Tower Ltd’s desire to buy the NZ insurance book of South African group, Youi has seen it forced to go to shareholders for new capital totaling $47.2 million after discussions with the country’s Reserve Bank.
The raising will be a renounceable one for four-issue at 56 NZ cents a share (54 cents Australian).
Tower shares ended down 7% on the ASX at 66 cents after investors digested the complicated statement which also revealed that Tower would be omitting dividend payments to shareholders until further notice.
That is being done as part of the financing of the Youi buy and the capital issue to boost Tower’s solvency position.
Tower says it will cost $NZ13 million to buy Youi’s portfolio of 34,000 policies. Under the deal Tower will offer Youi policyholders Tower policies when their current policies come to an end.
The deal would lift Tower’s gross written premium income by 8% and its chief executive Richard Harding said it would accelerate the company’s growth.
“The purchase of Youi’s portfolio will assist us to accelerate our growth and we are now firmly positioned as a challenger brand focused on delivering good customer outcomes and value for our shareholders.
“Together with the successful implementation of the IT simplification programme currently underway, this investment will deliver growth, build scale and leverage the investment in IT,” Harding said yesterday.
Tower hopes to complete the Youi deal by the end of the year.
But it would seem that to get the deal over the line (it still needs final approvals) Tower has had to cleanup its balance sheet to remove a questionable asset and in the process raise capital to finance the Youi purchase and bolster its capital base by repairing its strained solvency ratios.
The boost to Tower’s solvency position will be required as from October 31. That’s when the RBNZ has said it will be removed from Tower’s solvency calculations a disputed $NZ70 million receivable Tower has been claiming from the Earthquake Commission (EQC) in relation to the Canterbury earthquakes in 2010 and 2011.
CEO Richard Harding said in yesterday’s statement that Tower still intended to pursue the collection of the EQC receivable “to the maximum extent possible”.
He said, however, that given the status of discussions and the nature of the EQC receivable, “it is likely that the dispute will proceed to litigation”.
“We continue to be confident in the recovery of this receivable and while we have entered an alternative dispute resolution process, we are firmly committed to the collection of the EQC receivable to the maximum extent possible,” said Harding.
But he said given the increased likelihood of litigation and associated delay in receiving funds, it was appropriate to exclude the EQC receivable from Tower Insurance’s solvency calculations.
As a result, the RBNZ has modified Tower Insurance’s licence conditions to remove the receivable from its solvency calculations with effect from October 31 – hence the big capital raising.
