Tower Limited Annual Report 2016

FY2016 Annual Report · Tower Limited

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A 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

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

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

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%

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

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%.

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.

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

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.

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.

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

Board
of Directors

Michael
Stiassny

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.

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

Notes

1. Summary of general accounting
policies

13. Intangible assets

12. Receivables

25. Financial instruments

12A. Reinsurance contract in dispute 31

26. Risk management

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

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

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

11. Reconciliation of loss for the period
to net cash flows from operating
activities

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

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

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

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

302,940

304,730

(49,106)

(56,765)

253,834

247,965

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

(26,426)

(9,930)

4,911

1,898

(21,515)

(8,032)

–

1,396

(21,515)

(6,636)

(22,328)

(6,982)

813

346

(21,515)

(6,636)

CENTS

(13.21)

–

(4.79)

0.80

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)

(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)

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

92,228

125,113

254,685

257,851

188,522

213,593

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

382,172

384,585

(42,822)

6,376

(116,772)

(111,696)

222,578

279,265

1,374

1,644

223,952

280,909

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

–

(22,328)

–

(22,328)

813

(21,515)

–

(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

–

(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

Deferred income tax relating to asset
revaluation

Total comprehensive income (loss)

–

(6,982)

–

(6,982)

–

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

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

3,251

3,413

(1,077)

2,984

67,935

138,499

(47,248)

(57,105)

(261,779)

(299,642)

(77,248)

(84,912)

(4,598)

(10,310)

(3,940)

17,937

18,380

1,141

(9,175)

(21,606)

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

92,228

125,113

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.

Tower Limited annual report 2016

Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016Cash 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.

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

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

(163)

(154)

–

2,810

(106)

(1,045)

1,765

(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

Tower Limited annual report 2016

Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016Group 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)

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

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

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

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%

–
–

(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)

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.

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)

(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

149

543

343

384

Fees paid to subsidiaries’ auditors different to
Group auditors:

Audit of financial statements (4)

Total fees paid to auditors

594

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

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

C
O
M
P
R
E
H
E
N
S
V
E

(

C
H
A
R
G
E
D

)

C
R
E
D
T
E
D

T
O

S
T
A
T
E
M
E
N
T

T
O

N
C
O
M
E

(

C
H
A
R
G
E
D

)

C
R
E
D
T
E
D

N
C
O
M
E

O
P
E
R
A
T
O
N
S

O
T
H
E
R
G
R
O
U
P

C
R
E
D
T
E
D
T
O

C
O
M
P
A
N
E
S

(

C
H
A
R
G
E
D

)

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

D
S
C
O
N
T
N
U
E
D

FOR THE YEAR ENDED 30 SEPTEMBER 2016

$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

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)

(171)

(137)

–

(457)

–

949

492

–

(4,810)

(1,323)

(6,133)

(75)

218

143

–

(18)

–

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

J
U
R
S
D
C
T
O
N
A
L

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

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

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

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

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

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.

Tower Limited annual report 2016

Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 20162016
$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

(224)

(128)

155

(51)

Year ended
30 September 2016

–

Cost:

G
O
O
D
W
L
L

A
C
Q
U
R
E
D

D
E
V
E
L
O
P
E
D

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

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)

–

(10)

–

(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)

–

(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.

13. Intangible assets (continued)

SOFTWARE

Impairment of software

G
O
O
D
W
L
L

A
C
Q
U
R
E
D

D
E
V
E
L
O
P
E
D

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

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

–

9,798

15,349 25,180

(1)

–

(109)

(110)

–

(9,819)

–

(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)

(2)

–

(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

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.

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

E
Q
U
P
M
E
N
T
&

F
U
R
N
T
U
R
E

O
F
F
C
E

L
A
N
D
A
N
D

V
E
H
C
L
E
S

M
O
T
O
R

E
Q
U
P
M
E
N
T

C
O
M
P
U
T
E
R

T
O
T
A
L

B
U
L
D
N
G
S

$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

–

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)

124

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

–

5,583

129

–

101

–

432

6,116

–

129

–

(6,005)

(246)

(16)

(6,267)

251

275

176

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

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

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

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 201618. 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)

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.

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

$000

148,710 91,358 240,068 141,049 109,663 250,712

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)

(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.

Tower Limited annual report 2016

Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016The 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%

Discount rates for succeeding year

2.5% – 6.3%

Discount rates for following years

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

Long tail claims in the Pacific Islands

0.9 to 1.8 years

2016

2015

Inwards reinsurance

Inflation rate

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

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

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)

(11)

(28)

(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.

The following table shows the expected run-off pattern of net
outstanding 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;

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 2016estimate. 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.

(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

R
E
C
E
V
A
B
L
E
S

L
O
A
N
S
A
N
D

$
0
0
0

T
O
T
A
L

$
0
0
0

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

$
0
0
0

F
N
A
N
C
A
L

L
A
B
L
T
E
S

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

–

– 188,522

–

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

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.

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.

187,116

1,406

–

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.

188,522

Derivative financial assets

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

Total financial assets

213,593

–

211,621

1,972

–

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.

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

–

532,482

591,088

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

196

469

3,644

2,031

1,433

7,130

Credit exposure by credit rating

AAA

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

–

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

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

F
V
E
Y
E
A
R
S

T
H
R
E
E
T
O

$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

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

Other payables

3,164

Derivative financial
liabilities

735

Total

27,267 27,267 27,267

As at
30 September 2015

Financial liabilities

Reinsurance payables

2,612

Other payables

4,288

Total

26,229 26,229 26,229

1,875

2,442

4,365

Trade payables

19,329 19,329 19,329

–

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

29,419

–

12,000

–

41,419

–

(735)

–

(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

(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)

Change in variables

+ 50 basis points

– 50 basis points

(515)

469

(515)

469

(664)

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.

Tower Limited annual report 2016

Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 201627. 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

100%

Tower Insurance Limited NZ

100%

Tower New Zealand
Limited

Tower Operations
Limited

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%

National Pacific
Insurance Limited

Tower Insurance
(Vanuatu) Limited

Samoa

71%

Vanuatu

100%

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.

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

–

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.

Tower Limited annual report 2016

Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2016Corporate
governance
and disclosures

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

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

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.

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

• 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.

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

T
O
W
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L
M
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D
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O
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D

A
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D
T
A
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D
R
S
K

C
O
M
M
T
T
E
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Meetings held

Michael Stiassny

Steve Smith

Graham Stuart

Rebecca Dee-Bradbury1

Warren Lee

David Hancock2

A
N
D
A
P
P
O
N
T
M
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N
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S

R
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R
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O
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C
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M
T
T
E
E

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.

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%

63%

37%

50%

45%

55%

45%

55%

2015-2016

NUMBER

2014-2015

NUMBER

% BY
GROUP

231

285

252

304

84%

16%

66%

34%

65%

35%

42%

58%

44%

56%

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

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

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.

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

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

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

Total

104

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

Director

Chair

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

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

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

Chair

Director

Chair

Trustee

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

Chair

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

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.

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)

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), 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.

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

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

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

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

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

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

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.

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