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26 February 2017
There seems to be universal agreement – New Zealand insurer Tower is in trouble, and has been for some time.
A respected local brand with a long history, the company has been selling off assets for years and is now considered too small to compete effectively against the likes of Australian-owned competitors IAG and Suncorp.
As a direct insurer its market was also under attack from new entrants like Youi.
It has been rocked by earthquake claims, and plans to create a new company called RunOff Co to manage legacy liabilities from Canterbury. And Tower is also engaged in legal battles over recovery with Peak Re and the Earthquake Commission.
Many sources contacted by insuranceNEWS.com.au believe the company is just one catastrophe away from collapse. So last week’s intervention from Canada’s Fairfax Financial Holdings could not have come at a better time.
Led by Chairman and CEO Prem Watsa – known as “the Canadian Warren Buffett” – the Toronto-based group has agreed to buy Tower for $NZ197 million ($188 million), and most interested parties are crossing their fingers the deal goes through.
Tower began in 1869 as the New Zealand Government Life Insurance Department.
It became Tower Corporation in 1987, and three years later it was privatised and ownership passed to policyholders as a mutual insurer.
In 1999 it demutualised and listed on the Australian and New Zealand sharemarkets, and in 2006 the New Zealand and Australian businesses were separated.
The Australian operation became life insurer TAL, which was acquired in 2010 by Japanese life insurer Dai-ichi Life but still operates under the TAL brand.
Tower is now solely a general insurer, having also sold its life insurance business in 2010, its medical insurance arm in 2012 and its managed funds in 2013.
Morningstar insurance analyst David Ellis told insuranceNEWS.com.au the proposed deal with Fairfax comes as no surprise.
“If you go back 10 years or more, they have had a number of restructures and sold various businesses – health, life, wealth management,” he said.
“They are certainly a much scaled-down version of their previous selves, and the takeover offer seems like the only option at this point. It is a sub-scale general insurer that is struggling to get ahead, and a deal like this is certainly in the best interests of the shareholders.
“It is hard to see a viable future for that business, despite its history and branding. I think the transaction will proceed [and] I don’t think there will be any other bids.”
Insurance Brokers Association of New Zealand CEO Gary Young believes the proposed sale to Fairfax is the best option for the business and consumers.
Far better, he says, to sell to an outsider and continue offering an alternative to the likes of market leaders IAG and Suncorp.
“There has been a lot of talk in recent years that they are readying it for sale,” he told insuranceNEWS.com.au. “It is a direct insurer so we don’t deal with it, but this has to be good for the New Zealand market because it has not been swallowed up by one of the major local players.
“We were opposed to Lumley being taken over by IAG, because there is now less competition in the market.”
Michael Naylor, Senior Lecturer in Finance and Insurance at Massey University, told insuranceNEWS.com.au Tower has been in trouble for “a long time”.
“Canterbury claims have not yet bankrupted them, but it has been close,” he said.
“Another large quake event would bankrupt them. Their share price has been plummeting for the past several years. So they had to do something.
“It would be hard to raise enough funds via a rights issue given the current low share price, so a sale is the most obvious way out.”
Dr Naylor questions how clean the break from RunOff Co can be.
“If more claims, or rebuild claims, come through, does some legal liability still remain?
“There are massive engineering questions about many quake house rebuilds on poor-quality foundations, so there is the potential for a long stream of re-rebuild requests.”
However, Dr Naylor says the residual company is sound, and it should rebound once quake claims are removed.
He believes Fairfax’s intentions are good, and a “deep-pocketed” owner bodes well for customers and claimants.
He says Tower is too small to provide the huge investments required to keep up with looming technological disruption, but Fairfax has the capacity to invest and expand the business.
“New Zealand has had a history of external firms buying [local] companies and extracting value, leaving an empty shell,” he said.
“But Fairfax does have a good reputation, so we can assume they mean well.”
Fairfax has certainly been busy. Earlier this year it announced the acquisition of Swiss (re)insurer Allied World for $US4.9 billion ($6.42 billion).
Last year it also acquired AIG’s operations in Latin America and Turkey, and Zurich’s operations in South Africa and Botswana.
We can only guess what Fairfax’s intentions are for the teetering Tower, but one thing is certain – anything is better than the alternative.
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