Tower confident it has enough reinsurance so the North Canterbury quakes won't set it back more than $7.2m; Share price falls as its investors wary 2010/11 quake hangover remains

Tower confident it has enough reinsurance so the North Canterbury quakes won't set it back more than $7.2m; Share price falls as its investors wary 2010/11 quake hangover remains

Tower is assuring customers and shareholders it has a decent amount of cushioning in place to take a punch from the North Canterbury earthquakes.

The insurer has announced to the NZX its reinsurance programme provides over $700 million of cover for events such as this, which can be called upon if the cost of claims surpasses $10 million (before tax).

It says the “maximum possible impact” to the company will therefore only be $7.2 million after tax.

Put in context, Tower ended up footing a $75 million bill for the February 2011 Canterbury earthquake, as it ran out of reinsurance to cover this event.

It did however only have half the amount of regular reinsurance it has available for the North Canterbury quake.

In relation to yesterday’s quakes, Tower CEO Richard Harding says: “Given the continuing aftershocks and difficulties in reaching some impacted areas, Tower will not have a thorough understanding of the damage – and therefore the financial implications of the earthquakes – for some days yet.”

Starting a new task on a back foot

Tower’s announcement comes further to Tower’s share price falling by nearly 12% from before the North Canterbury quakes, to a low of $0.76. That's a 60% drop over the year.

The North Canterbury quakes have made investors jittery, as Tower will have to tackle the disaster, carrying a lot of baggage from the 2010/11 Canterbury earthquakes.

$50 million of reinsurance in dispute

It is currently in a commercial dispute with one of its reinsurers, Peak Re. This has put $43.5 million of additional reinsurance, known as adverse development cover (ADC), for the February 2011 quake at risk, according to Forsyth Barr analyst James Bascand.

The insurer in September told the NZX, “Tower will take every step to fully recover the amounts due."

Tower is reliant on receiving this ADC, worth $50 million in total, to meet the Reserve Bank’s solvency standards.

If it settles its dispute with Peak Re and secures the funds, it will have solvency of $11.7 million above the RBNZ’s $50 million requirement.

Tower says it's unable to further comment on the issue as "the matter is about to enter arbitration".

The insurer in September said that “outside of the regulated insurance entity, Tower Limited holds $11.2 million of excess cash."

“Additionally, Tower Limited has a $50 million standby credit facility which may be drawn at any time and can be used for general corporate purposes, including the support of Tower Insurance Limited should it be required.”

2010/11 Canterbury claims costs still rising

Further to this Peak Re issue, Tower expects its profit after tax to take a $16.2 million hit, when its results for the year ended September 30 2016 are announced on November 29.

It warned shareholders of this in September, explaining that Deloitte, in its draft actuarial review, had instructed it to strengthen its provisions for the 2010/11 earthquakes.  

Tower suffered a $6.6 million loss after tax in 2015, as a $53.2 million (gross) increase in quake provisions had a $36.2 million impact on its bottom line. 

Tower's statement

Tower assessing impact of 14 November 2016 earthquake event Tower Limited (NZX/ASX: TWR) said today that it is in the early stages of assessing the impact of the 14 November 2016 earthquake event in New Zealand. 

Chief Executive Officer Richard Harding said Tower’s immediate thoughts are with the people in the various areas affected. The company’s focus is on assisting those customers to get their homes and businesses restored and their lives back on track. 

Given the continuing aftershocks and difficulties in reaching some impacted areas, Tower will not have a thorough understanding of the damage – and therefore the financial implications of the earthquakes – for some days yet. However, Tower’s reinsurance programme provides over $700m of cover for events such as this. Tower advises its reinsurance programme provides cover once the excess of NZ$10 million has been surpassed. Therefore the maximum possible impact is NZ$7.2 million after tax. 

Tower will make a further announcement to the market in due course.

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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So what it boils down to is whether or not Tower secures the $50 million reinsurance under dispute. Without this, at least according to this article, Tower will fail to meet the Reserve Bank solvency standard. That raises some very interesting questions. Such as why the necessity in the first place for this reinsurance but more importantly, the frantic need to draw it down only hours after it was approved. And therefore, what lies behind the curtain so to speak, that has caused and enabled the reinsurer to withdraw the funds. There has been quite some revealing comment made by a reinsurer previously on this web site about Tower's modus operandi, all of it worryingly critical and negative. Peak Re are internationally huge. Tower are internationally tiny. On the rather unsavoury history and performance of Tower in this little episode do believe it will be Goliath 1 David 0.

In related news, Enron is a strong buy, Bear Stearns is fine, Lehman has no liquidity worries and Hanover has the strength to withstand any conditions.

Actually you can add to that. Even if Tower does succeed legally how long is that going to take? Peak Re will need to be sued in an Asian court. By the time that happens the horse will have long bolted, over the hills and far away. Peak Re are insurance people. That means,,delay, deny & defend is second nature. Do believe Tower knows all about that, ask some of their EQ claimants if in doubt.This has the prospect of being rather a fine irony. Hoist by one's own petard one might say.

For Tower to confidently assert it will cop only $7.5m it must have fabulous insight into the seismic behaviour of this particular fault.
I think there was an earthquake somewhere in recent times where there was more than one 'event' from the same sequence. Or did I just imagine that?
It would be interesting to know the details of Towers reinsurance policy, specifically the way an 'event' is defined and in particular how many hours must elapse before a new event is declared that reactivates cover and triggers a fresh $7.5 excess ......and so on.

Indeed. Let's just agree Tower's new name and be done with it.

How about "Central Response".