Cameron Preston reveals how Tower staff are incentivised to settle remaining quake claims as he ponders the fate of the insurer as its year-end approaches

By Cameron Preston*

Tower Insurance Limited is the oldest and largest New Zealand-owned insurer.

It was formed on 1 October 1908 and as such has a somewhat unusual financial year end date of 30 September.

So in just under 3 weeks, Tower will be celebrating its 109th birthday.

But will it be the last?

Much has been written about the lead up to the situation Tower finds itself in today, which I shall not repeat here [refer to the timeline at the end of this article for more background].

I have previously provided my opinion on the genesis of Tower’s and indeed the insurance industry’s challenges.

But as 1 October 2017 approaches the question is, will it be B-Day or D-Day for Tower?

The latest information is not encouraging.

In May Tower’s half year update revealed that as at 30 September 2016 its estimated ‘open’ outstanding liability for 2010-11 Canterbury Earthquake claims was $149.1 million:















By 31 March 2017, some 6 months later, the same estimate had reduced only by $10 million to $139.5 million, reflecting an upward revision in the estimate of its outstanding Canterbury liability by its actuary.

This hit Tower’s bottom-line hard. When combined with a dispute with its reinsurer for $43.8 million and a dispute with EQC for $66.6 million, withdrawals from its emergency BNZ overdraft for cashflow purposes began.

Anyone in business will tell you when you are tapping your emergency overdraft, don’t plan on holding a big birthday bash.

Then on 31 August 2017, Tower made a further disclosure to the NZX:

“Tower continues to make progress closing Canterbury claims…Deloitte, Tower’s appointed actuary, completed its quarterly update review in July for the period ending 30 June 2017. Deloitte’s review confirms Tower is progressing in line with expectations based on the prior half year review.”

Then last week a keen reader sent me a copy of Tower’s progress report.

The progress report contains a number of concerning issues.

1. Firstly the report shows the number of properties (not claims – properties can have multiple claims) that are being “litigated” or not. When put together with Tower’s earlier disclosed outstanding liabilities this shows the average cost of individual property settlements is continuing to increase dramatically:

2. Secondly the report shows that Tower’s Canterbury settlement staff are financially incentivised in two ways:

  • 50% of their bonus relies on them settling as many claim as possible before D-Day – 30 September 2017; and
  • The other 50% of their bonus relies on them settling as many properties as possible before D-Day for less than Tower’s own actuarial estimate.

The report shows that staff have no chance of getting bonus 1, as settlements appear to be hitting a wall:

But staff will make bonus 2 because they have managed to settle those fewer claims for less than Tower’s actuarial estimate:

So on 1 October 2017, while Tower’s staff will be opening their bonus cheques and helping themselves to an obligatory slice of birthday cake, Tower’s actuary will be poring over these latest progress stats.

The actuary will note that Tower has kept its settlements below his previous estimates – but that the settlement rate has plateaued because of this.

In my opinion he will have little choice but to increase his provision again, which in turn will free up Tower staff to make more settlements/closures.

But there is one small problem – there is no more money.

Tower no doubt will be putting pressure on the Reserve Bank to release part of the $50 million additional capital condition they have loaded on Tower’s license. But I personally don’t like Tower’s chance of convincing the RBNZ that this would be a ‘prudent’ move.

Meanwhile Tower is on negative watch with ratings agency, A.M. Best, and doesn’t appear to have made any efforts to raise more capital before 30 September. It seems to be clinging to it and Vero’s appeals against the Commerce Commission decision preventing a buyout – the timescale for which is unknown.

Tower’s new CFO starts on 18 September, the third in as many years, while David Hancock (Tower’s ex-CEO and current Board member) announced “his desire to resign from the Tower Board” last week.

I expect 1 October 2017 will be B-Day and D-Day for Tower’s Board.

Whether the Board hold on for another couple of months while its actuary performs their calculations, or whether it is in crisis talks with a white knight investor, now is unknown.

Meanwhile Tower’s Canterbury policyholders have been patiently waiting more than six years for Tower to settle its property claims – it feels more like 109 years to them I am sure.

But Tower can’t settle them.

And it is slowing its settlements down – on purpose.

Because it is broke.

Rational analysis provides no other conclusion.

Tower was broke the moment it returned capital to shareholders and paid big dividends to maintain its share price post-earthquake.

Tower will disagree and seek to blame all others.

But I predict while the cake will come out on 1 October, if we stay up a bit later we might see some fireworks.

Count down to D-day for Tower:

October 2014 – Michael Boggs announces his resignation as Tower’s CFO

March 2015 – Brett Wilson appointed as Tower’s new CFO

July 2015 – David Hancock steps down as Tower CEO, but stays on Board

July 2016 – Brett Wilson resigns as Tower’s CFO

September 2016 – Tower announce they are in dispute with their international reinsurer

January 2017 – Tower files a Statement of Claim against EQC in the High Court in Wellington

February 2017 – Fairfax Financial announces intention to purchase Tower

February 2017 – Tower Chair Michael Stiassny lashes out at its policyholders and EQC

June 2017 – Vero tries to outbid Fairfax Financial

June 2017 –Fairfax Financial pulls out of purchase

July 2017 – ComCom prevents Vero bid for Tower

August 2017 – Tower and Vero appeal ComCom decision, AM Best puts Tower on “negative watch

September 2017 – Jeff Wright starts as Tower’s third CFO in as many years, David Hancock “his desire to resign from the Tower Board”

30 September 2017 – Tower year end

*Cameron Preston is a Christchurch-based accountant and advocate for insurance policyholders post the Canterbury earthquakes.