Tower to carve off quake liabilities

Earthquake hit insurer Tower wants to “draw a line” under its Canterbury liabilities by carving them off into a separate company.

Announcing a $21.5 million full-year loss this morning, Tower chairman Michael Stiassny said the quakes were overshadowing improvements in its underlying business.

“In our view, the industry model is broken with claims inflation continuing unabated, construction far slower than anticipated  and little effective co-ordination between [the Earthquake Commission] and insurers.’’

Tower had received about 300 new earthquake claims in the past year, he said.

The company was also facing litigation around 100 claims as “a litigation industry has arisen around the Canterbury tail,” driven by delays and frustration.

“We have therefore resolved to draw a line under the Canterbury legacy to benefit both policyholders and shareholders’ interests, enhance the prospects of our strong underlying business and enable Tower to accelerate its journey to becoming a high performing general insurer.’

Mr Stiassny said the two separate companies would be worth more than the current whole.

“Separation provides a vehicle to unlock that value.”

Tower would be looking at options to raise capital post separation, including from “strategic sources,” Mr Stiassny said.

As previously signalled, dividend payments were suspended.

The separated “Runoff Co” would be tasked with settling the remaining 564 earthquake claims and maximising recoveries from Tower’s disputes with reinsurer Peak Re, involving $43.7 million, and EQC, involving $57.6 million.

Tower said it was confident in its recovery position and “will not resile from litigation” if necessary.

Tower said it aims to offer a proposal for shareholders to consider at the annual meeting in March.

The full year loss was attributed to two major factors – Canterbury earthquake provisions of $25.3 million and technology asset impairments of $21.5 million.

Gross written premium fell 0.8% to $303.2 million, while underwriting profit fell 25% to $19.8 million.

Underlying profit before the impact of further Canterbury provisions and IT impairment was down 34% to $20.1 million.

Tower said reinsurance would limit the impact of the Kaikoura quake to a $13 million reduction in solvency capital.

Tower shares last traded at 73.5c, valuing the company at $124 million.