 64% through major reports and 78% through rebuilds, if you include cash settlements.

If you take out the quick early cash settlements and look at just rebuilds and major repairs they are still to complete then in fact they are at:

Rebuilds - 178 completed divided by (178+102+121) = 401 = 44.3% complete

Major Repairs - 279 completed divided by (279+72+386) = 737 = 37.8% complete

Isn't there some type of law that you are not allowed to lie to the NZX and your investors???

It is strange that they are paying out shareholders in the form of increased dividends and share buy backs while that are so obviously in trouble in Canterbury.

Are they stripping the company?

The underlying principle is that anyone's guess is good enough when it comes to insurance results.

Rule One: If thou knowest not thy result, declare one anyway.:
This applies to all insurance companies at all times. A fortnight ago, Pierpont was chatting to Sir Arvi Parbo, who spent some time on the Zurich board. Sir Arvi observed: ``If insurance companies were honest, they'd say, `We think we made this much last year, but we won't really know for another five or 10 years'.''

As it has been so well understood for so long, nobody expects the results announced by insurance companies to be even remotely accurate. If Pierpont ever formed Blue Sky Insurance, he would first decide what he wanted his profit or loss to look like and then move the assumptions until they fitted.

http://www.pierpont.com.au/article.php?Ten-commandments-of-insurance-336

ring the QI bell, nobody knows.......

Interest.co.nz could we have the total provisions Tower have made for the outstanding claims?

If we assume the average rebuild is $550k (mostly complex tc3 and hill properties probably remain), and that the average EQC payout was $150k assuming multiple claims, then 223 rebuilds at $400k liability is $89.2m.

If we assume the average repair is $150k above the EQC cap then 458 repairs is $68.7m.

A grand total of over $150m

I am assuming that most of the claims cash settled for indemnity early on lowered the amount Tower paid out on those claims. If claimants could prove that they were cash settled under duress or provided with inaccurate costings (as I and many others who have dealt with claims from both Tower and others could attest to) then there could potentially be more liabilities if some of the prospective class actions that are being talked about proceed.

Interesting to know their current provisions for outstanding claims...

(At worst it could be towards $300m if all of those repairs were actually close to being rebuilds).

Hi Chris J, 

Tower's HY results state the company estimates the gross claims it's incurred from the Canterbury quakes totals $748.4 million.

Tower says it cannot specifically tell me what its current provisions for outstanding claims are.

However based on the fact it's said it's settled 84% of its claims by value, and the claims it's incurred to date equal $748.4 million, we can estimate it needs to fork out another $142.6 million for outstanding claims.

Thanks Jenée, obviously that's close to the back of the envelope numbers I did, but probably not enough if EQC hand them another 200, 300, 400 or 500 claims as they have been doing over the past year or two. And also probably not enough if lots of those houses can't be relevelled as they hope and turn to rebuilds. And also probably not enough if the disgruntled try to take them to court in some of the proposed class actions.

The good news is that they have $300m in equity plus reinsurance left over from June and Dec 2011, so enough to settle all claims. There is bad news too and that is either for insureds or investors depending how Tower act to settle the final claims: scrimping to keep payouts within provisions may cost the insureds or going over the allocated amount may cost investors. Hopefully insureds are not the ones pushed.

Whilst I do not believe almost anything from Insurers generally ,Tower judging by their over representation in litigation and losing many cases Towers bigger problem in future may be the loss of customers they have delayed settlement with and generally screwed over and of course the reputational damage that will occur as their many dissatisfied previous customers relate their treatment to friends etc . Share buy backs have often been used especially in the US to do deals that benefit company executives so something else to watch out for .