Increased Canterbury quake costs pushed Tower into the red this year

Tower [NZX: TWR], the general insurer, says it will report an annual loss next week after raising its provisioning for the cost of the Canterbury earthquake caused by more expensive repairs and rebuilds from its outstanding claims.

The Auckland-based company said it will report a net loss of about $7 million in the 12 months ended September 30, compared to a profit of $23.6 million a year earlier. That's because of a $53.2 million increase in its provisioning for the quakes in the second half of the financial year, which will hit the bottom line by $13.6 million. The insurer said underlying earnings, which strips out the cost of the quakes, rose 12% to $28 million.

"The higher claims provision is driven by increased repair and rebuild costs for the remaining claims, and an increased risk margin," Tower said in a statement.

This is the second time in a year that Canterbury quake costs have affected Tower, which reported a first-half loss when labour and material shortages and higher building costs pushed the insurer's projected claim expense above its $325 million reinsurance limit for the biggest quakes, in 2011.

The complexity and uncertainty of the Canterbury claims prompted Tower to hire accounting firm EY to help manage the insurer's risk, leading to the implementation of adverse development cover in April to protect the company's balance sheet if costs escalated. It will be fully used by the increased provisioning. More recently, it appointed Deloitte in an actuarial role to analyse Tower's claims file by file, which "helped provide a clearer picture of the likely costs for these more complex claims."

"The detailed analysis undertaken by the actuaries to understand these claims, their significantly smaller number and the pace of Tower's claims resolution progress in resolving claims, provides the company with increasing confidence regarding the balance of the claims expense provision," it said.

As at September 30, Tower resolved 95.6% of claims relating to the quake, amounting to 88% of the total value, it said.

The insurer said it maintained a strong balance sheet, holding excess capital above its minimum solvency requirements of more than $70 million at balance date, and doesn't intend to adjust its share buyback programme or dividend policy.

The shares last traded at $2.105, and have decreased 2.1% this year.

(BusinessDesk)