By Jenée Tibshraeny
There is more preventing Tower from receiving the money it believes it is owed by the Earthquake Commission (EQC) than a dispute over land damage.
Tower last week told its customers it was taking EQC to the High Court over a disagreement it has with the government agency over how it values increased liquefaction vulnerability (ILV) land damage caused by the 2010/11 Canterbury earthquakes.
Tower - along with other insurers including IAG, which is also taking legal action - agreed to settle land damage claims on behalf of EQC, as it rebuilt and repaired its customers’ homes.
Yet both EQC and private insurers have used different methods to calculate the cost of this land damage; an issue which has really come to the fore as private insurers have sought to be reimbursed by EQC.
Private insurers have essentially spent more fixing land damage than EQC has been willing to pay.
Tower’s Statement of Claim, issued to the High Court in Wellington, reveals Tower is waiting to be reimbursed $6.1 million, in relation to 102 claims.
Yet Tower’s financial results for the year to September 30 2016 show the company is banking on winning disputes it has with EQC so it can be paid the $57.6 million it believes it's owed by the agency.
If only $6.1 million of these "disputed recoveries" relate to the ILV land damage disagreement, the question is, what is the remaining $51.5 million attributable to?
Tower’s financial results say they're broadly for “land damage” and “building costs”.
Yet Tower has refused to expand on this, or explain the other issues it is working through with EQC to obtain the $51.5 million.
Rather a spokesperson says: “We remain confident in our position and are unable to comment any further.”
Tower’s customers and shareholders ought to know what’s going on because Tower’s finances are so tight, it doesn’t have wriggle room to forgo tens of millions of dollars.
And on March 30 its shareholders are expected to vote on whether Tower should ring-fence its troublesome quake-related business from the rest of its business.
Tower still has $43.7 million of reinsurance for the Canterbury quakes up in the air, as it is undergoing a legal dispute with Peak Re.
Otherwise it has used up its $734.7 million of reinsurance for the events, so has dug into its own pockets to pay for another $134.9 million of claims.
Coming out the of 2016 financial year having suffered a loss of $21.5 million, it still had 564 outstanding claims - 100 of which involve legal battles.
Now it needs additional capital to meet Reserve Bank requirements, as it seeks to split into two companies - ‘RunOff Co’ and ‘New Tower’.
Tower's dividends are on hold so it can preserve capital for RunOff Co. These payments are expected to resume once its separation is complete.
At 81 cents (as at Feb 3), Tower’s share price has plummeted 53% over the past year and is at a record low.So yes, all things considered, this mystery $51.5 million in dispute with EQC is a big deal, so Tower should tell us more about it.
The fact the EQC Act is still being reviewed - years after it was supposed to be completed - may create more uncertainty for both Tower and EQC, as they continue to work out how to deal with a natural disaster unprecedented in size.
13 Comments
Thought Tower, prudently but belatedly, had suspended all dividends? Still a big mystery as to how this so called run off company is actually going to be capitalised, in real and ready money that is. Some pundits seem to believe that this entity is then be sold off to reinsurance interests. On the face of it, it looks more likely that you would need to pay someone to take it.
Not necessarily. The prospects for further recovery off EQC , in addition to the current ILV/IFV action, are real. Once Tower has completed its program and established actual costs - as opposed to the theoretical costs on which event apportionment between it and EQC was initially made - additional EQC caps could come into play, thus creating an opportunity to extract more cash from EQC.
Prospects are never real until they have been banked. Problem for Tower is working capital, cash flow if you like. Even should they realise what are undoubtedly overly optimistic predictions, getting the actual funds from both EQC & the reinsurer is going to be difficult, expensive and prolonged. The fort may well fall before the cavalry arrives. Even then, will these prospects be enough. It seems to be that Tower has consistently under allocated liability for its EQ claims. Not so long ago our author here quite rightly & soundly questioned how many more claims in the vicinity of the recent court case that Tower lost, could they withstand. So $100mill between EQC & the reinsurer if they are lucky, seriously is that going to be enough anyway!
The $51.5m may stem from the other area of the Declaratory Judgement, namely IFV. For both flooding and liquefaction risks, the EQC dodged the bullet and avoided making any repairs to the damaged land, instead making small DoV (diminution of value) payments to homeowners (IFV average $23,000; ILV average $36,000), and leaving them with properties now (more) prone to flooding and liquefaction in a future event. For an "as new/as when new", rebuild, however, the property needs to be reinstated to the condition it was in before the earthquakes, i.e. not prone to flooding. Tower may have incurred substantial costs to achieve this condition in the form of additional expenditure on consenting fees, enhanced foundations, retaining walls, landfill, etc. And even where it has not actually carried out the work, these costs will have been included in the High Court settlement amounts. As at the end of December 2016, claimants were seeking damages of $59m from Tower in the High Court, with further cases bound to be added this year.
All in all, it is difficult to see how Tower can capitalise any run-off company, or indeed, justify creating one. For claims it has not settled in six and a half years, how long would the process continue to drag on once such claims were ring-fenced. The damage to the brand and share price are the only motivating factors at present.
The finished floor level (FFL) for a rebuild must be elevated to the required height in flood management areas but existing use rights usually allow repairs to be carried out at the existing FFL height. So its not correct to say that all reinstatements have to comply, in flood prone areas.
The extra cost to elevate a new house to comply with FFL rules is not all that great, compared with building the same house at its previous height, so it's unlikely the $51m is for that.
Middleman, from my observations in an IFV riverside lateral spread zone, the foundations do not appear to be where the huge money and work is required, rather it is the ground remediation. At a nearby property, the ground remediation - excavating and removing near three metres deep of soil, then compacting layers of gravel - took four months alone. Then the high-pile foundations were started. This is not an unusual method in this part of Christchurch.
I understood this case was for ILV settlements alone. If indeed it relates to Increased Flooding Vulnerability Dimunition of Value settlements, the bill for EQC could well be massive, as the four-figure IFV DoV we received would go nowhere near the cost of remediating our land to make it capable of holding a comparable timber structure.
Is your understanding that if the insurers win this case, the finding will apply to IFV properties? Given the many thousands more IFV properties than ILV, and the often derisory payments so far, then perhaps hill mass movement areas as well, the $51 million does not look so far-fetched.
Apologies for not responding sooner. Yes, the case is ILV only - as I understand it.
Not sure I agree there will be significant flow on to IFV, if EQC lose this one. The EQC act allows the commission to exclude increased flooding risk caused by land changes away from the site and this rules out a lot of sections that have IFV. Changes to river courses that slow down water flow, global tilt in the estuary, land sinking out east etc can all increase flooding risk to upstream sites but as these are not changes to land 'at the site' they don't need to be considered in IFV calculations.
One aspect of IFV that may be challenged is the flooding return period thresholds EQC uses to trigger IFV. But insurers don't have a great deal of skin in that game as their costs are not usually hugely higher when they need to build a replacement house higher. Quite common for a lighter weight and cheaper construction to be used for the new house. Repairs don't usually require the house to be lifted.
Yes, lateral spread is very expensive to fix but is relatively rare. The excavation and densification process you describe is probably to address ILV. Four months is a very long time. Must have been some other problems.
Tower and other insurers did not 'agree to settle land claims on behalf of EQC'. Insurers had no choice than to proceed with land repairs if they wanted to commence building repairs. They were forced to take a leap of faith a long time before EQC finally decided how they would settle claims for land damage.
The amount Tower will have spent on land repairs is likely to be well in excess of $6m. One guess is the $6m is the delta between how much they spent and what EQC paid, at those sites where EQC has agreed ILV exists. Say 100 sites at $60K a pop.
Staying in the speculation zone; if Tower is successful in its challenge of EQC's ILV methodology, it could open the door to a lot more sites being brought into play where EQC has declared no ILV exists but Tower has spent big bucks on fixing land or paying for stronger foundations ........possibly $51m worth! But if this guess is right, some would consider it a bit risky to be counting that chicken.
Tower is the most litigious and difficult company to deal with. Law suits against their re insurers, EQC and at least 100 policyholders tell a sorry tale with the departure of the CEO/CFO and a Director smell of rats deserting a sinking ship . So were is the regulator in all this, the RBNZ who should know the exact state of Towers finances given the clear signals that all may not be well and the distinct possibility of a financial failure, the proposal to split the Bad Insurer from the Good with Michael Stiassny as chairman and well know liquidator at Korda Mentha is likely an indication of what is to come. Should this occur a very detailed investigation into current & former directors, Towers Lawyers and senior staff and outside advisors Engineers Project managers etc is required to determine and hold accountable those who have willfully failed in their duty to be honest, fair and have the professional integrity their professional institutes espouse.Will it happen - probably if Helen Clark is next Queen of England.
RBNZ will not 'know the exact state of Towers finances'. Reserves for the CHCH EQ are determined by actuarial analysis of resolutions to date, outstanding claims etc but then adjusted for 'special issues' such as this EQC recovery action. How much to 'bank' for these issues is a highly subjective decision and RBNZ is unlikely to have have sufficiently detailed understanding of the technically complex issues that feed into these decision, to strongly challenge what insurer executives report to the market on this aspect of their business.
RBNZ however does have EQ data from all insurers. One hopes they are making high level comparisons of the various insurers assumptions on recovery prospects and asking the hard questions where significant differences exist.
Tower's repeated claims to be ahead of its competitors in claim resolution progress would presumably have been validated by RBNZ, enabling shareholders to be assured the published progress data was correct.
If the RBNZ does not have the technical expertise to validate whatever Tower claim then it questions the suitability of the RBNZ as the industry regulator. I believe that if RBNZ does not have the in house technical expertise then it will outsource and hopefully satisfy itself that Towers figures are reasonable, looking through court decisions however reveals that Towers figures are often woefully inaccurate and the RBNZ should be exceedingly careful to ensure the Public's trust in Tower is not misplaced.
Yes, they could hire experts to assist but they too will still end up at the same place i.e. conclude the insurer may or may not succeed in recovering from EQC the amount they say they will. Lawyers could provide guidance on likelihood but would likely run the safe ' we think you could win but there is also a good chance you won't', line. Leaving RBNZ no further ahead.
IAG recently made a huge increase in its reserve citing new claims and escalation in claim costs as the cause. I'm unconvinced that was the full story and suspect a philosophic shift in position on the likelihood of recoveries, also made a major contribution. Interestingly, Suncorp's latest reserve movement was comparatively modest, perhaps indicating they had made less heroic assumptions about recovery prospects.
We will likely never know and it's probably not important for the Aussie giants but Tower doesn't have that back up luxury. Stiassny has declared himself confident of recovery from EQC and reinsurers. I'm not convinced that is a realistic assessment.
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