Tower posts first-half loss on increased quake costs, underlying earnings rise in line with guidance

Tuesday 26th May 2015

Tower, the general insurer, reported a loss in the first half as the cost of earthquake claims from the Canterbury earthquakes rose, exceeding its reinsurance cap for the February 2011 event, even as underlying earnings rose in line with expectations.

The Auckland based company reported a net loss of $4.9 million, or 2.99 cents per share, in the six months ended March 31, compared to a profit of $13.1 million, or 4.96 cents, a year earlier, it said in a statement. Tower increased provisioning for costs associated with the Canterbury quakes by $22.6 million, slightly above the top of the forecast range flagged earlier this month, as projected rebuild costs rose due to labour and material shortages and higher building costs. That pushed the insurer's projected claim expense above it $325 million reinsurance limit for the major 2011 event.

Stripping out the increased quake provisioning, Tower's underlying earnings climbed 36 percent to $17.9 million, near the top of guidance, as the industry benefited from rising premiums and fewer large claim events. Gross written premium rose 4.9 percent to $145.9 million, while favourable weather across New Zealand and the Pacific helped cut the insurer's claims ratio to 44.5 percent from 50.4 percent a year earlier.

"We are very pleased with the improvement in our underlying general insurance profit over the past six months," chief executive David Hancock said. "We have been busy implementing our growth strategy: transforming our customer interactions to drive revenue and efficiency, building our digital capability to take us into new distribution channels, and increasing our very strong position in the Pacific Rim."

The company signalled it would face higher claims expenses from the Canterbury rebuild earlier this month to reflect an industry wide increase in costs and delays for repair and rebuild work, higher costs of complex multi-unit claims, and a clearer understanding of where claim costs fall between Tower and reinsurers. That increased cost was also captured in the Reserve Bank's recent financial stability report, which raised its estimate for industry claims to between $33 billion and $38 billion from a previous range of $32 billion to $37 billion.

The insurer settled 94 percent of all claims relating to the Canterbury rebuild as at April 30, and was carrying $51 million in capital above its minimum solvency requirements under the central bank's prudential regime.

Chairman Michael Stiassny today confirmed plans to implement an on-market share buyback of up to $34 million, or 10 percent of Tower's stock, which he said will commence shortly.

The board declared an unimputed interim dividend of 8.5 cents per share, payable on June 30 with a June 12 record date.

The company's shares last traded at $2.11, and have declined 1.9 percent this year. The stock is rated an average 'buy' based on four analyst recommendations compiled by Reuters, with a median target price of $2.31.

Tower didn't provide full year earnings guidance, saying it was focusing on growing New Zealand gross written premiums, managing costs, and pursuing opportunities across the Pacific. It aims to have 95 percent of Canterbury claims settled by the end of the year.

The company said the insurance industry will see growth in reinsurance costs following the Canterbury quakes which will put upward pressure on premiums, while technology advances provide opportunities to improve service while reducing costs.

Tower anticipates consolidation in the sector to continue, and it will participate where there is benefit to shareholders, it said.

BusinessDesk.co.nz

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