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Tower to raise $47.2m at a discount to buy Youi, bolster balance sheet again

Tuesday 24th September 2019

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Tower will raise $47.2 million at a discount, of which less than half will go towards buying controversial minnow Youi NZ and the rest will bolster the insurer's balance sheet to meet new licencing conditions.  

The Auckland-based insurer will sell 84.3 million shares at 56 cents apiece in a one-for-four pro rata renounceable entitlement offer. That's a 23 percent discount to the theoretical ex-rights price and a 27 percent discount to the 77 cents price the shares closed at yesterday. 

The shares fell 6.5 percent on the open to 72 cents. 

Tower will use $13 million to buy Youi's 34,000 in-force policies and another $5 million will support the newly acquired policies.

The bulk of the funds will strengthen Tower's balance sheet, replacing a disputed $53.1 million receivable from the Earthquake Commission, which will no longer qualify as solvency capital from Oct. 31. The insurer expects the dispute will end up in court. 

Tower said it consulted the Reserve Bank on its capital needs for the Youi acquisition and its existing solvency capital. The insurer said likely litigation and delays in collecting the funds meant it was appropriate to remove the receivable from solvency calculations. 

"We continue to be confident in the recovery of this receivable and, while we have entered into an alternative dispute resolution process, we are firmly committed to collection of the EQC receivable to the maximum extent possible," chief executive Richard Harding said in a statement. 

Tower raised $70.8 million in November 2017 in a one-for-one entitlement offer to bolster its balance sheet in the face of escalating costs from the 2010 and 2011 series of Canterbury earthquakes. At the time, the shares were trading at 76 cents and the new shares were sold at 42 cents. 

Those funds were used to repay a $30 million loan to Bank of New Zealand and lift the insurer's surplus margin above the Reserve Bank's solvency capital requirements. 

The insurer today said its attempts to close Canterbury earthquake claims were being hampered by "unacceptable and ongoing receipt of over-cap claims" from EQC "as a result of past performance, poor workmanship and faulty repairs." It received 45 new claims in August, and another 15 were reopened or new and undercap. It closed 21 claims in the month, leaving it with 116 open properties at Aug. 31. 

"While the number of Canterbury earthquake claims continues to reduce steadily, new over-cap claims from EQC continue to be a source of upward pressure on valuation," it said. 

Tower said the Youi acquisition will add $24 million of gross written premiums, of which 64 percent will come from motor policies and 23 percent from house policies. 

"The purchase of Youi's portfolio will assist us to accelerate our growth and we are now firmly positioned as a challenger brand focused on delivering good customer outcomes and value for our shareholders," Harding said. 

Youi was fined $320,000 in 2016 after pleading guilty to breaching the Fair Trading Act. It was also fined $100,000 by industry body the Insurance Council and warned that any further dodgy practices would see it ousted. 

Tower had 487,000 policies as at March 31, which generated $141.6 million of gross written premiums in the first half. 

The insurer said gross written premiums were $325.8 million in the 11 months ended Aug. 31, up from $306.8 million a year earlier. Its claims expense ratio shrank to 48.6 percent from 56.6 percent in the year-earlier period. 

Tower said it expects underlying net profit of $28 million in the year ending Sept. 30. Its previous guidance was for annual earnings to exceed $26 million. 

The insurer ruled out the prospect of a dividend due to the capital raising and Youi acquisition. It had previously signalled plans to resume paying dividends this financial year, if it was prudent to do so. 

Goldman Sachs New Zealand is underwriting the offer, which opens on Oct. 3. Goldman also underwrote the 2017 offer. 


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