Tower has slashed its full-year earnings guidance as inflation, car thefts, supply chain difficulties and extreme weather challenges in New Zealand increase claim frequency and hurt profitability.

The Auckland-based insurer today forecast a range of an underlying loss of $NZ2 million ($1.85 million) to profit of $NZ3 million ($2.77 million) in the year to September.

It says it is “further tightening risk selection” amid a challenging claims environment in New Zealand.

Tower had been forecasting a profit of as much as $NZ13 million ($12.02 million) in May and in October last year had given guidance of around $NZ26 million ($23.3 million), and $NZ40 million ($35.8 million) excluding large events. 

The share price declined 2.6% today after Tower said inflation, rising vehicle theft and supply chain issues have continued to worsen in recent months, with the average cost of motor claims increasing by a fifth from a year ago to around $NZ3400 ($3143). 

Even after lifting motor insurance premiums by an average of 26% in the past year, its claims ratio excluding large events still deteriorated to 55% over the three months to June 30, from 52%. Persistent wet weather and other factors are pushing motor and house claims frequency above historical norms. 

Tower has now settled more than 50% of the claims received from record Auckland floods on May 9 and Cyclone Gabrielle. Costs from large events, including cyclones Judy and Kevin in Vanuatu, are now $NZ39.5 million ($36.5 million) – leaving just over a fifth of a $NZ50 million large events allowance to September.

At the end of June, year to date Gross Written Premiums were up 16.5% on the prior year excluding Tower PNG, at $NZ385 million ($355.85 million). Tower is forecasting GWP growth of 15-20%.

In March, Tower appointed Australian Prudential Regulation Authority (APRA) General Manager Sharyn Reichstein as its new Chief Risk Officer. CEO Blair Turnbull has previously said heightened risk selection criteria for landslide risks was introduced after March, and the weighting on the flood risk portion of customer premiums increased. 

The team is further tightening risk selection, automating claims management processes and working with suppliers to manage rising costs, but says it will take a year for the full impact of its rating and underwriting actions to take effect as insurance policies are renewed.

Car theft has been addressed with higher premiums and raising the excess for models stolen more regularly.

Tower reported an underlying loss of $NZ3.3 million ($3.1 million) including large events costs for the six months to March.

Tower’s expense ratio improved to 34% at end the of June, versus 36% in third-quarter 2022, on digitisation and cost controls.

Tower’s underlying net profit was $NZ27.3 million ($25.3 million) in fiscal 2022.

Insurance Council of New Zealand Te Kāhui Inihua o Aotearoa (ICNZ) said last month a third of the claims for the Auckland floods and Cyclone Gabrielle had been paid out from the estimated $NZ3.18 billion ($2.9 billion) bill from 107,569 claims.

In 2022 the total claims for the general insurance sector in New Zealand were valued at $NZ3.08 billion ($2.81 billion).