Tower said it will separate its liabilities and receivables from the Canterbury earthquakes into a separate 'bad bank' structure and "aggressively pursue" recoveries from the EQC and reinsurer Peak Re that amount to about $101 million.
RunOff Co will own all of Tower's Canterbury-related liabilities and assets - 564 claims for which it has made a gross provision of $149m (net of about $40m) and two receivables - $43.7m it says is owed by Peak Re and $57.6m from the EQC. Chief executive Richard Harding said it was "entirely possible" the dispute over those recoveries could end up in the courts.
"If that means litigation the board is very clear it's not going to resile from that," Harding told BusinessDesk. It was already in a form of arbitration with Peak Re.
Tower struggled to quantify the Canterbury claims under the "open-ended" full replacement policies in effect at the time and the fact that the claims were "dribbled across to us" by EQC, he said. It has received about 300 new claims in the past year alone, worth $22m. The switch to sum-insured policies "provides more clarity about maximum liability".
Still, "EQC is broken overall and the EQC review has to be accelerated, he said.
Another difference with the Kaikoura quake is that it didn't have the same liquefaction element as those in Christchurch, except for parts of the Wellington foreshore, while the general insurer's exposure to claims in Wellington wasn't huge, he said.
Tower today posted a wider annual loss of $22.3m that included a $14.1m writedown of technology assets. The Auckland-based company also took $25.3m for provisions due to the Canterbury earthquakes. Its underlying net profit fell to $20.1m from $30.3m a year earlier.
Tower's shares fell 2.7 percent to 71.5 cents today and have slumped 62 percent this year, the worst performancer in the S&P/NZX 50 Index, in the face of ongoing quake provisioning and the dispute with the reinsurer.
Harding said the split into RunOff and 'New Tower' was designed to allow the value of Tower's underlying business as a "high-performing general insurer" to be recognised in its share price by investors while RunOff manages the legacy liabilities related to Canterbury.
"The whole point of the change is to enable New Tower to realise the huge potential in that business," he said.
The company is looking at how best to raise new capital, both for RunOff and potentially New Tower, a process that requires it to consult with the Reserve Bank over the amounts of capital needed after the restructuring. Options including tapping the capital markets and bringing in a strategic partner. Hardin said today that Tower was in commercial discussions with potential partners although it was "very early days".
Under its separation plan, the "new" Tower company would be listed on the NZX and include its current management and board structure, holding its underlying core business in New Zealand and the Pacific. The RunOff company would be a separate legal entity with its own board and management, holding all liabilities and receivables associated with Canterbury with the aim of managing those to maximise capital return to shareholders.
The Reserve Bank has consented to the creation of two separate licensed entities in initial talks and the process is ongoing to receive formal approval, Tower said.
It expects to put the proposal for separation to shareholders for approval at its annual meeting in March. Dividends are expected to resume after the separation is complete.