Large numbers of over-cap Canterbury earthquake claims are continuing to flow from the Earthquake Commission (EQC) to private insurers, drawing out the settlement process for Cantabs five years on from the quakes.
Tower Insurance’s 2016 Half Year results released today show it received 155 new property claims from EQC in the six months to March 31, leaving its total number of outstanding claims at 641. The country’s fourth largest general insurer (market share of 4.7%) settled 249 claims in the half year.
It says the new property claims mainly relate to properties over EQC’s $100,000 cap, as well as temporary accommodation and driveways, fences, pools and pathways claims.
As at the end of March, it had settled 15,260 claims, representing a 96% settlement rate by number of claims. It had also paid over $705m settling claims.
In the six months to March, it increased its estimate for the cost it'll incur from the quakes by $30.3m to $822.3m.
Tower digs into own coffers to cover costs of Feb 2011 quake
Like most other insurers, Tower has used all its reinsurance cover for the February 2011 quake, so is tapping into its own kitty to cover these costs.
It expects the total cost of this event to be $449.8m, but its reinsurance has only covered $375.4m, leaving it with a shortfall of $74.5m.
Tower accordingly expensed $2.9m before tax ($2.1 million after tax) for provisions for the February 2011 quake in the 2016 half year. This comes off the back of it increasing its provisions for the event by $45.5m before tax in the 2015 Financial Year.
While Tower’s chief financial officer Brett Wilson says the company is working closely with EQC to quickly get to the bottom of how many more over-cap claims will be passed on to the insurer, the company warns there are still a number of variables that could mean the final cost of the Canterbury quakes is “perhaps substantially” different from what it expects at this point in time.
It notes increasing building costs and future claim management expenses will also have a bearing on the final cost of the disaster.
Trading in Tower shares were halted in April last year, as it reviewed its Canterbury provisions ahead of it releasing its financial results for the six months ended March 2015.
Need for new IT system sees HY loss widen to $8.7m
Given Tower only increased its provisions for the Canterbury quakes by $2.9m in the half year to March, the quakes haven’t had a major bearing on its results.
It today reports it widened its net loss to $8.7m, from $4.9m in 2015, largely off the back of writing down the value of its IT system.
By early Tuesday afternoon Tower's shares were down almost 11% at $1.58.
Tower red flags a $19.6 million impairment charge on its IT system; its chairman Michael Stiassny saying, “Tower has undertaken a detailed IT review and concluded that our current system poses limitations to our high performance ambitions. We have therefore taken the decision to accelerate depreciation on our existing IT assets.”
The insurer reports that against a backdrop of flat premiums, an active storm season in the Pacific, increasing claims costs across the industry and low interest rates, its underlying profit after tax was $7.6m, down from $17.5m the previous year.
Tower’s gross written premium has remained stable at $146.2m, as flat premiums hampered its growth, despite it growing the number of policies it writes in New Zealand for the first time since March 2014.
A stormy weather period in the Pacific (ie Cyclone Winston), following a relatively calm patch the previous year, has seen Tower pay out proportionally more in claims. Its claims ratio - the amount it pays out in claims as a percentage of the amount it earns in premiums - has increased to 52.1% from 44.5% in the 2015 half year.
Tower reports it has maintained strong solvency, with $155 in solvency capital.
What's surprising the sharemarket
Forsyth Barr equity analyst, James Bascand, maintains Tower’s high underlying claims cost would’ve disappointed the market. He says Tower’s management has struggled to pass on higher claims costs - largely derived from increased building costs - to customers.
He notes Tower’s expense ratio has also worsened from 40.9% to 42.2% from H1 15 to H1 16, which is surprising given one would expect expenses to decrease as the insurer builds up its scale. Bascand believes Tower’s high management costs might partially stem from its new chief executive, Richard Harding, reviewing the company as he settles into his role.
He expects the company's outlook to remain fairly subdued in the next financial year.
Challenges facing industry to stay
Looking ahead, Tower expects the challenges facing the industry - a flat market, increasing claims costs, increased competition from new entrants, continued progress on Canterbury and the low interest rate environment - to continue in the short-term.
Yet it expects to build its gross written premium through “retention improvement” and expects its improved IT system to improve its results in the longer term.
It also notes it is confident in Trade Me Insurance’s future potential. Tower underwrites Trade Me Insurance’s general insurance business, which was launched in August last year.
Tower declared a dividend of 8.5 cents per share and says it intends to maintain its full year dividend at the same level as 2015.
It won’t, however, renew its 7.1 million share buyback programme announced last year.