More annual reports from Tower Limited:
2023 ReportTower Limited
2017 Annual Report
2
Tower Limited annual report 2017
Transformation
into a
New Zealand
challenger brand
underway
3
With additional
capital in place, we
will now accelerate
our momentum
through continued
investment in
transformation
initiatives that will
achieve a
true step change.
Michael Stiassny
Chair
4
Chair’s report
on behalf of the directors
Turning the corner
and accelerating
transformation.
There is no hiding the fact that the past
few years have been challenging ones for
the Tower business and our shareholders.
Faced with an exceptional set of
circumstances, Tower has had to dig
deep to find new ways to prosper by
embracing disruption and innovation.
While it is most certainly early days, Tower is turning the corner.
The positive trends experienced over the past two years allow
for greater confidence in both Tower’s strategy and future
performance targets.
Tower’s full year result has shown improvement in core metrics
including policy and premium growth, claims control and
expense reduction.
The Board’s focus over the past 12 months has been on
creating a suitable and sustainable structure to enable Tower
to confidently invest in its future – while also mitigating the
fundamental uncertainty relating to the legacy of the Canterbury
earthquakes. This platform is now in place.
Following an extensive independent review of Tower’s solvency
capital, Tower has now successfully raised the $70.8 million
additional capital required to achieve those joint objectives.
We are increasingly optimistic, but also remain appropriately
cautious. The Board acknowledges the complexity of the
environment surrounding Canterbury claims and the ongoing
uncertainty in finalising these. Therefore, we elected to create
an additional risk margin of $10 million over and above the
provision of the Appointed Actuary. This is equivalent to a
probability of sufficiency between the 80-85th percentile.
This capital will be released once uncertainty surrounding
outstanding Canterbury claims liability declines.
Tower reported a full year loss of $8 million, an improvement
of $13.5 million on the prior year. This reported loss was driven
by additional Canterbury provisions of $11.4 million after tax and
further after tax impacts of $7.2 million from the additional risk
margin for Canterbury, as determined by the Board; $4.1 million
from the Kaikoura earthquake; and $3.1 million from corporate
transaction activity.
Despite an unprecedented number of large natural events,
underlying profit after tax of $18 million reflected the positive
impact of the initiatives driving Tower’s transformation into a
digital challenger brand.
As we have previously outlined, investment in digital and IT is
required to successfully complete Tower’s emergence as a
challenger brand.
We remain confident that investment in these programmes
of work that underpin the Tower transformation strategy will
deliver long-term value for shareholders.
With additional capital in place, we will accelerate our
momentum through continued investment in transformation
initiatives that will achieve a true step change.
Tower has inherently strong cash flows and a long history
of paying dividends to shareholders. Tower’s Board and
management team remain strongly committed to paying
dividends and to the efficient management of capital. The
Board will review the dividend policy and look to recommence
dividends in FY18.
In closing, my fellow Directors join with me in acknowledging
the work and dedication of Richard Harding and the Tower
team. Despite the uncertainty over Tower’s future ownership,
they have remained resolute in their determination to enact our
transformation strategy and deliver solid results.
I would also like to thank our customers, shareholders and
business partners for their continued loyalty and support.
Michael Stiassny
Chair
5
Update
from the CEO
Transformation
of underlying
business
underway.
Richard Harding
Chief Executive Officer
6
Tower Limited annual report 2017
Significant opportunity exists in the Tower
business. The positive momentum we’ve gained
over the past 12 months shows that we have a
powerful platform to grow from.
We have made progress transforming our business, with our focus on
improving everything we do having a real impact, delivering a stable
underlying performance.
Our simplification strategy has driven growth in customers and
Gross Written Premium (GWP), controlled claims costs, while at the
same time improving management expenses. Over the past year:
• 12,441 policies were added to Tower’s core NZ book
• core GWP grew 5.8%, delivering full year GWP of $312.4 million
• digital sales grew to 30% of new business transactions,
up from 9% in March 2016
• business as usual claims costs successfully contained at
$124.2 million
• management expenses reduced $3.9 million on the prior year
These positive trends demonstrate that Tower’s transformation into
a digital challenger brand is progressing and shows that the strength
of our underlying business provides a powerful platform for future
growth.
Over the coming years, Tower will keep growing thanks to our
focus on customers and the continued momentum being gained
through our digital channels. Sound underwriting, efficient claims
management and improved business processes will see continued
stabilisation of claims costs and management expenses.
There remains significant opportunity in the Tower business and
I am confident that investment in our transformation strategy will
accelerate the progress we have seen, by allowing us to rapidly
respond in today’s constantly changing digital landscape.
Investment will drive our transformation into a digital challenger
brand and deliver a step change in our results.
With our capital raise now complete, we are well positioned to
complete this transformation and I’m looking forward to leading the
business through the change, realising Tower’s significant potential
and delivering strong shareholder returns.
Richard Harding
Chief Executive Officer
Full year
summary
Tower reported a loss after tax of $8 million
for the year ended 30 September 2017
(FY17), compared to a loss of $21.5 million
for the year ended 30 September 2016 (FY16).
Tower’s FY17 result was impacted by further adjustments to
Canterbury provisions, an additional risk margin Tower’s Board
allocated for Canterbury claims, the Kaikoura earthquake and
a number of other large loss events.
Tower delivered an underlying profit after tax of $18 million
for FY17, a slight decline from $20.1 million in FY16 due to an
unusually large number of natural events and the impact of
lower interest rates on investment revenue.
Tower has strong underlying New Zealand and Pacific
businesses with its strategic imperatives driving ongoing
transformation.
During the year, Tower continued to improve the business,
achieving policy growth in the core New Zealand book,
growing its digital offering, delivering better claims
performance, and reducing management expenses.
These improvements and positive results show Tower’s
transformation is well underway. However, this has been
offset by an unusually large number of natural events in FY17
and the impact of lower interest rates on investment revenue.
Thanks to improvements in pricing and digital, Tower added
over 12,000 policies to its core New Zealand portfolio, seeing
GWP grow 3% over the year to $312.4 million.
Tower’s claims costs were controlled at $131.6 million despite
experiencing one of the most severe natural disaster years
in history. This was due to the success of initiatives launched
in the past 12 months and continued focus on underwriting
excellence.
A sharp focus on non-personnel costs saw the trend on
management and sales expenses continue to decline.
Expenses fell $3.9 million to $102.4 million for the year.
These savings were achieved by driving high performance
and productivity, building internal capability and close
management of expenses.
Underlying profit in the Pacific increased to $7.2 million for
FY17, compared to $5.5 million in FY16, due to a benign
weather environment and improved underwriting.
Group Profit Summary (NZ$m)1
$ MILLION
Gross written premium
Gross earned premium
Reinsurance costs
Net earned premium
Net claims expense
Management and sales expenses
Underwriting profit
Investment revenue and other revenue
Financing costs
Underlying profit before tax
Income tax expense
Underlying profit after tax
Canterbury impact
FY17
FY16
312.4
303.2
306.8
302.9
(49.8)
(49.1)
256.9
253.8
(131.6)
(127.7)
(102.4)
(106.3)
22.9
19.8
6.1
(0.8)
28.2
(10.2)
18.0
8.5
–
28.3
(8.2)
20.1
– Increase in outstanding claims
(11.4)
(25.3)
– Additional risk margin
Kaikoura impact
Impairment of intangibles
Business in runoff
Corporate transaction costs
Foreign tax credits written off
Reported loss after tax
(7.2)
(4.1)
–
1.7
(3.1)
(1.9)
(8.0)
–
–
(14.1)
–
–
(2.2)
(21.5)
Investment revenue fell $2.4 million to $6.1 million in
FY17, as a result of lower interest rates and lower cash
balances following Canterbury claims payments.
Tower continues to make solid progress settling claims
in Canterbury, however, issues with EQC continue to
hamper the entire industry.
In September 2016, Tower had 564 property claims
remaining. In the intervening 12 months, the number of
open Canterbury Earthquake claims was reduced by 241.
However, new claims from the EQC continue
to be received.
Tower’s Appointed Actuary recommended a further
$1.6m after-tax strengthening in the second half, bringing
the full after tax impact to $11.4 million for the year.
1. Note: “Underlying profit” does not have a standardised meaning prescribed by Generally Accepted Accounting Practice (GAAP) and may not be comparable to similar
measures presented by other entities. While Tower has applied a consistent approach to measuring underlying profit in the current and comparative periods, it is not subject
to audit or independent review. Tower uses underlying profit as an internal reporting measure as management believes it provides a better measure of Tower’s underlying
performance than reported profit, as it excludes large or non-recurring items that may obscure trends in the underlying performance of the Tower group. Tower considers
that underlying profit is useful to investors as it makes it easier to compare the underlying financial performance of Tower between periods. “Reported loss after tax” is
calculated and presented in accordance with GAAP and is taken from Tower Limited’s audited financial statements for the year ended 30 September 2017.
7
7
A New Zealand and
Pacific general insurer
As one of the leading general insurers in New Zealand and
the Pacific, we have a powerful platform for future growth.
Tower has seen improvements in crucial areas that
demonstrate the business’ transformation into a digital
challenger brand is underway:
• focus on customers has delivered policy and GWP growth
• management expenses continue the downward trend,
decreasing $3.9 million when compared to the prior year
• tight management of claims processes and supplier
networks resulted in contained claims costs
There is significant opportunity in the Tower business and
the clear strategic plan that has delivered these results will
continue to drive Tower’s transformation into New Zealand’s
leading digital challenger brand.
Tower is confident that it can continue the transformation of the
underlying business and deliver long-term shareholder value
by continuing to pursue all aspects of its strategy to:
• drive GWP growth of 4 – 6%
• reduce expense ratio to below 35%
• deliver return on equity of 12 – 14% through the cycle
The implementation of Tower’s strategy will continue driving
the transformation of the business, however, a fundamental
step change in Tower’s performance will be delivered through
IT simplification. Significant management focus will go into this
in FY18, with benefits expected to flow through from FY19.
In the longer term, the results of the work being delivered will
strengthen Tower’s performance, unlock further opportunities
and create long-term, sustainable shareholder value.
8
Tower Limited annual report 2017
99
Digital is essential to the future growth
and prosperity of Tower
Almost one year ago, we launched Tower’s new simple and
easy product suite online, opening us up to a new customer
base. Since launching, we have seen online sales increase
from 9% of new-business transactions in March 2016 to 30%
in September 2017.
The increased stability and added functionality has enabled
better marketing and targeting of customers. While starting
from a small base, this growth shows that we understand
the market and have the right capabilities to continue
delivering growth through digital.
Focus on customers delivers growth
Achievements
• New digital programme supporting core GWP growth of 5.8%
over prior year
• Tower Direct retention improved 2.0% points on prior year
• Online sales increased from 9% of new business transactions
in March 2016, to 30% in September 2017
• New, simple and easy products improving lead conversion –
currently 4% points above target
Tower’s focus on customers has seen continued growth in its
core New Zealand portfolio in FY17, with 12,441 policies added
to the core book and GWP increasing 5.8%.
With Tower’s new product suite fully available online, more
customers can research, quote and buy insurance from Tower
through their mobile, tablet or computer, delivering a significant
uplift in new business sales.
Encouraging existing customers to stay with Tower through
targeted retention initiatives and offerings has delivered an
increase in retention rates for the direct Tower business,
up 2% points.
This positive result is being achieved through
a combination of:
• building and refining Tower’s digital offering, including
the relaunch of the new Trade Me Insurance platform
• working harder to attract new customers to Tower,
particularly in attractive segments which are actively targeted
• new products making it easier for Tower’s team to convert
sales leads
• tailored, targeted insurance offers available for customers
using digital channels
10
10
Tower Limited annual report 2017
Tower Limited annual report 2017
Claims and underwriting update
Achievements
• Over 30 product updates, pricing reviews and targeted rate
changes across all New Zealand portfolios
• Supply chain and preferred supplier initiatives delivered
material savings
• New vehicle risk ratings further reducing claims frequency
• Excess changes significantly improved average claims costs
Tower is actively managing its portfolio and delivering
simple and easy insurance, which is helping attract the right
customers to Tower. This focus on underwriting excellence
has helped control claims costs, despite an unprecedented
number of large natural events.
The New Zealand insurance industry is also experiencing
inflation in the frequency and cost of motor claims. This is due
to the greater number of cars on the road and the increased
costs and constraints in the repair industry supply chain.
Recent storms have resulted in large event claims increasing
by $3.6 million, to $7.4 million, compared to the same period
last year.
While industry inflation has eroded some of the gains made
in the first half of the year, initiatives introduced over the past
12 months have contained business as usual claims costs at
$124.2 million.
This positive result in controlling claims costs is a result of:
• better risk selection and underwriting processes
• tighter management of end-to-end claims supply chain
• simpler policy wordings enabling customers and claims
teams to easily understand exactly what customers are
entitled to
• regular review and improvements to policy wordings,
including the capping of meth benefits and removal of
excess refund
• continued focus on claims leakage and recoveries
Investment will improve long-term
profitability
Investment in Tower will deliver better digital, data, pricing
and risk selection which will continue improving long-term
profitability by:
• using data and address-level earthquake rating capabilities
to build advanced rating algorithms to accurately
underwrite risks
• increasing the use of data to manage and regularly review
pricing, ensuring we offer products that are priced well for
customers’ specific locations and requirements
• developing data capability to deliver rapid insights
enabling change and improvement across all facets
of the customer experience
11
11
Kaikoura earthquake and storm events
Achievements
• 100% of Tower motor claims, 97% of contents and 79% of
over-cap and other house claims finalised
• 99% of EQC contents claims and 82% of EQC home claims
that relate to Tower’s Kaikoura customers closed
• $3.1m reduction of after tax impact of Kaikoura earthquakes
from H1, from $7.2m to $4.1m
• $1.5m reduction of after tax impact of Ex-Cyclone Debbie
and associated flooding in Edgecumbe since April 2017, from
$3.6m to $2.1m
While Tower’s aggregate reinsurance cover is helping to absorb
some of the costs of the recent storm volatility, efficient and
proactive management of claims has had the biggest impact in
reducing the total cost of these events.
Tower’s team has been working hard to set things right for
customers in Kaikoura, Edgecumbe and other areas that have
experienced large natural events.
The after tax impact of the Kaikoura earthquakes, attributable
to Tower, reduced by $3.1 million from the first half (down from
$7.2 million to $4.1 million).
The after tax impact of Ex-Cyclone Debbie claims, attributable
to Tower, reduced by $1.5 million since April 2017 (down from
$3.6 million to $2.1 million).
Thanks to dedicated claims teams, Tower’s customers impacted
by the Kaikoura earthquake can be confident that their claims
will be finalised in early 2018. Tower is confident that most, if not
all customers impacted by the Edgecumbe floods will have their
claim finalised, or where repairs are being undertaken, will be
back in their homes by Christmas.
This pleasing result is thanks to:
• a focus on early intervention and effective claims
management
• a single point of contact for customers enabling quick
resolution of claims
• new ways of working with EQC providing insurers with
complete visibility of all claims relating to their customers
12
12
Tower Limited annual report 2017
Tower Limited annual report 2017
1313
Focus on costs
Achievements
• Increased focus on efficiency and productivity
• Significant saving through in-housing IT service desk and
other key support functions
• Whole of business procurement review and close
management of contract negotiations
• Some costs deferred as a result of acquisition and
separation activity
Tower has strengthened its focus on non-personnel related
costs, reducing management expenses to $102.4 million in
FY17, down from $106.3 million in FY16.
Tower’s savings of approximately $3.9 million in its core
underlying expenses, compared to FY16, has been driven by:
• implementing new performance, development and
achievement frameworks that drive performance, resulting
in greater efficiency and productivity
• identifying and reducing expenditure for business and
technology support services and building capability
internally
Tower expects expenses will continue to decrease as
simplification programme initiatives are embedded. A step
change in productivity gains and expense reduction will be
dependent on long-term IT investment.
IT simplification
Tower has continued stabilising core legacy systems and
enhancing its digital offerings to deliver a consistent customer
experience.
While some improvements have been made, there are many
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 complete
the formal scoping and costing processes following a
comprehensive tender. Some work has already commenced,
with EIS working with the Tower team to establish a firm
implementation timeline and itemised project deliverables.
Board approval will be sought once costs and the timeline are
confirmed.
The new build is likely to take 12 months, following which new
business will immediately go live on the new platform and
migration of the legacy book can start.
14
14
Tower Limited annual report 2017
Tower Limited annual report 2017
403
Canterbury
property
claims closed
99.0%
IBNR and risk
margin allowance
Canterbury update
As has been regularly reiterated by Tower and other industry
players, the ongoing legacy of the Canterbury earthquakes
has resulted in significant issues for customers and insurers,
with the receipt of EQC over-cap claims continuing in 2017.
Tower is making good progress closing Canterbury
Earthquake claims. In September 2016, Tower had 564
property claims remaining. In the past 12 months, 403 have
been closed, while receiving 73 completely new over-cap
claims from the EQC, and 33 new under-cap claims in the
interim. This resulted in the number of open Canterbury claims
reducing by 241 in FY17.
Despite this difficult environment, Tower is closing claims
at a faster rate and settlement outcomes are in line with
expectations.
Tower’s Appointed Actuary recommended a further $1.6m
after-tax strengthening in the second half, bringing the full
after tax impact to $11.4 million for the year.
Given the complexity of the Canterbury claims situation and
the ongoing uncertainty in finalising these, Tower’s Board has
elected to create an additional risk margin of $10 million over
and above the provision recommendation of the Appointed
Actuary. This is currently equivalent to a probability of
sufficiency between the 80-85th percentile.
The net result of the Appointed Actuary’s recommendation is
that Tower’s IBNR and risk margin allowance have increased
from 60% in September 2016 to 99% of underlying case
estimates in September 2017.
While Tower is making significant progress closing claims,
more certainty is still required. EQC Act reform will assist in
ensuring past experience is not repeated. It is also important
that the changes in EQC protocols that have made Kaikoura
successful are included in any future reform. Tower continues
to strongly believe more needs to be done by the EQC and
New Zealand government.
15
Update on EQC and Peak Re
Tower has commenced recovery action against Peak Re and
EQC and remains confident in its position.
In regards to the Peak Re dispute, Tower anticipates that
arbitration will take place in early 2018.
Tower remains confident that it will be successful but both the
process and the hearing hold risk and collection of the owed
amount is not certain. An adverse outcome could lead to a nil
recovery due to the binary nature of the process.
Tower, in consultation with its reinsurers, is progressing its
recovery programme against the EQC in relation to the costs
incurred due to building and land work following the 2010 and
2011 Canterbury earthquakes.
To date, Tower along with IAG, have issued proceedings
against the EQC seeking compensation for remediation of
land damage with a court hearing expected in late 2018.
Further litigation in regards to land is expected. Tower is also
applying significant resources to the EQC building recovery
programme. Based on legal advice to date, Tower is confident
in its position on the recovery programme.
Tower estimates the gross amount receivable due from EQC
is significantly higher than the $65.1 million currently in its
accounts, but has adopted this amount, which is the actuarial
valuation of the Appointed Actuary. The method by which the
actuarial valuation is completed recognises the inherent risk
and uncertainty with recovery of the full gross amount.
If the amount of $65.1m is received from EQC, an amount of
$17.7 million will be payable to reinsurers.
Due to the nature of the claims and the potential for litigation
or an alternate dispute resolution process, the actual
recoveries may be higher or lower than anticipated.
Surplus margin
RBNZ margin
MSC
16
Tower Limited annual report 2017
Solvency position and capital
requirements
Following extensive, independent review of Tower’s solvency
capital, Tower’s Board determined that additional capital of
$70.8 million is required to address the inherent uncertainty
faced by the business, repay the BNZ facility, and to permit
the signalled and ongoing reinvestment in Tower’s NZ
business.
If applied to Tower’s solvency position at 30 September 2017,
this would have resulted in Tower holding $123.4 million above
minimum solvency capital requirements, or approximately
300% MSC.
Tower recognises the need for capital in the medium-term,
however remains strongly committed to paying dividends and
to the efficient management of capital. The Tower Board will
review the dividend policy and look to recommence dividends
in FY18.
Tower Insurance Limited
Solvency Position (NZ$m)
(30.0)
70.8
less
offer
costs
37.9
50.0
61.4
73.4
50.0
61.7
Current
solvency
capital
position
Entitlements
offer
Repayment
of BNZ
facility
Solvency
capital
position post
entitlements
offer
Note:
Solvency capital calculation based on $70.8m entitlement offer less offer costs
61.450.037.961.750.073.4 1717
Michael
Stiassny
David
Hancock
Board
of Directors
Michael Stiassny Chair
LLB, BCom, FCA, CFInstD
Non-Executive Director
Independent
David Hancock
BBus, GAICD
Non-Executive Director
Not Independent
Appointed Director: 12 October 2012
Appointed Director: 16 November 2012
Michael is a Fellow of Chartered
Accountants Australia and New Zealand.
He has both a Commerce and Law
degree from the University of Auckland.
He is currently Chairman of Vector
Limited, Chairman of Ngati Whatua Orakei
Whai Rawa Limited, and is a director of
a number of other companies. Michael
is the immediate past President and
a Chartered Fellow of the Institute of
Directors in New Zealand (Inc).
Michael resides in Auckland,
New Zealand.
David was Chief Executive Officer of
Tower from July 2013 to August 2015.
David has over 25 years of broad
experience in financial services. This
experience includes being a former
Executive General Manager at the
Commonwealth Bank of Australia,
with a variety of roles including capital
markets, fixed income and equities. He
held several board positions at the bank
including Commonwealth Securities
(ComSec), as well as external professional
board positions. Prior to that he served
in roles at JPMorgan where he was a
Managing Director with responsibilities
in New Zealand, Australia and Asia
across various operations. David was the
Interim Chief Executive Officer at Firstfolio
Limited, an Australian listed financial
services company. He holds a Bachelor of
Business from the Queensland University
of Technology, Brisbane.
David resides in Sydney,
Australia.
18
Tower Limited annual report 2017
David
Hancock
Warren
Lee
Steve
Smith
Graham
Stuart
Warren Lee
BCom, CA
Steve Smith
Graham Stuart
BCom, CA, Dip Bus (Finance), CFInstD
BCom (Hons), MS, FCA
Non-Executive Director
Non-Executive Director
Non-Executive Director
Independent
Independent
Independent
Appointed Director: 26 May 2015
Appointed Director: 24 May 2012
Appointed Director: 24 May 2012
Warren has extensive experience
and a long record of leadership in the
international insurance industry, including
15 years at AXA in senior management
positions within the company’s Australian
and Asian businesses. Warren’s two
most recent positions were Chief
Executive Officer of the Victorian Funds
Management Corporation and Chief
Executive Officer, Australia and New
Zealand for AXA Asia Pacific Holdings
Limited. Warren is also a director of
MyState Limited, an Australian Financial
Services Group. He has a Bachelor
of Commerce from the University of
Melbourne and is a member of Chartered
Accountants Australia and New Zealand.
Warren resides in Melbourne,
Australia.
Steve has been a professional Director
since 2004. He has over 35 years’
business experience, including being a
specialist corporate finance partner at a
leading New Zealand accountancy firm.
He has a Bachelor of Commerce and
Diploma in Business from the University
of Auckland, is a member of Chartered
Accountants Australia and New Zealand
and a Chartered Fellow of the Institute
of Directors in New Zealand (Inc). Steve
is Chairman of Pascaro Investments Ltd,
and a Director of Fulton Hogan Ltd, Rimu
S.A. (Chile), and the National Foundation
for the Deaf Inc.
Steve resides in Auckland,
New Zealand.
With over 30 years of senior management
experience, Graham has held senior
leadership roles with several major
corporates, in New Zealand and overseas,
the latest being the Sealord Group of
which he was Chief Executive Officer for
7 years. Prior to that he held a number of
diverse leadership roles including CEO
of Mainland Products, Managing Director
of Lion Nathan International, and Chief
Financial Officer and Director of Strategy
for the Fonterra Co-operative Group.
Graham has a Bachelor of Commerce
(First Class Hons) from the University
of Otago, a Master of Science from
Massachusetts Institute of Technology
and is a Fellow of 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.
19
Tower Limited
Financial Statements
For the year ended 30 September 2017
Contents
Independent Auditor’s Report
Consolidated Income Statement
Consolidated Statement of
Comprehensive Income
Consolidated Balance Sheet
21
27
28
29
Consolidated Statement of Changes in Equity 30
Consolidated Statement of Cash Flows
Notes to the Financial Statements
31
32-60
20
Tower Limited annual report 2017
Tower Limited
Independent Auditor’s Report
For the year ended 30 September 2017
Independent Auditors’ Report
Independent auditor’s report
to the shareholders of TOWER Limited
To the shareholders of Tower Limited
The financial statements comprise:
•
•
•
•
•
•
Report on the Financial Statements
the consolidated balance sheet as at 30 September 2017;
We have audited the financial statements of TOWER Limited (“the Company”) on pages 32 to
the consolidated income statement for the year then ended;
80, which comprise the balance sheets as at 30 September 2013, the income statements,
the consolidated statement of comprehensive income for the year then ended;
statements of comprehensive income, statements of changes in equity and statements of cash
the consolidated statement of changes in equity for the year then ended;
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 consolidated statement of cash flows for the year then ended; and
the Group. The Group comprises the Company and the entities it controlled at 30 September
the notes to the financial statements, which include a summary of general accounting policies.
2013 or from time to time during the financial year.
Our opinion
Directors’ Responsibility for the Financial Statements
In our opinion, the financial statements of Tower Limited (the Company), including its subsidiaries
The Directors are responsible for the preparation of these financial statements in accordance
(the Group), present fairly, in all material respects, the financial position of the Group as at 30
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
September 2017, its financial performance and its cash flows for the year then ended in accordance
necessary to enable the preparation of financial statements that are free from material
with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and
misstatement, whether due to fraud or error.
International Financial Reporting Standards (IFRS).
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.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs
NZ) and International Standards on Auditing (ISAs). Our responsibilities under those standards are
further described in the Auditor’s responsibilities for the audit of the financial statements section of
our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
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.
We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised)
Code of Ethics for Assurance Practitioners (PES 1) issued by the New Zealand Auditing and Assurance
Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Our firm carries out other services for the Group in the areas of solvency return assurance and agreed
upon procedures. The provision of these other services has not impaired our independence as auditor
of the Group. In addition, certain partners and employees of our firm may deal with Tower Limited
and the Group on normal terms within the ordinary course of trading activities of Tower Limited and
the Group. These matters have not impaired our independence. We have no other interests in Tower
Limited or the Group.
We have no relationship with, or interests in, TOWER Limited or any of its subsidiaries other
than in our capacities as auditors and providers of other assurance, taxation and advisory
services. These services have not impaired our independence as auditors of the Company and
the Group.
PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand
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
T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz
PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand
T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz
21
Our audit approach
Overview
An audit is designed to obtain reasonable assurance whether the financial
statements are free from material misstatement.
Overall group materiality: $3,068 thousand, which represents approximately
1% of premium revenue.
We chose premium revenue as the benchmark because, in our view, it is a key
financial statement metric used in assessing the performance of the Group and
is not as volatile as other profit and loss measures, and is a generally accepted
benchmark. The 1% is based on our professional judgement, noting that it is
also within the range of commonly accepted revenue related thresholds.
The following have been determined as key audit matters:
• Outstanding claims and related reinsurance and other recoveries
• Recoverability of the deferred tax asset
Materiality
The scope of our audit was influenced by our application of materiality.
Based on our professional judgement, we determined certain quantitative thresholds for materiality,
including the overall Group materiality for the financial statements as a whole as set out above. These,
together with qualitative considerations, helped us to determine the scope of our audit, the nature,
timing and extent of our audit procedures and to evaluate the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Audit scope
We designed our audit by assessing the risks of material misstatement in the financial statements and
our application of materiality. As in all of our audits, we also addressed the risk of management
override of internal controls including among other matters, consideration of whether there was
evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an
opinion on the financial statements as a whole, taking into account the structure of the Group, the
accounting processes and controls, and the industry in which the Group operates.
Our Group audit scope focused on the most financially significant subsidiary, which contributes 80%
of the Group’s premium revenue. We performed further audit procedures over the balances and
transactions of the non-significant subsidiaries and the consolidation of the Group’s subsidiaries.
22
Tower Limited annual report 2017
3
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the financial statements of the current year. These matters were addressed in the context of our audit of
the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
Key audit matter
How our audit addressed the key audit matter
1) Outstanding claims and related reinsurance and other recoveries from the Earthquake
Commission (EQC) and Peak Re
This is a key audit matter because of the complexity involved in the estimation process and the significant
judgements that management make in determining the balances.
Notes 8, 20 and 27 to the financial statements describe the elements of the outstanding claims, related
reinsurance and other recoveries and assumptions used in the calculation.
(a) Outstanding claims ($181,156 thousand)
Central estimate of expected present value
of future payments for claims incurred
The valuation of outstanding claims involves
significant judgement given the inherent
uncertainty in the calculation of the central estimate
of the expected present value of future payments for
claims incurred (central estimate).
In particular, judgement arises over the estimation
of payments for claims that have been incurred at
the reporting date but have not yet been reported to
the Group, or claims that have been reported but
there is uncertainty over the amount which will be
settled.
This estimate relies on the quality of underlying
data, including historical claims data, and the
application of complex and subjective actuarial
models and methodologies, judgements and
assumptions about future events.
Our audit procedures included the following:
• Re-performing key actuarial data reconciliations
by agreeing claims data to the general ledger.
•
Inspecting a sample of claims paid during the year
to check that they were supported by appropriate
documentation and approved within delegated
authority limits.
• Testing the historical claims data by:
o
evaluating the design and effectiveness of
controls over the processing of claims,
o
for a sample of claims outstanding at year
end, agreeing to supporting documents.
• We utilised our actuarial specialists to assist us
with:
o
evaluating the actuarial models and
methodologies by comparing with generally
accepted models and methodologies applied
in the sector and with the prior year,
o
o
assessing key actuarial judgements and
assumptions by comparing with our
expectations based on the Group’s
experience, our own sector knowledge and
independently observable trends, and
considering the work and findings of the
external independent actuaries engaged by
the Group.
4
23
Risk margin
Outstanding claims include a risk margin that
allows for the inherent uncertainty in the central
estimate of the future claim payments. In
determining the risk margin, the Group makes
judgements about the volatility of each class of
business written and the correlation between each
division and between different geographical
locations.
With the assistance of our actuarial specialists we
assessed the Group’s approach to determining the risk
margin by comparing to known industry practices and
the Actuaries Institute recommended framework. In
particular we focused on the assessed level of
uncertainty in the central estimate.
We have no matters to report from the procedures
performed.
(b) Reinsurance and other recoveries from
EQC ($65,100 thousand) and Peak Re
($43,750 thousand)
Significant management judgement is required to
value:
•
•
expected recoveries from EQC in respect of land
damage and building costs, as these recoveries
are subject to agreement with EQC, and
reinsurance recoveries from Peak Re, as these
are dependent upon the outcome of a legal
arbitration process.
The expected recoveries from EQC are related to the
Canterbury earthquakes, and require judgement
and actuarial expertise to evaluate the attribution of
claims cost between the major earthquake events, in
particular the September 2010 and February 2011
events.
We assessed management’s approach to estimate the
recoveries from EQC. We reviewed correspondence
with EQC and held discussions with management,
lawyers and external independent actuaries to
understand assumptions, including the attribution of
losses to the different Canterbury earthquake events,
used to establish the right to recovery. We compared
these assumptions with sector peers and sought
evidence for any significant variances.
For reinsurance recoveries from Peak Re, we discussed
with management the status of the arbitration process.
We reviewed the legal correspondence between the
Group and Peak Re lawyers and held discussions with
the lawyers advising the Group.
We have no matters to report from the procedures
performed.
5
24
Tower Limited annual report 2017
2) Recoverability of the deferred tax asset
The Group has a deferred tax asset balance of
$32,745 thousand, of which $26,958 thousand
relates to deferred tax assets arising from past tax
losses. We focused on the deferred tax asset from
tax losses as its recoverability is sensitive to the
Group’s expected future profitability and its
entitlement to offset these losses against future
profits. Significant management judgement is
involved in forecasting future taxable profits which
are inherently uncertain.
Refer to note 10 to the financial statements.
We evaluated the progress made by management in
improving the profitability of the business in recent
periods, which includes the remediation of the causes
of past losses through, amongst other things,
assessment of the Canterbury earthquakes claims and
related reinsurance and other recoveries (assessment
of the recoverability of the receivables from EQC and
Peak Re) and other expense reduction and income
initiatives. We noted that progress has been made in
relation to each of these matters.
We assessed the operational plan used in the deferred
tax asset recoverability assessment by comparing
previous business plans with actual results and
assessed the appropriateness of the assumptions used
in the operational plan.
We used our tax specialist to assess whether the Group
is entitled to offset the tax losses against future profits.
We have no matters to report from the procedures
performed.
Information other than the financial statements and auditor’s report
The Directors are responsible for the annual report. Our opinion on the financial statements does not cover
the other information included in the annual report and we do not express any form of assurance
conclusion on the other information.
In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If,
based on the work we have performed on the other information that we obtained prior to the date of this
auditor’s report, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
Responsibilities of the Directors for the financial statements
The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of the
financial statements in accordance with NZ IFRS and IFRS, and for such internal control as the Directors
determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations,
or have no realistic alternative but to do so.
6
25
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements, as a whole,
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs NZ and ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located at the
External Reporting Board’s website at:
https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-1/
This description forms part of our auditor’s report.
Who we report to
This report is made solely to the Company’s shareholders, as a body. Our audit work has been
undertaken so that we might state those matters which we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our
audit work, for this report or for the opinions we have formed.
The engagement partner on the audit resulting in this independent auditor’s report is Karl Deutschle.
For and on behalf of:
Chartered Accountants
14 November 2017
26
Tower Limited annual report 2017
Auckland
7
Tower Limited
Consolidated Income Statement
For the year ended 30 September 2017
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
Acquisition proposal expenses
Impairment expense
Financing expenses
Total expenses
Profit (Loss) attributed to shareholders before tax
Tax (expense) benefit attributed to shareholders’ profits
Profit (Loss) for the year
Profit (Loss) attributed to:
Shareholders
Non-controlling interest
Basic and diluted profit (loss) per share
NOTE
2017
$000
2016
$000
5
6
7
9
4
15
306,760
302,940
(49,845)
(49,106)
256,915
253,834
7,643
3,040
8,998
3,413
267,598
266,245
217,547
(29,996)
187,551
81,744
3,467
–
835
240,138
(54,526)
185,612
87,410
–
19,649
–
273,597
292,671
10A
(5,999)
(2,001)
(8,000)
(26,426)
4,911
(21,515)
(8,461)
461
(22,328)
813
(8,000)
(21,515)
26
CENTS
(5.02)
CENTS
(13.21)
The above statement should be read in conjunction with the accompanying notes.
27
Tower Limited
Consolidated Statement of
Comprehensive Income
For the year ended 30 September 2017
Profit (Loss) for the year
(8,000)
(21,515)
NOTE
2017
$000
2016
$000
Other comprehensive income (loss)
Currency translation differences
Gain on asset revaluation
Deferred income tax relating to asset revaluation
Other comprehensive income (loss) net of tax
Total comprehensive income (loss) for the year
Total comprehensive income (loss) attributed to:
Shareholders
Non-controlling interest
17
10D
105
247
(29)
323
(7,677)
(8,143)
466
(7,677)
(5,910)
181
(23)
(5,752)
(27,267)
(27,404)
137
(27,267)
The above statement should be read in conjunction with the accompanying notes.
28
Tower Limited annual report 2017
Tower Limited
Consolidated Balance Sheet
As at 30 September 2017
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
Borrowings
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 14 November 2017.
Michael P Stiassny
Chairman
Graham R Stuart
Director
The above statement should be read in conjunction with the accompanying notes.
NOTE
2017
$000
2016
$000
12
14
28
28
16
10B
17
15
10D
18
10C
19
28
20
22
10D
23
24
102,876
261,375
167,702
231
20,961
13,462
8,780
31,334
32,745
92,228
254,685
188,522
57
19,973
13,168
9,511
31,982
30,155
639,466
640,281
51,124
560
5,773
–
49,500
123
4,177
735
336,004
361,009
29,921
340
–
785
423,722
416,329
215,744
223,952
382,172
(51,299)
(116,454)
214,419
1,325
382,172
(42,822)
(116,772)
222,578
1,374
215,744
223,952
29
Tower Limited
Consolidated Statement of Changes in Equity
For the year ended 30 September 2017
ATTRIBUTED TO SHAREHOLDERS
CONTRIBUTED
EQUITY
$000
NOTE
ACCUMULATED
(LOSSES)
PROFIT
$000
RESERVES
$000
TOTAL
$000
NON-
CONTROLLING
INTEREST
$000
TOTAL
EQUITY
$000
Year Ended 30 September 2017
At the beginning of the year
382,172
(42,822)
(116,772)
222,578
1,374
223,952
Comprehensive income (loss)
–
(8,461)
318
(8,143)
466
(7,677)
Transactions with shareholders
Dividends paid
Other
Total transactions with shareholders
21
–
–
–
–
(16)
(16)
–
–
–
–
(16)
(16)
(515)
–
(515)
(515)
(16)
(531)
At the end of the year
382,172
(51,299)
(116,454)
214,419
1,325
215,744
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)
–
(22,328)
(5,076)
(27,404)
137
(27,267)
Transactions with shareholders
Capital repayment plan
Dividends paid
Other
Total transactions with shareholders
21, 23
21
(2,413)
–
–
–
(27,024)
154
(2,413)
(26,870)
–
–
–
–
(2,413)
(27,024)
154
(29,283)
At the end of the year
382,172
(42,822)
(116,772)
222,578
–
(2,413)
(407)
(27,431)
–
(407)
1,374
154
(29,690)
223,952
The above statement should be read in conjunction with the accompanying notes.
30
Tower Limited annual report 2017
Tower Limited
Consolidated Statement of Cash Flows
For the year ended 30 September 2017
NOTE
2017
$000
2016
$000
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 inflow (outflow) from operating activities
13
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
Facility fees and interest paid
Proceeds of borrowings
Capital raise costs
Payment of non-controlling interest dividends
Net cash inflow (outflow) from financing activities
Net increase (decrease) in cash and cash equivalents
Foreign exchange movement in cash
Cash and cash equivalents at the beginning of year
Cash and cash equivalents at the end of year
309,147
295,867
7,734
–
(1,928)
3,040
28,962
(50,228)
10,088
9
3,251
3,413
67,935
(47,248)
(248,183)
(261,779)
(76,408)
(4,908)
(32,772)
(77,248)
(4,598)
(10,310)
21,852
(6,883)
136
15,105
18,380
(9,175)
70
9,275
–
–
(2,413)
(27,024)
(778)
30,000
–
(515)
–
–
–
(407)
28,707
(29,844)
11,040
(30,879)
(392)
92,228
12
102,876
(2,006)
125,113
92,228
The above statement should be read in conjunction with the accompanying notes.
31
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 Group financial statements are presented in New Zealand dollars
and rounded to the nearest thousand dollars. They have been prepared
on a fair value measurement basis with any exceptions noted in the
accounting policies below, or in the notes to the financial statements.
Principles of consolidation
The Group financial statements incorporate the assets and liabilities of
all subsidiaries of the Company at balance date and the results of all
subsidiaries for the year.
Subsidiaries are those entities over which the consolidated entity has
control, being power over the investee; exposure, or rights to variable
returns from its involvement with the investee; and the ability to use its
power over the investee to affect the amount of the investor’s returns.
The results of any subsidiaries acquired during the year are consolidated
from the date on which control was transferred to the consolidated
entity and the results of any subsidiaries disposed of during the year
are consolidated up to the date control ceased.
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.
Foreign currency translation 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.
Cash flows
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.
32
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 2. Impact of Amendments to NZ IFRS
— NZ IFRS 9 Financial instruments is effective for periods beginning
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 2017 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 is assessing the effect of adopting NZ IFRS 15
on its 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 Leases. 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. Work continues
on assessing the impact of adopting IFRS 16 on Tower’s financial
statements. Preliminary assessments indicate the treatment of
office buildings, motor vehicles, and other equipment leases will
change. The potential financial impact of changes will result in
the creation of a ‘right of use asset’ of approximately $11 million,
with a corresponding lease liability amount to be recognised,
in effect as a gross up to the balance sheet, of approximately
$11 million to $12 million.
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 is assessing the effect of adopting
NZ IFRS 9 on its financial statements.
— NZ IFRS 17 Insurance Contracts is effective for periods
beginning on or after 1 January 2021. The standard replaces the
current guidance in NZ IFRS 4, and establishes the principles
for recognition, measurement, presentation and disclosure of
insurance contracts. The implementation date for the Group will
be for the year ending 30 September 2022. A detailed assessment
of the effect of adopting NZ IFRS 17 will be commenced during
2018.
— Amendments to NZ IAS 7 Statement of Cash Flows is effective
for periods beginning on or after 1 October 2017 unless early
adopted. Comparatives are not required on first application.
The standard requires additional disclosures regarding both
cash and non-cash changes in liabilities arising from financing
activities. The standard is not expected to have a material impact.
2B Standards, amendments and interpretations to existing standards
effective 30 September 2017 or early adopted by the Group
The application of new or amended accounting standards as of
1 October 2016 has not had a material impact on the financial
statements.
33
3. Critical Accounting Judgements and Estimates
Capitalised IT development costs
The Group makes estimates and judgements in respect of certain key
assets and liabilities. Estimates and judgements are continually evaluated
and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under
the circumstances. Key areas where critical accounting estimates and
judgements have been applied are noted below.
Claims estimation
Valuation of net outstanding claims is an area of significant judgement
and estimation. Key elements of judgement included within claims
estimations are: the rate of claims closure; the quantum of closed claims
reopening; the level of future increases in building and other claims
costs; future claim management expenses; assessments of risk margin;
apportionment of claims costs between the four main earthquake
events; and the quantum of new claims being received from EQC and
the average cost of these claims.
Key elements of judgement included within recoveries estimations are:
the collectability of reinsurance recoveries (includes consideration of
factors such as counterparty and credit risk); recoveries from EQC in
respect of land damage and building costs; and the assessments of
risk margin. The nature of estimation uncertainties, including from those
factors listed above, mean that actual claims experience may deviate
from reported results.
Refer to Note 8 for further detail on the Canterbury Earthquakes.
EQC recoveries
Valuation of additional EQC recoveries in respect of building costs and
land damage is an area of significant judgement and estimation. Areas
of judgement and subjectivity exist in assessments of: claim file review
of earthquake event allocation; the quality of assessment information;
litigation risk factors; and portfolio conservatism. Tower has filed a
statement of claim against EQC in respect of land damage recoveries.
Refer to Note 8 and Note 14 for further detail on EQC recoveries for
Canterbury earthquakes.
Deferred taxation
Recognition of deferred tax assets is an area of significant judgement and
estimation. Deferred tax assets are recognised for all unused tax losses to
the extent it is probable that future taxable profits will be available against
which the losses can be utilised and there is continuity of ownership (of
greater than 49%). Significant management judgement and estimation
is required to determine the amount of deferred tax assets recognised,
based on the likely timing and quantum of future taxable profits. This
assessment is completed on the basis of the approved strategic plans
of Tower Limited and subsidiaries within the consolidated tax group. The
recoverability of tax losses outlined above is also subject to ongoing
assessment in respect of the active acquisition proposal. If it becomes
probable that the acquisition proposal to purchase 100% of the shares in
Tower would result in a shareholder change of more than 49%, remaining
deferred tax assets from loss carry forwards will be de-recognised and
removed from the balance sheet. For further detail refer to Note 10.
Capitalisation of IT development costs is an area of significant judgement
and estimation. The application of NZ IAS 38 “Intangible Assets” includes
accounting considerations required for capitalisation of IT projects.
When applying NZ IAS 38, areas of judgement include consideration of
impairment indicators, assessments of economic useful life, previous
Board impairment decisions and potential impacts from the active
acquisition proposal. For further detail refer to Note 15.
Reinsurance recovery receivables
Valuation of reinsurance recovery receivables is an area of significant
judgement and estimation. Key elements of judgement included within
recovery estimations are: counterparty and credit risk; and risks around
the arbitration process for the reinsurance contract in dispute. The nature
of estimation uncertainties, including from those factors listed above,
mean that actual reinsurance recoveries may differ from expected
outcomes. Refer to Note 14 for further detail.
Goodwill
Goodwill is an area of significant judgement and estimation. Areas of
judgement and subjectivity exist in the assessment of cash generating
units and assumptions underlying goodwill impairment testing. Refer to
Note 15 and Note 27 for further details of key assumptions used.
4. Acquisition Proposals
Suncorp Group Limited / Vero Insurance New Zealand Limited
(Suncorp)
On 27 June 2017, Tower Limited announced it had entered into a Scheme
Implementation Arrangement (SIA) with Suncorp. Under this agreement,
Suncorp agreed to acquire 100% of the Company’s shares at $1.40
per share for an aggregate purchase price of $236 million. On 26 July
2017, the New Zealand Commerce Commission announced that it had
declined Suncorp’s application to purchase 100% of Tower shares.
On 23 August 2017, Suncorp advised that they would be appealing
the Commerce Commission decision. On 5 September 2017 the Tower
Board lodged its own cross appeal against the Commerce Commission’s
decision to decline Suncorp’s application to acquire 100% of Tower.
On 7 November 2017, Tower advised that the SIA with Suncorp had
passed its end date and had been terminated. Suncorp subsequently
announced that as a result, it would no longer be proceeding with its
appeal of the Commerce Commission’s decision to decline its application
to acquire Tower.
The Tower Board has withdrawn its cross appeal against the Commerce
Commission’s decision.
Fairfax Financial Holdings Limited (Fairfax)
On 9 February 2017, Tower Limited announced it had entered into a
Scheme Implementation Arrangement (SIA) with Fairfax. Under this
agreement, Fairfax agreed to acquire 100% of the Company’s shares
at $1.17 per share for an aggregate purchase price of $197 million (the
Fairfax proposal).
34
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 The Fairfax SIA was terminated on 29 June 2017 following Tower’s
announcement on 27 June 2017 that it had entered into a SIA with
Suncorp. Tower has reimbursed $400,000 of Fairfax’s costs under
the conditions of its discontinued scheme. Under the Fairfax mutual
termination agreement, a break fee of a further $1.57 million is payable
to Fairfax if another party completes an acquisition of Tower by 31 August
2018. Refer to Note 34 Contingent Liabilities.
Acquisition proposal expenses
At 30 September 2017, Tower has provided for all costs incurred to that
date in respect of the acquisition activity. These have been recorded in
the Consolidated Income Statement as a separate line item (Acquisition
proposal expenses).
Adviser fees
The Company has worked with various legal, financial and Board advisers
to assist with the acquisition proposals. Costs for work completed by
these advisers on the acquisition proposals prior to 30 September 2017
have been included in the Income Statement. Where no invoice has been
received, an estimate of likely costs up to 30 September 2017 has been
made on the basis of best information available at the time.
Tower has engaged Goldman Sachs New Zealand Limited (Goldman)
to act as lead financial adviser in relation to the acquisition proposals
and potential capital raising. Goldman advisory fees are linked to the
outcome of any acquisition proposal and capital raising. In the event that
an acquisition proposal or capital raising is completed, advisory fees
estimated up to $4.5 million before tax will become payable to Goldman.
At 30 September 2017, no provision has been made for Goldman advisory
fees because at that date, the obligation to pay fees remained contingent
upon the successful implementation of an acquisition proposal or
completion of capital raising.
6. 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)
Total net unrealised gain (loss)
Total investment revenue
2017
$000
2016
$000
7,734
10,088
(631)
913
8,016
441
(3,142)
7,387
–
(3)
(3)
9
(163)
(154)
(1,297)
2,810
927
(1,045)
(370)
1,765
7,734
10,097
(1,928)
3,251
1,837
(4,350)
7,643
8,998
Investment revenue is recognised as follows:
(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.
5. Premium Revenue
(iii) Fair value gains and losses
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.
Gross written premiums
Less: Gross unearned premiums
Premium revenue
2017
$000
2016
$000
312,396 303,236
(5,636)
(296)
306,760 302,940
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 premiums.
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.
35
Tower Limited
Notes to the Financial Statements
For the year ended 30 September 2017
7. Net Claims Expense
8. Canterbury Earthquakes
Canterbury earthquake claims
(4 key events)
Additional risk margin
Kaikoura earthquake claims
Other claims
Total net claims expense
NOTE
2017
$000
2016
$000
8
8
15,916
35,084
10,000
5,739
–
–
155,896
150,528
187,551
185,612
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;
— the effects of inflation; and
— the impact of large losses.
A component of these estimation techniques is usually the estimation
of the cost of notified but not paid claims. In estimating the cost of
these, the Group has regard to the claim circumstances reported, any
information available from loss adjusters and information on the cost of
settling claims with similar characteristics in previous periods.
Provisions are calculated gross of any reinsurance recoveries except risk
margin, which is net of reinsurance recoveries. A separate estimate is
made of the amounts that will be recoverable from reinsurers based on
the gross provisions. Details of specific assumptions used in deriving the
outstanding claims liability at year end are detailed in Note 27.
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.
Tower has received over 16,106 individual claims from customers as
a result of earthquakes impacting the Canterbury region during 2010
and 2011 (2016: 15,990 claims). Like other industry participants, Tower
continues to receive ‘over-cap’ claims from the Earthquake Commission
(EQC). The growth in new claims received has impacted Tower’s
settlement rates during the year. Of all claims received, Tower has
settled over 15,783 claims at 30 September 2017 (2016: 15,426 claims),
representing a 98% settlement rate by number of claims and 93% by
value (2016: 96% by number and 89% by value). To date, Tower has paid
out more than $825 million to customers (2016: $749 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 2017, Tower has estimated gross ultimate incurred
claims of $897.4 million in respect of the four main Canterbury
earthquake events (2016: $869.6 million).
Outstanding claims comprises case estimates, claims incurred but not
reported (IBNR) and risk margins. In the year ended 30 September 2017,
case estimates have reduced as claims have been settled and paid.
These decreases have been offset however, by increased costs on
remaining open claims; new over-cap claims being received from EQC;
and the Appointed Actuary increasing IBNR and risk margins, particularly
in respect of litigated claims and additional EQC recoveries.
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 completes 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. Tower has a
commercial dispute with the provider of its adverse development cover,
Peak Reinsurance Company Limited (Peak Re), which is discussed further
in Note 14.
The table below presents a financial representation of Tower’s net
outstanding claims provision at 30 September 2017 in relation to the four
main earthquake events.
Canterbury earthquake provisions
Insurance liabilities
Gross outstanding claims
Additional risk margin
Receivables
Reinsurance recovery receivables
EQC related to open claims
Less: EQC payable to reinsurers
Net outstanding claims
2017
$000
2016
$000
(107,200)
(149,100)
(10,000)
–
(117,200)
(149,100)
13,600
50,800
5,800
57,600
(1,700)
–
17,700
108,400
(99,500)
(40,700)
36
Tower Limited annual report 2017
Change in presentation of comparative insurance liabilities
and receivables
The 2016 comparative information in the table above includes
receivables from Peak Re and EQC as deductions from gross outstanding
claims relating to both open and closed claims. As the gross outstanding
claims liability continues to reduce, only EQC recoveries for open claims
have been deducted from gross outstanding claims liability for the
September 2010 and February 2011 events. For the other earthquakes,
EQC recoveries for open claims and reinsurance recoveries are deducted.
Due to the nature of EQC recoveries, the categorisation between open
claims and closed claims is an approximation that takes into account
the split between open and closed claims for EQC recoveries already
received as well as EQC recoveries expected to be received.
Tower has two significant receivable amounts related to closed
Canterbury earthquake claims, being $43.75 million from Peak Re and
$65.1 million from EQC (2016: $57.6 million). $17.7 million of this EQC
amount is payable to reinsurers which has been allowed for (2016:
$20.7 million). A risk margin of $10.7 million has been allowed for on the
receivable from EQC (2016: $4.3 million).
Recognising the challenging history of Canterbury earthquake claims
and the potential for ongoing complexity in finalising remaining claims
and potential new over-cap claims, the Board has elected to create an
additional risk margin of $10.0 million over and above the provision of
the Appointed Actuary, which is set at the 75th percentile probability
of sufficiency.
This additional risk margin approximates the 80-85th percentile
probability of sufficiency of the Appointed Actuary’s central estimate as at
30 September 2017. This provision will remain at $10.0 million, subject to
review by the Board each half year and will be released once Canterbury
Outstanding Claims Liability has sufficiently run off.
The following table presents the cumulative impact of the four main
Canterbury earthquake events on the income statement.
Cumulative expenses associated
with Canterbury earthquakes:
Earthquake claims estimate
Reinsurance recoveries
2017
$000
2016
$000
(897,440)
(869,600)
746,623
734,699
The 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 323 open claims
at 30 September 2017 (2016: 564 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.
The actuarial reviews performed during the year ended 30 September
2017 identified the following as key contributors to the increase in
expected earthquake claims costs:
— Continued growth in the level of litigation claims received;
— Continued development of claim costs as they progress through the
claims life cycle;
— Greater than anticipated new over-cap claims received from EQC;
— Increase in the level of future claims handling expenses; and
— Refinement of actuarial assumptions, including the setting of risk
margins.
The key elements of judgement within the claims estimation are as
follows:
Claims
— the level of future increases in building and other claims costs
— the number of new litigated claims received and the average cost
of these claims
— the number of new claims expected from EQC and the average cost
of these claims
— the rate of closed claims reopening
— risk margin
— future claim management expenses, and
Recoveries
— collectability of reinsurance recoveries
— recoveries from EQC (including litigation risks) in respect of land
Claim expense net of reinsurance recoveries
(150,817)
(134,901)
damage and building costs
Reinsurance expense
Additional risk margin
Cumulative impact of Canterbury earthquakes
before tax
Income tax
(25,045)
(25,045)
(10,000)
–
(185,862)
(159,946)
52,710
45,454
Cumulative impact of Canterbury earthquakes
after tax
(133,152)
(114,492)
Recognised in current period (net of tax)
(18,660)
(25,272)
— 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
2017. 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 $507.0 million including risk margin. Tower has reinsurance for
$375.4 million on this event including catastrophe cover, proportional
reinsurance and adverse development cover. During the year ended
30 September 2017, Tower expensed $13.3 million in relation to the
February 2011 event (2016: $35.1 million).
37
8. Canterbury Earthquakes (continued)
Tower has also exceeded its catastrophe reinsurance cover limit in
relation to the September 2010 event. The estimated ultimate incurred
claims cost of the September 2010 event totals $303.4 million including
risk margin. Tower has reinsurance for $295.8 million on this event
including catastrophe cover and proportional reinsurance cover. During
the year ended 30 September 2017, Tower expensed $2.6 million in
relation to the September 2010 event (2016: nil).
The catastrophe reinsurance cover headroom remaining is included in
the table below.
DATE OF EVENT
September 2010
February 2011
June 2011
December 2011
CATASTROPHE REINSURANCE
COVER REMAINING
2017
$000
–
–
2016
$000
7,700
–
254,200
486,500
256,500
487,500
Sensitivity analysis – impact of changes in key variables
Net outstanding claims are comprised of several key elements, as
described 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.
SPLIT
BETWEEN
EVENTS
FOUR MAIN
EARTH-
QUAKES
I
V
A
R
A
B
L
E
C
H
A
N
G
E
S
E
P
2
0
1
0
$
M
F
E
B
2
0
1
1
$
M
J
U
N
2
0
1
1
$
M
D
E
C
2
0
1
1
$
M
3
0
-
S
E
P
-
1
7
$
M
3
0
-
S
E
P
-
1
6
$
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%
(1.3)
1.3
(3.0)
3.0
+ 1%
- 1%
4.9
(7.0)
(9.0)
9.0
Reinsurance recovery receivables
(iii) Adverse development
cover
- 50%
- 100%
–
–
(21.9)
(38.8)
(iv) Recoveries from EQC in
respect of land damage
(v) Recoveries from EQC in
respect of building costs
+ 10%
- 10%
+ 10%
- 10%
0.1
(0.1)
0.7
(0.7)
3.2
(3.2)
0.9
(0.9)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4.3)
4.3
(4.1)
4.1
(4.1)
2.0
(9.0)
9.0
(21.9)
(38.8)
(21.9)
(38.8)
0.8
(0.8)
0.7
(0.8)
4.1
(4.1)
0.1
(0.1)
(i)
(ii)
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 over-cap claims,
closed claims re-opening and risk margin.
Calculated as 1% of total reported costs (net of EQC contributions)
plus IBNR/IBNER moved to/from Feb 2011 event and the impact on
Tower’s profit quantified.
(iii)
Calculated as the impact on net outstanding claims due to 50% or
100% lower recoveries being received.
38
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017
53,600
54,396
10A. Tax expense
9. Management and Sales Expenses
10. Tax
Included in total management and sales expenses are the following
requiring separate disclosures:
Amortisation of deferred acquisition costs
19,973
20,277
2017
$000
2016
$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
Employee benefits expense
(Gain) on disposal of property, plant and
equipment
Claims related management expenses
reclassified to claims expense
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
Fees paid to subsidiaries’ auditors
different to Group auditors:
Audit of financial statements (4)
Total fees paid to auditors
176
(945)
6,395
2,032
928
93
1,011
509
162
(307)
3,950
2,438
840
170
1,428
565
(42)
(43)
(25,998)
(22,846)
495
30
6
531
364
30
149
543
45
576
51
594
The Group is subject to income taxes in New Zealand and jurisdictions
where it has foreign operations. Significant management judgement is
required in determining the worldwide provision for income taxes. There
are some transactions and calculations undertaken during the ordinary
course of business for which the ultimate tax determination is uncertain.
The Group estimates its tax liabilities based on its understanding of tax
law in each relevant jurisdiction. Where the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the current and deferred income tax assets and
liabilities in the period in which such determination is made. Deferred tax
assets are recognised for all unused tax losses to the extent it is probable
that taxable profits will be available against which the losses can be
utilised. Significant management judgement is required to determine the
amount of deferred tax assets that can be recognised based on the likely
timing and quantum of future taxable profits.
Analysis of tax expense
Current tax
Deferred tax
Under (over) provided in prior years
Total tax expense (benefit)
The tax benefit can be reconciled
to the accounting profit as follows:
2017
$000
2016
$000
4,468
6,026
(3,064)
(10,615)
597
(322)
2,001
(4,911)
Loss before tax from continuing operations
(5,999)
(26,426)
Income tax at the current rate of 28%
(1,680)
(7,399)
Tax effect of:
Prior period adjustments
Non-deductible expenditure/non-assessable
income
Foreign tax credits written off
Non-taxable dividend from subsidiaries
597
(322)
967
216
1,874
2,226
–
243
–
368
2,001
(4,911)
Audit of financial statements includes fees for both the audit of
annual financial statements and the review of interim financial
statements.
Other assurance related services includes annual solvency return
assurance and Pacific Island regulatory return audits.
Other
Total tax expense (benefit)
Non-assurance advisory related services related to Annual
Shareholders’ Meeting procedures and IT Platform review (in 2016).
(i) Current tax
(1)
(2)
(3)
(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.
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.
39
10D. Deferred tax assets and liabilities
The movement in deferred income tax assets and liabilities during the
year is as follows:
B
A
L
A
N
C
E
A
T
1
O
C
T
O
B
E
R
O
P
E
N
N
G
I
S
T
A
T
E
M
E
N
T
T
O
I
N
C
O
M
E
C
R
E
D
T
E
D
I
(
C
H
A
R
G
E
D
)
I
N
C
O
M
E
C
O
M
P
R
E
H
E
N
S
V
E
I
I
C
R
E
D
T
E
D
T
O
(
C
H
A
R
G
E
D
)
3
0
S
E
P
T
E
M
B
E
R
B
A
L
A
N
C
E
A
T
C
L
O
S
N
G
I
$000
$000
$000
$000
For the Year Ended
30 September 2017
Movement in deferred
tax assets
Provisions and accruals
3,141
(876)
–
2,265
Property, plant and
equipment
Tax losses
Other
3,288
4,493
29,086
(2,128)
–
778
Total deferred tax assets
35,515
2,267
–
–
–
–
7,781
26,958
778
37,782
(5,037)
32,745
Set-off of deferred tax
liabilities pursuant to
NZ IAS 12
Net deferred tax assets
Movement in deferred
tax liabilities
Deferred acquisition costs
Other
(4,851)
(1,294)
Total deferred tax liabilities
(6,145)
Set-off of deferred tax
liabilities pursuant to
NZ IAS 12
Net deferred tax liabilities
(227)
1,024
797
–
(29)
(29)
(5,078)
(299)
(5,377)
5,037
(340)
10. Tax (continued)
(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.
10B. Current tax assets
Analysis of current tax assets
Current
Non-current
Total current tax assets
2017
$000
2016
$000
1,206
912
12,256
12,256
13,462
13,168
A non-current tax asset of $12,256,000 is recognised in the financial
statements of the Group as at 30 September 2017 in relation to excess
tax payments made in previous years (2016: $12,256,000). Non-current
tax assets are expected to be recovered from 2021, as determined by
the Board approved operational plan for financial years 2018 to 2021.
A current tax asset of $1,206,000 is recognised in relation to excess tax
payments made in the Pacific Islands over and above the estimated tax
liabilities for the year (2016: $595,000).
10C. Current tax liabilities
Current tax liabilities of $560,000 relate to taxes payable to off shore tax
authorities in the Pacific Islands (2016: $123,000).
40
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017
B
A
L
A
N
C
E
A
T
1
O
C
T
O
B
E
R
O
P
E
N
N
G
I
S
T
A
T
E
M
E
N
T
T
O
I
N
C
O
M
E
C
R
E
D
T
E
D
I
(
C
H
A
R
G
E
D
)
C
O
M
P
R
E
H
E
N
S
V
E
I
I
C
R
E
D
T
E
D
T
O
I
N
C
O
M
E
(
C
H
A
R
G
E
D
)
3
0
S
E
P
T
E
M
B
E
R
B
A
L
A
N
C
E
A
T
C
L
O
S
N
G
I
10E. Imputation credits
The Group imputation credit account reflects the imputation credits held
by the Company as the representative member of the Group.
$000
$000
$000
$000
Imputation credits available for
use in subsequent reporting periods
2017
$000
2016
$000
489
489
For the Year Ended
30 September 2016
Movement in deferred
tax assets
Provisions and accruals
2,321
820
–
3,141
Property, plant and
equipment
3,431
(120)
(23)
3,288
Tax losses
19,034
10,052
–
29,086
Total deferred tax assets
24,786
10,752
(23)
35,515
Set-off of deferred tax
liabilities pursuant to
NZ IAS 12
Net deferred tax assets
Movement in deferred
tax liabilities
(5,360)
30,155
Year Ended
30 September 2017
Revenue
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.
11. Segmental Reporting
NEW
ZEALAND
PACIFIC
ISLANDS
OTHER
(HOLDING
COMPANIES
& ELIMINA-
TIONS)
TOTAL
$000
$000
$000
$000
Net operating revenue
222,117
44,816
665
267,598
Total revenue
222,117
44,816
665
267,598
Earnings before interest,
tax, depreciation and
amortisation
Interest expense
Depreciation and
amortisation
Profit (Loss) before
income tax
(15,648)
12,688
6,223
3,263
–
–
(835)
(835)
(1,529)
(521)
(6,377)
(8,427)
(17,177)
12,167
(989)
(5,999)
Income tax credit (expense)
2,470
(4,958)
487
(2,001)
Profit (Loss) for the year
(14,707)
7,209
(502)
(8,000)
Total assets
30 September 2017
Total liabilities
30 September 2017
Acquisition of property
plant and equipment
and intangibles
481,532
82,664
75,270 639,466
335,602
54,483
33,637
423,722
819
295
12,059
13,173
Deferred acquisition costs
(4,885)
Other
(1,123)
Total deferred tax liabilities
(6,008)
34
(171)
(137)
–
–
–
(4,851)
(1,294)
(6,145)
Set-off of deferred tax
liabilities pursuant to
NZ IAS 12
Net deferred tax liabilities
Deferred tax
5,360
(785)
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 4 years.
Deferred tax liabilities of $946,000 have not been recognised in respect
of temporary differences associated with investments in subsidiaries
(2016: liabilities of $166,000).
41
11. Segmental Reporting (continued)
OTHER
(HOLDING
COMPANIES
& ELIMINA-
TIONS)
TOTAL
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.
NEW
ZEALAND
PACIFIC
ISLANDS
$000
$000
$000
$000
Year Ended
30 September 2016
Revenue
Net operating revenue
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)
479,420
79,104
81,757
640,281
The effective interest rate at 30 September 2017 for deposits at call
is 2.60% (2016: 2.60%). There was no offsetting within cash and cash
equivalents (2016: 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 $4.2 million (2016: $5.5 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 $1.6 million
(2016: $2.7 million) recorded within Insurance liabilities for Tower’s portion
of multi-unit outstanding claims; and $2.6 million (2016: $2.8 million)
recorded within Payables as held on behalf of other insurers in respect
of SPP claims.
360,613
51,981
3,735
416,329
13. Reconciliation of Loss for the Period to Net Cash Flows
from Operating Activities
Total assets
30 September 2016
Total liabilities
30 September 2016
Acquisition of property
plant and equipment
and intangibles
481
1,523
7,553
9,557
Description of segments and other segment information
An operating segment is a group of assets and operations engaged in
providing products or services that are subject to risks and returns that
are different to those of other operating segments.
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker who reviews
the operating results on a regular basis and makes decisions on resource
allocation and assessing performance. The chief operating decision-
maker has been identified as the Company’s Board of Directors.
Tower Group operates predominantly in two geographical segments,
New Zealand and the Pacific region.
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.
12. Cash and Cash Equivalents
Cash at bank and in hand
Deposits at call
Restricted cash
2017
$000
2016
$000
21,981
25,792
76,689
60,932
4,206
5,504
Total cash and cash equivalents
102,876
92,228
42
Tower Limited annual report 2017
Loss for the year
Add (less) non-cash items
Depreciation of property, plant and equipment
Amortisation of software
Impairment of software
2017
$000
2016
$000
(8,000)
(21,515)
2,032
6,395
2,438
3,950
–
19,649
Unrealised (gain) loss on financial assets
(1,837)
4,350
Movement on disposal of property, plant and
equipment
Change in deferred tax
Add (less) movements in working capital
(excluding the effects of exchange differences
on consolidation)
Change in receivables
Change in payables
Change in taxation
Add (less) other items classified
as investing / financing activities
Financing costs
Net cash inflows (outflows)
from operating activities
(42)
(43)
(3,024)
(10,560)
3,524
19,784
(7,653)
1,984
(21,537)
(11,614)
116
1,051
(29,074)
(8,579)
778
778
–
–
(32,772)
(10,310)
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 14. Receivables
Reinsurance recovery receivables
63,947
68,406
Outstanding premiums and trade receivables
127,319
125,855
2017
$000
2016
$000
Other
Total receivables
Analysed as
Current
Non current
Total receivables
70,109
60,424
261,375
254,685
192,466
173,613
68,909
81,072
261,375
254,685
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.
Outstanding premiums and trade receivables
128,124
127,605
Allowance for credit losses and impairment
(805)
(1,750)
2017
$000
2016
$000
Opening balance
Provisions added during the year
Provisions released during the year
Foreign exchange movements
Closing balance
127,319
125,855
(1,750)
(2,057)
(41)
978
8
(45)
224
128
(805)
(1,750)
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.
Earthquake Commission receivables
Kaikoura Region Earthquake
In December 2016 Tower Insurance Limited, along with other private
insurers, signed a Memorandum of Understanding (MOU) with EQC
whereby private insurers act as agents for the Crown agency in relation
to the Kaikoura region earthquake. Under the agreement, Tower directly
lodges, assesses and settles home and contents claims arising from the
14 November 2016 earthquake in the Kaikoura region, including claims
under EQC’s $100,000 cap for house claims and $15,000 cap for contents
claims. Claims from earlier earthquakes in the Canterbury region which
are still open or unresolved are not part of this agreement with EQC. The
agreement with EQC provides for private insurers to get reimbursed for
claim costs, including costs of settlement and handling. At 30 September
2017, the amount due from EQC for reimbursement of claims handling
expenses and claims paid in relation to the Kaikoura event is $1.3 million
(2016: nil).
Canterbury earthquakes
Other receivables include an amount of $65.1 million due from EQC for
land damage and building costs relating to the Canterbury earthquake
provisions as disclosed in Note 8.
Tower estimates the gross amount receivable due from EQC is
significantly higher than the $65.1 million, but has adopted this amount,
which is the actuarial valuation of the Appointed Actuary. The method
by which the actuarial valuation is completed recognises the inherent
risk and uncertainty with recovery of the full gross amount. An amount of
$17.7 million (2016: $20.7 million) will be payable to reinsurers on receipt
from EQC of these balances. The amount payable to reinsurers may vary
depending on the balance collected from EQC.
Tower acknowledges that the EQC recoveries relating to Canterbury
earthquakes are an area of significant accounting estimation and
judgement, including earthquake event allocation, litigation risk factors
and other actuarial assumptions discussed in Note 8.
Reinsurance contract in dispute
Tower is party to an arbitration process with Peak Re regarding an
Adverse Development Cover (ADC) policy entered into in 2015 with
the recovery valued at $43.75 million. Currently Tower anticipates the
arbitration will take place in March 2018 with a decision by mid-2018.
Tower remains confident that it will be successful but both the process
and the hearing hold risk and collection of the owed amount is not
certain. An adverse outcome could lead to a nil recovery due to the
binary nature of the process.
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 8).
43
15. Intangible Assets
SOFTWARE
G
O
O
D
W
L
L
I
A
C
Q
U
R
E
D
I
D
E
V
E
L
O
P
E
D
I
N
T
E
R
N
A
L
L
Y
D
E
V
E
L
O
P
M
E
N
T
U
N
D
E
R
T
O
T
A
L
$000
$000
$000
$000
$000
Year Ended
30 September 2017
Cost:
Opening balance
17,744 5,020 31,305
4,554 58,623
Additions
Disposals
Transfers
Foreign exchange
movements
Transfers to Property,
plant and equipment
–
–
–
–
–
82
5,740
6,237 12,059
(6)
–
1
–
–
–
–
(17)
(23)
(5,822)
(5,822)
–
1
–
(468)
(468)
Closing balance
17,744
5,097 37,045
4,484 64,370
Accumulated amortisation:
Opening balance
Amortisation charge
Foreign exchange movements
Closing balance
Net book value
At cost
–
–
–
–
(4,265) (22,376)
– (26,641)
(235)
(6,160)
(1)
1
–
–
(6,395)
–
(4,501) (28,535)
– (33,036)
17,744
5,097 37,045
4,484 64,370
Accumulated amortisation
–
(4,501) (28,535)
– (33,036)
Closing net book value
17,744
596
8,510
4,484 31,334
Year Ended
30 September 2016
Cost:
Opening balance
17,744
4,223 34,861
14,279 71,107
339
7,070
8,255
–
(39)
Goodwill
–
–
(339)
(339)
Additions
Disposals
Transfers
Transfers to Property,
plant and equipment
Foreign exchange
movements
Impairment expense
–
–
–
–
–
–
846
(39)
–
–
–
(702)
(702)
(10)
–
–
(10)
–
(3,895)
(15,754) (19,649)
Closing balance
17,744 5,020 31,305
4,554 58,623
Accumulated amortisation:
Opening balance
Amortisation charge
Amortisation on disposals
Foreign exchange movements
Closing balance
Net book value
At cost
–
–
–
–
–
(4,047) (18,687)
– (22,734)
(261)
(3,689)
40
3
–
–
–
–
–
(3,950)
40
3
(4,265) (22,376)
– (26,641)
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
44
Tower Limited annual report 2017
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
The determination of estimated useful economic life is a key area of
judgement.
Impairment of software
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 2017. 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 expectations for future technology
platforms required to support growth in the New Zealand and Pacific
insurance businesses. The Directors concluded that no impairment of
software intangible assets was required as at 30 September 2017.
An impairment charge of $19.65 million was recorded at 31 March 2016,
and was recognised in the 30 September 2016 financial statements
relating to Internally developed software and Software under
development categories.
Following the impairment review in 2016, the Group reduced the
estimated useful economic life and amortisation period of the core
operating system software to 3 years from 1 April 2016. This increased the
annual amortisation by $844,000.
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.
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017
Impairment testing for goodwill
17. Property, Plant and Equipment
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
2017
$000
2016
$000
17,744
17,744
Impairment of goodwill is a key area of judgement.
Goodwill is subject to impairment testing at the cash-generating unit
level every six months. No impairment loss has been recognised in 2017
as a result of the impairment review (2016: 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 (2016: 14%).
Other assumptions used are consistent with the actuarial assumptions
in Note 27 in respect of Tower Insurance. The cash flows were projected
over the expected life of the policies. The projected cash flows are
determined based on past performance and management’s expectations
for market developments with a terminal growth rate of 2% (2016: 2%).
Sensitivity to changes in assumptions
Management considers that the recoverable amount from the general
insurance business, as determined by the appraisal value, will exceed the
carrying value under a reasonable range of adverse scenarios.
16. Deferred Acquisition Costs
Balance at the beginning of year
Acquisition costs during the year
Current period amortisation
Total deferred acquisition costs
Analysed as:
Current
Non-current
Total deferred acquisition costs
2017
$000
2016
$000
19,973
20,277
20,961
19,973
(19,973)
(20,277)
20,961
19,973
20,961
19,973
–
–
20,961
19,973
I
E
Q
U
P
M
E
N
T
&
F
U
R
N
T
U
R
E
I
O
F
F
C
E
I
L
A
N
D
A
N
D
I
V
E
H
C
L
E
S
M
O
T
O
R
I
E
Q
U
P
M
E
N
T
C
O
M
P
U
T
E
R
T
O
T
A
L
I
B
U
L
D
N
G
S
I
$000
$000
$000
$000
$000
For the Year Ended
30 September 2017
Cost
Opening balance
2,710
7,481
1,277 14,038 25,506
Additions
Revaluations
Disposals
Foreign exchange movements
–
291
247
(27)
29
–
(74)
17
69
–
(231)
7
754
1,114
–
(19)
(9)
247
(351)
44
Closing balance
2,959
7,715
1,122 14,764 26,560
Accumulated depreciation
Opening balance
–
(2,004)
(930) (13,061) (15,995)
Depreciation
Disposals
Foreign exchange
movements
Closing balance
Closing balance
–
–
–
(928)
(93)
(1,011)
(2,032)
57
188
16
261
(5)
(2)
(7)
(14)
– (2,880)
(837) (14,063) (17,780)
Cost / revaluation
2,959
7,715
1,122
14,764 26,560
Accumulated depreciation
–
(2,880)
(837) (14,063) (17,780)
Net book value
2,959
4,835
285
701 8,780
For the Year Ended
30 September 2016
Cost
Opening balance
2,754
6,749
1,396
13,597 24,496
Additions
Revaluations
Disposals
–
1,182
203
619 2,004
181
–
–
–
–
181
(85)
(122)
(33)
(240)
Foreign exchange movements
(225)
(365)
(200)
(145)
(935)
Closing balance
2,710
7,481
1,277 14,038 25,506
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.
Accumulated depreciation
Opening balance
Depreciation
Disposals
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.
Foreign exchange movements
Closing balance
Closing balance
–
–
–
–
(1,513)
(1,022)
(11,740)
(14,275)
(840)
(170)
(1,428)
(2,438)
82
267
124
138
7
100
213
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
45
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 Insurance 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 Insurance receives cash from other
insurance companies as settlement of their obligations under building
contracts covered within the SPP. Tower Insurance 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 Insurance is lead insurer for. Tower
Insurance holds this cash on behalf of other insurers in a segregated
bank account.
At 30 September 2017 there was $2.6 million (2016: $2.8 million) recorded
within Payables as funds held on behalf of other insurers in respect
of SPP claims. Refer also to Note 12 for further details on cash held in
respect of multi-unit claims as lead insurer.
19. Provisions
Employee benefits
Total provisions
Analysed as:
Current
Non current
Total provisions
2017
$000
5,773
5,773
2016
$000
4,177
4,177
5,592
4,037
181
140
5,773
4,177
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. 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.
17. 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
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.
Computer equipment
Furniture & fittings
Motor Vehicles
Buildings
Leasehold property improvements
3 – 5 years
5 – 9 years
5 years
50 – 100 years
3 – 12 years
Land and buildings are located in Fiji 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 30 August 2017 by
Rolle Associates, registered valuers in Fiji. There has been no material
movement in the valuation between 30 August 2017 and 30 September
2017. 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% (2016: 7.0%).
Had land and buildings been recognised under the cost model the
carrying amount would have been $1,145,000 (2016: $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.
18. Payables
Trade payables
Reinsurance payables
Payable to other insurers
Other payables
Total payables
Analysed as:
Current
Non current
46
Tower Limited annual report 2017
2017
$000
2016
$000
16,479
16,125
4,063
2,590
4,445
2,798
27,992
26,132
51,124
49,500
51,124
49,500
–
–
51,124
49,500
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 20. Insurance Liabilities
21. Distributions to Shareholders
Unearned premiums
Outstanding claims
Additional risk margin
Total insurance liabilities
Analysed as
Current
Non current
Total insurance liabilities
2017
$000
2016
$000
Dividend payments
154,848
150,807
171,156
210,202
10,000
–
336,004 361,009
297,190
291,845
38,814
69,164
336,004 361,009
There were no Tower Limited dividend payments during the year ended
30 September 2017.
The final dividend for the 2015 financial year of 7.5 cents per share was
paid on 3 February 2016. The total amount paid was $12,687,553. There
were no imputation credits attached to the dividend and the Dividend
Reinvestment Plan was not offered.
The interim dividend for the 2016 financial year of 8.5 cents per share
was paid on 30 June 2016. The total amount paid was $14,336,340. There
were no imputation credits attached to the dividend and the Dividend
Reinvestment Plan was not offered.
The table below includes the reconciliation of the unearned premiums
as at the reporting date:
Return of capital
Opening balance
Premiums written
Premiums earned
Foreign exchange movements
Closing balance
2017
$000
2016
$000
150,807
155,677
296,855
288,537
(292,153)
(293,911)
(661)
504
154,848
150,807
There was no return of capital during the year ended 30 September 2017.
On 24 May 2016 the Directors announced the voluntary on-market share
buyback would stop with immediate effect. Consequently there was no
on-market share buyback during the year ended 30 September 2017.
In 2015 the Company commenced on market share buyback of up to
$34 million. Capital of $2.4 million was bought back in the half year to
31 March 2016.
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 and to ensure provision is at least at 75% probability
of sufficiency.
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.
Refer to Note 8 for further details on the additional risk margin.
22. Borrowings
I
N
T
E
R
E
S
T
R
A
T
E
C
U
R
R
E
N
C
Y
(
D
R
A
W
N
)
/
M
A
T
U
R
T
Y
I
D
A
T
E
(
U
N
D
R
A
W
N
)
R
O
L
L
O
V
E
R
D
A
T
E
F
A
C
E
V
A
L
U
E
I
U
N
A
M
O
R
T
S
E
D
C
O
S
T
S
I
C
A
R
R
Y
N
G
V
A
L
U
E
I
F
A
R
V
A
L
U
E
$000
$000
$000
$000
As at 30
September 2017
Bank facilities
(drawn)
Bank facilities
(undrawn)
Total borrowings
As at 30
September 2016
Bank facilities
(undrawn)
Total borrowings
NZD
4.505% 13-Nov-17 30,000
(79)
29,921
29,921
NZD Variable
9-Sep-19 20,000
–
–
–
(79) 29,921 29,921
NZD Variable
9-Sep-19 50,000
–
–
–
–
–
–
Borrowings are recognised initially at fair value, net of transaction costs
incurred. Subsequent to initial recognition, borrowings are measured at
amortised cost with any difference between the initial recognised amount
and the redemption value being recognised in the income statement
over the period of the borrowings using the effective interest method.
47
22. Borrowings (continued)
Fees paid on the establishment of loan facilities are recognised as
transaction costs of the loan to the extent that it is probable that some
or all of the facility will be drawn down. The fee is capitalised as a pre-
payment for liquidity services and amortised over the period of the facility
to which it relates.
2017
$000
2016
$000
24. Reserves
Foreign currency translation reserve (FCTR)
Opening balance
(4,443)
791
2017
$000
2016
$000
Currency translation differences arising
during the year
29,921
–
29,921
–
–
–
Closing balance
Separation Reserve
Opening balance
Closing balance
Asset revaluation reserve
Opening balance
Gain on revaluation, net of deferred tax
Closing balance
Total reserves
100
(5,234)
(4,343)
(4,443)
(113,000)
(113,000)
(113,000)
(113,000)
671
218
889
513
158
671
(116,454)
(116,772)
Analysed as
Current
Non current
Total borrowings
Standby credit facility
The Company entered into a cash advance facility with Bank of New
Zealand on 7 September 2016. The facility provides for an amount of up
to $50.0 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.
In May 2017, the Company utilised the cash advance facility agreement.
An amount of $30.0 million was drawn (from the available $50.0 million).
Funds were used for new share capital within Tower Insurance Limited.
Covenants
All borrowings are unsecured and are subject to various financial
covenants. The Company has fully complied with all covenants during
the year ended 30 September 2017.
23. Contributed Equity
Ordinary share capital (fully paid)
Total contributed equity
Represented by:
2017
$000
382,172
382,172
2016
$000
382,172
382,172
2017
NUMBER
2016
NUMBER
OF SHARES
OF SHARES
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.
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.
25. Net Assets per Share
Net assets per share
Net tangible assets per share
2017
$
1.28
0.90
2016
$
1.33
0.96
Ordinary shares (issued and fully paid)
168,662,150
168,662,150
Movement in ordinary shares:
Opening balance
Buyback of share capital
Closing balance
168,662,150
169,983,470
–
(1,321,320)
168,662,150
168,662,150
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:
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.
Net assets
Less: deferred tax
Less: intangible assets
Net tangible assets
2017
$000
2016
$000
215,744 223,952
(32,405)
(29,370)
(31,334)
(31,982)
152,005
162,600
48
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 26. 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 2017
(2016: nil).
2017
$000
2016
$000
RISKS
BORNE IN
CURRENT
YEAR
$000
2016
RISKS
BORNE
IN PRIOR
YEARS
$000
TOTAL
$000
Gross claims expense
Direct claims – undiscounted
148,710
91,358 240,068
Movement in discount
53
17
70
Total gross claims expense
148,763
91,375
240,138
Reinsurance and other recoveries
Reinsurance and other recoveries
– undiscounted
(12,094)
(42,428)
(54,522)
Movement in discount
(3)
(1)
(4)
Total reinsurance recoveries
(12,097)
(42,429)
(54,526)
Loss attributable to shareholders
(8,461)
(22,328)
Net claims expense
136,666
48,946
185,612
2017
NUMBER
2016
NUMBER
OF SHARES
OF SHARES
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 Notes 7 and 8.
168,662,150
169,069,382
(a) Assumptions adopted in calculation of insurance liabilities
27B Outstanding claims
Weighted average number of ordinary
shares for basic and diluted earnings
per share
Basic and diluted (loss) earnings
per share
27. Insurance Business Disclosure
27A Net claims expense
2017
CENTS
2016
CENTS
(5.02)
(13.21)
RISKS
BORNE IN
CURRENT
YEAR
$000
2017
RISKS
BORNE
IN PRIOR
YEARS
$000
TOTAL
$000
Gross claims expense
Direct claims – undiscounted
171,160
46,316
217,476
Movement in discount
43
28
71
Total gross claims expense
171,203
46,344
217,547
Reinsurance and other recoveries
Reinsurance and other recoveries
– undiscounted
The estimation of outstanding claims as at 30 September 2017 has been
carried out by the following Actuaries:
Rick Shaw, B.Sc. (Hons), FIAA, Appointed Actuary; and
Peter Davies, B.Bus.Sc, FIA, FNZSA.
The New Zealand actuarial assessments are undertaken in accordance
with the standards of the New Zealand Society of Actuaries, in particular
Professional Standard No. 30 “Valuations of General Insurance Claims”.
The Actuaries were satisfied as to the nature, sufficiency and accuracy
of the data used to determine the outstanding claims liability. The
outstanding claims liability is set by the Actuaries at a level that is
appropriate and sustainable to cover the Group’s claims obligations after
having regard to the prevailing market environment and prudent industry
practice.
The following assumptions have been made in determining net
outstanding claims liabilities:
2017
2016
Inflation rates varied from
0.0% – 3.8%
0.0% – 3.8%
Inflation rates for succeeding year
0.0% – 3.8%
0.0% – 3.8%
Inflation rates for following years
0.0% – 3.8%
0.0% – 3.8%
Discount rates varied from
0.0% – 6.3%
0.0% – 6.3%
(16,640)
(13,354)
(29,994)
Discount rates for succeeding year
0.0% – 6.3%
0.0% – 6.3%
Movement in discount
(1)
(1)
(2)
Discount rates for following years
0.0% – 6.3%
0.0% – 6.3%
Total reinsurance recoveries
(16,641)
(13,355)
(29,996)
Claims handling expense ratio
3.1% – 39.1% 0.0% – 56.4%
Net claims expense
154,562
32,989
187,551
Risk margin
4.9% – 23.1%
6.3% – 21.8%
In addition to the risk margin range shown above, the total risk margin
also includes $23,900,000, gross of reinsurance (2016: $17,700,000)
associated with the Canterbury earthquakes.
49
27. Insurance Business Disclosure (continued)
The weighted average expected term to settlement of outstanding
claims (except for Canterbury earthquake claims) based on historical
trends is:
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.
Outstanding claim liabilities are discounted to present value using a risk
free rate relevant to the term of the liability and the jurisdiction.
Discount
Net outstanding claims
Short tail claims within 1 year
within 1 year
within 1 year
Long tail claims in the Pacific Islands
1.0 to 1.8 years
0.9 to 1.8 years
2017
2016
Inwards reinsurance
Inflation rate
greater than
10 years
greater than
10 years
Insurance costs are subject to inflationary pressures. Inflation
assumptions for all classes of business are based on current economic
indicators for the relevant country.
For motor and property classes, for example, claim costs are related to
the inflationary pressures of the materials and goods insured as well as
labour costs to effect repairs. These costs are expected to increase at a
level between appropriate Consumer Price Index (CPI) indices and wage
inflation.
Discount rate
EQC recoveries
For each claim to which additional EQC recoveries relate, Tower has
allocated recoverable amounts according to the quality of information
and evidence available. Claims with primary evidence (e.g. independent
expert documentation) have been assessed as having a strong
position for recovery. Claims with non-primary evidence (e.g. general
documentation like post code analysis or adjacent locations) will have 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.
Claims handling expense
The estimate of outstanding claim liabilities incorporates an allowance
for the future cost of administering the claims. This allowance is
determined after analysing historical claim related expenses incurred by
the classes of business.
Risk margin
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
50
Tower Limited annual report 2017
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 sufficiency for both the
outstanding claims liability and the unexpired risk liability.
The following analysis is in respect of the insurance liabilities:
Central estimate of expected present value
of future payments for claims incurred
Risk margin
Claims handling costs
2017
$000
2016
$000
133,898
129,058
27,885
14,663
3,914
4,177
165,697
147,898
(270)
(201)
165,427
147,697
Reconciliation of movements in discounted outstanding claim
liabilities
2017
GROSS
$000
RE-
INSURANCE
$000
NET
$000
Balance brought forward
210,202
(62,505)
147,697
Effect of change in foreign
exchange rates
Incurred claims recognised
in the income statement
Claim (payment) recoveries
during the year
(553)
98
(455)
217,547
(29,996)
187,551
(246,040)
76,674
(169,366)
Total outstanding claims
181,156
(15,729)
165,427
2016
GROSS
$000
RE-
INSURANCE
$000
NET
$000
Balance brought forward
220,200
(65,914)
154,286
Effect of change in foreign
exchange rates
Incurred claims recognised
in the income statement
Claim (payment) recoveries
during the year
699
3
702
240,138
(54,526)
185,612
(250,835)
57,932
(192,903)
Total outstanding claims
210,202
(62,505)
147,697
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 Reconciliation of movements in undiscounted claims to outstanding
claim liabilities
(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;
— monitoring natural disasters such as earthquakes, floods, storms
and other catastrophes using models; and
— the use of reinsurance to limit the Group’s exposure to individual
catastrophic risks.
(b) Concentration of insurance risk
RISK
An accumulation of
risks arising from a
natural peril
A large property loss
SOURCE OF
CONCENTRATION
RISK MANAGEMENT
MEASURES
Insured property
concentrations
Accumulation risk
modelling, reinsurance
protection
Fire or collapse
affecting one building
or a group of adjacent
buildings
Maximum acceptance
limits, property risk
grading, reinsurance
protection
2017
GROSS
$000
RE-
INSURANCE
$000
NET
$000
Outstanding claims undiscounted
1,968
(367)
1,601
Discount
60
–
60
Outstanding claims
2,028
(367)
1,661
Short tail outstanding claims
Total outstanding claims
Outstanding claims undiscounted
Discount
Outstanding claims
Short tail outstanding claims
Total outstanding claims
(b) Sensitivity analysis
2016
GROSS
$000
RE-
INSURANCE
$000
1,731
(13)
1,718
(90)
2
(88)
163,766
165,427
NET
$000
1,641
(11)
1,630
146,067
147,697
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 historical inwards reinsurance business which
is in run off. While this business is not material, it is sensitive to claims
experience, timing of claims and changes in assumptions. Movement in
these variables does not have a material impact on the performance and
equity of the Group.
(c) Future net cash out flows
The following table shows the expected run-off pattern of net
outstanding claims:
Expected claim payments
Within 3 months
3 to 6 months
6 to 12 months
After 12 months
2017
$000
2016
$000
50,622
39,580
32,137
22,255
43,064
19,234
39,604
66,628
Total outstanding claim liabilities
165,427
147,697
27C 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 29). Notes on the policies and
procedures employed in managing these risks in the insurance business
are set out below.
51
27. Insurance Business Disclosure (continued)
(c) Development of claims
The following table shows the development of net outstanding claims
relative to the current estimate of ultimate claims costs for the five most
recent years:
ULTIMATE CLAIMS COST ESTIMATE
PRIOR
$000
2013
$000
2014
$000
2015
$000
2016
$000
2017
$000
TOTAL
$000
At end of incident year
113,839
123,816
138,878
137,220
154,562
One year later
Two years later
Three years later
Four years later
Current estimate of ultimate
claims cost
117,277
124,667
138,720
145,970
116,819
125,502
138,851
117,862
125,408
142,015
142,015
125,408
138,851
145,970
154,562
Cumulative payments
(141,740)
(125,125)
(138,094)
(139,064)
(119,644)
Undiscounted central estimate
90,759
Discount to present value
Discounted central estimate
(3)
90,756
275
(3)
272
283
(11)
272
757
(8)
749
6,906
34,918
133,898
(19)
(226)
(270)
6,887
34,692
133,628
3,914
27,885
165,427
15,729
181,156
Claims handling expense
Risk margin
Net outstanding claim liabilities
Reinsurance recoveries on
outstanding claim liabilities and
other recoveries
Gross outstanding claim liabilities
27D 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 estimate. The future cash flows are future
claims, associated claims handling costs and other administration costs
relating to the business.
If the unearned premium liability less related deferred acquisition
costs exceeds the present value of expected future cash flows plus
additional risk margin then the unearned premium liability is deemed to
be adequate. The risk margins applied to future claims were determined
with the objective of achieving at least 75% probability of sufficiency of
the unexpired risk liability using the methodology described above. The
unearned premium liabilities as at 30 September 2017 were sufficient
(2016: sufficient).
Central estimate claim % of premium
Risk margin
2017
%
41.2%
12.0%
2016
%
45.3%
9.3%
52
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 27E Insurer financial strength rating
(i) Loans and receivables
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 16 August 2017.
27F 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.
27G Solvency requirements
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.
The minimum solvency capital required to meet solvency requirements
under the Insurance (Prudential Supervision) Act 2010 is shown below.
Actual solvency capital exceeds the minimum solvency capital
requirement for Tower Insurance Group by $96.3 million (2016: $73.8
million) and Tower Insurance parent by $87.9 million (2016: $64.3 million).
TOWER INSURANCE
LIMITED
TOWER INSURANCE
LIMITED GROUP
UNAUDITED
2017
$000
UNAUDITED
2016
$000
AUDITED
2017
$000
AUDITED
2016
$000
Actual solvency capital
149,317
120,684
166,823
140,827
Minimum solvency capital
61,387
56,350
70,545
67,047
Solvency margin
87,930
64,334
96,278
73,780
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.
Solvency ratio
243%
214%
236%
210%
(iv) Fair value
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 continues to
be a requirement for Tower Insurance Limited.
27H 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.
Assets backing insurance liabilities are managed in accordance with
approved investment mandate agreements on a fair value basis and are
reported to the Board on this basis.
28. Financial Instruments
28A 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.
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.
The Group does not hold financial assets and financial liabilities subject
to offsetting arrangements other than cash and cash equivalents. Refer
to Note 12.
(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.
53
(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
2017, the Level 3 category included an investment in equity securities of
$1,412,000 (2016: $1,406,000). 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
2016: nil).
28. Financial Instruments (continued)
The analysis of financial assets and liabilities into their categories and
classes is set out in the following tables:
AT AMORTISED
COST
AT FAIR VALUE
THROUGH
PROFIT OR LOSS
I
R
E
C
E
V
A
B
L
E
S
L
O
A
N
S
A
N
D
$
0
0
0
$
0
0
0
$
0
0
0
T
O
T
A
L
I
I
L
A
B
L
T
E
S
I
I
I
F
N
A
N
C
A
L
I
I
D
E
S
G
N
A
T
E
D
$
0
0
0
H
E
L
D
F
O
R
T
R
A
D
N
G
I
$
0
0
0
As at 30 September 2017
Assets
Cash and cash
equivalents
Trade and other
receivables
Investments
Derivative assets
102,876 102,876
257,964 257,964
–
–
–
–
167,702
231
–
–
– 167,702
–
231
Total financial assets
528,773 360,840
– 167,933
Liabilities
Trade and other payables
25,814
–
25,814
Borrowings
29,921
– 29,921
Total financial liabilities
55,735
– 55,735
As at 30 September 2016
Assets
Cash and cash
equivalents
Trade and other
receivables
Investments
Derivative assets
92,228 92,228
253,115 253,115
–
–
188,522
57
–
–
– 188,522
–
57
Total financial assets
533,922 345,343
– 188,579
Liabilities
Trade and other payables 26,532
– 26,532
–
Derivative financial
liabilities
735
–
–
Total financial liabilities
27,267
– 26,532
735
735
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
28B 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.
54
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017
The following tables present the Group’s assets and liabilities categorised
by fair value measurement hierarchy levels.
TOTAL
$000
LEVEL 1
$000
LEVEL 2
$000
LEVEL 3
$000
As at 30 September 2017
Assets
Investment in equity securities
1,412
–
–
1,412
Investments in fixed interest
securities
166,256
– 166,256
Investments in property securities
34
–
34
–
–
Investments
167,702
– 166,290
1,412
Derivative financial assets
231
–
231
–
Total financial assets
167,933
– 166,521
1,412
Liabilities
Borrowings
Total financial liabilities
As at 30 September 2016
Assets
29,921
29,921
– 29,921
– 29,921
–
–
Investment in equity securities
1,406
–
–
1,406
Investments in fixed interest
securities
187,082
– 187,082
Investments in property securities
34
Investments
Derivative financial assets
188,522
57
–
–
–
–
–
34
187,116
1,406
57
–
Total financial assets
188,579
– 187,173
1,406
Liabilities
Derivative financial liabilities
Total financial liabilities
735
735
–
–
735
735
–
–
The following table represents the changes in Level 3 instruments:
Opening balance
Total gains and losses recognised in profit or loss
Foreign currency movement
Closing balance
INVESTMENT IN
EQUITY SECURITIES
2017
$000
2016
$000
1,406
1,972
(3)
9
(163)
(403)
1,412
1,406
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
UNFAVOURABLE
CHANGES OF 10%
$000
As at 30 September 2017
Investment in equity
securities
As at 30 September 2016
Investment in equity
securities
1,412
141
(141)
1,406
141
(141)
28C 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.
For financial assets carried at amortised cost, the amount of the
impairment is the difference between the carrying amount and the
present value of estimated future cash flows, discounted at the original
effective interest rate.
For all financial assets, other than trade receivables, the carrying amount
is reduced by the impairment loss directly. For trade receivables the
carrying amount is reduced via an allowance account, against which an
uncollectible trade receivable is written off.
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.
29. Risk Management
The financial condition and operating results of the Group are affected by
a number of key financial and non-financial risks. Financial risks include
market risk, credit risk, financing and liquidity risk. The non-financial risks
include insurance risk, compliance risk and operational risk. The Group’s
objectives and policies in respect of insurance risks are disclosed in Note
27, 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.
55
29 Risk Management (continued)
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.
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.
29A 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 29F.
(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 29F.
29B 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
2017
$000
2016
$000
8,184
3,744
18,412
12,390
229,526
237,842
13,241
25,770
Other non-investment related receivables
257,964
252,736
Total financial assets with credit exposure
527,327
532,482
(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
2017
$000
2016
$000
102,876
92,228
257,964
253,115
Financial assets at fair value through profit or loss
166,256
187,082
Derivative financial assets
Total credit risk
231
57
527,327
532,482
56
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 Total counterparties with external credit ratings
267,667
275,159
Total
Outstanding premiums and trade receivables
(iii)
Credit quality of financial assets that are neither past due nor
impaired
The credit quality of financial assets that are neither past due nor
impaired can be assessed by reference to external credit ratings (if
applicable) or to historical information about counterparty default rates:
Credit exposure by credit rating
AAA
AA
A
BBB
Below BBB
CARRYING VALUE
2017
$000
2016
$000
67,201
81,795
184,233
180,515
527
–
412
–
15,706
12,437
Group 1
Group 2
Group 3
205,601
234,274
–
–
1,696
6,026
Total counterparties with no external credit rating 207,297 240,300
Total financial assets neither past due nor
impaired with credit exposure
474,964
515,459
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.
(iv) Financial assets that would otherwise be past due whose terms
have been renegotiated
No financial assets have been renegotiated in the past year (2016: nil).
(v) Financial assets that are past due but not impaired
The Group considers that financial assets are past due if payments have
not been received when contractually due. At the reporting date, the total
carrying value of past due but not impaired assets held are as follows:
LESS
THAN
30 DAYS
$000
31 TO
60 DAYS
$000
61 TO
90 DAYS
$000
OVER
90 DAYS
$000
TOTAL
$000
As at 30 September 2017
Reinsurance recoveries
receivable
Outstanding premiums
and trade receivables
Total
8,761
4,434
3,267 35,901 52,363
5,026
1,754
1,268
410
8,458
LESS
THAN
30 DAYS
$000
31 TO
60 DAYS
$000
61 TO
90 DAYS
$000
OVER
90 DAYS
$000
TOTAL
$000
As at 30 September 2016
Reinsurance recoveries
receivable
Outstanding premiums
and trade receivables
1,875
2,442
45
3
4,365
3,150
7,978
1,244
285
12,657
Total
5,025 10,420
1,289
288
17,022
(vi) Financial assets that are individually impaired
CARRYING VALUE
2017
$000
2016
$000
–
–
–
–
29C Financing and liquidity risk
Financing and liquidity risk is the risk that the Group will not be able to
meet its cash outflows or refinance debt obligations, as they fall due,
because of lack of liquid assets or access to funding on acceptable
terms. To mitigate financing and liquidity risk the Group maintains
sufficient liquid assets to ensure that the Group can meet its debt
obligations and other cash outflows on a timely basis.
Financial liabilities and guarantees by contractual maturity
The table below summarises the Group’s financial liabilities and
guarantees into relevant maturity groups based on the remaining period
to the contractual maturity date at balance date. All amounts disclosed
are contractual undiscounted cash flows that include interest payments
and exclude the impact of netting agreements.
C
O
N
T
R
A
C
T
U
A
L
C
A
S
H
F
L
O
W
S
T
O
T
A
L
C
A
R
R
Y
N
G
I
V
A
L
U
E
L
E
S
S
T
H
A
N
O
N
E
Y
E
A
R
O
N
E
T
O
T
W
O
Y
E
A
R
S
T
H
R
E
E
Y
E
A
R
S
T
W
O
T
O
I
F
V
E
Y
E
A
R
S
T
H
R
E
E
T
O
$000
$000
$000
$000
$000
$000
As at 30 September 2017
Financial liabilities
Trade payables
19,069 19,069 19,069
Reinsurance payables
4,063 4,063 4,063
Other payables
2,682
2,682
2,682
Derivative financial
liabilities
–
–
–
Borrowings
29,921 29,921 29,921
Total
55,735 55,735 55,735
As at 30 September 2016
Trade payables
18,923 18,923 18,923
Reinsurance payables
4,445
4,445
4,445
Other payables
3,164
3,164
3,164
Derivative financial
liabilities
735
735
735
Total
27,267 27,267 27,267
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
57
3,735
2,680
1,999
35,491 43,905
Financial liabilities
29 Risk Management (continued)
29D Fair value of financial assets and liabilities
(ii) Foreign currency
Refer to Note 28B, which discusses the fair value of financial assets and
liabilities.
29E Derivative financial instruments
The Group utilises derivative financial instruments to reduce investment
risk. Specifically, derivatives are used to achieve cost effective short-term
re-weightings of asset class, sector and security exposures and to hedge
portfolios, as an economic hedge, when a market is subject to significant
short-term risk.
Derivative financial instruments used by the Group 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
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.
2017
IMPACT ON:
2016
IMPACT ON:
PROFIT
AFTER TAX
$000
EQUITY
$000
PROFIT
AFTER TAX
$000
EQUITY
$000
292
(2,380)
86
(2,284)
(357)
2,909
(105)
2,791
Change in variables
10% appreciation of
New Zealand dollar
10% depreciation of
New Zealand dollar
The dollar impact of the change in currency movements is determined by
applying the sensitivity to the value of the international assets.
The risks assumed and methods used for deriving sensitivity information
and significant variables have been applied consistently over the
reporting period included in the analysis.
2017
%
2016
%
2017
$000
2016
$000
2017
$000
2016
$000
(iii) Equity price
Less than 1 year
1 to 2 years
2 to 5 years
Over 5 years
0%
0%
2%
0%
0% 25,249 29,419
166
(735)
0%
–
–
2% 20,580 12,000
0%
–
–
–
65
–
–
57
–
45,829 41,419
231
(678)
29F Sensitivity analysis
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.
2017
IMPACT ON:
2016
IMPACT ON:
PROFIT
AFTER TAX
$000
EQUITY
$000
PROFIT
AFTER TAX
$000
EQUITY
$000
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 (2016: nil).
(iv) Other price
Other price sensitivity includes sensitivity to unit price fluctuations. Unit
price risk is the risk that the fair value of investments in property fund
units and international equities held in unit trusts will decrease as a result
of changes in the value of these units.
The 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.
2017
IMPACT ON:
2016
IMPACT ON:
PROFIT
AFTER TAX
$000
EQUITY
$000
PROFIT
AFTER TAX
$000
EQUITY
$000
2
(2)
2
(2)
2
(2)
2
(2)
Change in variables
+ 10% property funds
and other unit trusts
- 10% property funds
and other unit trusts
Change in variables
+ 50 basis points
- 50 basis points
(511)
409
(511)
409
(515)
469
(515)
469
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.
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.
58
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 30. Capital Risk Management
32. Subsidiaries
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.
NOTE
2017
$000
2016
$000
Tower shareholder equity
214,419
222,578
Standby credit facility (undrawn)
22
20,000
50,000
Total capital resources
234,419
272,578
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 (2016: $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 2017 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.
The table below lists Tower Limited subsidiary companies and controlled
entities. All entities have a balance date of 30 September.
NAME OF COMPANY
COUNTRY
INCORPORATED
IN
HOLDINGS
2017
2016
NATURE OF
BUSINESS
Incorporated in New Zealand
Tower Financial Services
Group Limited
NZ
100%
100% Holding
company
Tower Insurance Limited
NZ
100%
100% General
Tower New Zealand Limited NZ
100%
insurance
100% Management
services
Incorporated Overseas
Tower Insurance
(Cook Islands) Limited
Tower Insurance (Fiji)
Limited
Tower Insurance (PNG)
Limited
National Pacific
Insurance Limited
Tower Insurance
(Vanuatu) Limited
Cook Islands
100%
100% General
insurance
Fiji
100%
100% General
insurance
PNG
100%
100% General
insurance
Samoa
71%
71% General
insurance
Vanuatu
100%
100% General
insurance
33. Transactions with Related Parties
33A Key management personnel compensation
The remuneration of key management personnel during the year was as
follows:
31. Operating Leases
2017
$000
2016
$000
Salaries and other short term employee
benefits paid
Independent director fees
2017
$000
2016
$000
4,244
4,219
509
565
4,753
4,784
As lessee
Rent payable to the end of the lease terms are:
Not later than one year
Later than one year and not later than five years
Later than five years
2,806
3,044
7,444
2,010
7,763
3,733
12,260
14,540
Leases in which a significant portion of the risks and rewards of
ownership are retained by the lessor are classified as operating leases.
Operating lease payments are recognised as an expense in the periods
the services are received over the 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.
Information regarding individual director and executive compensation is
provided in the Corporate Governance section of the annual report.
33B 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 (2016: nil).
33C Other transactions with key management personnel
Key management hold various policies and accounts with Tower Group
companies. These are operated in the normal course of business on
normal customer terms.
59
34. 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.
Under the Fairfax mutual termination agreement, a break fee of $1.57
million is payable to Fairfax if another party completes an acquisition of
Tower by 31 August 2018.
The Group has no other contingent liabilities (2016: nil).
35. Capital Commitments
The Group has no capital commitments at reporting date (2016: nil).
36. Subsequent Events
Capital raise process
The Tower Board has announced it will undertake a capital raising
process commencing 14 November 2017. The capital raise will be by
way of a fully underwritten, renounceable rights issue. An amount of
approximately $70.8 million gross of fees will be raised, with rights
offered at a ratio of 1 for every 1 ordinary shares held on the record date of
22 November 2017. It is expected new shares will be allotted and quoted
on NZX and ASX in December 2017. Capital will be utilised to repay the
BNZ banking facility partially drawn in May 2017 and to allow accelerated
growth in Tower’s strategy.
Suncorp Group Limited / Vero Insurance New Zealand Limited
(Suncorp)
On 7 November 2017, Tower advised that the SIA with Suncorp had
passed its end date and had been terminated. Suncorp subsequently
announced that as a result, it would no longer be proceeding with its
appeal of the Commerce Commission’s decision to decline its application
to acquire Tower.
Following Suncorp’s announcement, the Tower Board withdrew its cross
appeal against the Commerce Commission’s decision.
60
Tower Limited annual report 2017
Tower LimitedNotes to the Financial StatementsFor the year ended 30 September 2017 Corporate
Governance
at Tower Limited
(Tower)
61
This section of the Annual Report provides
an overview of the corporate governance
principles, policies and processes
adopted and followed by Tower’s Board.
The Board is committed to achieving the highest standards of
corporate governance, ethical behaviour, and accountability,
While Tower’s Board has opted not to voluntarily report early
against the new Code, Tower fully supports the new Code
and is undertaking a review of its governance practices to
ensure alignment with the new Code. Tower has amended the
structure of this year’s Corporate Governance section to better
align with the new Code, and the content of reporting will
comply with the new Code upon release of the FY18 annual
and has implemented corporate governance practices that
report.
are consistent with best practice. Where developments arise
in corporate governance, the Board reviews Tower’s practices
and incorporates changes where appropriate.
This statement is current as at 14 November 2017 and has
been approved by Tower’s Board.
Governance Framework
Tower Limited is a company incorporated in New Zealand
under the Companies Act 1993 (NZ) (‘Companies Act’), whose
fully paid ordinary shares (‘Shares’) are listed on the NZX Main
Board and Australian stock exchange (‘NZX’ and ‘ASX’). Tower
changed its ASX admission category to ‘ASX Foreign Exempt
Listing’ on 18 May 2016. As an ASX Foreign Exempt Listing,
Tower is primarily regulated by the listing rules of its home
exchange (being the NZX Main Board (NZX)) and is exempt
from complying with most of ASX’s Listing Rules.
Compliance
In addition to compliance with the NZX listing rules, Tower’s
corporate governance framework also requires compliance
with the NZX Corporate Governance Best Practice Code
(NZX Code) and the Financial Markets Authority’s ‘Corporate
Governance in New Zealand: Principles and Guidelines’
handbook (FMA Handbook).
Tower Insurance Limited, a subsidiary of Tower Limited, is
licensed to undertake general insurance business in New
Zealand under the Insurance (Prudential Supervision) Act
2010 (IPSA). Tower Insurance Limited must comply with the
requirements of IPSA, and is regulated by the Reserve Bank
of New Zealand. Further information on Tower Insurance
Limited’s governance structure is contained in its annual
report which is registered each year with the Companies
Office.
For the reporting period to 30 September 2017, the Board
considers that Tower’s corporate governance practices have
materially adhered to the NZX Code and the FMA Handbook,
other than as outlined in this corporate governance section.
In May 2017, NZX published a new Corporate Governance
Code (new Code), which will replace the existing NZX Code
from 31 December 2017.
62
Tower Limited annual report 2017
More information
Tower’s principal governance policies and practices can
be found on Tower’s website at https://www.tower.co.nz/
investor-centre/corporate-governance.
Ethical behaviour
Code of Ethics
Tower is committed to acting responsibly and ethically, and
meeting its legal and other obligations to shareholders,
customers, employees and the wider community. Maintaining
Tower’s reputation for honesty and fairness is crucial to its
success as a financial services business. To help achieve these
goals, Tower has a Code of Ethics which sets out minimum
standards of ethical behaviour. The Code of Ethics applies to
Tower’s directors, executives, employees and contractors.
The Code of Ethics is available to Tower’s people on its staff
intranet and website, and training is provided on the Code
through the orientation process. The behavioural expectations
set out in the Code of Ethics include:
• Acting honestly, with personal integrity, and in the best
interests of Tower, its shareholders and stakeholders
• Avoiding situations in which personal interests interfere or
appear to interfere with the interests of Tower, and advising
of any such conflicts
• Proper receipt and use of Tower’s corporate information,
assets and property
• Taking appropriate action when giving and receiving gifts
• Adhering to whistleblowing procedures
The Code of Ethics requires any person who becomes aware
of a breach or suspected breach of the Code to report it
immediately to the Head of Risk and Controls or the People
and Culture Team. Failure to comply with the Code of Ethics
may lead to disciplinary action and, in serious cases, dismissal.
All persons who disclose a breach will be protected in
accordance with Tower’s Whistleblower Policy.
Insider Trading and Market Manipulation Policy
• approving capital expenditure, operating expenditure,
Tower has an Insider Trading and Market Manipulation Policy
which governs dealing in financial products. The policy applies
to directors, employees, consultants and contractors and
helps provide transparency around Tower’s requirements in
relation to financial dealing, in particular protecting Tower’s
people from the risk of breaching Insider Trading laws. The
policy prohibits these people from trading and dealing in
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.
Tower shares while they are in possession of information that
The Charter provides that the day-to-day leadership and
has not been released to the public and that is likely to have a
management of the company is undertaken by the Chief
material effect on the price of Tower securities. The policy also
Executive Officer and senior management. The Chief
requires directors and designated employees to obtain prior
consent to trade, and specifies blackout periods where all
trading is prohibited.
The policy is available on Tower’s staff intranet and website,
and is circulated to all staff at the beginning of each blackout
period.
Board composition and performance
Board charter
Tower’s Board operates in accordance with a written charter
which sets out the roles and responsibilities of the Board.
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 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.
Executive Officer is solely accountable to the Board for
management performance. The Chief Executive Officer
has also formally delegated 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.
Nomination and Appointment of
Directors to the Board
Tower’s procedure for the nomination and appointment of
directors to the Board is set out in Tower’s Remuneration
and Appointments Committee Terms of Reference. The
Remuneration and Appointments Committee will identify and
recommend to the Board suitable candidates for appointment
as directors. The Committee will consider, among other
The Board reserves certain functions to itself. These include:
matters, a candidate’s:
• determining the company’s strategic objectives, and
• experience as a director
approving annual operating plans, financial targets and
capital expenditure plans
• skills, expertise and competencies (the Board aims to have
a mix of skilled directors with particular competencies in the
• assessing and monitoring performance, including
insurance and financial services sector)
management’s performance against the strategic
objectives, operating plans and financial targets
• the extent to which those skills complement the skills of
existing directors
• approving all changes to the company’s corporate structure
• the candidate’s ability to devote sufficient time to the
where these are of strategic importance
directorship, and
• 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
• 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,
63
along with the Fit and Proper Policy Guidelines for Licensed
Director profiles and independence
Insurers issued by the Reserve Bank of New Zealand. All
newly appointed directors and relevant officers are subject
to Fit and Proper assessments prior to appointment. The Fit
and Proper assessment considers a candidate’s character,
experience, education, criminal record, and credit history.
Profiles of Tower’s directors are available at pages 18 and 19
of this report. Directors’ independence is assessed in
accordance with the requirements for independence set out
in Tower’s Board and Director Protocols. Those independence
requirements are benchmarked against the Reserve Bank of
In the case of a candidate standing for election as a
New Zealand and NZX independence requirements.
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 Fit and Proper
checks
• 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.
Written agreements with directors
All Tower directors have entered into written agreements
establishing the terms of their appointment. These written
agreements include information relating to:
• Tower’s expectations of the director in his or her role
• The director’s expected time commitment to Tower
(including other duties)
At 30 September 2017, the Board comprised of five non-
executive directors, four of whom are independent. In
accordance with Tower’s Board and Director Protocols, David
Hancock is not independent as he has held an executive
position at Tower within the last three years. Tower’s
constitution currently requires a minimum of five directors and
provides for a maximum of eight.
Diversity policy
Tower has a written diversity policy which embodies Tower’s
commitment to pursuing an inclusive and flexible workplace.
The Board is responsible for overseeing the implementation of
Tower’s Diversity Policy. The Remuneration and Appointments
Committee are delegated responsibility to annually review
and report on policy effectiveness and diversity within Tower.
Tower’s business operations are spread across 11 sites in
9 different countries and Tower recognises the value of
its diverse employee population as an essential driver of
performance culture, brand and shareholder returns. An
inclusive environment improves the quality of decision
making, incentivises productivity, and creates innovation
through collaboration. Tower’s Board is committed to further
developing an inclusive culture that encourages Tower’s
• Remuneration entitlements (including any superannuation
people to perform to their highest potential.
included); and
• Indemnity and insurance arrangements.
64
Tower Limited annual report 2017
During FY17, Tower celebrated the diversity of its people
through a number of initiatives, including International
Women’s Day, Harmony Day, Matariki, Eid Mubarak, Te Wiki O
Te Reo Maori and Tongan Language Week.
Tower is also committed to attracting and retaining quality,
passionate people who are dedicated to helping transform
Tower’s business. Throughout FY17, Tower’s Executive
Leadership Team, Senior Leadership Team and People
Leaders participated in a leadership development programme
focussed on developing key leadership skills and enhancing
engagement. The leadership programme continues in FY18.
While the Board considers that Tower has addressed the
requirements of its Diversity Policy, the Policy does not
currently require the Board to set measurable objectives for
achieving diversity. Tower’s diversity programme remains
under review and will be finalised in FY18 in accordance with
the new Code.
The following table shows gender representation across
Director, Board and Committee performance
Tower as at 30 September 2017. Tower acknowledges the
lack of gender diversity on its Board and continues to actively
recruit for new directors.
GROUP
Board of Directors
Male
Female
Executive leadership team1
Male
Female
Senior leadership team2
Male
Female
Employees
Male
Female
Total company3
Male
Female
2016-2017
NUMBER
5
0
5
3
21
11
256
352
282
366
% BY
GROUP
100%
0%
63%
37%
66%
34%
42%
58%
44%
56%
2015-2016
NUMBER
5
0
5
3
16
16
231
285
252
304
% BY
GROUP
100%
0%
63%
37%
50%
50%
45%
55%
45%
55%
The Board recognises that the performance of its directors
and Board Committees is crucial to Tower’s success and to
the interests of its shareholders. The Board regularly reviews
its own composition and performance and that of the Board
Committees in accordance with the terms of the Board
Charter. A performance evaluation of the Board and Board
Committees was carried out by an external party in early 2017,
in accordance with the Board Charter.
Independence of Chair and CEO
Tower’s Chair is responsible for leading the board, facilitating
the effective contribution of all directors and promoting
constructive and respectful relations between the Board
and management. The Chair of the Board is elected by the
directors.
The Board supports the separation of the roles of Chair and
Chief Executive Officer, and these roles are separate at Tower.
Michael Stiassny was appointed Chair of Tower on 21 March
2013 and is independent.
1 ‘Executive Leadership Team’ includes the Chief Executive Officer, and
those employees who report directly to the Chief Executive Officer.
Board committees
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.
The 2016-2017 figures include Tower’s Pacific Island subsidiaries,
which were not included in the 2015-2016 figures.
Director training
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.
Directors are expected to develop their skills, competencies
The terms of reference for each Committee are reviewed
and industry knowledge by taking responsibility for their
periodically.
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 reports from the Chief
Executive Officer and senior management.
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
confirm the membership and Chair of each of the Committees.
The experience and skills of individual Committee members
are set out in the directors’ profiles on pages 18 and 19.
Member attendance at each Committee meeting is set out on
Directors have unrestricted access to management and any
page 67.
additional information they consider necessary for informed
decision making. Senior management also attend Board
meetings in order to provide presentations to the Board and
answer any queries directors may have.
65
Audit and Risk Committee
Remuneration and Appointments Committee
Members: Graham Stuart (Chair), Michael Stiassny, Steve
Members: Michael Stiassny (Chair), Steve Smith, Graham
Smith, Warren Lee and David Hancock.
Stuart and Warren Lee.
The written Terms of Reference of the Audit and Risk
The Remuneration and Appointments Committee advises the
Committee include the following duties and responsibilities:
Board in respect of a number of matters, including:
• independently and objectively review the financial
• the appointment and succession of directors, and director
information presented by management to the Board,
remuneration packages
the external auditors and the public and keep the Board
• the composition and structure of the Board
informed about these matters
• induction and continuing professional development
• review draft half year and annual financial statements and
programmes for directors
the external auditor’s report, and make recommendations to
• performance evaluations of the Board and individual
the Board as to their adoption
directors; and
• recommend the appointment and removal of, and oversee
the performance of, the external auditor and be satisfied as
• the Chief Executive Officer and senior executive
appointments, termination, performance appraisal and
to the auditor’s independence
remuneration.
• review the effectiveness and efficiency of management
processes, risk management and internal financial controls
and control systems
• monitor and review compliance with regulatory and
statutory requirements and obligations
The written 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-
• monitor the internal audit function and receive regular
reports from the internal auditors on risks, exposures and
executive director.
compliance; and
• maintain unrestricted and direct lines of communication
with the external and internal auditors.
The Committee meets with the external auditors at least
twice per year and has regular contact with the internal audit
function.
The Terms of Reference require that the Committee has a
minimum of three non-executive directors, the majority of
whom are independent. At least one must have a financial or
accounting background. 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.
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 Committee activities, findings,
recommendations and results for the past year.
Management may attend Audit and Risk Committee meetings
only at the invitation of Chair of the Committee.
The Company’s remuneration policies for directors and senior
executives are set out on page 69.
Nominations Committee
Tower’s Remuneration and Appointments Committee
carries out the functions of a nominations committee.
The Committee’s authority, duties, responsibilities and
relationship with the Board are set out in the Remuneration
and Appointments Committee’s Terms of Reference. Tower’s
Board considers that due to its size and the nature of Tower’s
business, it is appropriate for its remuneration and nomination
Employee attendance at Committee meetings
committees to be combined.
Tower’s employees may attend Audit and Risk Committee
meetings only at the invitation of Chair of the Committee.
66
Tower Limited annual report 2017
Other Committees
Tower’s Board has the ability to establish additional
subcommittees from time to time. During FY17, the Board
established a Due Diligence Committee to consider the merits
of undertaking a Capital Raise.
The Due Diligence Committee consisted of Michael
Stiassny, Graham Stuart and Warren Lee. The Committee
met 4 times up to 14 November 2017. The Committee made
recommendations to the Board in relation to the Capital Raise
and recommended on 14 November 2017 that the Tower
Limited Board undertake to raise capital. The Capital Raise
process completed on 20 December 2017.
Acquisition proposals
A communication protocol was developed between
information insiders and the proposed purchasers. The Board
considers that all processes in relation to the acquisition
proposals were robust.
Board and Committee meeting attendance
The following numbers of Board and Committee meetings
were held during the year from 1 October 2016 to
30 September 2017:
• Board meetings – 33
• Audit and Risk Committee meetings – 5
• Remuneration and Appointments Committee – 1
• Capital Raise Due Diligence Committee – 2
The number of Board meetings held in FY17 was greater than
Tower was subject to two acquisition proposals during FY17.
usual due to the continued consideration of corporate activity
On 9 February 2017, Tower Limited announced it had entered
throughout the year.
into a Scheme Implementation Agreement (SIA) with Fairfax
Financial Holdings Limited. Under this Agreement, Fairfax
agreed to acquire 100% of Tower’s shares at $1.17 per share
for an aggregate purchase price of $197 million (the Fairfax
proposal).
The Chief Executive Officer, Chief Financial Officer and Chief
Risk Officer attend all Board and Audit and Risk Committee
meetings. All meetings are attended by an appropriately
qualified person who is responsible for taking accurate
minutes of each meeting and ensuring that Board procedures
On 27 June 2017, Tower Limited announced it had entered
are observed.
Director attendance at these meetings is set out below.
2016/2017 Tower Limited directors’
attendance record
into an SIA with Suncorp. Under this agreement, Suncorp
agreed to acquire 100% of Tower’s shares at $1.40 per share
for an aggregate purchase price of $236 million (the Suncorp
proposal).
The Fairfax SIA was mutually terminated on 29 June 2017
following announcement of the Suncorp proposal.
On 26 July 2017, the New Zealand Commerce Commission
announced that it had declined Suncorp’s application to
purchase 100% of Tower shares. On 23 August 2017, Suncorp
advised that they would appeal the Commerce Commission
decision. On 5 September 2017 the Tower Limited Board
lodged its own cross appeal against the Commerce
Commission’s decision.
On 7 November 2017, Tower advised that the SIA with
Suncorp had passed its end date and had been terminated.
Suncorp subsequently announced that as a result, it would
no longer be proceeding with the appeal of the Commerce
David Hancock
Commission’s decision to decline its application to acquire
Tower.
The Tower Board has withdrawn its cross appeal against the
Commerce Commission’s decision.
Throughout acquisition discussions, Tower’s Board obtained
advice from Chapman Tripp about the appropriate protocols
to follow. The Board met on a regular basis to discuss
developments in relation to the acquisition proposals.
Meetings held (to 30 September 2017)
Michael Stiassny
Steve Smith
Graham Stuart
Warren Lee
I
I
T
O
W
E
R
L
M
T
E
D
B
O
A
R
D
I
A
U
D
T
A
N
D
R
S
K
I
C
O
M
M
T
T
E
E
I
33
33
28
30
33
25
5
5
5
5
5
4
A
N
D
A
P
P
O
N
T
M
E
N
T
S
I
R
E
M
U
N
E
R
A
T
O
N
I
C
O
M
M
T
T
E
E
I
1
1
1
1
1
-
I
I
D
L
G
E
N
C
E
C
O
M
M
T
T
E
E
I
I
C
A
P
T
A
L
R
A
S
E
D
U
E
I
2
2
-
2
2
-
67
Reporting and disclosure
Key governance documents
Continuous disclosure policy
Tower’s website provides information to shareholders and
investors about Tower. The website includes copies of past
Tower recognises that public confidence in the integrity of
annual reports, results announcements, media releases
Tower is based on continuous, full and open disclosure of
(including NZX and ASX announcements) and general Tower
information about its activities to the market and relevant
information.
stakeholders. Tower’s Corporate Disclosure Policy provides
for a planned, proactive communication programme with
shareholders and the wider investment community to
encourage their participation and interaction with Tower.
Tower believes this communication programme assists in
creating a fully informed market and enhances shareholder
value. The Policy explains the respective roles of directors,
The following key governance documents are also available
on Tower’s Investor Centre website, https://www.tower.co.nz/
investor-centre/corporate-governance/policies.
• Tower Limited constitution
• Board Charter
• Board Protocols
officers and employees in relation to:
• Audit and Risk Committee Terms of Reference
• Complying with Tower’s continuous disclosure obligations
• Remuneration and Appointments Committee Terms of
• Safeguarding the confidentiality of corporate information to
Reference
avoid premature disclosure
• Insider Trading and Market Manipulation Policy
• External communications, including analyst briefings
• Corporate Disclosure Policy
• Responding to or avoiding the emergence of a false market
• External Audit Independence Policy
The policy provides that only authorised spokespersons
can communicate on behalf of Tower with the investment
community, shareholders and the media.
Announcements
Tower makes the following regular announcements to the
market and shareholders:
• Annual results are announced in November
• Annual reports are released in December
• Tower’s Notice of Annual Shareholders’ Meeting is generally
• Internal Audit Policy
• Code of Ethics
• Diversity Policy
Financial reporting
The Financial information contained in this annual report has
been audited by Tower’s external auditors, PwC, and complies
with relevant financial reporting requirements under the
Companies Act 1993, Financial Markets Conduct Act 2013,
and the NZX Listing Rules.
sent to shareholders in December or January
Tower has a structure to independently verify and
• Tower’s Annual Shareholders’ Meeting is generally held in
February or March
• Half year results are announced in May
• Half year reports are released in June
safeguard the integrity of its financial reporting. The principal
components of this are the Audit and Risk Committee, the
external and internal auditors, and the certifications provided
to the Board by senior management. These certifications
include a representation letter from the CEO and CFO
provided to 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 financial records
have been properly maintained, that Tower’s accounting
policies and financial statements comply with the appropriate
accounting standards, and that the financial statements fairly
represent the financial position of Tower as at the balance
date. This letter is provided on the basis that Tower has
maintained an internal control structure which is sufficient to
produce reliable accounting records.
68
Tower Limited annual report 2017
Non-financial reporting
Tower recognises the importance of environmental, social and
governance (ESG) practices for the long-term sustainability
of its business. While Tower has not chosen to report against
a formal ESG reporting framework, a number of initiatives
have been undertaken in FY17 to promote sustainable
Additional fees may be paid to non-executive directors for
one-off tasks and/or additional appointments where required.
2016/2017 directors’ remuneration and
benefits of Tower and its subsidiaries
Amounts in the table below reflect fees paid and accrued for
processes and minimise waste. These include introducing
the year ended 30 September 2017.
a new recycling and composting initiative in Tower’s offices;
switching to the use of more sustainable stationery products
across all New Zealand offices (21% of products used in
Fees include base fees and additional fees in the financial year
for one-off tasks and additional appointments.
Tower’s offices now have environmental accreditation); and
DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER LIMITED
reducing paper usage by optimising digital platforms (with a
24% reduction in paper usage across Tower’s Auckland office
in FY17).
Tower is passionate about setting things right for our
FOR THE YEAR TO 30 SEPTEMBER 2017
Michael Stiassny
Graham Stuart
Steve Smith
Warren Lee
customers and their communities. All of Tower’s people have
David Hancock
FEES (NZ$)
139,000
93,570
87,570
87,570
87,570
the ability to take one volunteer day per year to give back to
the community. Tower teams have volunteered their time and
resources to clearing scrub and planting trees in Auckland,
holding a family day at a home for orphaned children in Fiji,
and donating water tanks for fresh, clean water to schools in
the Solomon Islands.
DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER LIMITED SUBSIDIARIES
FOR THE YEAR TO 30 SEPTEMBER 2017
Alden Godinet1
Rodney Reid1
Isikeli Tikoduadua2
FEES
$7,250
$7,250
$9,000
Tower intends to develop an ESG framework in FY18, and
1. Fees earned in capacity as director of National Pacific Insurance
Limited. NPI fees are paid in Western Samoan Tala.
continues to work on improving recording and reporting of
2. Fees earned in capacity as director of Tower Insurance (Fiji) Limited.
sustainability measures.
Tower Insurance (Fiji) Limited fees are paid in Fijian Dollars.
Remuneration
Director remuneration
The Board’s approach is to remunerate directors at a similar
level to comparable Australasian companies, with a small
premium to reflect the complexity of the insurance and
Remuneration policy
Tower aims to attract and retain talented and motivated
directors and employees by offering 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’s Remuneration Policy will be updated in FY18, in
accordance with the new Code and as appropriate for Tower’s
financial services sector. At the Annual Shareholders’ Meeting
business.
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
CEO and senior executive remuneration
The Board’s approach to 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.
This approach is intended to encourage Tower’s executives to
meet Tower’s short and long term objectives.
69
In September 2017, the Board renegotiated Richard Harding’s
The table includes base salaries, short-term incentives (if
contract, extending it for two years to December 2019. The
applicable) and vested or exercised long-term incentives.
new annual base salary is $772,500 plus a performance
If the individual is a KiwiSaver member the table does not
based short-term incentive of up to $500,000 per annum.
include contributions of 3% of gross earnings towards that
As part of the renegotiation a retention payment of $750,000
individual’s KiwiSaver scheme.
Risk management
Risk Management Framework
Tower has established a framework to identify, assess,
monitor and manage exposure to risk. The framework applies
to Tower and all of its subsidiaries and related companies,
and all staff and contractors employed by Tower and any of its
subsidiaries. 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. Executive and
senior management and staff must be able to demonstrate
that reasonable steps have been taken to effectively manage
Tower’s risks.
Tower maintains a risk register which records the likelihood
and impact of relevant risks on Tower’s business. Tower’s
Risk and Compliance team actively monitors the risk register,
identifies key risks and notes steps taken to mitigate the risks.
A Risk and Compliance report is provided at each Audit and
Risk Committee meeting so that the Committee is aware of
relevant risks and how they are being managed.
The Audit and Risk Committee regularly reviews its risk
management procedures and framework to ensure that it
complies with its legal obligations. Tower’s Board has adopted
a Risk Appetite Statement, which 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. For the reporting period to 30
September 2017, no material exposure to these risks was
identified.
was paid in September 2017, incorporating the 2017 short-
term incentive and in lieu of future long-term incentive
benefits which have been forgone under the new contract.
Employee remuneration
Set out in the following table are the number of employees
or former employees of Tower, not being directors or former
directors, who received remuneration and other benefits
valued at or exceeding $100,000 for the year ended 30
September 2017. Remuneration includes redundancy
payments and termination payments made during the year
to employees whose remuneration would not otherwise
have been included in the table. The remuneration bands are
expressed in New Zealand Dollars.
FROM
TO
2016-2017
2015-2016
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
249,999
250,000
259,999
260,000
269,999
270,000
279,999
280,000
289,999
300,000
309,999
310,000
319,999
320,000
329,999
350,000
359,999
360,000
369,999
380,000
389,999
400,000
409,999
410,000
419,999
430,000
439,999
440,000
449,999
490,000
499,999
590,000
599,999
750,000
759,000
760,000+
Total
13
19
13
10
9
6
6
3
4
1
3
2
2
1
2
5
1
2
-
1
2
2
1
1
1
-
-
-
1
-
-
-
1
112
19
21
7
10
11
4
5
3
6
3
2
2
1
-
1
-
-
2
1
-
-
-
-
-
-
1
1
1
-
1
1
1
–
104
70
Tower Limited annual report 2017
Health and Safety risks
Health, safety and wellbeing of Tower’s people is a key Board
priority. Tower employs a Health and Safety Advisor to assist
PwC was re-appointed as auditor by shareholders at the
Annual Shareholders’ Meeting in March 2017 to audit the
financial statements for Tower and its subsidiaries.
with the implementation and socialisation of policies and
A formal engagement letter with PwC sets out the respective
processes relating to health and safety. In addition, Tower has
obligations and responsibilities of PwC and Tower in relation to
designated health and safety representatives at each of its
the preparation and audit of financial statements.
sites in New Zealand and the Pacific. All of Tower’s people are
required to complete a health and safety e-learning module
when they begin with Tower, and extensive information about
health, safety and wellbeing is available on Tower’s staff
intranet. Additional health and safety training is undertaken by
all Tower people in the field, including site assessors. Tower
has robust health and safety standards in place for contractors
and third party providers.
Monthly campaigns are run to raise awareness of health and
safety matters. In FY17, health and safety campaigns included:
• Stress management awareness
• Cholesterol and diabetes screening
• World smokefree day
• Women’s and men’s health awareness
• Flu vaccines
• Heart health awareness
Tower’s Board receives monthly Health and Safety reports
which are considered and discussed at Board meetings. In
FY17, Tower’s management, health and safety representatives
and assessors held a Health and Safety ‘walk through’ for
the Board, during which the Board had an opportunity to
query and clarify health and safety processes for assessors,
contractors and third party providers.
The directors undertake periodic site visits to assess health
and safety matters at Tower’s various sites.
Auditors
External audit framework
The Tower Board is fully committed to ensuring the
quality and independence of the external audit process.
As part of this process Tower encourages full and frank
disclosure and discussions between the Board, Tower’s
The Board also has a formal External Audit Independence
Policy that includes the provision of non-audit services by the
external auditor.
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.
Under the Policy, PwC is required to provide the Audit and
Risk Committee with an annual certification of its continued
independence, and in particular confirm that it has not carried
out any engagements during the year which would impair
its 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 external auditor generally attends all Audit and Risk
Committee meetings.
Details of PwC fees for audit and other services provided
to Tower are set out in note 9 of the Tower Limited financial
internal auditors, management and the external auditor,
statements.
PricewaterhouseCoopers (PwC).
71
Attendance at annual meeting
Shareholder rights and relations
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.
Internal audit functions
Tower has an internal audit function. The structure of that
function, and the roles it performs, are set out in Tower’s
Internal Audit Policy.
The purpose of the internal audit function is to provide
independent and objective assurance of the adequacy and
effectiveness of the controls set up by management. It helps
the organisation accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance
processes. The scope of work of the internal audit function
includes determining whether the organisation’s network
of risk management, compliance, control and governance
Investor Centre website
Tower’s website, www.tower.co.nz, provides information to
shareholders and investors about Tower. The website includes
copies of past annual reports, results announcements, media
releases (including NZX and ASX announcements) and
general Tower information.
Investor Communication
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
www.investorcentre.com/nz.
Tower shareholders can also contact Tower at
investor.relations@tower.co.nz
Shareholder voting
Tower confirms its compliance with Listing Rule
processes, as designed and represented by management, is
specifications in respect of obtaining shareholder approval.
adequate. The internal audit function will complete reviews
Where appropriate, Tower will conduct voting by polls at
identified and agreed in the annual Internal Audit Plan.
shareholder meetings.
The internal audit function is managed within the Risk &
Controls function under the Chief Risk Officer and receives
strategic support from the Audit and Risk Committee. The
internal audit function has direct access to the Chief Executive
Officer and the Chair of the Committee whenever required.
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.
Annual shareholder meeting
Tower is aware of the new Code requirements to provide
notice of annual shareholder meetings 28 days prior to the
meeting. Tower’s next shareholder meeting will be held
in March 2018 and a notice of meeting will be provided to
shareholders in due course.
72
Tower Limited annual report 2017
Statutory disclosures
Directors’ shareholdings
Some information in this section is provided as at 14 November
2017, being less than 6 weeks before publication of this report.
Note that following completion of the Capital Raise in
December 2017, shareholder names and holdings will change.
Substantial product holders (as at 14 November 2017)
The names and holdings of Tower’s substantial product
holders based on notices filed with Tower under the Financial
Markets Conduct Act 2013 as at 14 November 2017 were:
At 30 September 2017, Tower Limited directors held the
following interests in Tower Limited shares:
DIRECTOR
David Hancock
Steve Smith
Michael Stiassny
Graham Stuart
Warren Lee
ORDINARY SHARES
BENEFICIAL
–
9,230
82,732
6,154
2,000
NAME
Vero Insurance New Zealand Limited
Salt Funds Management Limited
Accident Compensation Corporation
Westpac Banking Corporation
TOTAL ORDINARY SHARES1
Directors’ trading in Tower securities
33,732,429
16,965,182
12,285,273
9,173,589
No directors disclosed acquisitions or disposals of relevant
interests in Tower securities during the financial year pursuant
to section 148 of the Companies Act 1993.
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.
Principal shareholders (as at 14 November 2017)
The names and holdings of the 20 largest registered Tower
shareholders as at 14 November 2017 were:
Shareholder analysis
Tower’s shares are quoted on both the NZSX and ASX. As at
14 November 2017, 20,086 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 8,202,616
Tower shares.
NAME TOTAL ORDINARY SHARES
%
Total voting securities
Vero Insurance New Zealand Limited
33,732,429 19.99
HSBC Nominees (New Zealand) Limited
12,874,190
7.63
Accident Compensation Corporation
12,185,273
7.22
6,705,564
3.98
JBWere (NZ) Nominees Limited
Continue reading text version or see original annual report in PDF format above