Tower Limited FY 18 Results Announcement to Market
Market Information
NZX Limited
Level 1, NZX Centre
11 Cable Street
Wellington
New Zealand
Company Announcements Office
ASX Limited
Exchange Centre
Level 6, 20 Bridge Street
Sydney NSW
2000 Australia
28 November 2018
Tower Limited
FY18 Full Year Results for Announcement to Market
In accordance with NZSX Listing Rule 10.3.1, I enclose the following for release to
the market in relation to Tower Limited’s (NZE/ASX: TWR) FY18 Full Year Results:
1 Media Release
2 Management Review
3 NZX Appendix 1
4 Financial Statements (including Independent Auditor’s
Report)
5 Results Announcement Presentation
6 Results Announcement Call Script
Tower’s Chairman Michael Stiassny, Chief Executive Officer Richard Harding and
Chief Financial Officer Jeff Wright will discuss the full year results at 10:00am
New Zealand time today.
Tower’s Board confirms for the purposes of ASX Listing Rule 1.15.3 that Tower
continues to comply with the NZX Main Board Listing Rules.
ENDS
David Callanan
Company Secretary
Tower Limited
ARBN 088 481 234
Incorporated in New Zealand
For further information, please contact:
Nicholas Meseldzija
Head of Corporate Communications
Phone: +64 21 531 869
Email: nicholas.meseldzija@tower.co.nz
28 November 2018
Strong growth narrows Tower’s loss
Tower Limited (NZX/ASX:TWR) has today announced continued strong growth and improvement of
sales through digital channels, a declining expense ratio, and positive progress through a major
technology upgrade, demonstrating that the transformation of the company is well underway.
While more customers are choosing to insure with Tower, the removal of the Peak Re legacy issue,
impacts of severe weather and short-term claims challenges have resulted in Tower reporting a full
year loss of $6.7 million, a $1.3 million improvement on the prior year.
Features of Tower’s 2018 full year result:
• Key metrics :
- Strong growth achieved
Gross written premium in core book increased 11.9% over prior year
Growth of 18,192 risks in core book
45% of new business sales online in September 2018, up from less than 10%
during FY16
- Increases to claims costs
Severe weather in the Pacific contributed to claims cost increases as well as
development of prior year claims and other cost impacts in New Zealand
Each of these is well understood with pricing and underwriting responses
either already implemented or in train to improve performance through the
coming year
- Management expense ratio decreased
Management expense ratio decreased to 39% compared to 39.9% in prior year
- Major technology upgrade progressing well
Full replacement of core platform with leading technology is tracking to
expectations, with costs remaining within tolerances
IT simplification is a critical enabler for Tower’s transformation and will
accelerate growth and reduce expenses, delivering a step change in results
from the end of FY19
• Reported full year loss of $6.7 million impacted by
- $16.2 million after-tax impact from Peak Re settlement
- $11 million before-tax impact from weather and large events
- Minor adjustment to Canterbury provisions, resulting in a $3.6 million after-tax impact
• Continued positive progress closing Canterbury earthquake claims, with open claims almost
halved, down to 163, from 323 on October 1 2017
Transformation into a challenger brand is driving growth
Tower’s full year result shows that its efforts to transform into a digital challenger brand are driving
improved performance.
Strong growth is a result of more customers choosing to insure with Tower thanks to a continued
focus on simplifying insurance and delivering fairer pricing for all.
Tower Chief Executive Richard Harding is pleased with Tower’s progress in the transformation of
the business.
“The strong growth we’ve achieved, especially through our digital channels, is testament to the
work we’ve done to make insurance simpler and easier, and I’m pleased customers are noticing and
choosing to insure with us,” said Harding.
Mr Harding said that while the reported result is disappointing, finalising the Peak Re dispute and
removing this legacy issue from the business provides confidence and certainty for the future of the
company.
“While it offsets our growth, the resolution of the Peak Re dispute is a positive step forward, and the
short-term challenges we’ve seen in claims have been addressed through pricing and underwriting
responses.
“We are now building on this positive momentum and expect to see strong growth continue over
the coming year as we keep transforming our business.
“Combined with the successful delivery of our new IT platform in the coming year, we are well
placed to continue challenging the market and offering customers a genuinely different option
when it comes to insurance, said Harding.
ENDS
Richard Harding
Chief Executive Officer
Tower Limited
ARBN 088 481 234 Incorporated in New Zealand
For media queries, please contact:
Nicholas Meseldzija
Head of Corporate Communications
Mobile: +64 21 531 869
Email: Nicholas.meseldzija@tower.co.nz
1
Tower management review – full year to 30 September 2018
Features of half year 2018
• Transformation of core business well underway and driving strong GWP growth
in the core New Zealand book of 11.9% on the prior year, and strong volume
growth, with 18,192 risks added to the core New Zealand book
1
.
• Claims costs increased due to severe weather in the Pacific along with some prior
year development in New Zealand and other cost impacts. Each of these is well
understood and pricing and underwriting responses either already implemented
or in train to improve performance through the coming year.
• Major technology upgrade progressing well, with replacement of core platform
with leading technology tracking well
• Reported full year loss of $6.7 million impacted by
- $16.2 million after-tax impact from Peak Re settlement
- $11 million before-tax impact from weather and large events
- Minor adjustment to Canterbury provisions, resulting in a $3.6 million after-
tax impact
• Continued positive progress closing Canterbury earthquake claims, with open
claims almost halved, down to 163, from 323 on October 1 2017
Full year summary
Tower has strong underlying New Zealand and Pacific businesses and the 2018
Financial Year has seen the continued delivery against its strategy to transform.
With a focus clearly on simplifying and improving all aspects of our business to
differentiate the company, strong growth in GWP and customer numbers, contained
expenses and a major technology upgrade progressing well, demonstrates that
transformation is well underway.
The implementation of risk-based pricing and continued improvements in digital
channels added 18,192 new risks
2
to Tower’s core New Zealand portfolio, seeing core
NZ GWP for the year grow 11.9% contributing to total GWP of $336 million.
Tower reported a loss after tax of $6.7 million for the year ended 30 September 2018
(FY18), narrowing from a loss of $8 million for the year ended 30 September 2017 (FY17).
The strong growth of $23.7m in gross written premium and $13.1m in net earned
premium has been offset by storm activity, higher claims costs, the resolution of the
Peak Re dispute as well as an increase in ultimate incurred claims for Canterbury.
Severe storm activity in New Zealand and the Pacific resulted in an $11 million before-tax
impact to underlying profit, seeing it decline to $13.6 million, from $18 million in the year
prior.
1. Following the end to Tower’s distribution relationship with Kiwibank on 4 April 2018, the ‘core’ portfolio now refers to the NZ
business excluding the ANZ Bank and Kiwibank portfolios. The FY17 comparative has been restated to be consistent with this
approach.
2. In prior years Tower has reported volumes using policy numbers as the relevant metric. Tower has changed to using risk
numbers as the key metric in FY18 to align with internal management reporting and to better illustrate risk exposures, e.g.,
where one policy might cover several risks.
2
Claims costs increased over the 2018 financial year, with weather in the Pacific the most
significant impact along with some prior year development in New Zealand and other
cost impacts. Each of these is well understood and pricing and underwriting responses
either already implemented or in train to improve performance through the coming year.
Severe weather across the Pacific increased claims costs significantly in FY18. Cyclone
Gita impacted Tonga heavily, while Cyclones Keni and Josie impacted Fiji, resulting in a
10.4 percentage point uplift on the Pacific FY17 claims ratio. Reinsurance is being utilised
to minimise impacts of weather along with ongoing refinement of products and
underwriting criteria.
New Zealand claims expenses also increased over the 2018 financial year due to a
number of claims challenges, however, these are being countered with pricing and
underwriting responses to improve performance.
A continued focus on non-personnel costs saw the management expense ratio
decrease almost 1% to 39%, while still allowing further investment in the business.
Tower’s Pacific premium remains stable and in line with the same period in the prior
year, however, underlying profit of $2.2 million has been impacted by Cyclones Gita,
Josie and Keni and a small number of commercial fires.
Tower continues to make solid progress settling claims in Canterbury, reducing open
claims by 160. On October 1 2017, Tower had 323 open claims remaining. In the
intervening 12 months, the number of open Canterbury Earthquake claims was reduced
to 163, with 318 claims were closed, however, 115 new claims from the EQC were
received and 43 claims were reopened.
3
Transformation momentum is accelerating
Tower holds a unique position in the New Zealand insurance market, with a solid existing
customer base, yet plenty of room to grow. A clear strategic plan to continue
transforming and growing the business by delivering a compelling, challenger
proposition to the market will see Tower turn industry norms upside down and
revolutionise the way customers interact with the company.
The achievements seen to date show that there is a powerful platform for future growth
with progress seen in crucial areas:
• Focus on customers has delivered strong growth
• Management expenses ratio has reduced, while continuing to invest
• Major technology upgrade progressing well
• Increases to claim costs well understood with action taken to offset inflation
Focus on customers driving growth
Overview
• Strong GWP growth of 11.9% in core book with total GWP growing strongly at
7.6%
• Growth in risks in core New Zealand book increased significantly by 18,192
• 45% of new business sales online in September 2018, up from less than 10%
during FY16
• New approach to pricing combined with simple and easy products driving
impressive customer growth and improved mix
Tower’s focus on customers has seen continued growth in its core New Zealand
portfolio in FY18, with 18,192 risks added to the core book and GWP increasing 11.9%.
With Tower’s new product suite fully available online, and continued refinement and
optimisation of the digital sales channels, more customers are choosing Tower,
delivering a significant uplift in new business sales, with 45% of new business sales
online in September 2018, up from less than 10% in FY16.
In the Pacific, Samoa, American Samoa and the Solomon and Cook Islands have
returned to growth thanks to additional underwriting, pricing and marketing support for
local teams. However, this growth has been offset by the continued remediation of the
Papua New Guinea portfolio to reduce risk and exposure which will lead to improved
profitability.
4
This positive result across Tower’s businesses is being achieved through a combination
of:
• Ongoing pricing improvements in New Zealand motor, house and contents
portfolios to offset increased claims costs
• Constant refinement of underwriting criteria enabling more granular assessment
to improve profitability of portfolio
• Attracting new, profitable customers with improved and targeted offerings;
• Building and refining Tower’s digital offering and online sales process
• The creation of the Pacific operations centre, centralising back office functions,
ensuring that the pricing and underwriting approach is consistent and minimises
claims leakage
New Zealand and Pacific claims expenses
Overview
• Claims costs increased across New Zealand and Pacific
• Inflation is well understood and has been addressed through pricing and
underwriting responses already implemented or in train to improve performance
through the coming year
• Strengthened underwriting and risk selection in the Pacific to improve profitability
New Zealand claims expenses increased in FY18 due to a number of claims challenges,
however, these challenges are well understood and swift action has been taken to
address each of them.
Throughout the year an increase in the development of open FY17 claims was
experienced. The reserving model used didn’t respond well during the claims backlog
experienced due to storms, understating expected development of claims in FY17. This
resulted in a 1.2 percentage point increase in the claims ratio and the reserving
methodology has now been updated accordingly.
Tower’s new, simpler products have resulted in a decrease in NZ House claim
frequency, however, this positive result has been offset by an increase in severity, driven
by a number of large house fires and the increased costs relating to increasing Health &
Safety costs and asbestos testing requirements which is an industry-wide issue driven
by regulatory change. In response to these issues Tower has strengthened pricing and
improved its underwriting criteria and expects to see improved outcomes in the coming
year.
5
Supply chain constraints and inflation continues to impact the industry with increasingly
advanced technology in cars seeing the cost of repair rise. Tower is addressing motor
claims inflation through pricing and more granular underwriting.
A higher cost per claim in Tower’s NZ Contents book is also linked to the increase in
house fires and work has been completed to actively address this through improved
pricing and underwriting.
In the Pacific, severe weather increased claims costs significantly in FY18. Cyclone Gita
impacted Tonga heavily, while Cyclones Keni and Josie impacted Fiji, resulting in a 10.4
percentage point uplift on Tower’s FY17 Pacific claims ratio.
In Fiji, an increase in claims expenses mostly relates to motor claims inflation and in
Tower’s National Pacific Insurance business, a small number of large commercial fires
have driven the claims ratio higher.
Reinsurance is being utilised to minimise impacts of weather and constant refinement of
Tower’s pricing, product offering and underwriting criteria in response to weather events
and claims inflation means that Tower expects to see its claims ratio excluding large
events to revert to prior year levels.
Severe weather events and reducing volatility
Overview
• Severe and unprecedented weather drove increased claims expenses in both
FY17 and FY18
• Losses for these two years are significantly above long-term trends
• Gross impact of weather events in FY18, before reinsurance $20.1 million
• Reinsurance structure will reduce volatility from exposure to large events with
FY19 reinsurance secured on favourable terms
The past two years have seen a number of unprecedented and severe weather events
that have impacted communities and the business beyond expectations. Impacts to
Tower in FY17 totalled $15.5 million before reinsurance, and this year reached a gross
amount of $20.1 million, well above both Tower’s 10 year average of $7.6 million, and its
five year average of $11.3 million.
This is not unique to Tower, with industry wide losses in New Zealand from weather in
the 2018 calendar year totalling over $200 million so far.
6
In response to these increased impacts Tower has adjusted pricing and strengthened its
reinsurance programme to increase cover and reduce volatility from large events in
FY19.
Tower has:
• Doubled its aggregate cover from $10 million to $20 million and increased the
excess from $7 million to $10 million
• Increased cover for single large events from $5 million to $7.5 million, once its
excess of $10 million is used
• Purchased drop-down cover to bridge the gap between aggregate and
catastrophe cover
• Secured FY19 reinsurance on favourable terms
Tower is putting in considerable effort and taking all appropriate steps to preserve
capital and reduce any volatility from these short-term weather abnormalities.
Building capability while controlling costs
Achievements
• Management expense ratio continues to improve
• Investment made to build capability and deliver growth
Tower has maintained its focus on non-personnel related costs, reducing the
management expense ratio t o 39% in FY18, compared to 39.9% FY17.
Tower has achieved a significant capability lift with a lower expense ratio thanks to close
management of costs. Tower has increased capability in the pricing and underwriting,
technology and digital, data lake, data science, claims management, procurement and
customer insights areas.
In addition, the management expense ratio of 39.0%, includes incremental investment of:
• $1.0m to reduce cyber security risks
• $1.2m on acquisition, including partnerships and marketing
• $0.7m on ancillary IT system refresh
Tower expects expenses will continue to stabilise as simplification programme initiatives
are embedded, with a step change in productivity gains to be realised after the
implementation of its new IT platform.
Major technology upgrade underway
The key to accelerating Tower’s transformation is a new IT platform that enables the
simplification of products and processes. This will remove complexity for frontline teams
and enable the delivery of a unique and revolutionary customer experience.
Combined with Tower’s push to move 50 - 70% of all transactions online, removing
complexity from the business will deliver significant cost savings and productivity gains.
Tower is now approaching the half way mark of this programme and progress to date is
in line with expections. This programme is complex and includes legacy replacement,
digital enhancement and product rationalisation. The programme remains on track to
deliver in the first half of the 2019 calendar year.
7
At the half way point costs are within tolerances, however like all projects of this nature
there remains risk and complexity in the delivery. Tower’s robust governance controls
include a focus on managing delivery risk and cost trade-off.
Key benefits to be seen from Tower’s new IT platform include the ability to:
• Create and deliver a unique customer experience
• Quickly deliver simple, customer focussed products
• Target specific, profitable customer segments through granular, and
automated pricing and underwriting
• Charge fairer and more accurate premiums through improved access to, and
use of, internal and external data
• Easily trial new products and pricing
• Rationalise products and reduce claims costs by improving the customer
claims journey and overall claims management
• Significantly reduce our cost base and realise large productivity gains by
moving low value transactions online
• Add value through improved employee engagement
Tower’s approach to implementing this new IT platform is designed to deliver on a dual
purpose – accelerate transformation and protect and realise shareholder value.
Tower’s robust governance approach and clear roadmap forward will enable Tower to
commence selling new business on the new platform in the first half of the 2019
calendar year. Once new business is live, migration of the existing book can start.
Canterbury update
Tower continues to make solid progress settling claims in Canterbury, reducing open
claims by 160. On October 1 2017, Tower had 323 open claims remaining. In the
intervening 12 months, the number of open Canterbury Earthquake claims was reduced
by 318. However, 115 new claims from the EQC were received and 43 claims were
reopened.
Tower’s gross outstanding claims have more than halved since September 2016. This
demonstrates that solid progress is being made. In addition, the amount of IBNR / IBNER
and risk margin has increased from 60% to 95% of case estimates.
Notes:
1. IBNR / IBNER includes claims handling expenses
2. Ratio of IBNR / IBNER plus risk margin to case estimates
8
Tower also welcomes the recent government announcement of an enquiry into EQC as
an important step toward ensuring that mistakes of the past are learnt from and not
repeated in future.
EQC Act reform will assist in ensuring past experience is not repeated and that the
pitfalls and problems associated with the EQC set up and the 2010 model can be
avoided. Tower strongly believes that the Kaikoura model is successful and that any
reform of the EQC must include these changes.
Solvency position
Tower holds significant capital over and above the minimum regulatory requirement.
As at 30 September 2018, following the Peak re settlement and the weather events
earlier this year, Tower Insurance Limited held approximately $78 million of solvency
margin, $28 million above RBNZ requirements and equivalent to 234% of minimum
solvency capital.
An additional $25 million in corporate cash is also held by Tower
Limited.
Tower retains access to undrawn debt facilities and has a preference to fund remaining
IT investment from debt.
9
Outlook
Tower is transforming, and is focussed on progressing initiatives that will continue
accelerating momentum and deliver long-term shareholder value.
Tower has provided a one-off guidance for FY19 to demonstrate its confidence in the
strategy and performance of its underlying business. Tower’s guidance for underlying
NPAT in FY19 is in excess of $22m.
This includes the following assumptions:
• Continued momentum in revenue growth and sales through improved digital
channels
• Underwriting and pricing changes will be implemented, continuing to drive
improvement in mix of risk, as well as addressing inflation
• Pacific contribution will return to normal levels
• The management expenses ratio will be maintained at a steady level
• The Aggregate excess will be fully utilised for weather events
Accordingly, Tower’s Board has determined that in FY19, Tower will pay a dividend of
50% to 70% of reported NPAT where prudent to do so.
Tower is being transformed and the work underway will deliver significant long-term
value.
TOWER LIMITED
Results for announcement to the market
Reporting Period 12 months to 30 September 2018
Previous Reporting
Period
12 months to 30 September 2017
Amount (000s) Percentage change
Revenue from ordinary
activities
$NZ 335,973 6%
Profit (loss) from
ordinary activities after
tax attributable to
security holder
$NZ (6,726) (16)%
Net profit (loss)
attributable to security
holders
$NZ (6,726) (16)%
Interim/Final Dividend Amount per security Imputed amount per
security
Nil Nil
Record Date Not Applicable
Dividend Payment Date Not Applicable
Comments:
For the year ended 30 September 2018 Tower
Limited reported a 6% increase in revenue as a
result of policy and premium growth.
Tower Limited reported a net loss attributable to
security holders of $(6.7)m due to an impairment
charge related to the settlement of a reinsurance
claim and an increase in claims expense over the
prior year.
Refer attached 30 September 2018 audited Financial Statements for Tower
Limited and Presentation for more detailed analysis and explanation.
The consolidated financial statements were approved for issue by the Board on 28 November 2018.
Michael P StiassnyGraham R Stuart
ChairmanDirector
Tower Limited
Consolidated financial
statements
for the year ended 30 September 2018
PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand
T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz
Independent auditor’s report
To the shareholders of Tower Limited
The financial statements comprise:
the consolidated balance sheet as at 30 September 2018;
the consolidated income statement for the year then ended;
the consolidated statement of comprehensive income for the year then ended;
the consolidated statement of changes in equity for the year then ended;
the consolidated statement of cash flows for the year then ended; and
the notes to the financial statements, which include a summary of general accounting policies.
Our opinion
In our opinion, the financial statements of Tower Limited (the Company), including its subsidiaries
(the Group), present fairly, in all material respects, the financial position of the Group as at 30
September 2018, its financial performance and its cash flows for the year then ended in accordance
with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and
International Financial Reporting Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs
NZ) and International Standards on Auditing (ISAs). Our responsibilities under those standards are
further described in the Auditor’s responsibilities for the audit of the financial statements section of
our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised)
Code of Ethics for Assurance Practitioners (PES 1) issued by the New Zealand Auditing and Assurance
Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
Our firm carries out other services for the Group in the areas of solvency return assurance and agreed
upon procedures. The provision of these other services has not impaired our independence as auditor
of the Group.
57
Our audit approach
Overview
An audit is designed to obtain reasonable assurance whether the financial
statements are free from material misstatement.
Overall group materiality: $3,241,000, which represents approximately 1% of
premium revenue.
We chose premium revenue as the benchmark because, in our view, it is a key
financial statement metric used in assessing the performance of the Group and
is not as volatile as other profit and loss measures, and is a generally accepted
benchmark. The 1% is based on our professional judgement, noting that it is
also within the range of commonly accepted revenue related thresholds.
The following have been determined as key audit matters:
Valuation of outstanding claims
Valuation of EQC recovery receivables
Recoverability of the deferred tax asset
Materiality
The scope of our audit was influenced by our application of materiality.
Based on our professional judgement, we determined certain quantitative thresholds for materiality,
including the overall Group materiality for the financial statements as a whole as set out above. These,
together with qualitative considerations, helped us to determine the scope of our audit, the nature,
timing and extent of our audit procedures and to evaluate the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Audit scope
We designed our audit by assessing the risks of material misstatement in the financial statements and
our application of materiality. As in all of our audits, we also addressed the risk of management
override of internal controls including among other matters, consideration of whether there was
evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an
opinion on the financial statements as a whole, taking into account the structure of the Group, the
accounting processes and controls, and the industry in which the Group operates.
Our Group audit scope focused on the most financially significant subsidiary, which contributes
approximately 83% of the Group’s premium revenue. We performed further audit procedures over the
balances and transactions of the non-significant subsidiaries and the consolidation of the Group’s
subsidiaries.
58
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the financial statements of the current year. These matters were addressed in the context of our audit of
the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
Key audit matter How our audit addressed the key audit matter
(1) Valuation of outstanding claims (2018
$148,976,000, 2017 $181,156,000)
We considered the valuation of outstanding claims
a key audit matter because of the complexity
involved in the estimation process and the
significant judgements that management make in
determining the balance.
The valuation of outstanding claims relies on the
quality of underlying data and involves significant
judgements and assumptions given the inherent
uncertainty in estimating the expected present
value of future payments for claims incurred.
In particular, judgement arises over the estimation
of payments for claims that have been incurred at
the reporting date but have not yet been reported to
the Group, as there is generally less information
available in relation to these claims, and claims that
have been reported but there is uncertainty over the
amount which will be settled.
Outstanding claims include a risk margin that
allows for the inherent uncertainty in the central
estimate of the future claim payments. In
determining the risk margin, the Group makes
judgements about the volatility of each class of
business written and the correlation between each
division and between different geographical
locations.
Relevant references in the financial statements
Refer to notes B2, B3, B4 and B5 to the financial
statements, which also describes the elements that
make up the balance.
Our audit procedures included obtaining an
understanding of key controls, including key data
reconciliations and management review of the
estimates.
Historical claims data is a key input to the actuarial
estimates. Accordingly, we:
o Evaluated the design effectiveness and tested
controls over claims processing;
o Re-performed claims data reconciliations;
o Assessed a sample of claim case estimates at
the year end to check that they were
supported by appropriate documentation;
and
o Inspected a sample of claims paid during the
year to confirm that they were supported by
appropriate documentation and approved
within delegated authority limits.
Together with PwC actuarial experts we:
o Evaluated the actuarial models and
methodologies used by comparing with
generally accepted models and
methodologies applied in the sector and with
the prior year;
o Assessed key actuarial judgements and
assumptions and challenged them by
comparing with our expectations based on
the Group’s experience, our own sector
knowledge and independently observable
industry trends;
o Considered the work and findings of the
external independent actuaries engaged by
the Group; and
o Assessed the risk margin, by comparing to
known industry practices and the Actuaries
Institute recommended framework. In
particular we focused on the assessed level of
uncertainty in the central estimate.
We have no matters to report from the procedures
performed.
59
(2) Valuation of Earthquake Commission
(EQC) recovery receivables (2018
68,400,000, 2017 $65,100,000)
We considered EQC recovery receivables a key audit
matter because significant management judgement
is required to value expected recoveries from EQC
in respect of land damage and building costs, as
these recoveries are subject to agreement with EQC.
The expected recoveries from EQC are related to the
Canterbury earthquakes which requires judgement
and actuarial expertise to evaluate the attribution of
claims cost between the major earthquake events, in
particular the September 2010 and February 2011
events.
Relevant references in the financial statements
Refer to notes B3 and E1 to the financial
statements.
We assessed management’s approach to estimate the
EQC recovery receivables. We reviewed
correspondence with EQC and held discussions with
management, lawyers, external advisors and external
independent actuaries to understand assumptions,
including the attribution of losses to the different
Canterbury earthquake events, used to establish the
right to recovery. We compared these assumptions
with sector peers and obtained evidence for any
significant variances.
We considered the range from which the amount
recognised has been determined and assessed whether
the current circumstances could support a different
recovery receivable amount.
We have no matters to report from the procedures
performed.
(3) Recoverability of the deferred tax asset
on tax losses (2018 36,376,000, 2017
37,782,000)
The Group has a deferred tax asset balance of
$36,376,000, of which $30,685,000 relates to
deferred tax assets arising from past tax losses.
We considered recoverability of the deferred tax
asset a key audit matter because it is sensitive to the
Group’s expected future profitability and its
entitlement to offset these losses against future
profits. Significant management judgement is
involved in forecasting future taxable profits which
are inherently uncertain.
Relevant reference in the financial statements
Refer to note D6 to the financial statements.
We evaluated management’s assessment of the
recoverability of the deferred tax asset, including
understanding the progress made by management in
improving the profitability of the business in recent
periods, which includes the remediation of the causes
of past losses through, amongst other things,
assessment of the Canterbury earthquakes claims and
related reinsurance and other recoveries (assessment
of the recoverability of the receivables from EQC) and
other expense reduction and income initiatives.
We assessed the operational plan used in the deferred
tax asset recoverability assessment by comparing
previous operational plans with actual results and
assessed the appropriateness of the assumptions used
in the operational plan. We used our tax specialist to
assess whether the Group is entitled to offset the tax
losses against future profits.
We have no matters to report from the procedures
performed.
60
Information other than the financial statements and auditor’s report
The Directors are responsible for the annual report. Our opinion on the financial statements does not
cover the other information included in the annual report and we do not express any form of assurance
conclusion on the other information.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated. If, based on the work we have performed on the other information that we obtained prior to
the date of this auditor’s report, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard, except that
not all other information was available to us at the date of our signing.
Responsibilities of the Directors for the financial statements
The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of
the financial statements in accordance with NZ IFRS and IFRS, and for such internal control as the
Directors determine is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements, as a whole,
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs NZ and ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located at the
External Reporting Board’s website at:
https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-1/
This description forms part of our auditor’s report.
Who we report to
This report is made solely to the Company’s shareholders, as a body. Our audit work has been
undertaken so that we might state those matters which we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our
audit work, for this report or for the opinions we have formed.
The engagement partner on the audit resulting in this independent auditor’s report is Karl Deutschle.
For and on behalf of:
Chartered Accountants Auckland
28 November 2018
Transformation of iconic NZ brand is driving growth•
Strategic focus on customers is delivering strong growth
•
Implementation of leading technology will accelerate growth
•
Reported result reflects impacts of Peak Re
settlement, severe weather and Canterbury
Earthquake provisions
Consumer trust and confidence has never been more important•
Australian banking Royal Commission has shone a spotlight on financial services conduct
•
Tower’s high customer trust is driven by an
ethical and transparent approach to change
•
Tower is a New Zealand listed company with st
rong ethical business practices and independent
from any Australian owner
Chairman's update
2
2018 performance
4
•
Significant NZ growth
•
Strong digital sales continue
•
Pacific remediation has positioned us for future growth
•
Moved to risk-based pricing for all New Zealanders
Strong growth achieved
1.
Following the end to Tower’s distribution relationship with Kiwibank on 4 April 2018, the
‘core’ portfolio now refers to the NZ bu
siness excluding the ANZ Bank and Kiwibank
portfolios. The FY17 comparative has been restated to be consistent with this approach.
2.
In prior years Tower has reported volumes us
ing policy numbers as the relevant metric.
Tower has changed to using risk numbers as the
key metric in FY18 to align with internal
management reporting and to better illustrate
risk exposures, e.g., where one policy might
cover several risks.
Key metrics
FY18
FY17
Gross written premium (GWP)
$336m
$312m
Growth in GWP
7.6%
3.0%
Growth in GWP in core
1
NZ portfolio
11.9%
6.0%
Increase in risks
2
in core NZ portfolio
18,192 11,410
Claims expenses
$152m
$132m
Claims expense ratio
56.4%
51.2%
Open Canterbury earthquake claims
163 323
Management expense ratio
39.0%
39.9%
Underlying profit after tax
$13.6m
$18.0m
Reported loss after tax
$6.7m
$8.0m
•
Pacific claims ratio significantl
y impacted by severe weather
•
FY18 loss ratio impacted by development of prior year claims
•
NZ claims ratio impacted by industry wide inflation
•
Reinsurance secured on favourab
le terms to reduce impacts
Increases to claims costs
•
Management expense ratio reduced
•
Major technology upgrade on track
•
Continued resolution of Canterbury Earthquake claims
Other achievements
More customers choosing Tower
5
GWP growth is across all NZ products:
•
NZ House has grown 14% in FY18
•
NZ Contents is up 2% in FY18
•
NZ Motor has grown 12% in FY18
Growth driven through a combination of volume and rating changes as well as changing mix of business
Reduced GWP in Papua New Guinea reflects deliberate strategy to reduce risk
Improved targeting and pricing is attracting more profitable customers
•
11.9% GWP growth in core NZ book
•
Total GWP has grown 7.6% through higher volumes and improved rating
GROWTH IN GWP (NZ$m)
312.4
336.2
15.3
8.2
2.4
2.1
FY17 GWP
NZ Rate
NZ Volume
Pacific
Growth
Remediation
in PNG
FY18 GWP
Change in risk counts
FY16
FY17
FY18
Core NZ
(14)
11,410 18,192
Non-core NZ (ANZ + Kiwibank)
(8,848)
(8,031)
(9,018)
To t a l N Z
(8,862)
3,379 9,174
Digital leads the way
6
Digital sales increased to 45% of new business in September 2018, up from
less than 10% during FY16
Online conversion rates 26
% better in FY18, relative
to prior year
New website launched with continued improvement in organic search rankings
Continued investment in digi
tal capability by shifting
to agile operating model to enable rapid ongoing optimisation of channel
The digital offering is attracting more customers with a lower cost to acquire, and we continue to target an industry leading goal of 50 - 70% of all transactions online
•
GWP from digital channels has grown at CAGR of 133% over past 3 years
•
Digital channels now contribute 45% of new business
$0.7m
$0.6m
$0.7m
$1.1m
$1.7m
$2.1m
$2.9m
$3.3m
$4.4m
$4.9m
$6.2m
$7.2m
H1.16
H2.16
H1.17
H2.17
H1.18
H2.18
Tower Digital
Trade Me Insurance
GWP BY QUARTER THROUGH DIGITAL CHANNELS
(NZ$m)
CAGR = 133%
FY16
FY17
FY18
Pacific set for growth
7
•
Until FY18, the Pacific had been a
significant contributor to Tower’s
performance
Samoa, American Samoa and the Solomon and Cook Islands have returned to revenue growth in FY18
, with Tonga heavily impacted by
Cyclone Gita
Over the past year, we have b
een remediating Papua New Guinea
portfolio to:
•
Reduce risk
•
Improve customer outcomes
•
Increase profitability
Created new Pacific operations centre to:
•
Centralise back office functi
ons, improving cost and risk
management
•
Co-ordinate approach to loca
l-market product development
•
Pacific remediation continuing to position us for future growth
•
Growing the Pacific business profitably is a key component of Tower’s strategy
YEAR ON YEAR CHANGE IN GWP (NZ$m)
-4
-3
-2
-1
+0
+1
+2
+3
FY16-FY17
FY17-FY18
VanuatuSolomonCooksAmerican SamoaSamoaTongaPapua New GuineaFiji
NPI
We are confident that Pacific will make a significant contribution in the future
Note: National Pacific Insurance
(NPI) is a subsidiary of Tower
and operates across Samoa,
American Samoa and Tonga
•
Cyclone Gita impacted National Pacific Insurance (NPI) and Josie and Keni impacted Fiji which has contributed significantly to increases in Pacific claims costs. We are utilising reinsurance, continually refining our product offering and pricing in response to weather impacts as well as working with the Cyclone Testing Agency to improve building standards in the Pacific.
•
Remediation of PNG book is delivering improved claims outcomes, supporting sustainable future growth
•
Growth in Fiji claims expenses mostly driven by motor claims inflation which has been addressed through pricing and underwriting criteria
•
NPI claims increases relate to 3 large commercial fires. This number of fires is higher than average, however is a normal part of the volatility in a small portfolio and is being managed through improved underwriting criteria
36.2%
46.9%
51.8%
3.6%
0.3%
9.2%
1.2%
-1.5%
4.0%
-1.2%
FY17 claims
ratio, including
large events
Change in mix
between
countries vs
FY17
Cyclone Gita
Cyclones Josie
and Keni
FY17 adjusted
for storms and
country mix
Papua New
Guinea
Fiji, excluding
cyclones
NPI, excluding
cyclones
Other countries
FY18 claims
ratio, including
large events
Pacific claims expenses
8
•
Cyclones Gita, Josie and Keni drove significant increases
•
Action taken to address claims escalation
3
2
1
3
2
1
YEAR ON YEAR CHANGE IN CLAIMS RATIO
4
4
Note: Pricing changes include increases for Fiji Motor, and movin
g under-priced PNG Commercial Fire
to standard rates. Underwri
ting improvements
include the establishment of a centralised Pacific Underwriting
team and refined underwriting guidelines for new business and r
enewals.
54.2%
56.2%
57.2%
0.8%
1.2%
1.1%
0.6%
0.6%
-1.3%
FY17 claims ratio,
including large
events
Change in
product mix vs
FY17
Increases to prior
year claims
FY17 adjusted for
claims reserving
and mix
Improved claim
frequency on NZ
House
Higher cost per
claim on NZ
House
Higher cost per
claim on NZ
Motor
Higher cost per
claim on NZ
Contents
FY18 claims ratio,
including large
events
3
New Zealand claims expenses
9
•
Reserving model used in FY17 didn’t respond well during the claims backlog we experienced due to storms, understating expected development of claims in FY17. We have updated reserving methodology accordingly
•
Higher cost per claim in NZ House driven by large house fires and increased industry wide Health & Sa
fety requirements that are being
addressed through pricing and product changes, and underwriting
•
Higher cost per claim in NZ Motor portfolio has been addressed through pricing changes
•
Inflationary impacts in NZ Conten
ts portfolio are being addressed
through pricing and underwriting changes
•
Claims challenges are being well managed
•
Some claims inflation continued into 2018
43
2
1
4
2
1
Note: Pricing changes include increases for higher risk homes, as
bestos, higher risk drivers, as well as more granular rating for vehicle categories. Ongoing underwriting
improvements include refinements to risk selection criteria and meth contamination policy limits.
YEAR ON YEAR CHANGE IN CLAIMS RATIO
Severe weather event impacts in FY17 totalled $15.5 million before reinsurance. Impacts in
FY18 reached a gross amount
of $20.1 million, well above both
the 10 year average of $7.6
million, and the five year average of $11.3 million
Experts
1
are reporting that recent weather has been
extraordinary and that weather patterns are likely to revert closer to longer term trends
Reinsurance programme changed
to reduce volatility from
large events in FY19
Pricing changes and improvemen
ts to supply-chain process
will help to offset claims cost inflation
Specialist team dedicated to fa
st and fair settlements to set
things right for customers
•
Severe and unprecedented weather drove increa
sed claims expense in both FY17 and FY18
•
Losses in past two years significantly above long term trends
Severe weather events
10
LOSSES FROM LARGE STORMS
2
NZ$m
1.
Source: NIWA Special Climate Statement - record wa
rmth in the Tasman Sea, New Zealand and Tasmania
2.
Includes only those events which individ
ually have a >$1m impact to Tower, and
is stated before reinsurance recoveries.
Number of events:
2101332157
-
5
10
15
20
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Ultimate estimate10 year average5 year average
Reducing claims volatility
•
Reinsurance structure will reduce volatility from exposure to large events
•
FY19 reinsurance secured on favourable terms
11
•
Increased aggregate cover to $20m, from $10m, with excess increased to $10m from $7m
•
Increased cover for single large event to $7.5m, from $5m, once excess of $10m used
•
$2.5m drop-down cover to help bridge gap between aggregate cover and catastrophe cover
•
Reinsurance expense ratio expected to improve in FY19
HIGH-LEVEL REINSURANCE STRUCTURE OVERVIEW
Amount of cover for a single
catastrophe event
Catastrophe
cover
(including
earthquakes)
$735m
$10m
Aggregate cover
($7.5m per event)
Storm and other large event cover excluding EQ
(across multiple events)
First $10m
retained by
Tower
$10m
$30m
Note: Detailed reinsurance structure overview available on page 34
Dropdown cover $2.5m
(2
nd
and 3
rd
events only)
Building capability while controlling costs
12
•
Tower has achieved a significant
capability lift with a lower
expense ratio thanks to close management of costs
•
Increased capability in
the following areas:
•
Pricing and underwriting
•
Technology and digital
•
Data lake and data scientists
•
Claims management
•
Procurement
•
Customer insights
•
In addition, the management expe
nse ratio of 39.0%, includes
incremental investment of:
•
$1.0m to reduce cyber security risks
•
$1.2m on acquisition, includin
g partnerships and marketing
•
$0.7m on ancillary IT system refresh
•
Management expense ratio continues to improve
•
Additional spend directed towards growth
, building capability and reducing risk
41.9%
39.9%
39.0%
FY16
FY17
FY18
GROUP MANAGEMENT EXPENSE RATIO
1
1.
For management reporting Towe
r includes claims handling
expenses in Management Expense Ratio
Continued focus on expenses will enable ac
hievement of long term MER target of <35%
Major tech upgrade progressing well
13
Programme delivery on track•
Full replacement of our core platform with invest
ment in leading technolo
gy announced in May 2018
•
Progress to date is in line with expectations, with ne
w business to be on sale on
new platform from mid 2019
•
Halfway through programme and now approa
ching most complex part, however due to
strong methodology and governance
we are confident delivery will be
achieved within expected timeframes
•
End-to-end digital integration and transforma
tion will drive growth and reduce cost
Further significant foundational technology achievements•
Replacement of ancillary legacy system server delivere
d, resulting in annual savings of $1.3m going forward
•
Creation of data lake and implementa
tion of new data platform complete
•
We are also upgrading other IT infrastructure and processes to ‘fit-for-pur
pose’ digital and technology systems
FY18
FY19
Current
progress
Scoping
Roadmap
Getting ready to launch
Mobilisation
Delivering the new platformRealising benefits
Configuration of platform
Digital integration and development
Product rationalisation
Customer migration (12 months)
Improved pricing and rating (ongoing)
Full omni-channel service (ongoing)
New business on sale
Experience with new platform confirms
assumptions and is enabling transformation
•
Address specific data means customers
now fairly pay the true cost of the
earthquake risk they face
•
We believe risk-based pricing is th
e right thing to do for New Zealand
•
Portfolio being built for long-t
erm growth and profitability
•
Our approach to pricing and underwriti
ng Wellington earthquake has already
reduced the amount of reinsurance required by $35m due to reductions in exposure.
•
We have seen an annualised 17% reductio
n in extreme risk house policies and 4%
growth in larger low risk areas like Auckland
•
Risk based pricing will result in lower risk
profile for Tower, resulting in even lower
earthquake exposure, long term profitabil
ity and ultimately lower reinsurance costs
Work has begun on risk-based pricing for
flood, wind and storm, which will deliver
long-term benefits
Enhanced risk pricing
14
•
17% reduction in extreme risk house policies
•
Earthquake risk-based pricing already delivering shareholder value
Earthquake risk premiums
for a rebuild value of $500k
•
Continued progress with 318 claims closed in FY18
•
Uncertainty continues to reduce
Canterbury earthquakes
15
MOVEMENT IN PROPERTIES
•
Settlement of
Peak Re
dispute achieved in first half
•
Tower is actively engaging with
EQC
in relation to
recoveries and remain co
nfident of our position.
•
Canterbury Earthquake claims
continue to reduce at a
solid pace, with over 300 clos
ed for the year, bringing the
total remaining to 163
•
New overcaps have reduced in the second half with additional data provided
by EQC providing greater
foresight
•
There continues to be challeng
es with some of the more
complex outstanding claims, but these are being closely managed
•
We expect the majority of non-litigated claims to be closed out in FY19
323
163
115
43
318
Open
properties
1
October
2017
New
properties
Reopened
Closed
Open
properties
30
September
2018
Financial performanceConsolidated Group
GROUP PROFIT SUMMARY
(NZ$m)
17
•
Significant growth in GWP of $23.7m and GEP of $17m reflects ongoing successful turnaround in New Zealand business
•
Management and sales expenses controlled, with almost 1% improvement in expense ratio
•
Underlying profit of $13.6m after tax affected by severe and unprecedented storm activity and short-term claims challenges
•
Resolution of Peak Re disp
ute resulted in P&L impact
of $16.2m
•
Full year Canterbury P&L impact of $3.6m
$ million
FY18
FY17
Change
Gross written premium (GWP)
336.1
312.4
23.7
Gross earned premium (GEP)
323.1
306.1
17.0
Reinsurance expense
(53.1)
(49.2)
(3.9)
Net earned premium
270.0
256.9
13.1
Net claims expense
(141.2)
(124.2)
(17.1)
Large events claims expense
(11.0)
(7.4)
(3.6)
Management and sales expenses
(105.4)
(102.4)
(3.0)
Underwriting profit
12.4
22.9
(10.5)
Investment and other revenue
7.2
6.1
1.1
Financing costs
(0.6)
(0.8)
0.3
Underlying profit before tax
19.1
28.2
(9.2)
Income tax expense
(5.5)
(10.2)
4.7
Underlying profit after tax
13.6
18.0
(4.5)
Peak Re settlement
(16.2)
0.0
(16.2)
Christchurch impact
(3.6)
(18.6)
15.1
Kaikoura impact
0.3
(4.1)
4.5
Corporate transaction costs
(0.2)
(3.1)
2.9
Foreign tax credit write-offs
(1.2)
(1.9)
0.7
Business in runoff
0.0
1.7
(1.7)
Other non-underlying items
0.6
0.0
0.6
Reported loss after tax
(6.7)
(8.0)
1.3
Key ratios
FY18
FY17
Change
Reinsurance / gross earned premiums
16.4%
16.1%
(0.3%)
Claims ratio excluding large events
52.3%
48.3%
(4.0%)
Claims ratio
56.4%
51.2%
(5.2%)
Expense ratio
39.0%
39.9%
0.9%
Combined ratio
95.4%
91.1%
(4.3%)
28.2
19.1
13.1
1.4
3.0
3.6
17.1
FY17
Underlying
profit
before
tax
Net
earned
premium
Investment
income
less
financing
costs
Management
expenses
Large
event
claims
Net
claims
expense
(excl
large
events)
FY18
Underlying
profit
before
tax
•
Net earned premium higher due to growth in core book and new approach to pricing
•
Improved investment income primarily a result of increased investment assets
•
Management expenses continue to be contained with inve
stment in core
business capability continuing
•
Increase in claims costs reflective of severe weather, a number of large house fires in New Zealand and the Pacific, short term severity issues and regulatory changes that are all being actively managed
Movement in Underlying profit before tax
18
MOVEMENT IN UNDERLYING PROFIT BEFORE TAX
(NZ$m)
NZ 13.8
Pacific (0.7)
NZ 1.1
Pacific 0.9
Corporate 1.0
NZ volume 9.4
NZ other 5.3
Pacific 2.4
Financial performanceNew Zealand
NEW ZEALAND PROFIT SUMMARY
(NZ$m)
•
Underlying profit increased by $0.7m on prior year
•
9.2% increase in GWP was the result of a new pricing approach, custom
er growth and stable
retention, leading to a 6.4% growth in net earned premium
•
Growth in the New Zealand business offset by increased claims expenses
•
Increased claims costs due to business growth, 2017 development, unusually large number of weather events and industry wide inflation which is being addressed
•
Management expenses contained, resulting in an almost 2% decrease in ex
pense ratio on prior year
19
$ million
FY18
FY17
Change
Gross written premium
277.7
254.2
23.5
Gross earned premium
266.8
248.8
18.1
Reinsurance expense
(38.2)
(34.0)
(4.3)
Net earned premium
228.6
214.8
13.8
Net claims expense
(123.6)
(108.9)
(14.7)
Large events claims expense
(7.2)
(7.4)
0.2
Management and sales expenses
(86.4)
(85.2)
(1.1)
Underwriting profit
11.4
13.2
(1.8)
Investment and other revenue
5.4
4.6
0.8
Underlying profit before tax
16.9
17.8
(0.9)
Income tax expense
(4.0)
(5.7)
1.7
Underlying profit after tax
12.8
12.1
0.7
Key ratios
FY18
FY17
Change
Claims ratio excluding large events
54.1%
50.7%
(3.4%)
Claims ratio
57.2%
54.2%
(3.0%)
Expense ratio
37.8%
39.7%
1.9%
Combined ratio
95.0%
93.9%
(1.1%)
Financial performancePacificPACIFIC PROFIT SUMMARY
(NZ$m)
20
•
Lower underlying profit after
tax of $2.2m largely due to
adverse weather impacts
•
3% growth in GWP in local currency terms was offset by exchange rate movements
•
Revenue growth was strongest in Fiji and Vanuatu, while Papua New Guinea saw a decrease due to more stringent risk selection and remediation
•
Net claims expense increased due to weather impacts and several large commercial fires, partly offset by improvements in Papua New Guinea following remediation activity
•
Large events claims expense reflects the impact of Cyclone Gita
$ million
FY18
FY17
Change
Gross written premium
58.4
58.2
0.2
Gross earned premium
56.3
57.3
(1.0)
Reinsurance costs
(14.8)
(15.2)
0.3
Net earned premium
41.4
42.1
(0.7)
Net claims expense
(17.6)
(15.3)
(2.4)
Large events claims expense
(3.8)
0.0
(3.8)
Management and sales expenses
(16.4)
(15.6)
(0.9)
Underwriting profit
3.5
11.3
(7.8)
Investment revenue
and other revenue
0.7
0.9
(0.2)
Underlying profit before tax
4.2
12.2
(7.9)
Income tax expense
(2.0)
(5.0)
2.9
Underlying profit after tax
2.2
7.2
(5.0)
Key ratios
FY18
FY17
Change
Claims ratio excluding large events
42.6%
36.2%
(6.4%)
Claims ratio
51.8%
36.2%
(15.6%)
Expense ratio
39.7%
37.0%
(2.7%)
Combined ratio
91.5%
73.2%
(18.3%)
•
The second half saw strengthening in a number of non litigated claims as we moved closer toward finalisation, as well as increases in litigated claims
•
Outstanding claims almost halved from 323 to 163
•
Risk continues to reduce as the portfolio finalises, and accordingly $5m of additional risk margin has been released
•
While risks remain, provisioning is considered adequate, with the ratio of IBNR/IBNER and risk margins increasing from March 2018, to 95%
•
Increase in ultimate incurred claim estimates in 2018 was $10m, net of allocation to reinsurers, which was offset by release of $5m additional risk margin, resulting in a $3.6m impact on NPAT
Canterbury earthquakesReducing balance sheet risk
21
Notes:1. IBNR / IBNER includes claims handling expenses2. Ratio of IBNR / IBNER plus ri
sk margin to case estimates
$ million
Sep-
18
Mar-
18
Sep-
17
Mar-
17
Sep-
16
Case estimates
37.5
48.0
58.9
73.9
93.2
IBNR/IBNER
1
21.4
22.0
34.4
47.4
44.0
Risk margin
9.0
10.8
13.9
18.2
11.9
Additional risk margin
5.0
10.0
10.0
-
-
Actuarial provisions
35.4
42.8
58.3
65.6
55.9
Gross outstanding claims
72.9
90.8
117.2
139.5
149.1
Ratio of provisions to case estimates
2
95%
89%
99%
89%
60%
Capital raise successfully completed with over 88% of shareholders taking up rights
At 30 September, $78m of solvency margin was held in Tower Insurance Limited (TIL); $28m above RBNZ requirements and
equivalent to 234% of
minimum solvency capital
An additional $25m in corporate cash is also held by Tower Limited
Tower’s strong capital base supports growth while providing a buffer against legacy risks
Debt facilities remain in place and undrawn, although our preference is to fund remaining IT investment from debt
-30
61
59
58
50
50
50
38
25
28
1
39
25
30-Sep-17 31-Mar-18 30-Sep-18
Net cash held incorporateTIL's solvency marginabove RBNZ minimumTIL's RBNZ minimumsolvency marginTIL's MSCBNZ facility (drawndown)
A robust solvency position
22
TOWER INSURANCE LIMITED SOLVENCY POSITION
PLUS CORPORATE CASH
($m)
200%
180%
100%
•
Strong capital position has been maintained
•
Funding in place to support continuing investment
Continued delivery of strategy
24
Medium-term operating targets:•
GWP growth of 8-10%
•
Combined Operating Ratio < 85%
•
Return on equity of 14 – 16%
•
Digital challenger positioning enables achievement of medium-term targets
Operational
Excellence
Underwriting
Excellence
Amazing
Claims
Experiences
Stunningly
Simple
Products
Great
Value
for
Money
Challenger
Value
Proposition
Company
purpose
Setting
it
right
for
customers
and
their
communities
FY19 priorities
25
1. IT and digital transformation completed2. Continue driving strong growth in NZ and Pacific businesses 3. Deliver underwriting and pricing impr
ovements to improve claims costs and
drive profitability
4. Continue to control expenses and invest in growth
Keep improving core business while building digital challenger reputation and capability
Completion of simplification in 2019
will provide the platform for growth
•
Increased digital capability will enable accelerated growth
•
Improved product offering building on
Tower’s award-winning, plain English
product set
•
Reduction in number of products in NZ
book from over 400 to 12 core products
•
Improved time to answer customer calls
•
Enables a unique digital, self-service
offering which will improve retention
•
Better, faster claims outcomes and reduce claims turn-around time
Delivers a step change in expenses from FY20•
Efficiencies through IT will enable
us to reduce complexity and cost
•
Immediate and real time data enab
les instantaneous pricing adjustment
Reduction of business risk•
Simplified, cloud-based technology reduces complexity and risk
1. Complete digital transformation
26
•
Enables accelerated growth
•
Will deliver cost savings
Will enable achievement of medium term Gro
ss Written Premium growth target of 8 – 10%
Challenger value proposition is differentia
ting Tower and will continue attracting
more customers
•
Stunningly simple products
•
Great value for money
•
Amazing claims experiences
Improved data capability enables growth
•
Increased ability to target profitab
le customers with attractive offers
•
Simplified quote and buy proce
ss will reduce customer effort
Pacific operations centre focussed on enabling local growth
•
Leverage centralised product and innovation capability
•
Continue driving strong risk and underwriting practices
2. Keep driving growth
27
•
Deliver challenger value proposition
•
Increase use of data and analytics
Will enable achievement of medium term Gro
ss Written Premium growth target of 8 – 10%
Continued implementation of fairer pricing
•
Deliver risk-based pricing for other na
tural perils including, flood, wind and
storm
•
Ongoing portfolio review to offset claims inflation
•
Ongoing reduction in catastrophe exposure
in high-risk locations will reduce
reinsurance expense
Development of even simpler products
•
Award winning products will be further refined and simplified
•
New products will keep reducing comp
lexity, improving customer experience
and reducing leakage
•
Increase use of data to en
able improved underwriting
Migration of all customers to new, simpler policies
•
Tower customers to be migrated on re
newal to new core system, following
implementation
•
All Tower customers will benefit from si
mpler policies and improved experience
3. Improve profitability
28
•
Ongoing pricing review and refinement
•
Improved underwriting and new products
Will enable achievement of medium term
Combined Operating Ratio target of <85%
Increase automation to enable focus on customers
•
Automation of all repeatable processes and tasks
•
Ongoing removal of complex systems and processes to improve efficiency
Continue investing to ensu
re long-term sustainability
•
Ongoing upgrade of IT infrastructure a
nd processes to industry best practice
•
Review and improvement of frameworks
to keep improving on strong ethical
business practices
Continue to increase capability and engagement
•
New Executive team members to
drive industry leading practice
•
Delivery of employee experience to posi
tion Tower as an employer of choice
4. Continue controlling expenses
29
•
Continue investing in core business
•
Reduce expenses through removal of complexity
Will enable achievement of medium term
Combined Operating Ratio target of <85%
FY19 financial outlook
30
Tower has provided a one-off guidance for FY19 to
demonstrate its confidence in the strategy and
performance of its underlying business•
Tower’s guidance for underlying NPAT in FY19 is in excess of $22m
•
Assumptions include:
Continued momentum in revenue growth an
d sales through improved digital channels
Underwriting and pricing changes will be implemented,
continuing to drive improvement in mix of risk,
as well as addressing inflation
Pacific contribution will return to normal levels
Maintaining a steady management expenses ratio
Aggregate excess fully utilised for weather events
•
Tower’s Board has determined that in FY19, Tower will
pay a dividend of 50% to 70% of reported NPAT
where prudent to do so
•
Strong growth expected to continue
•
Claims ratio expected to improve
•
“Underlying profit” does not have a standardised meaning under Generally Accepted Accounting Practice (GAAP). Consequently it may not be comparable to similar measures presented by other reporting entities and is not subject to audit or independent review.
•
Tower uses underlying profit as an internal reporting measure as management believes it provides a better measure of Tower’s underlying performance than reported
profit, as it excludes large or
non-recurring items that may obscur
e trends in Tower’s underlying
performance, and is useful to investors as it makes it easier to compare the underlying financial performance of Tower between periods.
•
Tower has applied a consistent a
pproach to measuring underlying
profit in the current and comparative periods.
•
“Reported loss after tax” is calcul
ated and presented in accordance
with GAAP and is taken from To
wer Limited’s audited financial
statements for the year ended 30 September 2018.
Notes on reconciling items:1.
Non-underlying items are shown separately in Tower’s
management reporting, yet included
within other lines (depending
on the nature of the item) in th
e statutory financial statements.
2.
In Tower’s manageme
nt reporting, indirect claims handling
expenses are reported within ‘m
anagement and sales expenses’. In
the financial statements, indirect claims handling expenses are reclassified to ‘net claims expense’.
3.
Certain items of revenue are netted off ‘management and sales
expenses’ in Tower’s management re
porting, and are reclassified to
‘other revenue’ in the financial st
atements. This primarily relates to
commission received by Tower.
Reconciliation betweenunderlying profit after tax
and
reported loss after tax
32
$ million
FY18
underlying
profit
Non-
underlying
items (1)
Claims
handling
expenses (2)
Other items
(3)
FY18
reported
profit
Gross written premium
336.1
336.1
Gross earned premium
323.1
323.1
Reinsurance expense
(53.1)
(1.2)
(54.3)
Net earned premium
270.0
(1.2)
0.0
0.0
268.8
Net claims expense
(152.3)
(4.5)
(19.9)
(176.6)
Management and sales expenses
(105.4)
(0.3)
19.9
(4.3)
(90.0)
Impairment of reinsurance receivables
0.0
(22.5)
(22.5)
Underwriting profit
12.4
(28.5)
0.0
(4.3)
(20.4)
Investment revenue and other revenue
7.2
1.4
4.3
12.9
Financing costs
(0.6)
(0.6)
Underlying profit before tax
19.1
(27.1)
0.0
0.0
(8.0)
Income tax expense
(5.5)
6.8
1.3
Underlying profit after tax
13.6
(20.3)
0.0
0.0
PeakRe settlement
(16.2)
16.2
Christchurch impact
(3.6)
3.6
Kaikoura impact
0.3
(0.3)
Corporate transaction costs
(0.2)
0.2
Foreign tax credit write-offs
(1.2)
1.2
Other non-underlying items
0.6
(0.6)
Reported loss after tax
(6.7)
0.0
0.0
0.0
(6.7)
Balance sheetTo w e r G r o u p
33
$ million
30 Septembe
r
2018
30 September
2017
Movement $
Movement %
Cash & call deposits
102.0
83.9
18.1
21.6%
Investment assets
198.2
186.9
11.3
6.0%
Deferred acquisition costs
22.6
21.0
1.6
7.8%
Intangible assets
45.0
31.3
13.7
43.7%
Other operational assets
318.3
341.5
(23.2)
(6.8%)
Total assets
686.2
664.6
21.6
3.3%
Policy liabilities & insurance provisions
324.5
343.5
(19.0)
(5.5%)
External debt
0.0
29.9
(29.9)
100.0%
Other operational liabilities
86.9
75.5
11.4
15.1%
Total liabilities
411.4
448.9
(37.5)
(8.4%)
Total equity
274.8
215.7
59.1
27.4%
4
33
1
7.5
7.5
3
1
2
2.5
2
Event 1
Event 2
Event 3
Event 4
Event 5
Event 6
Event 7
Contribute to excess (Tower cost)
Covered by aggregate reinsurance
Covered by dropdown reinsurance
Above coverage (Tower cost)
Reinsurance structure overview
Changes to our reinsurance structure will
reduce volatility from large events,
with reinsurance expense ratio expected to improve in FY19
34
Max coverage of $7.5m per event,
dropdown cover activates for 2
nd
event over $7.5m
$20m total cover
under aggregate treaty exhausted
First $10m of losses
at Tower cost
Aggregate cover overview for FY19•
Minimum event size of $1m to qualify, max of $7.5m per event
•
$20m cover once $10m excess filled
•
No coverage for earthquake in New Zealand
•
Drop-down cover for 2
nd
and 3
rd
event over $7.5m to bridge gap between aggregate
cover and catastrophe cover (including earthquake)
1
st
event over $7.5m,
cover is limited to $7.5m
High-level reinsurance structure overview
Amount of cover for a single
catastrophe event
Catastrophe
cover
(including
earthquakes)
$735m
$10m
Aggregate cover
($7.5m per event)
Storm and other large event cover
(across multiple events)
First $10m
covered by
Tower
$10m
$30m
Dropdown cover $2.5m
(2
nd
and 3
rd
events only)
This presentation has been prepared by Tower Limited to provide
shareholders with information on
Tower’s business. This documen
t is part of, and should be read in
conjunction with an oral briefing to be given by Tower.
A copy of this webcast of the briefing is available at
http://www.tower.co.nz/investor-centre/
It contains summary
information about Tower as at 30 September 2018, which is genera
l in nature, and does not purport to contain all information a
prospective investor should consider when
evaluating an investment. It is not an offer or invitation to
buy Tower shares. Investors must rely on their own enquiries and
seek appropriate professional advice in relation to
the information and statements in relation to the proposed prospects, business and operations of Tower. The data contained in th
is document is for illustrative purposes only.
Past performance is not a guarantee of future performance and must
not be relied on as such. The information in this presentati
on does not constitute financial advice.
Forward looking statementsThis document contains certain forward-looking statements. Such st
atements relate to events and
depend on circumstances that wi
ll occur in the future and are subject to
risks, uncertainties and assumptions. There are a number of fact
ors which could cause actual results and developments to differ materially from those expressed or implied by
such forward-looking statements, including,
among others: the enactment of legislation or regulation that may impose costs or r
estrict activities; the re-negotiation of contracts;
fluctuations in demand and pricing in the industry; fluctuations
in exchange controls; changes in government policy and taxatio
n; industrial disputes; and war and terrorism.
These forward-looking statements speak only as at the date of this document. DisclaimerNeither Tower nor any of its advisers or any of their respective
affiliates, related bodies corporate, directors, officers, par
tners, employees and agents (other persons) makes any
representation or warranty as to the currenc
y, accuracy, reliability or completeness of
information in this presentation. To th
e maximum extent permitted by law, Tower and the
other persons expressly disclaim any liability incurred as a result of the information in this Presentation being inaccurate or
incomplete in any way. The statements made in this
presentation are made only as at the date
of this presentation. The accuracy of the
information in this presentation remains subject to change without notice.
Disclaimer
35
1
Tower FY18 results call script
MICHAEL STIASSNY
SLIDE 2: CHAIRMAN’S UPDATE
Thank you for making the time to join us today.
With me in Auckland is our Chief Executive Officer, Richard Harding and
our Chief Financial Officer, Jeff Wright who will take you through the full
year results and answer questions
For almost 150 years Tower has been insuring New Zealanders, and
over the course of those years, has transformed and changed
considerably.
Just over two years ago, Tower embarked on its latest – and arguably
most difficult – transformation to reposition itself as a contemporary,
challenger brand underpinned by a customer-focused, digital-first
strategy to successfully compete in the 21st century insurance market
place.
Richard and his team have created and are now driving an ambitious
plan to have New Zealanders and Pacific Islanders see Tower in a new
light, and set the bar for how insurance “should” be.
2
In the past few years, we have talked a lot about how the
implementation of new technology will accelerate growth. Today, the
significant uplift in customers using our digital channels to engage with
and purchase Tower products is proof that our confidence in user-
friendly technology is well placed.
However, just as important – perhaps even more so – is the trust
customers place in Tower. Our customers tell us this is driven by our
ethical and transparent approach: They like our plain English policies
which they can understand, and they appreciated our honesty when
launching our new risk-based pricing.
Interestingly, recent research we conducted shows that 70% of people
think risk-based pricing is fairer.
We led the way on risk-based pricing because we believe it IS fairer.
But we also realised that it was going to be really tough for a handful of
customers, so we did the right thing – we communicated openly and
spent time and effort explaining our rationale. In the process, we also
ignited a much needed national conversation around risk management.
In a nutshell, we treated people how we would like to be treated and it
resonates, not because we feel good but because it makes good
business sense. Genuine customer focus engenders trust and loyalty
which makes a strong foundation for any business.
3
And, at a time when trust and confidence in financial services and
banking institutions is at an all-time low in the wake of the Australian
banking Royal Commission and a seemingly constant stream of
debatable business practice revelations, our customers’ trust is gold.
Tower’s job – day in and day out – is to continue to earn and keep that
trust.
So, while it is disappointing to be reporting a loss of $6.7 million, due to
the impacts of the well signalled Peak Re settlement, severe weather
and Canterbury earthquake provisions, the fundamentals of the
underlying business are solid.
It is gratifying to see Tower’s approach really resonating with our
customers and as a result, FY18 has delivered substantial growth.
[PAUSE]
In closing, on behalf of the Board I’d like to thank Richard and the
management team. Their focus continues to be on driving the business
forward.
I’ll now hand over to Richard and Jeff, who will take you through the
results and outlook before we take questions.
4
RICHARD HARDING
SLIDE 3: 2018 FINANCIAL YEAR ACHIEVEMENTS TITLE SLIDE
Thank you Michael and good morning everyone.
SLIDE 4: 2018 PERFORMANCE
The 2018 Financial Year has seen us continue to deliver against our
strategy to transform Tower. Our focus has been clearly on simplifying
and improving all aspects of our business to differentiate ourselves,
drive growth and reduce costs.
It is pleasing to see that our efforts are being noticed by customers, with
more people choosing to insure with us.
Our continued focus on customers grew GWP in the core New Zealand
portfolio by 11.9%, seeing total GWP reach $336 million across New
Zealand and the Pacific.
Throughout the year we invested in our business, building capability to
enable growth. We achieved this while reducing our expense ratio
almost 1%, to 39%.
I will talk through claims cost increases in detail shortly as it is clear that
claims have been the largest impact on our underlying results. Weather
in the Pacific has been the most significant impact along with some prior
year development in New Zealand and other costs. Each of these is well
understood and pricing and underwriting responses either already
implemented or in train to improve performance through the coming
year.
5
We are well progressed on our technology upgrade recently moving
through the half way point. At the half way point costs are within
tolerances, however like all projects of this nature there remains risk and
complexity in the delivery. We are managing this with robust governance
controls at all levels.
These distinctly positive signals show that our business has turned the
corner and this positive momentum should not be overshadowed by
short-term increases to claims costs.
We continue to make solid progress through the complex tail of
Canterbury claims, reducing open claims by 160, with only 163 claims
remaining.
Our reported loss was narrowed to $6.7 million and was a result of our
efforts to mitigate the risks facing our balance sheet following the
Canterbury earthquakes.
Achieving settlement with Peak Re marked an important step towards
finalising this legacy issue and has resulted in a $16.2 million after-tax
impact on profit.
These results show that we are removing legacy risks and at the same
time, realising the potential in the underlying business.
If you look back over the past two years, it is clear that we have built
solid foundations, and we are now creating an exciting customer
proposition that is delivering growth.
6
SLIDE 5: MORE CUSTOMERS CHOOSING TOWER
We are driving strong growth in our core book thanks to our focus on
customers. The growth we have achieved is significant, adding over
18,000 risks to our core New Zealand portfolio, a huge improvement
from two years ago where we were losing customers.
This positive momentum has driven continued GWP growth with GWP in
the core portfolio growing 11.9%, compared to 6% in 2017.
This growth is above industry averages, with:
− The majority of growth in our NZ motor book being attributable to
volume
− The majority of growth in our NZ house book being attributable to
rating, and
− Growth in our NZ contents book an equal mix of rating and volume
This growth is being achieved through a combination of factors,
including:
− ongoing pricing improvements in our motor, house and contents
portfolios to offset increased claims costs
− constant refinement of underwriting criteria enabling more granular
assessment to improve profitability of portfolio, and
− attracting new, profitable customers with improved and targeted
offerings.
The growth we have achieved is demonstration that our focus on
customers and improving our business is delivering results and we are
realising the potential that exists in the Tower brand.
7
As you can see, we have delivered good growth in the Pacific, however,
this has been offset by a reduction in GWP in Papua New Guinea. This
reduction is a direct result of deliberate activity to remediate this portfolio
and reduce our exposure to risk.
Over the coming twelve months we see a positive growth and pricing
environment which will lead to improved profitability.
SLIDE 6: DIGITAL LEADS THE WAY
Two years ago we started on our digital transformation journey and
since then I have consistently said that digital is essential to the future
growth of Tower.
We have continued to place significant effort into attracting new
customers and improving this channel’s performance.
This effort in becoming a digital insurer has paid off, with 45% of our new
business coming through our digital channels in September. This
compares to less than 10% during 2016.
In the last twelve months we have increased conversion by 26% and
delivered the significant growth demonstrated on this slide thanks to a
new website, improved search rankings and the launch of innovations
like our claims chatbot, Charlie.
8
Delivering a unique customer experience through our digital channels
will be possible with our new IT platform. It enables full omni-channel,
digital self-service, policy management and online claims lodgement.
It will significantly improve our ability to grow and leverage digital
partnerships. We will be able to attract new partners at low cost using
the new digital solution and with them, offer more targeted propositions.
Digital remains one of the most crucial, foundational parts of our
business moving forward. It enables differentiation, agility, innovation
and accelerated growth.
SLIDE 7: PACIFIC SET FOR GROWTH
Our Pacific business remains strong and we continue to believe that
there is unrealised potential here.
Until this year, the Pacific has been a strong contributor to Tower’s
financial performance. While Pacific GWP of $58.4 million this year, was
in line with the $58.2 million achieved in the prior year, weather impacts,
and a small number of commercial fires did impact profitability.
We have returned Samoa, American Samoa and the Solomon and Cook
Islands to growth thanks to additional underwriting, pricing and
marketing support for our local teams.
However, this growth has been offset by the continued remediation of
the Papua New Guinea portfolio to reduce risk and exposure which will
ultimately lead to improved profitability.
9
However, one of the most significant activities we undertook in the
Pacific was the creation of our Pacific operations centre.
The Pacific operations centre has allowed us to centralise back office
functions that had previously been duplicated across the islands and will
reduce cost while improving risk management.
Centralised underwriting brings greater discipline and consistency
across the region ensuring we grow within our risk appetite. Similarly
managing complex claims centrally reduces leakage and brings a focus
on costs, while enabling us to build capability for managing large events
when they occur.
We remain confident that there is strong growth potential in our Pacific
markets and that it will make a significant contribution in the coming
year.
SLIDE 8: PACIFIC CLAIMS EXPENSES
Unfortunately, severe weather across the Pacific increased claims costs
significantly in FY18.
Cyclone Gita impacted Tonga heavily, while Cyclones Keni and Josie
impacted Fiji, resulting in a 10.4 percentage point uplift on the FY17
claims ratio.
Reinsurance is being utilised to minimise impacts of weather and we are
constantly refining our product offering and underwriting criteria in
response to weather events like these.
10
In Fiji we have also seen an increase in claims expenses mostly related
to motor claims inflation. In Fiji, a recent influx of hybrid vehicles has
seen a rise in the cost of motor claims due to the higher cost of repair for
these vehicles. We are addressing this with pricing and underwriting
responses.
And in our National Pacific Insurance business, 3 large commercial fires
have also driven the claims ratio higher. These fires are a normal part of
the volatility of a small book and are not symbolic of any systemic
underwriting issues.
The introduction of our Pacific operations centre will help ensure that our
pricing and underwriting approach is consistent, minimises claims
leakage and enables the Pacific to return to making a significant
contribution in the coming year.
SLIDE 9: NEW ZEALAND CLAIMS EXPENSES
New Zealand claims expenses also increased over the 2018 financial
year due to a number of claims challenges, however, these challenges
are well understood and we have taken swift action to address each of
them.
Throughout the year we experienced an increase in the development of
open FY17 claims. The reserving model used didn’t respond well during
the claims backlog we experienced due to storms, understating
expected development of claims in FY17. This resulted in a 1.2
percentage point increase in the claims ratio and we have now updated
reserving methodology accordingly.
11
Our new, simpler products have contributed to a decrease in our NZ
House claim frequency. This has been offset by an increase in severity,
driven by large house fires and the increased costs relating to increasing
Health & Safety and asbestos testing requirements. This is an industry-
wide issue driven by regulatory change.
In response to these issues we have strengthened pricing and improved
our underwriting criteria and expect to see improvements in the coming
year.
In our motor portfolio, supply chain constraints and inflation continues to
impact the industry with increasingly advanced technology in cars seeing
the cost of repair rise. We are addressing motor claims inflation through
pricing and more granular underwriting.
A higher cost per claim in our NZ Contents book is also linked to the
increase in house fires and we are actively addressing this through
improved pricing and underwriting.
Through the action we have taken over the course of the year, we
expect our claims ratio excluding large events to revert to prior year
levels
12
SLIDE 10: SEVERE WEATHER EVENTS
Historically, costs relating to severe weather events for Tower have been
well below the level we’ve seen in the past two years.
The past two years have seen a number of unprecedented and severe
weather events that have impacted communities and our business
beyond expectations. Impacts in FY17 totalled $15.5 million before
reinsurance, and this year reached a gross amount of $20 .1 million, well
above both our 10 year average of $7.6 million, and our five year
average of $11.3 million.
This is not unique to Tower. Industry wide losses in New Zealand from
weather in the 2018 calendar year are some of the worst on record and
already total over $200 million.
Industry experts are reporting that the recent weather looks to be a
short-term abnormality and have said that the temperature of the
Tasman sea, although higher than long-term averages, have already
returned to be in line with prior trends.
However, it is clear from looking around the world that weather trends
are intensifying. In response to these increased impacts we have
adjusted pricing and strengthened our reinsurance programme to
increase cover and reduce volatility from large events in FY19.
13
SLIDE 11: REDUCING CLAIMS VOLATILITY
Our aggregate reinsurance cover has absorbed some of the costs of
storm volatility and we have increased cover for FY19 to ensure that our
exposure to large events is reduced.
We have:
• Increased the excess on our aggregate cover from $7 million to
$10 million
• Doubled our aggregate cover from $10 million to $20 million
• Increased cover for single large events from $5 million to $7.5
million, once our excess of $10 million is used
• Purchased drop-down cover to bridge the gap between aggregate
and catastrophe cover
Savings from the improved efficiency of our Catastrophe cover
programme have been used to fund increased aggregate reinsurance,
and we expect an improvement in the FY19 reinsurance ratio.
We are taking all appropriate steps to preserve capital by reducing
volatility from these short-term weather abnormalities.
SLIDE 12: BUILDING CAPABILITY WHILE CONTROLLING COSTS
I’m pleased to report that we have continued to reduce our expense
ratio, while investing significantly in improvements in the business.
14
One of the most significant investments we have made is increasing the
capability of our team. We have built a team of experts who are driving
the transformation of Tower and delivering the continued strong growth.
As well as increasing capability, we have employed new, skilled people
to enable our digital transformation and the increased use and
understanding of data.
In addition to this capability lift, we have also invested in the ongoing
uplift of our IT systems to mitigate risk and our exposure to cyber
security threats.
As I have said a number of times before, we continue to:
• Increase efficiency and productivity and drive high performance;
• Identify and reduce expenditure through in-sourcing services and
reducing reliance on external business support; and
• Consistently review our procurement processes and closely
manage contract negotiations
We expect further expense improvements to be delivered with a step
change in productivity gains after the implementation of our new IT
platform from the end of FY19.
SLIDE 13: MAJOR TECH UPGRADE PROGRESSING WELL
Our plan is driving change and transforming the business, we are now
accelerating this momentum and creating long-term shareholder value
by investing in a new technology platform that will deliver a step change
in results.
15
As we approach the half way mark of this programme I am pleased to let
you know that progress to date is as we expected and our experience
with the new platform confirms our assumptions.
This programme is complex and includes legacy replacement, digital
enhancement and product rationalisation.
The programme remains on track to deliver in the first half of the 2019
calendar year. At the half way point costs are within tolerances, however
like all projects of this nature there remains risk and complexity in the
delivery. Our robust governance controls include a focus on managing
delivery risk and cost trade-off.
Earlier this week we launched the first piece of the simplification
programme, providing a new telephony and workforce system that will
streamline the customer experience and improve collaboration across
the business.
New business will be on sale on the new platform in the first half of the
2019 calendar year, with migration of customers to the new system and
rationalisation to the new product set over the following 12 months.
The benefits of our new core platform will be maximised with a number
of supporting systems that drive customer satisfaction and improve
business operations.
Combined with our push to move 50 – 70% of all transactions online, our
ability to rapidly respond in today’s constantly changing digital landscape
will set us apart from our competitors.
16
SLIDE 14: PRICING RISK CORRECTLY
In April we announced that we were starting to price insurance more
fairly and moving to risk-based pricing for earthquake.
Risk based pricing has resulted in the growth of our portfolio in Auckland
while also reducing our exposure in extreme risk areas by an annualised
figure of 17%.
This reduction of extreme risk policies, combined with already completed
changes in our Wellington portfolio has reduced the amount of
reinsurance cover required by $35 million.
Our fairer approach to pricing has also allowed us to grow our exposure
4% in the larger, low risk areas like Auckland and Taranaki.
It is clear that our strategy is working and will continue delivering
benefits as well as improving reinsurance efficiency in future.
Through this process we have worked closely with our impacted
customers to support them through the change and we have received
positive feedback about our open and transparent approach.
Risk based pricing helps to educate communities, governments and
other authorities about risk and encourages them to take action to
mitigate or prepare for what might happen in the future.
17
We continue to strongly believe that moving to risk-based pricing was
the right decision to make and work has begun on risk-based pricing for
flood, wind and storm.
SLIDE 15: CANTERBURY EARTHQUAKES
You can see that we are making good progress closing Canterbury
Earthquake claims. In the past twelve months we have closed 318, while
receiving 115 completely new over-cap claims from the EQC, and 43
reopening.
Of the claims that remain open, many are well progressed towards
settlement and we are now into the serious end of the tail.
We have continued this good progress this year, and at the end of
October had less than 100 non-litigated claims remaining, bringing us
very close to the end of Canterbury earthquake programme.
By March, we expect the number of open claims to be significantly less
and are hopeful we can move these claims into BAU activity.
As we have previously advised, we are actively engaging with EQC in
relation to recoveries and remain confident of our position.
This demonstrates that we are making solid progress and stepping ever
closer to finalising the Canterbury legacy.
18
Tower also welcomes the recent government announcement of an
enquiry into EQC as an important step toward ensuring that mistakes of
the past are learnt from and not repeated in future.
EQC Act reform will assist in ensuring past experience is not repeated
and that we can all avoid the pitfalls and problems associated with the
EQC set up and the 2010 model.
Tower strongly believes that the Kaikoura model is successful and that
any reform of the EQC must include these changes.
I will now hand over to Jeff who will take you through our financial results
in more detail.
19
JEFF WRIGHT
SLIDE 16: FINANCIAL PERFORMANCE TITLE SLIDE
Thank you Richard and good morning everyone
SLIDE 17: FINANCIAL PERFORMANCE CONSOLIDATED GROUP
Looking at the consolidated results, we can see the strong growth this
year of $23.7m in gross written premium and $13.1m in net earned
premium has been offset by storm activity, higher claims costs , the
resolution of the Peak Re dispute as well as some increase in ultimate
incurred claims for Canterbury.
In particular,
achieving settlement with Peak Re has resulted in a $16.2
million after-tax impact on profit, while severe and unprecedented storm
activity resulted in an $11 million before-tax impact to our underlying
profit, $3.6m higher than 2017.
Overall, this has resulted in a reported loss of $6.7 million, a slight
improvement on the prior year. The reported loss has also resulted in
the writing off of $1.2m in foreign tax credits from the Pacific.
In addition to the strong growth results, the management expense ratio
continues to decline, falling for the third straight year to 39%.
SLIDE 18: MOVEMENT IN UNDERLYING PROFIT
Slide 18 details the key drivers of the decrease in underlying profit
before tax from 2017 to 2018.
20
The strong growth is reflected in the $13.1m increase in net earned
premiums.
Of the increase in claims costs of $20.7m, $9.4m is as a result of the
increase in volume in both new and retained risks.
$3.6m is as a result of increased storm activity, and $7.7m is as a result
of a number of drivers of claims costs that Richard mentioned earlier.
While this $7.7m increase in claims cost before tax is disappointing, we
clearly understand the underlying causes, which include $2.8m related
to 2017 development, and have taken swift action to rectify. We expect
these actions will be reflected in the 2019 result.
SLIDE 19: FINANCIAL PERFORMANCE NEW ZEALAND
The majority of growth in Tower’s gross written premium, due to both
rate and volume, occurred in our NZ markets, with $23.5m growth in
gross written premium and $13.8m growth in net earned premium.
Our continued focus on management expenditure saw the expense ratio
for NZ decrease from 39.7% to 37.8% - a significant result given the
level of ongoing investment in capability in NZ to drive and support
future growth.
21
Increases in claims costs over and above the rate of increase of net
earned premium negated some of these strong results, resulting in a
modest increase in underlying profit after tax of $0.7 million on the prior
year, to $12.8 million.
SLIDE 20: FINANCIAL PERFORMANCE PACIFIC
Growth in Pacific was mixed, with good growth in our core markets of
Fiji, Vanuatu, Samoa and American Samoa being offset by the
continued deliberate shedding of higher risk commercial lines in Papua
New Guinea.
Overall, Pacific gross written premium was almost flat at $58.4 million.
The Pacific business bore the significant weight of increased storm
activity, with a $3.8m impact on underlying profit before tax, primarily
from Cyclone Gita, which impacted Samoa, American Samoa and
Tonga.
Other drivers of the outcome were $2.4m increase in claims cost, largely
as a result of volatility in large claims in several locations, and $0.9m
increase in management expenses, primarily due to the investment in
the Pacific operations centre.
22
While the overall result for the Pacific was a reduction in underlying profit
after tax of $5m, management are confident that the Pacific business is
strong and will quickly return to longer term contribution to group profit,
especially given:
• Remediation of Papua New Guinea approaching conclusion;
• The growth trends in other core markets, and;
• The benefits that will flow through from the establishment of the
Pacific operations centre.
SLIDE 21: CANTERBURY EQ REDUCING BALANCE SHEET RISKS
As Richard mentioned earlier, we are making good progress through the
remaining Canterbury earthquake claims.
Outstanding claims have reduced by almost 50%, from 323 to 163, and
central estimates by $34.4 million, from $93.3 million to $58.9 million, a
decrease of 37%.
We have seen strengthening in some of the more complex non-litigated
claims, as well as a spike in litigated claims earlier in the year. This has
resulted in an increase in ultimate incurred claims of $10 million after
taking into account reinsurance offsets, which is reflected in the current
central estimates of outstanding claims.
23
Due to the significant progress in finalisation of existing claims and
associated reduction in the central estimate, the Board has released
$5m of the additional risk margin of $10m created in September 2017.
This leaves the ratio of IBNR/IBNER and risk margins to case estimates
as a robust 95%.
Of the claims that remain open, many are well progressed towards
settlement and by March, we expect the number of open claims to be
significantly less and are hopeful we can move these claims into BAU
activity.
SLIDE 22: A ROBUST SOLVENCY POSITION
In 2017, Tower’s Board determined that additional capital of $70.8
million was required to address the inherent uncertainty faced by the
business, to repay the BNZ facility, and enable ongoing reinvestment in
Tower. We also committed to addressing legacy risks arising from the
Canterbury earthquakes.
Since then, in addition to the continued strong rate of finalisation of
outstanding claims, Tower settled the Peak Re dispute, receiving $22
million of the $43.75 million claimed, resulting in a write-off of the
residual amount plus associated costs of $1 6.2 million after-tax.
Despite the impact on capital of this write-off, Tower Insurance remains
in a strong capital position.
24
As at September 2018, Tower Insurance Limited held $136 million of
actual solvency capital - $78 million above, or 234% of, RBNZ minimum
solvency capital, and $28m above RBNZ minimum solvency capital and
$50m licence condition.
As at 30 September 2018, Tower Limited held an additional $25 million
in cash.
We also retain access to undrawn debt facilities and have a preference
for their short to medium-term utilisation for the completion of major
technology upgrade.
I will now hand over to Richard who will provide an update on our
strategic plan.
25
RICHARD HARDING
SLIDE 23: FUTURE OUTLOOK TITLE SLIDE
SLIDE 24: CONTINUED DELIVERY OF STRATEGY
Over the past two years I’ve spoken about the significant opportunity
that exists in the Tower business. I’m pleased that our clear strategic
plan is seeing us realise this potential and that we are now in a position
to accelerate our transformation into a digital challenger brand.
Tower holds a unique position in the New Zealand insurance market. We
have a solid existing customer base, yet plenty of room to continue
growing and acquiring market share from the two large incumbents.
Our desire to step outside the confines of a traditional insurer and our
dynamic size means that we can make decisions faster and capitalise on
opportunities quicker and more efficiently than our competitors.
As I’ve said before, there are many similarities between the New
Zealand and Australian insurance industries where two large multi-
nationals hold a high percentage of the market. In Australia, challenger
brands entered and achieved significant growth thanks to their ability to
quickly deliver something unique and targeted to customers.
Over the past 18 months, research has shown us that customers are
dissatisfied with insurers. Our goal is to challenge industry norms to
change this because we believe this customer apathy provides us with
opportunity.
26
We believe that delivering unique customer value through amazing
claims experiences will be our key differentiator and will build strength
and long-term value in our business.
Further increasing our focus on customers and creating products,
systems and processes that enable amazing claims experiences,
combined with continued refinement of our underwriting, ensuring we
operate excellently and replacing our core IT platform will enable us to
reach our challenger brand aspiration faster.
With this work already delivering benefits and we now want to accelerate
our progress and deliver a step change in results and long-term
shareholder value.
Delivering against our challenger strategy will enable us to achieve our
uplifted, medium-term operating targets of:
• GWP growth of 8-10%
• Combined Operating Ratio < 85%
• Return on equity of 14 – 16%
SLIDE 25: FY19 PRIORITIES
Our plan is driving change and transforming the business and we are
now accelerating this momentum and creating long-term shareholder
value.
27
Our key priorities for the coming year build on this positive momentum
and will see us:
• Complete our IT simplification and digital transformation, launching
new business in the first half of the calendar year
• Continue to attract more customers and grow our New Zealand
and Pacific businesses
• Keep improving underwriting and pricing to improve profitability
and reduce claims costs, and
• Continue to invest in our business while controlling expenses
Successful delivery against these priorities will build on the already
strong growth seen in the underlying business.
SLIDE 26: COMPLETE DIGITAL TRANSFORMATION
The key to accelerating our transformation is a new IT platform that
enables the simplification of our products and processes.
Completion of our simplification programme and our digital
transformation will accelerate our growth opportunities and combined
with our push to move 50 - 70% of all transactions online, will deliver
significant cost savings and productivity gains.
We will drive growth through our new platform by combining our existing
data with that of our partners to get a full understanding of our
customers and actively targeting niche customer segments with
compelling and appropriately priced propositions.
We will improve the customer experience with simpler, improved
products, reduced wait times and fully digital self-service capability.
28
Cost savings and productivity gains will be realised from the end of
FY19 and will be achieved thanks to the removal of a significant amount
of complexity.
The reduction in number of products from over 400, to just 12 core
products, along with automation and moving low value transactions
online will drive improved efficiency.
IT simplification is a critical enabler for our transformation. It is a core
component of our strategy and will deliver a step change in results.
SLIDE 27: KEEP DRIVING GROWTH
Tower’s core NZ business has experienced solid growth for the past five
consecutive halves and we will continue to build on this momentum
through further differentiation.
We believe that customers deserve better and we have refined our
customer proposition to start offering customers a truly different choice
for insurance.
We are removing jargon filled policies and making our award winning
policies even simpler. Not only does this benefit our customers, it
reduces the complexity and leakage that comes from having over 400
different products.
We will continue with our push for fairer pricing which will allow us to
grow in the large low risk areas, like Auckland and Taranaki, that had
previously been subsidising those in high-risk areas.
29
And our key differentiator will see us deliver amazing claims
experiences. Our new platform, combined with a number of other
ancillary systems will increase automation. This will improve the
customer experience, reduce claim turn-around-times and reduce
leakage, resulting in improved efficiency and profitability.
In the Pacific, our new operations centre will support local teams through
improved product, pricing and underwriting capability to ensure we grow
within our risk appetite, along with complex claims management which
will reduce leakage.
This will reduce process duplication and provide a significant increase in
time spent helping customers and enable the Pacific to return to making
a significant contribution in the coming year.
What we’re building will be unique and will continue to attract more
customers to Tower and drive strong growth.
SLIDE 28: IMPROVE PROFITABILITY
Tower is an insurance company and managing risk is at the very heart of
what we do. How we manage that risk, through pricing and underwriting,
is an important measure of the performance of our business and links
directly through to profitability.
This coming year we will accelerate the activity already underway,
specifically increasing the use of data and the continued implementation
of risk-based pricing.
30
The implementation of our new platform will deliver significant
underwriting capability. Utilising new and existing data we are building
an incredibly granular and sophisticated underwriting engine, a vast
improvement on the 50 or so legacy algorithms currently used in the
business.
One of the most important things we will do this coming year is to start
the 12 month migration of customers from our existing platforms onto
our new, single core platform.
Customers will benefit from simpler policies and improved claims
experiences and this will lead to improved profitability.
As I have said earlier, the benefits from reducing the complexity of
having over 400 products down to a core of just 12 cannot be
underestimated.
We will also continue to implement risk based pricing for flood, wind and
storm which will allow growth in low risk areas, and improve efficiency of
our reinsurance programme.
These actions will enable us to improve profitability and meet our
Combined Operating Ratio target of less than 85%.
SLIDE 29: CONTINUE CONTROLLING EXPENSES
Investment in our business has driven strong growth and we will
continue investing in initiatives that improve performance.
31
Increased automation and innovation is a natural part of becoming a
digital challenger. Along with our push to move 50 – 70% of all
transactions online, a grassroots approach to innovation is improving
efficiency by removing duplication and repetitious tasks.
This focus on automation will deliver significant operational benefits and
allow our teams to focus on value add tasks to keep improving
efficiency. We will also continue to invest in the upgrade of ancillary IT
applications to ensure that we realise the full benefits of our new core
platform.
I am very pleased to welcome our new CIO, Peter Muggleston and
General Manager of People & Culture, Michelle McBride to my executive
team, with both starting in the coming week.
Peter has extensive experience leading significant digital and technology
transformation programmes at some of New Zealand’s best known
companies. His stewardship as we replace our core system will help
drive improvement and efficiency across all areas of our business.
Michelle brings significant International experience leading cultural
change across a range of organisations and has played a key role in
enabling companies to deliver on their strategy through improved
performance.
32
Pleasingly, our employee engagement results have consistently
improved over the past two years and Michelle comes in to Tower with a
large agenda to keep driving this cultural change.
With Peter and Michelle on the team we will continue to lead a business
that is undergoing significant change and transformation.
The results of the work we are doing are already delivering benefits and
we expect this to continue with pace moving forward.
SLIDE 30: OUTLOOK
As you can see, the work we are doing sets us up well for the future and
the investment in a new IT platform will accelerate our transformation.
Our focus is on progressing initiatives that will continue accelerating our
momentum and deliver long-term shareholder value.
Tower is confident in the strength of its strategy and the performance of
its underlying business and is providing a one-off guidance for
underlying NPAT in excess of $22 million in FY19.
This includes the following assumptions:
• Continued momentum in revenue growth and sales through
improved digital channels
• Underwriting and pricing changes will be implemented, continuing
to drive improvement in mix of risk, as well as addressing inflation
• Pacific contribution will return to normal levels
• Maintaining a steady management expenses ratio, and
• Aggregate excess will be fully utilised for weather events
33
Accordingly, Tower’s Board has determined that in FY19, Tower will pay
a dividend of 50% to 70% of reported NPAT where prudent to do so.
You can be confident that we are transforming Tower and that the work
we are doing will deliver you significant long-term value.
[PAUSE]
Before I ask for questions, I want to thank the Tower Board for their
continued support and the Tower team for the effort they have put in and
the continuous improvement we have seen as a result.
ENDS
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.
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