TOWER Limited Leading light Annual report 2015 Highlights and achievements First year as a pure General Insurer Investment in branding - refresh the TOWER brand Launch of Trade Me Insurance August 2015 Improved customer satisfaction NPS increased Expanded distribution alliances in New Zealand and the Pacific Increased confidence resolving remaining Canterbury claims Well capitalised General Insurance business $35 million in capital above target solvency requirements,1 (comprising $25 million in New Zealand and $10 million across subsidiaries) plus $38 million in cash held by corporate entities REPORTED NET LOSS AFTER TAX $ 6.6m GROSS WRITTEN PREMIUMS $ 305.6m UP 2.7% UNDERLYING NET PROFIT $ 28.2m2 UP 29.6% PACIFIC NET PROFIT $ 9.6m UP 17.4% DIVIDEND POLICY MAINTAINED FULL YEAR DIVIDEND 16.0 UP 10.3% CPS UNIMPUTED ON MARKET SHARE BUYBACK CONTINUES OF UP TO $ 22m3 $12m COMPLETED 1. Based on TOWER's long term policy of targeting 175% of Minimum Solvency Capital. 2. Underlying net profit excludes the impact of Canterbury earthquakes and profit from disposal of subsidiaries. 3. Total buyback of up to $34 million. Delivering business improvement, prudent risk management and shareholder value Chairman’s report on behalf of the directors Marking our first year as a pure General Insurer, TOWER has delivered a strong underlying performance, while managing the remaining risk posed by unresolved Canterbury claims and producing solid returns for our shareholders. While TOWER reported a net loss after tax (NPAT) of $6.6 million, reflecting the need to increase provisions for Canterbury, underlying profit after tax increased by 29.6% to $28.2 million. TOWER maintains a strong balance sheet and is well capitalised, holding significant capital above target solvency levels. The strength of the underlying results – together with its solid capital position – indicates the business is in good heart. TOWER’s gross written premium (GWP) increased 2.7% to $305.6 million, largely influenced by stable rates in New Zealand and continued strong premium and policy growth in the Pacific. The Pacific continues to perform very strongly with a 17.4% increase in net profit after tax (NPAT) of $9.6 million. Another highlight this year has been the expansion of distribution alliances both in the Pacific, and through the launch of Trade Me Insurance in New Zealand, which is not only building TOWER’s digital capability, but also providing access to new markets and customers. TOWER has delivered a strong underlying performance, while managing the remaining risk posed by unresolved Canterbury claims and producing solid returns for our shareholders. Michael Stiassny Chairman 2 TOWER Limited annual report 2015 With regard to Canterbury, TOWER has sought to act in the TOWER will continue to maintain its dividend policy at 90% to best interests of our customers and our shareholders by 100% of NPAT where prudent to do so. closely managing the rebuild programme, resolving claims, and getting our customers back in their homes as quickly as possible. This has resulted in 96% of claims by number (88% by value) being settled and closed by 30 September 2015. However, managing the tail end of Canterbury earthquake claims is challenging and complex. TOWER strengthened its actuarial process by adding expertise in catastrophe and reinsurance claims, and by having the Appointed Actuary conduct a file-by-file analysis of all remaining claims. This process identified the need to increase Canterbury claims provisions, the total impact over the full year was $36.2 million after tax. While the increased provision is disappointing, the Board now has greater confidence in the likely costs and risks faced in resolving the remaining claims. This gives us comfort that TOWER can work through the balance of Canterbury claims to deliver good outcomes for customers, while continuing to invest in growth and providing solid shareholder returns. Judicious capital management remains essential to TOWER’s continued growth and success. As a result, despite the increase in provisions for Canterbury, TOWER holds $73 million in capital above target levels, comprised of $35 million in General Insurance solvency ($25 million in New Zealand and $10 million across subsidiaries) and $38 million at corporate level. TOWER continues to offer strong dividends – an unimputed dividend of 7.5 cents per share will be paid for the six months to September 2015, bringing the annual dividend to 16.0 cents per share (unimputed), an increase of 10.3%. The on-market share buyback programme announced at the half year has acquired $12 million of TOWER’s issued capital. This programme will continue to a maximum of $34 million. On behalf of your Board, I acknowledge and thank former CEO, David Hancock for successfully leading TOWER’s transition into a pure general insurer over the past two years. David was instrumental in developing an appropriate management and operating structure to support change and deliver a growth strategy. With the transition to general insurer now well underway it is the Board’s pleasure to welcome new CEO, Richard Harding. Richard is a 30-year insurance industry veteran who brings a depth of critical insurance experience that will not only assist in resolving the last of the Canterbury claims, but also enhance TOWER’s growth prospects through delivering operational excellence and a high performance customer service culture. In closing, my fellow directors join with me in thanking the entire TOWER team for their daily commitment to building this business. I would also like to thank our customers, shareholders and business partners for their continued loyalty and support. Michael Stiassny Chairman 3 Strong underlying performance despite provisions increase Business review and outlook TOWER delivered a strong underlying performance in 2015, but earnings were significantly impacted by the need to increase provisions for the remaining Canterbury Earthquake claims. The complexity and costs associated with Canterbury Earthquake claims continue to represent a challenge for the whole insurance industry and TOWER is not immune. We acknowledge that the provision increase is disappointing for our shareholders. However, as a result of the recent actuarial report, we are more confident that TOWER can continue to deliver positive outcomes for our Canterbury customers, maintaining our focus on finalising claims quickly and fairly. It is important and pleasing to note that TOWER has maintained a strong balance sheet and increased returns to shareholders. Our underlying results are very good and reflect the potential of the General Insurance business. TOWER holds an estimated 4.7% share of the New Zealand general insurance market, placing it in fourth position, highlighting the substantial growth opportunity available to TOWER in the New Zealand market. The company has more than 480,000 policies and almost 265,000 customers in New Zealand and eight Pacific territories through its own direct business and alliance partnerships. TOWER is well positioned to drive growth through product and alliance innovation, improved customer retention and operational excellence in the coming year. Having only recently joined the company, these underlying results represent a solid foundation on which to build. I look forward to bringing sound general insurance capability to bear in realising TOWER’s significant potential and delivering strong shareholder returns. TOWER is well positioned to drive growth through product and alliance innovation, improved customer retention and operational excellence in the coming year. Richard Harding Chief Executive Officer 4 TOWER Limited annual report 2015 Performance summary Group Performance $ MILLION FY15 FY14 MOVEMENT % Gross written premium 305.6 297.6 2.7% Reported (loss)/profit after tax Canterbury earthquakes Profit on discontinued businesses Underlying profit after tax from continuing operations New Zealand2 Pacific Underlying EPS(c)3 DPS(c) Key ratios4 Claims ratio Expense ratio Combined ratio (6.6) (36.2) 23.6 (0.1) 1.4 2.0 28.2 18.9 9.6 16.0 16.0 21.7 16.9 8.2 11.3 14.5 47.7% 50.8% 41.9% 40.8% 89.6% 91.6% - - - 29.6% 11.6% 17.4% 41.6% 10.3% - - - 1. Excess cash defined as cash balance less payables. 2. New Zealand figures include general insurance only 3. Profit attributable to shareholders from ongoing operations only and excludes Canterbury impacts, using weighted average number of shares outstanding. 4. Based on underlying business, excludes Canterbury impacts. TOWER reported a net loss after tax of $6.6 million for the year ended 30 September 2015 due to the impact of increased provisions relating to the Canterbury earthquakes. Underlying profit after tax was $28.2 million, a 29.6% increase on the previous financial year. The increased provisions for the February 2011 Canterbury earthquake impacted net profit after tax (NPAT) by $36.2 million, after taking into account reinsurance recoveries and tax benefits. The Adverse Development Cover (ADC) taken out in April 2015 significantly reduced the impact on profit. Underlying earnings per share (EPS) was 16.0 cents, up 41.6%. Underlying EPS now reflects the pure general insurance operating model. Underlying EPS increased at a higher rate than underlying net profit due to capital management initiatives. The Board announced a final dividend of 7.5 cents per share (unimputed), compared to 8.0 cents unimputed in the previous year. This makes 16.0 cents per share for the full year, a payout ratio on underlying profit of 100%. Subject to maintaining appropriate levels of solvency, the Board remains committed to a 90% to 100% dividend payout ratio. The final dividend will be paid on 3 February 2016 to shareholders on the register at 20 January 2016. Despite the increased provisions for Canterbury claims costs, the TOWER balance sheet remains strong with significant capital above our long-term target solvency levels. The on market share buyback of up to $34 million – $12 million of which has been completed – is continuing. TOWER Insurance Limited, the licenced insurance entity, remains well capitalised and carries significant capital above target solvency levels. Further excess cash of $38 million is held in the corporate entities1. Further details of TOWER’s solvency position can be found in the solvency disclosures section of TOWER’s website: www.tower.co.nz 5 Underlying financial performance Our gross written premium (GWP) increased 2.7% to $305.6 million, influenced by slowing premium growth in New Zealand and solid policy growth in the Pacific. Gross earned premiums rose 6.9% to $304.7 million. While industry reinsurance costs have eased, TOWER elected to take out increased cover as part of its risk management strategy, which has seen our reinsurance costs increase over the previous financial year. We have increased cover for large claim events and the February 2011 Canterbury earthquake ADC, both of which have reduced our final exposure to claims. Underlying earnings performance1 $ MILLION 2015 2014 MOVEMENT The ratio of claims to net earned premium (NEP) across New Zealand and the Pacific declined to 47.7%, from 50.8%, reflecting fewer large claim events. There were no large event claims in the first half. The second half was affected by storms in Wellington, Dunedin and Whanganui, as well as by seasonally higher travel and motor claims. Our combined ratio (a measure of insurance margins, with a lower number being better) improved to 89.6%, down from 91.6% in the previous year. The underlying expense ratio (management expenses and sales expenses to net earned premium) increased to 41.9% in the year, up from 40.8%. Operating expenses increased in the second half due to the timing of a number of our initiatives including the launch of Trade Me Insurance, the brand refresh and Insurance Faces migration programme. These investments have led to an increase in the management expense ratio but are anticipated $ % to improve returns to shareholders through revenue and Gross written premium 305.6 297.6 8.0 Gross earned premium 304.7 285.1 19.6 Reinsurance costs (51.9) (48.0) (3.9) Net earned premium 252.8 237.1 10.9 (115.6) (106.2) (9.4) 2.7% 6.9% 8.1% 6.6% 8.9% efficiency benefits over the medium term. Our Pacific business continues to grow, and is a significant component of TOWER, accounting for 34% of underlying net profit after tax (NPAT). Profit after tax increased 17.4% to $9.6 million supported by benign weather across the Pacific Net incurred claims Large events claims2 Management and sales expenses Depreciation and amortisation Underwriting profit Investment revenue Financing costs Underlying profit before tax Income tax expense Underlying profit after tax (4.9) (14.4) 9.4 (65.6%) territories as well as policy and premium growth and currency (101.9) (94.0) (7.9) 8.4% translation. (4.0) 26.3 14.0 - 40.3 (12.2) 28.2 (2.7) 19.9 14.2 (4.1) (1.4) 6.4 51.9% 32.1% (0.2) (1.2%) 4.1 - 30.0 10.3 34.4% (8.3) (3.9) 46.9% 21.7 6.4 29.6% Investment revenue net of financing costs increased $3.9 million to $14.7 million following the bond redemption undertaken in the previous year that left TOWER debt free. TOWER’s tax expense reflects the average of the New Zealand and Pacific Islands’ corporate rates after taking into account foreign tax credits arising from transactions with the Pacific subsidiaries. 1. Table excludes the impact of Canterbury earthquakes and related ADC reinsurance 2. Large claim events are those greater than $1m. 2014 large claim events were due to storms in New Zealand. 6 TOWER Limited annual report 2015 Operating priorities during the year TOWER’s strategy remained focused on the strategic pillars of customer satisfaction, staff engagement and financial performance. TOWER aims to become the leading light in the New Zealand and Pacific General Insurance markets and to drive shareholder value. Making it easy for customers We have seen encouraging improvements in key indicators of customer satisfaction. TOWER views customer interactions as an opportunity to engage and build a relationship, improve customer retention and extend TOWER’s service offering in order to better address customer needs. A key element of this approach is the introduction of a new service model that reflects the full customer experience and offers both service and sales functions from a single customer interaction. Merging sales and service provides We are planning the next phase of systems and process improvement to deliver efficiency and service improvements over the medium term. There is a significant opportunity in this area. However, this is currently constrained by systems and business complexity - simplification will be crucial. Unlocking the power of TOWER The TOWER Insurance brand consistently achieves a level of recognition associated with the major market leaders. However, our market share does not reflect this high recognition. The realisation of this latent brand potential has been – and will continue to be – a focus. We seek effective communication of the brand story, ensuring product quality and innovation, and delivery of an attractive value proposition. TOWER continues to build its brand as a trusted alternative to the major insurers, and a leader in customer service and product innovation. We launched a new branding campaign during the year: “Confidence. Get it back with TOWER the opportunity to significantly improve revenue, customer Insurance.” satisfaction and operating efficiency. Execution of this strategy, including associated staff training, affected short-term call wait times in March and April 2015. This impacted service levels and the observed net promoter score (NPS), a key measure of customer service and engagement that has increased significantly over the last two years. Measures were adopted to improve performance including expansion of the sales and service team, increased training and process enhancements. These resulted in a strong recovery of NPS to levels above previous peaks. The recovery in customer satisfaction has been assisted by a reduction in customer “hand-offs” (when a call is transferred to another service agent) and “drop-outs” (when a customer discontinues a call). Migration to the core insurance platform, Insurance Faces, has continued through 2015 with 100% of direct personal lines customers now on this platform. Migration is underway for alliance partners. The advertising campaign – which included increased use of social media and billboards – seeks to help realise the potential of the well-recognised TOWER brand, creating a stronger connection with customers, increased confidence in our policies and improved consumer preference for our insurance products. To date, the campaign has achieved encouraging improvement in brand awareness, preference, consideration and inbound inquiries. TOWER also enhanced its reputation as an insurer that listens to customers with the launch of its full replacement fire benefit for New Zealand homes. This insurance product has been recognised in key brand measures. In line with the repositioning of the brand and improving its online presence, we upgraded our corporate website to be fully mobile-friendly. 7 New alliances, distribution channels and markets Boosting Pacific growth Alliances are an important part of TOWER’s growth strategy Our Pacific business comprises a balance of small to medium and a key source of revenue. TOWER has three types of enterprise business insurance and personal lines, including a alliance partnerships: alliances with the major banks which healthy motor insurance business. allow them to sell insurance on their banking product platforms; customer referral relationships with New Zealand’s major networks of financial planners; and as underwriter for a number of specialist insurance agencies. TOWER recognises the significant opportunity to improve sales, service and our cost position by using technology to engage both direct and alliance customers. The Internet and mobile apps like SmartDriver have become attractive channels for insurers like TOWER to promote and sell insurance products. In mid-August, TOWER and Trade Me launched Trade Me Insurance, with a fully online end-to-end service model. Trade Me Insurance represents an exciting market innovation that aims to offer policy flexibility and deliver operating efficiencies that supports a competitive price and value position. The Trade Me platform offers access to 1.4 million potential insurance customers. While it is early days, to date 80% of policies sold through the alliance are in motor insurance, where value is an important TOWER has been operating in the Pacific region for over 140 years and in a number of our markets, we are the industry leader. Customer satisfaction is high in the Pacific, with NPS in the high 40s. Local staff record high levels of engagement. Our online presence in the Pacific was significantly enhanced with website launches in Fiji, Papua New Guinea and the Solomon Islands. New alliance partnerships have been implemented with two major Papua New Guinean finance companies and sales have been encouraging. TOWER recently commenced operations in Vanuatu and we believe this will be an attractive market. Update on Canterbury earthquake rebuild TOWER made further progress on the Canterbury rebuild, and at 30 September 2015 had achieved 96% closed by volume and 88% by value, with approximately 700 claims outstanding. factor and where TOWER remains under-represented The Canterbury situation remains unique in the global context. compared to other segments. TOWER’s investment in Trade Me Insurance to deliver an end-to-end online customer experience provides important Along with other general insurers, TOWER continues to work through the tail end of Canterbury claims, which are challenging and complex. learning that can be applied to establishing our direct digital TOWER has used Deloitte to provide actuarial services platform and other new alliance opportunities. The Trade Me Insurance alliance is an example of TOWER participating in industry innovation, entering new markets and establishing an online presence and skill base. TOWER is seeking to apply technology to the entire policy sales and service cycle to better meet customer needs through improved convenience, cost and service. to project claims costs from the remaining Canterbury earthquake rebuild. In preparing the 30 September financial statements, the Board requested additional expertise from TOWER’s actuarial adviser, Deloitte, who began a file-by- file review of remaining claims. Following the receipt of an actuarial report in April 2015, the TOWER Board determined that Canterbury provisions should be prudently increased by $22.6 million after tax for the February 2011 event. This is reflected in the 31 March 2015 interim financial statements.1 8 TOWER Limited annual report 2015 1. There were four separate events that make up the Canterbury earthquakes. Each event is considered a separate event for reinsurance and Earthquake Commission’s (EQC) purposes. The February 2011 earthquake event provision impacts our profit given it is the only one of the four events to exceed the reinsurance cap. At 30 September 2015, TOWER has further increased the provision for the February 2011 event to an impact of $13.6 million net of tax and after the benefit of the ADC reinsurance. Balance sheet and capital management The total increase to Earthquake provisions was $36.2 million TOWER’s solvency remains sound with capital above target after tax for the full financial year. The provision adjustment in the second half of the financial year was driven by increased costs for paid claims during the period, an increase in case estimates for current claims, and an increase in the claims incurred but not reported, a reflection of the unreported cost. The net outstanding claims provision is $46.2 million after reinsurance and EQC recoveries. Current estimates of claims costs include an expectation of recovery from EQC based on levels within the licenced insurance entity (TOWER Insurance Limited). TOWER has a long term policy of retaining within its licenced General Insurance entity 175% of the minimum solvency capital (MSC) required under the Insurance (Prudential Supervision) Act 2010. As at 30 September 2015, TOWER’s actual MSC was $70 million and therefore the target solvency margin was $52 million. Tower Group therefore had a surplus of $35 million over the long-term target (comprising $25 million in New Zealand and $10 million across subsidiaries). Further excess cash of $38 million is held in the detailed work completed by TOWER and its advisers. There are corporate entities. elements of the recovery that remain to be agreed with EQC. As a result of the Deloitte review, TOWER believes there is Further details on TOWER’s solvency position can be found in the solvency disclosures section of TOWER’s website: greater certainty regarding the balance of the claims provision www.tower.co.nz given: 1. The granular detail of this case-by-case claim cost analysis; 2. An enhanced view of claim cost (and risk) profile over time through cost development curves and; 3. The availability of detailed information from this review process that will improve claims and risk management. Capital management remains a priority for TOWER. In addition to paying healthy dividends, we have returned $189 million of capital over the past three years and remain committed to returning additional capital to shareholders where possible. An on market share buyback of up to $34 million is currently underway and to date has returned $12 million This allows TOWER to more accurately assess the risks and to shareholders through the acquisition and cancellation estimate the ultimate cost of claims. It also allows a more of shares. This buyback is being funded out of excess strategic approach to managing claims, for example, targeting cash currently in the corporate entities and will not impact high risk claims and gaining a better understanding of insurance solvency. settlement opportunities. The full year dividend of 16.0 cents per share represents an TOWER remains focused on bringing resolution as quickly increase of 10.3% on the previous year. Subject to maintaining as possible to the remaining approximately 700 customers appropriate solvency within the insurance company, TOWER with unresolved claims at 30 September 2015. The complexity expects to retain its policy of paying out 90% to 100% of of these claims means some risk still remains. However, the underlying profits as dividends. detailed actuarial analysis completed to understand these claims, their significantly smaller number, and the pace of TOWER’s claims resolution progress in resolving claims, provides the company with greater certainty regarding the balance of the outstanding claims provision. 9 TOWER outlook TOWER aims to deliver solid shareholder returns by growing a General Insurance business that is seen as a leading light in New Zealand and the Pacific. The company has three well-established pillars supporting its General Insurance strategy: staff engagement, customer satisfaction and financial performance. In support of this strategy, our medium term operational and strategic priorities are: Growth and Retention There is a significant opportunity to improve policy attrition and grow TOWER’s direct policy numbers and premium through higher customer retention. Establishing a high performance customer service culture and improving our TOWER’s long term approach to building shareholder value processes to enhance the customer experience are key seeks to: • Drive growth and efficiency through staff engagement; • Unlock significant brand potential through product innovation and customer service; • Maintain and grow a leading position in attractive Pacific markets; • Deliver financial performance; • Efficiently manage risk and capital for better shareholder returns; and • Capitalise on any opportunities presented by industry consolidation. Our focus now moves to achieving operational excellence, developing a high performance customer service culture and unleashing the power of the TOWER brand. Richard Harding Chief Executive Officer 10 TOWER Limited annual report 2015 elements of this strategy. Therefore, TOWER has established specialist retention teams to proactively engage with customers and lift service, build the brand, and improve customer retention. New markets and channels Trade Me Insurance represents an exciting market innovation. The online delivery platform has now entered into the post-launch phase. TOWER has gained valuable experience through this relationship which can be applied to growing our own direct business and pursuing further new alliance opportunities in New Zealand. Operational excellence TOWER sees significant opportunity in improving a number of core operational areas including, improved claims management, enhanced risk management framework, simplification of processes, and a deeper focus on underwriting and pricing. An increased focus on these core areas will improve the outcomes for customers and create efficiencies over the medium term. Capital management TOWER intends to maintain strong solvency while managing capital efficiently. The on-market buyback of up to $34 million, of which $12 million has been acquired, is continuing. Subject to appropriate solvency, TOWER expects to retain its policy of paying out 90% to 100% of underlying profits as dividends. Vision The leading light in New Zealand and Pacific General Insurance Strategic pillars Customer People Financial Values Taking ownership Open and honest Working as one Empathy in everything Raising the bar Outcomes Shareholder Returns Conclusion With the foundations of a pure General Insurer now firmly bedded in, I am looking forward to leading TOWER through its next phase of development and growth. Our focus now moves to achieving operational excellence, developing a high performance customer service culture and unleashing the power of the TOWER brand. I would like to acknowledge and thank the TOWER team for their dedication in what has proven a challenging year. The enthusiasm they demonstrate for the business stands TOWER in very good stead for the future. On the team’s behalf, I also thank our customers for their loyal support of TOWER. We will continue to work hard to earn the confidence they place in our insurance products. Richard Harding Chief Executive Officer 11 Board of Directors Michael Stiassny Chairman LLB, BCom, CA, CFInstD Non-Executive Director Independent Rebecca Dee-Bradbury BBus (Marketing), GAICD Non-Executive Director Independent David Hancock BBus, GAICD Non-Executive Director Not Independent Appointed Director: 12 October 2012 Appointed Director: 15 August 2014 Appointed Director: 16 November 2012 Michael is a chartered accountant Rebecca has a background in strategic David was Chief Executive Officer of and senior partner of KordaMentha, marketing and business transformation. TOWER from July 2013 to August based in Auckland, which specialises in She has held senior regional executive 2015. David has over 25 years of broad financial consulting work. He has both and CEO roles with businesses in experience in financial services. This a Commerce and Law degree from the Australia, New Zealand and Asia experience includes being a former University of Auckland. He is currently Pacific. She has extensive experience in Executive General Manager at the Chairman of Vector Limited, Chairman consumer and retail marketing, brand Commonwealth Bank of Australia, with a of Ngati Whatua Orakei Whai Rawa management and innovation gained with variety of roles including capital markets, Limited, and is a Director of a number of international companies such as Kraft/ fixed income and equities. He held several other companies. Michael is President Cadbury, Maxxium and Lion Nathan/ board positions at the bank including and a Chartered Fellow of the Institute of Pepsi Cola bottlers. She holds a Bachelor Commonwealth Securities (ComSec), Directors in New Zealand (Inc). of Business from Monash University, as well as external professional board Michael resides in Auckland, New Zealand. Melbourne. Rebecca is a Director of positions. Prior to that he served in roles Bluescope Steel Limited and GrainCorp at JPMorgan where he was a Managing Limited. Rebecca is on the Business Director with responsibilities in New Advisory Board for Monash Business Zealand, Australia and Asia across various School. Rebecca resides in Melbourne, Australia. operations. David was the Interim Chief Executive Officer at Firstfolio Limited, an Australian listed financial services company. He holds a Bachelor of Business from the Queensland University of Technology, Brisbane. David resides in Sydney, Australia. 12 TOWER Limited annual report 2015 Warren Lee BCom, CA Steve Smith Graham Stuart BCom, CA, Dip Bus (Finance), CFInstD BCom (Hons), MS, FCA Non-Executive Director Non-Executive Director Independent Independent Non-Executive Director Independent Appointed Director: 26 May 2015 Appointed Director: 24 May 2012 Appointed Director: 24 May 2012 Warren has extensive experience Steve has been a professional Director With over 30 years of senior management and a long record of leadership in the since 2004. He has over 35 years’ experience, Graham has held senior international insurance industry, including business experience, including being a leadership roles with several major 15 years at AXA in senior management specialist corporate finance partner at a corporates, in New Zealand and overseas, positions within the company’s Australian leading New Zealand accountancy firm. the latest being the Sealord Group of which and Asian businesses. Warren’s two He has a Bachelor of Commerce and he was Chief Executive Officer for 7 years. most recent positions were Chief Diploma in Business from the University Prior to that he held a number of diverse Executive Officer of the Victorian Funds of Auckland, is a member of Chartered leadership roles including CEO of Mainland Management Corporation and Chief Accountants Australia and New Zealand Products, Managing Director of Lion Executive Officer, Australia and New and a Chartered Fellow of the Institute Nathan International, and Chief Financial Zealand for AXA Asia Pacific Holdings of Directors in New Zealand (Inc). Steve Officer and Director of Strategy for the Limited. He has a Bachelor of Commerce is Chairman of Hellaby Holdings Ltd, Fonterra Co-operative Group. from the University of Melbourne and Spanbild Holdings Ltd and Pascaro is a member of Chartered Accountants Investments Ltd, and a Director of Fulton Australia and New Zealand. Hogan Ltd, Rimu S.A. (Chile), and the Warren resides in Melbourne, Australia. National Foundation for the Deaf Inc. Graham has a Bachelor of Commerce (First Class Hons) from the University of Otago, a Master of Science from Massachusetts Institute of Technology and is a Fellow of Steve resides in Auckland, New Zealand. Chartered Accountants Australia and New Zealand. Graham has served on a number of Government bodies including the Food & Beverage Taskforce and the Maori Economic Development Panel. Graham resides in Auckland, New Zealand. 13 TOWER Limited Financial Statements For the year ended 30 September 2015 Contents Independent Auditors’ Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet 15 17 18 19 Consolidated Statement of Changes in Equity 20 Consolidated Statement of Cash Flows Corporate governance and disclosures 21 51 Notes 1. Summary of general accounting 18. Accumulated profits policies 2. Impact of amendments to NZ IFRS 3. Premium revenue 4. Investment revenue 5. Claims expense 6. Canterbury earthquakes 7. Other expenses 8. Taxation 9. Receivables 10. Intangible assets 11. Deferred acquisition costs 12. Property, plant and equipment 13. Payables 14. Provisions 15. Insurance liabilities 16. Contributed equity 17. Distributions to shareholders 22 23 23 24 24 25 26 27 29 30 31 31 32 33 33 34 34 19. Reserves 20. Net assets per share 21. Earnings per share 22. Segmental reporting 23. Insurance business disclosure 24. Financial instruments 25. Risk management 26. Capital risk management 27. Operating leases 28. Cash and cash equivalents 29. Contingent liabilities 30. Capital commitments 31. Subsidiaries 32. Transactions and balances with related parties 33. Subsequent events 34. Discontinued operations 34 35 35 35 36 36 41 43 47 47 48 48 48 49 49 49 49 14 TOWER Limited annual report 2015 TOWER Limited Independent Auditors’ Report For the year ended 30 September 2015 Independent Auditors’ Report Independent Auditors’ Report to the shareholders of TOWER Limited to the shareholders of TOWER Limited Report on the Financial Statements Report on the Financial Statements We have audited the financial statements of TOWER Limited (“the Company”) on pages 32 to 80, which comprise the balance sheets as at 30 September 2013, the income statements, We have audited the consolidated financial statements of TOWER Limited (“the Company”) on pages 17 to 50, statements of comprehensive income, statements of changes in equity and statements of cash which comprise the consolidated balance sheet as at 30 September 2015 and the consolidated income statement, the flows for the year then ended, and the notes to the financial statements that include a summary consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated of significant accounting policies and other explanatory information for both the Company and statement of cash flows for the year then ended, and the notes to the financial statements that include a summary of the Group. The Group comprises the Company and the entities it controlled at 30 September general accounting policies and other explanatory information for the Group. The Group comprises the Company and 2013 or from time to time during the financial year. the entities it controlled at 30 September 2015 or from time to time during the financial year. Auditors’ Responsibility Directors’ Responsibility for the Consolidated Financial Statements Directors’ Responsibility for the Financial Statements The Directors are responsible for the preparation of these financial statements in accordance with generally accepted accounting practice in New Zealand and that give a true and fair view of the matters to which they relate and for such internal controls as the Directors determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Directors are responsible on behalf of the Company for the preparation and fair presentation of these consolidated financial statements in accordance with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards and for such internal controls as the Directors determine are necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. These standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. These standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Company and the Group’s preparation of financial statements that give a true and fair view of the matters to which they relate, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company and the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the financial statements. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. We are independent of the Group. Other than in our capacity as auditors and providers of other related assurance services we have no relationship with, or interests in, the Group. We have no relationship with, or interests in, TOWER Limited or any of its subsidiaries other than in our capacities as auditors and providers of other assurance, taxation and advisory services. These services have not impaired our independence as auditors of the Company and the Group. PricewaterhouseCoopers , 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 (9) 355 8000, F: +64 (9) 355 8001, www.pwc.com/nz 15 Independent Auditors’ Report TOWER Limited Opinion In our opinion, the financial statements on pages 17 to 50 present fairly, in all material respects, the financial position of the Group as at 30 September 2015, and its financial performance and cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards. Restriction on Use of our Report This report is made solely to the Company’s shareholders, as a body, in accordance with the Companies Act 1993. Our audit work has been undertaken so that we might state those matters which we are required to state to them in an auditors’ 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. Chartered Accountants 24 November 2015 Auckland 16 TOWER Limited annual report 2015 TOWER Limited Consolidated Income Statement For the year ended 30 September 2015 Revenue Premium revenue Less: Outwards reinsurance expense Net premium revenue Investment revenue Fee and other revenue Net operating revenue Expenses Claims expense Less: Reinsurance recoveries revenue Net claims expense Management and sales expenses Net claims and operating expenses Financing costs Total expenses Note 2015 $000 2014 $000 3 4 304,730 285,113 (56,765) (48,197) 247,965 236,916 14,734 2,984 14,217 3,731 265,683 254,864 252,244 258,855 (64,907) (119,742) 5 187,337 139,113 7(A) 88,276 81,699 275,613 220,812 7(B) – 4,104 275,613 224,916 (Loss) Profit before taxation (9,930) 29,948 Tax benefit (expense) attributed to shareholders’ profits 8(A) 1,898 (8,324) (Loss) Profit for the year from continuing operations Profit for the year from discontinued operations Profit (Loss) from disposal of subsidiaries Profit for the year from discontinued operations (Loss) Profit for the year (Loss) Profit attributed to: Shareholders Non-controlling interest Basic and diluted (loss) earnings per share from continuing operations Basic and diluted earnings per share from discontinued operations The above income statement should be read in conjunction with the accompanying notes. (8,032) 21,624 – 1,396 1,396 4,964 (2,977) 1,987 (6,636) 23,611 (6,982) 23,194 346 417 (6,636) 23,611 Cents Cents (4.79) 0.80 11.29 1.06 34 34 21 21 17 TOWER Limited Consolidated Statement of Comprehensive Income For the year ended 30 September 2015 (Loss) Profit for the year Other comprehensive income: Items that may be reclassified subsequently to profit: Gain on asset revaluation Deferred income tax relating to asset revaluation Currency translation differences Other comprehensive income net of taxation Total comprehensive (loss) income for the year Total comprehensive (loss) income attributed to: Shareholders Non-controlling interest Total comprehensive (loss) income attributed to equity arises from: Continuing operations Discontinuing operations Note 2015 $000 2014 $000 (6,636) 23,611 12 19 129 (18) 3,518 3,629 58 (10) 2,582 2,630 (3,007) 26,241 (4,095) 25,758 1,088 483 (3,007) 26,241 (4,403) 24,254 1,396 1,987 (3,007) 26,241 The above statement of comprehensive income should be read in conjunction with the accompanying notes. 18 TOWER Limited annual report 2015 TOWER Limited Consolidated Balance Sheet As at 30 September 2015 Assets Cash and cash equivalents Receivables Financial assets at fair value through profit or loss Property, plant and equipment Tax assets Deferred acquisition costs Deferred tax assets Intangible assets Total Assets Liabilities Payables Tax liabilities Provisions Derivative financial liabilities Insurance liabilities Deferred tax liabilities Total Liabilities Net Assets Equity Contributed equity Accumulated profit Reserves Total equity attributed to shareholders Non-controlling interest Total Equity The financial statements were approved for issue by the Board on 24 November 2015. Michael P Stiassny Chairman Graham R Stuart Director The above balance sheet should be read in conjunction with the accompanying notes. Note 2015 $000 2014 $000 28(A) 125,113 168,062 9 24 12 8(B) 11 8(D) 10 13 8(C) 14 24 15 301,666 333,996 213,593 212,407 10,221 6,285 14,893 12,733 20,277 20,028 24,786 19,303 48,373 35,483 758,922 808,297 48,472 46,157 568 3,273 – 371 7,308 46 419,692 422,273 8(D) 6,008 6,133 478,013 482,288 280,909 326,009 16 18 19 384,585 396,819 6,376 42,174 (111,696) (114,583) 279,265 324,410 1,644 1,599 280,909 326,009 19 TOWER Limited Consolidated Statement of Changes in Equity For the year ended 30 September 2015 Year ended 30 September 2015 At the beginning of the year Comprehensive (loss) income (Loss) Profit for the year Other comprehensive (loss) income Gain on asset revaluation Deferred income tax relating to asset revaluation Currency translation differences Total comprehensive (loss) income Transactions with shareholders Capital repayment plan Dividends paid Minority interest dividend paid Other Attributed to shareholders Contributed equity $000 Accumulated losses/profits $000 Note Reserves $000 Total $000 Non- controlling Interest $000 Total equity $000 396,819 42,174 (114,583) 324,410 1,599 326,009 – (6,982) – (6,982) 346 (6,636) – – – – – – – 129 (18) 129 (18) – – 129 (18) 2,776 2,776 742 3,518 (6,982) 2,887 (4,095) 1,088 (3,007) 16 18 (12,234) – – – – (28,999) – 183 – – – – – (12,234) (28,999) – 183 – – (12,234) (28,999) (1,043) (1,043) – 183 (41,050) (1,043) (42,093) Total transactions with shareholders (12,234) (28,816) At the end of the year 384,585 6,376 (111,696) 279,265 1,644 280,909 Year ended 30 September 2014 At the beginning of the year Comprehensive income Profit for the year Other comprehensive income Gain on asset revaluation Deferred income tax relating to asset revaluation Currency translation differences Total comprehensive income Transactions with shareholders Capital repayment plan Movement in share based payment reserve Dividends paid Minority interest dividend paid Other 16 18 18 453,935 42,983 (117,103) 379,815 1,262 381,077 – 23,194 – 23,194 417 23,611 – – – – (57,116) – – – – – – – 58 (10) 58 (10) 2,516 2,516 23,194 2,564 25,758 – 44 (24,011) – (36) – (44) – – – (57,116) – (24,011) – (36) – – 66 483 – – – (146) – 58 (10) 2,582 26,241 (57,116) – (24,011) (146) (36) Total transactions with shareholders (57,116) (24,003) (44) (81,163) (146) (81,309) At the end of the year 396,819 42,174 (114,583) 324,410 1,599 326,009 The above statement of changes in equity should be read in conjunction with the accompanying notes. 20 TOWER Limited annual report 2015 TOWER Limited Consolidated Statement of Cash Flows For the year ended 30 September 2015 Cash flows from operating activities Premiums received Interest received Dividends received Fee and other income Reinsurance received Reinsurance paid Claims paid Net realised investment (loss) gain Payments to suppliers and employees Interest paid Income tax paid Note 2015 $000 2014 $000 308,232 303,993 14,873 36,035 25 2,984 1,377 3,825 138,499 193,920 (57,105) (51,688) (299,642) (383,020) (1,077) 18,896 (84,912) (81,287) – (3,940) (5,136) (4,539) Net cash inflow from operating activities 28(B) 17,937 32,376 Cash flows from investing activities Net proceeds from (payments for) financial assets Purchase of property, plant and equipment and intangible assets Disposal of property, plant and equipment and intangible assets Cash disposed with sale of subsidiaries Proceeds from sale of subsidiaries Net cash outflow from investing activities Cash flows from financing activities Dividends paid Bond repayment Payment of minority interest dividends Capital repayment Net cash outflow from financing activities Net decrease in cash and cash equivalents Foreign exchange movement in cash Cash and cash equivalents at the beginning of year Cash reclassified as part of sale 1,141 (63,294) (21,606) (9,983) 1,161 (77) – – (12,194) 35,500 (19,304) (50,048) (28,999) (24,011) – (81,759) (1,043) (146) (12,234) (57,116) (42,276) (163,032) (43,643) (180,704) 694 (1,257) 168,062 341,624 – 8,399 Cash and cash equivalents at the end of year 28(A) 125,113 168,062 The above statement of cash flows should be read in conjunction with the accompanying notes. 21 1. Summary of general accounting policies Currency TOWER Limited (the Company) is a company incorporated in New Zealand under the Companies Act 1993 and listed on the New Zealand and Australian Stock Exchanges. The Company is a Financial Markets Conduct Act 2013 reporting entity under Part 7 of the Financial Markets Conduct Act 2013. The Company and its subsidiaries together are referred to in this financial report as TOWER, or the Group, or the consolidated entity. The address of the Company’s registered office is 45 Queen Street, Auckland, New Zealand. The financial statements of the Group have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP). They comply with International Financial Reporting Standards (IFRS) and also New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable financial reporting standards, as appropriate for Tier 1 profit-oriented 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, the NZX Main Board Listing Rules and the ASX Listing Rules. In accordance with the Financial Markets Conduct Act 2013, separate financial statements for the Company (being the parent entity) are no longer required. During the periods presented, the principal activity of the TOWER Limited Group was provision of general insurance. The Group predominantly operates in New Zealand with some of its operations based in the Pacific Islands region. The consolidated Group financial statements are presented in New Zealand dollars and rounded to the nearest thousand dollars and have been prepared on a fair value basis with any exceptions described in the accounting policies and notes. Principles of consolidation The consolidated 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. The acquisition of controlled entities from external parties is accounted for using the acquisition method of accounting. The share of net assets of controlled entities attributable to minority interests is disclosed separately in the balance sheet, income statement and statement of comprehensive income. 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. (i) Functional and presentation currencies The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates. (ii) Transactions and balances In preparing the financial statements of the individual entities, transactions denominated in foreign currencies are translated into New Zealand dollars using the exchange rates in effect at the transaction dates. Monetary items receivable or payable in a foreign currency, including forward exchange contracts, 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 are recognised in the income statement. (iii) Consolidation 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 sheet 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. Exchange differences are taken to the Foreign Currency Translation Reserve and recognised in the statement of comprehensive income and the statement of changes in equity. Comparatives The following comparative information has been reclassified to achieve consistency with the current year’s presentation. (i) Canterbury earthquake receivables Changes relate to balance sheet reclassifications only. There is no change to net assets or the 2014 income statement. In 2015, a receivable has been separately disclosed for amounts recoverable from EQC. Within note 9 Receivables – Other is $57.4 million recoverable from EQC on Canterbury earthquake claims. In 2014, the $17.7 million comparative amount recoverable from EQC was disclosed net within outstanding claims. To achieve consistent presentation, the 2014 comparatives have been adjusted as follows: On the Balance Sheet, 2014 receivables increased $17.7 million to $333.9 million and 2014 insurance liabilities increased $17.7 million to $422.3 million. Total assets and total liabilities balances have increased accordingly. There is no change to net assets. 22 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 Within note 9 Receivables, the 2014 balance for other receivables has increased $17.7 million to $24.6 million, all of which has been classified as non-current (the 2014 non-current balance has increased to $53.7 million). Within note 15 Insurance liabilities, the 2014 balance for outstanding claims has increased $17.7 million to $271.8 million, all of which has been classified as non-current (the 2014 non-current balance has increased to $56.6 million). Note 22 Segmental reporting 2014 comparative balances for total assets and total liabilities have increased $17.7 million reflecting the above reclassifications. Within note 23 Insurance business disclosures, 2014 comparative amounts for outstanding claims have been increased by $17.7 million throughout the note. Note 24 Financial instruments 2014 comparative balances for receivables have been increased by $17.7 million. The $17.7 million comparative amount recoverable from EQC has been allocated to other government agencies in the credit risk concentration table of note 24 (B) (i) and to loans and receivables in the maximum exposure to credit risk table of note 24 (B) (ii). The $17.7 million has been included as a Group 1 receivable balance in the credit quality table of note 24 (B) (iii). Within note 28 Cash and cash equivalents, the balances for decrease in receivables and decrease in payables in the reconciliation of profit to net cash flows from operating activities, have both been adjusted by $17.7 million. The decrease in receivables balance has reduced $17.7 million to $56.7 million and the decrease in payables has increased $17.7 million to ($52.3) million. (ii) Segmental reporting Comparative information in note 22 Segmental reporting, has been reclassified to present intangible assets (software) within New Zealand general insurance to achieve consistency in disclosure with the current year. 2. Impact of amendments to NZ IFRS – NZ IFRS 9, Financial instruments, was issued in September 2014 as a complete version of the standard. NZ IFRS 9 replaces the parts of NZ IAS 39 that relate to the classification and measurement of financial instruments, hedge accounting and impairment. NZ IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the NZ IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The new hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by companies when hedging their financial and non-financial risks. NZ IFRS 9 introduces a new expected credit loss model for calculating the impairment of financial assets. This standard is effective for reporting periods beginning on or after 1 January 2018. The Group is yet to assess NZ IFRS 9’s full impact. – NZ IFRS 15 Revenue from Contracts with Customers is effective for balance dates beginning on or after 1 January 2017, thus for the year ending 30 September 2018 for the Group. The standard will provide a single source of requirements for accounting for all contracts with customers (except for some specific exceptions, such as insurance contracts, lease contracts and financial instruments) and will replace all current accounting pronouncements on revenue. New revenue disclosures are also introduced. The Group is in the process of evaluating the impact of this standard. (B) Standards, amendments and interpretations to existing standards effective 2015 or early adopted by the Group. The application of new or amended accounting standards as of 1 October 2014 has not had a material impact on the financial statements. (A) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group. 3. Premium revenue The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning after 1 October 2015 or later periods, and the Group has not adopted them early. The Group expects to adopt the following new standards on 1 October after the effective date. Premium revenue is recognised in the period in which the premiums are earned during the term of the contract. The proportion of premiums not earned in the income statement at reporting date is recognised in the balance sheet as unearned premium liability. Premiums on unclosed business are brought to account using estimates based on the previous year’s actual unclosed business with due allowance made for any changes in the pattern of new business and renewals. Premiums ceded to reinsurers under reinsurance contracts are recorded as outwards reinsurance expense and are recognised over the period of the reinsurance contract. Accordingly, a portion of outwards reinsurance premium is treated at balance date as a prepayment. 2015 $000 2014 $000 Gross written premiums 305,582 297,627 Less: Gross unearned premiums (852) (12,514) Premium revenue 304,730 285,113 23 4. Investment revenue Investment revenue is recognised as follows: (i) Dividends and distributions Revenue is recognised on an accrual basis when the right to receive payment is established. (ii) Property income Property income is recognised on an accrual basis. (iii) Interest income Interest income is recognised using the effective interest method. (iv) Fair value gains and losses Fair value gains and losses on financial assets at fair value through profit or loss are recognised through the income statement in the period in which they arise. Fee revenue on investment contracts and other services provided by the Group is recognised in the period the services are provided. Other revenue includes commission and administration fees reimbursed. It is recognised when the right to receive is established. Fixed interest securities Interest income Net realised loss Net unrealised gain Equity securities Dividend income Property securities Property income Net realised gain Net unrealised loss Other Net realised (loss) gain Net unrealised gain (loss) Total investment revenue Total investment revenue Total net realised loss Total net unrealised gain 2015 $000 2014 $000 14,873 15,637 (971) (2,947) 867 1,563 14,769 14,253 25 25 – – – – (106) 46 (60) 14 14 4 412 (401) 15 103 (168) (65) 14,898 15,655 (1,077) (2,432) 913 994 14,734 14,217 Other investment gains and losses have been generated by derivative financial assets and financial liabilities classified as held for trading at fair value through profit or loss. 5. Claims expense Claims expense is recognised when claims are notified. Provision is made at the end of the year for the estimated cost of claims incurred but not settled at balance date, including the cost of claims incurred but not yet reported to the Group. The estimated cost of claims includes direct expenses incurred in settling claims net of any expected salvage value and other recoveries. The Group takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. The estimation of claims incurred but not reported (IBNR) is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the Group, where more information about the claim event is generally available. IBNR claims may often not be apparent to the insured until many years after the events giving rise to the claims have happened. In calculating the estimated cost of unpaid claims the Group uses a variety of estimation techniques, generally based on statistical analyses of historical experience, which assumes that the development pattern of current claims will be consistent with past experience. Allowance is made for changes or uncertainties which may create distortions in underlying statistics or which may cause the cost of unsettled claims to increase or reduce when compared with the cost of previously settled claims including: – changes in Group processes which might accelerate or slow down the development and (or) recording of paid or incurred claims, compared with statistics from previous periods; – changes in the legal environment; – the effects of inflation; – changes in the mix of business; – the impact of large losses; – movements in industry benchmarks; and – technological developments. A component of these estimation techniques is usually the estimation of the cost of notified but not paid claims. In estimating the cost of these the Group has regard to the claim circumstances reported, any information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods. Provisions are calculated gross of any reinsurance recoveries except risk margin which is net of reinsurance recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based on the gross provisions. Details of specific assumptions used in deriving the outstanding claims liability at year end are detailed in note 23. Reinsurance recoveries are recognised as revenue. Amounts recoverable are assessed in accordance with the terms of the reinsurance contracts, in a manner similar to the assessment of outstanding claims. Recoveries are measured as the present value of expected future receipts. The income and loss from fixed interest, equity and property securities has been generated by financial assets designated on initial recognition at fair value through profit or loss. 24 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 6. Canterbury earthquakes TOWER has received over 15,800 individual claims from customers as a result of earthquakes impacting the Canterbury region during 2010 and 2011. Of all claims received, TOWER has settled over 15,100 claims at 30 September 2015, representing a 96% settlement rate by number of claims and 88% by value. To date, TOWER has paid out more than $654 million to customers in respect of the four main earthquakes that occurred on 4 September 2010; 22 February 2011; 13 June 2011 and 23 December 2011. TOWER enjoys the support of its reinsurance partners as it works through its Canterbury claims settlement programme. As at 30 September 2015, TOWER has estimated gross ultimate incurred claims of $792.0 million in respect of the four main Canterbury earthquake events (30 September 2014: $706.9 million). The table below presents a financial representation of TOWER’s net outstanding claims provision at 30 September 2015 in relation to the four main earthquake events. Canterbury earthquake provisions Insurance liabilities Outstanding claims Receivables 2015 $000 2014 $000 (206,815) (197,854) Reinsurance recovery receivables 103,215 164,787 TOWER’s actuarial review at 30 September 2015 identified the following as key contributors to the increase in expected earthquake claims costs: • Greater cost clarity from case-by-case claim analysis giving enhanced cost development profiles across a claim’s life cycle (i.e. highlighting increases post geotechnical reviews and during construction phases); • Enriched assessment of claim costs and risks associated with repairs, rebuilds and complex multi-unit claims; • Re-evaluation of actuarial assumptions including risk margins and claims incurred but not reported; and • Completion of the apportionment of claims costs between each Canterbury earthquake event. TOWER has exceeded its catastrophe reinsurance and adverse development cover limits in relation to the February 2011 event. For the three other main earthquake events, the catastrophe reinsurance cover headroom remaining is: Date of event Catastrophe reinsurance cover remaining September 2010 June 2011 December 2011 $35.7 million $267.4 million $488.1 million The Group’s Appointed Actuary continues to be directly involved with assessment of the earthquake ultimate incurred claims estimate and the derivation of estimated outcomes. Other receivables 57,400 17,700 160,615 182,487 The key elements of judgement within the claims estimation are as follows. Net outstanding claims at 30 September (46,200) (15,367) The following table presents TOWER’s cumulative income statement information in relation to the four main earthquake events at 30 September 2015. 2015 $000 2014 $000 Cumulative expenses associated with Canterbury earthquakes: Earthquake claims estimate Reinsurance recoveries (792,000) (706,931) 692,183 652,564 Claim expenses net of reinsurance recoveries (99,817) (54,367) Reinsurance expense Income tax (25,045) (20,220) (124,862) (74,587) 35,642 21,565 Cumulative impact of Canterbury earthquakes after tax (89,220) (53,022) Recognised in current period (net of tax) (36,198) (191) The estimated ultimate incurred claims cost of the most significant earthquake event in February 2011 (“February 2011 event”) totals $446.9 million. TOWER has reinsurance for $368.75 million on this event (a $325 million initial catastrophe reinsurance cover limit, plus an adverse development cover of $50m where TOWER shares 12.5% of the $50m). During the year ended 30 September 2015, TOWER has recorded an expense of $45.5 million in relation to the February 2011 event. Of this, $31.4 million was recognised in the first half, with a further $14.1 million expensed in the second half of 2015. • the rate of claims closure • recoveries from EQC in respect of land damage and building costs • apportionment of claim costs to each of the four main earthquake event • future increases in building costs • future claim management expenses • closed claims reopening, and • risk margin. Given the nature of estimation uncertainties (including those listed above) actual claims experience may still deviate, perhaps substantially, from the gross outstanding claims liabilities recorded as at 30 September 2015. Any further changes to estimates will be recorded in the accounting period when they become known. Sensitivity analysis – impact of changes in key variables Net outstanding claims is comprised of several key elements, as set out earlier in this note. Sensitivity of net outstanding claims is therefore driven by changes to the assumptions underpinning each of these elements. The impact of changes in significant assumptions on the net outstanding claims liabilities are shown in the table below for the Group. Each change has been calculated in isolation to other changes. Where TOWER is reinsured, the impact of a change to claims cost is borne by reinsurance, so the net impact is nil on the basis that there is no default on the part of the reinsurers. This is the situation for three of the four main earthquakes other than February 2011 event which has exceeded reinsurance cover. 25 6. Canterbury earthquakes (continued) The changes in the table below therefore relate to February 2011 event to the extent that claim costs change. If cumulative costs were to reduce by more than $8.5 million, then the impact on TOWER is muted by adverse development reinsurance at the rate of 87.5%. Sensitivity Change Variable 2015 $000 2014 $000 Impact on February 2011 event provision 7. Other expenses Included in total management and sales expenses are the following: Amortisation of deferred acquisition costs 20,028 18,211 2015 $000 2014 $000 Outstanding Claims: Change to costs and quantity of expected claim estimates including building costs and other impacts Change in apportionment of claim costs to/from February 2011 event Other receivables: Recoveries from EQC in respect of land damage Recoveries from EQC in respect of building costs +5% –5% +1% –1% +10% –10% +10% –10% Bad debts written off Change in provision for doubtful debts Amortisation of software 6,500 5,000 Depreciation: (6,500) (5,000) Office equipment and furniture Motor vehicles Computer equipment Directors’ fees Operating leases Employee benefits expense (6,800) (6,600) 6,800 6,600 (850) 850 (450) 450 (550) 550 (150) 150 155 104 1,660 676 184 32 (160) 931 328 186 1,514 1,247 455 495 2,966 3,834 51,038 49,621 Loss on disposal of property, plant and equipment 15 21 Claims related expense reclassified to claims expense (21,352) (18,564) Auditors’ remuneration Fees paid to Company’s auditors: Audit of financial statements (1) 343 518 Other services: Other assurance related services (2) Non-assurance advisory related services (3) Fees paid to subsidiaries’ auditors different to Group auditors: 33 8 71 6 Audit of annual financial statements 39 33 (1) The audit of financial statements includes fees for both the annual audit of financial statements and the review of interim financial statements. (2) Other assurance related services related to the solvency return audit, share register audit and regulatory returns, plus the audit of TOWER Life (N.Z) Limited net asset statement and Australian branch licence revocation in the prior year. (3) Non-assurance advisory related services related to Annual Shareholders’ Meeting procedures. (B) Financing costs Financing costs include interest on external debt (borrowing costs), and amortisation of transaction costs recognised on the effective interest method. Interest expense Total financing costs 2015 $000 – – 2014 $000 4,104 4,104 The process used to determine assumptions and key elements of judgement within claims estimation is described in note 23 (C) (a) Insurance business disclosures. 26 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 8. Taxation (A) Current tax expense Current tax is the amount of income taxes payable or recoverable in respect of the taxable profit or loss for the period. It is calculated using tax rates and laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). TOWER Limited and its New Zealand wholly-owned subsidiaries with the exception of TOWER Insurance Limited comprise a New Zealand tax consolidated group of which TOWER Limited is the head entity. All members of the tax consolidated group are jointly and severally liable for the tax liabilities of the group. The consolidated group imputation credit account balance reflects the imputation credits available to all members of the group including TOWER Insurance Limited which is a member of the consolidated imputation group. The Group is subject to income taxes in New Zealand and jurisdictions where it has foreign operations. Significant management judgement is required in determining the worldwide provision for income taxes. There are some transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group estimates its tax liabilities based on its understanding of tax law in each relevant jurisdiction. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. 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. Analysis of taxation benefit (expense) Current taxation Deferred taxation Under provided in prior years Income tax (benefit) expense for the year attributed to shareholders 2015 $000 2014 $000 4,223 10,681 (5,082) (2,088) (1,039) (269) (1,898) 8,324 The tax (benefit) expense can be reconciled to the accounting profit as follows: (Loss) profit before taxation from continuing operations (9,930) 29,948 Income tax at the current rate of 28% (2,780) 8,385 Taxation effect of non deductible expenses / non-assessable revenue: Recognition of prior period current tax Non deductible expenditure (income) Foreign tax credits write-off Other (1,325) 253 2,132 (178) (551) (146) 795 (159) Income tax (benefit) expense (1,898) 8,324 (B) Tax assets The income tax expense is the tax payable on taxable income for the current period, based on the income tax rate for each jurisdiction and adjusted for changes in deferred tax assets and liabilities attributable to temporary differences and unused tax losses. Analysed as: Current Non-current All revenues, expenses and certain assets are recognised net of goods and services taxes (GST) except where the GST is not recoverable. In these circumstances the GST is included in the related asset or expense. Receivables and payables are reported inclusive of GST. The net GST payable to or recoverable from the tax authorities as at balance date is included as a receivable or payable in the balance sheet. Cash flows are included in the statements of cash flows on a net basis other than to the extent that the GST is not recoverable and has been included in the expense or asset. 2015 $000 2014 $000 3,629 12,733 11,264 – 14,893 12,733 A tax asset of $11,263,821 is recognised in the financial statements of the Group as at 30 September 2015 in relation to non-refundable excess tax payments made in previous years. In the prior year this balance formed part of current tax assets as it was anticipated that it would be imminently utilised. This balance has been reclassified to a non-current tax asset in the current year as it is now anticipated that it will be utilised in the 2019 financial year, although this may be impacted by changes in taxation laws or the Group’s business activities in the intervening period. (C) Tax liabilities Current tax liabilities of $568,000 relate to taxes payable to offshore tax authorities in the Pacific Islands (2014: $371,000). 27 8. Taxation (continued) (D) Deferred tax assets and liabilities Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities settled, based on the tax rates enacted or substantively enacted for each jurisdiction. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences or unused tax losses can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of the other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: i O p e n n g b a l a n c e a t 1 O c t o b e r t o i n c o m e s t a t e m e n t C h a r g e d / ( c r e d i t e d ) i d s p o s a l g r o u p h e l d o p e r a t i o n s a n d i D s c o n t i n u e d f o r s a l e c o m p r e h e n s v e i s t a t e m e n t o f C r e d i t e d t o i n c o m e C h a r g e d / ( c r e d i t e d ) t o o t h e r G r o u p c o m p a n e s i a t 3 0 S e p t e m b e r i l C o s n g b a l a n c e 2015 $000 $000 $000 $000 $000 $000 Movements in deferred tax assets Provisions and accruals 3,427 (649) Tax losses 11,063 6,968 Property, plant and equipment 4,813 (1,382) Total deferred tax assets 19,303 4,937 Movements in deferred tax liabilities Deferred acquisition costs Other Total deferred tax liabilities 4,810 1,323 6,133 75 (218) (143) – – – – – 18 18 (457) 949 – 492 – – – – 54 – 54 – – – 2,321 19,034 3,431 24,786 4,885 1,123 6,008 Net deferred tax 13,170 5,080 (18) 492 54 18,778 2014 Movements in deferred tax assets Provisions and accruals 3,747 (324) Tax losses 10,462 7,701 Property, plant and equipment 9,443 (4,630) Total deferred tax assets 23,652 2,747 Movements in deferred tax liabilities Deferred acquisition costs Other Total deferred tax liabilities 4,434 1,030 5,464 376 283 659 – – – – – 10 10 4 – 3,427 (34) (7,066) 11,063 – – 4,813 (30) (7,066) 19,303 – – – – 4,810 – – 1,323 6,133 Net deferred tax 18,188 2,088 (10) (30) (7,066) 13,170 28 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 The analysis of deferred tax assets and deferred tax liabilities taking into consideration the offsetting balances within the same tax jurisdiction is as follows: Deferred tax assets Deferred tax assets to be recovered – within 12 months – after more than 12 months Deferred tax liabilities Deferred tax liabilities to be settled – within 12 months – after more than 12 months 2015 $000 2014 $000 5,584 4,459 16,336 9,621 21,920 14,080 1,413 1,729 3,142 688 222 910 Deferred tax liabilities of $156,000 have not been recognised in respect of temporary differences associated with investments in subsidiaries (2014: liabilities of $908,000). (E) Imputation Credits The Group imputation credit account reflects the imputation credits held by the Company as the representative member of the Group. 2015 $000 2014 $000 9. Receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. Assets arising from reinsurance contracts are determined using the methods discussed in note 5, regarding the provision of outstanding claims. The recoverability of these assets is assessed on a periodic basis to ensure that the balance reflects the amounts that will ultimately be received, taking into consideration factors such as counterparty and credit risk. Impairment is recognised where there is objective evidence that the Group may not receive amounts due to it and these amounts can be reliably measured. Collectability of trade receivables is reviewed on an on-going basis. The allowance for credit losses and impairment in relation to trade receivables is provided for based on estimated recoverable amounts determined by reference to current customer circumstances and past default experience. In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the date the credit was initially granted up to the reporting date. The Group has provided fully for receivables over 120 days past due. Trade receivables between 60 and 120 days past due are provided for based on estimated recoverable amounts. Trade and other receivables, including EQC reinsurance recoveries, are included in current assets, except for those with maturities greater than 12 months after the reporting date, which are classified as non-current assets. 2015 $000 2014 $000 Imputation credits available for use in subsequent reporting periods Reinsurance recovery receivables 113,765 187,590 489 477 Outstanding premiums and trade receivables 124,658 121,836 The balance of the imputation account at the end of the reporting period is determined having adjusted for imputation credits that will arise from the payment of income tax provided; dividends recognised as a liability; and the receipt of dividends recognised as receivables at the reporting date. Other Total receivables Analysed as: Current Non current 63,243 24,570 301,666 333,996 222,578 280,277 79,088 53,719 301,666 333,996 Outstanding premiums and trade receivables above are presented net of allowance for credit losses and impairment. Movement in the allowance for credit losses and impairment during the reporting period was as follows: 2015 $000 2014 $000 Outstanding premiums and trade receivables 126,715 123,789 Allowance for credit losses and impairment (2,057) (1,953) Balance at 1 October Impairment loss recognised during the year Provisions released during the year Balance at 30 September 124,658 121,836 1,953 2,113 155 (51) 32 (192) 2,057 1,953 29 10. Intangible assets Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the entity acquired, at the date of acquisition. Following initial recognition, goodwill on acquisition of a business combination is not amortised but is tested for impairment bi-annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Any impairment is recognised immediately in the income statement. On disposal of an entity the carrying value of any associated goodwill is included in the calculation of the gain or loss on sale. Software Application software is recorded at cost less accumulated amortisation and impairment. Amortisation is charged on a straight line basis over the estimated useful life of the software. Internally generated intangible assets are recorded at cost which includes all the directly attributable costs necessary to create, produce and prepare the asset 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. General use computer software 3–5 years Core operating system software 10 years Software A c q u i r e d d e v e l o p e d I n t e r n a l l y d e v e l o p m e n t U n d e r G o o d w i l l T o t a l $000 $000 $000 $000 $000 Year ended 30 September 2015 Cost: At 1 October 2014 17,744 4,186 25,063 9,563 56,556 Additions Disposals Transfers Foreign exchange movements Transfers to Property, plant and equipment – – – – – 33 9,798 15,349 25,180 (1) – 5 – – – – – (109) (110) (9,819) (9,819) – 5 (705) (705) At 30 September 2015 17,744 4,223 34,861 14,279 71,107 Accumulated amortisation: At 1 October 2014 Amortisation charge Amortisation on disposals Foreign exchange movements – – – – (3,745) (17,328) – (21,073) (301) (1,359) 1 (2) – – – – – (1,660) 1 (2) At 30 September 2015 – (4,047) (18,687) – (22,734) At 30 September 2015 At cost 17,744 4,223 34,861 14,279 71,107 Accumulated amortisation – (4,047) (18,687) – (22,734) Net book value at 30 September 2015 Year ended 30 September 2014 Cost: 17,744 176 16,174 14,279 48,373 At 1 October 2013 17,744 4,117 18,210 10,245 50,316 Additions Disposals Transfers – – – 69 6,853 6,758 13,680 – – – – (587) (587) (6,853) (6,853) At 30 September 2014 17,744 4,186 25,063 9,563 56,556 Accumulated amortisation: At 1 October 2013 Amortisation charge At 30 September 2014 At 30 September 2014 – – – (3,180) (16,962) – (20,142) (565) (366) – (931) (3,745) (17,328) – (21,073) At cost 17,744 4,186 25,063 9,563 56,556 Accumulated amortisation – (3,745) (17,328) – (21,073) Net book value at 30 September 2014 17,744 441 7,735 9,563 35,483 30 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 Impairment testing for goodwill 12. Property, plant and equipment Goodwill is allocated to New Zealand general insurance cash generating unit. The carrying amount of goodwill allocated to the cash generating unit is shown below: Property, plant and equipment is initially recorded at cost including transaction costs and subsequently measured at cost less any subsequent accumulated depreciation and impairment losses. 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. Depreciation is calculated using the straight line method to allocate the assets 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. Computer equipment 3 – 5 years Office equipment and furniture 5 – 9 years Motor vehicles Buildings 5 years 50 – 100 years Leasehold property improvements 3 – 12 years Assets that have an indefinite useful life are not subject to depreciation and are tested bi-annually for impairment. Assets with a finite useful life are subject to depreciation and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell, and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Carrying amount of goodwill 2015 $000 2014 $000 17,744 17,744 Goodwill is subject to impairment testing at the cash-generating unit level every six months. No impairment loss has been recognised in 2015 as a result of the impairment review (2014: Nil). Impairment review method The recoverable amount of the general insurance business has been assessed with reference to its appraisal value to determine its value in use. A base discount rate of 14% was used in the calculation (2014: 10%). Other assumptions used are consistent with the actuarial assumptions in note 23 in respect of TOWER Insurance. The projected cash flows have been determined using a steady average growth rate of 2% (2014: 2%). The cash flows were projected over the expected life of the policies. The projected cash flows are determined based on past performances and management expectations for market developments. Sensitivity to changes in assumptions Management considers that the recoverable amount from the general insurance business, as determined by the appraisal value, will exceed the carrying value under a reasonable range of adverse scenarios. 11. Deferred acquisition costs Acquisition costs incurred in obtaining general insurance contracts are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in subsequent reporting periods. Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the general insurance contracts to which they relate. This pattern of amortisation corresponds to the earning pattern of the corresponding premium revenue. Balance at 1 October 2015 $000 2014 $000 20,028 18,211 Acquisition costs deferred during the year 20,277 20,028 Current period amortisation Balance at 30 September Analysed as: Current (20,028) (18,211) 20,277 20,028 20,277 20,028 20,277 20,028 31 12. Property, plant and equipment (continued) a n d f u r n i t u r e i e q u p m e n t O ffi c e L a n d a n d i v e h c l e s M o t o r i e q u p m e n t C o m p u t e r T o t a l b u i l i d n g s $000 $000 $000 $000 $000 Year ended 30 September 2015 Cost: At 1 October 2014 2,374 6,896 1,365 13,155 23,790 Land and buildings are all located in Fiji and are stated at fair value. Fair value is determined using a replacement cost approach whereby the depreciated replacement cost of improvements is added to the leasehold interest in the land. This value is then adjusted to take into account recent market activity. Valuation of the commercial building was performed as at 7 September 2015 by Rolle Associates, registered valuers in Fiji. There has been no material movement in the valuation between 7 September and 30 September 2015. Inputs to the valuation of the Fiji property are considered to be based on non-observable market data, thus classified as level 3 in the fair value hierarchy. – 5,583 129 – 101 – 432 6,116 – 129 – (6,005) (246) (16) (6,267) Had land been recognised under the cost model the carrying amount would have been $1,145,000 (2014: $1,145,000). The revaluation surplus for the period is recorded in other comprehensive income. There are no restrictions on the distribution of this balance to shareholders. Additions Revaluation Disposals Foreign exchange movements At 30 September 2015 2,754 6,749 1,396 13,597 24,496 251 275 176 26 728 Accumulated Depreciation: At 1 October 2014 Depreciation charge Disposals Foreign exchange movements At 30 September 2015 At 30 September 2015 – – – – – (6,295) (992) (10,218) (17,505) (676) (184) (1,514) (2,374) 5,755 237 15 6,007 (297) (83) (23) (403) (1,513) (1,022) (11,740) (14,275) Trade payables 13. Payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unsettled. Payables are recognised initially at fair value net of transaction costs and subsequently measured at amortised cost using the effective interest method. Reinsurance payables Other payables Payable to other insurers Total payables Analysed as: Current 2015 $000 2014 $000 15,847 14,200 2,612 2,967 26,532 28,990 3,481 – 48,472 46,157 48,472 46,157 48,472 46,157 TOWER is a party to the Shared Property Process – Insurer Contract (SPP) which sets out obligations for insurers and appoints a lead insurer to act on behalf of other insurers with respect to the repair and rebuild of shared properties (known as multi-units). As lead insurer on multi-unit repairs or rebuilds, TOWER receives cash from other insurance companies as settlement of their obligations under building contracts covered within the SPP. TOWER has recorded amounts received from other insurers as a Payable, recognising these funds are restricted in use. Funds can only be applied to the rebuild or repair of properties within the SPP that TOWER is lead insurer for. TOWER holds this cash on behalf of other insurers in a segregated bank account. At 30 September there was $3.5 million recorded within Payables as funds held on behalf of other insurers in respect of SPP claims. Refer also note 28 for further details on cash held in respect of multi-unit claims as lead insurer. At cost 2,754 6,749 1,396 13,597 24,496 Accumulated depreciation – (1,513) (1,022) (11,740) (14,275) Net book value at 30 September 2015 Year ended 30 September 2014 Cost: 2,754 5,236 374 1,857 10,221 At 1 October 2013 2,280 6,733 1,285 10,666 20,964 Additions Revaluation Disposals Foreign exchange movements – 58 – 36 251 – 197 2,650 3,098 – – 58 (167) (132) (173) (472) 79 15 12 142 At 30 September 2014 2,374 6,896 1,365 13,155 23,790 Accumulated Depreciation: At 1 October 2013 – (6,038) (918) (9,129) (16,085) Depreciation charge Disposals Foreign exchange movements – – – (328) (186) (1,247) (1,761) 139 112 168 419 (68) – (10) (78) At 30 September 2014 – (6,295) (992) (10,218) (17,505) At 30 September 2014 At cost 2,374 6,896 1,365 13,155 23,790 Accumulated depreciation – (6,295) (992) (10,218) (17,505) Net book value at 30 September 2014 2,374 601 373 2,937 6,285 32 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 14. Provisions Provisions are only recognised when the Group has a present legal or constructive obligation as a result of a past event or decision, and it is more likely than not that an outflow of resources will be required to settle the obligation. Provisions are recognised at the best estimate of future cash flows discounted to present value where the effect is material. Provision is made for employee entitlements for services rendered up to the balance date. This includes salaries; wages, bonuses, annual leave and long service leave, but excludes share-based payments. Liabilities arising in respect of employee entitlements expected to be settled within 12 months of the reporting date are measured at their nominal amounts. All other employee entitlements are measured at the present value of the estimated future cash outflows to be made in respect of services provided up to the balance date. In determining the present value of future cash outflows, discount rates used are based on the interest rates attaching to government securities which have terms to maturity approximating the terms of the related liability. Business separation Opening balance at 1 October 2014 Additions Amount utilised in the period Reversal of unused amount Closing balance at 30 September 2015 Opening balance at 1 October 2013 2015 $000 2014 $000 Additions I n v e s t m e n t s i p a r t i c p a t i n g N o n - l i f e i P a r t i c p a t i n g l i f e H e a l t h T o t a l $000 $000 $000 $000 $000 – – – – – 13 – – 984 2,031 3,028 – 1 1 (845) (972) (1,817) (13) (130) (860) (1,003) – 9 200 209 372 1,444 4,561 2,880 9,257 – – – 834 834 Business separation Employee benefits Total provisions Analysed as: Current 209 3,028 3,064 4,280 3,273 7,308 Amount utilised in the period (226) (1,102) (3,444) (1,288) (6,060) Reversal of unused amount (146) (329) (133) (395) (1,003) Closing balance at 30 September 2014 – 13 984 2,031 3,028 3,273 7,308 Provision has been utilised during the year ended 30 September 2015 for legal, consultancy and IT related costs. 3,273 7,308 Employee benefits Movement in provisions Movements in each class of provision (other than employee benefits) during the financial year are set out below: Business separation Opening balance at 1 October Additions Amount utilised in the year Reversal of unused amount Closing balance at 30 September 2015 $000 2014 $000 3,028 9,257 1 834 (1,817) (6,060) (1,003) (1,003) 209 3,028 Employee benefits include provisions for holiday pay and long service leave. 15. Insurance liabilities Outstanding claims are measured at the central estimate of the present value of expected future payments after allowing for inflation and discounted at the risk free rate. In addition a risk margin is added to the claims provision to recognise the inherent uncertainty of the central estimate. The expected future payments include those in relation to claims reported but not yet paid, claims incurred but not yet reported (IBNR), claims incurred but not enough reported (IBNER) and anticipated claims handling costs. Claims handling costs include costs that can be associated directly with individual claims, such as legal and other professional fees, and costs that can only be indirectly associated with individual claims, such as claims administration costs. Provision has been made for the estimate of claim recoveries from third parties in respect of general insurance business. Liability adequacy testing is performed in order to recognise any deficiencies in the income statement arising from the carrying amount of the unearned premium liability less any related deferred acquisition costs and intangible assets not meeting the estimated future claims under current insurance conditions. Liability adequacy testing is performed at a portfolio level of contracts that are subject to broadly similar risks and are managed together as a single portfolio. Refer to note 23 (E). 33 15. Insurance liabilities (continued) Unearned premiums Outstanding claims Analysed as: Current Non current 2015 $000 2014 $000 155,677 150,504 264,015 271,769 419,692 422,273 381,313 365,674 38,379 56,599 419,692 422,273 The table below includes a reconciliation of unearned premiums as at balance date: 17. Distributions to shareholders Dividend payments On 26 November 2014 the Directors declared a final dividend for the 2014 financial year of 8 cents per share. The dividend was paid on 3 February 2015. The total amount payable was $14,059,956. There were no imputation credits attached to the dividend and TOWER did not offer its Dividend Reinvestment Plan for this dividend. An interim dividend for the 2015 financial year of 8.5 cents per share was declared by the Directors on 25 May 2015 for the half year ended 31 March 2015. There were no imputation credits attached to the dividend and TOWER did not offer its Dividend Reinvestment Plan for this dividend. The total amount payable was $14,938,762. The dividend was paid on 30 June 2015. Unearned premiums Opening balance at 1 October Premiums written Premiums earned Other 2015 $000 2014 $000 150,504 136,915 290,780 283,314 (286,376) (270,804) 769 1,079 Return of capital In 2014, the Board announced to the market the return of approximately $34 million of capital to shareholders via a voluntary on-market buyback. TOWER continues to hold significant capital above the current solvency minimum required by the Reserve Bank of New Zealand and its own long-term solvency policy. TOWER’s on market share buyback of up to $34 million commenced following the Company’s half-year results announcement on 26 May 2015. $12.2 million of capital was bought back and cancelled as at 30 September 2015. Closing balance at 30 September 155,677 150,504 16. Contributed equity Ordinary shares issued by the Group 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. 18. Accumulated profits Accumulated profits Balance at 1 October (Loss) profit for the year 2015 $000 2014 $000 42,174 42,983 (6,982) 23,194 2015 $000 2014 $000 Movement in share based payments reserve – 44 Ordinary share capital (fully paid) 384,585 396,819 Dividends paid Total contributed equity 384,585 396,819 Other Represented by: Ordinary shares Movements in ordinary shares Number of shares 169,983,470 175,749,449 Balance at 30 September (28,999) (24,011) 183 (36) 6,376 42,174 Balance at 1 October 175,749,449 207,193,438 Capital repayment plan (5,765,979) (31,443,989) Balance at 30 September 169,983,470 175,749,449 Movements in ordinary share capital Balance at 1 October Capital repayment 396,819 453,935 (12,234) (57,116) Balance at 30 September 384,585 396,819 34 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 19. Reserves 20. Net assets per share Exchange differences arising on translation of foreign controlled entities are taken to the foreign currency translation reserve as described in note 1. The reserve is recognised in profit and loss when the net investment is disposed. Net assets per share represent the value of the Group/Company’s net assets divided by the number of ordinary shares on issue at balance date. Net tangible assets per share represent the net assets per share adjusted for the effect of intangible assets and deferred tax balances. Foreign currency translation reserve (FCTR) Net assets per share (dollars) Balance at 1 October (1,985) (4,501) Net tangible assets per share (dollars) 2015 $000 2014 $000 2015 1.65 1.26 2014 1.85 1.58 Currency translation differences arising during the year Balance at 30 September 2,776 2,516 791 (1,985) The separation reserve was created 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 as a non-equity reserve to meet the requirements of the ATO. 2015 $000 2014 $000 Reconciliation to net tangible assets is provided below, Net assets Less deferred tax Less intangible assets Net tangible assets 2015 $000 2014 $000 280,909 326,009 (18,778) (13,170) (48,373) (35,483) 213,758 277,356 Separation reserve (113,000) (113,000) 21. Earnings per share The asset revaluation reserve is used to recognise unrealised gains on the value of land and buildings above their initial cost. Asset revaluation reserves Opening balance at 1 October Gain on revaluation Balance at 30 September 2015 $000 2014 $000 402 111 513 354 48 402 Total reserves (111,696) (114,583) Basic earnings per share is calculated by dividing the net profit attributed to shareholders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated by dividing the net profit attributed to shareholders of the Company by the weighted average number of ordinary shares on issue during the year adjusted for the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. There was no dilutive impact on basic earnings per share for 2015 (2014: nil). (Loss) profit attributable to shareholders from continuing operations Profit attributable to shareholders from discontinued operations Weighted average number of ordinary shares for basic and diluted earnings per share 2015 $000 2014 $000 (8,378) 21,207 1,396 1,987 Number of shares 175,024,794 187,795,541 Cents Basic and diluted (loss) earnings per share from continuing operations Basic and diluted earnings per share from discontinued operations (4.79) 11.29 0.80 1.06 35 22. Segmental reporting Description of segments and other segment information 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 who reviews the operating results on a regular basis and makes decisions on resource allocation and assessing performance. The chief operating decision-maker has been identified as the Company’s Board of Directors. N e w Z e a l a n d I n s u r a n c e G e n e r a l i P a c fi c G e n e r a l I n s u r a n c e c o m p a n e s a n d i O t h e r ( H o l d n g i e l i i m n a t i o n s ) T o t a l $000 $000 $000 $000 30 September 2015 Revenue New Zealand general insurance segment comprised general insurance business written in New Zealand. Pacific general insurance segment includes general insurance business with customers in the Pacific Islands written by TOWER Insurance subsidiaries and branch operations. Other includes head office expenses, financing costs and eliminations. Life businesses have been excluded from 30 September 2014 as the results of these segments are contained within note 34. TOWER Group operates predominantly in two geographical segments, New Zealand and the Pacific region. Dormant operations in the United Kingdom and the United States are a negligible part of the Group’s operations and assets. Revenue from external customers in New Zealand (excluding discontinued operations) is $218,764,000 (2014: $216,072,000) and total revenue from external customers from other countries is $46,919,000 (2014: $38,792,000). The Group does not derive revenue from any individual or entity that represents 10% or more of the Group’s total revenue. Revenue – external 216,813 46,919 1,951 265,683 Total revenue 216,813 46,919 1,951 265,683 23. Insurance business disclosure Earnings before interest, tax, depreciation and amortisation (22,474) 14,844 1,734 (5,896) (A) Analysis of general insurance operating result Depreciation and amortisation (2,954) (239) (841) (4,034) Profit before income tax (25,428) 14,605 893 (9,930) Income tax credit (expense) (1) 6,249 (4,989) 638 1,898 Premium revenue 2015 $000 2014 $000 304,730 285,113 Outward reinsurance expense (56,765) (48,197) Net premium income Claims expense Reinsurance recoveries Net claims incurred Acquisition costs Other underwriting expenses Underwriting result Investment and other income Operating profit before taxation 247,965 236,916 252,244 258,855 (64,907) (119,746) 187,337 139,109 46,958 38,691 38,365 39,363 (24,695) 19,753 15,767 15,303 (8,928) 35,056 Profit for the year (19,179) 9,616 1,531 (8,032) Total assets Total liabilities 598,856 86,651 73,415 758,922 419,050 54,266 4,697 478,013 Acquisition of property, plant and equipment, intangibles and other non current assets 30 September 2014 Revenue 12,496 3,429 4,847 20,772 Revenue – external 213,427 38,792 2,645 254,864 Total revenue 213,427 38,792 2,645 254,864 Earnings before interest, tax, depreciation and amortisation 23,250 11,990 1,504 36,744 Interest expense – – (4,104) (4,104) Depreciation and amortisation (930) (186) (1,576) (2,692) Profit before income tax 22,320 11,804 (4,176) 29,948 Income tax credit (expense) (1) (6,421) (3,612) 1,709 (8,324) Profit for the year 15,899 8,192 (2,467) 21,624 Total assets Total liabilities 629,530 82,609 96,158 808,297 423,965 50,380 7,943 482,288 Acquisition of property, plant and equipment, intangibles and other non current assets 13,376 619 2,783 16,778 (1) Tax expense of individual segments has been impacted by intercompany reclassifications which have been eliminated for management and segmental reporting. This has a nil impact on the Group. 36 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 (B) Net claims expense Gross claims expense Direct claims – undiscounted Movement in discount Gross claims expense Reinsurance and other recoveries 2015 2014 Risks borne in current year Risks borne in prior years Risks borne in current year Risks borne in prior years Total Total $000 $000 $000 $000 $000 $000 141,049 109,663 250,712 152,282 103,706 255,988 54 1,478 1,532 (294) 3,161 2,867 141,103 111,141 252,244 151,988 106,867 258,855 Reinsurance and other recoveries revenue – undiscounted (3,901) (61,026) (64,927) (13,097) (104,753) (117,850) Movement in discount Reinsurance recoveries Net claims expense 18 2 20 (14) (1,882) (1,896) (3,883) (61,024) (64,907) (13,111) (106,635) (119,746) 137,220 50,117 187,337 138,877 232 139,109 Current year amounts relate to risks borne in the current financial year. Prior period amounts relate to a reassessment of the risks borne in all previous financial years including those arising due to the Canterbury earthquakes. Refer to note 6. (C) Outstanding claims (a) Assumptions adopted in calculation of general insurance provisions Estimation of outstanding claims as at 30 September 2015 have been carried out by the following Actuaries: General Insurance: R. Shaw, B.Sc. (Hons), FIAA, Deloitte Australia; and P. Davies, B.Bus.Sc, FNZSA, FIA. TOWER appointed R. Shaw (Deloitte Australia) as Appointed Actuary on 10 November 2015, replacing C. Hett (Deloitte New Zealand). The New Zealand actuarial assessments are undertaken in accordance with the standards of the New Zealand Society of Actuaries. 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 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. The following assumptions have been made in determining general insurance net outstanding claims liabilities: 2015 2014 Inflation rates for succeeding year 2.5% to 3.8% 1.5% to 3.7% Inflation rates for following years 2.5% to 3.8% 1.5% to 3.7% Discount rates for succeeding year 2.5% to 6.3% 2.5% to 5.2% Discount rates for following years 2.5% to 6.3% 2.5% to 5.2% Claims handling expense ratio 4.7% to 43.0% 3.5% to 15.7% Risk margin 8.0% to 14.8% 7.0% to 22.9% In addition to the risk margin range shown above, the total risk margin also includes $19,300,000 (2014: $30,100,000) associated with the Canterbury earthquake. The weighted average expected term to settlement of outstanding claims (except for Canterbury earthquake claims), based on historical trends is: Short tail claims within 1 year within 1 year Long tail claims in the Pacific Islands 0.9 to 1.8 years 1.0 to 1.6 years Inwards reinsurance greater than 10 years greater than 10 years 37 23. Insurance business disclosure (continued) Inflation rate Risk margin Insurance costs are subject to inflationary pressures. Inflation assumptions for all general insurance classes of business are based on current economic indicators for the relevant country. For motor and property classes, for example, claim costs are related to the inflationary pressures of the materials and goods insured as well as labour costs to effect repairs. These costs are expected to increase at a level between appropriate Consumer Price Index (CPI) indices and wage inflation. Discount rate General insurance outstanding claims liabilities are discounted to present value using a risk free rate relevant to the term of the liability and the jurisdiction. EQC recoveries TOWER has adopted an approach which allocates recoverable amounts from EQC according to various tiers reflecting the likelihood of recovery. For example, tier 1 represents TOWER having good information and a strong position for recovery, whereas tier 5 represents TOWER having to rely on EQC information and having a lower likelihood of recovery. Claims handling expense The estimate of outstanding claims liabilities incorporates an allowance for the future cost of administrating the claims. This allowance is determined after analysing historical claim related expenses incurred by the classes of business. The outstanding claim liability also includes a risk margin that relates to the inherent uncertainty in the central estimate of the future payments. Risk margins are determined on a basis that reflects TOWER’s business. Regard is given to the robustness of the valuation models, the reliability and volume of available data, past experience of the insurer and the industry and the characteristics of the classes of business written. Uncertainty in claims is represented as a volatility measure in relation to the central estimate. The volatility measure is derived after consideration of statistical modelling and benchmarking to industry analysis. The measure of the volatility is referred to as the coefficient of variation, defined as the standard deviation of the distribution of future cash flows divided by the mean. Risk margins are calculated for each jurisdiction. The risk margin for all classes when aggregated is less than the sum of the individual risk margins. This reflects the benefit of diversification. The measure of the parameter used to derive the diversification benefit is referred to as correlation, which is adopted with regard to industry analysis, historical experience and actuarial judgement. The risk margins applied to future claims payments are determined with the objective of achieving 75% probability of sufficiency for both the outstanding claims liability and the unexpired risk liability. The following analysis is in respect of the insurance liabilities: Central estimate of expected present value of future payments for claims incurred Risk margin Claims handling costs Discount Net outstanding claims 2015 $000 2014 $000 139,111 70,874 11,675 23,944 3,766 3,314 154,552 98,132 (266) (1,819) 154,286 96,313 38 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 2015 Reinsur- ance $000 Gross $000 Net $000 Gross $000 2014 Reinsur- ance $000 Net $000 Reconciliation of movements in outstanding claims Balance brought forward 271,768 (175,455) 96,313 314,990 (238,375) 76,615 Effect of change in foreign exchange rates 2,210 (4,059) (1,849) 1,943 (3,120) (1,177) Incurred claims recognised in the income statement 252,244 (64,907) 187,337 258,855 (119,746) 139,109 Claim (payment) recoveries during the year (262,207) 134,692 (127,515) (304,020) 185,786 (135,934) Balance carried forward 264,015 (109,729) 154,286 271,768 (175,455) 96,313 Reconciliation of undiscounted claims to liability for outstanding claims Outstanding claims undiscounted 2,200 (129) 2,071 4,654 (139) 4,515 Discount Outstanding claims Short tail outstanding claims Total outstanding claims as per balance sheet (28) 7 (21) (1,566) 70 (1,496) 2,172 (122) 2,050 3,088 (69) 3,019 152,236 154,286 93,294 96,313 (b) Sensitivity analysis and terms of insurance business (D) Risk management policies and procedures The Group’s insurance business is generally short tail in nature. Key sensitivities relate to the volume of claims, in particular for significant events such as earthquakes or extreme weather. The Group has exposure to some inwards reinsurance business which is in run off. While this business is not large, it is sensitive to claims experience, timing of claims and changes in assumptions. Movement in these variables does not have a material impact on the performance and equity of the Group. (c) Future net cash out flows The following table shows the expected run-off pattern of net outstanding claims. 2015 $000 2014 $000 The financial condition and operations of the insurance business are affected by a number of key risks including insurance risk, interest rate risk, currency risk, market risk, financial risk, compliance risk, fiscal risk and operational risk (refer to note 25). Notes on the policies and procedures employed in managing these risks in the insurance business are set out below. (a) Objectives in managing risks arising from insurance contracts and policies for mitigating those risks The risk management activities include prudent underwriting, pricing, and management of risk, together with claims management, reserving and investment management. The objective of these disciplines is to enhance the financial performance of the insurance operations and to ensure sound business practices are in place for underwriting risks and claims management. Expected Claims payments Within 3 months 3 to 6 months 6 to 12 months After 12 months Total 51,307 26,248 The key processes and controls in place to mitigate risk arising from writing insurance contracts include: 22,982 9,000 – comprehensive management information systems and actuarial 6,063 6,002 73,934 55,063 models using historical information to calculate premiums and monitor claims; – monitoring natural disasters such as earthquakes, floods, storms and 154,286 96,313 other catastrophes using models; and – the use of reinsurance to limit the Group’s exposure to individual catastrophic risks. (b) Concentration of insurance risk Risk Source of concentration Risk Management measures An accumulation of risks arising from a natural peril Insured property concentrations Accumulation risk modelling, reinsurance protection A large property loss Fire or collapse affecting one building or a group of adjacent buildings Maximum acceptance limits, property risk grading, reinsurance protection 39 23. Insurance business disclosure (continued) (c) Development of claims 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. Incident year Prior $000 2011 $000 2012 $000 2013 $000 2014 $000 2015 $000 Total $000 Ultimate claims cost estimate At end of incident year One year later Two years later Three years later Four years later Earlier 113,814 113,839 123,816 138,878 137,221 127,689 117,277 124,667 138,720 147,024 116,819 125,502 147,438 117,862 193,870 – – – – – – – – – – – – – – – Current estimate of ultimate claims cost 193,870 117,862 125,502 138,720 137,221 Cumulative payments Undiscounted central estimate Discount to present value Discounted central estimate Claims handling expense Risk margin Net outstanding claim liabilities Reinsurance recoveries on outstanding claim liabilities and other recoveries Gross outstanding claim liabilities (82,688) (117,542) (124,394) (137,386) (117,052) 4,998 111,182 320 1,108 1,334 20,169 139,111 (1) (1) (1) – (28) (235) (266) 4,997 111,181 319 1,108 1,306 19,934 138,845 3,766 11,675 154,286 109,729 264,015 (E) Liability adequacy test (F) Insurer financial strength rating Liability adequacy tests are performed to determine whether the unearned premium liability is sufficient to cover the present value of the expected cash flows arising from rights and obligations under current insurance contracts, plus an additional risk margin to reflect the inherent uncertainty in the central estimate. The future cash flows are future claims, associated claims handling costs and other administration costs relating to the business. If the unearned premium liability less related deferred acquisition costs exceeds the present value of expected future cash flows plus additional risk margin then the unearned premium liability is deemed to be sufficient. The risk margins applied to future claims were determined with the objective of achieving at least 75% probability of sufficiency of the unexpired risk liability using the methodology described above. The unearned premium liabilities as at 30 September 2015 were sufficient (2014: sufficient). Central estimate claim % of premium Risk margin 2015 2014 41.1% 42.5% 9.3% 13.6% TOWER Insurance Limited has an insurer financial strength rating of ‘A–’ (Excellent) issued by international rating agency A.M. Best Company Inc. with an effective date of 24 July 2015. (G) Reinsurance programme Reinsurance programmes are 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. 40 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 (H) Solvency requirements (ii) Financial liabilities at amortised cost Financial liabilities at amortised cost are non-derivative financial liabilities with fixed or determinable payments that are not quoted on an active market. The Group’s financial liabilities comprise trade, reinsurance and other payables in the balance sheet. Financial liabilities are measured initially at fair value plus transaction costs and subsequently at amortised cost less any impairment. (iii) Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss are comprised of financial assets that are either held for trading or designated on initial recognition at fair value through profit or loss. A financial asset and liability is classified in this category if acquired principally for the purpose of selling in the short-term or if so designated by management. Designation by management takes place when it is necessary to eliminate or significantly reduce measurement or recognition inconsistencies, or if related financial assets or liabilities are managed and evaluated on a fair value basis. Financial assets at fair value through profit or loss are stated at fair value, with any resultant gain or loss recognised in the income statement. The net gain or loss recognised in the income statement includes any dividend or interest earned on the financial assets. Derivatives are categorised as held for trading unless they are designated as hedges. All derivatives entered into by the Group are classified as held for trading as the Group does not apply hedge accounting. (iv) Fair value Financial assets and liabilities are measured in the balance sheet at fair value (excluding short term amounts held at a reasonable approximation of fair value). Refer to the heading Fair value of financial assets and liabilities below. (v) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Group does not hold financial assets and financial liabilities subject to offsetting arrangements other than cash and cash equivalents. Refer to note 28. The minimum solvency capital required to be retained to meet solvency requirements under the Insurance (Prudential Supervision) Act 2010 is shown below. Actual solvency capital exceeds the minimum capital requirements for TOWER Insurance Limited group by $86.9 million. Actual Solvency Capital Minimum Solvency Capital Solvency Margin Solvency ratio 2015 $000 2014 $000 156,646 199,400 69,730 74,600 86,916 124,800 225% 267% On 22 August 2014 the Reserve Bank of New Zealand imposed a condition of license requirement for TOWER Insurance Limited to maintain a minimum solvency margin of $50.0 million. This minimum solvency requirement was confirmed on 15 September 2015 by the Reserve Bank of New Zealand. The methodology and bases for determining the solvency margin are in accordance with the requirements of the Solvency Standard for Non-life Insurance Business published by the Reserve Bank of New Zealand. (I) Assets backing insurance business The Group has determined that all assets within its insurance companies are held to back insurance liabilities, with the exception of property, plant and equipment and investments in operating subsidiaries. These assets are managed in accordance with approved investment mandate agreements on a fair value basis and are reported to the Board on this basis. 24. Financial instruments (A) Financial instrument categories The Group classifies its financial assets and liabilities in the following categories: at fair value through profit or loss; loans and receivables; and liabilities at amortised cost. The classification depends on the purpose for which the financial assets and liabilities were acquired. Management determines the classification of its financial assets and liabilities at initial recognition. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. The Group’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet. Loans and receivables are measured initially at fair value plus transaction costs and subsequently at amortised cost using the effective interest rate method less any impairment. 41 24. Financial instruments (continued) (vi) Derecognition Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. The analysis of financial assets and liabilities into their categories and classes is set out in the following tables. Fair value through profit or loss Loans and Receiv- ables $000 Total $000 Desig- nated $000 Held for trading $000 As at 30 September 2015 Financial assets Cash and cash equivalents 125,113 125,113 Receivables 298,203 298,203 – – Financial assets at fair value through profit or loss 213,593 – 213,593 Total financial assets 636,909 423,316 213,593 As at 30 September 2014 Financial assets Cash and cash equivalents 168,062 168,062 Receivables 333,995 333,995 – – Financial assets at fair value through profit or loss 212,407 – 212,407 Total financial assets 714,464 502,057 212,407 – – – – – – – – Fair value through profit or loss Total $000 Desig- nated $000 Held for trading $000 Financial liabilities at amortised cost $000 As at 30 September 2015 Financial liabilities Payables 26,229 Total financial liabilities 26,229 As at 30 September 2014 Financial liabilities Payables Derivative financial liabilities 31,335 46 Total financial liabilities 31,381 – – – – – – – 26,229 26,229 – 31,335 46 – 46 31,335 (B) Fair value of financial assets and liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer below for details of valuation methods used for each category of financial assets and liabilities. The carrying amounts of all assets and liabilities not measured at fair value reasonably approximate their fair values. The following methods and assumptions were used by TOWER in estimating the fair values of assets and liabilities measured at fair value: (i) Cash and cash equivalents The carrying amount of cash and cash equivalents reasonably approximates its fair value. (ii) Financial assets at fair value through profit or loss and held for trading The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in Level 1. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. The following fair value measurements are used: – The fair value of fixed interest securities is based on the maturity profile and price/yield. – The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date, with the resulting value discounted back to present value. – Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. At 30 September 2015, the level 3 category included an investment in equity securities of $1,972,000 (2014: $1,835,000). This investment is unlisted shares of a company which owns a building used by TOWER. The fair value is calculated based on the net assets of the property owning company from the most recently available financial information. The property is periodically independently valued. (iii) Loans and receivables and other financial liabilities held at amortised cost Carrying values of loans and receivables, adjusted for impairment values, and carrying values of other financial liabilities held at amortised cost reasonably approximate their fair values. (iv) Derivative financial liabilities and assets The fair value of derivative financial liabilities and assets is determined by reference to market accepted valuation techniques using observable market inputs. There have been no transfers between levels of the fair value hierarchy during the current financial year (2014: nil). 42 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 Impairment of Financial assets and liabilities Financial assets, with the exception of those measured at fair value through profit or loss, are assessed for indicators of impairment at each reporting date. Financial assets are impaired when there is objective evidence that the estimated future cash flows of the asset have been impacted as a result of one or more events that occurred after the initial recognition of the financial asset. For financial assets carried at amortised cost, the amount of the impairment is the difference between the carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. For all financial assets, other than trade receivables, the carrying amount is reduced by the impairment loss directly. For trade receivables the carrying amount is reduced via an allowance account, against which an uncollectible trade receivable is written off. The following table represents the changes in Level 3 instruments for the year ended 30 September. Opening balance Foreign currency movement Closing balance Investment in equity securities 2015 $000 2014 $000 1,835 1,685 137 150 1,972 1,835 The following table shows the sensitivity of Level 3 measurements to changes in assumptions used to determine the fair value of the financial asset. If the market value of the investment in equity securities were to change by +/– 10% the impact is outlined below: Carrying Amount $000 Favourable changes of 10% $000 Unfavourable changes of 10% $000 A trade receivable is deemed to be uncollectible upon receipt of evidence that the Group will be unable to collect the amount. Changes in the carrying amount of the allowance account are recognised in the income statement. 2015 A previously recognised impairment loss is reversed when, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was initially recognised. In respect of financial assets carried at amortised cost, with the exception of trade receivables, the impairment loss is reversed through the income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Subsequent recoveries of trade receivables previously written off are credited against the allowance account. The following tables present the Group’s assets categorised by fair value measurement hierarchy levels. There has been no designated financial liability held at fair value through the income statement (2014: nil). Total $000 Level 1 $000 Level 2 $000 Level 3 $000 As at 30 September 2015 Assets Investment in equity securities 1,972 – – 1,972 Investments in fixed Interest securities 211,587 – 211,587 Investments in property securities 34 – 34 – – Total financial assets 213,593 – 211,621 1,972 As at 30 September 2014 Assets Investment in equity securities 1,835 – – 1,835 Investments in fixed Interest securities 210,538 – 210,538 Investments in property securities 34 – 34 – – Total financial assets 212,407 – 210,572 1,835 Investment in equity securities 1,972 197 (197) 2014 Investment in equity securities 1,835 184 (184) 25. Risk management The financial condition and operating results of the Group are affected by a number of key financial and non-financial risks. Financial risks include market risk, credit risk, financing and liquidity risk. The non-financial risks include insurance risk, compliance risk and operational risk. The Group’s objectives and policies in respect of insurance risks are disclosed in note 23 while the managing of financial and other non-financial risks are set out in the remainder of this section. TOWER’s objective is to satisfactorily manage these risks in line with the Board approved Group Risk and Compliance framework policy. Various procedures are in place to help identify, mitigate and monitor the risks faced by the Group. Business managers are responsible for understanding and managing their risks including operational and compliance risk. The consolidated entity’s exposure to all high and critical risks is reported monthly to the Board and quarterly to the Audit and Risk Committee. The Board has delegated to the Audit and Risk Committee the responsibility to review the effectiveness and efficiency of management processes, internal audit services, risk management and internal financial controls and systems as part of their duties. A Risk and Compliance team is in place in an oversight and advisory capacity and to manage the risk and compliance framework. Financial risks are generally monitored and controlled by selecting appropriate assets to back policy liabilities. The assets are regularly monitored to ensure that there are no material asset and liability mismatching issues and other risks such as liquidity risk and credit risk are maintained within acceptable limits. 43 (iii) Price risk Price risk is the risk of loss resulting from the decline in prices of equity securities or other assets. The exposure is not considered to be material. Refer to note 25 (E) (iv) for sensitivity analysis. (B) Credit risk Credit risk is the risk of loss that arises from a counterparty failing to meet their contractual commitment in full and on time, or from losses arising from the change in value of a trading financial instrument as a result in changes in credit risk of that instrument. The Group’s exposure to credit risk is limited to cash deposits and investments held with banks and other financial institutions as well as credit exposure to trade customers or other counterparties. Credit exposure in respect of the Group's cash deposit balances in New Zealand are limited to banks with minimum AA credit ratings. TOWER 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 investments relate to the insurance business of the Group and generally have low credit ratings. These investments represent the majority of the value included in the ‘Below BBB’ and unrated categories in the following tables. Investments held with banks and financial institutions that are managed by investment managers have a minimum credit rating accepted by the Group of ‘A’. Independent ratings are used for customers that are rated by rating agencies. For customers with no external ratings, internally developed minimum credit quality requirements are applied, which take into account customers’ financial position, past experience and other relevant factors. Overall exposure to credit risk is monitored on a Group basis in accordance with limits set by the Board. (i) Credit risk concentration Concentration of credit risk exists when the Group enters into contracts or financial instruments with a number of counterparties that are engaged in similar business activities or exposed to similar economic factors that might affect their ability to meet contractual obligations. TOWER manages concentration of credit risk by credit rating, industry type and individual counterparty. The significant concentrations of credit risk are outlined by industry type below. New Zealand government Other government agencies Banks Financial institutions Carrying value 2015 $000 2014 $000 3,760 2,990 72,152 31,128 300,874 343,341 17,555 19,187 Other non-investment related receivables 240,562 314,290 Other industries – 1,659 Total financial assets with credit exposure 634,903 712,595 25. Risk management (continued) The Board is responsible for: – reviewing investment policies for TOWER shareholder and policyholder funds; – reviewing the risk management policy and statements in respect of investment management, including the derivative policy; – considering the establishment, adjustment or deletion of limits and counter-party approvals, and the scope of financial instruments to be used in the management of TOWER’s investments; – reviewing the appointment of external investment managers; – monitoring investment and fund manager performance; and – monitoring compliance with investment policies and client mandates. (A) Market risk Market risk is the risk of change in the fair value of financial instruments from fluctuations in foreign exchange rates (currency risk), market interest rates (interest rate risk) and market prices (price risk), whether such change in price is caused by factors specific to an individual financial instrument or its issuer, or factors affecting all financial instruments traded in a market. The impact of reasonably possible changes in market risk on the Group shareholders’ profit and equity is included in note 25(E) below. (i) Currency risk Currency risk is the risk of loss resulting from changes in exchange rates when applied to assets and liabilities or future transactions denominated in a currency that is not the Group’s functional currency. The exposure is not considered to be material. TOWER’s principal transactions are carried out in New Zealand Dollars and its exposure to foreign exchange risk arises primarily with respect to the Pacific Island insurance business. TOWER generally elects to not hedge the capital invested in overseas entities, thereby accepting the foreign currency translation risk on invested capital. The Board sets limits for the management of currency risk arising from its investments based on prudent international asset management practice. Regular reviews are conducted to ensure that these limits are adhered to. In accordance with this policy, TOWER does not hedge the currency risk arising from translation of the financial statements of foreign operations other than through net investments in foreign operations. (ii) Interest rate risk Interest rate risk is the risk that the value or future value cash flows of a financial instrument will fluctuate because of changes in interest rates. The Group manages interest rate risk arising from its interest bearing investments in accordance with approved investment management agreements. Interest rate risk arises in insurance to the extent that there is a mismatch between the fixed interest portfolios used to back outstanding claim liabilities and those outstanding claims. Interest rate risk is managed by matching the duration profiles of investment assets and outstanding claim liabilities. The exposure is not considered to be material. Interest rate and other market risks are managed by the Group through a strategic asset allocation policy and an investment management policy that has regard to policyholder expectations and risks and to target surplus for solvency as advised by the Appointed Actuary. 44 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 (ii) Maximum exposure to credit risk (iv) Financial assets that would otherwise be past due whose terms have The Group’s maximum exposure to credit risk without taking account of any collateral or any other credit enhancements is as follows: Cash and cash equivalents Loans and receivables Carrying value 2015 $000 2014 $000 125,113 168,062 298,203 333,995 Financial assets at fair value through profit or loss 211,587 210,538 Total credit risk 634,903 712,595 (iii) Credit quality of financial assets that are neither past due nor impaired The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if applicable) or to historical information about counterparty default rates: Credit exposure by credit rating AAA AA Below BBB Total counterparties with external credit rating by Standard and Poor’s Group 1 Group 2 Group 3 Carrying value 2015 $000 2014 $000 92,119 85,549 214,153 278,185 16,705 13,810 322,977 377,544 290,362 323,594 – – 13,964 1,402 Total counterparties with no external credit rating 304,326 324,996 Total financial assets neither past due nor impaired with credit exposure 627,303 702,540 Group 1 – trade debtors outstanding for less than 6 months Group 2 – trade debtors outstanding for more than 6 months with no defaults in the past Group 3 – unrated investments been renegotiated None of the financial assets that are fully performing have been renegotiated in the past year (2014: nil). (v) Financial assets that are past due but not impaired The Group considers that financial assets are past due if payments have not been received when contractually due. At the reporting date, the total carrying value of past due but not impaired assets held by the Group is as follows: Past due but not impaired Less than 30 days $000 31 to 60 days $000 61 to 90 days $000 Over 90 days $000 Total $000 As at 30 September 2015 Reinsurance recoveries receivable Outstanding premiums and trade receivables 243 28 2 196 469 3,644 2,031 1,433 22 7,130 Total 3,887 2,059 1,435 218 7,599 As at 30 September 2014 Reinsurance recoveries receivable Outstanding premiums and trade receivables 134 29 78 1,120 1,361 4,361 2,749 481 1,071 8,662 Total 4,495 2,778 559 2,191 10,023 (vi) Financial assets that are individually impaired Financial assets that have been individually impaired in the past year are as follows: Outstanding premiums and trade receivables Total Carrying value 2015 $000 2014 $000 1 1 32 32 45 25. Risk management (continued) (C) Financing and liquidity risk Financing and liquidity risk is the risk that the Group will not be able to meet its cash outflows or refinance debt obligations, as they fall due, because of lack of liquid assets or access to funding on acceptable terms. To mitigate financing and liquidity risk the Group treasury function maintains sufficient liquid assets to ensure that the Group can meet its debt obligations and other cash outflows on a timely basis. (i) Financial liabilities and guarantees by contractual maturity The table below summarises the Group’s financial liabilities and guarantees into relevant maturity groups based on the remaining period to the contractual maturity date at the balance date. All amounts disclosed are contractual undiscounted cash flows that include interest payments and exclude the impact of netting agreements. c a s h fl o w s c o n t r a c t u a l T o t a l C a r r y n g i v a l u e L e s s t h a n o n e y e a r t w o y e a r s O n e t o f o u r y e a r s T w o t o fi v e y e a r s O v e r O n d e m a n d $000 $000 $000 $000 $000 $000 $000 As at 30 September 2015 Financial liabilities and guarantees Trade payables 19,329 19,329 19,329 Reinsurance payables 2,612 2,612 2,612 Other payables 4,288 4,288 4,288 – – – – – – – – – – – – (D) Derivative financial instruments The Group utilises derivative financial instruments to reduce investment risk. Specifically, derivatives are used to achieve cost effective short-term re-weightings of asset class, sector and security exposures and to hedge portfolios, as an economic hedge, when a market is subject to significant short-term risk. Derivative financial instruments used by the Group include interest rate swaps and foreign exchange forward contracts. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The fair values of interest rate swaps are calculated by discounting estimated future cash flows based on the terms and maturity of each contract using market interest rates. The average interest rate is based on the outstanding balances at the start of the financial year. The table below details the notional principal amounts (amounts used to calculate payments made on swap contracts), fair values and remaining terms of interest rate swap contracts outstanding as at reporting date: Average contracted fixed interest Notional principal amount Fair value 2015 % 2014 % 2015 $000 2014 $000 2015 $000 2014 $000 Less than 1 year 1 to 2 years 2 to 5 years over 5 years 0% 0% 0% 0% 0% 0% 5% 0% – – – – – 21,000 – – – 21,000 – – – – – – – (46) – (46) The Group has no foreign exchange forward contracts. 26,229 26,229 26,229 – – – – (E) Sensitivity analysis Total financial liabilities and guarantees As at 30 September 2014 Financial liabilities and guarantees Derivative financial liabilities Total financial liabilities and guarantees Trade payables 14,200 14,200 13,776 424 Reinsurance payables 2,967 2,967 2,967 Other payables 14,168 14,168 14,168 – – 46 90 55 31 – – – 4 – – – – – – – – 31,381 31,425 30,966 455 4 – – The analysis below demonstrates the impact of changes in interest rates, exchange rates and equity prices on profit after tax and equity on continuing business. The analysis is based on changes in economic conditions that are considered reasonably possible at the reporting date. The potential impact is assumed as at the reporting date. (i) Interest rate The impact of a 50 basis point change in New Zealand and international interest rates as at the reporting date on the Group’s profit after tax and equity is included in the table below. The sensitivity analysis assumes changes in interest rates only. All other variables are held constant. 2015 Impact on 2014 Impact on Profit after tax $000 Equity $000 Profit after tax $000 Equity $000 Change in variables +50 basis points –50 basis points (664) 660 (664) 660 (750) (750) 544 544 This analysis assumes that the sensitivity applies to the closing market yields of fixed interest investments. A parallel shift in the yield curve is assumed. The risks assumed and methods used for deriving sensitivity information and significant variables have been applied consistently over the reporting period included in the analysis. 46 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 (ii) Foreign currency 26. Capital risk management The table below demonstrates the impact of a 10% movement of currency rates against the New Zealand dollar on profit after tax and equity. The analysis assumes changes in foreign currency rates only, with all other variables held constant. The potential impact on the profit and equity of the Group is due to the changes in fair value of currency sensitive monetary assets and liabilities as at the reporting date. 2015 Impact on 2014 Impact on Profit after tax $000 Equity $000 Profit after tax $000 Equity $000 153 (6,010) 330 (6,161) (187) 7,394 (403) 7,530 Change in variables 10% appreciation of New Zealand dollar 10% depreciation of New Zealand dollar The dollar impact of the change in currency movements is determined by applying the sensitivity to the value of the international assets. The risks assumed and methods used for deriving sensitivity information and significant variables have been applied consistently over the reporting period included in the analysis. (iii) Equity price Equity price risk is the risk that the fair value of equities will decrease as a result of changes in levels of equity indices and the value of individual stocks. The Group does not hold any listed equities at fair value through profit or loss (2014: nil). (iv) Other price Other price sensitivity includes sensitivity to unit price fluctuations. Unit price risk is the risk that the fair value of investments in property fund units and international equities held in unit trusts will decrease as a result of changes in the value of these units. The Group holds all of its investments in property securities, international equities and other unit trusts at fair value through profit or loss. The table below demonstrates the impact of a 10% movement in the value of property funds and other unit trusts on the profit after tax and equity of the Group. The potential impact is assumed as at the reporting date. 2015 Impact on 2014 Impact on Profit after tax $000 Equity $000 Profit after tax $000 Equity $000 2 (2) 2 (2) 2 (2) 2 (2) Change in variables +10% property funds and other unit trusts –10% property funds and other unit trusts The risks assumed and methods used for deriving sensitivity information and significant variables have been applied consistently over the two reporting periods included in the analysis. The Group’s objective when managing capital is to ensure that the Group’s level of capital is sufficient to meet statutory solvency obligations including on a look forward basis to enable it to continue as a going concern in order to meet the needs of its policyholders, to provide returns for shareholders, and to provide benefits for other stakeholders of the Group. The Group’s capital resources include shareholders’ equity. TOWER shareholder equity Total capital resources 2015 $000 2014 $000 279,265 324,410 279,265 324,410 The Group measures adequacy of its capital against solvency standards for non-life insurance (the solvency standards) published by the Reserve Bank of New Zealand (RBNZ) alongside additional capital held to meet RBNZ minimum requirements and any further capital as determined by the Board. From 22 August 2014 the Group has been required by Reserve Bank of New Zealand to maintain a minimum solvency margin of no less than $50,000,000 in TOWER Insurance Limited. The actual solvency capital as determined under the solvency standards is required to exceed the minimum solvency capital level by at least this amount. The amount retained as minimum solvency capital is shown in note 23 (H). During the year ended 30 September 2015 the Group complied with all externally imposed capital requirements. The Group holds assets in excess of the levels specified by the various solvency requirements to ensure that it continues to meet the minimum requirements under a reasonable range of adverse scenarios. The Group’s capital management strategy forms part of the Group’s broader strategic planning process overseen by the Audit and Risk Committee of the Board. 27. Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease payments are recognised as an expense in the periods the services are received over the term of the lease. Operating lease payments represent future rentals payable for office space under current leases. Initial leases were for an average of four years with rental rates reviewed every two to six years. 2015 $000 2014 $000 As lessee Rent paid during the year 2,966 3,834 Rent payable to the end of the lease terms are: – Not later than one year 2,934 3,492 – Later than one year and not later than five years 9,326 9,953 – Later than five years 7,001 9,754 19,261 23,199 47 28. Cash and cash equivalents (B) Reconciliation of profit for the period to net cash flows from Cash and cash equivalents includes cash on hand and deposits held on call with financial institutions, other short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within cash and cash equivalents on the balance sheet if the net position is an asset due to the Group’s right to offset overdrafts within its banking facility. (A) Reconciliation of cash at the end of the year Cash at bank and in hand Deposits at call Restricted cash 2015 $000 2014 $000 28,330 24,253 90,043 143,809 6,740 – operating activities (Loss) profit for the year Add (less) non-cash items Depreciation of property, plant and equipment Amortisation of software Change in life insurance and life investment contract liabilities Unrealised (gain) on financial assets 2015 $000 2014 $000 (6,636) 23,611 2,374 1,660 1,761 931 – 1,194 (913) (22,978) (Decrease) increase in deferred tax (5,608) 16,029 Movement on disposal of property, plant and equipment Total cash and cash equivalents 125,113 168,062 Gross gain on sale of subsidiaries (16) – 673 6,319 (9,139) 27,540 The effective interest rate at 30 September for deposits on call is 3.25% (2014: 4.0%). The balances primarily mature within three months of balance date. There has been no offsetting within cash and cash equivalents (2014: nil). TOWER is a party to the Canterbury Earthquake Shared Property Process – Insurer Contract (SPP) which sets out obligations for insurers and appoints a lead insurer to act on behalf of other insurers with respect to the repair and rebuild of shared properties (known as multi-units). As lead insurer on Canterbury multi-unit repairs or rebuilds, TOWER receives cash from other insurance companies as settlement of their obligations under building contracts covered within the SPP. TOWER separately holds this cash on behalf of other insurers in a segregated bank account. At 30 September, TOWER was holding $6.7 million cash in respect of multi-unit claims as lead insurer on Canterbury claims. This is recognised within Cash and cash equivalents on the balance sheet. Related to this are corresponding amounts being $3.2 million recorded within Insurance liabilities for TOWER’s portion of multi-unit outstanding claims; and $3.5 million recorded within Payables as held on behalf of other insurers in respect of SPP claims. 48 TOWER Limited annual report 2015 Add (less) movements in working capital (excluding the effects of exchange differences on consolidation) Decrease in receivables Decrease in payables (Increase) decrease in taxation 72,228 56,674 (43,650) (52,259) (1,502) 68 27,076 4,483 Add other items classified as financing activities Decrease in capitalised costs – 353 Net cash inflow from operating activities 17,937 32,376 The statement of cash flows presents net cash flows for financial assets, property, plant and equipment, intangible assets and advances to subsidiaries. TOWER considers that knowledge of gross receipts and payments is not essential to understanding the activities of TOWER based on either; the turnover of these items is quick, the amounts are large; and the maturities are short, or the value of sales is immaterial. 29. Contingent liabilities The Group has no contingent liabilities as at 30 September 2015. The Group is occasionally subject to claims and disputes as a commercial outcome of conducting its 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. 30. Capital commitments The Group has capital commitments of approximately $815,000 at reporting date related to software under development and licensing (2014: $4,641,000). TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 31. Subsidiaries (B) Loans to key management personnel The table below lists TOWER Limited subsidiary companies and controlled entities. All entities have a balance date of 30 September. Holdings Name of Company 2015 2014 Nature of Business Incorporated in New Zealand TOWER Financial Services Group Limited 100% 100% Holding company TOWER Insurance Limited 100% 100% Fire and general insurance TOWER New Zealand Limited 100% 100% Management services TOWER Operations Limited 100% 100% Non-operating company Incorporated in Cook Islands TOWER Insurance (Cook Islands) Limited Incorporated in Fiji TOWER Insurance (Fiji) Limited Incorporated in PNG TOWER Insurance (PNG) Limited Incorporated in Samoa National Pacific Insurance Limited Incorporated in Vanuatu TOWER Insurance (Vanuatu) Limited 100% 100% General insurance 100% 100% General insurance 100% 100% General insurance 71% 71% General insurance 100% – General insurance 32. Transactions and balances with related parties (A) Key management personnel compensation The remuneration of key management personnel during the year was as follows: Salaries and other short-term employee benefits paid Independent director fees (1) 2015 $000 2014 $000 2,732 2,000 455 495 3,187 2,495 (1) Information regarding individual director and executive compensation is provided in the Corporate Governance section of the Annual Report. There have been no loans made to directors and other key management personnel of the Group, including their personally related parties (2014: nil). (C) Other transactions with key management personnel Key management hold various insurance policies with TOWER Group companies. These are operated in the normal course of business on normal customer terms. 33. Subsequent events Dividend declared On 24 November 2015 the Directors declared a dividend of 7.5 cents per share. There will be no imputation credits attached to the dividend. The dividend will be paid on 3 February 2016 (Payment Date) to all shareholders on the register as at 5pm on Wednesday, 20 January 2016 (Record Date). The estimated dividend payable is $12,749,000 based on the share register at 30 September 2015. TOWER will not be operating its Dividend Reinvestment Plan for the final dividend. TOWER will withhold resident and non-resident withholding tax where applicable in respect of this final dividend. 34. Discontinued operations Assets and liabilities of a disposal group are classified as held for sale if their carrying amount will be recovered or settled principally through a sale transaction rather than through continuing use. A disposal group is defined as a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated. This condition is regarded as being met only when the sale is highly probable and the assets or businesses are available for immediate sale in their present condition or is a subsidiary acquired exclusively with a view to resale. As required by accounting standards, assets and liabilities of a disposal group are measured at the lower of carrying amount and fair value less costs to sell and disclosed in aggregate on the balance sheet as single line items. Items in the Income Statement and Statement of Comprehensive Income relating to discontinued operations are shown as a single amount for the total discontinued operations on the face of the statements, however profit for the year is separated between continuing and discontinued operations. The operating results and financial position of the divested businesses have been removed from individual lines in the financial statements and notes, as required by accounting standards, and have been presented as a discontinued operation. For details of discontinued operations and disposal groups held for sale, refer to the 30 September 2014 audited financial statements. 49 34. Discounted operations (continued) Consolidated results of discontinued operations/disposal groups are as follows: Profit for the year from discontinued operations Profit for the year from discontinued operations: Australian liabilities Participating life business Profit from discontinued operations Profit from disposal of subsidiaries Health business Investments business 2015 $000 2014 $000 – – – – 13 (711) 5,675 4,964 105 (90) Non-Participating life business 491 1,312 Participating life business attributable cost 892 (4,304) Profit from discontinued operations Liabilities transferred on disposal of Australian operation 1,396 (2,977) 1,396 1,987 – (16,628) Profits for the year from discontinued operations in the table above result from releases of provisions (net of tax) and other attributable costs. In 2015, $1,081,695 was released to tax expense relating to an under- deduction of premium payback obligations in TOWER Operations Limited’s (formerly TOWER Health & Life Limited) 2010 to 2013 income tax returns. These deductions related to TOWER Operations Limited’s non-participating life business which was sold in a prior year. 50 TOWER Limited annual report 2015 TOWER LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2015 Corporate governance and disclosures 51 The Board and senior management have a responsibility to achieve the highest standards of corporate performance, ethical behaviour and accountability. The Board has adopted and developed corporate governance structures and practices that are consistent with best practice and ensure the integrity of the governance framework, with continual reassessment of its practices against these standards. Where developments arise in corporate governance, the Board is committed to reviewing TOWER’s practices and incorporating changes where appropriate to ensure TOWER maintains best practice governance structures. Compliance with governance requirements and recommendations responsibilities, is required to have appropriate regard to TOWER’s values, the concerns of its shareholders, its relationships with significant stakeholders and the communities and environment in which it operates. The Board reserves certain functions to itself. These include: • determining the company’s strategic objectives, and approving annual operating plans, financial targets and capital expenditure plans • assessing and monitoring performance, including management’s performance against the strategic objectives, operating plans and financial targets • approving all changes to the company’s corporate structure where these are of strategic importance • determining company financial and treasury strategies and policies, including approving all dividend policies and distributions to shareholders, lending and borrowing, tax, and For the reporting period to 30 September 2015, TOWER investment and foreign exchange policies considers its corporate governance practices have adhered • determining the company’s risk management policies and to the NZX Corporate Governance Best Practice Code, the framework and the company’s information technology Financial Markets Authority's ‘Corporate Governance in New Zealand: Principles and Guidelines’ handbook (FMA Handbook) and the third edition of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations (ASX Recommendations), other than as outlined in this corporate governance section. Copies of TOWER’s principal governance documents and strategies and policies • approving capital expenditure, operating expenditure, asset acquisitions and divestments, and settlement of legal proceedings, in all cases where this is outside the normal course of business and/or above delegated limits • approving all transactions relating to major business and company acquisitions, mergers and divestments, and more detail about TOWER’s governance practices are available • approving the appointment and remuneration of the Chief on TOWER’s website at www.tower.co.nz under the heading Executive Officer. ‘Corporate Governance’ in the Investor Centre section. The Board Protocols describe internal board procedures for This statement is current as at 20 November 2015 and has efficient decision making. They set out how the Board will be been approved by the Board of TOWER. structured, how directors are appointed and evaluated, how Role of the Board of directors The Board, elected by TOWER shareholders, is responsible for the performance of the company. In practice, this is achieved through formal delegation to the Chief Executive Officer and to TOWER’s two Board Committees (Audit and Risk Committee and Remuneration and Appointments Committee – the role of each of these Committees is outlined on pages 55 and 56). Each year the Board holds a strategy session with senior management to review TOWER’s business direction. The application of these strategies is reviewed regularly at Board meetings. The Board is primarily governed by the Board Charter, Board Protocols and the Code of Ethics. directors gain access to training and information, and they provide that the Company Secretary is accountable to the Board on all matters to do with the proper functioning of the Board. At 30 September 2015, Brett Wilson held the Company Secretarial position. The Code of Ethics ensures decision making is in accordance with TOWER’s values. The Board Charter, Board Protocols and Code of Ethics can be found on TOWER’s website at www.tower.co.nz under the heading ‘Corporate Governance’. Role of senior executives The day-to-day leadership and management of the company is undertaken by the Chief Executive Officer and senior The Board Charter records the Board’s roles and management. The Chief Executive Officer is solely accountable responsibilities. It provides that the primary role of the Board to the Board for management performance. The Chief is to effectively represent and promote the interests of Executive Officer has also formally delegated decision making shareholders with a view to enhancing growth and returns to senior management within their areas of responsibility and across TOWER and its subsidiaries, adding long-term value subject to quantitative limits to ensure consistent and efficient to TOWER shares. The Board, when fulfilling its roles and decision making across the company. Senior management 52 TOWER Limited annual report 2015 has no power to do anything which the Chief Executive Officer cannot do pursuant to his delegations. Within this formal delegation framework those executives who report directly to the Chief Executive Officer have authority to sub-delegate certain authorities to their direct reports. The Board meets regularly with management to provide strategic guidance for TOWER and effective oversight of management. Board composition, nominations and appointments Board composition At 30 September 2015, the Board was comprised of six non- executive directors. David Hancock was an executive director prior to the conclusion of his tenure as Chief Executive Officer on 16 August 2015. David became a non-executive director after that date. The TOWER constitution currently requires a minimum of five directors and provides for a maximum of eight. Directors’ profiles are on pages 12 and 13. Nominations, appointments and ongoing education The Remuneration and Appointments Committee recommends to the Board suitable candidates for appointment as directors. The Committee will consider, among other things: • the candidate’s experience as a director • their skills, expertise and competencies (the Board aims to have a mix of skilled directors with particular competencies in the insurance and financial services sector) • the extent to which those skills complement the skills of existing directors • their ability to devote sufficient time to the directorship, and • the candidate’s reputation and integrity. To ensure that the Board appoints directors and officers who have appropriate skills, knowledge, experience and integrity to perform their duties, and to fulfil their roles, TOWER has developed a Fit and Proper Policy benchmarked to the requirements of the Insurance (Prudential Supervision) Act 2010 and the Fit and Proper Standard for Licensed Insurers, along with the Fit and Proper Policy Guidelines for Licensed Insurers issued by the Reserve Bank of New Zealand. This The Remuneration and Appointments Committee is policy is applied to all directors and relevant officers. responsible for identifying directors for appointment to the Board to ensure there is an appropriate blend of commercial skills and experience to govern and add value to TOWER and to ensure the Board works effectively. The Committee is also responsible for the Board Protocols which have been established to facilitate the effective operation of the Board. Current directors contribute significant commercial, financial, legal and investment skills to the Board. The Remuneration and Appointments Committee has considered and is satisfied that the composition of the Board reflects an appropriate range of skills and experience for TOWER to effectively discharge its responsibilities. An independent evaluation of the Board was undertaken in the reporting period to 30 September 2015 in accordance with the Board Charter. Role of Chairman The Chairman’s role is to lead and manage the Board so that it operates effectively, and to facilitate interaction between the Board and the Chief Executive Officer. The Chairman of the Board is elected by the directors. The Board supports the separation of the roles of Chairman and Chief Executive Officer as recommended by the NZX Corporate Governance Best Practice Code, and these roles are separate at TOWER. Michael Stiassny was appointed Chairman of TOWER on 21 March 2013. The Remuneration and Appointments Committee undertakes appropriate checks before appointing a person or putting forward to shareholders a new candidate for election as a director. Such checks have been undertaken in relation to all current Board members, and will be undertaken prior to the appointment or election of any new Board candidate. In the case of a candidate standing for election as a director for the first time, TOWER will provide information to shareholders about the candidate to enable them to make an informed decision on whether or not to elect the candidate, including material adverse information revealed by any checks the Remuneration and Appointments Committee has performed on the candidate; details of any interest, position, association or relationship that might influence, or reasonably be perceived to influence in a material respect the candidate's capacity to exercise judgement on board matters or to act in the best interests of TOWER and its shareholders; the Board's view on whether the candidate will be considered to be an independent Director; and a recommendation by the Board in respect of the candidate’s election. Where Directors are seeking re-election at a general meeting, TOWER will provide information to shareholders to enable them to make an informed decision on whether or not to re-elect the Director, including their relevant qualifications and experience and the skills they bring to the Board; details of any other material directorships currently held by the candidate; the term of office already served by the Director; whether the Director is considered to be independent; and a recommendation by the Board in respect of the re-election of the Director. 53 On appointment to the Board, directors receive a formal • materially interfere with his/her ability to act in TOWER’s best letter of appointment outlining their duties, obligations and interests and the interests of its securityholders generally. remuneration and are provided induction information about TOWER in the form of a Director’s Manual. The Director’s Manual contains historical background on TOWER and its operations, information about how TOWER and its subsidiaries Examples of relationships that remove independence include relationships with a material TOWER customer, supplier, professional advisor or substantial shareholder. are structured, details of the Company’s directors’ and officers’ As at 30 September 2015, the Board considered that five of the insurance, the Board Charter and other TOWER corporate governance policies. The induction process also involves six directors were independent. Those directors are Michael Stiassny, Steve Smith, Graham Stuart, Rebecca Dee-Bradbury, one-on-one discussions with the Chairman, other directors and Warren Lee. David Hancock’s two-year tenure as Chief and briefings from senior management to help new directors Executive Officer concluded on 16 August 2015. David is participate actively in Board decision making at the earliest currently on a sabbatical but remains a non-executive director opportunity. To ensure ongoing education, directors are regularly informed of developments that affect TOWER’s industry and business environment, as well as company and legal issues that impact the directors themselves. Directors receive comprehensive on the Board, and is not considered to be independent. TOWER’s Board Protocols provide that being an executive of TOWER within the last three years or being a director after ceasing to hold such employment is a relationship that removes independence. Board papers and briefing information before Board meetings, The ASX Recommendations recommend that the Chairman including a report from the Chief Executive Officer and reports should be an independent director. Michael Stiassny is from senior management. Directors have unrestricted access considered to be an independent director. to management and any additional information they consider necessary for informed decision making. The roles of Chairman and Chief Executive Officer are not exercised by the same person. The role of Chief Executive Senior management also attend Board meetings in order to Officer is held by Richard Harding. provide presentations to the Board and answer any queries directors may have. This allows the Board to understand the practical issues affecting TOWER and the impact of these issues on its performance. Directors are expected to develop their skills, competencies and industry knowledge by taking responsibility for their continuing education. A director may obtain independent professional advice relating to the affairs of TOWER or his/her responsibilities as a director or Committee member. Where the director has the In accordance with TOWER’s Constitution, directors with an actual or potential conflict of interest on particular issues are required to disclose the conflict and may still attend meetings but will abstain from voting on that issue. Retirement, election and re-election During the year John Spencer retired from the TOWER Limited Board. approval of the Board Chairman or Committee Chairman to At least one-third of the total number of directors must retire obtain independent professional advice, TOWER will meet the from office each year by rotation and, if they choose, stand reasonable costs of the advice. Director independence The Board Protocols require that a majority of the Board will be independent directors. The Board assesses director independence upon each director’s appointment and then regularly assesses the independence of each director based on the interests disclosed by them. For this purpose directors are required to immediately advise the Board of any new or changed relationships so the Board can make this assessment. Based on the NZX Listing Rules and the ASX Recommendations, the Board Protocols define a director as being independent if he/she is a non-executive director who does not have any direct or indirect interest or relationship that could, or could reasonably be perceived to: • influence, in a material way, his/her decisions relating to TOWER, or 54 TOWER Limited annual report 2015 for re-election by shareholders at the Annual Shareholders’ Meeting. Directors who retire each year are those who have been in office longest since their last election. If several directors have held office for equal terms and cannot agree who will retire, it is determined by lot. The directors who will retire and stand for re-election at the 2016 Annual Shareholders’ Meeting are David Hancock and Steve Smith. In addition, all directors appointed by the Board since the last Annual Shareholders’ Meeting to fill a casual vacancy must stand for election. Shareholders will be provided with relevant information on the directors standing for re-election prior to the Annual Shareholders’ Meeting to enable them to make informed decisions when voting. Warren Lee was appointed as an independent, non-executive director to fill a casual vacancy on 26 May 2015. He will retire, and being eligible, will offer himself for election at the 2016 Annual Shareholders’ Meeting. The length of service of each director on the Board is disclosed on the ‘Director Profiles’ section on pages 12 and 13. Performance reviews of the Board, Board committees and individual directors The Board recognises that the performance of the directors and Board Committees is crucial to TOWER’s success and to the interests of shareholders. The Board regularly reviews its own composition and performance and that of the Board The Committees are governed by written terms of reference, which detail their specific functions and responsibilities. The terms of reference for each Committee are reviewed periodically. Copies of each Committee’s terms of reference are available on the TOWER website at www.tower.co.nz under the ‘Corporate Governance’ section. Committees in accordance with the terms of the Board Charter The Committees make recommendations to the Board. They (which also includes a review of the Board structure, policies, Board succession, delegations and the necessity for and composition of the Committees). A performance evaluation of the Board and Board Committees was undertaken in the reporting period to 30 September 2015 in accordance with the Board Charter. The Remuneration and Appointments Committee is responsible for the regular performance management and annual appraisal of the Chief Executive Officer, individual have no decision-making ability except where expressly provided by the Board. The Board is required to annually confirm the membership and Chairmanship of each of the Committees. The experience and skills of individual Committee members are set out in the directors’ profiles on pages 12 and 13. Member attendance at each Committee meeting is set out on page 56. Audit and Risk Committee directors and senior executives. Evaluations may be carried Members: Graham Stuart (Chairman), Michael Stiassny, Steve out by an external consultant. A performance evaluation of Smith, Rebecca Dee-Bradbury, and Warren Lee. the Chief Executive Officer, individual directors and senior executives was undertaken in the reporting period to 30 September 2015 in accordance with the process established by the Remuneration and Appointments Committee. Director share ownership TOWER has a structure to independently verify and safeguard the integrity of its financial reporting. The principal components of this are the Audit and Risk Committee, the external and internal auditors, and the certifications provided to the Board by senior management. These certifications include a representation letter from the CEO and CFO provided to All directors are required by the Company’s constitution to hold the Board prior to the Board’s approval of TOWER’s financial TOWER shares. Directors and management are required to comply with TOWER’s Insider Trading and Market Manipulation Policy when purchasing and disposing of TOWER securities. The number of shares held by each director and their dealings in TOWER securities during the financial year are disclosed on page 63. Indemnities and insurance TOWER has given Deeds of Indemnity to directors for potential liabilities and costs they may incur for acts or omissions in their capacity as directors. Directors’ and officers’ liability insurance is in place for directors and employees acting on behalf of TOWER and its subsidiaries. While the insurance covers risks arising out of acts or omissions of directors and employees statements, which states that, to the best of the CEO and CFO’s knowledge and belief, TOWER’s financial records have been properly maintained, that TOWER’s accounting policies and financial statements comply with the appropriate accounting standards, and that the financial statements fairly present the financial position of TOWER as at the balance date. The CEO and CFO provide this letter on the basis that TOWER has maintained an internal control structure which is sufficient to produce reliable accounting records. The Terms of Reference of the Audit and Risk Committee include the following duties and responsibilities: • independently and objectively review the financial information presented by management to the Board, the external auditors and the public acting for TOWER, it does not cover dishonest, fraudulent or • review draft half year and annual financial statements and malicious acts or omissions, or criminal liability. the external auditors’ report, and make recommendations to Board committees The Board currently has two standing committees: the Audit and Risk Committee and the Remuneration and Appointments Committee. Other committees are established from time to time to examine specific issues as required by the Board. the Board as to their adoption • recommend the appointment of, and oversee the performance of, the external auditor and be satisfied as to its independence • review the effectiveness and efficiency of management processes, risk management and internal financial controls and control systems • monitor and review compliance with regulatory and statutory requirements and obligations 55 • monitor the internal audit function and receive regular Board and Committee meeting attendance reports from the internal auditors on risks, exposures and compliance • maintain open and direct lines of communication with the external and internal auditors, and • make recommendations to the Board as to the appointment of the external auditors. There were six scheduled Board meetings during the year from 1 October 2014 to 30 September 2015. Director attendance at Board and Committee meetings is set out below. The Chief Executive Officer attends all Board and Committee meetings. The Chief Financial Officer attends all Board meetings and the Audit and Risk Committee meetings, along with an The Committee meets with the internal auditors three times appropriately qualified person who is responsible for taking during the financial year and with the external auditors at least accurate minutes of each meeting and ensuring that Board twice. procedures are observed. The Terms of Reference require that the Committee has a minimum of three non-executive directors, the majority of whom are independent. The Board appoints the Chairman of the Committee, who cannot also be Chairman of the Board, and who is an independent director. Following each meeting the Chairman of the Committee provides a report to the Board. The Chairman is also required to provide an annual report summarising the Committee’s activities, findings, recommendations and results for the past year. Remuneration and Appointments Committee Members: Michael Stiassny (Chairman), Steve Smith, Graham Stuart, Rebecca Dee-Bradbury and Warren Lee. The Remuneration and Appointments Committee advises the Board in respect of a number of matters, including: 2014/2015 TOWER Limited directors’ attendance record B O A R D T O W E R L M T E D I I I A U D T A N D R S K I C O M M T T E E I Meetings held Michael Stiassny Steve Smith Graham Stuart Rebecca Dee-Bradbury Warren Lee 1 David Hancock 2 John Spencer 3 6 6 6 6 6 2 5 2 4 2 4 4 4 1 3 2 A N D A P P O N T M E N T S I R E M U N E R A T O N I C O M M T T E E I 3 3 2 3 3 0 1 1 • the appointment and succession of directors, and director 1. Warren Lee was appointed as a director of TOWER on 26 May 2015. remuneration • the composition and structure of the Board • induction and continuing professional development programmes for directors • performance evaluations of the Board and individual directors, and • the Chief Executive Officer and senior executive appointments, termination, performance appraisal and remuneration. The Terms of Reference for the Remuneration and Appointments Committee require that the Committee comprises suitably qualified non-executive directors, the majority of whom are independent. The Board appoints the Chairman of the Committee, who will be an independent, non- executive director. Following each meeting the Chairman of the Committee provides a report to the Board. The Chairman is also required to provide an annual report summarising Committee activities, findings, recommendations and results for the past year. The Company’s remuneration policies for directors and senior executives are set out on page 60. 56 TOWER Limited annual report 2015 2. David Hancock’s tenure as CEO concluded on 16 August 2015. David is currently on a sabbatical but remains a director of TOWER. 3. John Spencer retired as a director of TOWER on 11 February 2015. Promoting ethical and responsible behaviour Ethical and responsible behaviour TOWER is committed to meeting its legal and other obligations to stakeholders, including shareholders, employees, customers, policyholders and the wider community. Maintaining TOWER’s reputation for honesty and fairness is crucial to its success as a financial services business. The Board has adopted a Code of Ethics which is an important tool for achieving these aims as it sets out the minimum standards of conduct and behaviour TOWER expects of its directors, executives and employees and requires them to adhere to these standards. The Code of Ethics is available to staff both on the TOWER website and through the induction process. The types of behaviour addressed in the Code of Ethics include: • avoiding situations in which personal interests interfere or appear to interfere with the interests of TOWER • using a person’s position at TOWER or TOWER’s information Insider trading or property for personal gain • safeguarding the confidentiality of all TOWER non-public information, and • complying with all applicable legal requirements and ensuring that behaviour is appropriate while conducting TOWER’s business. Any person who becomes aware of a breach or suspected breach of the Code of Ethics is required to report it immediately in accordance with the Policy. Legal restrictions and TOWER’s Insider Trading and Market Manipulation Policy do not allow trading and dealing in TOWER securities by directors, employees, consultants and contractors while they are in possession of information that has not been released to the public and that is likely to have a material effect on the price of TOWER securities. There are supplementary guidelines for directors and designated employees (usually senior executives) requiring prior consent to trade, and specifying periods when In addition to the Code of Ethics, TOWER has a Fraud Policy trading is allowed (following half year and full year results which is applicable to all staff. The Policy includes reference announcements). A copy of TOWER’s Insider Trading and to a whistleblower process (which is also set out in TOWER’s Market Manipulation Policy is available on TOWER’s website at Whistleblower Policy) and sets out TOWER’s approach to the www.tower.co.nz under the ‘Corporate Governance’ section. way in which suspicions/allegations of fraud, corruption and/ or misconduct within the Group are to be reported by staff and Diversity Policy how TOWER will deal with such incidents. The Policy provides that TOWER will ensure that a person who, in good faith, makes an allegation of misconduct under the Policy will not be personally disadvantaged by having made the report. Insurance (Prudential Supervision) Act 2010 The New Zealand insurance industry is regulated by the TOWER’s Diversity Policy has been designed to ensure that diversity is encouraged, respected and embraced in our day-to-day business practices. Our people bring different experiences, backgrounds and skills to our business. TOWER believes that by valuing diversity, this will help drive our performance culture, brand and shareholder returns. The overall goal is an inclusive, flexible workplace with people Reserve Bank of New Zealand, under the Insurance (Prudential motivated to do their very best for our customers and for each Supervision) Act 2010 (IPSA). All companies carrying on other. Nurturing an environment that values and promotes insurance business in New Zealand must hold a licence under diversity will help improve the quality of our decision making, IPSA. The relevant TOWER company is TOWER Insurance productivity, and collaboration. Limited, which is a licensed general insurer. ASX Recommendation 1.5 provides that a listed entity should Key elements of the insurance prudential supervision regime have a diversity policy which includes requirements for the include minimum solvency requirements and regular reporting Board or a relevant committee of the Board to set measurable to the Reserve Bank, the need for directors and other relevant objectives for achieving gender diversity and to assess annually officers to meet fit and proper standards, and governance and both the objectives and the entity's progress in achieving them. risk management requirements. The TOWER Insurance Limited Board: • is governed by a Board Charter • comprises the same directors as the Board of TOWER Limited, and The Recommendation also provides that the entity should disclose at the end of each reporting period the measurable objectives and its progress towards achieving them. TOWER does not fully follow ASX Recommendation 1.5 as its Diversity Policy does not include requirements for the Board to set measurable objectives. However the Board considers that • has two standing committees, being the Audit and Risk TOWER has addressed the requirements of its Diversity Policy. Committee and the Remuneration and Appointments Committee, which are governed by written terms of reference. The Board is responsible for overseeing the implementation of the Diversity Policy, with delegation to the Remuneration and Appointments Committee to review and report annually on the Further information on the governance of TOWER Insurance status of diversity within TOWER and on policy effectiveness. Limited will be contained in the annual report of that company, TOWER’s diversity Policy will be reviewed in the next 12 months which will be registered with the Companies Office. for compliance with NZX and ASX diversity requirements. Further information on the insurance prudential supervision regime can be found on the Reserve Bank website www.rbnz.govt.nz. 57 The following table shows gender representation across TOWER’s website, www.tower.co.nz, provides information TOWER as at 30 September 2015: to shareholders and investors about TOWER. The website 2014–2015 2013–2014 includes copies of past annual reports, results announcements, GROUP Board of Directors Male Female Executive leadership team 1 Male Female Senior leadership team 2 Male Female Employees Male Female Total company3 Male Female % BY GROUP NUMBER % BY GROUP NUMBER 84% 16% 66% 34% 65% 35% 42% 58% 44% 56% 5 1 4 2 15 8 235 318 254 328 84% 16% 60% 40% 64% 36% 42% 58% 42% 58% 5 1 3 2 16 9 209 290 228 301 1. ‘Executive Leadership Team’ includes the Chief Executive Officer, and those employees who report directly to the Chief Executive Officer. 2. ‘Senior Leadership Team’ is the second level of employees below the Chief Executive Officer, who report directly to the Executive Leadership Team. 3. ‘Total Company’ figures do not include the Board of Directors. Market and shareholder communication and shareholder participation at meetings TOWER recognises that public confidence in the integrity of TOWER is based on continuous, full and open disclosure of information about its activities to the market and relevant stakeholders. TOWER’s Corporate Disclosure Policy provides for a planned, proactive communication programme with shareholders and the wider investment community to encourage their participation and interaction with TOWER. TOWER believes this communication programme assists in creating a fully informed market and enhances shareholder media releases (including NZX and ASX announcements) and general TOWER information. It also has a comprehensive corporate governance section for shareholders at http://www.tower.co.nz/investor-centre/. TOWER provides shareholders with the option to receive communications from, and send communications to, TOWER and the share registry electronically, for reasons of speed, convenience, cost and environmental considerations. TOWER encourages its shareholders to receive company information electronically by registering their email addresses online with TOWER’s share registry. TOWER’s Annual Shareholders’ meeting is an opportunity for shareholders to receive updates from the Chief Executive Officer and Chairman on TOWER’s performance, ask questions of the Board and vote on the various resolutions affecting TOWER’s business. Shareholders are also given an opportunity at an Annual Shareholders’ Meeting to ask questions of TOWER’s auditors regarding the conduct of the audit and preparation and content of the auditors’ report. Whilst shareholders are encouraged to attend meetings in person, in the event that they are unable to do so, they are encouraged to participate in the meeting by proxy, attorney or representative to vote on their behalf. Announcements TOWER makes the following regular announcements to the market and shareholders: • Full year results are announced in late November • Annual reports are released in late December • TOWER’s Notice of Annual Shareholders’ Meeting is sent to shareholders in late December • TOWER’s Annual Shareholders’ Meeting is held in February value. The Policy provides that only authorised spokespersons • Half year results are announced in late May can communicate on behalf of TOWER with the investment • Half year reports are released in late June. community, shareholders and the media. A copy of the Policy is available on TOWER’s website at www.tower.co.nz. Credit Rating TOWER has policies and procedures in place designed to Global rating organisation A.M. Best Company issued the ensure that all investors have equal and timely access to following ratings of companies: material information concerning TOWER, and to ensure that company announcements are factual and presented in a clear and balanced way, and that TOWER complies with the continuous disclosure requirements of the ASX and NZX. Announcements of financial results, changes in profit forecasts TOWER Insurance Limited Financial Strength Rating A– (Excellent) Issuer Credit Rating a– Effective 24 July 2015 and other material market announcements require Board TOWER Limited approval. Issuer Credit Rating bbb– (Good) Effective 24 July 2015 58 TOWER Limited annual report 2015 Audit and risk management at TOWER TOWER has established a framework to identify, assess, monitor and manage risk. At the forefront of this are the internal audit and compliance processes, and the risk management process for each operating company. TOWER faces a range of risks that are inherent to the business activities undertaken. TOWER stakeholders, including shareholders, clients, staff and suppliers, require assurance that TOWER will manage its exposure to risk. Executive and senior management and staff The internal auditors help the Board and TOWER exercise good corporate governance and meet their regulatory obligations by providing them with independent assurance of the adequacy and effectiveness of internal control systems and processes within TOWER. The internal auditors have unrestricted access to TOWER information and staff, and are completely independent of the activities and operations they audit. TOWER regularly evaluates the effectiveness of its risk management framework to ensure that its internal control must be able to demonstrate that reasonable steps have been systems and processes are monitored and updated on an on- taken to effectively manage TOWER’s risks. Risk and compliance framework going basis. External audit The Risk and Compliance Framework Board Policy sets out TOWER’s commitment to managing risk and compliance, and provides an overview of the core components including roles and responsibilities and requirements that must be met. This applies to TOWER and all of its subsidiaries and related companies, and all staff and contractors employed by TOWER and any of its subsidiaries. Effective management of risk and The TOWER Board is fully committed to ensuring the quality and independence of the external audit process. As part of this process TOWER encourages full and frank disclosure and discussions between the Board, TOWER’s internal auditors, management and the external auditor, PricewaterhouseCoopers (PwC). PwC was re-appointed as auditor by shareholders at the compliance is essential to ensure that TOWER remains a viable Annual Shareholders' Meeting in February 2015 to audit the business and is able to achieve its objectives. This is integral in providing guidance to management and staff of TOWER in dealing with its risk and compliance obligations. The Audit and Risk Committee regularly reviews its risk management procedures and framework to ensure that it financial statements for TOWER and its subsidiaries. A formal engagement letter with PwC sets out the respective obligations and responsibilities of PwC and TOWER in relation to the preparation and audit of financial statements. The Board also has a formal External Audit Independence Policy that includes complies with its legal obligations. No significant changes to the the provision of non-audit services by the external auditor. framework or Policy were identified during the financial year. The Audit and Risk Committee is responsible for reviewing whether TOWER has any material exposure to any economic, The Policy describes the Board’s approach to the approval of TOWER’s external audit firm; what services the external auditor may and may not provide to TOWER; auditor rotation; and hiring environmental and social sustainability risks, and if so, to develop of staff from the audit firm. The Board reviews external auditor strategies to manage such risks, and present such strategies to the Board. For the reporting period to 30 September 2015, no material exposure to these risks was identified. quality and effectiveness by reference to obligations described in the Policy. Tenure and reappointment of the external auditor is managed through compliance with relevant legislation and Internal audit TOWER contracts an independent chartered accounting firm to carry out the internal audit function. That firm reports to the Chairman of the Audit and Risk Committee and has full access to other Committee members and the Board. The Committee approves the Internal Audit Policy that governs the internal audit function across the company. The Internal Audit Policy formally records the delegations the Audit and Risk Committee has made to the internal auditor in relation to the internal control systems and processes of TOWER. The Audit and Risk Committee approves the appointment of the internal auditor following the Chief Executive Officer’s recommendation. NZX and FMA guidance. The Board mitigates any threats to auditor independence by prohibiting TOWER’s external audit firm from providing any non-audit services. Allowable services are limited to statutory financial statement audit engagements and directly related assurance engagements (including assurance opinions on solvency returns; regulatory return audits; and opinions required by legislation such as shareholder meeting votes or proxy counts). Should a situation arise which may require TOWER’s external audit firm to provide services beyond these, any such engagement must first be pre-approved by TOWER’s Audit and Risk Committee. Under the Policy, PwC is required to provide the Audit and Risk Committee with an annual certification of its continued independence, and in particular confirm that it has not carried out any engagements during the year which would impair its 59 professional independence. Non-audit services provided by • setting Board committee members’ fees, and PwC to TOWER and its subsidiaries during the financial year • determining remuneration packages of senior executives, did not, in TOWER’s opinion, affect auditor objectivity and following recommendations from the Chief Executive Officer. independence. The Policy is overseen by the Audit and Risk Committee. The Policy is available on TOWER’s website at www.tower.co.nz under the ‘Corporate Governance’ section. Representatives from TOWER’s external auditor will be present at the Annual Shareholders' Meeting to be held in February 2016 and will be available to answer shareholder questions about the conduct of the audit and the preparation and content Non-executive director remuneration The Board’s policy is to remunerate directors at a similar level to comparable Australasian companies, with a small premium to reflect the complexity of the insurance and financial services sector. At the Annual Shareholders’ Meeting in February 2004 shareholders approved an increase in non-executive director annual remuneration to the current maximum of NZ$900,000 of the auditors’ report. per annum. Details of PwC fees for audit and other services provided to TOWER are set out in note 7 of the TOWER Limited financial statements. TOWER seeks external advice when reviewing Board remuneration. The Remuneration and Appointments Committee is responsible for reviewing directors’ fees. Non- executive directors are also paid additional annual fees for Corporate governance policies and procedures sitting on Board Committees. To support the Board’s aims of developing and fostering corporate governance practices which are consistent with best practice, TOWER has developed a number of corporate governance policies that apply to all directors and employees of TOWER. Where indicated, copies are available on TOWER’s website at www.tower.co.nz under the ‘Corporate Governance’ section. Remuneration at TOWER BOARD/COMMITTEE CHAIRMAN MEMBER Base fee – Board of directors $130,000 $78,570 Audit and Risk Committee $15,000 $9,000 Remuneration and Appointments Committee 1 – – 1 The Board determined that from 1 December 2012 no fees would be payable for sitting on the Remuneration and Appointments Committee Additional fees may be paid to non-executive directors for one- off tasks and/or additional appointments where required, for example, sitting on a due diligence committee. The remuneration policy for non-executive directors does not TOWER’s remuneration policies aim to attract and retain include participation in either a share or share option plan. talented and motivated directors and employees. TOWER aims to provide employees with remuneration that is competitive, equitable and related to the achievement of individual, team and business unit objectives. TOWER rewards high performing staff for providing superior performance. TOWER has different policies for remunerating non-executive directors as opposed to the Chief Executive Officer and senior executives. The following section discusses TOWER’s remuneration policies and arrangements for non-executive 2014/2015 directors’ remuneration and benefits of TOWER and its subsidiaries Amounts in the table below reflect fees paid and accrued for the year ended 30 September 2015. Fees include base fees and additional fees in the financial year for one-off tasks and additional appointments. DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER LIMITED directors, the Chief Executive Officer, the senior executives and FOR THE YEAR TO 30 SEPTEMBER 2015 FEES (NZ$) staff in general. Role of the Remuneration and Appointments Committee The Remuneration and Appointments Committee is responsible for assisting and advising the Board in relation to, amongst other things: • remuneration strategy, structure and policy • remuneration of the Chief Executive Officer • setting non-executive directors’ remuneration 60 TOWER Limited annual report 2015 Michael Stiassny Steve Smith Graham Stuart Rebecca Dee-Bradbury Warren Lee 1 John Spencer 2 David Hancock 3 127,417 87,570 93,570 87,570 26,940 31,997 Nil 1. Warren Lee was appointed as a director of TOWER on 26 May 2015. 2. John Spencer retired as a director of TOWER on 11 February 2015. 3. David Hancock did not receive directors’ fees during his tenure as CEO. Further information relating to David’s salary is disclosed under the heading ‘Chief Executive Officer and senior executive remuneration’ below. David is currently on a sabbatical but remains a director of TOWER. David is not receiving director fees while he is on sabbatical. DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER LIMITED SUBSIDIARIES Employee remuneration FOR THE YEAR TO 30 SEPTEMBER 2015 Alden Godinet 1 Rodney Reid 1 FEES (WST$) $7,500 $7,500 1. Fees earned in capacity as director of National Pacific Insurance Limited. These fees are paid in Western Samoan Tala. Chief Executive Officer and senior executive remuneration The Board’s policy for remunerating the Chief Executive Officer and other key executives is to provide market based remuneration packages comprising a blend of fixed and incentive based remuneration with clear links between individual and company performance, and reward. Remuneration packages currently comprise a mixture of fixed and performance-based remuneration in the form of short and long term incentives. The Remuneration and Appointments Committee reviews the remuneration packages of the Chief Executive Officer and other senior executives at least annually. The policy is intended to encourage meeting TOWER’s short and long term objectives. The Chief Executive Officer does not receive directors’ fees. David Hancock’s remuneration paid during the financial year ended 30 September 2015 equated to $2,038,270, which consisted of: • a base salary of $705,835; • a $503,864 short-term incentive payment for the 12 months from July 2013 to June 2014 (paid December 2014); from July 2014 to June 2015 (paid August 2015); • a $500,000 long-term incentive payment paid at the conclusion of his tenure as CEO; and • an additional allowance provided for under the terms of the contract extending his tenure as CEO. Richard Harding’s tenure as CEO commenced on 17 August 2015. Richard’s remuneration consisted of a salary of $95,192 from the date his tenure commenced until 30 September 2015. Richard’s annual base salary is $750,000, with the potential to earn short-term incentives up to $500,000. Under the terms of TOWER’s Insider Trading and Market Manipulation Policy, directors are prohibited from entering into transactions which operate to limit the economic risk of Set out in the following table are the number of employees or former employees of TOWER, not being directors or former directors, who received remuneration and other benefits valued at or exceeding $100,000 for the year ended 30 September 2015. Remuneration includes redundancy payments and termination payments made during the year to employees whose remuneration would not otherwise have been included in the table. The remuneration bands are expressed in New Zealand Dollars. FROM TO 2014–2015 2013–2014 100,000 109,999 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 119,999 129,999 139,999 149,999 159,999 169,999 179,999 189,999 199,999 200,000 209,999 210,000 219,999 220,000 299,999 230,000 239,999 280,000 289,999 290,000 299,999 310,000 319,999 320,000 329,999 400,000 409,999 470,000 479,999 490,000 499,999 720,000 729,999 13 14 12 14 10 5 1 3 4 2 2 – 2 2 2 – 1 – 1 1 – 1 1 17 7 7 11 5 1 4 2 1 2 – 1 – 1 – 1 – 1 – – 1 – 1 Total 91 63 The table includes base salaries, short-term incentives (if applicable) and vested or exercised long-term incentives. If the individual is a KiwiSaver member the table does not include contributions of 3% of gross earnings towards that individual’s KiwiSaver scheme. Donations • a $175,000 short-term incentive payment for the 12 months 380,000 389,999 their TOWER securities (including under any equity-based During the financial year ended 30 September 2015, total remuneration scheme). donations made by TOWER and its subsidiaries are as follows: TOWER Limited: NZ$1,000 TOWER Limited subsidiaries: NZ$4,260 61 Disclosures Interests register TOWER and its subsidiaries are required to maintain an John Spencer 1 Derby Street Limited KiwiRail Holdings Limited Mitre 10 (New Zealand) Limited and subsidiary companies interests register in which the particulars of certain transactions New Zealand Railways Corporation and matters involving the directors must be recorded. The Raukawa Iwi Development Limited interests register for TOWER Limited is available for inspection on request by shareholders. TOWER’s constitution provides that an ‘interested’ director may not vote on a matter in which he or she is interested unless the director is required to sign a certificate in relation to that vote pursuant to the Companies Act 1993, or the matter relates to a grant of an indemnity pursuant to section 162 of the Companies Act 1993. General disclosures of interest During the financial year, TOWER’s directors disclosed interests, Raukawa Asset Holding Company Limited RVNZ Investments Limited Tertiary Education Commission Titanium Park Limited Waikato Regional Airport Limited Michael Stiassny Atapo Corporation Limited DNZ Property Fund Limited DNZ Holdings Limited or a cessation of interests (indicated by an asterisk (*)), in the Frequency Media Group Limited following entities pursuant to section 140 of the Companies Gadol Corporation Limited Act 1993. No disclosures were made by directors of any other Geffen Holdings Limited TOWER subsidiary. Glenogle Trust Limited Any cessation of interest that occurred after 30 September Knotser Properties Limited Director Chairman Director Chairman Chairman Director Director Chairman Director Director Director Director Director Director Director Director Director Director 2015 is indicated by two asterisks (**). Kordamentha Limited and subsidiary companies Director Rebecca Dee-Bradbury Bluescope Steel GrainCorp Ltd LMH Investments Pty Ltd Director Director Director Business Advisory Board, Monash Business School Member David Hancock Finarch Pty Limited AXE ECN Pty Limited Steve Smith Director Director Fulton Hogan Limited and subsidiary companies Director Hellaby Holdings Limited Kinrich Trust Kinrich Holdings Limited Summerlee Investments Limited Unison Securities Limited Unison Capital Advisors Limited Pascaro Investments Limited Chairman Trustee Director Director Director Director Chairman Spanbild Holdings Limited and subsidiary companies Chairman Trebol Investments Limited and subsidiary companies Director Rimu SA (Chile) and subsidiary companies Director Michael Spencer Limited Ngati Whatua Orakei Whai Rawa Limited Director Chairman NZ Windfarms Limited and subsidiary companies Director** Plan B Limited Poukawa Estate Limited Queenstown Airport Corporation Limited Sasha Properties Limited Director Director Director Director SB Entertainment Holdings and subsidiary companies Director Ted Kingsway Limited Triceps Holdings Limited Director Director Vector Limited and subsidiary companies Chairman WEST24 Limited Whai Rawa GP Limited Whai Rawa Kainga Development Limited Graham Stuart Clear Sky Syndicate Limited Five River Dairies Limited Leroy Holdings Limited Lincoln Hub Owaka Dairies Limited Director Director Director Director* Director* Director Chairman* Director* The National Foundation for the Deaf Incorporated Board Member 1. John Spencer retired as a director of TOWER on 11 February 2015. Good Sounds Limited Board Member Specific disclosures of interests During the financial year, no subsidiary of TOWER entered into any transaction in which directors were interested. Accordingly, no disclosures of interest were made. 62 TOWER Limited annual report 2015 Indemnity and insurance In accordance with section 162 of the Companies Act 1993 and TOWER’s constitution, TOWER has provided insurance for and indemnities to, directors and employees of TOWER for losses from actions undertaken in the course of their duties. The insurance includes indemnity costs and expenses incurred to defend an action that falls outside the scope of the indemnity. Particulars have been entered in the Interests Register pursuant As at 1 October 2015, TOWER had purchased 5,765,979 shares at an average price of $2.1056, returning approximately $12.1 million to shareholders. This represents 21% of the total market volumes since TOWER started trading and 23% of the available market volume. The proportional target for the full $34 million over the 12 month period was $14.0 million at 1 October 2015. TOWER subsidiary company director disclosures to section 162 of the Companies Act 1993. The following persons held office as directors of subsidiary Use of company information by directors No member of the Board, nor of any subsidiary, issued a notice requesting to use information received in his or her capacity as a director which would not have otherwise been available to that director. Directors’ shareholdings At 30 September 2015, TOWER Limited directors held the following interests in TOWER Limited shares: DIRECTOR Rebecca Dee-Bradbury 1 David Hancock Steve Smith John Spencer 2 Michael Stiassny Graham Stuart Warren Lee ORDINARY SHARES BENEFICIAL 5,000 – 9,230 – 82,335 6,154 2,000 1. These shares were purchased by LMH Investments Pty Limited, of which Rebecca is a director. Rebecca has a beneficial interest in LMH Investments Pty Limited through her family trust. 2. John Spencer retired as a director of TOWER on 11 February 2015. Directors’ trading in TOWER securities Directors disclosed the following acquisitions and disposals of relevant interests in TOWER securities during the financial year pursuant to section 148 of the Companies Act 1993. DIRECTOR DISCLOSURE INTEREST DATE OF NUMBER ACQUIRED (DISPOSED) CONSIDER- ATION John Spencer 1 10/02/15 Beneficial (13,798) NZ$30,475 Rebecca Dee-Bradbury 2 22/07/15 Beneficial 5,000 AU$9,611 Warren Lee 3 26/05/15 Beneficial 2,000 AU$4,377.50 1. John Spencer retired as a director of TOWER on 11 February 2015. 2. Rebecca purchased shares in Australian dollars. 3. Warren purchased shares in Australian dollars. Buyback An on market share buyback of up to $34 million is currently underway. This buyback is being funded out of excess cash held in TOWER’s corporate entities. companies at 30 September 2015. Those who retired during the year are indicated with an (R). Those who retired or were appointed after 30 September 2015 are footnoted. TOWER SUBSIDIARY COMPANY DIRECTOR DISCLOSURES TOWER Insurance Limited Rebecca Dee-Bradbury, David Hancock, Warren Lee, Steve Smith, Michael Stiassny, Graham Stuart, John Spencer (R) TOWER Financial Services Group Limited Rebecca Dee-Bradbury, David Hancock, Warren Lee, Steve Smith, Michael Stiassny, Graham Stuart, John Spencer (R) The National Insurance Company of New Zealand Limited Richard Harding, Brett Wilson, Michael Boggs (R), David Hancock (R) TOWER New Zealand Limited Richard Harding, Brett Wilson, Michael Boggs (R), David Hancock (R) TOWER Operations Limited Richard Harding, Brett Wilson, Michael Boggs (R), David Hancock (R) National Insurance Company (Holdings) Limited Vanessa Dudley, Richard Harding, Sarah-Jane Wild, Brett Wilson, Michael Boggs (R), David Hancock (R), Paul Absell 1 Southern Pacific Insurance Company (Fiji) Limited Vanessa Dudley, Richard Harding, Sarah-Jane Wild, Brett Wilson, Michael Boggs (R), David Hancock (R), Paul Absell 1 TOWER Insurance (Fiji) Limited Vanessa Dudley, Richard Harding, Sarah-Jane Wild, Brett Wilson, Michael Boggs (R), David Hancock (R), Paul Absell 1 TOWER Insurance (Cook Islands) Limited Vanessa Dudley, Richard Harding, Brett Wilson, Michael Boggs (R), David Hancock (R), Mark Savage 2 TOWER Insurance (PNG) Limited Southern Cross Marine Limited National Pacific Insurance Limited Vanessa Dudley, Jeremy Fergusson, Richard Harding, Brett Wilson, Michael Boggs (R), Debbie Eyre (R), Colin Gilson (R), David Hancock (R), Mark Savage 2, Paul Absell 3 Vanessa Dudley, Jeremy Fergusson, Richard Harding, Brett Wilson, Michael Boggs (R), Debbie Eyre (R), Colin Gilson (R), David Hancock (R), Mark Savage 2, Paul Absell 3 Vanessa Dudley, Alden Godinet, Richard Harding, Rodney Reid, Brett Wilson, Michael Boggs (R), David Hancock (R), Darryl Williamson (R) National Pacific Insurance (Tonga) Limited Vanessa Dudley, Alden Godinet, Richard Harding, Rodney Reid, Brett Wilson, Michael Boggs (R), David Hancock (R), Darryl Williamson (R) TOWER Insurance (Vanuatu) Limited Vanessa Dudley, David Hancock, Richard Harding, Mike Petrie, Brett Wilson 1. Paul Absell resigned as director of National Insurance Company (Holdings) Limited, TOWER Insurance (Fiji) Limited and Southern Pacific Insurance Company (Fiji) Limited on 27 October 2015. 2. Mark Savage resigned as director of TOWER Insurance (Cook Islands) Limited, Southern Cross Marine Limited and TOWER Insurance (PNG) Limited on 16 October 2015. 3. Paul Absell resigned his directorships of TOWER Insurance (PNG) Limited and Southern Cross Marine Limited on 11 December 2015. 63 No employee appointed as a director of a subsidiary receives Principal shareholders (as at 20 November 2015) any remuneration in their role as a director. The number of employees who receive remuneration of more than $100,000 is included in the remuneration table on page 61. Auditor fees paid on behalf of TOWER and its subsidiaries are disclosed in the financial statements. NAME The names and holdings of the 20 largest registered TOWER shareholders as at 20 November 2015 were: TOTAL ORDINARY SHARES Shareholder and exchange disclosures Shareholder analysis TOWER’s shares are quoted on both the NZSX and ASX. As at 20 November 2015, 6,256 TOWER shareholders held less than A$500 of TOWER shares (ie less than a marketable parcel as defined in the ASX Listing Rules), holding a total of 1,345,975 TOWER shares. Total voting securities As at 20 November 2015, TOWER had 169,983,470 ordinary shares held by 28,247 holders. TOWER’s ordinary shares each carry a right to vote on any resolution on a poll at a meeting of shareholders. Holders of ordinary shares may vote at a meeting in person, or by proxy, representative or attorney. Voting may be conducted by a show of hands or a poll. The address and telephone number of each office at which a register of TOWER securities is kept is set out in the directory at the back of this Annual Report. 1 2 3 4 5 6 7 8 BNP Paribas Nominees (NZ) Limited 13,235,816 Accident Compensation Corporation 11,250,392 Citibank Nominees (New Zealand) Limited 10,887,918 Guardian Nominees No 2 A/C FNZ Custodians Limited 9,718,851 7,189,874 BNP Paribas Nominees (NZ) Limited 6,513,700 National Nominees Limited 6,398,503 New Zealand Superannuation Fund Nominees Limited 5,764,245 9 JP Morgan Nominees Australia Limited 5,464,233 10 RBC Investor Services Australia Nominees Pty Limited 4,000,000 11 12 13 14 BT NZ Unit Trust Nominees Limited 3,462,403 BNP Paribas Nominees (NZ) Limited BNP Paribas Nominees Pty Limited 3,221,897 3,215,123 JP Morgan Chase Bank NA NZ Branch 3,179,582 15 National Nominees New Zealand Limited 2,636,668 16 Citicorp Nominees Pty Limited 2,354,622 17 HSBC Nominees (New Zealand) Limited A/C State Street 18 JBWere (NZ) Nominees Limited 2,083,601 1,617,008 19 HSBC Nominees (New Zealand) Limited 1,519,873 20 Investment Custodial Services Limited 1,399,254 Substantial product holders (as at 20 November 2015) TOWER Limited shareholder statistics (as at 20 November 2015) % 7.78 6.61 6.40 5.71 4.22 3.83 3.76 3.39 3.21 2.35 2.03 1.89 1.89 1.87 1.55 1.38 1.22 0.95 0.89 0.82 HOLDING RANGE 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over HOLDER COUNT HOLDER COUNT % 21,313 5,076 902 902 54 75.45 17.97 3.19 3.19 0.19 HOLDING QUANTITY (ORDINARY SHARES) HOLDING QUANTITY % 8,835,036 10,505,294 6,586,888 22,537,605 121,518,647 5.2 6.18 3.88 13.26 71.49 Total 28,247 99.99 169,983,470 100.00 The names and holdings of TOWER’s substantial product holders based on notices filed with TOWER under the Securities Markets Act 1988 and the Financial Markets Conduct Act 2013 as at 20 November 2015 were: NAME Devon Funds Management Limited Salt Funds Management Limited Westpac Banking Corporation AMP Capital Investors (NZ) Limited Accident Compensation Corporation IOOF Holdings TOTAL ORDINARY SHARES 1 24,579,604 18,698,751 15,004,226 14,037,959 12,004,388 8,893,090 1. Total ordinary shares held by the substantial product holder is the number of shares disclosed in the latest Substantial Product Holder notice filed with TOWER. 64 TOWER Limited annual report 2015 Other matters Limits on acquisition of securities under New Zealand law TOWER undertook to the ASX, at the time it granted TOWER a full listing (July 2002), to include the following information in its annual report. Except for the limitations detailed below, TOWER securities are freely transferable under New Zealand law. The New Zealand Takeovers’ Code imposes a general rule by which an acquisition of more than 20% of the voting rights in TOWER or an increase of an existing holding to 20% or more can only occur in certain permitted ways. These include a full or partial takeover offer in accordance with the Takeovers Code, an acquisition or an allotment approved by an ordinary resolution of shareholders, a creeping acquisition (in defined circumstances) and a compulsory acquisition once a shareholder owns or controls 90% or more of the voting rights in TOWER. The New Zealand Overseas Investment Act and related regulations determine certain investments in New Zealand by overseas persons. Generally the Overseas Investment Office’s consent is required if an ‘overseas person’ acquires TOWER shares or an interest in TOWER shares of 25% or more of the shares on issue or, if the overseas person already holds 25% or more, the acquisition increases that holding. The New Zealand Commerce Act is likely to prevent a person from acquiring TOWER shares if the acquisition would, or would be likely to, substantially lessen competition in a market. Corporations Act 2001 (Australia) TOWER is not subject to Chapters 6, 6A, 6B or 6C of the Corporations Act 2001 (Australia) dealing with the acquisition of shares (such as substantial holdings and takeovers). Waivers There were no applications to NZX or ASX for any waivers in the financial year ending 30 September 2015. The Annual Report is signed on behalf of the Board by Michael Stiassny Graham Stuart Chairman Director 65 66 TOWER Limited annual report 2015 67 68 TOWER Limited annual report 2015 TOWER Directory Enquiries For customer enquiries, call TOWER on 0800 808 808 or visit tower.co.nz For investor enquiries: Telephone: +64 9 369 2000 Email: investor.relations@tower.co.nz Website: tower.co.nz Board of Directors Michael Stiassny (Chairman) Rebecca Dee-Bradbury David Hancock Warren Lee Steve Smith Graham Stuart Chief Executive Officer Richard Harding Chief Financial Officer and Company Secretarial Brett Wilson Executive Leadership Team Richard Harding (CEO) Brett Wilson (CFO) Vanessa Dudley Faye Luxton Glenys Talivai Glenn Vade Registered Office New Zealand Level 14 TOWER Centre 45 Queen Street PO Box 90347 Auckland Telephone: +64 9 369 2000 Facsimile: +64 9 369 2160 Australia C/- PricewaterhouseCoopers Nominees (N.S.W.) Pty Ltd PricewaterhouseCoopers Darling Park Tower 2 Level 1 201 Sussex Street Sydney NSW 2000 Australia Auditor PricewaterhouseCoopers Banker Westpac New Zealand Limited Solicitor DLA Piper New Zealand Company numbers TOWER Limited (Incorporated in New Zealand) NZ Incorporation 979635 NZBN 9429 0374 84576 ARBN 088 481 234 Stock exchanges The Company’s ordinary shares are listed on the NZSX and the ASX. Registrar New Zealand Computershare Investor Services Limited Level 2, 159 Hurstmere Road, Takapuna, Auckland Private Bag 92119 Auckland 1142 Freephone within New Zealand: 0800 222 065 Telephone New Zealand: +64 9 488 8777 Facsimile New Zealand: +64 9 488 8787 Australia (TOWER Limited Shareholders) Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford VIC 3067 GPO Box 3329 Melbourne Vic 3001 Freephone within Australia: 1800 501 366 Telephone Australia: +61 3 9415 4083 Facsimile Australia: +61 3 9473 2500 Email: enquiry@computershare.co.nz Website: www.investorcentre.com/nz You can also manage your holdings electronically by using Computershare’s secure website investorcentre.com/nz This website enables holders to view balances, change addresses, view payment and tax information and update payment instructions and report options. TOWER recommends shareholders elect to have any payments direct credited to their nominated bank account in New Zealand or Australia to minimise the risk of fraud and misplacement of cheques. Please quote your CSN number or shareholder number when contacting Computershare. TOWER Limited Investor Relations Registrar Telephone: +64 9 369 2000 Email: investor.relations@tower.co.nz Website: tower.co.nz Computershare Investor Services Limited Freephone within New Zealand: 0800 222 065 Telephone New Zealand: +64 9 488 8777 Freephone within Australia: 1800 501 366 Telephone Australia: +61 3 9415 4083 Email: enquiry@computershare.co.nz Website: investorcentre.com/nz