Tower FY21 Results Announcement to Market & Capital Return
Level 5, 136 Fanshawe Street
Auckland 1142, New Zealand
ARBN 645 941 028
Incorporated in New Zealand
* Under a Court Scheme of Arrangement. Subject to necessary approvals.
Market Information Company Announcements Office
NZX Limited ASX Limited
Level 1, NZX Centre Exchange Centre
11 Cable Street Level 6, 20 Bridge Street
Wellington Sydney NSW 2000
New Zealand Australia
24 November, 2021
Tower announces FY21 result, dividend and proposed capital return
Kiwi insurer, Tower Limited (NZX/ASX:TWR) has today reported full year profit of $19.3m, up 72%
from $11.2m at the full year 2020. Underlying profit including large events was $20.8m, compared
to $28.4m in the prior year.
The Board has declared a final dividend of 2.5 cents per share, bringing total dividends for FY21 to 5
cents per share. As at 30 September Tower New Zealand Parent’s solvency ratio was 271% and the
company was holding $56.6m above its target solvency margin. Considering current opportunities
and the company’s capital position, the Board has proposed the return of $30.4m excess capital to
shareholders by way of a compulsory share buyback*.
Summary of key results:
Reported profit including large events $19.3m vs $11.2m in FY20
Underlying NPAT including large events $20.8m vs $28.4m in FY20
Gross written premium (GWP) $404m, up 5% on FY20
Customer numbers increased 5% to 304,000, market share up to 9.2%
Management expense ratio (MER) improved to 37% vs 39% in FY20
Combined operating ratio (COR) 91.4%, increased 2.7%
Tower CEO Blair Turnbull said the full year result reflected challenging external factors first
signalled at the half year. These included an increase in large events and large house claims, Covid-
related claims costs inflation, and lower investment income.
“Tower has navigated a difficult year. Our focus has been on addressing a range of external
challenges, while supporting our customers and delivering on our technology and distribution
growth strategies,” said Mr Turnbull.
FY21 large events comprised a $13.9m impact up from $9.7m in the prior year and included the
large fire at Lake Ōhau and severe floods in Napier in late 2020, and Westport flooding in July. The
frequency of large house claims, predominantly driven by house fires, continued to increase in the
second half rising 61% over the year to 92, totaling approximately $21.1m. Inflationary pressures also
continued to challenge claims costs which increased $17.1m in total to $166.8m, while net
investment income reduced by $5.1m to $0.2m for the year.
Tower is responding to climate change risks and market challenges with rating and underwriting
actions that will continue to ensure a strong and stable insurance business. In August Tower
changed the full replacement fire benefit in its house insurance policies to an extended sum insured
offering. Earlier this month, Tower announced the extension of its risk-based pricing strategy to
include flooding with the aim of assisting customers to better understand their risks and insurance
premiums while more accurately matching insurance pricing to risks. Tower believes this a fairer
and more transparent way of pricing insurance which will also further strengthen the company’s
financial resilience.
Level 5, 136 Fanshawe Street
Auckland 1142, New Zealand
ARBN 645 941 028
Incorporated in New Zealand
Prudent cost control and improved efficiencies saw Tower’s overall MER improve to 37% versus 39%
in FY20. These efficiency improvements were achieved while continuing to invest in Tower’s
flagship My Tower digital and data platform, which has now reached 132,000 registrations, over
double this time last year.
Mr Turnbull says, “Tower’s focus on simple and rewarding customer experiences combined with our
digital and data capability have contributed to good growth, particularly in New Zealand where we
saw a 7.9% premium increase to $350m. As part of our focus on developing deeper customer
relationships we have enhanced our customer experience, introduced new products and automated
our marketing delivery.
“We were particularly pleased to see Tower’s leading motor product win two Canstar awards in
2021 - the top Car Insurer of the Year Award, and also an Outstanding Value Award alongside our
partner brand Trade Me.
“Tower ends the year in a strong position to continue delivering sustainable earnings, dividends and
premium growth.
“Transforming the customer experience lies at the heart of this strategy. In the year ahead Tower will
continue to build customer relationships through leading partnerships and a richer product set. In
2022, Tower will be offering a world class digital experience on one core leading platform for all our
personal lines customers across New Zealand and the Pacific,” says Mr Turnbull.
ENDS
This announcement has been authorised by the Tower Board.
TOWER
Blair Turnbull
Chief Executive Officer
Tower Limited
ARBN 088 481 234 Incorporated in New Zealand
For media enquiries, please contact in the first instance:
Emily Davies
Head of Corporate Affairs and Reputation
Tower Limited
Mobile: +64 21 815 149
Email: emily.davies@tower.co.nz
---
Results for announcement to the market
Name of issuer Tower Limited
Reporting Period 12 months to 30 September 2021
Previous Reporting Period 12 months to 30 September 2020
Currency NZD
Amount (000s) Percentage change
Revenue from continuing
operations
$428,205 4%
Total Revenue $428,205 4%
Net profit/(loss) from
continuing operations
$18,683 74%
Total net profit/(loss) $18,683 74%
Interim/Final Dividend
Amount per Quoted Equity
Security
2.5 cents
Imputed amount per Quoted
Equity Security
N/A
Record Date 19 January 2022
Dividend Payment Date 2 February 2022
Current period Prior comparable period
Net tangible assets per
Quoted Equity Security
$ 0.57 $ 0.56
A brief explanation of any of
the figures above necessary
to enable the figures to be
understood
Revenues increased 4% year-on-year through a balanced mix of
premium rating increases and attracting new customers to Tower,
partly offset by lower investment revenue.
Net profit increased by 74% year-on-year, primarily due to the
prior year being impacted by the impairment of a receivable from
the EQC. The comparative period has been restated due to the
retrospective application of the change in accounting policy for
software-as-a-service assets.
Please refer to the 2021 annual results presentation for further
information.
Authority for this announcement
Name of person
authorised
to make this announcement
Hannah Snelling, Company Secretary
Contact person for this
announcement
Emily Davies, Head of Corporate Affairs and Reputation
Contact phone number +64 21 815 149
Contact email address emily.davies@tower.co.nz
Date of release through MAP
24 November 2021
Audited financial statements accompany this announcement.
---
Tower Limited
Consolidated
financial statements
for the year ended 30 September 2021
Tower Limited
Consolidated financial statements
Financial Statements
Consolidated statement of comprehensive income2
Consolidated balance sheet3
Consolidated statement of changes in equity4
Consolidated statement of cash flows5
Notes to the consolidated financial statements
1Overview6
1.1About this report61.3
Critical accounting judgements and estimates
9
1.2Consolidation71.4Segmental reporting10
2Underwriting activities12
2.1Underwriting revenue122.6Deferred insurance costs22
2.2Net claims expense142.7Receivables23
2.3Underwriting expense142.8Payables24
2.4Net outstanding claims152.9Provisions25
2.5Unearned premium liability212.10Assets backing insurance liabilities25
3Investments26
3.1Investment revenue263.3Fair value hierarchy27
3.2Investments26
4Risk management28
4.1Risk management overview284.7Capital management risk35
4.2Strategic risk294.8Operational risk36
4.3Insurance risk294.9Regulatory and compliance risk36
4.4Credit risk314.10Conduct risk37
4.5Market risk334.11Cyber risk37
4.6Liquidity risk34
5Capital structure38
5.1Borrowings385.4Net tangible assets per share39
5.2Contributed equity385.5Earnings per share40
5.3Reserves395.6Dividends40
6Other balance sheet items41
6.1Property, plant and equipment416.3Leases46
6.2Intangible assets43
7Tax 48
7.1Tax expense487.3Deferred tax49
7.2Current tax487.4Imputation credits51
8Other information52
8.1
Notes to the consolidated cash flow statement
528.6Capital commitments54
8.2Related party disclosures538.755
8.3Auditor's remuneration53
8.4Contingent liabilities54
8.5Subsequent events54
Independent Auditor's report, and Appointed Actuary's report
Independent Auditor's report
57
Appointed Actuary's report
62
Impact of new accounting standards and changes in
interpretation of current standards
1
Tower Limited
Consolidated statement of comprehensive income
For the Year Ended 30 September 2021Restated
$ thousandsNote20212020
Gross written premium404,681 377,159
Unearned premium movement(9,151)(4,607)
Gross earned premium 2.1395,530 372,552
Outward reinsurance premium(63,767)(58,030)
Movement in deferred reinsurance premium1,540 810
Outward reinsurance premium expense(62,227)(57,220)
Net earned premium333,303 315,332
Claims expense(228,903)(206,767)
Less: Reinsurance and other recoveries revenue2.124,635 25,711
Net claims expense2.2(204,268)(181,056)
Gross commission expense(18,058)(20,947)
Commission revenue2.16,753 6,457
Net commission expense(11,305)(14,490)
Underwriting expense2.3(89,751)(89,520)
Underwriting profit27,979 30,266
Investment income3.1580 5,810
Investment expense(384)(466)
Corporate and other income707 288
Corporate and other expense(54)(2,967)
Impairment of EQC receivable2.7 - (13,126)
Financing and other costs(378)(1,125)
Profit before taxation28,450 18,680
Tax expense7.1(9,135)(7,470)
Profit after taxation19,315 11,210
Items that may be reclassified to profit or loss
Currency translation differences(1,213)(1,374)
Items that will not be reclassified to profit or loss
Gain on asset revaluation5.3159 41
Deferred income tax relating to asset revaluation5.3(16)8
Other comprehensive loss net of tax(1,070)(1,325)
Total comprehensive profit for the year18,245 9,885
Earnings per share:
Basic and diluted earnings per share (cents)5.54.43 2.58
Profit after taxation attributed to:
Shareholders18,683 10,761
Non-controlling interests632 449
19,315 11,210
Total comprehensive profit attributed to:
Shareholders 17,729 9,522
Non-controlling interests516 363
18,245 9,885
The above statement should be read in conjunction with the accompanying notes.
2
Tower Limited
Consolidated balance sheet
As at 30 September 2021Restated
$ thousandsNote20212020
Assets
Cash and cash equivalents
8.1116,129 80,108
Investments3.2277,470 237,904
Receivables 2.7215,853 250,746
Current tax asset7.2a12,901 12,892
Deferred tax asset7.3a24,450 28,822
Deferred insurance costs2.631,967 34,667
Right-of-use assets6.3a(i)25,577 7,211
Property, plant and equipment 6.19,374 10,041
Intangible assets6.288,592 77,847
Total assets802,313 740,238
Liabilities
Payables2.868,905 66,600
Unearned premiums2.5212,275 203,452
Outstanding claims2.4122,338 107,747
Lease liabilities6.3a(ii)39,421 8,695
Provisions2.96,709 9,531
Current tax liabilities7.2b170 821
Deferred tax liabilities7.3b2,775 1,346
Total liabilities452,593398,192
Net assets349,720342,046
Equity
Contributed equity5.2492,424 492,424
Accumulated losses(39,995)(48,107)
Reserves5.3(105,385)(104,431)
Total equity attributed to shareholders347,044 339,886
Non-controlling interests2,676 2,160
Total equity349,720 342,046
The above statement should be read in conjunction with the accompanying notes.
The financial statements were approved for issue by the Board on 24 November 2021.
Michael P StiassnyGraham R Stuart
ChairmanDirector
3
Tower Limited
Consolidated statement of changes in equity
Year Ended 30 September 2021
$ thousands
Contributed
equity
Accumulated
losses
Reserves
Non-controlling
interest
Total Equity
Year Ended 30 September 2021
Balance as at 30 September 2020492,424 (48,107)(104,431)2,160
342,046
Comprehensive income
Profit for the year - 18,683 - 632 19,315
Currency translation differences - - (1,097)(116)(1,213)
Gain on asset revaluation - - 159 - 159
Deferred income tax relating to asset
revaluation
- - (16) - (16)
Total comprehensive income - 18,683 (954)516 18,245
Transactions with shareholders
Dividends paid - (10,541) - - (10,541)
Other - (30) - - (30)
Total transactions with shareholders - (10,571) - - (10,571)
At the end of the year492,424(39,995)(105,385)2,676349,720
Year Ended 30 September 2020
Balance as at 30 September 2019
209,990 (36,101)9,808 1,801 185,498
Impact of amalgamation*-107,160 - - 107,160
Balance post amalgamation 209,990 71,059 9,808 1,801 292,658
Adjustment on initial application of NZ IFRS 16-
(1,333)
- (4)(1,337)
Adoption of accounting policy on cloud
computing arrangements **
-
(3,986)
- - (3,986)
Restated balance at beginning of the year 209,990 65,740 9,808 1,797 287,335
Comprehensive income
Profit for the year - 10,761 - 449 11,210
Currency translation differences
- - (1,288)(86)(1,374)
Gain on asset revaluation
- - 41 - 41
Deferred income tax relating to asset
revaluation
- - 8 - 8
Total comprehensive income - 10,761 (1,239)363 9,885
Transactions with shareholders
Net proceeds of capital raise45,000 (119) - - 44,881
Dividends written off - (99) - - (99)
Other
4444
Cancel
lation of shares on amalgamation*(254,990)254,990 - - -
Recognition of shares on amalgamation*492,424 (379,424)(113,000) - -
Total transactions with shareholders282,434 (124,608)(113,000)-44,826
At the end of the year492,424(48,107)(104,431)2,160342,046
The above statement should be read in conjunction with the accompanying notes.
Attributed to Shareholders
** Refer to note 8.7 for further information.
* Please note, Tower amalgamated its corporate structure on 30 September 2020. Refer to note 5.2 for further information.
4
Tower Limited
Consolidated statement of cash flows
For the Year Ended 30 September 2021Restated
$ thousands20212020
Cash flows from operating activities
Premiums received 398,601 366,738
Interest received 5,273 7,328
Fee and other income received6,328 7,345
Reinsurance and other recoveries received17,686 18,035
Settlement of EQC receivable52,883 -
Motor premium refund payments(1,351)(5,849)
Reinsurance paid(55,979)(54,867)
Reinsurance paid in relation to settlement of EQC receivable(10,741) -
Claims paid(213,350)(223,751)
Employee and supplier payments(97,912)(97,499)
Income tax paid(2,797)(1,317)
Net cash inflow from operating activities 98,641 16,163
Cash flows from investing activities
Proceeds from sale of interest bearing investments158,509 112,484
Proceeds from sale of unlisted equity investments572 -
Payments for purchase of interest bearing investments(191,319)(117,734)
Payments for purchase of intangible assets (8,866)(4,645)
Payments for purchase of customer relationships*(14,434)(9,473)
Payments for purchase of property, plant & equipment(3,163)(3,122)
Net cash outflow from investing activities (58,701)(22,490)
Cash flows from financing activities
Proceeds from share capital issuance - 47,300
Received from lessor on signing of new lease10,945 -
Payments for cost of share capital issuance - (2,419)
Dividends paid(10,541) -
Repayment of borrowings - (15,000)
Facility fees and interest paid(378)(1,115)
Payment relating to principal element of lease liabilities(2,848)(3,070)
Net cash (outflow)/ inflow from financing activities (2,822)25,696
Net increase in cash and cash equivalents37,118 19,369
Effect of foreign exchange rate changes(1,097)(1,279)
Cash and cash equivalents at the beginning of the year 80,108 62,018
Cash and cash equivalents at the end of the year 116,129 80,108
The above statement should be read in conjunction with the accompanying notes.
* The 2021 balance represents the purchase of ANZ's rights and obligations relating to servicing a portfolio of
insurance underwritten by Tower. Please refer to note 6.2 for more information. The comparative 2020
balance reflects the net cashflow associated with the purchase of Youi NZ Pty Ltd's insurance portfolio.
5
Tower Limited
Notes to the consolidated financial statements
1
1.1About this Report
a. Entities reporting
b. Statutory base
c. Basis of preparation
d. Restatement of comparatives
Overview
The Group financial statements are presented in New Zealand dollars and rounded to the nearest thousand
dollars. They have been prepared on a fair value measurement basis with any exceptions noted in the accounting
policies below, or in the notes to the financial statements.
In April 2021 the IFRS Interpretations Committee (IFRIC) issued an agenda decision 'Configuration or
Customisation Costs in a Cloud Computing Arrangement (NZ IAS 38 Intangible Assets)'. This IFRIC agenda decision
clarifies the interpretation on how NZ IAS 38 Intangible Assets applies to configuration and customisation costs
incurred in implementing Software-as-a-Service (SaaS) cloud computing arrangements. Refer to note 8.7 for
further details of change in comparatives.
This section provides information that is helpful to an overall understanding of the financial statements and the
areas of critical accounting judgements and estimates included in the financial statements. It also includes a
summary of Tower's operating segments.
The financial statements presented are those of Tower Limited (the Company) and its subsidiaries. The Company
and its subsidiaries together are referred to in this financial report as Tower or the Group. The address of the
Company's registered office is 136 Fanshawe Street, Auckland, New Zealand.
Tower Limited is a company incorporated in New Zealand under the Companies Act 1993 and listed on the NZX
Main Board and the Australian Securities Exchange. The Company is a reporting entity under Part 7 of the
Financial Markets Conduct Act 2013.
The Company is a for-profit entity and the financial statements have been prepared in accordance with New
Zealand Generally Accepted Accounting Practice (NZ GAAP). They comply with International Financial Reporting
Standards (IFRS), New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and other
applicable financial reporting standards, as appropriate for Tier 1 for-profit entities.
The financial statements of the Group have been prepared in accordance with the requirements of Part 7 of the
Financial Markets Conduct Act 2013 and the NZX Main Board Listing Rules.
During the periods presented, the principal activity of the Group was the provision of general insurance. The
Group predominantly operates in New Zealand with some of its operations based in the Pacific Islands region.
The financial statements were authorised for issue by the Board of Directors on 24 November 2021. The entity’s
owners or others do not have the power to amend the financial statements after issue.
6
Tower Limited
1.2 Consolidation
a. Principles of consolidation
b. Foreign currency
(i)
Functional and presentation currencies
(ii)
Transactions and balances
(iii)
Consolidation
The Group financial statements incorporate the assets and liabilities of all subsidiaries of the Company at balance
date and the results of all subsidiaries for the year.
Subsidiaries are those entities over which the consolidated entity has control, being power over the investee;
exposure, or rights to variable returns from its involvement with the investee; and the ability to use its power over
the investee to affect the amount of the investor’s returns.
The results of any subsidiaries acquired during the year are consolidated from the date on which control was
transferred to the consolidated entity and the results of any subsidiaries disposed of during the year are
consolidated up to the date control ceased. There have been no acquisitions or disposals of subsidiaries during the
year ended 30 September 2021.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and
liabilities of the foreign operation and are translated at the closing rate with movements recorded through the
Foreign Currency Translation Reserve in the statement of changes in equity.
The acquisition of controlled entities from external parties is accounted for using the acquisition method of
accounting. Non-controlling interests in the results and equity of subsidiaries are shown separately in the statement
of comprehensive income, statement of changes in equity and balance sheet respectively. Acquisition related costs
are expensed as incurred.
When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date
when control is lost, with the change in carrying amount recognised in profit or loss.
Intercompany transactions and balances between Group entities are eliminated on consolidation.
The financial statements of each Group entity are presented in the currency of the primary economic environment in
which the entity operates. The Group financial statements are presented in New Zealand dollars and rounded to the
nearest thousand dollars unless stated otherwise.
In preparing the financial statements of the individual entities, transactions denominated in foreign currencies are
translated into the entities functional and reporting currency using the exchange rates in effect at the transaction
dates. Monetary items receivable or payable in a foreign currency are translated at reporting date at the closing
exchange rate.
Translation differences on non-monetary items such as financial assets held at fair value through profit or loss are
reported as part of their fair value gain or loss.
Exchange differences arising on the settlement or retranslation of monetary items at year end exchange rates impact
profit after tax in the consolidated statements of comprehensive income unless the items form part of a net
investment in a foreign operation. In this case, exchange differences are taken to the Foreign Currency Translation
Reserve and recognised (as part of comprehensive profit) in the statement of comprehensive income and the
statement of changes in equity.
For the purpose of preparing consolidated financial statements the assets and liabilities of subsidiaries with a
functional currency different to the Company are translated at the closing rate at the balance date. Income and
expense items for each subsidiary are translated at a weighted average of exchange rates over the period, as a
surrogate for the spot rates at transaction dates. Foreign currency translation differences are taken to the Foreign
Currency Translation Reserve and recognised in the statement of comprehensive income and the statement of
changes in equity.
7
Tower Limited
1.2Consolidation (continued)
c. Subsidiaries
20212020
Parent Company
New Zealand general insurance operations
Tower Limited (formerly named Tower Insurance Limited)
NZParentParent
Subsidiaries
Overseas general insurance operations
Tower Insurance (Cook Islands) Limited
Cook Islands100%100%
Tower Insurance (Fiji) LimitedFiji100%100%
Tower Insurance (PNG) LimitedPNG100%100%
National Pacific Insurance Limited ("NPI")Samoa71%71%
Tower Insurance (Vanuatu) LimitedVanuatu100%100%
Management service operations
Tower Services Limited
NZ100%100%
On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular
foreign operation is recognised in the statement of comprehensive income.
Name of company
Holdings
Incorporation
The table below lists Tower Limited's principal subsidiary companies and controlled entities. All entities have a
balance date of 30 September.
8
Tower Limited
1.3
note 2.4
note 2.5
note 6.2
note 6.3a(ii)
note 7.3
note 8.7a
COVID-19 Pandemic
Balance sheet
Investments
Receivables
Right of Use Assets
Intangible assets
Deferred acquisition costs
(DAC)
Unearned premiums
Net outstanding claims
In preparing these financial statements management is required to make estimates and related assumptions
about the future. The estimates and related assumptions are based on experience and other factors that are
considered to be reasonable, and are reviewed on an ongoing basis. Revisions to the estimates are recognised in
the period in which they are revised, or future periods if relevant. The key areas in which estimates and related
assumptions are applied are as follows:
An assessment of the impact of COVID-19 on Tower's balance sheet is set out below based on information
available at the time of preparing these financial statements.
Writedown in DAC due to deficiency reported as a result of the Liability Adequacy
Test, partially influenced by higher claims costs driven by COVID related inflationary
pressures.
- Net outstanding claims
- Liability adequacy test
- Intangible assets
- Lease liabilities (incremental borrowing rate)
- Deferred taxation
- Software-as-a-service arrangements
Critical accounting judgements and estimates
RBNZ continues to engage with Tower on its response to COVID-19 and the sufficiency of its capital position. This
is part of an ongoing sector-wide regulatory engagement in response to COVID-19 focused on financial stability,
and operational changes/decisions that have customer impacts.
Investments are carried at fair value and reflect a lower interest rate environment.
Impact
Immaterial impact. Provision for impairment of premium receivables and "other
recoveries" has been updated to include an allowance for increased non-payment.
Tower has assessed that there is no material impairment to right of use assets.
No impact. Tower has assessed that its intangible assets have not been impaired.
Immaterial impact. Provision for unearned premium cancellation has been updated
to include an allowance for increased non-payment.
Impacts on the quantum of outstanding claims due to supply chain delays and
lockdown both slowing the settlement of claims and, therefore, increasing
outstanding balances. An additional risk margin has also been established, partially
to allow for additional uncertainty in the post-covid environment.
9
Tower Limited
1.4Segmental reporting
a. Operating segments
b. Financial performance
$ thousands
New ZealandPacific IslandsOtherTotal
Year Ended 30 September 2021
Gross written premium351,058 53,623 - 404,681
Gross earned premium - external340,568 54,962 - 395,530
Outwards reinsurance expense(44,918)(17,309) - (62,227)
Net earned premium295,650 37,653 - 333,303
Net claims expense(195,343)(8,836)(89)(204,268)
Net commission expense(9,762)(1,543) - (11,305)
Underwriting expense(76,519)(13,232) - (89,751)
Underwriting profit14,026 14,042 (89)27,979
Net investment income44 152 - 196
Other expenses182 93 - 275
Profit before tax14,252 14,287 (89)28,450
Profit after tax8,855 10,533 (73)19,315
Year Ended 30 September 2020
Gross written premium317,478 59,681 - 377,159
Gross earned premium - external311,671 60,881 - 372,552
Outwards reinsurance expense(38,774)(18,446) - (57,220)
Net earned premium272,897 42,435 - 315,332
Net claims expense(162,032)(19,361)337 (181,056)
Net commission expense(12,027)(2,463) - (14,490)
Underwriting expense(76,323)(13,197) - (89,520)
Underwriting profit22,515 7,414 337 30,266
Net investment income4,265 769 310 5,344
Impairment of EQC receivable(13,126) - - (13,126)
Other expenses(286)62 (3,580)(3,804)
Profit before tax13,368 8,245 (2,933)18,680
Profit after tax8,776 4,789 (2,355)11,210
Tower operates in two geographical segments, New Zealand and the Pacific region. New Zealand comprises the
general insurance business underwritten in New Zealand. Pacific Islands comprises the general insurance business
underwritten in the Pacific by Tower subsidiaries and branch operations. Other contains balances relating to
Tower Services Limited (management services entity), and also includes intercompany eliminations and group
diversification benefits.
The Group does not derive revenue from any individual or entity that represents 10% or more of the Group's total
revenue.
10
Tower Limited
1.4Segmental reporting (continued)
c.
Financial position
$ thousands
New ZealandPacific IslandsOtherTotal
Total assets 30 September 2021707,368 105,561 (10,616)802,313
Total assets 30 September 2020529,370 105,376 105,492 740,238
Total liabilities 30 September 2021401,523 51,688 (618)452,593
Total liabilities 30 September 2020336,192 61,096 904 398,192
Definition
An operating segment is a group of assets and operations engaged in providing products or services that are subject to risks
and returns that are different to those of other operating segments. Operating segments are reported in a manner consistent
with the internal reporting provided to the chief operating decision-maker (the Chief Executive Officer) who reviews the
operating results on a regular basis and makes decisions on resource allocation and assessing performance.
11
Tower Limited
2 Underwriting activities
This section provides information on Tower's underwriting activities.
2.1 Underwriting Revenue
Composition
20212020
Gross written premium404,681 384,359
Motor premium refund*
- (7,200)
Movement in unearned premium liability(9,151)(4,607)
Gross earned premium395,530 372,552
Reinsurance and other recoveries revenue24,635 25,711
Reinsurance commission
5,6355,242
Insurance administration services commission1,1181,215
Commission revenue6,7536,457
Underwriting revenue426,918 404,720
$ thousands
*In the year ended 30 September 2020, Tower received lower motor vehicle claims in New Zealand due to travel restrictions imposed during
the time spent in New Zealand government’s COVID-19 alert level 3 and 4. On 21st April 2020 Tower Limited committed to returning the
benefit of lower New Zealand motor claims to customers through motor vehicle premium refunds. Total premiums of $7.2m (excluding GST)
were refunded to motor customers related to the year ended 30 September 2020. Gross Written Premiums were reduced accordingly and a
provision created (see note 2.9) to recognise this obligation.
Tower collects premiums from customers in exchange for providing insurance coverage. These premiums are
recognised as revenue when they are earned by Tower, with a liability for unearned premiums recognised on the
balance sheet.
When customers suffer a loss that is covered by their policy, Tower will make payments to customers or
suppliers, which it recognises as claims expenses. To ensure that Tower’s obligations to customers are properly
recorded within the financial statements, Tower recognises provisions for outstanding claims.
To manage Tower’s risk and optimise its returns, Tower reinsures some of its exposure with reinsurance
companies. The premiums paid to reinsurers are recognised as an expense, while recoveries from reinsurers are
recognised as revenue.
12
Tower Limited
2.1 Underwriting Revenue (continued)
Recognition and measurement
Insurance administration services commission includes a percentage of levies collected on behalf of third parties and is
recognised at the point the levy collected.
Gross earned premium is recognised in the period in which the premiums are earned during the term of the contract,
excluding taxes and levies collected on behalf of third parties. It includes a provision for expected future premium
cancellations (which is offset against net premium receivables, see note 2.7) and customer premium refunds (see note 2.9 for
more information). The proportion of premiums not earned in the consolidated statement of comprehensive income at
reporting date is recognised in the consolidated balance sheet as unearned premiums.
Reinsurance and other recoveries on paid claims, reported claims not yet paid, claims incurred but not reported and claims
incurred but not enough reported are recognised as revenue. Recoveries are measured as the expected future receipts and
recognised when the claim is incurred.
Reinsurance commission revenue includes reimbursements by reinsurers to cover part of Tower's management and sales
expense which are broadly recognised with the reference premium over the term of the reinsurance agreements.
Reinsurance commission income can also include a proportion of expected profitability of business ceded to the reinsurer.
The final value of the variable commission is based on the achievement of a hurdle rate over time. This revenue is recognised
on a systematic basis and reassessed at each reporting date.
13
Tower Limited
2.2 Net claims expense
Composition
202120202021202020212020
Gross claims expense228,594 201,943 309 4,824 228,903 206,767
Reinsurance and other recoveries revenue(23,430)(24,698)(1,205)(1,013)(24,635)(25,711)
Net claims expense205,164 177,245 (896)3,811 204,268 181,056
Recognition and measurement
2.3 Underwriting expense
Composition
Restated
$ thousands20212020
People costs65,042 72,635
People costs capitalised during the year(3,569)(2,933)
Technology 14,326 17,383
Amortisation 12,556 9,705
Depreciation*4,712 4,590
External fees10,375 7,137
Marketing8,518 8,181
Communications4,007 3,691
Miscellaneous1,090 (522)
Movement in indirect deferred acquisition costs892 (1,416)
Claims related management expenses reclassified to claims expense(28,198)(28,931)
Underwriting expenses89,751 89,520
* Includes $2.4m (2020: $2.6m) of depreciation on right-of-use assets. See note 6.3b for further information.
Additional disclosures related to the Canterbury earthquake events in 2010 and 2011 are provided in note 2.4.
Net claims expense is measured as the difference between net outstanding claims liability at the beginning and end of the financial
year plus any claims payments made net of reinsurance and other recoveries received during the financial year. Please refer to
note 2.4 for more information.
Exc. Canterbury
earthquake
Canterbury earthquakeTotal
$ thousands
14
Tower Limited
2.4
Net outstanding claims
a. Composition
202120202021202020212020
Central estimate of future cash flows87,535 65,475 16,402 21,236 103,937 86,711
Claims handling expense5,430 4,151 1,314 1,908 6,744 6,059
Risk Margin*6,724 4,325 4,933 10,652 11,657 14,977
Gross outstanding claims99,689 73,951 22,649 33,796 122,338 107,747
Reinsurance recoveries(18,970)(9,643)(3,880)(3,246)(22,850)(12,889)
Net outstanding claims80,719 64,308 18,769 30,550 99,488 94,858
Net claim payments within 12 months69,687 56,110 7,508 12,220 77,195 68,330
Net claim payments after 12 months11,032 8,198 11,261 18,330 22,293 26,528
Net outstanding claims80,719 64,308 18,769 30,550 99,488 94,858
*
b. Reconciliation of movements in net outstanding claims liability
GrossReinsuranceNetGrossReinsuranceNet
Balance brought forward107,747 (12,889)94,858 124,060 (13,457)110,603
Claims expense - current year234,675 (22,171)212,504 209,766 (26,084)183,682
Claims expense - prior year(5,772)(2,464)(8,236)(2,999)373 (2,626)
228,903 (24,635)204,268 206,767 (25,711)181,056
(213,350)14,397 (198,953)(223,654)26,444 (197,209)
Foreign exchange(962)277 (685)573 (165)408
Outstanding claims122,338 (22,850)99,488 107,747 (12,889)94,858
Incurred claims recognised in the
consolidated statement of comprehensive
income
Claims paid and reinsurance and other
recoveries raised
TotalCanterbury earthquake
Exc. Canterbury
earthquake
$ thousands
20212020
$ thousands
Includes nil additional (2020: $5.0m) for the Canterbury earthquake over and above the provision of the Appointed Actuary, which is set at the
75th percentile of sufficiency. The $5.0m has been released as the Canterbury outstanding claims liability has sufficiently run off.
15
Tower Limited
2.4Net outstanding claims (continued)
c.
Development of claims
$ thousands
Ultimate claims cost estimate
Prior20172018201920202021
Total
At end of incident year
138,574 148,088 146,873 157,845 183,450
One year later
140,610 145,887 143,975 154,459 -
Two years later
141,989 145,763 143,121 - -
Three years later
142,280 145,344 - - -
Four years later
142,701 - - - -
142,701 145,344 143,121 154,459 183,450
Cumulative payments(141,779) (144,586) (141,541) (149,522) (123,772)
13,212 922 758 1,580 4,937 59,678 81,087
Claims handling expense
6,744
Risk margin
11,657
Net outstanding claim liabilities99,488
22,850
Gross outstanding claim liabilities122,338
d.
Actuarial information
(i)
(ii)
The following table shows the development of net outstanding claims relative to the current estimate of
ultimate claims costs for the five most recent years.
The estimation of outstanding claims as at 30 September 2021 has been carried out by:
Geoff Atkins, BA (ActuarDc), FIAA, FIAL, FANZIIF, Appointed Actuary - Canterbury earthquake claims; and
John Feyter, B.Sc., FNZSA - all other outstanding claims
The New Zealand actuarial assessments are undertaken in accordance with the standards of the New Zealand
Society of Actuaries, in particular Professional Standard No. 30 "Valuations of General Insurance Claims". The
Actuaries were satisfied as to the nature, sufficiency and accuracy of the data used to determine the
outstanding claims liability. The outstanding claims liability is set by the Actuaries at a level that is appropriate
and sustainable to cover the Group's claims obligations after having regard to the prevailing market
environment and prudent industry practice.
Prior year numbers have been restated at current year exchange rates to reflect the underlying development of
claims.
Ultimate claims cost
Undiscounted central estimate
Reinsurance recoveries
16
Tower Limited
2.4Net outstanding claims (continued)
e. Canterbury earthquakes
Cumulative impact of Canterbury earthquakes
Restated
$ thousands20212020
Earthquake claims estimate net of EQC payments(944,418)(939,109)
Reinsurance recoveries732,090 730,885
Claim expense net of reinsurance recoveries(212,328)(208,224)
Reinsurance expense(25,045)(25,045)
Additional risk margin - (5,000)
Cumulative impact of Canterbury earthquakes before tax(237,373)(238,269)
Income tax66,464 66,715
Cumulative impact of Canterbury earthquakes after tax(170,909)(171,554)
Canterbury earthquake impact on profit or loss
$ thousands20212020
Net claims (gain)/expense(896)3,811
As at 30 September 2021, Tower has 33 claims remaining to settle (2020: 59) as a result of the earthquakes
impacting the Canterbury region during 2010 and 2011. The following table presents the cumulative impact of
the four main Canterbury earthquake events on the consolidated statement of comprehensive income. Figures
include the EQC settlement which has been received at 30 September 2021.
17
Tower Limited
2.4 Net outstanding claims (continued)
Recognition and measurement
Net outstanding claims liability is calculated by deducting reinsurance and other recoveries from gross outstanding claims.
Reinsurance and other recoveries on outstanding claims are recognised as income with the corresponding asset being recognised
on the balance sheet.
The outstanding claims liability is measured at the central estimate of future cash outflows relating to claims incurred prior to
the reporting date including direct and indirect claims handling costs. The liability is measured based on the advice of the
Appointed Actuary or on valuations which have been peer reviewed by the Appointed Actuary. It is intended to include no
deliberate or unconscious bias toward over or under-estimation. Given the uncertainty in establishing the liability, it is likely the
final outcome will differ from the original liability established. Changes in the claim estimates are recognised in profit or loss in
the reporting period in which the estimates are changed.
Gross outstanding claims liability comprises a central estimate of future cash outflows and a risk margin for uncertainty. Tower
has not applied a discount given the short tail nature of the portfolio and the low interest rate environment.
Uncertainties surrounding the liability estimation process include those relating to the available data, actuarial models and
assumptions, the statistical uncertainty associated with the general insurance run-off process and external risks.
The gross outstanding claim liabilities also include a risk margin that relates to the inherent uncertainty in the central estimate of
the future payments. The risk margin represents the amount by which the liability recognised in the financial statements is
greater than the actuarial estimate. Tower currently applies a 75% probability of adequacy to the outstanding claims liability
which means there is a 1-in-4 chance all future claim payments will exceed the overall reserve held.
18
Tower Limited
2.4 Net outstanding claims (continued)
Critical accounting estimates and judgements
Outstanding claims liability (excluding Canterbury Earthquakes)
Assumption20212020
Expected future claims development proportion19.7%50.5%
Claims handling expense ratio6.7%7.1%
Risk margin9.1%7.2%
Expected future claims development proportion
Claims handling expense ratio
Risk margin
Canterbury Earthquake outstanding claims liability
Assumption20212020
Number of new overcap and new litigated claims 38 68
Average cost of new overcap or new litigated claim $121,000 $107,000
Provision for re-opened claims $2,400,000 $2,800,000
New overcap and new litigated claims
Provision for re-opened claims
Re-opened claims arise where additional liability arises for additional scope not previously identified or where a repair has
failed or where another expense is payable for a claim that is currently closed.
The estimation of the outstanding claims liability involves a number of key assumptions. Tower's estimation uses
Company specific data, relevant industry data and general economic data for each major class of business. The estimation
process factors in a number of considerations including the risks to which the business is exposed to at a point in time,
claim frequency and severity, historical trends in the development of claims as well as legal, social and economic factors
that may affect each class of business.
This reflects the expected cost to administer future claims. The ratio is calculated based on historical experience of claims
handling costs.
This is the proportion of additional claims cost that is expected to be recognised in the future for BAU claims that have
already been reported. The assumption is expressed as a proportion of current case estimates for open claims and the
resulting amount is recognised in the balance sheet as an outstanding claims liability. The reduction in the expected future
claims proportion has arisen following a change in case estimation process in the year ended 30 September 2021.
Risk margins are calculated for outstanding claims in each country separately and a diversification benefit is calculated
taking into account the uncorrelated effect of random risk. The total risk margin percentage shown is calculated on a
weighted average basis. The increase in the risk margin this year reflects the heightened uncertainty on claim outcomes as
a result of the COVID-19 pandemic.
New litigated claims are existing or future new claims that are referred to either the Insurance Tribunal or the High Court
for resolution. Costs for new litigated claims are assumed to be substantially higher than costs for other overcap claims.
Only a small number of new litigated claims is now expected.
Assumptions are made for the estimation of outstanding claims related to the Canterbury earthquakes. The key
assumptions are estimated ultimate costs (including building costs) for settling open claims, and the numbers of new
overcap claims, litigated claims, re-opened claims and their associated costs. Other elements of judgement include the
apportionment of claim costs between the four main earthquake events, future claim management expenses and
assessment of the risk margin.
New overcap claims are typically for properties that have previously been managed by EQC but where damage is now
assessed as being more extensive than previously thought and there is now an insurance claim payable.
19
Tower Limited
2.4
Net outstanding claims (continued)
f. Sensitivity Analysis
Outstanding claims excluding Canterbury earthquake
$ thousands
20212020
Expected future claims development + 10%1,339 1,771
- 10%(1,339)(1,771)
Claims handling expense ratio + 10%543 415
- 10%(543)(415)
Risk margin + 10%672 431
- 10%(672)(431)
Canterbury earthquake outstanding claims
$ thousands
Movement in
assumption
20212020
+ 35%(1,610)(2,560)
- 35%1,610 2,560
+ 20%(920)(1,460)
- 20%920 1,460
+ 35%(840)(980)
- 35%840 980
+ 20%(480)(560)
- 20%480 560
The impact on profit or loss of changes in key assumptions used in the calculation of the outstanding claims
liabilities is summarised below. Each change has been calculated in isolation from the other variables and is stated
before income tax.
Number of new overcap or new litigated claims
Change in average cost of a new overcap or new litigated claim
Number of reopened claims
Change in average cost of a reopened claim
Impact on profit or loss
Movement in
assumption
Impact on profit or loss
20
Tower Limited
2.5 Unearned premium liability
Reconciliation
$ thousands20212020
Opening balance203,452 187,855
Premiums written during the year404,681 377,159
Premiums earned during the year(395,530)(372,552)
Unearned premium movement9,1514,607
Unearned premium balance purchased*- 12,003
Foreign exchange movements(328)(1,013)
Unearned premium liability212,275 203,452
Recognition and measurement
Adequacy of unearned premium liability
%20212020
Central estimate net claims as a % of unearned premium liability45.2%44.5%
Risk margin as a % of net claims11.0%10.2%
Critical accounting estimates and judgements
* Unearned premium balance acquired through the purchase of customer relationships in the year ended 30 September 2020 (see note 6.2).
The majority of unearned premiums will be earned in the 12 months after 30 September 2021 and therefore are
current liabilities. The unearned premium liability is presented net of cancellation provisions.
Tower undertakes a liability adequacy test ("LAT") to determine whether the unearned premium liability is
sufficient to pay future claims net of reinsurance recoveries.
If the present value of expected future net cash flows relating to current insurance contracts, plus a risk margin,
exceeds the unearned premium liabilities less related deferred acquisition costs and intangible assets, then the
unearned premium liability is deemed deficient. This deficiency is immediately recognised in profit or loss. In
recognising the deficiency, Tower will first write down any related deferred acquisition costs or intangible assets
before recognising an unexpired risk liability.
The LAT is conducted using a central estimate of premium liability adjusted for risk margin and it is carried out on an individual
country basis. The test is based on prospective information and so is heavily dependent on assumptions and judgements.
Unearned premium liability is the portion of premiums written that are yet to be earned in the consolidated statement of
comprehensive income. It is calculated based on the term of the risk and in accordance with the expected pattern of the
incidence of risk underwritten using an appropriate pro-rate method.
The unearned premium liability as at 30 September 2021 was not sufficient for the New Zealand business and a
deficiency of $2.0m was recognised (2020: no deficiency). The unearned premium liabilities for Pacific entities
were sufficient with the exception of Fiji and Vanuatu (2020: Fiji, NPI and Vanuatu) where small deficits were
recognised. The total deficit for the group recognised as a charge against deferred acquisition cost was $2.5m
(2020: $0.4m).
21
Tower Limited
2.6 Deferred insurance costs
Reconciliation
$ thousands
202120202021202020212020
Balance bought forward25,22023,7369,4478,79434,66732,530
Costs deferred40,32342,13617,96815,39658,29157,532
Amortisation expense(41,897)(40,221)(16,428)(14,586)(58,325)(54,807)
Writedown due to LAT deficiency(2,534)(440)- - (2,534)(440)
Foreign exchange movements49(136)(157)(132)(148)
Closing balance21,11625,22010,8519,44731,96734,667
Recognition and measurement
Deferred acquisition costs
Deferred outwards
reinsurance expense
Deferred insurance costs
Outwards reinsurance expense reflects premiums ceded to reinsurers and is recognised as an expense in accordance
with the pattern of reinsurance service received. Deferred outwards reinsurance expense at the reporting date
represents outwards reinsurance expenses related to unearned premium.
Acquisition costs comprises costs incurred in obtaining and recording general insurance contracts such as advertising
expenses, sales expenses and other underwriting expenses. These costs are initially capitalised and then expensed in
line with the earning pattern of the related premium. Deferred acquisition costs at the reporting date represent the
acquisition costs related to unearned premium.
Deferred insurance costs are expected to be amortised within 12 months from reporting date.
22
Tower Limited
2.7 Receivables
Composition
$ thousands20212020
Gross premium receivables177,141 171,041
Provision for impairment(655)(1,383)
Premium receivable176,486 169,658
Business as usual reinsurance recoveries 20,326 15,105
Canterbury earthquake reinsurance recoveries3,880 3,246
Other recoveries5,208 5,262
Reinsurance and other recoveries29,414 23,613
EQC receivable*523 52,883
Finance lease receivables4,278 -
Prepayments3,279 2,664
Miscellaneous receivables1,873 1,928
Receivables215,853250,746
Receivable within 12 months213,432250,746
Receivable in greater than 12 months2,421 -
Receivables215,853250,746
Recognition and measurement
EQC recovery receivable related to Canterbury earthquakes
There was nil impairment expense in the year ended 30 September 2021 (2020: $13.1m).
The remainder of Tower's receivables are assessed for impairment based on expected credit losses. The EQC receivable is the
only material item that falls into this category and is discussed further in the sub-note below.
During the year Tower received $52.9m (excluding GST) in a full and final settlement agreement with EQC
regarding the recovery of claims costs related to the 2010 and 2011 Christchurch Earthquakes during the period.
Tower fully reimbursed amounts payable to reinsurers of $10.7m and settled other outstanding costs during the
period. Tower's net proceeds from this settlement were $42.1m.
Receivables (inclusive of GST) are recognised at fair value and are subsequently measured at amortised cost less any
impairment.
Tower's premium receivables and reinsurance and other recoveries arise from insurance contracts. These receivables are
impaired if there is objective evidence that Tower will not be able to collect all amounts due according to the original terms of
the receivable.
* The EQC receivable for 2021 does not relate to the historic Canterbury earthquakes (CEQ) receivable settled during the period. This receivable
relates to non-CEQ receivables.
23
Tower Limited
2.7
Receivables (continued)
Finance lease receivables
$ thousands20212020
Less than one year2,019 -
Between one and five years2,421 -
More than five years- -
Total undiscounted finance lease receivable4,440 -
Unearned finance income(162) -
Net investment in the finance lease4,278 -
2.8 Payables
Composition
$ thousands20212020
Trade payables10,380 13,527
GST payable23,264 20,519
EQC receivable payable to reinsurers- 10,741
EQC & Fire and Emergency New Zealand levies payable10,857 11,068
Reinsurance premium payable6,343 3,414
Unsettled investment purchases11,456 -
Other6,605 7,331
Payables68,905 66,600
Payable within 12 months68,905 66,600
Payable in greater than 12 months- -
Payables68,905 66,600
Recognition and measurement
Payables are recognised where goods or services that have been received or supplied and have been invoiced or formally
agreed with the supplier. Payables are stated at the fair value of the consideration to be paid in the future inclusive of GST.
GST payable represents the net amount payable to the respective tax authorities.
Tower entered a sub-lease for its previous Auckland premises. The sub-lease is for the remaining non-
cancellable term of the head lease and therefore is classified as a finance lease. The profile of the net receipts is
illustrated in the table below:
24
Tower Limited
2.9 Provisions
Composition
$ thousands20212020
Annual leave and other employee benefits6,709 6,901
Customer premium refunds- 2,422
Other- 208
Provisions6,709 9,531
Payable within 12 months6,235 9,157
Payable in greater than 12 months474 374
Provisions6,709 9,531
Recognition and measurement
2.10 Assets backing insurance liabilities
Tower recognises a provision when it has a present obligation as a result of a past event and it is more likely than not that an
outflow of resources will be required to settle the obligation. Tower's provision represents the best estimate of the
expenditure required to settle the present obligation at the end of the reporting period.
Tower has determined that all assets within its insurance companies are held to back insurance liabilities, with
the exception of: (i) property, plant and equipment; (ii) right of use assets, (iii) intangible assets; and (iv)
investments in operating subsidiaries. Assets backing insurance liabilities are managed in accordance with
approved investment mandate agreements on a fair value basis and are reported to the Board on that basis.
25
Tower Limited
3 Investments
3.1 Investment income
$ thousands20212020
Interest income5,148 7,328
Net realised loss(2,152)(1,277)
Net unrealised loss(2,416)(241)
Investment income580 5,810
Recognition and measurement
3.2 Investments
$ thousands20212020
Fixed interest investments277,436 237,298
Equity investment-572
Property investment34 34
Investments277,470 237,904
Recognition and measurement
Tower's investment income is primarily made up of realised and unrealised interest income on fixed interest investments and
fair value gains or losses on its investment assets. Both are recognised in the period that they are earned through profit or
loss.
Tower's investment assets are designated at fair value through profit or loss. Investment assets are initially recognised at fair
value and are remeasured to fair value through profit or loss at each reporting date. Tower's approach to measuring the fair
value of these assets is covered in the following note.
Tower invests funds collected as premiums and provided by shareholders to ensure it can meet its obligations to
pay claims and expenses and to generate a return to support its profitability. Tower has a low risk tolerance and
therefore the majority of its investments are in investment grade supranational and government bonds, and
term deposits.
Purchases and sales of investments are recognised at the date which Tower commits to buy or sell the assets (i.e. trade date).
Investments are derecognised when the rights to receive future cash flows from the assets have expired, or have been
transferred, and substantially all the risks and rewards of ownership have transferred.
Net realised losses relate to the maturity of fixed interest bonds, with interest coupon rates higher than market
rates, purchased at higher than face value. The corresponding higher interest received is reflected in the interest
income amount.
26
Tower Limited
3.3Fair value hierarchy
Level 1
Level 2
Level 3
$ thousandsLevel 1Level 2Level 3Total
As at 30 September 2021
Fixed interest investments - 277,436 - 277,436
Equity investment - - - -
Property investment - 34 - 34
Investments - 277,470 - 277,470
As at 30 September 2020
Fixed interest investments - 237,298 - 237,298
Equity investment - - 572 572
Property investment - 34 - 34
Investments - 237,332 572 237,904
There have been no transfers between levels of the fair value hierarchy during the current financial period (2020:
nil).
Tower designates its investments at fair value through profit or loss in accordance with its Treasury policy. It
categorises its investments into three levels based on the inputs available to measure fair value:
Fair value is calculated using quoted prices in active markets. Tower currently does not
have any Level 1 investments.
Investment valuations are based on direct or indirect observable data other than
quoted prices included in Level 1. Level 2 inputs include: (1) quoted prices for similar
assets or liabilities; (2) quoted prices for assets or liabilities that are not traded in an
active market; or (3) other observable market data that can be used for valuation
purposes. Tower investments included in this category include government and
corporate debt, where the market is considered to be lacking sufficient depth to be
considered active, and part ownership of a property that is rented out to staff.
Investment valuation is based on unobservable market data. Tower's equity
investment in the unlisted reinsurance company Pacific Re was the only investment in
this category. Tower sold the investment to a third party in November 2020 at the
carrying value as at 30 September 2020.
27
Tower Limited
4 Risk Management
4.1 Risk management overview
(i)
(ii)
(iii)
(i)
(ii)
(iii)
Facilitates risk to be managed at all levels of the organisation through a structured process to identify risk,
and the allocation of clear, personal responsibility for management of identified risks by assigned risk
owners.
Tower is exposed to multiple risks as it works to set things right for its customers and their communities whilst
maximising returns for its shareholders. Everyone across the organisation is responsible for ensuring that Tower's
risks are managed and controlled on a day-to-day basis.
Tower’s approach to achieving effective risk management is to embed a risk-aware culture where everyone
across the organisation (including contractors and third parties) is responsible for managing risk.
Tower’s Board expresses its appetite for risk in a Risk Appetite Statement, which:
Gives clear concise guidance to management of parameters for risk taking.
Embeds risk management into strategic and decision-making processes.
The RMF is supported by a suite of policies that address the risks and compliance obligations covered in this
section.
The Board then approves and adopts: (i) the Risk Management Programme (RMP) which is the central document
that explains how Tower effectively manages risk within the business; and (ii) the Reinsurance Management
Strategy (ReMS) which describes the systems, structures, and processes which collectively ensures Tower's
reinsurance arrangements and operations are prudently managed. These documents are approved annually by
the Board.
The Board has delegated its responsibility to the Risk Committee to provide oversight of risk management
practices and provide advice to the Board and management when required. In addition, the Risk Committee also
monitors the effectiveness of Tower’s risk management function which is overseen by the Chief Risk Officer
(CRO). The CRO provides regular reports to the Risk Committee on the operation of the Risk Management
Framework (RMF), the status of material risks, risk and compliance incidents and risk framework changes.
Tower has embedded an RMF with clear accountabilities and risk ownership to ensure that Tower identifies,
manages, mitigates and reports on all key risks and controls through the three lines of defence model.
First line: Operational management has ownership, responsibility and accountability for directly
identifying, assessing, controlling and mitigating key risks which prevent them from achieving business
objectives.
Second Line: Tower’s Risk and Compliance Functions are responsible for developing and implementing
effective risk and compliance management processes; providing advisory support to the first line of
defence and constructively challenging operational management and risk and obligation owners to ensure
positive assurance.
Third line: Internal Audit is responsible and accountable for providing an independent and objective view
of the adequacy and effectiveness of the Group’s risk management, governance and internal control
framework. Internal audit, along with other groups such as external audit, report independently to the
Board and/or the Audit Committee.
28
Tower Limited
4.2
(i)
(ii)
(iii)
4.3
a. Underwriting risk
(i)
(ii)
(iii)
Insurance risk
Strategic risk
Strategic risk is the risk that internal or external factors compromise Tower's ability to execute its strategy or
achieve its strategic objectives. Strategic risk is managed through:
Monitoring and managing performance against Board approved plan and targets.
Board leading an annual strategy and planning process which considers our performance, competitor
positioning and strategic opportunities.
Identifying and managing emerging risks using established governance processes and forums.
Insurance risk is the risk that for any class of risk insured, the present value of actual claims payable will exceed
the present value of actual premium revenues generated (net of reinsurance). This risk is inherent in Tower's
operations and arises and manifests through underwriting, insurance concentration and reserving risk.
Underwriting risk refers to the risk that claims arising are higher (or lower) than assumed in pricing due to bad
experience including catastrophes, weakness in controls over underwriting or portfolio management, or claims
management issues. Tower has established the following key controls to mitigate this risk:
Use of comprehensive management information systems and actuarial models to price products based
on historical claims frequencies and claims severity averages, adjusted for inflation and modelled
catastrophes, trended forward to recognise anticipated changes in claims patterns after making
allowance for other costs incurred by the Group.
Passing elements of insurance risk to reinsurers. Tower's Board determines a maximum level of risk to be
retained by the Group as a whole.
Underwriting limits are in place to enforce appropriate risk selection criteria and pricing with specific
underwriting authorities that set clear parameters for the business acceptance.
Tower's reinsurance programme is structured to adequately protect the solvency and capital positions of
the insurance business. The adequacy of reinsurance cover is modelled by assessing Tower's exposure
under a range of scenarios. The plausible scenario that has the most financial significance for Tower is a
major Wellington earthquake. Each year, as part of setting the coming year's reinsurance cover,
comprehensive modelling of the event probability and amount of the Group's exposure is undertaken.
29
Tower Limited
4.3
b. Concentration risk
(i)
(ii)
NZPacificTotalNZPacificTotal
51%4%55%51%4%55%
33%4%37%30%5%35%
1%4%5%1%6%7%
1%0%1%1%0%1%
0%1%1%0%1%1%
1%0%1%0%1%1%
87%13%100%83%17%100%
c.
Workers compensation
Insurance risk (continued)
Concentration risk refers to the risk of underwriting a number of like risks, where the same or similar loss
events have the potential to produce claims from many of Tower's customers at the same time. Tower is
particularly subject to concentration risks in the following variety of forms:
Geographic concentration risk - Tower purchases a catastrophe reinsurance programme to protect
against a modelled 1-in-1000 years whole of portfolio catastrophe loss. In addition it takes out additional
aggregate reinsurance cover for large events which fall outside the catastrophe reinsurance programme
and tends to cover weather events in New Zealand and across the Pacific.
Product concentration risk - Tower's business is weighted towards the NZ general insurance market
where its risks are concentrated in house insurance (Home & Contents) and motor insurance. Tower
limits its exposure through proportionate reinsurance arrangements. The table below illustrates the
diversity of Tower's operations.
Gross written premium (%)20212020
Home & Contents
Motor
Commercial
Liability
Other
Total
Tower has limited exposure to long-tail classes (which comprises part of "liability" and "workers
compensation"). Long-tail classes have increased uncertainty of the ultimate cost of claims due to the
additional period of time to settlement.
Reserving risk
Reserving risk is managed through the actuarial valuation of insurance liabilities and monitoring of the
probability of adequacy booked reserves. The valuation of the net central estimate is performed by qualified
and experienced actuaries. The central estimate is subject to a comprehensive review at least annually.
30
Tower Limited
4.4
a.
(i)
(ii)
(iii)
$ thousands
202120202021202020212020
- - 94,430 106,805 94,430 106,805
83,614 55,478 143,548 90,859 227,162 146,337
- - 33,100 29,737 33,100 29,737
- - - - - -
Below BBB9,173 5,409 2,226 3,456 11,399 8,865
Not rated23,342 19,221 4,132 6,441 27,474 25,662
116,129 80,108 277,436 237,298 393,565 317,406
b.
Cash and Cash EquivalentsFixed Interest Investments
Credit risk
Investment and treasury
Credit risk is the risk of loss that arises when a counterparty fails to meet their financial obligations to Tower in
accordance with the agreed terms. Tower's exposure to credit risk primarily results from transactions with security
issuers, reinsurers and policyholders.
Tower manages its investment and treasury credit risks in line with limits set by the Board:
New Zealand cash deposits that are internally managed are limited to banks with a minimum Standard &
Poor's (S&P) AA- credit rating.
Cash deposits and investments that are managed by external investment managers are limited to
counterparties with a minimum S&P A- credit rating.
Tower holds deposits and invests in Pacific regional investment markets through its Pacific Island operations
to comply with local statutory requirements and in accordance with Tower investment policies. These
deposits and investments generally have low credit ratings representing the majority of the value included in
the 'Below BBB' and unrated categories in the table below. This includes deposits and investments with
Australian bank subsidiaries that comprise 88% (2020: 83%) of the "not rated" category.
Total
Reinsurance
Tower manages its reinsurance programme in line with the ReMS. Tower seeks to manage the quantum and
volatility of insurance risk in order to reduce exposure and overall cost.
Tower's policy is to only deal with reinsurers with a credit rating of S&P "A-" or better unless local statutory
requirements dictate otherwise. Additional requirements of the policy are for no individual reinsurer to have more
than 25% share of the overall programme and Tower is prohibited from offering inwards reinsurance to external
entities. The following table provides details on Tower's exposure to reinsurance recoveries:
AAA
AA
A
BBB
Total
31
Tower Limited
4.4
Credit risk (continued)
$ thousands
202120202021202020212020
AAA- - - - - -
AA12,005 6,738 1,028 3,490 13,033 10,228
A10,805 6,106 320 1,986 11,125 8,092
BBB- - - - - -
Below BBB- - - - - -
Not rated40 29 4 2 44 31
Total22,850 12,873 1,352 5,478 24,202 18,351
$ thousands
Not due 1 month
1 to 2
months
2 to 3
months
Over 3
months
Total
As at 30 September 2021
Reinsurance recoveries on paid
claims
1,352 - - - - 1,352
As at 30 September 2020
Reinsurance recoveries on paid
claims
5,379 - - - 99 5,478
c. Premium receivable
$ thousands
Not due* 1 month
1 to 2
months
2 to 3
months
Over 3
months
Total
As at 30 September 2021
Net premium receivable
168,843 5,514 1,484 562 83 176,486
As at 30 September 2020
Net premium receivable
162,935 3,705 1,992 986 40 169,658
Outstanding claims
Reinsurance on:
* this includes premiums that are less than 30 days outstanding (which are owed but not past due) of $5.5m (2020: $7.1m).
Paid claimsTotal
Past due
The following table provides further information regarding the ageing of reinsurance recoveries on paid claims
at the balance date.
Past due
Tower's premium receivable balance primarily relates to policies which are paid on either a fortnightly or
monthly basis. Payment default or policy cancellation - subject to the terms of the policyholder's contract - will
result in the termination of the insurance contract eliminating both the credit risk and insurance risk.
32
Tower Limited
4.5
a.
(i)
(ii)
$ thousands
2021202020212020
(581)(407)2317
710497(28)(20)
(1,667)(1,350)(38)(73)
2,0371,6504790
(743)(1,078)3057
9081,318(36)(70)
Market risk
Market risk is the risk of adverse impacts on investment earnings resulting from changes in market factors.
Tower's market risk is predominately as a result of changes in the value of the New Zealand dollar (currency
risk) and interest rate movements. Tower's approach to managing market risk is underpinned by its Treasury
Policy as approved by the Board.
Currency risk
Tower's currency exposure arises from the translation of foreign operations into Tower's functional currency
(currency translation risk) or due to transactions denominated in a currency other than the functional currency
of a controlled entity (operational currency risk). The currencies giving rise to this risk are primarily the US
dollar, Fijian dollar and Papua New Guinea (PNG) kina.
Tower's principal currency risk is currency translation (where movement impacts equity). Tower generally
elects not to hedge this risk as it is difficult given the size and nature of the currency markets in the Pacific.
Tower seeks to minimise its net exposure to foreign operational risk by actively seeking to return surplus cash
and capital to the parent company.
Operational currency risk impacts profit and generally arises from:
Procurement of goods and services denominated in foreign currencies. Tower may enter into hedges for
future transactions, using authorised instruments, provided that the timing and amount of those future
transactions can be estimated with a reasonable degree of certainty.
Investment assets managed by the external investment manager that are denominated in foreign
currencies. Tower's Board set limits for the management of currency risk based on prudent asset
management practice. Regular reviews are conducted to ensure that these limits are adhered to.
The following table demonstrates the impact of the New Zealand dollar weakening or strengthening against the
most significant currencies for which Tower has foreign exchange exposure holding all other variables constant.
Direct impact on equityImpact on profit or loss
New Zealand Dollar - PNG Kina
Currency strengthens by 10%
Currency weakens by 10%
New Zealand Dollar - USD
Currency strengthens by 10%
Currency weakens by 10%
New Zealand Dollar - Fijian Dollar
Currency strengthens by 10%
Currency weakens by 10%
33
Tower Limited
4.5 Market risk (continued)
b.
$ thousands
20212020
Interest rates increase by 0.5%(988)(921)
Interest rates decrease by 0.5%960750
4.6 Liquidity risk
$ thousands
2021202020212020
Floating interest rate (at call)- - 116,217 80,108
Within 3 months42,949 32,943 75,129 36,982
3 to 6 months17,070 15,140 31,890 53,797
6 to 12 months17,176 20,246 47,381 55,352
After 12 months22,293 26,529 122,948 91,167
Total99,489 94,858 393,565 317,406
Liquidity risk arises where liabilities cannot be met as they fall due as a result of insufficient funds and/or illiquid
asset portfolios. Tower mitigates this risk through maintaining sufficient liquid assets to ensure that it can meet all
obligations on a timely basis.
Tower is primarily exposed to liquidity risk through its obligations to make payment for claims of unknown
amounts on unknown dates. Fixed-interest investments can generally be readily sold or exchanged for cash to
settle claims and are managed in accordance with the policy of broadly matching the overall maturity profile to the
estimated pattern of claim payments. This is illustrated in the table below.
Net outstanding claims
liability
Cash and Investments
Interest rate risk
Tower is exposed to interest rate risk through its holdings in interest-bearing assets. Interest-bearing assets with a
floating interest rate expose Tower to cash flow interest rate risk, whereas fixed interest investments expose
Tower to fair value interest rate risk.
Tower's interest rate risk primarily arises from fluctuations in the valuation of fixed-interest investments
recognised at fair value and from the underwriting of general insurance contracts, which creates exposure to the
risk that interest rate movements materially impact the fair value of the insurance liabilities. Interest rate risk
arises to the extent that there is a mismatch which arises between the two.
Fixed-interest investments are measured at fair value through profit or loss. Movements in interest rates impact
the fair value of interest-bearing financial assets and therefore impact profit or loss (there is no direct impact on
equity). The impact of a 0.5% increase or decrease in interest rates on fixed interest investments is shown below
(holding everything else constant). The assumption made for 0.5% decrease in interest rates is that the lower
bound is capped at 0% as negative rates on fixed interest investments are highly unlikely.
Impact on profit or loss
Tower manages its interest rate risk through Board approved investment management guidelines that have regard
to policyholder expectations and risks and to target surplus for solvency as advised by the Appointed Actuary.
34
Tower Limited
4.7 Capital management risk
a. Regulatory solvency capital
$ thousands
ParentGroupParentGroup
Actual solvency capital179,439 214,128 150,451 181,214
Minimum solvency capital66,252 79,927 52,342 65,728
Solvency margin113,187 134,201 98,109 115,486
Solvency ratio271%268%287%276%
In October 2020, the Reserve Bank of New Zealand (RBNZ) commenced consultation on a review of the Insurance (Prudential
Supervision) Act 2010. The consultation process is expected to continue through to 2022. Tower has actively participated in the
consultation to date, with an ongoing assessment of the impacts to solvency being performed as information becomes known.
As part of the overall process, the RBNZ issued an exposure draft on an interim solvency standard (ISS) in July 2021 which
anticipates the introduction of IFRS 17 during the consultation period. This draft ISS: combines requirements for life and non-life
insurers, which were previously separate standards; proposes enhancements to the transparency of solvency reporting;
provides for increased prudential supervision for insurers operating close to their minimum solvency margin; and imposes
changes that would reduce solvency margins, such as the introduction of an operational risk capital charge. In October 2021,
the RBNZ advised that the effective date of the ISS would be deferred until 2023, and that the feedback received would likely
require some changes to the ISS. Tower considers it is not yet possible to provide a reasonable estimate of the impact of
changes to its solvency position from the ISS, as the ISS has not been finalised, the RBNZ has stated that it will change, and a lack
of clarity in certain areas of the draft ISS means that there are different possible interpretations as to the potential impact.
The solvency presented as of 30 September 2021 does not reflect any possible change to solvency as a result of the RBNZ's
Insurance (Prudential Supervision) Act 2010 review. Policy changes and legislative reforms as a result of this review are
expected to come into legislation in 2023 - 2024.
The Reserve Bank of New Zealand (RBNZ) is the prudential regulator and supervisor of all insurers carrying on insurance
business in New Zealand, and is responsible for administering the Insurance (Prudential Supervision) Act 2010. Tower measures
the adequacy of capital against the Solvency Standards for Non-life Insurance Business published by the RBNZ alongside
additional capital held to meet RBNZ minimum requirements and any further capital as determined by the Board.
Foreign operations are subject to regulatory oversight in the relevant jurisdiction. It is Tower's policy to ensure that each of the
licenced insurers in the Group maintain an adequate capital position within the requirements of the relevant regulator.
During the year ended 30 September 2021 the Group complied with all externally imposed capital requirements (2020:
complied).
During the year RBNZ reduced Tower’s required minimum solvency margin, via a license condition, to $25.0m (2020: $50.0m).
Tower Limited's Group and Parent solvency margin are illustrated in the table below.
2021
2020
Capital risk is the risk that capital is insufficient or not of the best form to provide a buffer against losses arising from
unanticipated events, while also maximising the efficient use of capital with a view to enhancing growth and returns and adding
long-term value to Tower's shareholders.
Tower has a documented description of its capital management process which sets out Tower's principles, approaches, and
processes in relation to capital management that enables it to operate at an appropriate level of target solvency capital which is
within the bounds of Tower's risk appetite.
The capital management process allows the Board, management, rating agencies and the regulator to understand Tower's
approach to capital management, including requirements for formulating capital targets, and monitoring, reporting and
remediating capital as required.
The operation of the capital management process is reported annually to the Board together with a forward-looking estimate of
expected capital utilisation and capital resilience. In addition, Tower carries out stress, reverse stress and scenario testing to
ensure the level of capital is appropriate given its risk appetite.
35
Tower Limited
4.7
Capital management risk (continued)
b.
Capital composition
Restated
$ thousands20212020
Total shareholder equity347,044 339,886
Total347,044 339,886
c. Financial strength rating
4.8 Operational risk
4.9 Regulatory and compliance risk
Tower engages with regulators and regularly monitors developments in regulatory requirements to support
ongoing compliance.
The balance sheet capital mix at reporting date is shown in the table below:
Operational risk is the risk of loss due to inadequate or failed internal processes or systems, human error or
from external events.
Tower's approach is to proactively manage our operational risks to mitigate potential customer detriment,
regulatory or legal censure, financial and reputational impacts.
Tower has in place appropriate operational processes and systems, including prevention and detection
measures. These include processes which seek to ensure Tower can absorb and/or adapt to internal or
external occurrences that could disrupt business operations.
Management and staff are responsible for identifying, assessing and managing operational risks in accordance
with their roles and responsibilities. Failures in controls are recorded and then actively monitored and
managed. Incidents are managed by the first line of defence and overseen by the second line of defence, with
ongoing reporting to management and the Board Risk Committee.
Regulatory and compliance risk is defined as the risk of legal, regulatory or reputational impacts arising from
failure to manage compliance obligations, or failure to anticipate and prepare for changes in the regulatory
environment.
Tower Limited has an insurer financial strength rating of "A- (Excellent)" and a long-term issuer credit rating of
"a-" as affirmed by international rating agency AM Best Company Inc. with an effective date of 23 April 2021.
36
Tower Limited
4.10
Conduct risk
4.11
Cyber risk
Conduct risk is defined as the risk that conduct may contribute to poor outcomes for customers.
Tower manages Conduct risk through a number of measures including undertaking ongoing product reviews to
ensure products are delivering good customer outcomes, reviewing customer feedback to identify conduct
trends or issues, managing vulnerable customers, holding workshops with frontline staff to identify potential
conduct issues and embedding and monitoring controls across the business to deliver good customer
outcomes.
There is robust governance in place to oversee Tower's conduct risk management programme including
reporting to the Management and Board Committees.
Cyber risk is any risk associated with financial loss, disruption or damage to the reputation of Tower resulting
from either the failure, or unauthorised or erroneous use of its information systems.
Tower’s approach to Cyber risk is to proactively protect against, monitor for and respond to those cyber
threats seen to be targeting the organisation. Tower continues to monitor evolving key cyber risks, which are
being discussed and reviewed on a monthly basis through our Management Risk and Conduct Committee and
on a quarterly basis with the Risk and Audit Committee. Risk mitigation is achieved through ongoing
investment in Tower’s Security programme and Tower’s dedicated security function.
37
Tower Limited
5 Capital Structure
5.1 Borrowings
5.2 Contributed equity
$ thousands
Opening balance
Issue of share capital
Cancellation of shares on amalgamation
Recognition of shares on amalgamation
Total contributed equity
Represented by:
Opening balance
Issued shares
Cancellation of shares on amalgamation
*
Recognition of shares on amalgamation
*
Total shares on issue
-
There were no new short term cash advances during the year ended 30 September 2021. The previous facility
agreement with a limit of $15m with Bank of New Zealand expired on 30 September 2020.
Total borrowing costs for the year were nil (2020: $0.8m, none of which were capitalised).
-
-
-
Ordinary shares issued by the Company are classified as equity and are recognised at fair value less direct issue
costs. All shares rank equally with one vote attached to each share. There is no par value for each share. There
have been no changes in contributed equity during the year.
(254,990)
421,647,258
(256,107,758)
492,424
-
* On 30 September 2020, Tower Insurance Limited was renamed Tower Limited (the Company) and was amalgamated by way of a short form
amalgamation under the Companies Act 1993 with its ultimate parent, Tower Limited (the prior Tower Limited); its parent, Tower Financial
Services Group Limited; and another subsidiary of Tower Limited, Tower New Zealand Limited. At this date the Company's existing share capital
of $255m (including the issue of $45m new share capital) was cancelled without payment or other consideration, and instead the shares of the
prior Tower Limited (of $492m) became the shares of the Company, so that the shareholders of the prior Tower Limited became shareholders
of the Company.
This section provides information about how Tower finances its operations through equity. Tower's capital
position provides financial security to its customers, employees and other stakeholders whilst operating within
the capital requirements set by regulators.
492,424
45,000,000
421,647,258
492,424
421,647,258
-
421,647,258
209,990
45,000
492,424
211,107,758
20202021
38
Tower Limited
5.3
Reserves
$ thousands20212020
Opening balance(4,985)(3,697)
Currency translation differences arising during the year(1,097)(1,288)
Foreign currency translation reserve(6,082)(4,985)
Opening balance1,564 1,515
Gain on revaluation159 41
Deferred tax on revaluation(16)8
Asset revaluation reserve1,707 1,564
Capital reserve11,990 11,990
Opening balance(113,000) -
Impact of amalgamation - (113,000)
Separation reserve(113,000)(113,000)
Reserves(105,385)(104,431)
Recognition and measurement
5.4 Net tangible assets per share
$ dollars20212020
Net tangible assets per share0.57 0.56
The assets and liabilities of entities whose functional currency is not the New Zealand dollar are translated at the exchange
rates ruling at balance date. Income and expense items are translated at a weighted average of exchange rates over the period
approximating spot rates at the transaction dates. Exchange rate differences are taken to the foreign currency translation
reserve.
Tower's land and buildings are valued at fair value less accumulated depreciation. Any surplus on revaluation of these items is
transferred directly to the asset revaluation reserve unless it offsets a previous decrease in value recognised in profit or loss in
which case it is recognised in the consolidated statement of comprehensive income.
On 30 September 2020, the Company was amalgamated with other Tower entities. On this date, the separation reserve was
recognised. The separation reserve was originally created in the prior Tower Limited in 2007 at the time of the demerger of the
New Zealand and Australian businesses in accordance with a ruling provided by the Australian Tax Office (ATO). It will be carried
forward indefinitely to meet the requirements of the ATO.
Net tangible assets per share have been calculated using the net assets as per the balance sheet adjusted for
intangible assets (including goodwill) and deferred tax assets divided by total shares on issue.
39
Tower Limited
5.5Earnings per share
Restated
20212020
Profit attributable to shareholders ($ thousands)18,683 10,761
421,647,258 417,172,654
Basic and diluted earnings per share (cents)4.43 2.58
5.6Dividends
Cents per share$ thousandsCents per share$ thousands
Final dividend for the year - -
- -
Interim dividend for the period 2.5 10,541 - -
Weighted average number of ordinary shares for basic and diluted earnings per share (number
of shares)
The Group has used the ordinary shares of the prior Tower Limited up to 30 September 2020, and of the Company from that
date, for the purposes of calculating the weighted average number of ordinary shares. The prior Tower Limited issued an
additional 84,322,958 shares as per its 1 for 4 rights offer (refer to Note 5.2). The shares were issued at NZ$0.56 which
represented a 19% discount to the share price of NZ$0.69 as at 15 October 2019 (the date immediately prior to the exercise of
rights). As a result, 13,118,388 shares issued as part of the rights offer are treated as a bonus issue. The weighted average
number of ordinary shares on issue in both 2021 and 2020 have been adjusted in accordance with NZ IAS 33 Earnings per share.
2021
2020
On 24 November 2021, the Board approved a full year dividend of 2.5 cents per share, with the dividend being payable on 2
February 2022. The anticipated cash impact of the final dividend is approximately $10.5m.
During the year ended 30 September 2021 no dividends were written off (2020: $0.1m).
40
Tower Limited
6
Other balance sheet items
6.1Property, plant and equipment
Composition:
30 September 2021
$ thousands
Land and buildings
Office equipment &
furniture
Motor vehicles
Computer
equipment
Total
Composition:
Cost4,102 4,257 1,616 17,292 27,267
Accumulated depreciation - (2,289)(847)(14,757)(17,893)
Property, plant and equipment4,102 1,968 769 2,535 9,374
Reconciliation:
Opening balance4,035 2,989 1,083 1,934 10,041
Depreciation - (928)(260)(1,106)(2,294)
Additions - 1,437 - 1,654 3,091
Revaluations159 - - - 159
Disposals - (1,527)(34)56 (1,505)
Foreign exchange movements(92)(3)(20)(3)(118)
Closing Balance4,102 1,968 769 2,535 9,374
30 September 2020
Composition:
Cost4,035 8,599 1,748 15,622 30,004
Accumulated depreciation - (5,610)(665)(13,688)(19,963)
Property, plant and equipment4,0352,9891,0831,93410,041
Reconciliation:
Opening balance4,082 4,002 205 815 9,104
Depreciation - (1,048)(205)(751)(2,004)
Additions - 31 1,211 2,004 3,246
Revaluations41 - - - 41
Disposals - 21 (125)(130)(234)
Foreign exchange movements(88)(17)(3)(4)(112)
Closing Balance4,035 2,989 1,083 1,934 10,041
This section provides information about assets and liabilities not included elsewhere.
41
Tower Limited
6.1Property, plant and equipment (continued)
Furniture & fittings5-9 years
Leasehold property improvements3-12 years
Motor vehicles5 years
Computer equipment3-5 years
Property, plant and equipment is initially recorded at cost including transaction costs and subsequently measured at cost less any
accumulated depreciation and impairment losses.
Depreciation is calculated using the straight line method to allocate the asset's cost or revalued amounts, net of any residual
amounts, over their useful lives. The assets' useful lives are reviewed and adjusted if appropriate at each balance date. An asset's
carrying amount is written down immediately to its recoverable amount if it is considered that the carrying amount is greater than
its recoverable amount.
Land and buildings are shown at fair value, based on periodic valuations by external independent appraisers less subsequent
depreciation for buildings. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount
of the asset and the net amount is restated to the revalued amount of the asset.
Recognition and measurement
42
Tower Limited
6.2 Intangible assets
a. Amounts recognised in the balance sheet
30 September 2021
$ thousandsGoodwillSoftware*
Customer
Relationships**
Total
Composition:
Cost
17,744 98,850 28,656 145,250
Accumulated amortisation - (50,323)(6,335)(56,658)
Intangible Assets
17,74448,52722,32188,592
Reconciliation:
Opening balance17,744 47,866 12,238 77,848
Amortisation - (8,205)(4,351)(12,556)
Additions - 10,528 14,434 24,962
Disposals - (237) - (237)
Transfers - (1,425) - (1,425)
Closing Balance17,74448,52722,32188,592
30 September 2020
Composition:
Cost
17,744 89,985 14,222 121,951
Accumulated amortisation - (42,119)(1,984)(44,103)
Intangible Assets
17,74447,86612,23877,848
Reconciliation:
Opening balance17,744 56,467 - 74,211
Adjustment to opening balance - (5,536) - (5,536)
Restated opening balance17,744 50,931 - 68,675
Amortisation - (7,721)(1,984)(9,705)
Additions - 4,819 14,222 19,041
Disposals - (43) - (43)
Transfers - (120) - (120)
Closing Balance17,74447,86612,23877,848
*Comparative information with respect to Software and related IT projects in progress has been restated due to a
change in accounting policies as specified in Note 8.7.
**Tower acquired and assumed ANZ's rights and obligations relating to servicing a portfolio of insurance
underwritten by Tower. Tower provided insurance for ANZ and National Bank customers between 1990 and 2009
and continues to cover over 23,000 people under those policies. On completion of the acquisition of the rights and
obligations these customers will be insured directly by Tower under a Tower branded policy. The amount
capitalised includes the price paid for acquiring the portfolio outright and associated acquisition costs. The asset
will be amortised over a 5 to 10 year period, with the pattern of amortisation being aligned with expected net
cashflow benefits over this period.
43
Tower Limited
6.2aAmounts recognised in the balance sheet (continued)
-
-
Critical accounting estimates and judgements
b. Impairment testing
(i) Software and customer relationships
Critical accounting estimates and judgements
The recoverable amount for software and customer relationships is determined by reference to a value in use calculation
based on (i) cash flow forecasts that combine past experience with future expectations based on prevailing and anticipated
market factors; and (ii) a discount rate that appropriately reflects the time value of money and the specific risks associated
with the assets.
Intangible assets are assets without physical substance. They are recognised as an asset if it is probable that expected future
economic benefits attributable to the asset will flow to Tower and that costs can be measured reliably.
Tower has determined that the ANZ customer relationship asset consists of two component intangible assets with different
useful lives, and these components are therefore expected to provide a different pattern of benefits to Tower.
The asset components, being 1) a customer relationship asset with a useful life equivalent to the customer base’s expected
lifespan of ten years, and; 2) a non-compete period with a contracted useful life of five years. The estimated capitalised cost
related to the ANZ customer relationship asset has been apportioned between the two asset components by valuing the non-
compete at the differential in net present value of the asset from improved customer retention over the non-compete period,
pro-rated over the full asset value. This valuation is calculated with reference to cash flow forecasts that combine past
experience with future expectations based on prevailing and anticipated market factors, expected retention rate and a
discount rate of 12.5%.
There were no indications of impairment during the year and therefore these assets were not tested for
impairment (2020: no indications).
capitalised software: 3-5 years for general use computer software and 3-10 years for core operating system software
customer relationships: 5-10 years
Internally generated intangible assets are recorded at cost which comprise all directly attributable costs necessary to create,
produce and prepare the asset to be capable of operating in the manner intended by management. Amortisation of internally
generated intangible assets begins when the asset is available for use and is amortised on a straight line basis over the
estimated useful life.
The useful lives for each category of intangible assets with a finite life are as follows:
Recognition and measurement
An impairment charge is recognised in profit or loss when the carrying value of the asset, or cash-generating unit
(CGU), exceeds the calculated recoverable amount.
Application software and customer relationships are recorded at cost less accumulated amortisation and impairment.
Application software is amortised on a straight line basis over the estimated useful life of the software. Customer
relationships are amortised over the estimated useful life in accordance with the pattern of economic benefit consumption.
Goodwill (i.e. assets with an indefinite useful life) generated as a result of business acquisition is initially measured as the
excess of the purchase consideration over the fair value of the net identifiable assets and liabilities acquired. Goodwill is not
subject to amortisation but is tested for impairment annually or more frequently where there are indicators of impairment.
Software and customer relationships are reviewed at each reporting date by determining whether there is an
indication that the carrying values may be impaired. If an indication exists, the asset is tested for impairment. A
loss is recognised for the amount by which the carrying value exceeds the asset's recoverable value.
44
Tower Limited
6.2b Impairment testing (continued)
(i) Software and customer relationships
Critical accounting estimates and judgements
(ii) Goodwill
Critical accounting estimates and judgements
Value-in-use calculations involve the use of accounting estimates and assumptions to determine the projected net cash
flows, which are discounted using an appropriate discount rate to reflect current market assessment of the risks associated
with the assets. An impairment charge for capitalised software is incurred where there is evidence that the economic
performance of the asset is not as intended by management. Customer relationships represent the present value of future
benefits expected to arise from existing customer relationships. The assumptions for the useful life are based on historical
information.
Goodwill is allocated to cash generating units (CGUs) expected from synergies arising from the acquisition
giving rise to goodwill. Tower's goodwill is allocated to the general insurance CGU.
Goodwill is deemed to have an indefinite useful life and is tested annually for impairment or more frequently
where there is an indication that the carrying value may not be recoverable.
Tower undertook an annual impairment review and no loss has been recognised in 2021 as a result (2020: nil).
COVID-19 impacts were again taken into account when performing the review.
The overall valuation is sensitive to a range of assumptions including the forecast combined operating ratio used in terminal
value calculation, discount rate, and terminal value long-term growth rate. Reasonable changes to these assumptions will
not result in an impairment.
The recoverable amount of the New Zealand general insurance business is assessed with reference to its appraisal value,
which is a common practice for insurance companies. A base discount rate of 12.0% was used in the calculation (2020:
10.5%). The cash flows are in line with the FY22 - FY24 operational plan (2020: FY21 - FY23) and longer term profitability is
assumed to continue to grow at 2.5% per annum. The projected cash flows are determined based on past performance and
management's expectations for market developments with a terminal growth rate of 2.5% (2020: 2%).
45
Tower Limited
6.3Leases
a. Amounts recognised in the Balance Sheet
(i) Right of use assets
30 September 2021
$ thousandsOffice spaceMotor vehiclesTotal
Composition:
Cost
26,901 25 26,926
Accumulated depreciation(1,332)(17)(1,349)
Right of use assets
25,569825,577
Reconciliation:
Opening balance7,189 22 7,211
Depreciation(2,404)(14)(2,418)
Additions*24,332 - 24,332
Disposals(3,308) - (3,308)
Revaluations(3) - (3)
Impairment - - -
Net foreign exchange movements(237) - (237)
Right of use assets
25,569825,577
30 September 2020
$ thousandsOffice spaceMotor vehiclesTotal
Composition:
Cost
9,619 53 9,672
Accumulated depreciation(2,430)(31)(2,461)
Right of use assets7,189227,211
Reconciliation:
Opening balance10,097 86 10,183
Depreciation(2,518)(68)(2,586)
Additions961 4 965
Disposals(1,249) - (1,249)
Revaluations(96) - (96)
Impairment(27) - (27)
Net foreign exchange movements21 - 21
Right of use assets
7,189227,211
Recognition and measurement
Right-of-use assets are recognised when Tower has the right to use the assets. Right-of-use assets are measured at cost
comprising the initial measurement of the lease liability adjusted for any lease payments made at or before the
commencement date less any lease incentives received; and indirect costs; and restoration costs. Right-of-use assets are
generally depreciated over the shorter of the asset's useful life and the lease term on a straight line basis.
* In August 2021 Tower entered into a new lease with a 10 year term for its Auckland premises. Tower recognised an initial right-of-use asset
of $24.0m and an initial lease liability of $33.3m with the difference primarily representing lease incentives. Tower has assumed no renewals
of the lease past the initial 10 year term for the purposes of the right of use asset and lease liability.
46
Tower Limited
6.3aAmounts recognised in the Balance Sheet (continued)
(ii) Lease liabilities
$ thousands20212020
Composition:
Current6,082 2,721
Non-current33,339 5,974
Lease liabilities
39,421 8,695
Due within 1 year6,082 2,721
Due within 1 to 2 years6,041 2,584
Due within 2 to 5 years12,055 3,534
Due after 5 years19,514 418
Discount(4,271)(562)
Lease liabilities
39,421 8,695
Recognition and measurement
b. Amounts recognised in the consolidated statement of comprehensive income
$ thousandsClassification20212020
Depreciation and impairmentUnderwriting expense & corporate and other expenses(2,418)(2,598)
Interest expenseFinance costs(378)(369)
Gain on disposalUnderwriting expense1,179 167
Lease expense
(1,617)(2,800)
c. Amounts recognised in the consolidated statement of cash flows
$ thousands20212020
Total cash outflow for lease principal payments(2,848)(3,070)
Lease liabilities are recognised at the date Tower has the right to use the corresponding asset. Lease liabilities are initially measured as
the present value of expected lease payments under lease arrangements. Lease liability will include any option to extend where it is
reasonably certain that the option will be exercised. The lease payments are discounted using the incremental borrowing rate as the
interest rate in the lease cannot be readily determined. Incremental borrowing rates used during the year ranged between 1.9% and
3.6% (2020: between 2.3% and 3.6%).
Subsequent repayments are split between principal and interest cost where the finance cost represents the time value of money and is
charged to the profit or loss over the lease period. The discount rate applied is unchanged from the applied at the initial recognition of
the lease, unless there are material changes to the lease.
47
Tower Limited
7Tax
7.1 Tax expense
Composition
Restated
$ thousands20212020
Current tax 3,745 3,621
Deferred tax5,785 3,900
Adjustments in respect of prior years(395)(51)
Tax expense9,135 7,470
Reconciliation of prima facie tax to income tax expense
Restated
$ thousands20212020
Net profit before tax28,450 18,680
Prima facie tax expense at 28% (2020: 28%)7,966 5,230
Adjustments in respect of prior years(395)(51)
Tax effect of non-deductible expenses and non-taxable income796 788
Foreign tax credits written off861 1,127
Other(93)376
Tax expense9,135 7,471
Recognition and measurement
7.2 Current tax
a. Current tax asset
$ thousands20212020
Excess tax payments related to prior periods*12,038 12,038
Excess tax payments/tax payable related to current period**863 854
Current tax assets12,901 12,892
** Excess tax payment made in the Pacific Islands during the reporting period.
This section provides information on Tower's tax expense during the year and its position at balance date.
Tax expense is calculated on the basis of the applicable tax rates that have been enacted or substantively enacted at the end
of the reporting period in the jurisdictions Tower operates in. There have been no tax rate changes during the year in these
jurisdictions. Current tax expense relates to tax payable for the current financial reporting period while deferred tax will be
payable in future periods.
*Expected to be recovered from 2024 as per the Board approved operational plan for 2022 to 2025.
48
Tower Limited
7.2
Current tax (continued)
b. Current tax liability
Recognition and measurement
7.3 Deferred tax
a. Deferred tax asset
Composition
Restated
$ thousands20212020
Tax losses recognised24,116 25,720
Software, property, plant and equipment2,834 3,744
Leases373 501
Provisions and accruals4,165 3,882
Recognised in profit or loss31,488 33,847
Impact through other comprehensive income - 1,550
Recognised in comprehensive profit or loss31,488 35,397
Set-off of deferred tax liabilities pursuant to NZ IAS 12(7,038)(6,575)
Deferred tax asset24,450 28,822
Reconciliation of movements
$ thousands20212020
Opening balance35,397 36,360
Movements recognised in other comprehensive income- 2,051
(3,909)(3,014)
Deferred tax asset pre NZ IAS 12 set off31,488 35,397
Overpayment of tax in the current and prior periods is recognised as a current tax asset. Current tax assets are measured at
the amount expected to be recovered from the taxation authorities, using the tax rates and tax laws that have been enacted
or substantively enacted by the end of the reporting period.
Movements recognised in consolidated statement of comprehensive income
The current tax liability balance of $170k (2020: $821k) relates to taxes payable to offshore tax authorities in the
Pacific Islands.
49
Tower Limited
7.3 Deferred tax (continued)
b. Deferred tax liability
Composition
$ thousands20212020
Deferred acquisition costs(5,481)(6,588)
Customer relationships(3,433) -
Other*(461)(911)
Recognised in profit or loss(9,375)(7,499)
Asset revaluation(438)(422)
Recognised in comprehensive profit or loss(9,813)(7,921)
Set-off of deferred tax liabilities pursuant to NZ IAS 127,038 6,575
Deferred tax liability(2,775)(1,346)
* Primarily relates to withholding tax on undistributed profit from the Pacific Islands.
Reconciliation of movements
$ thousands
20212020
Opening balance(7,921)(7,043)
(1,876)(886)
Movements recognised in equity(16)8
Deferred tax liability pre NZ IAS 12 set off(9,813)(7,921)
Recognition and measurement
Movements recognised in consolidated statement of comprehensive income
Deferred tax is income tax which is expected to be payable or recoverable in the future as a result of the unwinding of
temporary differences. These arise from differences in the recognition of assets and liabilities for financial reporting and from
the filing of income tax returns. Deferred tax is recognised on all temporary differences, other than those arising from (i)
goodwill or (ii) from the initial recognition of assets and liabilities in a transaction (other than in a business combination) that
affects neither the accounting nor taxable profit or loss.
At the reporting date, the Group has recognised a deferred tax asset in respect of its unused tax losses of $86.1m (2020:
$92.2m).
Deferred tax is calculated at the tax rates that are expected to apply to the year when the liability is settled or the asset
realised, based on tax rates and tax laws that have been enacted or substantively enacted at balance date.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to
settle its current tax assets and liabilities on a net basis.
50
Tower Limited
7.3 Deferred tax (continued)
Critical accounting judgements and estimates
7.4 Imputation credits
$ thousands
20212020
271271
The Group imputation credit account reflects the imputation credits held by the Company as the representative
member of the Group.
Imputation credits available for use in subsequent reporting periods
Deferred tax assets are recognised for all unused tax losses to the extent it is probable that taxable profits will be available
against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred
tax assets that can be recognised based on the likely timing and quantum of future taxable profits.
This assessment is completed on the basis of the approved strategic plans of Tower Limited and subsidiaries. Tower's ability
to utilise these tax losses depends on the future profitability, changes in ownership and a major change in Tower's business.
The enactment of the new business continuity test in the Income Tax Act 2007 on 30 March 2021 for carrying forward tax
losses means that Tower is able to carry forward its tax losses even if there is a significant shareholding change, as long as the
business continuity test is met.
51
Tower Limited
8
8.1
$ thousands20212020
Cash at bank88,740 61,892
Deposits at call27,389 18,071
Restricted cash - 145
Cash and cash equivalents116,129 80,108
Restated
Reconciliation of profit for the year to cash flows from operating activities20212020
Profit for the year19,315 11,210
Adjusted for non-cash items
Depreciation of property, plant and equipment2,294 2,004
Depreciation, impairment and disposals of right-of-use assets2,418 2,432
Amortisation of intangible assets12,556 9,706
Fair value losses on financial assets4,568 1,518
Gain/loss on disposal of fixed assets322 -
Change in deferred tax5,799 7,565
Change in receivables41,612 (2,659)
Change in payables8,840 (15,314)
Change in taxation539 (1,414)
Facility fees and interest paid378 1,115
98,641 16,163
Adjusted for financing activities
Net cash inflows from operating activities
Other information
This section includes additional disclosures which are required by financial reporting standards.
Notes to the Consolidated Cash Flow Statement
Composition
Adjusted for movements in working capital
The average interest rate at 30 September 2021 for deposits at call is 0.25% (2020: 0.47%).
52
Tower Limited
8.2Related party disclosures
$ thousands20212020
Salaries and other short term employee benefits paid
5,0594,736
Termination benefits486 -
Independent director fees723624
Related party remuneration 6,268 5,360
Definition
8.3
$ thousands20212020
Audit of financial statements
(1)
599550
Other assurance services
(2)
6046
Non-assurance agreed procedures
(3)
- 12
Total fees paid to Group's auditors659608
Fees paid to subsidiaries' auditors different to Group auditors:
Audit of financial statements
(4)
1415
Auditors remuneration673623
(1)
(2)
(3)
(4)
Tower considers key management personnel to consist of the Board of Directors, Chief Executive Officer and
executive leadership team. Information regarding individual director and executive compensation is provided in
the Corporate Governance section of the annual report.
Audit of financial statements includes fees for both the audit of annual financial statements and the review of the interim financial
statements. PwC Fiji perform the audits of all overseas incorporated subsidiaries with support of PwC New Zealand and other PwC network
firms. $129,600 is paid to other PwC network firms (non New Zealand) for their audit services.
Other assurance services includes annual solvency return assurance and Pacific Island regulatory return audits. The other assurance services
for the year ended 30 September 2020 were completed during the year ended 30 September 2021.
Agreed procedures on Pacific Island regulatory return and Annual Shareholders' Meeting procedures in the year ended 30 September 2020.
The non-assurance agreed procedures for the year ended 30 September 2020 were completed during the year ended 30 September 2021.
The audit of Tower Insurance (Vanuatu) Limited was performed by Law Partners (2020: Law Partners).
Auditor's remuneration
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the
activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.
Tower insurance products are available to all key management personnel on the same terms as available to
other employees. In addition, Tower purchases indemnity insurance for all directors both past and present
covering liabilities and legal expenses incurred whilst in office.
53
Tower Limited
8.4 Contingent liabilities
8.5 Subsequent events
8.6 Capital commitments
The Group has no other contingent liabilities.
The Group is occasionally subject to claims and disputes as a commercial outcome of conducting insurance
business. Provisions are recorded for these claims or disputes when it is probable that an outflow of resources will
be required to settle any obligations. Best estimates are included within claims reserves for any litigation that has
arisen in the usual course of business.
As at 30 September 2021, Tower has nil capital commitments (2020: $0.7m).
On 24 November 2021, the Board approved a full year dividend of 2.5 cents per share, with the dividend being
payable on 2 February 2022 as specified by Note 5.6. The anticipated cash impact of the final dividend is
approximately $10.5m.
On 14 October 2021 Tower Limited reached an agreement to increase its shareholding in National Pacific
Insurance Limited from 71.39% to 93.88% for a consideration of $3.4m. Tower Limited has subsequently
commenced a process to acquire the remaining 6.12% shareholding.
On 24 November 2021, the Board approved $30.4m capital return by way of a compulsory share buyback. The
capital return is subject to shareholder and Court approval.
54
Tower Limited
8.7Impact of new accounting standards and changes in interpretation of current accounting standards
a. Issued and effective
Software-as-a-Service (“SaaS”) arrangements
Impact of accounting policy change
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of cash flows
Earnings per share
Adjustment relating to periods before 1 October 2019
- an increase in opening accumulated losses of $7.1m (2020: $3.9m).
- an increase in employee and supplier payments for the year ended 30 September 2021 of $3.5m (2020: $2.7m).
For the year ended 30 September 2021 and its comparative period, the Group has revised its accounting policy in
relation to the configuration and customisation costs incurred in implementing Software as a Service (SaaS)
arrangements. These are arrangements in which, as a Group, application software is accessed over the internet or
via a dedicated portal as required. The change in accounting policy resulted from the IFRS Interpretations
Committee pronouncements as to how current accounting standards apply to these types of arrangements in
principle, primarily in relation to the recognition and measurement criteria of IAS 38 Intangible Assets with specific
respect to Software and IT related projects in progress.
SaaS arrangements are service contracts providing the Group with the right to access a cloud provider’s application
software over a stated time period. Costs the Group incurs to configure, customise and maintain access to providers
application software are recognised as operating expenses when incurred and in accordance with contracted terms.
As a result of this change in accounting policy the Group has determined certain costs that have been capitalised
relating to SaaS arrangements should have been expensed when they were incurred.
- the reduction in opening accumulated losses at 1 October 2019 relating to costs capitalised pre 1 October 2019 is
$3.9m.
- a decrease in earnings per share for the year ended 30 September 2021 of 0.34 cents (2020: 0.27 cents).
The changes are required to be applied retrospectively. Costs capitalised prior to 1 October 2019 that should have
been expensed have been adjusted against opening accumulated losses at 1 October 2019. Costs capitalised in the
years ended 30 September 2020 and 30 September 2021 that should have been expensed have been reclassified to
the consolidated statement of comprehensive income. The impact on the financial statements for the years ended
30 September 2020 and 30 September 2021 is summarised below:
- an increase in technology expenses for the year ended 30 September 2021 of $3.1m (2020: $1.5m).
- a decrease in tax expense for the year ended 30 September 2021 of $0.6m (2020: $0.4m).
- an overall decrease in net profit after tax for the year ended 30 September 2021 of $1.5m (2020: $1.3m).
- a decrease in people costs capitalised during the year ended 30 September 2021 of $0.5m (2020: $1.3m).
- a decrease in amortisation expenses for the year ended 30 September 2021 of $1.5m (2020: $1.1m).
- the portion of the decrease to intangible assets above relating to costs capitalised pre 1 October 2019 is $5.5m.
- the portion of the increase to deferred tax assets above relating to costs capitalised pre 1 October 2019 is $1.6m.
- a decrease in payments for purchase of intangible assets for the year ended 30 September 2021 of $3.5m (2020:
$2.7m).
- a decrease in intangible assets as at 30 September 2021 of $2.0m (2020: $7.1m).
- an increase in deferred tax assets as at 30 September 2021 of $0.6m (2020: $2.0m).
55
Tower Limited
8.7 Impact of new accounting standards and changes in interpretation of current accounting standards
b. Issued and not yet effective
NZ IFRS 17 Insurance Contracts is effective for periods beginning on or after 1 January 2023. Tower will
apply the standard for the year ending 30 September 2024, with the comparative period for the year ending
30 September 2023. The standard replaces the current guidance in NZ IFRS 4 Insurance Contracts, and
establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts.
The standard introduces substantial changes in the presentation of financial statements and disclosures,
introducing new balance sheet and income statement line items and increased disclosure requirements
compared with existing reporting. Tower has a programme with dedicated resource to assess the impact of
adopting NZ IFRS 17 and to project manage the transition to the new standard including system
development. Tower has completed an initial draft of accounting policies under IFRS 17, with the majority
of the impact assessment and systems development work expected to be completed in the financial year
ended 30 September 2022. An initial assessment has been completed on Tower's contracts, and it is
expected that the majority of Tower's insurance contracts will meet the requirements of the simplified
approach available under IFRS 17. However, due to the complexity of the requirements within the standard
and the availability of accounting policy choices as to how the standard is implemented which have not yet
been finalised, a full assessment of the financial impact has not yet been completed.
56
PricewaterhouseCoopers, 15 Customs Street West, 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
Our opinion
In our opinion, the accompanying consolidated 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 2021, 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).
What we have audited
The Group's consolidated financial statements comprise:
●the consolidated balance sheet as at 30 September 2021;
●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 consolidated financial statements, which include significant accounting policies
and other explanatory information.
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 consolidated 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.
Independence
We are independent of the Group in accordance with Professional and Ethical Standard 1
International Code of Ethics for Assurance Practitioners (including International Independence
Standards) (New Zealand) (PES 1) issued by the New Zealand Auditing and Assurance Standards
Board and the International Code of Ethics for Professional Accountants (including International
Independence Standards) issued by the International Ethics Standards Board for 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 assurance over solvency and
regulatory insurance returns and agreed upon procedures in respect of voting at the Annual
Shareholders Meeting and a regulatory insurance return. In addition, certain partners and employees
of our firm may deal with the Group on normal terms within the ordinary course of trading activities of
the Group. These matters have not impaired our independence as auditor of the Group.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in
our audit of the consolidated financial statements of the current year. These matters were addressed
in the context of our audit of the consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
PwC 58
Description of the key audit matter How our audit addressed the key audit matter
(1) Valuation of outstanding claims
(2021: $122,338,000, 2020: $107,747,000)
We considered the valuation of outstanding
claims a key audit matter because this
involves an estimation process combined
with significant judgements and assumptions
made by management to estimate future
cash outflows to settle claims.
The outstanding claims liability includes a
central estimate of the future cash outflows
relating to claims incurred, as at and prior to
the reporting date, and the expected costs of
handling those claims. There is uncertainty
over the amount that reported claims and
claims incurred at the reporting date but not
yet reported to the Group will ultimately be
settled at. The estimation process relies on
the quality of underlying claims data and the
use of informed estimates to determine the
quantum of the ultimate loss.
Key actuarial assumptions applied in the
valuation of outstanding claims include:
●expected future claims development
proportion; and
●claims handling expense ratios
Outstanding claims in relation to the
Canterbury earthquakes have a greater
degree of uncertainty and judgement. This
mainly arises due to the uncertainty as to
further deterioration of open known claims,
the Earthquake Commission (EQC) reporting
of new claims to the Group which have gone
over the $100,000 statutory liability cap (over
cap claims), new litigation claims, reopening
of closed claims, expected claims costs for
open claims and estimates of future claims
management expenses.
Changes in assumptions can lead to
significant movements in the outstanding
claims liability.
Claims data is a key input to the actuarial estimates.
Accordingly, we:
●evaluated the design effectiveness and tested
controls over claims processing;
●assessed a sample of claim case estimates at
the year end to check that they were supported
by appropriate management assessment and
documentation;
●assessed, on a sample basis, the accuracy of
previous claim case estimates by comparing to
the actual amount settled during the year and
analysed any escalation in the claim case
estimate to determine whether such escalation
was based on new information that came
available during the year;
●inspected a sample of claims paid during the
year to confirm that they were supported by
appropriate documentation and approved within
delegated authority limits; and
●tested the integrity of data used in the actuarial
models and calculations by agreeing the
relevant inputs, such as claims data, to source.
Together with our actuarial experts, we:
●considered the work and findings of the
actuaries engaged by the Group;
●evaluated the actuarial models and
methodologies used, and any changes to them,
by comparing with generally accepted models
and methodologies applied in the sector;
●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
(where applicable), taking into consideration
COVID-19 impacts; and
PwC 59
Description of the key audit matter How our audit addressed the key audit matter
The outstanding claims liability includes a
risk margin that allows for the inherent
uncertainty in the central estimate of future
claim cash outflows. In determining the risk
margin, the Group makes judgements about
the volatility of each class of business written
and the correlation between different
geographical locations.
Refer to note 2.4 to the consolidated
financial statements.
●assessed the risk margin as per the
requirements of applicable accounting
standards, by comparing to known industry
practice. In particular we focused on the
assessed level of uncertainty in the central
estimate; and with reference to the inherent
uncertainty in the remaining Christchurch
earthquake claims and its consistency with
prior periods.
(2) Recoverability of the deferred tax
asset arising from tax losses
(2021: $24,116,000, 2020: $25,720,000)
The majority of the Group’s deferred tax
asset arises from tax losses. We considered
recoverability of the deferred tax asset a key
audit matter because utilisation of the asset
is sensitive to the Group’s expected future
profitability and sufficient continuity of the
ultimate shareholders or business continuity.
Management judgement is involved in
forecasting the timing and quantum of future
taxable profits, which are inherently
uncertain, and whether it is probable the tax
losses will be utilised in the foreseeable
future.
Refer to note 7.3 to the consolidated
financial statements.
In considering the recoverability of the deferred tax
asset arising from tax losses we performed the
following procedures:
●compared the previous management budget
with actual results to assess the reliability of
management’s forecasting;
●considered the reasonableness of the
assumptions in the FY22 operational plan on
the forecast utilisation of tax losses;
●assessed the Group’s ability to maintain
sufficient continuity of the ultimate shareholders
or to meet the business continuity test and
therefore its entitlement to offset the tax losses
against future taxable profits; and
●determined whether it was probable (more likely
than not) that the tax losses would be utilised in
the foreseeable future.
PwC 60
Our audit approach
Overview
Overall group materiality: $3.95 million, which represents approximately 1% of
gross earned premium.
We chose gross earned premium as the benchmark because, in our view, it is
the benchmark against which the performance of the Group is most commonly
measured by users, and is a generally accepted benchmark for insurance
companies.
A full scope audit was performed for the Company based on its financial
significance to the Group. Specified audit procedures and analytical review
procedures were performed on the remaining Group entities.
As reported above, we have two key audit matters, being:
●Valuation of outstanding claims
●Recoverability of the deferred tax asset arising from tax losses
As part of designing our audit, we determined materiality and assessed the risks of material
misstatement in the consolidated financial statements. In particular, we considered where
management made subjective judgements; for example, in respect of significant accounting estimates
that involved making assumptions and considering future events that are inherently uncertain. 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.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement. Misstatements may arise due to fraud or error. They are considered material if,
individually or in aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality,
including the overall Group materiality for the consolidated 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 consolidated financial statements as a whole.
How we tailored our group audit scope
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion
on the consolidated 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.
Other information
The Directors are responsible for the other information. The other information comprises the
information included in the Annual Report, but does not include the consolidated financial statements
and our auditor’s report thereon. The Annual Report is expected to be made available to us after the
date of this auditor’s report.
Our opinion on the consolidated financial statements does not cover the other information and we will
not express any form of audit opinion or assurance conclusion thereon.
PwC 61
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information and, in doing so, consider whether the other information is materially inconsistent
with the consolidated financial statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated.
When we read the other information not yet received, if we conclude that there is a material
misstatement therein, we are required to communicate the matter to the Directors and use our
professional judgement to determine the appropriate action to take.
Responsibilities of the Directors for the consolidated financial statements
The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of
the consolidated 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 consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated 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 consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated 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 consolidated financial statements.
A further description of our responsibilities for the audit of the consolidated financial statements is
located at the External Reporting Board’s website at:
https://www.xrb.govt.nz/assurance-standards/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 Karen Shires.
For and on behalf of:
Chartered Accountants Auckland
24 November 2021
24 November 2021
The Directors
Tower Limited
136 Fanshawe Street
Auckland 1010
Dear Directors
Review of Actuarial Information contained in the financial statements
As required by Section 78 of IPSA the Appointed Actuary, Geoff Atkins of Finity Consulting, has reviewed the
actuarial information contained in, or used in the preparation of, the financial statements at 30 September
2021. Geoff Atkins and Finity have no relationship with or interest in Tower other than being a provider of
actuarial services.
I prepared the actuarial valuation of liabilities remaining from the Canterbury Earthquakes and reviewed the
actuarial valuations of insurance liabilities for the New Zealand business and the Pacific Islands businesses. I
reviewed the other actuarial information as specified by IPSA in Section 77, including the solvency calculations
for the financial statements.
No limitations were placed on me in performing the review and all data and information requested was
provided.
Nothing has come to my attention that would lead me to believe that any of the actuarial information
contained in, or used in the preparation of, the financial statements is not appropriate.
In my opinion the company has maintained a solvency margin in excess of the minimum required as at 30
September 2021.
The report is being provided for the sole use of Tower for the purpose state above. It is not intended, nor
necessarily suitable, for any other purpose and should only be relied on for the purpose for which it is intended.
Yours sincerely
Geoff Atkins Anagha Pasche
Appointed Actuary
Fellows of the New Zealand Society of Actuaries
---
2021 full year results1 October 2020 to 30 September 2021
24 NOVEMBER 2021
2
Chairman’s updateMichael Stiassny, Chairman
1
Business updateBlair Turnbull, Chief Executive Officer
2
FY21 financial performanceJeff Wright, Chief Financial Officer
3
Looking forward Blair Turnbull, Chief Executive Officer
4
Agenda
TACKLING THE CHALLENGES
STRONG AND WELL CAPITALISED
Chairman’s update –Dividends & premium growth in a challenging market
3
POSITIONED FOR LONG-TERM GROWTH
•
2.5
¢
dividend bringing full year to
5
¢
per share
•
RBNZ licence condition reduced from $50m to $25m
•
Proposed return of $30.4m excess capital through compulsory buy back
•
Addressing profit challenges first signalled at the half year
•
Responding with rating and underwriting actions with improvements expected through FY22
•
$400m premium milestone reached through unique technology and distribution footprint
•
Flagship Tower Direct digital business
•
Unique partnership distribution capability
•
Digitising our resilient Pacific business to improve efficiency & growth
•
Leading technology partnerships
•
Continued efficiency improvements
4
Good growth in a challenging environment
5
2015-2019RE-PLATFORMProduct rationalisationChristchurch recoveryInvestment in cloud-based, EIS platform implementation
2020-2021STRENGTHENING THE BUSINESSResolving legacy issuesEQC settlementRBNZ licence condition reduced $25mTower entity amalgamationContinuing customer migration to new platform
2021+LONG TERM EARNINGS, DIVIDENDS & PREMIUM GROWTHScaling leading platform - P
acific digitisation rollout,
migrating ANZ and Youi booksExpanding quality product suiteInnovating the customer experienceBuilding leading partnershipsAutomating and enhancing claims journeyInvesting in our people and culture
A journey of continued focus & innovation
6
Results achieved while navigating a challenging environment
vs $28.4m prior year
UNDERLYING NPAT
incl. large events
$20.8m
$19.3m
vs $11.2m prior year
REPORTED PROFIT
incl. large events
$404m
TOWER GROSS WRITTEN
PREMIUM (GWP)
Up 5% from $385m
prior year
COMBINED OPERATING
RATIO (COR)
91.4%
Increased 2.7% from
88.6% prior year
REPORTED PROFIT ($m)
UNDERLYING NPAT EXCL. LARGE EVENTS ($m)
Impact of external factors
7
MOVEMENT IN UNDERLYING NPAT ($m)
vs 57 prior year
LARGE HOUSE CLAIMS
92
$0.2m
vs $5.3m prior year
NET INVESTMENT
INCOME (pre-tax)
$7.1m
CLAIMS INFLATION
(pre-tax)
Increase in claims
expense
LARGE EVENTS
(pre-tax)
$13.9m
vs $9.7m prior year
8
Good growth in customers and premium
Up 5% on prior year
CUSTOMERS
304,000
NZ GWP GROWTH
7.9%
MYTOWER REGISTRATIONS
132,000
vs 45k prior year
To $350m GWP
vs 27% prior year
NET PROMOTER SCORE
43%
Note 1: There has been a minor customer de
finitional change compared to FY20 surrounding how joint policy owners are recorded as
customers
GWP BY BUSINESS UNIT ($m)
NZ PERSONAL LINES MARKET SHARE
Product, pricing and underwriting enhanced through data
9
Up 4% on prior year
NZ BAU LOSS RATIO
53.6%
NZ UNDERWRITING
IMPROVEMENTS
Full house fire
replacement cap
Flood risk-based
pricing
MULTIPLE PRODUCT
HOLDER TENURE
7.9 years
vs 4.8 years for a
single product holder
135,000 NZ customers
have multiple products
NZ CUSTOMERS WITH
MULTIPLE PRODUCTS
50%
NZ PRODUCT MIX GWP ($m)
NZ NEW BUSINESS RISKS –
ELECTRIC VEHICLE & BOAT
Investing in digital platform for efficiency and scalability
10
vs 40% prior year
NZ SERVICE TASKS
COMPLETED DIGITALLY
51%
NZ CLAIMS LODGED
DIGITALLY
31%
CORE ADMIN LEGACY
SYSTEMS REMAINING
4
vs 6 prior year,
2 remaining by end
of 2022
vs 23% prior year
TECHNOLOGY SYSTEM RELEASES
NZ SERVICE TASKS
COMPLETED DIGITALLY
TOTAL CUSTOMERS
MIGRATED TO EIS
80%
vs 62% in
September 2020
11
MER improving while continuing to invest
2% better than prior
year
TOWER MANAGEMENT
EXPENSE RATIO
37%
ACQUISITION COST
12.6%
DIGITAL AND DATA
$1 in $3
NET COMMISSION
EXPENSE REDUCED
Of total management
expenses
vs 13% in prior year
Reduction following
book purchase and
reinsurance profit share
22%
MANAGEMENT EXPENSE RATIO (% NEP)COMMISSION EXPENSE RATIO (% GEP)
12
*Cash earnings defined as Reported Full Year Net Profit Afte
r Tax adjusted for acquisition amortisation and unusual items
**Under a Court Scheme of Arrangement
Strong capital & solvency, delivering shareholder returns
Via compulsory
share buyback**
$21m
$30.4m
271%
Before return of
capital
ORDINARY
DIVIDEND POLICY
60-80%Of cash earnings*
where prudent to do
so
FULL YEAR DIVIDEND
PAYMENT
PROPOSED CAPITAL RETURN
OF
TOWER PARENT SOLVENCY
$10.5m to be paid
2 Feb
2022
2.5
¢
dividend
bringing full year to
5¢
per share
2.5
¢
dividend
bringing full year to
5¢
per share
13
FY21 financialperformance
14
•
Solid FY21 GWP of $404.1m. GWP growth $18.9m on FY20 (+5%)
•
BAU claims expense impacted by higher volume of large house claims and emerging claims inflation
•
Management expense ratio improved by 2.3%, reflecting scale platform efficiencies
•
The acquisition of the ANZ portfolio and higher proportional reinsurance profit share contributed to lower commission expenses
•
Underlying NPAT before large events of $30.8m is a decrease of 13% on FY20
•
Profit impacted by lower investment income
•
Reported profit of $19.3m, increase of 72% on FY20. Impacted by EQC receivable write down in FY20 of $9.5m after tax
Group underlying financial performance
Note: 1: FY20 reported profit has been restated for the IFRIC
accounting treatment decision on software-as-a-service (SaaS) cos
ts previously capitalised now expensed as non-underlying
Note 2: there has been minor reclassification between management
expenses and “other income an
d expenses” in the comparative pe
riod
Note 3: refer to reconciliation between Underlying NPAT and Reported profit on page 35
Reported profit after tax
11.2
8.1
19.3
One-off transactions (net of tax)
(17.2)
15.7
(1.5)
Underlying NPAT
28.4
(7.6)
20.8
Tax
(14.1)
4.7
(9.5)
Other income
0.5
0.9
1.4
Net investment income
5.3
(5.1)
0.2
Underwriting profit
36.7
(8.0)
28.7
Net commission expense
(14.5)
3.2
(11.3)
Management expenses
(112.7)
0.7
(112.0)
Large event claims expense
(9.7)
(4.2)
(13.9)
BAU claims expense
(149.7)
(17.1)
(166.8)
Net earned premium
323.3
9.4
332.7
Reinsurance
(57.2)
(5.0)
(62.2)
Gross earned premium
380.5
14.4
394.9
$ million
FY21
FY20
Change
Unearned premium
(4.6)
(4.5)
(9.2)
Gross written premium
385.1
18.9
404.1
Key ratios
FY21
FY20
Change
Claims ratio excluding large events
50.2%
46.3%
3.8%
Large events claims ratio
4.2%
3.0%
1.2%
Expense ratio
37.0%
39.3%
-2.3%
Combined ratio
C
C
91.4%
88.6%
2.7%
Claims challenges for insurers
15
Large events
Changing claims trends
InflationSupply chain
The volatility of large events in New Zealand and the Pacific is high. The reinsurance programme is Tower's main tool in managing this.
As New Zealand is heavily dependent on imports, supply chain issues like those associated with Covid-
19 can be particularly challenging.
When inflation occurs, quick identification and action is key. The FY21 inflation also raises a question of whether it is a short-term spike or a long-term change.
Tower pricing, policies, and process changes have
been actioned to address these challenges.
It takes 12 months for those actions
to flow through the whole portfolio.
Tower pricing, policies, and process changes have
been actioned to address these challenges.
It takes 12 months for those actions
to flow through the whole portfolio.
External factors
Tower’s FY21 result reflects the claims challenges that insurers can faceTower’s FY21 result reflects the claims challenges that insurers can face
Large fire-related house claims increased in FY21 which can be a changing trend or random volatility that needs to be explained and managed.
Claims inflation in New Zealand impacted us heavily
16
SECONDHAND VEHICLE CPI YOY%
CAR PARTS & REPAIRS CPI YOY%
Note 1: CPI (consumer price
index) data sourced from
Statistics New Zealand
September quarter
•
Claims inflation was anticipated due to
Covid-19, but when it emerged it
was more sudden and extreme than expected
•
Covid-19 lockdowns and supply chain
delays mean there are more open
claims than normal, so the impact of inflation is likely not over yet
•
Rating increases have been applied and will take 12 months to flow through the whole portfolio
•
Tower will continue to monitor inflation closely, taking action as necessary
HOUSE CONSTRUCTION CPI YOY%
TOTAL CLAIMS RATIO
17
Sharp focus on claims management
•
Both BAU and large events ratios were the highest since 2018
•
Inflation has been a significant driver of this with average motor claims up 6% and average house claims up 7%
•
Rate increases have been applied to all portfolios
•
Frequency of motor claims has dipped with Covid-19, while frequency of house claims has increased
NZ MOTOR FREQUENCY & SEVERITY
NZ HOUSE FREQUENCY & SEVERITY
Note 1: Severity is defined as the cost of closed claims (exc
luding large events, large house,
windscreen, zero value or negati
ve incurred claims) divided by the count of claims
Note 2: Frequency is defined as the count of claims (same exclusions as above) divided by risks in force
18
Large house claims and large events
NZ LARGE HOUSE CLAIMS ($m)
LARGE EVENTS CLAIMS ($m)
²
(BASED ON EVENT DATE)
•
Both NZ large house claims and large events were at their highest for many years in FY21
•
With most large house claims being fire related, Tower has remo
ved the uncapped replacement benefit for total loss house fires
•
Tower has investigated the large house fire claims trends but iden
tified no single factor that explains the rise – this analysis
continues
•
The introduction of risk-based pricing for flood will enable
Tower to better manage high risk exposures for large events
Note 1: Large house claims are defined as greater than $50k NZDNote 2: Large event claims are defined as $1m NZD or greater that impact more than one risk. The gross and net incurred claims
have been updated for the most recent ultimate estimate
and recoveries subsequently received after each reporting period
. Prior period adjustments have been allocated back to the repo
rting period to match the event date
19
•
Management expenses reduced $3.9m to $123.3m in FY21
•
MER improved 2.3% on FY20, down to 37%
•
Amortisation expense increased largely due to ANZ & EIS amortisation
•
Liability adequacy test (LAT) resulted in an additional $2.1m of acquisition costs that were unable to be capitalised
•
People expenses reduced by $4.0m partly through the realisation of benefits of the EIS platform post implementation
•
Net commission expenses decreased due to the purchase of the ANZ portfolio, and an increase in reinsurance profit share income in FY21
MOVEMENT IN MANAGEMENT EXPENSES ($m)
Continued focus on management expenses
Note: 1: there has been minor reclassification between management
expenses and “other income an
d expenses” in the comparative pe
riod.
20
Macroeconomic factors impact investment income
•
Tower maintains a conservative investment policy, with the fo
cus on high credit quality an
d liquidity, and an investment
duration of six to twelve months
•
Net investment income $0.2m vs $5.3m in FY20
•
Low interest rates in the first half of FY21
•
Rapidly rising interest rates in the second half drove ma
rked-to-market unrealised losses totaling $2.4m ($0.2m 2020)
PORTFOLIO BENCHMARK YIELD
ASSET ALLOCATION
21
•
Continued reduction in open claims with 56 claims closed in FY21
•
30 new EQC overcaps and reopenings in line with expectations with the flow reducing through FY21
•
Gross outstanding claims down to $22.6m
•
Several complex open claims have had significant strengthening, driven by both inflation and more costly rectification approaches
•
The additional risk margin of $5m was released through FY21 reflecting the continued run-off of CEQ claims
OPEN CEQ CLAIMS
Canterbury earthquake claims continue to reduce
CEQ RESERVING
Note: 1: IBNR = Incurred but not reported; IBNER = Incurred but not enough reported
$ million
Sep-21
Mar-21
Sep-20
Mar-20
Sep-19
Mar-19
Sep-18
Case estimates
6.8
7.3
9.7
15.1
20.8
29.7
37.5
IBNR/IBNER
1
9.6
9.9
11.6
11.7
15.5
17.7
18.1
Claims handling expense
1.3
1.6
1.9
1.9
2.5
2.6
3.3
Risk margin
4.9
5.1
5.7
6.7
7.8
9.0
9.0
Additional risk margin
0.0
2.5
5.0
5.0
5.0
5.0
5.0
Actuarial provisions
15.8
19.1
24.2
25.3
30.8
34.3
35.4
Gross outstanding claims
22.6
26.4
33.9
40.4
51.6
64.0
72.9
FY22 reinsurance renewal•
Increase of catastrophe cover from $812m to $873m, with increase of retention to $11.25m (from $10m)
•
Aggregate cover placed with an excess of $20m (up from $14m) and event range of $2m to $10m (up from $1m to $7.5m)
•
Reinsurers on average expect the aggregate excess to be exceeded one in every four years
FY22 reinsurance renewal•
Increase of catastrophe cover from $812m to $873m, with increase of retention to $11.25m (from $10m)
•
Aggregate cover placed with an excess of $20m (up from $14m) and event range of $2m to $10m (up from $1m to $7.5m)
•
Reinsurers on average expect the aggregate excess to be exceeded one in every four years
22
Robust reinsurance programme supports resilience
Aggregate applies to large events (excl. NZ earthquake) from $2m to $10m, with an excess of $20mAggregate applies to large events (excl. NZ earthquake) from $2m to $10m, with an excess of $20m
REINSURANCE PROGRAMME OVERVIEW
23
Strong capital and solvency position
TOWER SOLVENCY - NZ PARENT ($m)
•
Tower's solvency margin above minimum solvency capital (MSC) at the end of FY20 was $98.1m, boosted by the settlement of the EQC Receivable. This has increased to $113.2m at the end of FY21
•
Before returning capital, Tower’s (NZ parent) solvency margin is $56.6m above its target solvency margin, and $37.7m above the top of its target operating range. This equates to 271% of MSC
•
Following the proposed $30.4m return of capital by way of compulsory share buyback*, Tower would be $7.3m above the top of its target operating range, equating to 225% of MSC
Note: 1: ASC = Actual solvency capi
tal, MSC = Minimum solvency capital
*Under a Court Scheme of Arrangement, subject to necessary approvals
Dividend and proposed capital return
24
DividendAmount
2.5 cents per share
Record date
19 January 2022
Payment date
2 February 2022
Proposed capital return by way of compulsory share buyback*Amount
1 share for every 10
Price per share
$0.72
Notice of meeting
20 December 2021
Meeting (shareholder vote)
2 February 2022
IRD approval
9 February 2022
Final High Court orders
25 February 2022
Record date
4 March 2022
Payment date
18 March 2022
•
Subject to IRD approval that the proposed return of capital is not in lieu of a dividend, shareholder approval and court approval.
•
Indicative dates only.
•
Subject to IRD approval that the proposed return of capital is not in lieu of a dividend, shareholder approval and court approval.
•
Indicative dates only.
Tower’s Dividend Policy is to pay 60% - 80% of cash earnings where prudent to do so.Cash earnings is defined as reported profit adjusted for acquisition, amortisation and unusual items
FY21 Actual
FY22 Guidance
Underlying NPAT excluding large events
$30.8m
$35.4m to $39.4m
Large events after tax (before tax)
$10m ($13.9m)
$14.4m ($20m)
Underlying NPAT
$20.8m
$21m to $25m
Dividend
5 cents per share
5 cents per share*
Expecting increased return to shareholders in FY22
25
While the $20m excess of the aggregate is higher than Towe
r's long run large event average, the guidance has assumed
Tower utilises the full excess. A lower large event outcom
e will result in higher expected underlying NPAT.
Tower has assumed inflation pre
ssures continue throughout FY22.
While the $20m excess of the aggregate is higher than Towe
r's long run large event average, the guidance has assumed
Tower utilises the full excess. A lower large event outcom
e will result in higher expected underlying NPAT.
Tower has assumed inflation pre
ssures continue throughout FY22.
* At current number of
shares outstanding
Our plan for long term growth & improvement
27
GROW AND INNOVATE
Relentless focus
on customer
relationships
Leverage digital &
data everywhere
Partner wherever
possible
BUILD FINANCIAL STRENGTH & CAPABILITY
Embracing agile
culture & talent
Maintain a strong
capital & solvency
structure
Clear strategy leverages our technology, customer and partnership advantages
Our strategy for general insurance, personal
lines and small-medium sized commercial segments.
Focused on our core markets in New Zealand and the Pacific.
Our strategy for general insurance, personal
lines and small-medium sized commercial segments.
Focused on our core markets in New Zealand and the Pacific.
28
Building deeper, more engaged customer relationships
vs FY20 for Tower
Direct
INCREASE I N QUOTES
31%
TOWER DIRECT QUOTES (‘000s)
QUOTE TO BUY
NET PROMOTER SCORE
57%
24%
TOWER QUICK QUOTE
Conversion rate up
from 18% prior to
implementation
Of Tower Direct GWP
sold online +3% vs
prior year
DIGITAL SALES
59%
NZ AVG GWP PER CUSTOMER
First time measured
in FY21
29
Progressive product, pricing and underwriting
Boat, EV, Travel,
Pacific motor, home
& contents,
Sustainability
benefit
NEW & ENHANCED
PRODUCTS DELIVERED
OPEN AND TRANSPARENT
PRICING
GO CARMA CUSTOMERS
HAVE DRIVEN
Live from Nov '21
Premium
breakdowns & risk
profiles
Since Dec ’20 launch
Pet, Renovation,
Rural & SME
NEW & ENHANCED
PRODUCTS PLANNED
10.5 million kms
30
STREAMLINING NZ &
PACIFIC OPERATIONS
NEW PRODUCTS IN
DEVELOPMENT
Parametric
cover
NPI
One core leading platform for personal customers across NZ & Pacific complete by end of FY22One core leading platform for personal customers across NZ & Pacific complete by end of FY22
1
ST
ONLINE
INSURANCE OFFERING
IN THE PACIFIC
EIS live Fiji Dec '20,
Vanuatu Dec '21
Fiji, Vanuatu
PACIFIC MER
43%
Simplifying and digitising the Pacific
PAPUA NEW
GUINEA
SOLOMON
ISLANDS
VANUATU
FIJI
SAMOA &
AMERICAN SAMOA
NEW ZEALAND
COOK
ISLANDS
TONGA
vs 51% prior year
Planned for FY22
100% shareholding
from Dec ‘21
PRODUCT
PARTNERING
31
Partnering for new capabilities & winning experiences
Allianz
GWP FROM PARTNERS
TECHNOLOGY
PARTNERING
Microsoft, EIS,
Friss, Amodo,
Ushur
CONTINUOUSLY
USING DATA
10%
1.7 billion data
points
GWP FROM PARTNERS EXCL. ANZ
($m)
Pet & travel
From over 25
external partners
Increase on FY20
Note: 1: In the reporting period the ANZ portfolio was purchased
by Tower and is now included in
the Tower Direct distribution
channel. Prior periods have b
een adjusted to exclude ANZ
32
Supporting our people and communities
REDUCTION IN ANNUAL
CARBON EMISSIONS
From 551 tCO2e in FY20 to
378 tCO2e in FY21
58%
Of our workforce
identify as non-European
CULTURAL DIVERSITY
Up 6% on FY20
EMPLOYEE ENGAGEMENT
77%
Partnerships, Scholarships &
Internships
SUPPORTING OUR
COMMUNITIES
Bachelor of
Climate Change
31%
•
Beginning our sustainability journey – ESG & carbon plan developed in 2021
•
Auckland office ‘Six Green Star’ rating
•
Supporting our people through multiple lockdowns in New Zealand and the Pacific
•
100% of staff with remote working capability
•
Member of the Sustainable Business Council
•
Beginning our sustainability journey – ESG & carbon plan developed in 2021
•
Auckland office ‘Six Green Star’ rating
•
Supporting our people through multiple lockdowns in New Zealand and the Pacific
•
100% of staff with remote working capability
•
Member of the Sustainable Business Council
Shine tick accreditation
Rainbow tick re-accreditation
33
Well positioned to deliver dividends and growth
•
FY21 was a challenging year with actions taken to deliver improvements in FY22
•
Well capitalised with strong balance sheet and solvency margins
•
Delivered customer and premium growth
while improving management expenses
•
5 cents full year dividend
•
Proposed return of capital by way of compulsory share buyback*
•
Focus remains on driving shareholder va
lue by accelerating growth and innovation
•
Continue to invest in digita
l and data platform to drive efficiency and support growth
* Under a Court scheme of arrangemen
t, subject to necessary approvals
Questions?
Reconciliation between underlying profit after tax and reported profit after tax
35
Underlying and reported profit:•
“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 obscure trends in Tower’s unde
rlying performance, and is
useful to investors as it makes it easier to compare Tower’s financial performance between periods
•
Tower has applied a consistent approach to measuring underlying profit in the current and comparative periods. Note: there has been minor reclassification between management expenses and “o
ther income and expenses”
in the comparative period
•
“Reported profit after tax” is
calculated and presented in
accordance with GAAP and is taken from Tower Limited’s financial statements for the year ended 30 September 2021
•
Prior period restated - in April 2021 the IFRS Interpretations Committee (IFRIC) issued an agenda decision 'Configuration or Customisation Costs in a Cloud Computing Arrangement (NZ IAS 38 Intangible Assets)'. This decision resulted in Tower expensing previously capitalized assets which has been treated as a non-underlying expense in FY20
(1)
Non-underlying items include net impa
ct of Canterbury earthquake valuation update and part release of the
additional Canterbury earthquake risk margin release,
write off of Insurance Faces insurance system balances,
IAS38 interpretation on SaaS capitalisation written off
to profit and loss, release of customer remediation
provision treated as non-underlying, and the net costs asso
ciated with moving the corporate office in Auckland
(2)
Reclassification of claims handling expenses
from management expenses to net claims expense
(3)
Reclassification of foreign exchange mo
vements to management and sales expenses
$ million
FY21
underlying
profit
Non-
underlying
items (1)
Claims
handling
expenses (2)
Other
items (3)
FY21
reported
profit
Gross written premium
404.1
0.6
0.0
404.7
Gross earned premium
394.9
0.6
0.0
395.5
Reinsurance expense
(62.2)
(62.2)
Net earned premium
332.7
0.6
0.0
0.0
333.3
BAU claims expense
(166.8)
1.5
(25.1)
0.0
(190.4)
Large events
(13.9)
(13.9)
Management and sales expenses
(112.0)
(3.3)
25.1
0.4
(89.8)
Net commission expense
(11.3)
(11.3)
Underwriting profit
28.7
(1.2)
0.0
0.4
28.0
Net investment income
0.2
0.0
0.2
Other income
1.4
(0.7)
(0.4)
0.3
Underlying profit before tax
30.3
Income tax expense
(9.5)
0.3
(9.1)
Underlying profit after tax
20.8
Canterbury impact
0.9
(0.9)
Insurance Faces decomissioning
(0.7)
0.7
IAS 38 SaaS impact
(1.6)
1.6
Other non-underlying costs
(0.1)
0.1
Reported profit after tax
19.3
0.0
0.0
0.0
19.3
36
This presentation has been prepared by Tower Limited to prov
ide shareholders with information on Tower’s business. This
document is part of, and should be read in conjunction with an oral briefing to be given by Tower. A copy of this webcast of th
e
briefing is available at http:/
/www.tower.co.nz/investor-centre/ It contains summary information about Tower as at 30
September 2021 which is general in nature, and does not purp
ort 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 containe
d in this document is for illustrative purposes only. Past
performance is not a guarantee of future performance and must no
t be relied on as such. The information in this presentation
does not constitute financial advice.
Forward looking statementsThis document contains certain
forward-looking statements. Such
statements relate to events and depend on circumstances that will occur in the future and are subject to ri
sks, uncertainties and assumptions.
There are a number of factors 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 restrict activities; the re-negotiation of contracts; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxation; 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, partners,
employees and agents (other person
s) makes any representation or
warranty as to the currency, accuracy, reliability or completeness of information in this presentation. To the maximum extent permitted by law, Tower and the other persons expressly disclaim any liability incurred as a result of the inform
ation in this Presentation being
inaccurate or incomplete in any wa
y. 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
---
1
Tower FY21 Investor Presentation Script
Slide 3 – Chairman’s update
Michael Stiassny
Mōrena, good morning and thank you for making the time to join us for this
investor call and presentation of our full year results.
With me in Auckland is our Chief Executive Officer, Blair Turnbull and our Chief
Financial Officer, Jeff Wright who will take you through the results and answer
your questions.
Tackling the challenges
The insurance industry has faced a very challenging year. It has been
characterised by a marked increase in large events and large house claims,
pandemic‐induced inflationary pressures swiftly leading to a general increase
in business as usual claims costs, and lower investment income.
Tower has not been immune. These challenges which were emerging at the
half year, have continued to put pressure on profits over the second half, as
you will be aware from our three guidance announcements.
It has been a tough year and the board acknowledges and shares your
frustration. What I can say is that action is well underway to address these
issues and their impact on profitability.
Most significantly, we have already implemented rating and underwriting
changes including the introduction of a full house fire replacement cap and
risk‐based pricing for inland flooding.
2
These actions are substantial and will continue to have an impact throughout
FY22. Blair and Jeff will take you through those comprehensive measures
shortly.
It’s also important to note that despite these challenges, our unique
technology and distribution footprint have positioned Tower well to continue
delivering GWP growth. We have reached a milestone this year, with Tower
writing over $400m in premiums which is great.
Strong and well capitalised
Above all, Tower remains a resilient, strong and well capitalised business.
Accordingly I am pleased to announce that based on Tower’s ordinary dividend
policy of paying 60‐80% of cash earnings where it is prudent to do so, the
Board has declared a final dividend of 2.5 cents per share, to be paid on the 2
nd
of February, bringing total dividends for FY21 to 5 cents per share.
In March the Reserve Bank lowered Tower’s solvency condition from $50
million to $25 million. As at 30
th
September Tower’s New Zealand Parent
solvency ratio was 271% and the company was holding $56.6m above its target
solvency margin.
Considering current opportunities and our capital position, the Board has
proposed the return of $30.4 million excess capital to shareholders.
Positioned for long term growth
Tower is delivering on its strategy of innovation and growth. Its flagship Tower
Direct business and unique partnership distribution capability continue to go
from strength to strength.
3
The Pacific business has proven remarkably resilient through Covid and
digitisation will lead to further improvements in efficiency and
competitiveness.
Our leading technology partnerships are enabling the business to be
increasingly nimble in responding to challenges and capitalising on
opportunities.
I’d like to acknowledge the Tower team. As we all recognise, it’s been a difficult
year on many fronts. However, despite this, we are paying a dividend, we
remain strong and well capitalised and we have achieved sustained premium
growth. These are hard won victories and are a credit to Tower’s solid strategy
and the dedication of the people that implement it.
In short, even with the obstacles of 2021, Tower continues to be well
positioned for long term growth.
I’ll now hand over to Blair and Jeff, who will take you through the results and
outlook before we take questions.
Blair Turnbull
Slide 4 – Good growth in a challenging environment
Kia ora, thank you Michael and good morning, everyone.
I am pleased to be here sharing our full year results for 2021 which see Tower
in a very solid capital and solvency position. Our technology and distribution
advantage continues to set us apart from our competitors and has seen us
achieve good growth in FY21, despite the challenges we faced.
4
Slide 5 – A journey of continued focus and innovation
Tower’s journey of focus and innovating our business is accelerating at pace.
In the past 12 months we announced a $42.1 million settlement with EQC; the
Reserve Bank reduced our licence condition from $50 million to $25 million;
and we simplified our structure. This now positions Tower to deliver long term
earnings, dividends and premium growth.
As I said at the half year, strengthening the business remains a priority,
particularly as we address the claims inflation and wider environmental
pressures we experienced in FY21. The key to our long term success is
continuing to scale our leading cloud‐based digital and data platform, which is
the enabler of our flagship Tower Direct business; our unique Partnership
business and our distinctive Pacific business.
Our focus remains on deepening our customer relationships, achieved by
offering a rich product suite which supports higher customer satisfaction and
engagement, improved longevity and ultimately a more sustainable and
profitable Tower business.
We will continue to prioritise and invest in our people to ensure we have a
diverse, inclusive culture where everyone can contribute and feel valued, as
they are at the heart of delivering an exceptional customer experience.
Slide 6 – Results achieved while navigating a challenging environment
Tower’s FY21 results have been achieved while navigating a challenging
external environment, which has impacted profit.
However, reported profit including large events was $19.3 million for the year,
up 72% from $11.2 million in the prior year.
5
Underlying NPAT including large events was $20.8 million, versus $28.4 million
in FY20.
Tower’s combined operating ratio increased 2.7% over the prior year to 91.4%
reflecting claims inflationary pressure and higher large events.
Offering customers a simple and rewarding experience through our leading
technology platform has helped grow Tower’s Gross Written Premium to a
milestone $404 million, up 5% on the same period last year.
Slide 7 – Impact of external factors
In insurance, there will always be volatility in claims – it’s the nature of our
business.
However, it was the unusual combination of four external factors that weighed
on our profits in FY21:
Net investment income before tax dropped $5.1m to $0.2m
Seven large events contributed $13.9 million in costs vs $9.7 million in
the prior year
Large house claims rose significantly from 57 in FY20 to 92 in FY21
And inflation contributed an additional $7.1 million to business‐as‐usual
claims costs.
While the impact of any one of these factors alone would be sustainable in a
normal year, with the ongoing effects of the pandemic, this was not a normal
year.
Jeff will talk to each of these factors in detail shortly, including how we are
managing these to mitigate the effects on profitability in FY22.
6
Slide 8 – Good growth in customers and premium
Despite the challenges, we have continued to grow ahead of the market,
particularly in New Zealand where GWP rose 7.9% to $350m.
This was achieved through a balanced mix of market premium ratings and
attracting new customers to Tower. Our customer base grew 5% to 304,000 in
the year and market share has increased to 9.2%. This growth also reflects
improvements in customer satisfaction as evidenced by our Net Promoter
Score increasing to 43% vs 27% in the prior year.
Our flagship Tower Direct business is going from strength to strength recording
132,000 My Tower registrations in FY21, compared with 45,000 last year.
Tower Direct GWP has grown to $273m but noting this now includes the ANZ
legacy portfolio which is midway through migration. This was previously
included in the Partnership business which has reduced accordingly.
Our Partnership business has delivered positive growth as we transform from a
more traditional, higher commission portfolio to a new generation of
partnerships.
While our Pacific business GWP declined by 10% primarily as a result of
economic challenges related to Covid‐19, it remains resilient. We are
simplifying our ownership structure with the purchase of National Pacific
Insurance. And our cloud based platform is live in Fiji and will be progressively
rolled out across the Pacific as we more closely align our Pacific and New
Zealand businesses.
7
Slide 9 – Product, pricing and underwriting enhanced through data
Core to our strategy is leading with a quality, innovative, balanced product
range which enables us to deepen our relationships with customers, improve
revenue and increase retention.
Underpinning this is our disciplined and agile approach to underwriting,
enhanced through our use of data analytics.
While external events resulted in our New Zealand loss ratio increasing 4% to
53.6% for the year, we quickly identified the emerging challenges such as
construction inflation. Through our leading technology platform we were able
to adjust pricing within weeks to better manage our margin.
In August, in response to emerging increases in large house fires, we removed
the full replacement for house fire benefit from our policies and capped it to
an extended sum insured amount.
And throughout the year we have been working to launch New Zealand’s first
address‐based rating tool for flood risk. Tower has invested in detailed
modelling showing the risk of flooding from rivers and rain for residential
addresses across New Zealand. Tower is not only sharing flood risk ratings with
all New Zealanders but using this data to more accurately align premium
pricing with risk which supports Tower’s ability to manage our loss ratio.
This new feature, launched to the market earlier this month, received a very
positive response from customers and stakeholders who recognise that Tower
is leading the way in fairer and more transparent insurance pricing.
Our customer first approach is leading to greater loyalty, particularly among an
increasing number of customers who hold more than one product with us. In
8
New Zealand 135,000 customers, representing half of our Kiwi customer base,
now hold multiple products with Tower.
Multi product holders have a policyholder tenure of 7.9 years on average
compared to 4.8 years for those with only one product – a huge opportunity
that we are harnessing with clever product, pricing and underwriting.
By enhancing our product set to keep pace with customers’ lifestyles, we are
looking to further improve retention rates and build relationships. For
example, our boat offering is gaining pace, with around 5,000 new business
policies sold this year and our motor policy sales for EVs have increased by 60%
since February.
Slide 10 – Investing in digital platform for efficiency and scalability
With more than half of all service tasks in New Zealand now completed
digitally vs 40% last year, and a third of claims lodged digitally vs 23% in the
prior year, the customer and efficiency benefits from our leading digital and
data technology platform are being realised.
Eighty per cent of Tower customers have now been migrated to our cloud‐
based, digital EIS platform which is enabling us to scale quickly as we acquire
new business. We remain focused on decommissioning legacy systems with a
further two decommissioned in this financial year. We anticipate just two
remaining by the end of 2022.
Meanwhile new technology releases continue to trend upwards as we become
more agile and responsive in anticipating customers’ needs.
9
Slide 11 – MER improving while continuing to invest
Our management expenses continue to reduce while we make smart
technology and data investments aimed at efficiency, growth and resilience.
Tower’s Management Expense Ratio improved 2% to 37% over the year thanks
to reducing acquisition costs, which are now down to 12.6%, and a 22%
reduction in net commission expenses following the purchase of ANZ and
increased reinsurance profit share.
We invest one in every three dollars of management expenses in digital and
data technology that will further accelerate customer and efficiency
improvements.
Slide 12 – Strong capital & solvency, delivering shareholder returns
Our New Zealand parent solvency ratio is 271%, which is $56.6m above our
target solvency margin and reflects our strong capital position.
During the year we were pleased to resume dividend payments after a five
year hiatus. The Board has confirmed a full year dividend payment of 2.5 cents
per share
bringing total dividends for FY21 to 5 cents per share. The total
dividend payment is $21 million with $10.5 million to be paid on the 2
nd
of
February 2022.
This payment is in line with the ordinary dividend policy of paying 60‐80% of
cash earnings where prudent to do so.
Tower is in a strong capital position and we continue to look at acquisitions
which are sensible and value accretive for shareholders. In the year we
acquired the ANZ legacy portfolio and we are now finalising the acquisition of
National Pacific Insurance. However, in considering current opportunities and
10
*under a Court Scheme of Arrangement
our capital position, the Board felt it would be appropriate to return excess
capital to shareholders.
Therefore, as Michael mentioned, the Board has proposed a capital return by
way of a compulsory share buyback* of $30.4 million, subject to necessary
approvals being obtained.
I will now hand over to Jeff Wright who will take you through our financial
results in more detail.
Slide 13 – FY21 financial performance title slide – Jeff Wright
Thank you, Blair and good morning, everyone.
Slide 14 – Group underlying financial performance
Looking at the consolidated results, we can see that growth in GWP continued
to be a highlight, up $18.9m, or 5%, on FY20. Reinsurance expense increased
$5m following adjustment to aggregate sums insured and higher proportional
reinsurance. This resulted in an increase in Net Earned Premium of $9.4m on
FY20.
Investment income was also a significant detractor, down $5.1m.
Encouragingly, management expenses as a percentage of NEP were down 2.3%
from 39.3% in FY20 to 37% as benefits of the EIS platform emerge, and net
commission expenses decreased by $3.2m, driven by both the acquisition of
the ANZ portfolio and an increase in proportional reinsurance profit share.
As already highlighted, claims expense increased significantly by $21.3m
before tax across both BAU and large events.
Underlying NPAT of $20.8m is down $7.6m, or 27% on FY20.
11
Following the combined impact of several non‐underlying items which are
detailed in the Appendices, reported NPAT was $19.3m, up 72% on FY20,
noting that FY20 was impacted by the EQC receivable write down.
Slide 15 – Claims challenges for insurers
General insurers face a number of challenges, largely external, that need to be
recognised and actioned promptly to minimise impact.
Large events are a source of volatility for New Zealand and the Pacific that are
likely to become more pronounced with the impacts of climate change. For
Tower, this volatility is primarily managed by our aggregate reinsurance
programme.
From time to time there will be changes in the drivers of claims expenses that
require analysis and action. Tower’s recent increase in fire‐related large house
claims is an example.
While inflation has been relatively benign over recent years, it is an ever‐
present risk to the cost of claims, as evidenced by the recent Covid‐related
increase.
Finally, across both New Zealand and the Pacific, supply chain issues can have a
material impact because of the high proportion of imported materials for
motor, home and contents claims.
The key to managing all these challenges is prompt recognition and remedial
action, although even the most rapid response will take 12 months to flow
through an insurance portfolio.
12
Slide 16 – Claims inflation in New Zealand impacted us heavily
It was anticipated that Covid may cause inflationary pressures, particularly for
motor. However, it wasn’t until the March quarter that evidence of inflation
emerged. It has since accelerated rapidly.
Supply chain issues for new vehicles have driven up the value of second‐hand
vehicles by 13% year on year, significantly increasing the cost of total loss
motor claims. While the inflationary impact on motor parts and repairs hasn’t
been as dramatic, the full impact may be yet to be felt, with significant delays
in completing repairs due to supply chain issues with motor parts.
The cost of building materials has become a global issue with double digit
inflation common.
Tower has applied premium increases across motor and home to offset
inflation, but also continues to work closely with its supply chain partners to
moderate the impact on customers as much as possible.
Slide 17 ‐ Sharp focus on claims management
FY21 saw an increase in both the BAU claims loss ratio and large events loss
ratio of a combined 5% of Net Earned Premium. At 54%, this is the highest
claims loss ratio Tower has experienced since 2018.
Frequency and severity are the two key components of the claims loss ratio.
The severity charts show average motor claims have increased 6% and average
house claims 7% on FY20. Most of this inflation was in the second half of FY21
and evidence is that it is continuing.
13
Frequency of motor claims is largely unchanged but house claims frequency
continues to increase.
Slide 18 – Large events & large house claims
The two charts on slide 19 highlight that in FY21 Tower experienced the
highest number of large house claims and large event claims for many years,
and particularly higher than in FY20.
The majority of large house claims are fire related and as a result of the
marked increase, Tower removed the uncapped total loss house fire benefit
from new and renewing policies, capping the additional benefit to 20% of the
sum insured.
The majority of large events were New Zealand flood, which is in contrast to
recent high event years such as 2017 and 2018 which included significant
impact from Pacific cyclones.
This apparent increase in New Zealand flood highlights the importance of
pricing appropriately for flood, which Tower announced on the 10
th
of
November for new and renewing policies.
Slide 19 ‐ Continued focus on management expenses
Management expenses reduced in absolute terms by $3.9m before tax to
$123.3m from $127.2m in FY20.
As a percentage of Net Earned Premium, this represents a reduction of 2.3% to
37%.
In addition to cost containment measures introduced in FY21 in the face of
rising claims costs, the reduction in People expenses of $4.0m before tax and
14
Other expenses of $0.6m before tax was achieved in part through the benefits
of the EIS platform post implementation.
As stated previously, net commission reduced $3.2m before tax, driven by both
the acquisition of the ANZ portfolio and higher proportional reinsurance profit
share.
Amortisation increased with additional capitalisation of EIS platform
enhancements and the acquisition of the ANZ portfolio.
In addition, the liability adequacy test resulted in a $2.5m deficiency before
tax, requiring an additional $2.1m expense in FY21 for acquisition costs that
would otherwise have been capitalised.
Slide 20 – Macroeconomic factors impact investment income
Tower maintains a conservative investment policy with a focus on high credit
quality and liquidity.
Net investment income in FY21 was significantly reduced at just $0.2m before
tax compared with $5.3m before tax in FY20.
This was driven by low interest rates in the first half of the year, and the
negative impact of rapidly rising interest rates in the second half.
Although Tower maintains a relatively low duration of between 0.5 and 0.75
years, the marked‐to‐market impact of rapidly rising interest rates in the last
quarter of FY21 contributed to $2.4m of unrealised losses in the balance sheet
as at 30 September 2021. This compares with just $0.2m as at 30 September
2020.
15
As Tower generally holds investments to maturity, these unrealised losses will
unwind as the underlying investments reach their maturity dates.
Slide 21 Canterbury earthquake claims continue to reduce
CEQ claims have reduced to 33 claims from 59 at 30 September 2020.
This was after receiving an additional 30 new overcaps and reopened claims,
bringing the total number of claims closed in FY21 to 56.
The rate of new overcaps and reopens was in line with expectations and the
pipeline appears to be slowing in the second half.
There remains a small core of complex long term claims, with several of these
having significant strengthened through FY21. These continue to be closely
managed.
There was a net strengthening of outstanding claims of $4m through FY21
offset by the Board decision to release the $5m Additional Risk Margin, noting
that net outstanding claims are now below $20m.
Slide 22 ‐ Robust reinsurance programme supports resilience
Tower’s FY22 catastrophe programme was well subscribed by reinsurers and,
following an increase in the excess from $10m to $11.25m, was placed at a
risk‐adjusted near flat premium.
The total catastrophe cover has increased to $873m from $812m in FY20,
reflecting higher sums insured and the growing portfolio.
As is the case with aggregate programmes globally, the placement of Tower’s
FY22 aggregate programme was more challenging.
16
This was due to both reduced appetite among reinsurers for aggregate
programmes following poor recent international experiences, and the large
number of aggregate‐impacting events in New Zealand over the last 12
months.
Accordingly, Tower’s FY22 aggregate programme excess has increased to $20m
from $14m in FY20, and the event limits changed to between $2m and $10m
from $1m to $7.5m in FY20.
It should be noted that the setting of an excess at $20m implies reinsurers on
average expect that level to be exceeded one in every four years.
Slide 23 ‐ Strong capital and solvency structure
Tower NZ Parent actual solvency capital (ASC) has increased from $150m at 30
September 2020 to $179m boosted by the receipt of the EQC receivable.
The Tower Board set a target solvency margin above minimum solvency capital
(MSC) that is reviewed at least annually.
Above this target solvency margin is a target operating range.
As at 30 September 2021 after allowing for the 2.5c dividend, Tower NZ
Parent’s ASC was $56.6m above the target solvency margin, and $37.7m above
the top of the operating range.
As a percentage of MSC, the current ASC is 271%.
The Board considers there is sufficient solvency margin to allow the repayment
of $30.4m in capital by way of a compulsory share buyback, subject to
necessary approvals being obtained.
17
This would leave Tower NZ Parent’s ASC $26.2m above the target solvency
margin and $7.3m above the top of the operating range, positioning Tower
well for the future.
Slide 24 – Dividend and proposed capital return
As we have said, Tower will pay a dividend of 2.5c per share, bringing the total
FY21 dividend to 5c per share. This represents a dividend pay out ratio of 80%
of cash earnings which is at the top of the current Dividend Policy range but is
considered prudent given the overall strong capital position.
The record date is the 19
th
of January 2022 with the payment date being the
2
nd
of February 2022.
In addition, Tower proposes returning $30.4 million in capital by way of a
compulsory share buyback, under a Court Scheme of Arrangement, of one in
every ten shares held at a price of $0.72 per share. This is a premium of 12% on
the closing price on the 23
rd
of November of $0.645. This is subject to obtaining
IRD approval that the capital return is not taxable in New Zealand and is not in
lieu of a dividend, in addition to High Court approval and shareholder approval.
This slide provides indicative dates for this process, with the shareholder vote
anticipated to occur at the Tower annual shareholder meeting on the 2
nd
of
February 2022.
Slide 25 – Expecting increased return to shareholders in FY22
Tower anticipates underlying NPAT of between $21m and $25m for FY22.
This range is based on the assumed utilisation of the full $20m excess of the
aggregate programme. This represents a $4.4m after tax increase in the impact
of large events when compared to FY21.
18
Any lower utilisation will increase expected underlying NPAT.
In setting this guidance, Tower has assumed inflationary pressure continues
throughout FY22.
Tower anticipates a full year dividend of 5c per share, or 5.5c per share should
the buyback of shares proceed.
Slide 26 – Our plan for long term growth & improvement
Thank you. I will now hand back to Blair who will provide an update on our
strategy and outlook.
Blair Turnbull
Thank you, Jeff.
Slide 27 – Clear strategy leverages our technology, customer and
partnerships advantage
As I outlined at the half year, despite the headwinds, today’s results
demonstrate the resilience of our customer and digitally led strategy. We are
continuing to grow; to drive down expenses; and to respond quickly to the
changing external environment.
You can be confident that we are very focused on addressing the challenges
we’ve identified, improving profitability and continuing to leverage our
technology, customer and partnership advantage for growth.
Our core strategy is around personal lines and small to medium sized
commercial in New Zealand and the Pacific region.
We have a clear and focused set of five strategic priorities.
19
We are relentlessly focused on our customers, deepening our relationships
with them through rewards, new products and other offerings that make sense
and drive value.
As you have seen today, we are leveraging the full capability of our cloud‐
based platform by using the insights from our data to make our customers’
lives easier and to understand their needs better.
We are finding the best people to partner with to boost our offering, develop
new products, and deliver services in better ways and more efficiently.
We understand that our people are the ultimate drivers of our success as they
are on the front line, building our customer relationships.
And importantly, we are committed to maintaining a strong capital and
solvency structure delivering value for shareholders.
Slide 28 – Building deeper, more engaged customer relationships
Building deeper, more engaged customer relationships lies at the heart of our
strategy. We are seeking a seamless integration between telephone and digital
customer service.
In the year this approach saw the number of quotes issued by the Tower Direct
business grow steadily to reach an increase of 31% versus FY20 with the bulk of
these being through digital channels. This was helped in part by optimising our
customer quote‐to‐buy journey in order to deliver the quickest insurance
quote in the market, which boosted our sales conversion rate from 18% to
24%.
Our commitment to making insurance a simple and rewarding customer
experience has seen more customers than ever choosing to purchase a Tower
20
policy online. Digital sales increased to 59% over the year with the net
promoter score for our quote‐to‐buy process achieving 57%.
Positive feedback from customers was a key factor in Tower winning Canstar’s
top Car Insurer of the Year Award for 2021, and also an Outstanding Value
Award alongside our partner brand Trade Me. An achievement we are very
proud of this year.
Underpinning this has been a significant improvement in our contact centre
wait times which we have halved in the past six months through a combination
of enhanced training, technology upgrades and additional resourcing.
Ultimately, these innovative approaches are aimed at creating deeper and
more engaged customer relationships that lead to growth, which is why we’re
pleased to see average GWP per customer increasing to around $1,300 in
FY21.
Slide 29 ‐ Progressive product, pricing and underwriting
Investments in our scalable digital platform allow us to quickly develop and
bring to market a quality, innovative, balanced product range which in turn
enables us to deepen our relationships with customers, improve revenue and
increase retention.
In New Zealand this year we launched an end‐to‐end online boat experience
following our acquisition of the referral rights for Club Marine; we launched a
new Travel product in anticipation of future travel bubbles and border
openings; we enhanced our home offering with a new sustainability benefit
which contributes $15,000 to sustainable products for a total rebuild; and in
the Pacific we launched new home and contents, and motor policies.
21
In the coming year we will be working hard on a new home renovation
product; we are planning to upgrade our rural and SME offerings; and our
exciting new pet product will launch in time for Christmas this year.
We are also continuing to deepen engagement with our Go Carma customers
who drove 10.5 million kilometres over the year, receiving safe driving tips and
feedback, as well as rewards and offers. Already we are able to offer excess
discounts to those customers who demonstrate a lower risk profile through
safer driving. And we continue to learn and investigate other opportunities for
similarly innovative underwriting approaches.
This year we have raised the benchmark around open and transparent pricing
for customers. Through My Tower we are now presenting visual breakdowns of
customer premiums in an easy to understand chart which compares year on
year changes for the various pricing elements.
In November we also became the first New Zealand insurer to provide
customers with a risk rating for flood and earthquake hazards for their homes.
This was developed in partnership with Risk Management Solutions (RMS), a
world leader in catastrophe risk solutions.
Risk‐based pricing is a fairer way to structure insurance as it means that
customers don’t pay for risks they don’t have.
We know that customers with multiple products stay with us on average for
almost eight years, compared to less than five years for customers with only
one product. That’s why these progressive product, pricing and underwriting
approaches are key to attracting new customers, deepening our engagement
with them on our digital channels, having them buy more products and
22
keeping them with us for longer. Ultimately this results in growth and a more
profitable business that continues to improve shareholder value.
Slide 30 – Simplifying and Digitising the Pacific
As we continue to simplify and streamline our customer experiences, our
products and our operations, we are focused on aligning our Pacific
business more closely with our New Zealand operations.
Our goal for 2022 is for Tower to offer a world class digital experience on one
core leading platform for all our personal lines customers across New Zealand
and the Pacific. We took an important step towards this aim in November with
the announcement that Tower will acquire the remaining shares in National
Pacific Insurance (NPI), taking our shareholding up to 100% in December this
year.
One of our first steps will be to rebrand NPI to Tower which will coincide with
the launch of the first digital insurance solution in these markets.
We will complete Tower’s digital roll out across the Pacific in FY22. Our 100%
cloud‐based EIS platform has already gone live in Fiji this year and will be
launched in Vanuatu in the coming weeks.
These enhancements are already delivering benefits with our management
expense ratio dropping to 43% compared with 51% in the prior year.
Our agility and digital capability is leading to new product lines aimed at
supporting the unique needs of our Pacific customers as well as growth in this
important market. One concept in development is a parametric insurance
product which we intend to pilot in FY22.
Slide 31 – Partnering for new capabilities & winning experiences
23
A key element of our strategic focus has been to secure mutually beneficial
partnerships that drive significant growth and quickly give us capabilities that
we would otherwise have to build from scratch.
Our exciting partnership with Allianz, one of the world’s largest insurers, has
led to the development of new pet and travel products this year.
Importantly we use insights from our data to make our customers’ lives easier
and to better understand their needs. We’re continuously utilising more than
1.7 billion data points thanks to over 25 external partners including Microsoft,
EIS, Friss, Amodo and Ushur, who are all helping us to improve customer
outcomes and make better decisions.
In our Partnerships business division, we are building what we believe is a truly
unique model, one that relies less on higher commission and more on our
technology capability, customer experience and balanced referral
arrangements with our partners. These include corporates, insurtechs,
advisory businesses and our cornerstone partner Trade Me, with whom we
recently renewed our agreement for another five years.
Slide 32 – Supporting our people & communities
We are acutely aware that our ability to continue to grow, partner and
innovate as a leading digital and data business is only possible with the support
of our fantastic Tower team and the communities we serve.
This year we started our sustainability journey with the development of an ESG
strategy that will guide how Tower manages its environment, social and
governance issues in the future. Importantly we have taken a first step in
measuring our total carbon emissions across our New Zealand and Pacific
operations.
24
What gets measured, gets done and with this in mind we now know that our
carbon emissions reduced 31% year on year primarily driven by lower
emissions from travel due to Covid‐19 restrictions. We are committed to taking
the lessons from 18 months of remote working and setting a science‐based
target for meaningful reduction towards a zero carbon future.
This year our commitment to supporting our customers in navigating the
impacts of climate change saw Tower pledge to support scientific research,
education, and innovation through student scholarships for the world’s first
Bachelor of Climate Change degree at the University of Waikato.
As I noted earlier in this section none of this would be possible without our
wonderful Tower team, which is why we want to build the best possible
culture where everyone can bring their whole selves to work and build a
fulfilling career. And that’s why we’re pleased to see our employee
engagement scores continue their positive trend upwards in FY21 with our
score increasing 6% to 77%. This is particularly pleasing in a year when we have
navigated the challenges of Covid‐19 lockdowns both in New Zealand and
across our Pacific offices. While 100% of our people are able to work remotely,
we know it’s not easy and we have put in place a number of initiatives to
support our people through this time.
It’s also good to see that cultural diversity across our business continues to be
strong with well over half of our people identifying as non‐European.
For those of us in Auckland, we officially moved into our new six‐green‐star
rated building. While we only got to enjoy the new space for two business days
before the current lockdown, we are excited about its potential to promote
more agile, collaborative and creative ways of working.
25
Slide 33 – Well positioned to deliver dividends and growth
It’s clear that FY21 was a challenging year and we have taken decisive actions
to deliver improvements in FY22. Tower is a well‐capitalised business with a
strong balance sheet and solvency margins. We have delivered customer and
premium growth while further improving our management expenses. We are
delighted to have resumed dividends in the year and propose to return excess
capital to shareholders.
In FY22, our focus is on:
Driving shareholder value by accelerating growth and innovation
Continuing decisive action to address challenges with claims inflation
and climate change risks, and;
Continuing to invest in our digital and data platform to drive efficiency
and support growth.
In the meantime, I’m pleased to say we’ve started this year positively in terms
of new business and relatively benign weather. This is in sharp contrast to last
year which began with a large fire at Lake Ōhau village and significant floods in
Napier. We look forward to sharing a trading update with you at our ASM in
February.
Thank you for your time this morning, I will now hand back to the operator to
ask for questions.
---
Distribution Notice
Section 1: Issuer information
Name of issuer Tower Limited
Financial product name/description Ordinary Shares
NZX ticker code TWR
ISIN (If unknown, check on NZX
website)
NZTWRE0011S2
Type of distribution
(Please mark with an X in the
relevant box/es)
Full Year X Quarterly
Half Year Special
DRP applies
Record date 19/01/2022
Ex-Date (one business day before the
Record Date)
18/01/2022
Payment date (and allotment date for
DRP)
02/02/2022
Total monies associated with the
distribution
1
$10,541,181
Source of distribution (for example,
retained earnings)
Retained earnings
Currency NZD
Section 2: Distribution amounts per financial product
Gross distribution
2
$0.02500000
Gross taxable amount
3
$0.02500000
Total cash distribution
4
$0.02500000
Excluded amount (applicable to listed
PIEs)
N/A
Supplementary distribution amount $0.00000000
Section 3: Imputation credits and Resident Withholding Tax
5
Is the distribution imputed No imputation
1
Continuous issuers should indicate that this is based on the number of units on issue at the date of the form
2
“Gross distribution” is the total cash distribution plus the amount of imputation credits, per financial product, before the deduction of
Resident Withholding Tax (RWT).
3
“Gross taxable amount” is the gross distribution minus any excluded income.
4
“Total cash distribution” is the cash distribution excluding imputation credits, per financial product, before the deduction of RWT.
This should include any excluded amounts, where applicable to listed PIEs.
5
The imputation credits plus the RWT amount is 33% of the gross taxable amount for the purposes of this form. If the distribution is
fully imputed the imputation credits will be 28% of the gross taxable amount with remaining 5% being RWT. This does not constitute
advice as to whether or not RWT needs to be withheld.
If fully or partially imputed, please
state imputation rate as % applied
6
N/A
Imputation tax credits per financial
product
N/A
Resident Withholding Tax per
financial product
$0.00825000
Section 4: Distribution re-investment plan (if applicable)
DRP % discount (if any)
Start date and end date for
determining market price for DRP
Date strike price to be announced (if
not available at this time)
Specify source of financial products to
be issued under DRP programme
(new issue or to be bought on market)
DRP strike price per financial product
Last date to submit a participation
notice for this distribution in
accordance with DRP participation
terms
Section 5: Authority for this announcement
Name of person
authorised to make
this announcement
Hannah Snelling
Contact person for this
announcement
Emily Davies
Contact phone number +64 21 815 149
Contact email address emily.davies@tower.co.nz
Date of release through MAP
24/11/2022
6
Calculated as (imputation credits/gross taxable amount) x 100. Fully imputed dividends will be 28% as a % rate applied.
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.
Other issuers discussed similar conditions around this time
Matched by meaning across NZX announcement text, not keywords — based on our semantic index of announcement bodies.
- TWL — TradeWindow Holdings Limited: Investor Presentation2021-11-21
“Investor Roadshow…”
- FWL — Foley Wines Limited: FWL Full Year 2021 and Annual Report Published2021-08-26
“Results announcement Results for announcement to the market Name of issuer Foley Wines Limited Reporting Period 12 months to 30 June 2021 Previous Reporting Period 12 months to 30 June 2020 Currency NZD Amount (000s) Percentage change Revenue from continuing operations $…”
- CDI — CDL Investments New Zealand Limited: CDI FY2021 Results Announcement2022-02-17
“CDI | CDL Investments New Zealand Limited | 2022-02-17 | FLLYR | CDI FY2021 Results Announcement…”