Investors punish Tower stock as ongoing quake exposure erodes dividend prospects

Thursday 22nd September 2016

Tower's stock gained today after a report the general insurer could be a takeover target but the insurer has shed half its value in the past 12 months on signs prolonged exposure to Canterbury earthquake claims has sapped its ability to pay dividends.

The shares have tumbled 52 percent in the past 12 months, the worst performance on the NZX 50 Index. Some $36 million of provisions for Canterbury earthquake claims pushed it to a $7 million loss in 2015 and losses continued in the first half of this year on further charges and a $19.6 million IT system impairment.

This month the stock sank to its lowest in more than a decade as it flagged $16.2 million more provisions for quake costs and a dispute with a reinsurer. The company said at the time that its solvency and available capital were above the minimum regulatory requirements and it could also call on a standby $50 million credit facility.

But analysts say prolonged and larger-than-expected claim costs have sapped Tower’s ability to make distributions to shareholders.

"The market has given the company the benefit of the doubt, and it certainly looked like they had plenty of solvency capital they could potentially distribute back to shareholders," said James Bascand, an analyst who follows Tower at Forsyth Barr. "It appears less likely now that that's an option.”

“The rhetoric from management and board is they will look more closely at their capital distribution plans at their year-end result, which has given investors again reason to believe they might not get the dividend expectation they did have previously,” he said.

Tower is still getting about 100 new Canterbury quake claims every three months, where it had expected the Earthquake Commission would have exhausted the pool of new claims to pass on to Tower by now, chief executive Richard Harding said. It had about 1,000 outstanding Canterbury claims a year ago and has settled about 440 of those but has received another 300 in that time, he said.

"That creates a whole lot of strain to us,” Harding told BusinessDesk. “Add to that the EQC has recently announced there are 6,000 claims requiring remediation, claims they're continuing to manage, but they can't communicate to us which ones relate to Tower.”

"There's quite a lot of uncertainty and complexity come in, and we've tried to make sure when we're reserving we allow for that uncertainty," he said, adding that the share price performance was disappointing and didn’t reflect the underlying strength of the business.

Forsyth Barr’s Bascand said the remaining claims may be some of the hardest to resolve, and carry the most legal risk, increasing the cost and time required to get to a settlement.

Auckland-based Devon Funds Management is among investors who have exited the stock this year, having started 2016 with a 13 percent holding. Harding, who joined the company a year ago, says other investors have been drawn to the company by the prospects for a turnaround in its underlying business.

Harding said in February that Tower would cut the number of products it offers and clamp down on costs as it works to resolve claims. The insurer plans to launch new consolidated products and online quote facilities in November, which Harding says will make it more competitive. It has also been developing a new IT system, having postponed an investor meeting in July to tackle its technology issues.

Shareholders had said they didn't want to hear from Tower until it had something to update and the company wasn't going to have a clear timetable until the year end, so the meeting had been delayed until then, he said.

Forsyth Barr's Bascand said investors want evidence Tower has a successful strategy.

"The market is still looking for execution around lowering cost ratios and we haven't seen execution on that front,” he said. “It's been a struggle for people to figure out why they should be buying - what are they going to achieve over the next twelve months, or is it better to wait and see."

Tower shares climbed 4.2 percent today after the Australian Financial Review's Street Talk reported that the dual-listed company could be ripe for a takeover, possibly by Australia's Suncorp or Insurance Australia Group.

Tower neither confirmed nor denied the rumours in a statement this afternoon.

"Current media speculation is not distracting us from our focus on driving the business forward," a spokesperson said. "While we’re still in the early stages, we are starting to see positive results which we will share with the market at our full year results. Our business remains solid and our customers should be confident that Tower is here to protect New Zealanders."

BusinessDesk.co.nz

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