Tower has reported a full year 2016 loss of $21.5 million, with a $25.3 million impact from additional Canterbury provisions prompting the direct insurer to take drastic action.
Board chairman Michael Stiassny revealed the continuing legacy of Canterbury had prompted the company to propose creating a separate company called RunOff Co which would be dedicated solely to Canterbury claims resolutions.
This, coupled with a proposed investment in a new, modern core insurance platform, would give ‘New Tower’ the platform required to take on the large, incumbent Australian brands, Stiassny said.
It would also amplify the results of Tower’s underlying business and realise the potential in the Pacific.
“Each entity would have its own very clear and distinct mandate and strategy,” he said during the company’s full year 2016 results presentation.
“New Tower would realise its potential to become a high performing general insurer, while RunOff Co would manage the legacy liabilities relating to Canterbury.”
RunOff Co would own all Canterbury related liabilities and assets and would be managed by a team of experts charged with ‘making the hard calls’.
The company would be tasked with settling the remaining 564 claims and maximising the disputed recoveries which currently sat at $43.7 million for Peak Re and $57.6 million for EQC.
Stiassny said the strategy required to separate into two entities was ‘largely complete’ with a number of additional steps to be actioned before a final decision could be made.
It was also subject to RBNZ requirements, he said, but he hoped to bring a proposal to shareholders for their approval at the annual shareholders meeting in March 2017.
Tower CEO Richard Harding said while the Canterbury situation remained a ‘complex and difficult’ one for all insurers, and increasing Canterbury provisions had become the ‘new normal’,Tower being the only listed pure New Zealand general insurer gave it the ‘most visibility’.
“We are the canary in the coalmine,” Harding said.
Over the course of the year, gross claims costs had increased by $78 million to reach $870 million. This had resulted in a net impact on Tower of $35.1 million pre-tax, or $25.3 million post-tax.
This continued cost escalation was primarily driven by EQC and litigation claims.
Since Tower had announced an increase in provisions on 8 September, a further $7 million post tax had been added. Tower’s appointed actuary,
Deloitte, had recommended an increase in risk margins to reflect the continued uncertainty, he said.
“As at 1 October 2015, Tower had 703 property claims remaining. In the intervening 12 months to 30 September 2016, 534 of those claims were closed.
“However, in the interim 297 completely new claims were received, and 98 claims have been reopened,” he said.
Of the 564 remaining properties, there were 311 which were the most complex and challenging to resolve.
This was why the singular focus of a ‘specially skilled management team’ was crucial to deal with them, he said.
Also, separating the company this way would allow the value of new Tower to become more transparent.
“The Board believes that separation will draw a line under Canterbury, and enhance the prospects of Tower’s strong underlying business,” he said.
The company reported underlying profit after tax of $20.1 million with an improved second half performance of underlying profit growing from $7.6 million in 1H16 to $12.6 million in 2H16.
Business initiatives were driving improvements in core metrics which was providing confidence in strategy and future performance targets.
He cited a reduction in management expenses, a return to positive policy growth in the core New Zealand book, a 2.6% improvement in Tower Direct retention rates over the year, supply chain initiatives curtailing claims cost growth in the second half, and investment in new products and digital capability.
The company also suffered a $14.1 million impact from impairment of technology assets which had been announced in the first half following a review of the IT infrastructure.
Harding put forward medium term (3-5 years) strategic targets of 4-6% GWP growth, less than 35% expense ratio and ROE of 12-14% through the cycle which would be underpinned by Tower’s digital transformation strategy.
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