Premiums will rise, Tower advises

AUCKLAND: Tower says it will have to raise premiums to offset higher reinsurance costs after a spate of wild weather across the Pacific weighed on firsthalf earnings, and pushed it deeper into the red when combined with the insurer’s settlement with Peak Re.

The Aucklandbased insurer’s underlying earnings dropped 27% to $7.3 million in the six months ended March 31, as ‘‘unprecedented storm’’ activity dragged down the result by $5 million. Combined with a $16.5 million hit from a settlement with reinsurer Peak Re over a policy dispute and another $2.3 million added to its provisioning for the Canterbury earthquakes, the net loss was $11.6 million, or 4.14c per share, compared to $8.2 million, or 4.11c.

Tower’s reinsurance costs rose 7.1% to $25.5 million, outpacing a 6% gain in premium revenue to $159.6 million, while claims expenses fell 3.3% to $129.2 million, of which reinsurance recoveries climbed 12% to $40.4 million. Before the first Canterbury earthquake in 2010, Tower’s halfyear reinsurance bill was $19.6 million on $209.8 million of premium revenue, with just $6 million of reinsurance recoveries on $127.6 million of claims.

‘‘The unprecedented number and severity of weather events will have implications for insurance premiums,’’ the insurer said. ‘‘Increased claims will see reinsurance costs rise, and as a result, will mean premium increases for customers.’’

The insurer’s move echoes a similar response by former suitor Suncorp New Zealand, which this year signalled plans to raise prices in response to rising claims and reinsurance impacts of natural hazard events, and Climate Change Minister James Shaw last week touched on the complexities insurers are facing in adapting to the risk new weather patterns are posing.

Government figures show dwelling insurance has climbed 176% since the September 2010 Canterbury earthquake, or an annual pace of about 23.5%, while contents insurance has climbed 34% at an annual pace of 4.5%. Car insurance premiums have increased a more modest 11%, or 1.5% per year, roughly matching a 12% increase in the consumers price index, at a 1.6% annual pace since then.

Tower said yesterday it faced a bigger impact from severe weather events this year than in 2017, which was the insurer’s worst year for weather impacts in 25 years. The impact of those storms is estimated to be $24 million, of which reinsurance will absorb $13.2 million.

The insurer is still in a transition phase as it builds a new IT platform to replace what had been a fragmented and complicated backbone. Tower spent $3 million on buying property, plant, equipment and intangible assets in the half, down from $5.1 million a year earlier. The goal is to shift half of all transactions online to cut operating costs and make it easier for customers. Tower expects to start selling new business through the platform in the first half of calendar 2019.

Tower’s board did not declare an interim dividend, having suspended shareholder returns in 2016, when the insurer raised its provisioning for the Canterbury quakes.

The shares fell 1.9% to 78c, having gained 18% so far this year. — BusinessDesk