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2023 ReportA confident future 2016 Tower Limited Annual Report Highlights and achievements Launched new, straight- forward product packages Simple and easy to understand insurance products that make selecting and buying insurance easy for our customers Re-entered the digital marketplace Launched Tower Online and relaunched TradeMe Insurance in 2016, setting us up for growth in 2017 Claims costs contained Claims management initiatives have driven reduced claims costs in the second half Reversed trend on management expenses We have turned the tide on management expenses with overall expenses falling, allowing us to reinvest in our future Returned to policy growth A focus on retaining our customers has delivered positive policy growth in the core New Zealand book Reported net loss after tax $ 21.5m Underlying net profit after tax 1 20.1m $ Gross written premium 303.2m $ Pacific net profit after tax 5.5m $ 1. Underlying net profit excludes the impact of Canterbury earthquakes, impairment of intangibles and loss of foreign tax credits Chair’s report on behalf of the directors We have repositioned Tower for a more certain, brighter future Michael Stiassny Chair 2 Tower Limited annual report 2016 Tower’s underlying full year result has shown that our core New Zealand business is strong, the Pacific business has solid potential and that initiatives put in place to improve performance are beginning to take effect. Tower has reported a full year loss of $21.5 million, driven by an impairment of technology assets of $14.1 million and additional provisions for Canterbury of $25.3 million after tax. Tower reported an underlying profit of $20.11 million for the full year and experienced marked improvement in its core metrics in the second half with underlying profit increasing from $7.6 million in the first half to $12.6 million in the second half. It has been pleasing to see Tower return to policy growth in the core New Zealand book as a result of a concerted focus on retention, with Tower Direct retention rates improving by 2.6% in the year. The trend on management expenses has also been reversed. By targeting non-personnel costs and improving vendor control, management expenses fell $2.0 million to $99.9 million, which, importantly, has allowed for investment back into the business. Supply chain initiatives instituted in the first half have seen claims cost growth reduced in the second half, despite an industry-wide claims inflation environment. Tower’s full year claims costs grew by 7.2% to $123.9 million, considerably less than the industry inflation figure of 11%.2 These green shoots give confidence that Tower’s strategy to become a high performing General Insurer is on track and beginning to bear fruit. 1. Underlying profit excludes the impact of Canterbury earthquakes, foreign tax credits and IT impairment 2. ICNZ statistics – personal lines gross claims growth September 2015 – September 2016 We have resolved to draw a line under the legacy of the Canterbury earthquakes to benefit policyholders and shareholders’ interests, enhance the prospects of our strong underlying business and enable Tower to accelerate its journey to become a high performing General Insurer However, the full year result makes it clear that the legacy of the Canterbury earthquakes continues to overshadow fundamental improvement in Tower’s underlying business. We have therefore resolved to draw a line under the legacy of the Canterbury earthquakes to benefit policyholders and shareholders’ interests, enhance the prospects of our strong underlying business and enable Tower to accelerate its journey to become a high performing General Insurer. Our intention is to create a separate company, RunOff Co, dedicated to Canterbury claims’ resolution and maximising disputed recoveries. The Board is currently working through the separation process and anticipates bringing a proposal to shareholders for approval at the Annual Shareholder Meeting in March 2017. As a result, the full year dividend has been suspended to facilitate structural separation. This would be a short term measure as the new Tower will be a successful and profitable business, capable of paying dividends at a rate comparable with industry peers once separation is complete. In closing, my fellow Directors join with me in acknowledging and thanking former Director, Rebecca Dee-Bradbury who left Tower’s Board earlier this year. We also wish to thank Richard Harding and the entire Tower team for their drive and determination to see Tower become a high performing General Insurer. I would also like to thank our customers, shareholders and business partners for their continued loyalty and support. Michael Stiassny Chair 3 Update from the CEO Our focus on improving Tower’s underlying business over the past 12 months has been relentless, and pleasingly, delivered positive results in the second half of 2016. We have made significant inroads into a large ‘to do’ list and achieved a huge amount that I believe will set us up for a strong future as a market challenger. We’ve concentrated on getting the fundamentals right and in doing so, have succeeded in moving the needle. One of the most significant results has been reversing the trend on management expenses. The savings seen here are just the start, but prove we are on the right track. This is particularly true given that we are not only managing to reduce expenses, we’re doing so while still investing in transforming the business. Save to invest to improve is the mantra. We have also seen solid improvements in the retention of our customers where our focus has returned Tower’s core New Zealand business to positive policy growth and have begun revamping our claims processes and supplier networks early in the year. In addition to these three very visible achievements, we have repriced our product portfolio, appointed a highly capable management team, re-entered the digital market with the launch of Tower Online, and introduced a range of simple, straightforward product packages that make selecting and buying insurance policies easy. This progress will help us build a strong platform for next year and beyond and it is pleasing to see the clear shift in momentum in the second half as our initiatives have started to bite. Tower has been part of New Zealand life for almost 150 years, offering Kiwis another option for insurance and peace of mind. Our ambition to be a challenger brand means doing things differently. Every part of our business is starting to change and challenge the norms and our strategy supports this. From the progression of our technology replacement programme, to the realignment of processes, the way we are working is different – agile, robust and importantly, enjoyable. We are confident in our plan and the foundation of our strong underlying business means we are well positioned to continue improving what we do over the coming year. I’m looking forward to continuing to lead the business through this change, realising Tower’s significant potential and delivering strong shareholder returns. Richard Harding Chief Executive Officer Amplifying and accelerating underlying business strength Richard Harding Chief Executive Officer 4 Tower Limited annual report 2016 Business review and outlook Tower’s reported loss of $21.5 million, compares to a $6.6 million loss in the 2015 financial year (FY15). This reflects a $25.3 million impact from movement in Canterbury provisions and a $14.1 million impact from intangible asset impairment announced in the first half. Underlying profit was $20.1 million, compared to $30.3 million in FY15.1 This drop was driven primarily by the lower investment income ($5.6 million reduction) and increased claims costs in line with industry trends. Underlying profit increased by 66% in the second half, with second half year underlying profit of $12.6 million versus first half year underlying profit of $7.6 million demonstrating a trend of core business improvement. Tower’s claims costs rose 7.2% to $123.9 million, significantly lower than the industry wide figure of 11% due to the success of initiatives launched in the first half of the year. A sharp focus on non-personnel costs saw the trend on management and sales expenses reverse. Expenses fell $2.0 million to $99.9 million. These savings were achieved while at the same time Tower continued to reinvest in the business to drive future growth. 1. FY15 underlying profit restated from $28.2m to $30.3m due to the classification of foreign tax credits as one off items FINANCIAL PERFORMANCE $ MILLION FY16 FY15 MOVEMENT % Gross written premium Gross earned premium Reinsurance costs Net earned premium Net incurred claims Large events claims 303.2 305.6 302.9 304.7 (49.1) (51.9) 253.8 252.8 (123.9) (115.6) (0.8%) (0.6%) (5.5%) 0.4% 7.2% (3.8) (4.9) (23.7%) Management and sales expenses (99.9) (101.9) Depreciation and amortisation Underwriting profit Investment revenue Underlying profit before tax Income tax expense Underlying profit after tax (6.4) 19.8 8.5 28.3 (4.0) 26.3 14.0 40.3 (8.2) (10.0) 20.1 30.31 (1.9%) 160% (24.6%) (39.6%) (29.8%) (18.5%) (33.6%) Canterbury impact (25.3) (36.2) Impairment of intangibles Profit on discontinued businesses Foreign tax credits written off2 Reported loss Underlying EPS (c)3 DPS (c) Key ratios Claims ratio Expense ratio Combined ratio (14.1) – (2.2) (21.5) 11.9 8.5 – 1.4 (2.1) (6.6) 17.8 16.0 50.3% 47.7% 41.9% 41.9% 92.2% 89.6% Source: Tower Limited FY16 Results Announcement Presentation; 29 November 2016. 1. FY15 underlying profit restated from $28.2m to $30.3m due to the classification of foreign tax credits as one off items 2. Tower has lost the ability to use foreign tax credits due to the New Zealand business being in a loss making position following Canterbury provision increases 3. Reflects underlying profit rather than reported profit 5 Gross Written Premium (GWP) was slightly down year on year. FOCUS ON COSTS Pacific GWP fell by $1.2 million due to a tightening position on risk in Papua New Guinea (PNG) and the Solomon Islands. New Zealand GWP fell by $1.2 million with the continued run off of the ANZ portfolio offset by growth in the core Tower book. Tower returned to positive policy growth in the core New Zealand book in the 2016 financial year (FY16). This will assist to drive GWP growth into the 2017 financial year (FY17). Reduced reinsurance costs reflect the soft underlying reinsurance market, enabling Tower to increase coverage. Investment revenue fell from $14.0 million in FY15 to $8.5 million in FY16 as a result of lower interest rates and lower cash balances following Canterbury claims payments and the on market share buy back. The underlying combined ratio1 grew from 89.6% to 92.2% due to increased claims costs. The expense ratio2 remained flat at 41.9% with the reduction in management expenses offset by the increase in depreciation. Operational performance A FOCUS ON CLAIMS The insurance industry is currently facing inflationary pressure in the claims line from a range of factors including ongoing building inflation, more (and larger) cars on the road, inflation in the motor parts market and exchange rates. As a result, Tower’s claims costs grew from $115.6 million to $123.9 million in FY16. Tower has implemented a broad-based claims cost savings programme which is successfully addressing escalating claims costs. Initiatives include: • New claims handling processes • Developing a preferred supplier network for motor • Updating assessment and supply chain processes for house and contents; and • Updating pricing and policies. These claims initiatives resulted in a reduction in claims costs in the second half. Tower’s full year claims costs rose by 7.2%, considerably less than the industry growth of 11%. 6 Tower Limited annual report 2016 Cost-out initiatives have been pursued vigorously over the year and are already having the desired effect. Tower has successfully reversed the trend of increasing expenses through its sharp focus on getting the fundamentals right and reducing non-personnel related costs. Importantly, Tower’s ability to reduce expenses has allowed investment for the future of the business. Tower achieved overall savings of approximately $5 million in its core underlying expenses while simultaneously increasing investment in those areas essential to the future success of the business including digital capability, updated pricing, new products, and a general capability uplift across the organisation. Medium term change initiatives – in particular IT simplification and product rationalisation – will greatly accelerate expense base improvement. RETURN TO POSITIVE POLICY GROWTH Retention has been at the heart of one of Tower’s most significant results this year – the return to positive policy growth on the core New Zealand book. From losing 5,442 policies in FY15, Tower has added 2,509 policies to the core book in FY16. Growing our core policy base is critical to delivering long term profit growth. The improvement in FY16 has been largely driven by retention initiatives. Retention rates increased 2.6% over FY15 from 81.6% to 84.2%. Improved digital capability – and using that capability to leverage key partnerships – will enable Tower to accelerate its policy growth in the short to medium term. 1. Combined ratio is the sum of claims costs plus management and sales expenses divided by net earned premium 2. Expense ratio is management and sales expenses divided by net earned premium DISCIPLINED APPROACH TO THE PACIFIC Tower is confident in the underlying strength and untapped growth potential of its Pacific business. As an example, Tower has received around 300 new claims, a significant number of which are new overcap claims from the EQC with a total value of $22 million; 150 of these have been received in the past six months alone. Insurers are not seeing Pacific GWP reached $59.3 million in FY16 which reflected a any slow down in new overcap claims from EQC. drop on FY15. Largely as a consequence of delays and frustration, a litigation Net Profit After Tax (NPAT) of $5.5 million in FY16 reflects the industry has arisen around the Canterbury tail. Tower is impact of Cyclone Winston earlier in the year, costs associated currently facing or expecting litigation on up to 100 claims. with the launch of Tower in Vanuatu and one off losses in PNG. Our provisions include an allowance for further EQC overcap Tower is tightening its focus to ensure the appropriate claims and litigation. underwriting frameworks are in place to profitably execute on those opportunities. CAPITAL POSITION Over the course of FY16, gross claims costs have increased by $77.6 million to reach $870 million. This has resulted in a net impact on Tower of $35.1 million pre-tax, or $25.3 million post tax. This continued cost escalation is primarily driven by EQC At 30 September 2016, the Tower Insurance Group had a and litigation claims. solvency ratio of 210% and excess capital of $23.8 million above regulatory requirements. Since Tower announced an increase in provisions on 8 September, a further $7.0 million post tax ($9.7 million pre tax) Tower Insurance Limited (the New Zealand licensed entity), has been added. At the recommendation of Tower’s actuary, had a solvency ratio of 214% and excess capital of $14.3 million Deloitte, risk margins were increased reflecting the continued above regulatory requirements. uncertainty. In addition to this, Tower Limited held $12.2 million of cash that As at 1 October 2015, Tower had 703 property claims can be used for solvency capital if required and retains access remaining. In the intervening 12 months to 30 September 2016, to a $50 million undrawn liquidity facility. 534 of those claims were closed. However, in the interim 297 Creating certainty with Canterbury CANTERBURY UPDATE Canterbury remains a complex and difficult situation for all insurers. The situation continues to evolve with the Earthquake Commission (EQC), and six years on, insurers still do not have clarity on the number and value of the claims that remain in Canterbury. completely new claims were received, and 98 claims have been reopened. The new claims are a result of the EQC claims going overcap or additional hard landscaping and accommodation claims opening as the EQC finalises undercap properties. Of the 564 remaining properties, Tower’s particular focus is on 311 which are the most complex and challenging to resolve. Dealing with these claims requires the singular focus of a specially skilled management team. 7 UNLOCKING TOWER’S POTENTIAL Tower has strong underlying New Zealand and Pacific businesses. It will continue to be guided by the three strategic imperatives already well established in the business. HIGH PERFOMANCE CUSTOMER SERVICE CULTURE ACCURATE PRICING OF RISK OPERATIONAL EXCELLENCE CULTURE AND CAPABILITY MEDIUM TERM TARGETS 4-6% GWP GROWTH <35% EXPENSE RATIO 12-14% ROE1 THROUGH THE CYCLE These are now underpinned by Tower’s improved capability and a culture that champions agility, flexibility and the mind- set required of a challenger brand. By successfully executing this strategy, Tower believes it can deliver the following medium term targets: • GWP growth of 4-6% per annum, through a combination of digital, retention and new product initiatives. • An expense ratio below 35%, on the back of IT simplification, product rationalisation and a continued focus on costs. • Consistent ROE1 of 12-14% through the cycle, delivered through growth, expense control and underwriting. 1. ROE is Return on Equity. A strong underlying business and the right plan in place 8 Tower Limited annual report 2016 DELIVERING SIMPLE AND EASY PRODUCTS AND SERVICE LEVERAGING DIGITAL PARTNERSHIPS With improved digital capabilities, Tower will have a far Digital delivery is essential to the future growth and prosperity greater ability to grow and leverage partnerships. of Tower. The focus is on making it as simple and easy as possible for customers to do business with Tower. Tower has access to over 4 million customers through various partnerships, the largest of which are the newly Increasingly, customers research insurance products online formed partnerships with Airpoints with 1.8 million members, and want to be able to compare prices. Due to Tower’s limited and TradeMe with 1.4 million. These customer bases are ability to offer customers an online quote, an increasing share diverse and feature limited cross over with Tower’s existing of new business policy sales have been to existing customers. partnerships. Tower needs to be able to offer customers their preferred Digital capability will allow Tower to actively target niche communication channel at their preferred time. customer segments with bespoke offers using data held by On 5 October 2016, Tower launched an online offer called its partners. Cover4Car. This was a return to active online acquisition On 11 November 2016, Tower went live with the revamped following a two-year absence. This has opened up an entirely TradeMe Insurance platform. This stable new platform new customer base, and since launch has resulted in a 10% provides a significant increase in flexibility to optimise the increase in new business motor sales, largely from new site and adjust to customer demands. customers coming to Tower. Tower has recently extended this offer to house and contents products. With improved digital capability, Tower can add to those 4 million potential customers by attracting new partners at low From an operational perspective, digital is essential to drive cost using the Tower online solution. efficiencies in the Tower business. Transaction costs fall dramatically as more services move online. DELIVERING UNDERWRITING EXCELLENCE Tower aims to have over 50% of all transactions online within The focus on achieving underwriting excellence is a the next three to five years. Full self-service and an omni constant for Tower. channel experience will be possible with a new IT platform. Underwriting excellence results from targeting and retaining the right customers with compelling and appropriately priced products. Tower is introducing the concept of risk based pricing, whereby profitable market segments are actively targeted to take market share off the incumbents. Underwriting excellence is the capability set that will enable Tower to achieve this. 9 Tower made a number of important steps this year toward Tower has mapped the existing product set to these new achieving its underwriting excellence goal: products and will be able to complete the rationalisation • Launching new “simple and easy” products process with a new IT platform. • Identifying problem wording in products and removing them from the on sale policies • Repricing a number of portfolios, some of which had not been repriced for years • Investing in capability; and • Building a new data store to enable accurate portfolio monitoring The longer term key enabler to achieve underwriting excellence will be a new IT platform to improve access to information, deliver a more granular rating engine, improve flexibility and allow the integration of external data sources into pricing models. SIMPLE AND EASY PRODUCTS Tower currently has 444 products in the New Zealand business alone. This complexity makes it hard for both staff and customers, consequently impacting sales. IT SIMPLIFICATION The benefits of the IT simplification programme cannot be overstated: there are a raft of operational efficiencies to be derived from moving from four core IT systems with dozens of ancillary systems, to a single core system with a small number of critical interfaces. Tower has selected EIS as its preferred partner to conduct detailed scoping over the next four months. This involves working with the Tower team to establish a firm implementation timeline and clear project deliverables. This phase is expected to end in March 2017, at which point Tower will confirm its preferred platform – and expected cost – and seek approval from the Board. The new build is likely to take between six and twelve months, after which new business will be live on the new system and the migration of the legacy book can begin. In addition, Tower’s claims teams need to be experts in DEVELOPING A CHALLENGER CULTURE individual product wordings to appropriately assess how to treat claims. Tower has a proud heritage, and increasingly needs to look, feel and act like a challenger brand. As the Tower business is Tower’s recent launch of a simple, straightforward range of repositioned, it will have an agility and ethos that reflects the products building on packages is an exciting first step towards sort of culture that underpins a high performance enterprise: a smaller manageable set of products. dynamic, constructive and eager. The new products have: • Removed complexity; • Improved understanding and introduced targeted wording to address claims leakage; and • Simplified selection and buying of insurance policies for customers. The concept of packaged products is new to New Zealand: they offer clear choices and simplify complexity. Customers Tower has continued to build its insurance capability at both executive and senior leadership team level. These specialised skills are not only crucial to the successful implementation of Tower’s strategy, but also to provide the leadership necessary to deliver high performance. To complete this journey Tower has: • Started new leadership development programmes; • Developed and rolled out new competencies that align to strategic imperatives; and can choose the level and value of cover they want from a • Refreshed the Tower Values to align with the desired three-tiered structure to suit their needs. challenger culture. 10 Tower Limited annual report 2016 Tower outlook The challenges that face the general insurance industry remain – high claims necessitating pricing reviews, a low interest rate environment, increasing digital competition and the existing EQC framework. Separation could allow Tower to enjoy clear air to continue what it has started. In the short term, ongoing incremental improvement in digital capability to drive GWP growth, reducing levels of management expense, better control of claims costs and pricing improvements are anticipated. Tower believes successful implementation of its However, without the legacy of Canterbury, these strategic imperatives will deliver an improved become business as usual challenges that can be financial trajectory. effectively mitigated through Tower’s simple and easy strategy. 4-6% GWP GROWTH 12-14% ROE THROUGH THE CYCLE OVER THE NEXT THREE TO FIVE YEARS TOWER IS AIMING TO DELIVER: <35% EXPENSE RATIO 11 Board of Directors Michael Stiassny 12 Tower Limited annual report 2016 David Hancock Warren Lee Steve Smith Graham Stuart Michael Stiassny Chair LLB, BCom, FCA, CFInstD Non-Executive Director Independent Warren Lee BCom, CA Non-Executive Director Independent Graham Stuart BCom (Hons), MS, FCA Non-Executive Director Independent Appointed Director: 12 October 2012 Appointed Director: 26 May 2015 Appointed Director: 24 May 2012 Michael is a Fellow of Chartered Warren has extensive experience With over 30 years of senior management Accountants Australia and New Zealand and a long record of leadership in the experience, Graham has held senior and senior partner of KordaMentha, international insurance industry, including leadership roles with several major based in Auckland, which specialises in 15 years at AXA in senior management corporates, in New Zealand and overseas, financial consulting work. He has both positions within the company’s Australian the latest being the Sealord Group of a Commerce and Law degree from the and Asian businesses. Warren’s two which he was Chief Executive Officer for University of Auckland. He is currently most recent positions were Chief 7 years. Prior to that he held a number of Chairman of Vector Limited, Chairman Executive Officer of the Victorian Funds diverse leadership roles including CEO of Ngati Whatua Orakei Whai Rawa Management Corporation and Chief of Mainland Products, Managing Director Limited, and is a director of a number of Executive Officer, Australia and New of Lion Nathan International, and Chief other companies. Michael is President Zealand for AXA Asia Pacific Holdings Financial Officer and Director of Strategy and a Chartered Fellow of the Institute of Limited. He has a Bachelor of Commerce for the Fonterra Co-operative Group. Directors in New Zealand (Inc). from the University of Melbourne and Graham has a Bachelor of Commerce is a member of Chartered Accountants (First Class Hons) from the University Australia and New Zealand. of Otago, a Master of Science from Michael resides in Auckland, New Zealand. David Hancock BBus, GAICD Non-Executive Director Not Independent Warren resides in Melbourne, Australia. Steve Smith BCom, CA, Dip Bus (Finance), CFInstD Non-Executive Director Appointed Director: 16 November 2012 Independent David was Chief Executive Officer of Tower Appointed Director: 24 May 2012 from July 2013 to August 2015. David Steve has been a professional Director has over 25 years of broad experience since 2004. He has over 35 years’ in financial services. This experience business experience, including being a includes being a former Executive General specialist corporate finance partner at a Manager at the Commonwealth Bank of leading New Zealand accountancy firm. Australia, with a variety of roles including He has a Bachelor of Commerce and capital markets, fixed income and equities. Diploma in Business from the University He held several board positions at the of Auckland, is a member of Chartered bank including Commonwealth Securities Accountants Australia and New Zealand (ComSec), as well as external professional and a Chartered Fellow of the Institute board positions. Prior to that he served of Directors in New Zealand (Inc). Steve in roles at JPMorgan where he was a is Chairman of Hellaby Holdings Ltd and Managing Director with responsibilities Pascaro Investments Ltd, and a Director in New Zealand, Australia and Asia of Fulton Hogan Ltd, Rimu S.A. (Chile), and across various operations. David was the the National Foundation for the Deaf Inc. Steve resides in Auckland, New Zealand. 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. Massachusetts Institute of Technology and is a Fellow of 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 Contents Financial statements Independent Auditors’ Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Corporate governance and disclosures 14 15 17 18 19 20 21 47 Notes 1. Summary of general accounting policies 22 13. Intangible assets 12. Receivables 30 25. Financial instruments 12A. Reinsurance contract in dispute 31 26. Risk management 39 41 45 45 45 27. Capital risk management 28. Operating leases 29. Subsidiaries 30. Transactions with related parties 45 31. Contingent liabilities 32. Capital commitments 33. Subsequent events 34. Discontinued operations 46 46 46 46 31 33 33 34 34 35 35 35 35 36 36 36 2. Impact of amendments to NZ IFRS 23 14. Deferred acquisition costs 3. Premium revenue 4. Investment revenue 5. Net claims expense 6. Canterbury earthquakes 24 24 24 25 15. Property, plant and equipment 16. Payables 17. Provisions 18. Insurance liabilities 7. Management and sales expenses 26 19. Distributions to shareholders 8. Tax 9. Segmental reporting 10. Cash and cash equivalents 27 29 30 11. Reconciliation of loss for the period to net cash flows from operating activities 30 20. Contributed equity 21. Reserves 22. Net assets per share 23. Earnings per share 24. Insurance business disclosure Tower Limited Financial statements For the year ended 30 September 2016 14 Tower Limited annual report 2016 Tower Limited Independent Auditors’ Report For the year ended 30 September 2016 Independent Auditors’ Report Independent Auditors’ Report to the shareholders of TOWER Limited to the shareholders of Tower Limited Report on the Consolidated 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, statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and the notes to the financial statements that include a summary of significant accounting policies and other explanatory information for both the Company and the Group. The Group comprises the Company and the entities it controlled at 30 September 2013 or from time to time during the financial year. We audited the consolidated financial statements of Tower Limited (“the Company”) on pages 17 to 46, which comprise the consolidated balance sheet as at 30 September 2016 and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and the notes to the financial statements that include a summary of general accounting policies and other explanatory information for the Group. The Group comprises the Company and the entities it controlled at 30 September 2016 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 Group 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. Our firm carries out other services for the Group in the areas of assurance and advisory. The provision of these other services has not impaired our independence as auditors of the Group. In We have no relationship with, or interests in, TOWER Limited or any of its subsidiaries other addition, certain partners and employees of our firm may deal with Tower Limited and the Group on normal terms than in our capacities as auditors and providers of other assurance, taxation and advisory within the ordinary course of trading activities of Tower Limited and the Group. These matters have not impaired our services. These services have not impaired our independence as auditors of the Company and independence. We have no other interests in Tower Limited or the Group. 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 The above statement should be read in conjunction with the accompanying notes. Independent Auditors’ Report Tower Limited Opinion In our opinion, the consolidated financial statements on pages 17 to 46 present fairly, in all material respects, the financial position of the Group as at 30 September 2016 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 29 November 2016 Auckland 16 Tower Limited annual report 2016 Tower Limited Consolidated Income Statement For the year ended 30 September 2016 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 Impairment expense Total expenses Loss attributed to shareholders before tax Tax benefit attributed to shareholders’ profits Loss for the year from continuing operations Profit from disposal of subsidiaries Profit for the year from discontinued operations Loss for the year Loss attributed to: Shareholders Non-controlling interest Basic and diluted (loss) per share for continuing operations Basic and diluted earnings per share for discontinued operations NOTE 2016 $000 2015 $000 3 302,940 304,730 (49,106) (56,765) 253,834 247,965 4 8,998 3,413 14,734 2,984 266,245 265,683 240,138 252,244 (54,526) (64,907) 185,612 187,337 87,410 88,276 19,649 – 292,671 275,613 5 7 13 (26,426) (9,930) 8A 4,911 1,898 (21,515) (8,032) 34 – – 1,396 1,396 (21,515) (6,636) (22,328) (6,982) 813 346 (21,515) (6,636) CENTS CENTS (13.21) – (4.79) 0.80 23 23 17 The above statement should be read in conjunction with the accompanying notes. Tower Limited Consolidated Statement of Comprehensive Income For the year ended 30 September 2016 Loss for the year Other comprehensive income Currency translation differences Gain on asset revaluation Deferred income tax relating to asset revaluation Other comprehensive (loss) income net of tax Total comprehensive loss for the year Total comprehensive loss attributed to: Shareholders Non-controlling interest Total comprehensive loss attributed to equity arises from: Continuing operations Discontinued operations NOTE 2016 $000 2015 $000 (21,515) (6,636) 15 8D (5,910) 3,518 181 (23) 129 (18) (5,752) 3,629 (27,267) (3,007) (27,404) 137 (4,095) 1,088 (27,267) (3,007) (27,267) (4,403) – 1,396 (27,267) (3,007) 18 Tower Limited annual report 2016 The above statement should be read in conjunction with the accompanying notes. Tower Limited Consolidated Balance Sheet As at 30 September 2016 Assets Cash and cash equivalents Receivables Investments Derivative financial assets Deferred acquisition costs Current tax assets Property, plant and equipment Intangible assets Deferred tax assets Total assets Liabilities Payables Current tax liabilities Provisions Derivative financial liabilities Insurance liabilities Deferred tax liabilities Total liabilities Net assets Equity Contributed equity Accumulated (losses) profit Reserves Total equity attributed to shareholders Non-controlling interest Total equity The financial statements were approved for issue by the Board on 29 November 2016. Michael P Stiassny Chairman Graham R Stuart Director NOTE 2016 $000 2015 $000 10 12 25 25 14 8B 15 13 8D 16 8C 17 25 18 8D 92,228 125,113 254,685 257,851 188,522 213,593 57 19,973 13,168 9,511 31,982 30,155 – 20,277 14,893 10,221 48,373 19,877 640,281 710,198 49,500 48,472 123 4,177 735 568 3,273 – 361,009 375,877 785 1,099 416,329 429,289 223,952 280,909 20 382,172 384,585 (42,822) 6,376 21 (116,772) (111,696) 222,578 279,265 1,374 1,644 223,952 280,909 19 The above statement should be read in conjunction with the accompanying notes. Tower Limited Consolidated Statement of Changes in Equity For the year ended 30 September 2016 ATTRIBUTED TO SHAREHOLDERS CONTRIBUTED EQUITY $000 ACCUMULATED (LOSSES) PROFIT $000 NOTE RESERVES $000 TOTAL $000 NON- CONTROLLING INTEREST $000 TOTAL EQUITY $000 YEAR ENDED 30 SEPTEMBER 2016 At the beginning of the year 384,585 6,376 (111,696) 279,265 1,644 280,909 Comprehensive income (Loss) Profit for the year Currency translation differences Gain on asset revaluation Deferred income tax relating to asset revaluation Total comprehensive loss Transactions with shareholders 15 8D – – – – – (22,328) – (22,328) 813 (21,515) – – – (5,234) (5,234) (676) (5,910) 181 (23) 181 (23) – – 181 (23) (22,328) (5,076) (27,404) 137 (27,267) Capital repayment plan 19, 20 (2,413) – Dividends paid Other 19 – – (27,024) 154 Total transactions with shareholders (2,413) (26,870) – – – – (2,413) – (2,413) (27,024) (407) (27,431) 154 – 154 (29,283) (407) (29,690) At the end of the year 382,172 (42,822) (116,772) 222,578 1,374 223,952 YEAR ENDED 30 SEPTEMBER 2015 At the beginning of the year 396,819 42,174 (114,583) 324,410 1,599 326,009 Comprehensive income (Loss) Profit for the year Currency translation differences Gain on asset revaluation 15 Deferred income tax relating to asset revaluation Total comprehensive income (loss) – – – – – (6,982) – (6,982) – – – 2,776 2,776 129 (18) 129 (18) 346 742 – – (6,636) 3,518 129 (18) (6,982) 2,887 (4,095) 1,088 (3,007) Transactions with shareholders Capital repayment plan 19, 20 (12,234) – Dividends paid Other – – (28,999) 183 Total transactions with shareholders (12,234) (28,816) – – – – (12,234) – (12,234) (28,999) (1,043) (30,042) 183 – 183 (41,050) (1,043) (42,093) At the end of the year 384,585 6,376 (111,696) 279,265 1,644 280,909 20 Tower Limited annual report 2016 The above statement should be read in conjunction with the accompanying notes. Tower Limited Consolidated Statement of Cash Flows For the year ended 30 September 2016 Cash flows from operating activities Premiums received Interest received Dividends received Net realised investment gain (loss) Fee and other income received Reinsurance received Reinsurance paid Claims paid Payments to suppliers and employees Income tax paid Net cash (outflow) inflow from operating activities Cash flows from investing activities Net proceeds from financial assets Purchase of property, plant and equipment and intangible assets Disposal of property, plant and equipment and intangible assets Net cash inflow (outflow) from investing activities Cash flows from financing activities Capital repayment Dividends paid Payment of non-controlling interest dividends 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 NOTE 2016 $000 2015 $000 295,867 308,232 10,088 14,873 9 3,251 3,413 25 (1,077) 2,984 67,935 138,499 (47,248) (57,105) (261,779) (299,642) (77,248) (84,912) (4,598) 11 (10,310) (3,940) 17,937 18,380 1,141 (9,175) (21,606) 70 1,161 9,275 (19,304) (2,413) (12,234) (27,024) (28,999) (407) (1,043) (29,844) (42,276) (30,879) (43,643) (2,006) 694 125,113 168,062 Cash and cash equivalents at the end of year 10 92,228 125,113 21 The above statement should be read in conjunction with the accompanying notes. 1. Summary of general accounting policies Entities reporting The financial statements presented are those of Tower Limited (the Company) and its subsidiaries (the Group). 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. During the periods presented, the principal activity of Tower Limited Group was the provision of general insurance. The Group predominantly operates in New Zealand with some of its operations based in the Pacific Islands region. Statutory base Tower Limited 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. Basis of preparation 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 for-profit entities. The financial statements of the Group have been prepared in accordance with the requirements of Part 7 of the Financial Markets Conduct Act 2013 and the NZX Main Board Listing Rules. The consolidated Group financial statements are presented in New Zealand dollars and rounded to the nearest thousand dollars. They have been prepared on a fair value measurement basis with any exceptions noted in the accounting policies below. 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. Foreign currency (i) Functional and presentation currencies The financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates. The consolidated Group financial statements are presented in New Zealand dollars and rounded to the nearest thousand dollars unless stated otherwise. (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 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 statements unless the items form part of a net investment in a foreign operation. In this case, exchange differences are taken to the Foreign Currency Translation Reserve and recognised in the statements of comprehensive income and the statements of changes in equity. (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 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 statements of comprehensive income and the statements of changes in equity. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and are translated at the closing rate with movements recorded through the Foreign Currency Translation Reserve in the statements of changes in equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statements. 22 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 Cash flows 2. Impact of amendments to NZ IFRS The consolidated statement of cash flows presents the net changes in cash flow for financial assets. Tower considers that knowledge of gross receipts and payments is not essential to understanding certain 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 the sales are immaterial. Comparatives Restatement of receivables and insurance liabilities The 30 September 2015 comparative information has been restated to correct the presentation of receivables and insurance liabilities, each by $43.8 million. On the balance sheet, receivables has been reduced by $43.8 million to $257.9 million and insurance liabilities has reduced by $43.8 million to $375.9 million. Total assets and total liabilities have reduced accordingly. There is no change to net assets. For further details, refer to note 6. On the basis the impact on the opening balance sheet is not deemed material for users of financial statements the opening balances have not been represented. Within note 11 Reconciliation of loss for the period to net cash flows from operating activities, the balances for ‘Decrease in receivables’ and ‘Decrease in payables’ have both been adjusted by $43.8 million. The ‘Decrease in receivables’ balance has increased $43.8 million and the ‘Decrease in payables’ has increased $43.8 million. Within note 12 Receivables, the 2015 balance for Reinsurance recoveries on outstanding claims has decreased $43.8 million, all of which has been classified as current. Within note 18 Insurance liabilities, the 2015 balance for Outstanding claims has decreased $43.8 million, all of which has been classified as current. Note 9 Segmental reporting 2015 comparative balances for Total assets and Total liabilities have decreased $43.8 million reflecting the above reclassifications. Within note 24 Insurance business disclosure, 2015 comparative amounts for gross outstanding claims and reinsurance on outstanding claims have been decreased by $43.8 million. Note 25 Financial instruments 2015 comparative balances for Trade and other receivables have been decreased by $43.8 million. This has been allocated to ‘Other non- investment related receivables’ in the credit risk concentration table of note 26B (i) and to ‘Loans and receivables’ in the maximum exposure to credit risk table of note 26B (ii). The $43.8 million has been allocated as a ‘Group 1’ receivable balance in the credit quality table of note 26B (iii). Restatement of deferred tax assets and deferred tax liabilities The 30 September 2015 comparative information has been restated to offset the presentation of deferred tax assets and deferred tax liabilities. On the balance sheet, deferred tax liabilities has been reduced by $4.9 million to $1.1 million and deferred tax assets has been reduced by $4.9 million to $19.9 million. Total assets and total liabilities have reduced accordingly. There is no change to net assets. For further details, refer to note 8. On the basis the impact on the opening balance sheet (1 October 2014) is not deemed material for users of financial statements the opening balances have not been represented. Within note 9 Segmental reporting, 2015 comparative balances for Total assets and Total liabilities have decreased $4.9 million reflecting the above reclassifications. 2A Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group 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 2016 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. – NZ IFRS 15 Revenue from Contracts with Customers is effective for periods beginning on or after 1 January 2018. The standard will provide a single source of requirements for accounting for all contracts with customers (except for some specific exceptions, such as lease contracts, insurance contracts and financial instruments) and will replace all current accounting pronouncements on revenue. New revenue disclosures are also introduced. Tower has yet to fully evaluate the impact this standard will have on the financial statements. – NZ IFRS 16 Leases is effective for periods beginning on or after 1 January 2019. The standard replaces the current guidance in NZ IAS 17. Under NZ IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Under NZ IAS 17, a lessee was required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). NZ IFRS 16 now requires a lessee to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. Tower has yet to fully evaluate the impact this standard will have on the financial statements. – NZ IFRS 9 Financial instruments is effective for periods beginning on or after 1 January 2018. The complete version of NZ IFRS 9 was issued in September 2014. It replaces the guidance in NZ IAS 39 that relates to the classification and measurement of financial instruments. NZ IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit or loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in NZ IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. NZ IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under NZ IAS 39. The Group intends to adopt NZ IFRS 9 on its effective date and has yet to assess its full impact. 23 2B Standards, amendments and interpretations to existing Investment revenue is recognised as follows: standards effective 30 September 2016 or early adopted by the Group The application of new or amended accounting standards as of 1 October 2015 has not had a material impact on the financial statements. (i) Interest income on fixed interest securities Interest income is recognised using the effective interest method. (ii) Dividend income on equity securities Revenue is recognised on an accrual basis when the right to receive payment is established. (iii) Fair value gains and losses 2016 $000 2015 $000 303,236 305,582 (296) (852) 302,940 304,730 Fair value gains and losses on investments are recognised through the income statement in the period in which they arise. The gains and losses from fixed interest, equity and property securities have been generated by financial assets designated on initial recognition at fair value through profit or loss. 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. 3. Premium revenue Gross written premiums Less: Gross unearned premiums Premium revenue 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. 5. Net claims expense Canterbury earthquake claims (4 key events) Other claims Total net claims expense NOTE 2016 $000 2015 $000 6 35,084 45,450 150,528 141,887 185,612 187,337 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; 2016 $000 2015 $000 10,088 14,873 441 (3,142) (971) 867 7,387 14,769 9 (163) (154) 25 – 25 2,810 (106) (1,045) 1,765 46 (60) 10,097 14,898 4. Investment revenue Fixed interest securities Interest income Net realised gain (loss) Net unrealised gain (loss) Total fixed interest securities Equity securities Dividend income Net unrealised gain (loss) Total equity securities Other Net realised gain (loss) Net unrealised gain (loss) Total other Total investment revenue Total net realised gain (loss) 3,251 (1,077) • the effects of inflation; and Total net unrealised gain (loss) (4,350) 913 • the impact of large losses. Total investment revenue 8,998 14,734 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 24 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 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 24. 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. 6. Canterbury earthquakes Tower has received over 15,990 individual claims from customers as a result of earthquakes impacting the Canterbury region during 2010 and 2011 (2015: 15,800 claims). Like other industry participants, Tower continues to receive ‘over-cap’ claims from EQC. The growth in new claims received has impacted Tower’s settlement rates during the year. Of all claims received, Tower has settled over 15,426 claims at 30 September 2016 (2015: 15,100 claims), representing a 96% settlement rate by number of claims and 89% by value (2015: 96% by number and 88% by value). To date, Tower has paid out more than $749 million to customers (2015: $654 million) in respect of the four main earthquakes that occurred on 4 September 2010; 22 February 2011; 13 June 2011 and 23 December 2011. As at 30 September 2016, Tower has estimated gross ultimate incurred claims of $869.6 million in respect of the four main Canterbury earthquake events (2015: $792.0 million). The financial cost to Tower of the Canterbury earthquakes is reduced through reinsurance and is reflected within net outstanding claims. Tower continues to work closely with its catastrophe reinsurance partners as it works through its Canterbury claims settlement programme. Catastrophe reinsurance partners are required to have a financial strength rating of at least A – issued by a recognised international rating agency. Details on Tower’s reinsurance programme is provided in note 24F. Tower has a commercial dispute with the provider of its adverse development cover, Peak Re, which is discussed further in note 12A. The table below presents a financial representation of Tower’s net outstanding claims provision at 30 September 2016 in relation to the four main earthquake events. Canterbury earthquake provisions Restatement of comparative receivables and insurance liabilities At September 2015, an element of EQC contributions ($43.8 million) had been included within outstanding claims and reinsurance recovery receivables. This amount did not represent a liability for Tower nor a related reinsurance receivable. Accordingly, both outstanding claims and reinsurance recovery receivables have been reduced. There is no change to net outstanding claims. The following table presents the cumulative impact of the four main Canterbury earthquake events on the income statement. 2016 $000 2015 $000 Cumulative expenses associated with Canterbury earthquakes: Earthquake claims estimate (869,600) (792,000) Reinsurance recoveries 734,699 692,183 Claim expense net of reinsurance recoveries (134,901) (99,817) Reinsurance expense (25,045) (25,045) Cumulative impact of Canterbury earthquakes before tax Income tax (159,946) (124,862) 45,454 35,642 Cumulative impact of Canterbury earthquakes after tax (114,492) (89,220) Recognised in current period (net of tax) (25,272) (36,198) The Tower Board are actively engaged in monitoring Canterbury earthquake developments. Board process relies on the Appointed Actuary’s determination of earthquake ultimate incurred claims estimates and the derivation of estimated outcomes. Tower has 564 open claims at 30 September 2016 (2015: 703 open claims). Recognising relative complexities which exist within remaining open claims, the Appointed Actuary has reviewed each remaining property file with Tower claims staff. This individual claim methodology included review of the latest specialist assessment reports and scope of works to repair or rebuild properties to determine the propensity for future costs to vary. In addition, further provision was made for claims re-opening; claims moving over the EQC cap of $100,000; claims in litigation and other claim categories. A risk margin has been allowed for at 75% probability of sufficiency. The actuarial reviews performed during the year to 30 September 2016 identified the following as key contributors to the increase in expected earthquake claims costs: Insurance liabilities Outstanding claims Receivables Reinsurance recovery receivables 2016 $000 2015 $000 • Greater than anticipated new claims from EQC; • Growth in the level of litigation and customer disputes; (149,100) (163,000) claims life cycle; and • Continued development of claim costs as they progress through the • Refinement of actuarial assumptions incorporating claims incurred but not reported. The key elements of judgement within the claims estimation are as follows: Adverse development cover – Peak Re 43,750 43,750 Other reinsurance recovery receivables 7,050 15,650 Claims Other receivables Total receivables Net outstanding claims 57,600 57,400 108,400 116,800 (40,700) (46,200) • the level of future increases in building and other claims costs • the number of new claims being received from EQC and the average cost of these claims 25 6. Canterbury earthquakes (continued) • the rate of closed claims reopening • apportionment of claim costs to each of the four main earthquake events • risk margin • future claim management expenses, and Recoveries • collectability of reinsurance recoveries • recoveries from EQC in respect of land damage and building costs • 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 2016. Any further changes to estimates will be recorded in the accounting period when they become known. Tower has exceeded its catastrophe reinsurance and adverse development cover limits in relation to the February 2011 event. The estimated ultimate incurred claims cost of the February 2011 event totals $482.0 million. Tower has reinsurance for $375.35 million on this event including catastrophe cover, proportional reinsurance and adverse development cover. During the year ended 30 September 2016, Tower expensed $35.1 million in relation to the February 2011 event (2015: $45.5 million). For the three other main earthquake events, the catastrophe reinsurance cover headroom remaining is included in the table below. CATASTROPHE REINSURANCE COVER REMAINING SPLIT BETWEEN EVENTS I V A R A B L E C H A N G E S E P 2 0 1 0 $ M F E B 2 0 1 1 $ M J U N 2 0 1 1 $ M D E C 2 0 1 1 $ M FOUR MAIN EARTH QUAKES 3 0 - S E P - 1 6 $ M 3 0 - S E P - 1 5 $ M Outstanding claims: (i) Change to costs and quantity of expected claim estimates including building costs and other impacts. (ii) Change in apportionment of claim costs to / from February 2011 event. Receivables: + 5% – 5% + 1% – 1% Reinsurance recovery receivables (iii) Adverse development cover (iv) Recoveries from EQC in respect of land damage (v) Recoveries from EQC in respect of building costs – 50% –100% + 10% – 10% + 10% – 10% – – – – – – – – – – (4.1) 4.1 (9.0) 9.0 (21.9) (38.8) 0.7 (0.8) 0.1 (0.1) – – – – – – – – – – – – – – – – – – – – (4.1) 4.1 (6.5) 6.5 (9.0) 9.0 (6.8) 6.8 (21.9) (38.8) (21.9) (38.8) 0.7 (0.8) 0.1 (0.1) 0.9 (0.9) 0.5 (0.5) (i) Calculated as the change in case estimates (net of EQC contributions) plus IBNR/IBNER and the impact on Tower’s profit quantified. Changes in case estimates include overcap claims, closed claims re-opening and risk margin. (ii) Calculated as 1% of total reported costs (net of EQC contributions) 2016 $000 2015 $000 plus IBNR/IBNER moved to/from Feb 2011 event and the impact on Tower’s profit quantified. DATE OF EVENT September 2010 June 2011 December 2011 7,700 17,100 256,500 261,800 487,500 487,700 Sensitivity analysis – impact of changes in key variables Net outstanding claims are 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, and hence on Tower’s profit, are shown in the table below. Each change in assumption has been calculated in isolation of any other changes in assumptions. The impact of a change to claims costs is offset by reinsurance where there is reinsurance capacity remaining. The impact will be nil where the change in claims costs is less than the remaining reinsurance capacity. However, if the change in claims costs exceeds the reinsurance capacity then Tower’s profit will be impacted by the amount of claims costs in excess of the reinsurance capacity. The changes in the table below reflect the impact on Tower’s profits should that event occur. 26 Tower Limited annual report 2016 (iii) Calculated as the impact on net outstanding claims due to 50% or 100% lower recoveries being received. 7. Management and sales expenses Included in total management and sales expenses are the following requiring separate disclosures: Amortisation of deferred acquisition costs 20,277 20,028 2016 $000 2015 $000 Bad debts written off Change in provision for doubtful debts Amortisation of software Depreciation Office equipment and furniture Motor vehicles Computer equipment Directors’ fees 162 (307) 155 104 3,950 1,660 2,438 2,374 840 170 676 184 1,428 1,514 565 455 Employee benefits expense 54,396 51,038 (Gain) loss on disposal of property, plant and equipment Claims related management expenses reclassified to claims expense (43) 15 (22,846) (21,352) Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 Auditors remuneration Fees paid to Group’s auditors: Audit of financial statements (1) Other assurance related services (2) Non-assurance advisory related services (3) Total fees paid to Group’s auditors 364 30 149 543 343 33 8 384 Fees paid to subsidiaries’ auditors different to Group auditors: Audit of financial statements (4) Total fees paid to auditors 51 594 39 423 (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 includes the solvency return assurance, share register audit and regulatory returns. (3) Non-assurance advisory related services related to IT Platform review and Annual Shareholders’ Meeting procedures. (4) Tower Insurance Limited paid all fees for audit services provided to the Group, other than the audit fees of National Pacific Insurance Limited and Tower Insurance (Vanuatu) Limited. 8. Tax 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. The tax benefit can be reconciled to the accounting profit as follows: Loss before tax from continuing operations (26,426) (9,930) Income tax at the current rate of 28% (7,399) (2,780) Tax effect of: Prior period adjustments (322) (1,325) Non-deductible expenditure/non-assessable income Foreign tax credits written off Other Total tax benefit (i) Current tax 216 253 2,226 2,132 368 (178) (4,911) (1,898) 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 the 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). (ii) Tax consolidation Tower Limited and its subsidiaries are part of a single consolidated group for tax purposes, with the exception of Tower Insurance Limited. (iii) Income tax expense 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. (iv) GST 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. (v) Tax cash flows Tax 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. 8A. Tax expense Analysis of tax expense Current tax Deferred tax (Over) under provided in prior years Total tax benefit 2016 $000 2015 $000 6,026 4,223 (10,615) (5,082) (322) (1,039) (4,911) (1,898) 8B. Current tax assets Analysis of current tax assets Current Non-current Total current tax assets 2016 $000 2015 $000 912 3,629 12,256 11,264 13,168 14,893 A non-current tax asset of $12,256,000 is recognised in the financial statements of the Group as at 30 September 2016 in relation to excess tax payments made in previous years (2015: $11,263,821). Non-current tax assets are expected to be recovered from 2019, as determined by the Board approved operational plan for financial years 2016 to 2019. A current tax asset of $595,000 is recognised in relation to excess tax 27 8. Taxation (continued) payments made in the Pacific Islands over and above the estimated tax liabilities for the year (2015: $3,629,212). 8C. Current tax liabilities Current tax liabilities of $123,000 relate to taxes payable to off shore tax authorities in the Pacific Islands (2015: $568,000). 8D. Deferred tax assets and liabilities The movement in deferred income tax assets and liabilities during the year is as follows: A T 1 O C T O B E R B A L A N C E O P E N N G I C O M P R E H E N S V E I ( C H A R G E D ) C R E D T E D I T O S T A T E M E N T T O I N C O M E ( C H A R G E D ) C R E D T E D I I N C O M E O P E R A T O N S I O T H E R G R O U P I C R E D T E D T O C O M P A N E S I ( C H A R G E D ) I C L O S N G B A L A N C E A T 3 0 S E P T E M B E R I D S C O N T N U E D I FOR THE YEAR ENDED 30 SEPTEMBER 2016 $000 $000 $000 $000 $000 $000 Movement in deferred tax assets Provisions and accruals Property, plant and equipment Tax losses Total deferred tax assets Set-off of deferred tax liabilities pursuant to NZ IAS 12 Net deferred tax assets Movement in deferred tax liabilities Deferred acquisition costs Other Total deferred tax liabilities Set-off of deferred tax liabilities pursuant to NZ IAS 12 Net deferred tax liabilities FOR THE YEAR ENDED 30 SEPTEMBER 2015 Movement in deferred tax assets Tax losses Total deferred tax assets Set-off of deferred tax liabilities pursuant to NZ IAS 12 Net deferred tax assets Movement in deferred tax liabilities Deferred acquisition costs Other Total deferred tax liabilities Set-off of deferred tax liabilities pursuant to NZ IAS 12 Net deferred tax liabilities 28 Tower Limited annual report 2016 2,321 3,431 820 (120) 19,034 10,052 24,786 10,752 – (23) – (23) (4,885) (1,123) (6,008) 34 (171) (137) – – – – – – – (457) – 949 492 – – – – – – – (4,810) (1,323) (6,133) (75) 218 143 – (18) (18) – – – – – – – – – – – – 54 54 – – – 3,141 3,288 29,086 35,515 (5,360) 30,155 (4,851) (1,294) (6,145) 5,360 (785) 2,321 3,431 19,034 24,786 (4,909) 19,877 (4,885) (1,123) (6,008) 4,909 (1,099) Provisions and accruals 3,427 (649) Property, plant and equipment 4,813 (1,382) 11,063 6,968 19,303 4,937 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 Prior year deferred tax assets and liabilities have been restated in the balance sheet as follows: 3 0 S E P T E M B E R B A L A N C E A T 2 0 1 5 O F F S E T T N G I I I J U R S D C T O N A L I 3 0 S E P T E M B E R R E S T A T E D 2 0 1 5 FOR THE YEAR ENDED 30 SEPTEMBER 2015 $000 $000 $000 Total deferred tax assets 24,786 (4,909) 19,877 Total deferred tax liabilities (6,008) 4,909 (1,099) Restatement of comparatives At September 2015, deferred tax assets and deferred tax liabilities had been disclosed separately in the balance sheet without jurisdictional offsetting. Pursuant to NZ IAS 12, the deferred tax assets and deferred tax liabilities are offset to the extent that the entity has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to settle current tax liabilities and assets on a net basis. Accordingly, deferred tax liabilities and deferred tax assets have been reduced. There is no change to net deferred tax. Deferred tax 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. Recognition of deferred tax assets is a key area of judgement. Management expects to utilise the tax losses against future profits over the next 3 years. Deferred tax liabilities of $166,000 have not been recognised in respect of temporary differences associated with investments in subsidiaries (2015: liabilities of $156,000). 8E. Imputation credits The Group imputation credit account reflects the imputation credits held by the Company as the representative member of the Group. Imputation credits available for use in subsequent reporting periods 2016 $000 2015 $000 489 489 The balance of the imputation account at the end of the year 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. 9. Segmental reporting NEW ZEALAND PACIFIC ISLANDS OTHER (HOLDING COMPANIES & ELIMIN- ATIONS) TOTAL $000 $000 $000 $000 YEAR ENDED 30 SEPTEMBER 2016 Revenue Revenue – external 218,992 45,765 1,488 266,245 Total revenue 218,992 45,765 1,488 266,245 Earnings before interest, tax, depreciation and amortisation Depreciation and amortisation Profit (Loss) before income tax (12,577) 9,617 (17,078) (20,038) (2,076) (379) (3,933) (6,388) (14,653) 9,238 (21,011) (26,426) Income tax credit (expense) 2,760 (3,729) 5,880 4,911 Profit (Loss) for the year (11,893) 5,509 (15,131) (21,515) Total assets 30 September 2016 Total liabilities 30 September 2016 Acquisition of property plant and equipment and intangibles YEAR ENDED 30 SEPTEMBER 2015 Revenue 479,420 79,104 81,757 640,281 360,613 51,981 3,735 416,329 481 1,523 7,553 9,557 $000 $000 $000 $000 Revenue – external 216,813 46,919 1,951 265,683 Total revenue 216,813 46,919 1,951 265,683 Earnings before interest, tax, depreciation and amortisation Depreciation and amortisation Profit (Loss) before income tax (22,474) 14,844 1,734 (5,896) (2,954) (239) (841) (4,034) (25,428) 14,605 893 (9,930) Income tax credit (expense) 6,249 (4,989) 638 1,898 Profit (Loss) for the year (19,179) 9,616 1,531 (8,032) Total assets 30 September 2015 (restated) Total liabilities 30 September 2015 (restated) Acquisition of property plant and equipment and intangibles 550,162 86,621 73,415 710,198 370,356 54,236 4,697 429,289 12,496 3,429 4,847 20,772 29 9. Segmental reporting (continued) Description of segments and other segment information 11. Reconciliation of loss for the period to net cash flows 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. 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. The New Zealand segment comprised general insurance business written in New Zealand. The Pacific Islands segment includes general insurance business with customers in the Pacific Islands written by Tower Insurance Limited subsidiaries and branch operations. Other includes head office expenses, financing costs and eliminations. The Group does not derive revenue from any individual or entity that represents 10% or more of the Group’s total revenue. 10. Cash and cash equivalents from operating activities Loss for the year Add (less) non-cash items 2016 $000 2015 $000 (21,515) (6,636) Depreciation of property, plant and equipment 2,438 2,374 Amortisation of software Impairment of software 3,950 1,660 19,649 – Unrealised (gain) loss on financial assets 4,350 (913) Movement on disposal of property, plant and equipment Increase in deferred tax Add (less) movements in working capital (excluding the effects of exchange differences on consolidation) Decrease in receivables Decrease in payables Decrease (increase) in taxation Net cash inflows (outflows) from operating activities (43) (16) (10,560) (5,608) 19,784 (2,503) 1,984 116,043 (11,614) (87,465) 1,051 (1,502) (8,579) 27,076 (10,310) 17,937 Cash at bank and in hand Deposits at call Restricted cash 2016 $000 2015 $000 25,792 28,330 60,932 90,043 5,504 6,740 12. Receivables Reinsurance recovery receivables 12A 68,406 69,950 NOTE 2016 $000 2015 $000 Outstanding premiums and trade receivables Other Total receivables Analysed as Current Non current Total receivables 125,855 124,658 60,424 63,243 254,685 257,851 173,613 178,763 81,072 79,088 254,685 257,851 Outstanding premiums and trade receivables are presented net of allowance for credit losses and impairment. The tables below include reconciliations of outstanding premiums and trade receivables, together with the provision for cancellation at the reporting date. Total cash and cash equivalents 92,228 125,113 Cash and cash equivalents includes cash on hand and deposits held at 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. The effective interest rate at 30 September for deposits at call is 2.60% (2015: 3.25%). There was no offsetting within cash and cash equivalents (2015: 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 $5.5 million (2015: $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 $2.7 million (2015: $3.2 million) recorded within Insurance liabilities for Tower’s portion of multi- unit outstanding claims; and $2.8 million (2015: $3.5 million) recorded within Payables as held on behalf of other insurers in respect of SPP claims. 30 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 2016 $000 2015 $000 13. Intangible assets SOFTWARE Outstanding premiums and trade receivables Allowance for credit losses and impairment Opening balance Provisions added during the year Provisions released during the year Foreign exchange movements 127,605 126,715 (1,750) (2,057) 125,855 124,658 2,057 1,953 45 (224) (128) 155 (51) Year ended 30 September 2016 – Cost: G O O D W L L I A C Q U R E D I 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 T O T A L $000 $000 $000 $000 $000 Closing balance 1,750 2,057 Opening balance 17,744 4,223 34,861 14,279 71,107 Additions Disposals Transfers Foreign exchange movements Transfers to Property, plant and equipment Impairment expense – – – – – – 846 339 7,070 8,255 (39) – (10) – – – – (39) (339) (339) – (10) – – (702) (702) – (3,895) (15,754) (19,649) Closing balance 17,744 5,020 31,305 4,554 58,623 Accumulated amortisation: Opening balance – (4,047) (18,687) – (22,734) Amortisation charge Amortisation on disposals Foreign exchange movements Closing balance Net book value – – – (261) (3,689) – (3,950) 40 3 – – – – 40 3 – (4,265) (22,376) – (26,641) At cost 17,744 5,020 31,305 4,554 58,623 Accumulated amortisation – (4,265) (22,376) – (26,641) Closing net book value 17,744 755 8,929 4,554 31,982 Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. 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 irrecoverable 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. Assets arising from reinsurance contracts Assets arising from reinsurance contracts are also determined using the above methods. In addition, the recoverability of these assets is assessed on a periodic basis to ensure that the balance is reflective of 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. 12A. Reinsurance contract in dispute Tower has a commercial dispute with Peak Re, the provider of the Adverse Development Cover (ADC) entered into in April 2015. As a result the parties have agreed to an arbitration process in accordance with the ADC agreement. Tower anticipates the arbitration will take place in the second half of 2017. Tower remains confident in its position that it is fully entitled to claim on the ADC policy on the basis of strong legal advice. Tower will take every step to fully recover the amounts due. The ADC provides for recovery of claims cost on the February 2011 earthquake. The maximum value of the ADC recovery is $43.75 million which has been fully recognised in the calculation of Tower’s net claims expense in respect of the Canterbury earthquakes, refer to note 6. Tower notes that, while it has confidence in its position, the process of legal redress has risk and collection of the $43.75 million receivable cannot be certain. 31 13. Intangible assets (continued) SOFTWARE Impairment of software G O O D W L L I A C Q U R E D I 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 T O T A L $000 $000 $000 $000 $000 Year ended 30 September 2015 Cost: Opening balance 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) Closing balance 17,744 4,223 34,861 14,279 71,107 Accumulated amortisation: Opening balance – (3,745) (17,328) – (21,073) Amortisation charge Amortisation on disposals Foreign exchange movements Closing balance Net book value – – – (301) (1,359) – (1,660) 1 (2) – – – – 1 (2) – (4,047) (18,687) – (22,734) At cost 17,744 4,223 34,861 14,279 71,107 The Group has reviewed the carrying value of software intangible assets (both internally developed and under development) for indicators of impairment as at 30 September 2016. Assessment of impairment indicators included reviewing the technical feasibility of completing the software development so it would be available for use; the intention to complete the software development; and whether the software would generate probable future economic benefits. The review was undertaken in light of revised expectations for future technology platforms required to support growth in the New Zealand and Pacific insurance businesses. The Directors concluded that impairment of certain software intangible assets was required as at 31 March 2016. An impairment charge of $19.65 million was recorded at 31 March 2016, and has been recognised in these financial statements (2015: nil) relating to Internally developed software and Software under development categories. 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. Accumulated amortisation – (4,047) (18,687) – (22,734) Impairment testing for goodwill Closing net book value 17,744 176 16,174 14,279 48,373 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 Core operating system software 3 – 5 years 3 – 10 years Following the impairment review discussed below, the Group has reduced the estimated useful economic life and amortisation period of the core operating system software to 3 years from 1 April 2016, which increased the annual amortisation by $844,000. The determination of estimated useful economic life is a key area of judgement. Goodwill is allocated to the New Zealand general insurance cash generating unit. The carrying amount of goodwill allocated to the cash generating unit is shown below: Carrying amount of goodwill 2016 2015 17,744 17,744 Impairment of goodwill is a key area of judgement. Goodwill is subject to impairment testing at the cash-generating unit level every six months. No impairment loss has been recognised in 2016 as a result of the impairment review (2015: 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 (2015: 14%). Other assumptions used are consistent with the actuarial assumptions in note 24 in respect of Tower Insurance. The projected cash flows have been determined using a steady average growth rate of 2% (2015: 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. 32 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 Sensitivity to changes in assumptions 15. Property, plant and equipment 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. 14. Deferred acquisition costs 2016 $000 2015 $000 Balance at the beginning of year 20,277 20,028 For the year ended 30 September 2016 I E Q U P M E N T & F U R N T U R E I O F F C E I 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 I B U L D N G S I $000 $000 $000 $000 $000 Acquisition costs during the year Current period amortisation Total deferred acquisition costs Analysed as: Current Non-current Total deferred acquisition costs 19,973 20,277 Cost (20,277) (20,028) 19,973 20,277 19,973 20,277 – – 19,973 20,277 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. Opening balance 2,754 6,749 1,396 13,597 24,496 Additions Revaluations Disposals Foreign exchange movements Closing balance Accumulated depreciation Opening balance Depreciation Disposals Foreign exchange movements Closing balance Closing balance – 1,182 203 619 2,004 181 – – – – 181 (85) (122) (33) (240) (225) (365) (200) (145) (935) 2,710 7,481 1,277 14,038 25,506 – – – – (1,513) (1,022) (11,740) (14,275) (840) (170) (1,428) (2,438) 82 124 7 213 267 138 100 505 – (2,004) (930) (13,061) (15,995) Cost / revaluation 2,710 7,481 1,277 14,038 25,506 Accumulated depreciation – (2,004) (930) (13,061) (15,995) Net book value 2,710 5,477 347 977 9,511 For the year ended 30 September 2015 Cost Opening balance 2,374 6,896 1,365 13,155 23,790 Additions Revaluations Disposals Foreign exchange movements Closing balance Accumulated depreciation Opening balance Depreciation Disposals Foreign exchange movements Closing balance Closing balance – 5,583 129 – 101 – 432 6,116 – 129 – (6,005) (246) (16) (6,267) 251 275 176 26 728 2,754 6,749 1,396 13,597 24,496 – – – – – (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) Cost / revaluation 2,754 6,749 1,396 13,597 24,496 Accumulated depreciation – (1,513) (1,022) (11,740) (14,275) Net book value 2,754 5,236 374 1,857 10,221 33 15. Property, plant and equipment (continued) Property, plant and equipment 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 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 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. 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 less transaction costs and subsequently measured at amortised cost using the effective interest method. 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 $2.8 million (2015: $3.5 million) recorded within Payables as funds held on behalf of other insurers in respect of SPP claims. Refer also note 10 for further details on cash held in respect of multi-unit claims as lead insurer. Computer equipment Furniture & fittings Motor Vehicles Buildings Leasehold property improvements 3 – 5 years 5 – 9 years 5 years 17. Provisions 50 – 100 years 3– 12 years Employee benefits Business separation Total provisions Analysed as: Current Non current Total provisions 2016 $000 2015 $000 4,177 3,064 – 209 4,177 3,273 4,177 3,273 – – 4,177 3,273 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 as 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. Employee benefits include provisions for holiday pay and long service leave. Land and buildings are located in Fiji and Papua New Guinea and are stated at fair value. Fair value is determined using an income approach whereby future rental streams are capitalised at a rate appropriate for the type of property and lease arrangement. This value is then adjusted to take into account recent market activity. Valuation was performed as at 16 September 2016 by Rolle Associates, registered valuers in Fiji. There has been no material movement in the valuation between 16 September 2016 and 30 September 2016. 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. Inputs include gross rentals per square meter of similar property in the Suva area, recent comparable sales of commercial property in Suva and a capitalisation rate of 7.0% (2015: 7.5%). Had land and buildings been recognised under the cost model the carrying amount would have been $1,145,000 (2015: $1,145,000). The revaluation surplus for the period is recorded in other comprehensive income and has no restrictions on the distribution of the balance to shareholders. 16. Payables Trade payables Reinsurance payables Payable to other insurers Other payables Total payables Analysed as: Current Non current Total payables 34 Tower Limited annual report 2016 2016 $000 2015 $000 16,125 15,847 4,445 2,798 2,612 3,481 26,132 26,532 49,500 48,472 49,500 48,472 – – 49,500 48,472 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 18. Insurance liabilities Return of capital Unearned premiums Outstanding claims Total insurance liabilities Analysed as Current Non current 2016 $000 2015 $000 150,807 155,677 210,202 220,200 361,009 375,877 291,845 337,498 On 26 May 2015, following the Company’s half year results announcement, Tower commenced an on market share buyback of up to $34 million. Capital of $2.4 million was bought back in the year to 30 September 2016 (2015: $12.2 million). In total $14.6 million of capital was bought back and cancelled during the 10 months to 31 March 2016. Refer to note 20 for movement in ordinary shares relating to buyback. On 24 May 2016 the Directors announced the voluntary on-market share buyback would stop with immediate effect. 69,164 38,379 20. Contributed equity Total insurance liabilities 361,009 375,877 The table below includes the reconciliation of the unearned premiums as at the reporting date: Ordinary share capital (fully paid) 382,172 384,585 2016 $000 2015 $000 Opening balance Premiums written Premiums earned Foreign exchange movements Closing balance 155,677 150,504 Total contributed equity 382,172 384,585 288,537 290,780 Represented by: NUMBER OF SHARES (293,911) (286,376) Ordinary shares (issued and fully paid) 168,662,150 169,983,470 504 769 Movement in ordinary shares: 150,807 155,677 Opening balance 169,983,470 175,749,449 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. 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. 19. Distributions to shareholders Dividend payments On 24 November 2015 the Directors declared a final dividend for the 2015 financial year of 7.5 cents per share. The dividend was paid on 3 February 2016. The total amount paid was $12,687,553. There were no imputation credits attached to the dividend and Tower did not offer its Dividend Reinvestment Plan for this dividend. On 24 May 2016 the Directors declared an interim dividend for the half year ended 31 March 2016 of 8.5 cents per share. The dividend was paid on 30 June 2016. The total amount paid was $14,336,340. There were no imputation credits attached to the dividend and Tower did not offer its Dividend Reinvestment Plan for this dividend. Buyback of share capital (1,321,320) (5,765,979) Closing balance 168,662,150 169,983,470 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. 21. Reserves Foreign currency translation reserve (FCTR) Opening balance Currency translation differences arising during the year Closing balance Separation Reserve Opening balance Closing balance Asset revaluation reserve Opening balance Gain on revaluation, net of deferred tax Closing balance Total reserves 2016 $000 2015 $000 791 (1,985) (5,234) 2,776 (4,443) 791 (113,000) (113,000) (113,000) (113,000) 513 158 671 402 111 513 (116,772) (111,696) Exchange differences arising on translation of foreign controlled entities and net investment of a foreign entity 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. 35 21. Reserves (continued) 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. The asset revaluation reserve is used to recognise unrealised gains on the value of land and buildings above initial cost. 22. Net assets per share Net assets per share (dollars) Net tangible assets per share (dollars) 2016 2015 1.33 0.96 1.65 1.26 Net assets per share represent the value of the Group’s total net assets divided by the number of ordinary shares on issue at the period end. Net tangible assets per share represent the net assets per share adjusted for the effect of intangible assets and deferred tax balances. Reconciliation to net tangible assets is provided below: Net assets Less: deferred tax Less: intangible assets Net tangible assets 2016 $000 2015 $000 223,952 280,909 (29,370) (18,778) (31,982) (48,373) 162,600 213,758 23. Earnings per share 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 2016 (2015: nil). Loss attributable to shareholders from continuing operations Profit attributable to shareholders from discontinued operations 2016 $000 2015 $000 (22,328) (8,378) – 1,396 NUMBER OF SHARES Weighted average number of ordinary shares for basic and diluted earnings per share 169,069,382 175,024,794 Basic and diluted (loss) earnings per share from continuing operations Basic and diluted (loss) earnings per share from discontinued operations CENTS (13.21) (4.79) – 0.80 24. Insurance business disclosure 24A. Net claims expense 2016 2015 RISKS BORNE IN CUR RENT YEAR RISKS BORNE IN PRIOR YEARS RISKS BORNE IN CUR RENT YEAR RISKS BORNE IN PRIOR YEARS TOTAL TOTAL $000 $000 $000 $000 $000 $000 148,710 91,358 240,068 141,049 109,663 250,712 53 17 70 54 1,478 1,532 148,763 91,375 240,138 141,103 111,141 252,244 (12,094) (42,428) (54,522) (3,901) (61,026) (64,927) (3) (1) (4) 18 2 20 (12,097) (42,429) (54,526) (3,883) (61,024) (64,907) Gross claims expense Direct claims – undiscounted Movement in discount Total gross claims expense Reinsurance and other recoveries Reinsurance and other recoveries – undiscounted Movement in discount Total reinsurance recoveries Net claims expense 136,666 48,946 185,612 137,220 50,117 187,337 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 5 and 6. 24B. Outstanding claims (a) Assumptions adopted in calculation of insurance liabilities The estimation of outstanding claims as at 30 September 2016 has been carried out by the following Actuaries: Rick Shaw, B.Sc. (Hons), FIAA; and Peter Davies, B.Bus.Sc, FIA, FNZSA. Tower appointed Rick Shaw (Deloitte Australia) as Appointed Actuary on 10 November 2015, replacing Charles 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 by the Actuaries at a level that is appropriate and sustainable to cover the Group’s claims obligations after having regard to the prevailing market environment and prudent industry practice. 36 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 The following assumptions have been made in determining net outstanding claims liabilities: Inflation rates varied from 0.0% – 3.8% 2.5% – 3.8% 2016 2015 Claims handling expense The estimate of outstanding claim 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. Inflation rates for succeeding year 0.0% – 3.8% 2.5% – 3.8% Risk margin Inflation rates for following years 0.0% – 3.8% 2.5% – 3.8% Discount rates varied from 2.5% – 6.3% 2.5% – 6.3% Discount rates for succeeding year 2.5% – 6.3% 2.5% – 6.3% Discount rates for following years 2.5% – 6.3% 2.5% – 6.3% Claims handling expense ratio 0.0% – 56.4% 4.7% – 43.0% Risk margin 6.3% – 21.8% 8.0% – 14.8% In addition to the risk margin range shown above, the total risk margin also includes $17,700,000, gross of reinsurance (2015: $19,300,000) associated with the Canterbury earthquakes. 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 within 1 year Long tail claims in the Pacific Islands 0.9 to 1.8 years 0.9 to 1.8 years 2016 2015 Inwards reinsurance Inflation rate greater than 10 years greater than 10 years Insurance costs are subject to inflationary pressures. Inflation assumptions for all 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 Outstanding claim 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. Apportionment Tower assesses claims and apportions damage between Canterbury earthquake events on an individual property basis. The allocation process uses a hierarchical approach based on the relative quality and number of claim assessments completed after each of the four main earthquakes. Results from the hierarchical approach are used as an input to the actuarial valuations which estimate the ultimate claims costs. The outstanding claim liabilities also include 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 the 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 (CoV), defined as the standard deviation of the distribution of future cash flows divided by the mean. Risk margins are calculated by 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 adequacy 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 2016 $000 2015 $000 129,058 139,111 14,663 11,675 4,177 3,766 147,898 154,552 (201) (266) 147,697 154,286 2016 GROSS $000 REINSU- RANCE $000 NET $000 GROSS $000 REINSU- RANCE $000 2015 NET $000 Reconciliation of movements in discounted outstanding claim liabilities Balance brought forward Effect of change in foreign exchange rates Incurred claims recognised in the income statement Claim (payment) recoveries during the year Total outstanding claims 220,200 (65,914) 154,286 271,768 (175,455) 96,313 699 3 702 2,210 (4,059) (1,849) 240,138 (54,526) 185,612 252,244 (64,907) 187,337 (250,835) 57,932 (192,903) (306,022) 178,507 (127,515) 210,202 (62,505) 147,697 220,200 (65,914) 154,286 37 24. Insurance business disclosure (continued) Reconciliation of movements in undiscounted claims to outstanding claim liabilities – monitoring natural disasters such as earthquakes, floods, storms and other catastrophes using models; and Outstanding claims undiscounted 1,731 (90) 1,641 2,200 (129) 2,071 catastrophic risks. – the use of reinsurance to limit the Group’s exposure to individual Discount (13) 2 (11) (28) 7 (21) (b) Concentration of insurance risk Outstanding claims 1,718 (88) 1,630 2,172 (122) 2,050 Short tail outstanding claims Total outstanding claims (b) Sensitivity analysis 146,067 147,697 152,236 154,286 RISK An accumulation of risks arising from a natural peril SOURCE OF CONCENTRATION Insured property concentrations A large property loss Fire or collapse affecting one building or a group of adjacent buildings RISK MANAGEMENT MEASURES Accumulation risk modelling, reinsurance protection Maximum acceptance limits, property risk grading, reinsurance protection 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: (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: PRIOR $000 2012 $000 2013 $000 2014 $000 2015 $000 2016 $000 TOTAL $000 Ultimate claims cost estimate At end of incident year 113,839 123,816 138,878 137,220 136,666 One year later 117,277 124,667 138,720 151,751 2016 $000 2015 $000 Two years later 116,819 125,502 139,588 Expected claim payments Within 3 months 3 to 6 months 6 to 12 months After 12 months 39,580 51,307 22,255 22,982 19,234 6,063 66,628 73,934 Total outstanding claim liabilities 147,697 154,286 24C. Risk management policies and procedures 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 26). 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. The key policies in place to mitigate risks arising from writing insurance contracts include: – comprehensive management information systems and actuarial models using historical information to calculate premiums and monitor claims; 38 Tower Limited annual report 2016 Three years later 117,862 125,363 Four years later 119,415 Current estimate of ultimate claims cost Cumulative payments 119,415 125,363 139,588 151,751 136,666 (119,048) (124,719)(138,988) (149,642) (102,716) Undiscounted central estimate 91,388 367 644 600 2,109 33,950 129,058 Discount to present value (1) – (1) (2) (11) (186) (201) Discounted central estimate 91,387 367 643 598 2,098 33,764 128,857 Claims handling expense Risk margin Net outstanding claim liabilities Reinsurance recoveries on outstanding claim liabilities and other recoveries Gross outstanding claim liabilities 4,177 14,663 147,697 62,505 210,202 24D. Liability adequacy test 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 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 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 adequate. The risk margins applied to future claims were determined with the objective of achieving at least 75% probability of adequacy of the unexpired risk liability using the methodology described above. The unearned premium liabilities as at 30 September 2016 were sufficient (2015: sufficient). Central estimate claim % of premium Risk margin 2016 2015 45.3% 9.3% 41.1% 9.3% 24E. Insurer financial strength rating Tower Insurance Limited has an insurer financial strength rating of ‘A-’ (Excellent) issued by international rating agency AM Best Company Inc. with an effective date of 15 July 2016. 24F. 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. 24G. Solvency requirements 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 solvency capital requirement for the Group by $73.8 million (2015: $86.9 million). Actual solvency capital Minimum solvency capital Solvency margin Solvency ratio 2016 $000 2015 $000 140,827 156,646 67,047 69,730 73,780 86,916 210% 225% 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. 24H. 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. 25. Financial instruments 25A. 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 method less any impairment. (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 comprise of financial assets that are either held for trading or designated on initial recognition at fair value through profit or loss. A financial asset 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 statements. The net gain or loss recognised in the income statements 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. (iv) Fair value Financial assets and liabilities are measured in the balance sheet at fair value with the exception of short term amounts which are held at a reasonable approximation of fair value. (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. 39 (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 2016, the Level 3 category included an investment in equity securities of $1,406,000 (2015: $1,972,000). These investments are in unlisted shares of a company which provides reinsurance to Tower and a company which owns a building used by Tower. The fair value is calculated based on the net assets of the company from the most recently available financial information. In the case of the property owning company, the property is periodically valued by a third party independent valuer. The valuation has been calculated using the Income Capitalisation Approach and a sensitivity analysis has been performed later in this note. (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 period (30 September 2015: nil). The following tables present the Group’s assets and liabilities categorised by fair value measurement hierarchy levels. 25. Financial instruments (continued) The Group does not hold financial assets and financial liabilities subject to offsetting arrangements other than cash and cash equivalents. Refer to note 10. (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: AT AMORTISED COST AT FAIR VALUE THROUGH PROFIT OR LOSS I R E C E V A B L E S L O A N S A N D $ 0 0 0 $ 0 0 0 T O T A L $ 0 0 0 I D E S G N A T E D $ 0 0 0 H E L D F O R T R A D N G I $ 0 0 0 I F N A N C A L I I I L A B L T E S I I As at 30 September 2016 Assets Cash and cash equivalents 92,228 92,228 Trade and other receivables 253,115 253,115 Investments Derivative assets 188,522 57 – – – – – – – 188,522 – 57 Total financial assets 533,922 345,343 – 188,579 Liabilities Trade and other payables 26,532 – 26,532 Derivative financial liabilities 735 – – Total financial liabilities 27,267 – 26,532 – 735 735 As at 30 September 2015 Assets Cash and cash equivalents 125,113 125,113 Trade and other receivables 254,388 254,388 – – – – Investments 213,593 – – 213,593 Total financial assets 593,094 379,501 – 213,593 Liabilities Trade and other payables 26,229 – 26,229 Total financial liabilities 26,229 – 26,229 – – – – – – – – – – – – – – – – 25B. 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 and assumptions used by Tower for each category of financial assets and liabilities. (i) Cash and cash equivalents The carrying amount of cash and cash equivalents reasonably approximates its fair value. 40 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 TOTAL $000 LEVEL 1 $000 LEVEL 2 $000 LEVEL 3 $000 1,406 – – 1,406 25C. Impairment of financial assets 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. 187,082 – 187,082 – – 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. 34 187,116 1,406 57 – 187,173 1,406 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. 34 188,522 Derivative financial assets 57 Total financial assets 188,579 As at 30 September 2016 Assets Investment in equity securities Investments in fixed interest securities Investments in property securities Investments Liabilities Derivative financial liabilities Total financial liabilities As at 30 September 2015 Assets Investment in equity securities Investments in fixed interest securities – – – – – – 1,972 – – 1,972 211,587 – 211,587 Investments in property securities 34 Total financial assets 213,593 – – 34 211,621 1,972 – – 735 735 735 735 – – 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. 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 table represents the changes in Level 3 instruments: 26. Risk management Opening balance Total gains and losses recognised in profit or loss Foreign currency movement Closing balance INVESTMENT IN EQUITY SECURITIES 2016 $000 2015 $000 1,972 1,835 (163) (403) – 137 1,406 1,972 The following table shows the impact of increasing or decreasing the combined inputs used to determine the fair value of the investment by 10%: CARRYING AMOUNT $000 FAVOURABLE CHANGES OF 10% $000 UN- FAVOURABLE CHANGES OF 10% $000 As at 30 September 2016 Investment in equity securities 1,406 141 (141) As at 30 September 2015 Investment in equity securities 1,972 197 (197) 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 24, while the managing of financial and other non financial risks are set out in the remainder of this note. Tower Limited’s objective is to satisfactorily manage these risks in line with the Board approved Group Risk and Compliance policy. Various procedures are put in place to control and mitigate 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. The 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. 41 26. Risk management (continued) The Board has responsibility for: – reviewing investment policies for Tower Limited 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 Limited’s investments; – reviewing the appointment of external investment managers; – monitoring investment and fund manager performance; and – monitoring compliance with investment policies and client mandates. 26A. 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 26F. (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 Limited’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 Limited 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 Insurance does not hedge the currency risk arising from translation of the financial statements of foreign operations other than through net investment 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. 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. Interest rate risk arises 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. (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 26F. 26B. 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 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 is limited to banks with minimum AA credit ratings. 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. The Group has no significant exposure to credit risk. (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 Limited 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 2016 $000 2015 $000 3,744 3,760 12,390 72,152 237,842 300,874 25,770 17,555 Other non-investment related receivables 252,736 196,747 Total financial assets with credit exposure 532,482 591,088 (ii) Maximum exposure to credit risk 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 2016 $000 2015 $000 92,228 125,113 253,115 254,388 Financial assets at fair value through profit or loss 187,082 211,587 Derivative financial assets Total credit risk 57 – 532,482 591,088 42 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 (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: 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 Credit exposure by credit rating AAA AA A BBB Below BBB CARRYING VALUE 2016 $000 2015 $000 81,795 92,119 180,515 214,153 412 – – – 12,437 16,705 Total 3,887 2,059 1,435 218 7,599 (vi) Financial assets that are individually impaired Outstanding premiums and trade receivables Total CARRYING VALUE 2016 $000 2015 $000 – – 1 1 Total counterparties with external credit rating by Standard and Poor’s 275,159 322,977 26C. Financing and liquidity risk Group 1 Group 2 Group 3 234,274 246,547 – – 6,026 13,964 Total counterparties with no external credit rating 240,300 260,511 Total financial assets neither past due nor impaired with credit exposure 515,459 583,488 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 Tower Insurance invests in Pacific regional investment markets through its Pacific Island operations to comply with local statutory requirements and in accordance with Tower Insurance investment policies. These investments generally have low credit ratings representing the majority of the value included in the ‘Below BBB’ and unrated categories in the table above. 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 maintains sufficient liquid assets to ensure that the Group can meet its debt obligations and other cash outflows on a timely basis. 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 balance date. All amounts disclosed are contractual undiscounted cash flows that include interest payments and exclude the impact of netting agreements. C O N T R A C T U A L C A S H F L O W S 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 T H R E E Y E A R S T W O T O I F V E Y E A R S T H R E E T O $000 $000 $000 $000 $000 $000 (iv) Financial assets that would otherwise be past due whose terms have been renegotiated No financial assets have been renegotiated in the past year (2015: nil). As at 30 September 2016 Financial liabilities (v) Financial assets that are past due but not impaired Trade payables 18,923 18,923 18,923 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 are as follows: LESS THAN 31 TO 61 TO OVER 30 DAYS $000 60 DAYS $000 90 DAYS $000 90 DAYS $000 TOTAL $000 As at 30 September 2016 Reinsurance recoveries receivable Outstanding premiums and trade receivables Total 5,025 10,420 1,289 288 17,022 3,150 7,978 1,244 285 12,657 Reinsurance payables 4,445 4,445 4,445 Other payables 3,164 3,164 3,164 Derivative financial liabilities 735 735 735 Total 27,267 27,267 27,267 As at 30 September 2015 Financial liabilities Reinsurance payables 2,612 2,612 2,612 Other payables 4,288 4,288 4,288 Total 26,229 26,229 26,229 1,875 2,442 45 3 4,365 Trade payables 19,329 19,329 19,329 – – – – – – – – – – – – – – – – – – – – – – – – – – – 43 26. Risk management (continued) 26D. Fair value of financial assets and liabilities Refer to note 25. 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. 26E. Derivative financial instruments (ii) Foreign currency 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 are interest rate swaps. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured 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 the reporting date: AVERAGE CONTRACTED FIXED INTEREST NOTIONAL PRINCIPAL AMOUNT FAIR VALUE 2016 % 2015 % 2016 $000 2015 $000 2016 $000 2015 $000 0% 0% 2% 0% 0% 0% 0% 0% 29,419 – 12,000 – 41,419 – – – – – (735) – 57 – (678) – – – – – Less than 1 year 1 to 2 years 2 to 5 years Over 5 years The following tables demonstrate 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. 2016 IMPACT ON: 2015 IMPACT ON: PROFIT AFTER TAX $000 PROFIT EQUITY $000 AFTER TAX $000 EQUITY $000 Change in variables 10% appreciation of New Zealand dollar 10% depreciation of New Zealand dollar 86 (2,284) 153 (6,010) (105) 2,791 (187) 7,394 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 (2015: nil). 26F. Sensitivity analysis (iv) Other price 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 profit after tax and equity is included in the tables below. The sensitivity analysis assumes changes in interest rates only. All other variables are held constant. 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 following tables demonstrate the impact of a 10% movement in the value of property funds and other unit trusts on the profit after tax and equity. The potential impact is assumed as at the reporting date. 2016 IMPACT ON: 2015 IMPACT ON: PROFIT AFTER TAX $000 EQUITY $000 PROFIT AFTER TAX $000 EQUITY $000 Change in variables + 10% property funds and other unit trusts – 10% property funds and other unit trusts 2016 IMPACT ON: 2015 IMPACT ON: PROFIT AFTER TAX $000 PROFIT EQUITY $000 AFTER TAX $000 EQUITY $000 2 (2) 2 (2) 2 (2) 2 (2) Change in variables + 50 basis points – 50 basis points (515) 469 (515) 469 (664) (664) 660 660 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. 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. 44 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 27. Capital risk management The Group’s objective when managing capital is to ensure that the level of capital is sufficient to meet the Group’s 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. Operating lease payments are recognised as an expense in the periods the services are received over the period 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. 29. Subsidiaries The table below lists Tower Limited subsidiary companies and controlled entities. All entities have a balance date of 30 September. NOTE 2016 $000 2015 $000 222,578 279,265 NAME OF COMPANY COUNTRY INCORPORATED IN HOLDINGS 2016 2015 NATURE OF BUSINESS Tower shareholder equity Standby credit facility Total capital resources 27A 50,000 – 272,578 279,265 The Group measures adequacy of capital against the Solvency Standards for Non-life Insurance Business (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. The Group is required by RBNZ to maintain a minimum solvency margin of no less than $50.0 million (2015: $50.0 million) 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. During the year ended 30 September 2016 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. 27A. Standby credit facility The Group entered into a cash advance facility with Bank of New Zealand on 7 September 2016. The facility provides for an amount of up to $50 million that can be drawn for general corporate purposes over a three year term and is subject to normal terms and conditions for a facility of this nature including financial covenants. 28. Operating leases Incorporated in New Zealand Tower Financial Services Group Limited NZ 100% 100% Tower Insurance Limited NZ 100% 100% Tower New Zealand Limited Tower Operations Limited NZ NZ 100% 100% 0% 100% Holding company General insurance Management services Non-operating company (amalgamated 29 April 2016) Incorporated Overseas Tower Insurance (Cook Islands) Limited Cook Islands Tower Insurance (Fiji) Limited Fiji Tower Insurance (PNG) Limited PNG 100% 100% 100% 100% 100% 100% National Pacific Insurance Limited Tower Insurance (Vanuatu) Limited Samoa 71% 71% Vanuatu 100% 100% General insurance General insurance General insurance General insurance General insurance 30. Transactions with related parties 30A. Key management personnel compensation The remuneration of key management personnel during the year was as follows: As lessee Rent payable to the end of the lease terms are: 2016 $000 2015 $000 Salaries and other short term employee benefits paid Independent director fees Not later than one year 3,044 2,934 Later than one year and not later than five years 7,763 9,326 Later than five years 3,733 7,001 14,540 19,261 Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. The 2015 comparative figure for salaries and other short term employee benefits has been restated to ensure comparability of current year presentation. Information regarding individual director and executive compensation is provided in the Corporate Governance section of the annual report. 45 2016 $000 2015 $000 4,219 4,321 565 455 4,784 4,776 30. Transactions with related parties (continued) 30B. Loans to key management personnel There have been no loans made to directors of the Company and other key management personnel of the Group, including their personally related parties (2015: nil). 34. 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 discontinued operations below. 30C. Other transactions with key management personnel Consolidated results of discontinued operations are as follows: For the year ended 30 September Investments business Non-participating life business Participating life business attributable costs Profit from discontinued operations 2016 $000 2015 $000 – – – – 13 491 892 1,396 Key management hold various policies and accounts with Tower Group companies. These are operated in the normal course of business on normal customer terms. 31. Contingent liabilities The Group is occasionally subject to claims and disputes as a commercial outcome of conducting insurance business. Provisions are recorded for these claims or disputes when it is probable that an outflow of resources will be required to settle any obligations. Best estimates are included within claims reserves for any litigation that has arisen in the usual course of business. The Group has no other contingent liabilities (2015: nil). 32. Capital commitments The Group has no capital commitments at reporting date (2015: $815,000 related to software licensing). 33. Subsequent events November earthquakes On 14 November a large earthquake occurred near Kaikoura, with a large number of aftershocks experienced in the subsequent days. At the time of preparing this note the extent of claims on Tower Insurance Limited was unable to be accurately quantified. However, under the existing reinsurance arrangements of Tower Insurance Limited, catastrophe cover attaches at $10,000,000. As early indications are that the impact of the event is extremely unlikely to exceed the limit of Tower Insurance Limited catastrophe cover, the maximum potential financial impact on Tower Insurance Limited, and therefore Tower Limited, is $10,000,000, or $7,200,000 after tax, plus the cost of any reinsurance reinstatement. Separation of Canterbury earthquake claims Tower Insurance Limited continues to be impacted by the Canterbury earthquake claims and the ongoing reassessment of over-cap claims by the EQC. To enhance the prospects of the strong underlying business, the board has determined to restructure the Tower group with the separation of Canterbury earthquake claims into a separate company. Tower Insurance Limited will be the likely entity for the Canterbury earthquake claims business, with the remaining underlying insurance business to be transferred to another company within the Tower Limited group with the same beneficial shareholding. There are three essential steps to implement this separation. • RBNZ approval and separate licences for each entity. • The raising of additional capital to fund the separation. • Shareholder approval to execute the separation. 46 Tower Limited annual report 2016 Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016 Corporate governance and disclosures 47 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. Tower’s governance team will undertake a review of Tower’s corporate governance practices and disclosures once NZX finalises its amended Corporate Governance Code in 2017. Compliance with governance requirements and recommendations For the reporting period to 30 September 2016, Tower considers its corporate governance practices have adhered to the NZX Corporate Governance Best Practice Code and the Financial Markets Authority’s ‘Corporate Governance in New Zealand: Principles and Guidelines’ handbook (FMA Handbook), other than as outlined in this corporate governance section. Copies of Tower’s principal governance documents and more detail about Tower’s governance practices are available on Tower’s website at www.tower.co.nz under the heading ‘Corporate Governance’ in the Investor Centre section. This statement is current as at 11 November 2016 and has been approved by Tower’s Board. 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 51 and 52). 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. returns across Tower and its subsidiaries, adding long- term value to Tower shares. The Board, when fulfilling its roles and 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 investment and foreign exchange policies • determining the company’s risk management policies and framework and the company’s information technology 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 • approving the appointment and remuneration of the Chief Executive Officer. The Board Protocols describe internal board procedures for efficient decision making. They set out how the Board will be structured, how directors are appointed and evaluated, how 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 2016, David Callanan was Tower’s company secretary. 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’. The Board is primarily governed by the Board Charter, Board Role of senior executives Protocols and the Code of Ethics. The Board Charter records the Board’s roles and responsibilities. It provides that the primary role of the Board is to effectively represent and promote the interests of shareholders with a view to enhancing growth and 48 Tower Limited annual report 2016 The day-to-day leadership and management of the company is undertaken by the Chief Executive Officer and senior management. The Chief Executive Officer is solely accountable to the Board for management performance. The Chief Executive Officer has also formally delegated Nominations, appointments and ongoing education decision making to senior management within their areas of responsibility and subject to quantitative limits to ensure consistent and efficient decision making across the company. Senior management 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 2016, the Board comprised five non- executive directors. Tower’s constitution currently requires a minimum of five directors and provides for a maximum of eight. Directors’ profiles are on pages 12 and 13. The Remuneration and Appointments Committee is 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 is currently being undertaken in accordance with the Board Charter. Role of Chair The Chair’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 Chair of the Board is elected by the directors. The Board supports the separation of the roles of Chair 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 Chair of Tower on 21 March 2013. 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 • the candidate’s 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 policy is applied to all directors and relevant officers. 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 49 candidate; the term of office already served by the director; Based on the NZX Listing Rules, the Board Protocols define whether the director is considered to be independent; and a a director as being independent if he/she is a non-executive recommendation by the Board in respect of the re-election of director who does not have any direct or indirect interest or the director. On appointment to the Board, directors receive a formal letter of appointment outlining their duties, obligations and 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 are structured, details of the Company’s directors’ and officers’ insurance, the Board Charter and other Tower corporate governance policies. The induction process also involves one-on-one discussions with the Chair, other directors and briefings from senior management to help new directors participate actively in Board decision making at the earliest opportunity. Directors are expected to develop their skills, competencies and industry knowledge by taking responsibility for their continuing education. 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 board papers and briefing information before Board meetings, including a report from the Chief Executive Officer and reports from senior management. Directors have unrestricted access to management and any additional information they consider necessary for informed decision making. Senior management also attend Board relationship that could, or could reasonably be perceived to: • influence, in a material way, his/her decisions relating to Tower, or • materially interfere with his/her ability to act in Tower’s best interests and the interests of Tower’s securityholders generally. Examples of relationships that remove independence include relationships with a material Tower customer, supplier, professional advisor or substantial shareholder. As at 30 September 2016, the Board considered that four of the five directors were independent. Those directors are Michael Stiassny, Steve Smith, Graham Stuart, and Warren Lee. David Hancock’s two-year tenure as Chief Executive Officer concluded on 16 August 2015. David remains a non-executive director 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. The FMA Handbook recommends that the Chair should be an independent director. Michael Stiassny is considered to be an independent director. The roles of Chair and Chief Executive Officer are not exercised by the same person. The role of Chief Executive Officer is held by Richard Harding. meetings in order to provide presentations to the Board and In accordance with the Company’s constitution, directors answer any queries directors may have. This allows the Board with an actual or potential conflict of interest on particular to understand the practical issues affecting Tower and the issues are required to disclose the conflict and may still attend impact of these issues on its performance. meetings but will abstain from voting on that issue. 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 Retirement, election and re-election During the year Rebecca Dee-Bradbury resigned from the has the approval of the Board Chair or Committee Chair to Tower Limited Board. obtain independent professional advice, Tower will meet the reasonable costs of the advice. Director independence At least one-third of the total number of directors must retire from office each year by rotation and, if they choose, stand for re-election by shareholders at the Annual Shareholders’ Meeting. Directors who retire each year are those who have The Board Protocols require that a majority of the Board been in office longest since their last election. If several will be independent directors. The Board assesses director directors have held office for equal terms and cannot agree independence upon each director’s appointment and then who will retire, it is determined by lot. The directors who regularly assesses the independence of each director will retire and stand for re-election at the 2017 Annual based on the interests disclosed by them. For this purpose Shareholders’ Meeting are Graham Stuart and Michael directors are required to immediately advise the Board of any Stiassny. new or changed relationships so the Board can make this assessment. 50 Tower Limited annual report 2016 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. No directors have been appointed to fill a casual vacancy since the last Annual Shareholders’ Meeting. The length of service of each director on the Board is 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 Committees are governed by written terms of reference, which detail their specific functions and responsibilities. The terms of reference for each Committee are reviewed disclosed on the ‘Director Profiles’ section on pages 12 and 13. periodically. Copies of each Committee’s terms of reference 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 are available on the Tower website at www.tower.co.nz under the ‘Corporate Governance’ section. The Committees make recommendations to the Board. They have no decision-making ability except where expressly provided by the Board. The Board is required to annually the interests of its shareholders. The Board regularly reviews confirm the membership and Chair of each of the Committees. its own composition and performance and that of the Board The experience and skills of individual Committee members Committees in accordance with the terms of the Board are set out in the directors’ profiles on pages 12 and 13. Member Charter (which also includes a review of the Board structure, attendance at each Committee meeting is set out on page 52. policies, Board succession, delegations and the necessity for and composition of the Committees). A performance evaluation of the Board and Board Committees is currently being undertaken, 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 directors and senior executives. Evaluations may be carried out by an external consultant. A performance evaluation of the Chief Executive Officer and individual directors is currently being undertaken. Director share ownership Audit and Risk Committee Members: Graham Stuart (Chair), Michael Stiassny, Steve Smith, Warren Lee and David Hancock. 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 (or equivalent) provided to the Board prior to the Board’s approval of Tower’s financial statements, which states that, to the best of the CEO and CFO’s knowledge and belief, Tower’s All directors are required by the Company’s constitution to financial records have been properly maintained, that Tower’s hold Tower shares. Directors and management are required to accounting policies and financial statements comply with comply with Tower’s Insider Trading and Market Manipulation the appropriate accounting standards, and that the financial Policy when purchasing and disposing of Tower securities. statements fairly present the financial position of Tower as The number of shares held by each director and their dealings at the balance date. This letter is provided on the basis that in Tower securities during the financial year are disclosed on Tower has maintained an internal control structure which is page 59. sufficient to produce reliable accounting records. 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 acting for Tower, it does not cover dishonest, fraudulent or malicious acts or omissions, or criminal liability. 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 • review draft half year and annual financial statements and the external auditor’s report, and make recommendations to the Board as to their adoption • recommend the appointment of, and oversee the performance of, the external auditor and be satisfied as to the auditor’s independence 51 • review the effectiveness and efficiency of management Following each meeting the Chair of the Committee provides processes, risk management and internal financial controls a report to the Board. The Chair is also required to provide and control systems an annual report summarising Committee activities, findings, • monitor and review compliance with regulatory and recommendations and results for the past year. statutory requirements and obligations • monitor the internal audit function and receive regular 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. The Company’s remuneration policies for directors and senior executives are set out on pages 56 and 57. Board and Committee meeting attendance There were seven scheduled Board meetings during the year from 1 October 2015 to 30 September 2016. Director attendance at Board and Committee meetings is set out below. The Chief Executive Officer attends all Board The Committee meets with the current internal auditors three and Committee meetings. The Chief Financial Officer (or times during the financial year and with the external auditors equivalent) attends all Board meetings and the Audit and Risk at least twice. 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 Chair of the Committee, who cannot also be Chair of the Board, and who is an independent director. Following each meeting the Chair of the Committee provides a report to the Board. The Chair 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 (Chair), Steve Smith, Graham Stuart and Warren Lee. The Remuneration and Appointments Committee advises the Board in respect of a number of matters, including: • the appointment and succession of directors, and director 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 Chair of the Committee, who will be an independent, non- executive director. 52 Tower Limited annual report 2016 Committee meetings. All Board and Committee meetings are attended by an appropriately qualified person who is responsible for taking accurate minutes of each meeting and ensuring that Board procedures are observed. 2015/2016 Tower Limited directors’ attendance record I I T O W E R L M T E D B O A R D 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-Bradbury1 Warren Lee David Hancock2 7 7 7 7 6 7 5 5 5 5 5 5 5 1 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 1 1 1 1 1 1 - 1 Rebecca Dee-Bradbury resigned as a Tower director on 14 September 2016. 2 David Hancock returned from a sabbatical in February 2016. 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 Further information on the governance of Tower Insurance for achieving these aims as it sets out the minimum standards Limited will be contained in the annual report of that company, of conduct and behaviour Tower expects of its directors, which will be registered with the Companies Office. 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 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. Further information on the insurance prudential supervision regime can be found on the Reserve Bank website, www.rbnz.govt.nz. Insider trading 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 trading is allowed (following half year and full year results announcements). A copy of Tower’s Insider Trading and In addition to the Code of Ethics, Tower has a Fraud Policy and Market Manipulation Policy is available on Tower’s website at a Whistleblower Policy, which are applicable to all staff. The www.tower.co.nz under the ‘Corporate Governance’ section. Fraud Policy sets out Tower’s approach to the way in which suspicions/allegations of fraud, corruption and/or misconduct Diversity Policy within the Group are to be reported by staff and how Tower will deal with such incidents. The Whistleblower 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 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 The New Zealand insurance industry is regulated by motivated to do their very best for our customers and for each the Reserve Bank of New Zealand, under the Insurance other. Nurturing an environment that values and promotes (Prudential Supervision) Act 2010 (IPSA). All companies diversity will help improve the quality of our decision making, carrying on insurance business in New Zealand must hold productivity, and collaboration. a licence under IPSA. Tower’s licensed general insurance company is Tower Insurance Limited. The Board is responsible for overseeing the implementation of the Diversity Policy, with delegation to the Remuneration Key elements of the insurance prudential supervision and Appointments Committee to review and report annually regime include minimum solvency requirements and regular on the status of diversity within Tower and on policy reporting to the Reserve Bank, the need for directors and effectiveness. The Board considers that Tower has addressed other relevant officers to meet fit and proper standards, and the requirements of its Diversity Policy. Tower’s diversity governance and risk management requirements. programme and policy is currently undergoing review and will be finalised when NZX finalises its amended Corporate Governance Code in 2017. The Tower Insurance Limited Board: • is governed by a Board Charter • comprises the same directors as the Board of Tower Limited, and • has two standing committees, being the Audit and Risk Committee and the Remuneration and Appointments Committee, which are governed by written terms of reference. 53 The following table shows gender representation across Tower’s website, www.tower.co.nz, provides information to Tower as at 30 September 2016: shareholders and investors about Tower. The website includes GROUP Board of Directors Male Female Executive leadership team1 Male Female Senior leadership team2 Male Female Employees Male Female Total company3 Male Female % BY GROUP 100% 0% 63% 37% 50% 50% 45% 55% 45% 55% 2015-2016 NUMBER 2014-2015 NUMBER % BY GROUP 5 0 5 3 16 16 231 285 252 304 84% 16% 66% 34% 65% 35% 42% 58% 44% 56% 5 1 4 2 15 8 235 318 254 328 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. copies of past annual reports, results announcements, 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 encourages shareholders to receive communications from, and send communications to, Tower and the share registry electronically, for reasons of speed, convenience, cost and environmental considerations. Tower shareholders can receive company information electronically by registering their email addresses online with Tower’s share registry http://www.investorcentre.com/nz. Tower’s Annual Shareholders’ meeting is an opportunity for shareholders to receive updates from the Chief Executive Officer and Chair 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 the Annual Shareholders’ Meetings to ask questions of Tower’s auditors regarding the conduct of the audit and preparation and content of the auditor’s 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 who will vote on their behalf. Market and shareholder communication and shareholder participation at meetings Announcements Tower recognises that public confidence in the integrity of Tower is based on continuous, full and open disclosure of Tower makes the following regular announcements to the market and shareholders: information about its activities to the market and relevant • Annual results are announced in late November stakeholders. Tower’s Corporate Disclosure Policy provides • Annual reports are released in December 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 value. The Policy provides that only authorised spokespersons can communicate on behalf of Tower with the investment community, shareholders and the media. A copy of the Policy is available on Tower’s website at www.tower.co.nz. Tower has policies and procedures in place designed to ensure that all investors have equal and timely access • Tower’s Notice of Annual Shareholders’ Meeting is generally sent to shareholders in December or January • Tower’s Annual Shareholders’ Meeting is held in February or March • Half year results are announced in late May • Half year reports are released in June. Credit Rating Global rating organisation A.M. Best Company issued the following ratings of companies: to material information concerning Tower, to ensure that Tower Insurance Limited company announcements are factual and presented in a Financial Strength Rating A – (Excellent) clear and balanced way, and that Tower complies with the continuous disclosure requirements of the NZX and ASX. Issuer Credit Rating a- Effective 15 July 2016 Announcements of financial results, changes in profit forecasts and other material market announcements require Board approval. Tower Limited Issuer Credit Rating bbb – (Good) Effective 15 July 2016 54 Tower Limited annual report 2016 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. 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. Under the current Policy, the Audit and Risk Committee approves the appointment of the internal auditor following the Chief Executive Officer’s recommendation. Tower stakeholders, including shareholders, clients, staff The internal auditors help Tower exercise good corporate and suppliers, require assurance that Tower will manage its governance and meet their regulatory obligations by providing exposure to risk. Executive and senior management and staff them with independent assurance of the adequacy and must be able to demonstrate that reasonable steps have been taken to effectively manage Tower’s risks. 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 Risk and compliance framework activities and operations they audit. Tower’s Risk and Compliance Framework 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. Tower regularly evaluates the effectiveness of its risk management framework, including the internal audit function, to ensure that its internal control systems and processes are monitored and updated on an on-going basis. The Framework applies to Tower and all of its subsidiaries and related companies, and all staff and contractors employed by External audit Tower and any of its subsidiaries. Effective management of The Tower Board is fully committed to ensuring the risk and compliance is essential to ensure that Tower remains quality and independence of the external audit process. a viable business and is able to achieve its objectives. This As part of this process Tower encourages full and frank is integral in providing guidance to management and staff of disclosure and discussions between the Board, Tower’s Tower in dealing with its risk and compliance obligations. internal auditors, management and the external auditor, The Audit and Risk Committee regularly reviews its risk PricewaterhouseCoopers (PwC). management procedures and framework to ensure that it PwC was re-appointed as auditor by shareholders at the complies with its legal obligations. Changes to the enterprise Annual Shareholders’ Meeting in February 2016 to audit the risk management framework during the financial year included the adoption of a Risk Appetite Statement. The Risk Appetite Statement articulates the amount and type of risk that Tower is willing to take in order to meet its strategic objectives and provides direction to management on how to manage risks. The Audit and Risk Committee is responsible for reviewing whether Tower has any material exposure to any economic, environmental and social sustainability risks, and if so, to develop strategies to manage such risks, and present such strategies to the Board. Internal audit During the 2016 financial year, Tower contracted an independent chartered accounting firm, Ernst & Young (EY), to carry out the internal audit function. That firm reported to the Chair of the Audit and Risk Committee and had 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. Tower is currently reviewing its internal audit policies and procedures. 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. 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 of staff from the audit firm. The Board reviews external auditor 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 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 55 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. Role of the Remuneration and Appointments Committee The Remuneration and Appointments Committee is responsible for assisting and advising the Board in relation to, Under the Policy, PwC is required to provide the Audit and amongst other things: 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 professional independence. Non-audit services provided by PwC to Tower and its subsidiaries during the financial year did not, in Tower’s opinion, affect auditor objectivity and 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 March 2017 and will be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. Details of PwC fees for audit and other services provided to Tower are set out in note 7 of the Tower Limited financial statements. Corporate governance policies and procedures 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 Tower’s remuneration policies aim to attract and retain 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 directors, the Chief Executive Officer, the senior executives and staff in general. 56 Tower Limited annual report 2016 • remuneration strategy, structure and policy • remuneration of the Chief Executive Officer • setting non-executive directors’ remuneration • setting Board committee members’ fees, and • determining remuneration packages of senior executives, following recommendations from the Chief Executive Officer. 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 per annum. 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 sitting on certain Board Committees. BOARD/COMMITTEE Base fee – Board of directors Audit and Risk Committee CHAIR MEMBER $130,000 $78,570 $15,000 $9,000 Remuneration and Appointments Committee1 - - 1 The Board determined that from 1 December 2012 no fees would be payable for sitting on the Remuneration and Appointments Committee Additional fees may be paid to non-executive directors for one-off tasks and/or additional appointments where required, for example, sitting on a due diligence committee. The remuneration policy for non-executive directors does not include participation in either a share or share option plan. 2015/2016 directors’ remuneration and benefits of Tower and its subsidiaries Amounts in the table below reflect fees paid and accrued for the year ended 30 September 2016. Fees include base fees and additional fees in the financial year for one-off tasks and additional appointments. DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER LIMITED FOR THE YEAR TO 30 SEPTEMBER 2016 Michael Stiassny Steve Smith Graham Stuart Rebecca Dee-Bradbury1 Warren Lee2 David Hancock3 FEES (NZ$) 139,000 87,570 93,570 87,570 98,770 56,880 1. Rebecca Dee-Bradbury resigned as a Tower director on 14 September 2016. 2. Warren Lee’s remuneration includes a one-off consultancy fee paid to him. 3. David Hancock was on sabbatical from August 2015 to February 2016 and did not receive directors’ fees during that time. David received directors’ fees from his return from sabbatical in February 2016, and Audit and Risk Committee fees from his appointment to the Committee in April 2016. DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER LIMITED SUBSIDIARIES FOR THE YEAR TO 30 SEPTEMBER 2016 Alden Godinet1 Rodney Reid1 FEES (WST$) $5,625 $5,625 1. Fees earned in capacity as director of National Pacific Insurance Limited. NPI fees are paid in Western Samoan Tala. 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 their Tower securities (including under any equity-based remuneration scheme). 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 Tower’s executives to meet Tower’s short and long term objectives. Employee remuneration Set out in the following table are the number of employees or former employees of Tower (including Tower’s Pacific subsidiaries), not being directors or former directors, who received remuneration and other benefits valued at or exceeding $100,000 for the year ended 30 September 2016. 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 2015-2016 2014-2015 100,000 109,999 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 119,999 129,999 139,999 149,999 159,999 169,999 179,999 189,999 199,999 200,000 209,999 210,000 219,999 220,000 229,999 230,000 239,999 240,000 270,000 249,999 279,999 280,000 289,999 310,000 319,999 380,000 389,999 400,000 409,999 410,000 419,999 430,000 439,999 490,000 499,999 590,000 599,999 720,000 729,999 750,000 759,000 19 21 7 10 11 4 5 3 6 3 2 2 1 - 1 2 1 - - 1 1 1 1 1 - 1 13 14 12 14 10 5 1 3 4 2 2 - 2 2 - - 2 1 1 1 - - 1 - 1 - Total 104 91 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. Richard Harding’s annual base salary is $750,000, with the Donations potential to earn short-term incentives up to $500,000. During the financial year ended 30 September 2016, total donations made by Tower and its subsidiaries are as follows: Tower Limited Tower Limited subsidiaries NZ$0 NZ$39,120 57 Director Director Director Director Director Director Director Director Director Director Director Chair Director Director Director Director Disclosures Interests register Michael Stiassny Atapo Corporation Limited Bengadol Corporation Limited Frequency Media Group Limited Tower and its subsidiaries are required to maintain an interests Emerald Group Limited register in which the particulars of certain transactions and matters involving the directors must be recorded. The 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 Gadol Corporation Limited Geffen Holdings Limited Glenogle Trust Limited Knotser Properties Limited Kordamentha Limited and subsidiary companies or she is interested unless the director is required to sign a Michael Spencer Limited 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 Ngati Whatua Orakei Housing Trustee Limited Ngati Whatua Orakei Whai Rawa Limited NZ Windfarms Limited and subsidiary companies Director* Plan B Limited Poukawa Estate Limited Queenstown Airport Corporation Limited During the financial year, Tower’s directors disclosed interests, Sasha Properties Limited or a cessation of interests (indicated by an asterisk (*)), in the following entities pursuant to section 140 of the Companies Act 1993. No disclosures were made by directors of any other Tower subsidiary. Rebecca Dee-Bradbury1 Bluescope Steel GrainCorp Ltd LMH Investments Pty Ltd Director Director Director Business Advisory Board, Monash Business School Member David Hancock Afterpay Pty Limited Finarch Pty Limited Finclear Pty Limited Freedom Insurance Pty Limited Steve Smith Fulton Hogan Limited and subsidiary companies Hellaby Holdings Limited Kinrich Trust Kinrich Holdings Limited Summerlee Investments Limited Unison Securities Limited Unison Capital Advisors Limited Pascaro Investments Limited Director Director Director Chair Director Chair Trustee Director Director Director Director Chair Spanbild Holdings Limited and subsidiary companies Chair* Trebol Investments Limited and subsidiary companies Director Rimu SA (Chile) and subsidiary companies Director The National Foundation for the Deaf Incorporated Board Member SB Entertainment Holdings and subsidiary companies Director Stride Property Limited and related companies Ted Kingsway Limited Triceps Holdings Limited UCI Holdings Limited Vector Limited and subsidiary companies WEST24 Limited Whai Rawa GP Limited Whai Rawa Kainga Development Limited Institute of Directors in New Zealand Graham Stuart Leroy Holdings Limited Director Director Director* Director Chair Director Director Director President Director 1. Rebecca Dee-Bradbury resigned as a director of Tower on 14 September 2016. 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 to section 162 of the Companies Act 1993. Use of company information by directors Good Soundz Limited Board Member 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. 58 Tower Limited annual report 2016 Directors’ shareholdings At 30 September 2016, Tower Limited directors held the following interests in Tower Limited shares: DIRECTOR Rebecca Dee-Bradbury1 David Hancock Steve Smith2 Michael Stiassny Graham Stuart Warren Lee ORDINARY SHARES BENEFICIAL 5,000 – 9,230 82,732 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. Rebecca resigned as a director of Tower on 14 September 2016. 2. These shares are owned by Kinrich Holdings Limited, of which Steve is a director. Steve has a beneficial interest in Kinrich Holdings Limited through his family trust. 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 DATE OF DISCLOSURE INTEREST NUMBER ACQUIRED (DISPOSED) CONSIDERATION Michael Stiassny 02/08/2016 Beneficial 397 Nil Buyback An on market share buyback of up to $34 million continued during the first half of 2016. As at 31 March 2016, Tower had purchased 1,321,320 shares at an average price of $1.83, returning approximately $2.41 million to shareholders. This represented less than 1% of total issued Tower shares. The share buyback was not renewed following Tower’s half-year results announcement on 24 May 2016. Tower subsidiary company director disclosures The following persons held office as directors of subsidiary companies at 30 September 2016. Those who retired during the year are indicated with an (R). Those who retired or were appointed after 30 September 2016 are footnoted. TOWER SUBSIDIARY COMPANY DIRECTOR DISCLOSURES Tower Insurance Limited Tower Financial Services Group Limited The National Insurance Company of New Zealand Limited David Hancock, Warren Lee, Steve Smith, Michael Stiassny, Graham Stuart, Rebecca Dee-Bradbury (R) David Hancock, Warren Lee, Steve Smith, Michael Stiassny, Graham Stuart, Rebecca Dee-Bradbury (R) Richard Harding, Brett Wilson2, David Callanan3 Tower New Zealand Limited Richard Harding, Brett Wilson2, David Callanan3 Tower Operations Limited1 Richard Harding, Brett Wilson2 National Insurance Company (Holdings) Limited Vanessa Dudley (R), Paul Absell (R), Richard Harding, Sarah-Jane Wild, Christopher Sutherland, Brett Wilson2, David Callanan3 Southern Pacific Insurance Company (Fiji) Limited Vanessa Dudley (R), Paul Absell (R), Richard Harding, Sarah-Jane Wild, Christopher Sutherland, Brett Wilson2, David Callanan3 Tower Insurance (Fiji) Limited Vanessa Dudley (R), Paul Absell (R), Richard Harding, Sarah-Jane Wild, Christopher Sutherland, Brett Wilson2, David Callanan3 Tower Insurance (Cook Islands) Limited Vanessa Dudley (R), Mark Savage (R), Richard Harding, Christopher Sutherland, Brett Wilson2, David Callanan3 Tower Insurance (PNG) Limited Southern Cross Marine Limited National Pacific Insurance Limited National Pacific Insurance (Tonga) Limited Tower Insurance (Vanuatu) Limited Vanessa Dudley (R), Paul Absell (R), Mark Savage (R), Richard Harding, Christopher Sutherland, Brett Wilson2, David Callanan3, Jeremy Fergusson4 Vanessa Dudley (R), Paul Absell (R), Mark Savage (R), Richard Harding, Christopher Sutherland, Brett Wilson2, David Callanan3, Jeremy Fergusson4 Vanessa Dudley (R), Alden Godinet, Richard Harding, Rodney Reid, Christopher Sutherland, Brett Wilson2, David Callanan3 Vanessa Dudley (R), Alden Godinet, Richard Harding, Rodney Reid, Christopher Sutherland, Brett Wilson2, David Callanan3 Vanessa Dudley (R), David Hancock (R), Richard Harding, Mike Petrie, Christopher Sutherland, Brett Wilson2,David Callanan3 1. Tower Operations Limited was amalgamated with Tower Financial Services Group Limited on 29 April 2016 and became Tower Financial Services Group Limited. 2. Brett Wilson resigned as director of these companies on 7 October 2016. 3. David Callanan was appointed a director of these companies on 7 October 2016. 4. Jeremy Fergusson resigned as director of these companies on 26 October 2016. No employee appointed as a director of a subsidiary receives 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 57. Auditor fees paid on behalf of Tower and its subsidiaries are disclosed in the financial statements. Shareholder and exchange disclosures Shareholder analysis Tower’s shares are quoted on both the NZSX and ASX. As at 11 November 2016, 17,057 Tower shareholders held less than A$500 of Tower shares (i.e. less than a marketable parcel as defined in the ASX Listing Rules), holding a total of 5,710,642 Tower shares. 59 Total voting securities Principal shareholders (as at 11 November 2016) As at 11 November 2016, Tower had 168,662,150 ordinary The names and holdings of the 20 largest registered Tower shares held by 28,432 holders. Tower’s ordinary shares each shareholders as at 11 November 2016 were: 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. NAME 1 Accident Compensation Corporation Voting may be conducted by a show of hands or a poll. 2 UBS Nominees Pty Limited TOTAL ORDINARY SHARES % 13,913,935 8.24 11,274,196 6.68 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. Substantial product holders (as at 11 November 2016) 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 11 November 2016 were: NAME TOTAL ORDINARY SHARES1 Salt Funds Management Limited Accident Compensation Corporation UBS Group Perpetual Limited Westpac Banking Corporation National Australia Bank 18,755,235 13,980,252 11,413,975 11,274,196 10,854,312 10,708,635 3 Citibank Nominees (New Zealand) Limited 10,783,563 6.39 4 Guardian Nominees No 2 A/C 5 FNZ Custodians Limited 10,744,391 6.37 9,869,932 5.85 6 HSBC Custody Nominees New Zealand Limited 5,763,669 3.41 7 BNP Paribas Nominees (NZ) Limited 8 National Nominees New Zealand Limited RBC Investor Services Australia Nominees Pty Limited 9 10 HSBC Nominees (New Zealand) Limited 11 JP Morgan Chase Bank NA NZ Branch 12 Citicorp Nominees Pty Limited HSBC Nominees (New Zealand) Limited A/C State Street 13 14 National Nominees Limited 15 Forsyth Barr Custodians Limited 16 BNP Paribas Nominees Pty Limited 17 New Zealand Depository Nominee Limited 18 Leveraged Equities Finance Limited 19 FNZ Custodians Limited (DRP NZ A/C) 5,452,757 3.23 4,944,805 2.93 3,692,257 2.18 2,389,864 1.41 2,372,933 1.4 2,186,604 1.29 1,481,942 0.87 1,087,023 0.64 958,783 0.56 953,675 0.56 866,782 0.51 815,596 0.48 720,295 0.42 20 FNZ Custodians Limited (DTA Non Resident A/C) 691,469 0.4 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. Tower Limited Shareholder Statistics (as at 11 November 2016) HOLDER COUNT HOLDER COUNT % 72.89 18.22 HOLDING QUANTITY (ORDINARY SHARES) 8,603,079 11,007,238 4 8,485,669 4.59 0.3 100 34,429,077 106,137,087 168,662,150 20,723 5,181 1,136 1,306 86 28,432 HOLDING QUANTITY % 5.1 6.53 5.03 20.41 62.93 100 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 Total 60 Tower Limited annual report 2016 Other matters ASX Listing Status Tower Limited changed its ASX admission category to ‘ASX Foreign Exempt Listing’ on 18 May 2016. As an ASX Foreign Exempt Listing, Tower Limited is primarily regulated by the listing rules of its home exchange (being the NZX Main Board (NZSX)) and is exempt from complying with most of ASX’s Listing Rules. Tower confirms that it continues to comply with the NZX Listing Rules. The Annual Report is signed on behalf of the Board by Michael Stiassny Graham Stuart Chair Director 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 2016. 61 62 Tower Limited annual report 2016 63 64 Tower Limited annual report 2016 Tower Directory Enquiries For customer enquiries, call Tower on 0800 808 808 or visit www.tower.co.nz For investor enquiries: Telephone: +64 9 369 2000 Email: investor.relations@tower.co.nz Website: www.tower.co.nz Board of Directors Michael Stiassny (Chair) David Hancock Warren Lee Steve Smith Graham Stuart Chief Executive Officer Richard Harding Company Secretary David Callanan Executive Leadership Team Richard Harding Tony Antonucci David Callanan Michelle James 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 2245 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. On Wednesday 18 May 2016, Tower’s ASX admission category changed to “ASX Foreign Exempt Listing”. 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 Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford VIC 3067 GPO Box 3329 Melbourne Vic 3000 Freephone within Australia: 1800 501 366 Telephone Australia: +61 3 9415 4083 Facsimile Australia: +61 3 9473 2500 Email: enquiry@computershare.co.nz Website: investorcentre.com/nz You can also manage your holdings electronically by using Computershare’s secure website www.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: www.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: www.investorcentre.com/nz
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