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Tower board mulls takeovers, capital raising as performance in line with expectations in 2017

Thursday 30th March 2017

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Tower is performing in line with expectations in the first few months of the 2017 financial year, as it considers three options for its future with costs from the Canterbury earthquakes escalating.

At the general insurer's annual meeting in Auckland this morning, chief executive Richard Harding said the company had a "full-on 12 months" with new initiatives in 2016, and still has "a lot to do to refocus Tower on its core", according to speech notes posted to the NZX.

Two external offers have been made for Tower shares: the first from Canada's Fairfax Financial Holdings, which entered into a binding agreement to pay $1.17 a share in February, while ASX-listed insurer Suncorp Group put forward an indicative offer of $1.30 per share later that month. The shares recently traded at $1.30, and have gained 56 percent this year, jumping after each offer was announced to the market.

The board has not yet made a recommendation to shareholders, though it had unanimously approved the Fairfax proposal before the Suncorp offer came along. Chairman Michael Stiassny said the board is considering both options along with the structural separation it flagged to the market before the bids were made, and a further update will be provided once it has increased certainty, as it's working through the Suncorp offer to understand the conditionality.

"Given the likelihood of a protracted process, the board may look to raise capital to ensure a prudent level of capitalisation and solvency to protect the ongoing business from contingencies during this period," Stiassny said. "We will continue to update you on developments as they occur and we hope to be in a position to provide further details in the near future."

Separating Tower into two entities - 'New Tower' and 'RunOff Co', which would deal with leftover claims from the Canterbury earthquakes which have dragged on the insurer's bottom line - is the default option if the Suncorp or Fairfax offers don't complete, and will require up to $100 million of incremental capital.

Tower reported an annual loss of $22.3 million in 2016, widening from a $7 million loss a year earlier, as lingering claims from the Canterbury quakes took longer and were more expensive to settle. Continued uncertainty mean the costs of the earthquakes have continued to escalate, with new over-cap claims and increasing litigation, Harding said today.

The insurer is "the canary in the coal mine" as the only listed pure New Zealand general insurer, Harding said, meaning the ongoing claims development situation was most visible with them but is being faced by all insurers.

"Six years on, insurers still do not have clarity on the number and value of claims that remain," Harding said. "Re-provisioning for Canterbury has become the norm for all as evidenced by Southern Response, MAS and IAG announcements in 2016. More recently, in the first quarter of 2017, Vero also increased their EQ provisions."

Gross claims costs rose by $78 million to $870 million over 2016, Harding said, primarily driven by EQC and litigation claim with Tower receiving 297 new claims in the year.

"The team did a great job in closing 534 claims, though they continue to swim against the tide with the continual arrival of new overcap claims from EQC. These issues with the EQC continue to confront the entire industry and add to the complexity of an already challenging situation," Harding said.

The chief executive said the business was continuing to perform in line with expectations as it approaches the halfway point of the 2017 financial year, and he was "pleased that the momentum we started to build in 2016 has continued into the new financial year."

Tower is part of an insurance industry taskforce working with government and EQC to review data, identify how many over-cap or new claims are coming in and seek to resolve these issues, he said.

The Kaikoura earthquakes in November 2016 have not had a similar impact on the business, and Harding said he was confident that the maximum claims cost would be $7.2 million after tax. Tower expects the Port Hills fires to cost between $1.2 million and $2 million, and recent storms in Auckland to cost between $3.5 and $4.5 million, which combined mean it will fill its aggregate reinsurance excesses, resulting in a pre-tax impact of $5 million for the year.


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