TWR - Tower Insurance.

[bull....]

Nothing from Tower so far about the cyclone. Got to assume there will be more than $12m of claims and their 2nd catastrophe cover will now be triggered.

Key questions:

1) Did they replace the catastrophe cover used by the Auckland event before the cyclone hit?

2) If not, will they now need to buy cover for an additional two events? If so, how much will the delay cost them?

3) If not, Tower is currently left with only their 3rd, final and markedly reduced $45m of cover and even then only if Auckland flood claims stay below $889m. See page 19 of their FY presentation.

Another disaster before they buy more cover and it could be the end of Tower, a modelled 1 in 1000 year probability.

But they are just a ticket clipper right?

getting extra re-insurance will cost them and s/h probably meaning a profit downgrade at some stage i reckon from figure's they released at the last report. Still means they can make a profit it might just reduce some to pay for this extra re-insurance.
But at the same time this cost of extra re-insurance ( be the same for iag i presume and suncorp etc ) is usually just passed on to consumers as higher premiums and this would probably be on top of the increase that was to come for inflationary increase in premiums
So all this flows thru in following period's hence why insurers normally still make good money even after big events

[Antipodean]

Watch the shared lunch chat with CEO that was put out yesterday. The short answer is, no problems expected with covering both events and rest of year even if further large events are forthcoming. Some strain on front line responses but financially they are well prepared.

People seem to be confused so note there is a big difference between cost of events in total, towers intial exposure via claims cost, and towers net exposure once reinsurance treaties are accounted for.

[ronaldson]

Interesting update announcement to NZX this morning.

Pleased to hear that the weather bomb from late January has an expected cost of $95 - $125m because that suggests the Cyclone Gabrielle event will not exceed the catastrophe cap for the 2nd such event.

Concerning that it refers to "the expected cost of reinstating reinsurance arrangements" because that implies it hasn't actually happened yet or the cost would be known. I note that the recent strong earthquake event off the Kapiti Coast, had it occurred onshore, would plainly have triggered third event cover which would then have been limited to a completely inadequate capped sum based upon the information already referenced on this thread.

That apart the revision to guidance is reassuring and should have been anticipated by most holders. I would expect it would be prudent to pass the interim dividend for the current financial year, but that the Board of TWR will make every effort to keep to the full year dividend guidance of 5cps in due course.

[Jaa]

Terrible announcement as the share price is showing.

Needed to say "we have bought X amount of replacement cover at Y cost".

Reinsurers have them over a barrel.

[Antipodean]

The share price is reflecting the updated - lowered - guidance which isn't a surprise you'd exit if you are invested for the short term.

Noted this guidance includes the already budgeted cost to reinstate the reinsurance which is a fairly standard item in most treaties. I'd expect its already been triggered but will be accounted for at end of FY. The new guidance also includes increasing the large event provision to $40m so they could take another event of this size and still have funds allocated for large event(s) left for this year.

[Poet]

Terrible announcement as the share price is showing.

Needed to say "we have bought X amount of replacement cover at Y cost".

Reinsurers have them over a barrel.

I'm not sure it's as bad as all that Jaa.

Wouldn't the re-insurers have them over a barrel at every reinsurance negotiation? I don't really see this reinstatement as being any different from the normal annual negotiation. For one thing the RE market will have a reasonable amount of competition and I also expect that TWR have long term relationships in place and attempts by reinsurer to profiteer wouldn't be all that profitable to the reinsurer over the long term (other clients will be watching their behaviour too I'd imagine). They may also have reinstatement arrangements built into the original RE contract.

Also, if I'm reading the arrangements correctly as per that slide in December's shareholder presentation. The catastrophe cover is broken into three parts for each evet

The Excess $11.85m
Cover for $11.85m to $200m
Cover for $200m to $934m

These two weather events have probably both fallen in the $11.85m to $200m bucket so if I'm not mistaken the two reinsurance covers for $200m to $934m are still in place and untouched. So the requirement now for a third Cat event will be to bridge the gap up to $200m

I think that the market is over-reacting somewhat. But then it often does doesn't it?

[Jaa]

I'm not sure it's as bad as all that Jaa.

Wouldn't the re-insurers have them over a barrel at every reinsurance negotiation? I don't really see this reinstatement as being any different from the normal annual negotiation. For one thing the RE market will have a reasonable amount of competition and I also expect that TWR have long term relationships in place and attempts by reinsurer to profiteer wouldn't be all that profitable to the reinsurer over the long term (other clients will be watching their behaviour too I'd imagine). They may also have reinstatement arrangements built into the original RE contract.

Also, if I'm reading the arrangements correctly as per that slide in December's shareholder presentation. The catastrophe cover is broken into three parts for each evet

The Excess $11.85m
Cover for $11.85m to $200m
Cover for $200m to $934m

These two weather events have probably both fallen in the $11.85m to $200m bucket so if I'm not mistaken the two reinsurance covers for $200m to $934m are still in place and untouched. So the requirement now for a third Cat event will be to bridge the gap up to $200m

I think that the market is over-reacting somewhat. But then it often does doesn't it?

You may be right, there is no info about what the "multi-year secured" portion ($11.85m to $220m) means and precious little about their reinsurance arrangements in general. Both events should fit in that range.

I don't put much store in their estimates though, they are hopeless at estimating the total cost of a disaster (they are STILL adding extra provisions for the Christchurch earthquakes - a couple of million in FY22).

The floods and cyclone increase NZ's risk profile therefore making reinsurance in general more expensive. They paid $66m for reinsurance in FY 22, $51m of that for NZ. Maybe these include reinstatement at a set price, who knows? Dividing by the remaining 7.5 months suggests replacing it at similar rates could be ~$32m? The announcement and updated guidance suggest the cost is more like a few million so it must just be the $12-220m portion?

The phrase "reinstating arrangements" makes it unclear if they are buying cover for 1 or 2 more large events, $10m of additional cover suggests only one?

As Ronaldson says the company is hinting they won't pay an interim dividend. I would be surprised if the Reserve Bank allows them to.

Insurance is risk management. Tower is being tested, again.

[Poet]

Yes all very confusing and ambiguous, I agree.

But, your criticism of
I don't put much store in their estimates though, they are hopeless at estimating the total cost of a disaster (they are STILL adding extra provisions for the Christchurch earthquakes - a couple of million in FY22).

Is a bit misdirected, this needs to be slated home to EQC who are still reopening repairs that they had initially deemed 'under cap' and only now sending them to the insurance companies to sort out.

[Jaa]

Yes all very confusing and ambiguous, I agree.

But, your criticism of
I don't put much store in their estimates though, they are hopeless at estimating the total cost of a disaster (they are STILL adding extra provisions for the Christchurch earthquakes - a couple of million in FY22).

Is a bit misdirected, this needs to be slated home to EQC who are still reopening repairs that they had initially deemed 'under cap' and only now sending them to the insurance companies to sort out.

Naaa, EQC and house repairs are a known part of the NZ insurance industry.

Tower employ actuaries whose job it is to make these estimates. Then they add a standard risk contingency on top based on what they don't know (undercap claims going overcap, inflation etc) and then the Tower board even added additional contingency on top of that. All were hopelessly inadequate. Year after year after year. 12 years later they are still inadequate!

Insurance companies with good risk management make abnormal extra profits from contingencies not being needed and released as bonus dividends. Tower does the opposite.

Tower had an incentive to lowball the estimates, to get shareholders to buy into the rights issue and suffer through years of no dividends and poor returns.

[Antipodean]

They paid $66m for reinsurance in FY 22, $51m of that for NZ. Maybe these include reinstatement at a set price, who knows? Dividing by the remaining 7.5 months suggests replacing it at similar rates could be ~$32m? The announcement and updated guidance suggest the cost is more like a few million so it must just be the $12-220m portion?

The phrase "reinstating arrangements" makes it unclear if they are buying cover for 1 or 2 more large events, $10m of additional cover suggests only one?

This is simply not how reinsurance works.