Tower Insurance plans to split Canterbury Earthquake claims into separate company
Insurance company Tower plans to ring-fence its remaining Canterbury earthquake claims in a separate business.
Tower's board announced today it planned to split the business into two separate businesses called New Tower and RunOff Co.
It hopes the move could improving its falling share-price, but said it would serve the interests of both policyholders and shareholders.
But the deal was dependent on the Reserve Bank decision, though spokesman Angus Barclay said there was no deadline for that decision to be made.
Tower announced the plan along with a full-year loss of $21.5 million.
The loss was partly caused by increased earthquake claims.
But Tower said despite the loss its underlying business was strong.
The "legacy of Canterbury continues to overshadow fundamental improvement", Tower said, with the rise in earthquake costs related to "constant reassessment of overcap claims from EQC".
Over the course of the year ended of June 30, gross claims had increased by $78m. "This continued cost escalation is primarily driven by EQC and litigation claims," it said.
In the year, it got 297 new claims as result of EQC finally recognising the claims were overcap, meaning they would cost more than EQC's $100,000 plus GST claims limit.
Tower said the industry model was "broken" with Canterbury claims taking too long to resolve and no slow-down in overcap claims coming back to insurers from EQC.
"Therefore, the board has taken two decisions to benefit both policyholders and shareholders' interests, enhance the prospects of the strong underlying business and enable Tower to accelerate its journey to become a high performing general insurer."
It intends to create a separate insurer called RunOff Co, "dedicated" to handling the "fair" settling of Canterbury claims, of which 564 remained.
It said the aim of RunOff C would be to "maximise" capital returns to shareholders, which included continuing to battle for just over $43.7m from reinsurer Peak Re.
The Reserve Bank would have to assess how much capital RunOff Co would require, with any excess capital being repaid to shareholders.
RunOff Co would require its own insurance licence from the Reserve Bank.
Tower said the split would make it easier for the market to value Tower's assets. New Tower and RunOff Co would be worth more as two entities than as one, it said.
The split would "draw a line under Canterbury", Tower said.
Earthquakes claims for the more recent earthquakes centred on Kaikoura would not be included in RunOff Co.
The Tower board would now work through a "process" and hoped to bring a proposal to shareholders at the annual shareholder meeting in March.
New capital would have to be raised to enable the split, and shareholders would have to vote on the plan before it could go forward.