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2023 ReportTower Limited
Annual Report
2019
Tower Snapshot
The Tower of today is well
placed to challenge the
industry, deliver better
outcomes for customers
and drive shareholder value.
Born and bred in New Zealand, Tower Insurance has been supporting New Zealand
communities with their insurance needs for 150 years. 2019 marks Tower’s 150th
birthday and while our heritage is important to us, we’ve set our sights on the future
and on becoming the challenger in the New Zealand insurance sector.
We’re repositioning ourselves as a contemporary, challenger brand underpinned by
a customer-focused, digital-first strategy to successfully compete in the 21st century
insurance market place.
Why? Because we believe that people deserve better and we’re
passionate about delivering on this belief.
The Tower of today is vastly different from the company it used to be. As a challenger
brand, we are taking on the big market incumbents, offering Kiwis a genuinely better and
different choice for insurance which is driving growth and improving business results.
Over the past year, we…
• Added over 17,000 risks to our core
New Zealand portfolio
• Grew GWP in our core New Zealand
portfolio by 9.1%
•
Increased sales through digital channels
to over 50% of new business in September
2019, up from less than 10% in FY16
• Delivered and launched a new IT platform
that underpins the future of Tower
2
3
Update from the
Chair and CEO
Over the past four years
Tower has completely
transformed, into a company
that is increasingly profitable
and achieving growth by
challenging and breaking
industry norms.
In this time, the business has been simplified
and improved through the identification and
execution of a clear and purposeful strategy.
The goal of the Tower Board and management
team is to recreate a profitable company
that delivers shareholder value and it is clear
that the work being delivered is achieving
these outcomes.
Our reported result of $16.8m is a significant achievement and
a $23.5m improvement on last year, with underlying profit after
tax increasing $13.8m on the prior year, to $27.4m.
This return to profitability is thanks to a strategy that is focused
on making things easier and better for customers. Our customer
centred strategy provides a unique platform to continue driving
growth and rebuild trust by setting the bar for how insurance
“should” be.
Our determination to deliver something better to customers is
being noticed and this is driving solid growth. Gross Written
Premium in the core New Zealand portfolio increased by 9.1%,
and total GWP reached $356.8 million across New Zealand and
the Pacific.
We believe that risk-based pricing is a fairer way to price
insurance and its continued implementation, along with
improved underwriting and a benign weather environment has
significantly reduced claims costs.
Over the last year, our total claims ratio has reduced to 48.8%, a
7.6% reduction from 56.4% in 2018 thanks to benign weather and
improved underwriting. When large events are excluded, our
claims costs decreased to 48.4%, a 3.9% reduction from 52.3% in
2018 which demonstrates the strength of our underwriting.
Pleasingly, our Pacific business has returned to historical norms,
with solid and profitable growth, improved underwriting and a
benign weather environment all helping to deliver better results.
As well as delivering these improved results, a major piece of
work that sets Tower up for its digital future was completed.
The successful delivery and launch of our new IT platform is
an exciting milestone for Tower. Combined with the other work
undertaken, we are now well positioned to deliver on the next
phase of our strategy.
The next phase of our strategy is centred on delivering better
outcomes for customers. Our customers have told us that
New Zealand insurers are complacent and lack transparency,
which has led to a lack of trust and we believe that people
deserve better.
Our belief that people deserve better means we will utilise our
new system to create stunningly simple products, new systems
and simpler processes that enable amazing claims experiences.
We’re going to turn industry norms on their head:
• We’re getting rid of big words and complex policies
• We’re increasing transparency around risk and insurance
information and knowledge
• We’re simplifying pricing and confusing discounts
• And we’re creating an employee culture that always pushes for
better and is there to help set things right when they go wrong
This is how we will set the bar for how insurance should be and
continue driving growth. Thanks to the work that the Tower
team have put in, we are now positioned to take on the New
Zealand insurance market and challenge the large incumbent
organisations that are slow to adapt.
Our business has transformed and the company is vastly
different to what it was four years ago. Our results demonstrate
the long held belief of the Tower Board and management team,
that Tower offers an exciting platform for growth and we are
now about to accelerate.
Shareholders can be confident that the work we are doing will
deliver significant long-term value.
Michael Stiassny
Richard Harding
Chairman
Chief Executive Officer
Our full year profit is a
significant achievement
and a $23.5m improvement
on last year, proof that our
strategy is paying off.
4
Tower Limited annual report 2019
5
Tower management review
Full year to 30 September 2019
Three years of improving results
and solid growth achieved
• Tower continues to deliver solid growth, which
has led to a $23.5m improvement in profit.
Growth has continued in the core NZ book and
digital sales remain strong
• Tower’s claims ratio has improved significantly
thanks to initiatives that have improved
underwriting and pricing, and benign weather
across New Zealand and the Pacific
• Tower’s Pacific business has returned to historic
norms, with the region returning to profit on
the back of sustainable growth and reduced
claims expenses
• Tower has delivered its major technology
transformation programme, officially launching its
IT platform, with positive early signs being seen
• As previously signalled, a slight uplift in
management expenses was experienced as the
IT transformation concludes
• Continued positive progress closing Canterbury
earthquake claims, with 109 claims remaining
open at 30 September 2019
9.1%
GWP Growth in core
NZ book on prior year
6
Tower Limited annual report 2019
7
Focus on customers
driving growth
Underwriting excellence delivering improvements
Overview
• Solid 9.1% GWP growth in core NZ portfolio with total group
GWP growing at 6.1%
• Growth in risks in core New Zealand book increased
significantly by 17,716
• Over 50% of new business sales online in September 2019,
up from less than 10% during FY16
• Continued risk-based pricing approach combined with
simple and easy products driving impressive customer
growth and improved mix
In a market dominated by overseas-owned and controlled
insurers, Tower is offering customers a genuinely different,
better alternative, and this focus is driving solid growth in the
core book.
Over 17,000 risks have been added to Tower’s core New
Zealand portfolio over the past year with this continued
momentum driving GWP growth in the core New Zealand
portfolio 9.1%, with total GWP in New Zealand growing 6.8%.
Tower’s efforts to become a digital insurer continue to pay
dividends, with 51% of new business coming through digital
channels in September 2019. This compares to less than 10%
during 2016.
Tower has recently improved its digital claims lodgement
process and delivered innovations like a claims chatbot, Charlie,
which has resulted in 27% of claims being lodged online in
September 2019, evidence that digital is the way of the future.
Growth in the Pacific has returned to historical levels with
Vanuatu, Tonga, Samoa, American Samoa and the Cook Islands
returning to growth thanks to additional underwriting, pricing
and marketing support for local teams. However, this growth
was offset by more disciplined growth in Papua New Guinea,
remediation of the Fiji motor portfolio and nationalisation of the
Worker’s Compensation and Comprehensive Third Party
schemes in Fiji.
This positive result across Tower’s businesses is being achieved
through a combination of factors, including:
• Continued execution of risk-based pricing and simpler
policies that customers can understand
• Constant refinement of underwriting criteria enabling more
granular assessment
• Strong retention through our digital and phone channels, and
• Attracting new, profitable customers with improved and
targeted offerings
The growth that has been achieved is the result of offering
customers simpler insurance at a fair price and over the coming
twelve months Tower sees a positive growth and pricing
environment in New Zealand and the Pacific, which will lead to
further improved profitability.
Growth in GWP (NZ$m)
8.3
11.6
4.8
5.8
1.8
336.1
356.8
Sep 18
Core NZ Rate
Core NZ
Volume
Non-core
NZ Rate
Non-core
NZ Volume
Pacific Growth
Sep 19
Overview
• Underwriting excellence driving good customer and
business results
• Risk based pricing is delivering benefits
• Improving reinsurance ratio
• Increased protection with savings reinvested to reduce
exposure and volatility
Tower is focused on achieving underwriting excellence
which continues to play a vital part in the delivery of the
company’s strategy and improving results.
Over the past 12 months, significant steps have been
made toward achieving underwriting excellence, with
the company having:
• Implemented better risk selection and
underwriting processes
• Continued to focus on claims leakage and recoveries
• Launched and continued to refine plain language products
that have won awards, providing greater clarity to customers
and employees at claims time
• Implemented new data practices to enable accurate
monitoring of the portfolio
This relentless focus on underwriting excellence has helped
shift Tower’s portfolio to a more balanced mix and improve
claim frequency. This is particularly noticeable in the NZ house
product with sustained improvements in claims frequency
over the past four years, a result of clear products and benefits
for customers.
Tower led the way 18 months ago with risk-based pricing and
removing cross-subsidisation between low and high-risk
customers. Risk based pricing has resulted in the growth of
Tower’s portfolio in Auckland while also reducing exposure to
high-risk areas by 16%.
Tower’s fairer approach to pricing has also allowed the company
to grow exposure by 4% in the larger, low risk areas like
Auckland, Hamilton and Taranaki.
The reduction of extreme risk policies, combined with already
completed changes in our Wellington portfolio has reduced the
amount of reinsurance cover required.
Tower has taken significant steps to ensure exposure to large
events and the resulting volatility is reduced by reinvesting
savings back into its reinsurance programme.
Tower has:
• Catastrophe cover to $783m, for catastrophic events in
excess of 1 in 1000years
• Increased pre-paid catastrophic event coverage from two
events to three
• Added additional cover to minimise any potential impacts
• Limited Tower’s exposure to catastrophe to $10m per event
• Capped Tower’s exposure to storm and other events at
$10m, up to a limit of $30m
Tower’s approach to underwriting excellence is working and will
continue to deliver growth and reinsurance efficiency in future.
8
Tower Limited annual report 2019
9
Improved New Zealand and
Pacific claims expenses
Overview
• Claims costs improved across New Zealand
and Pacific
• Underwriting and pricing initiatives have
delivered significant improvements
• Benign weather across NZ and Pacific
contributed to improvement
• Continued targeting of core insurance activity
to offset inflation
New Zealand claims expenses have decreased significantly
over the past 12 months with a number of underwriting and
pricing initiatives helping to offset inflation.
There are four key factors that have contributed to this result:
1. Last year, an adjustment relating to the 2017 financial year
increased the base claims ratio, this was a one-off issue for
FY 2018
2. While in prior years, severe weather has impacted claims
costs, benign weather this year resulted in a 2.7% decrease in
Tower’s claims ratio
3. New, simpler products have contributed to a reduction in
NZ Contents claim frequency. While Tower’s risk-based
pricing approach is delivering benefits in NZ house, this has
been offset by a higher frequency of large house fires in the
second half of FY 2019
4. Good weather also means more people out exploring New
Zealand and as a result, there has been an increase in claims
frequency in the motor portfolio
In the Pacific, a number of severe weather events over the past
few years have impacted claims ratios. However, this part of the
business has now returned to historical norms.
Improvements in claims costs have been delivered through
targeted underwriting and pricing initiatives across key markets,
and, combined with a benign weather environment, have
resulted in a 22.7 percent decrease in our Pacific claims ratio.
Continued repricing of the Fiji motor book has led to improved
profitability. Although slightly softer growth than previously
seen, this was an important step to ensure future growth
remains sustainable and claims costs were controlled.
Remediation of the Papua New Guinea portfolio to reduce risk
and exposure is now complete and this portfolio has returned
to profitability.
While these results are pleasing and significant improvements
have been delivered, focus remains on refining Tower’s
products and pricing approach to ensure continued
management of claims costs.
Change in New Zealand claims ratio vs. prior year
0.3%
57.2%
2.1%
55.5%
0.7%
0.1%
2.7%
1.1%
0.3%
52.2%
FY18 claims
ratio, including
large events
Change in
product mix
vs FY18
FY18 reserving
changes
FY18 adjusted for
claims reserving
and mix
Benign large
events
Higher house
Lower contents
Higher motor
Lower
commercial
FY19 claims
ratio, including
large events
Change in Pacific claims ratio vs. prior year
51.8%
8.7%
6.8%
0.8%
0.3%
5.0%
1.7%
29.1%
FY18 claims
ratio, including
large events
Benign large
events
Fiji, excluding
cyclones
NPI, excluding
cyclones
PNG, excluding
cyclones
Other countries
Change in mix
FY19 claims
ratio, including
large events
10
Tower Limited annual report 2019
11
Building capability
while controlling costs
IT transformation concluding
Overview
• Uplift in expenses as IT transformation concludes
• Additional spend directed towards growth and reducing risk
Tower has previously signalled a slight uplift in expenses as
Tower’s IT transformation concluded. The finalisation of this
piece of work has increased the group management expense
ratio by 1.4%, which includes increased headcount in frontline
teams, the running of dual systems and the delivery of a tailored
customer migration process.
Tower is investing in the business to drive long term value, and
as outlined previously, a major component of this is new
technology and moving customers to a new IT platform.
Managing customers through the migration process is one of
the most important parts of this technology transformation and
along with investment in frontline teams, a tailored customer
management approach will help to reduce risk, maximise
retention and manage customer impact.
These costs will continue over the next 12 months as customers
are migrated to the new platform. Following this, it is expected
that costs of between $5m – $7m pre-tax can be removed from
Tower’s expense base, and along with other productivity gains,
the company will be operating at or near its target MER of less
than 35%.
Group management expense ratio1
41.9%
39.9%
39.0%
40.0%
38.6%
FY16
FY17
FY18
FY19
MER
IT Transformation
1. For management reporting. Tower includes claims handling expenses in Management Expense Ratio
Customer migration has commenced and will be complete by
the end of the 2020 calendar year. Moving around 350,000
customers to a core set of 12 products will deliver significant
benefits to customers and improve the efficiency of the business.
The new platform enables the company to rapidly test and
learn on all aspects of insurance. What used to take weeks
and months can now be tested and delivered almost instantly.
Pricing changes that used to take months of coding can now
be made, delivered and monitored in the same day.
It allows products to be built quickly, tested with customers and
modified on an ongoing basis. It supports the push to move 50
– 70% of all transactions online which will deliver better customer
outcomes and significant cost savings and productivity gains.
Along with the reduction in number of products from over 400,
to just 12 core products, increased automation and moving low
value transactions online, efficiency will improve.
Costs for the programme were in line with previously advised
amounts and at this stage, the total cost to deliver the core
platform is estimated to be $47.6m.
Overview
• New IT platform delivered and launched successfully
• Customer migration underway, to be complete
by December 2020
• IT transformation will drive growth and continued
shift to digital delivery
18 months ago Tower announced its commitment to invest
in a new technology platform that will deliver a step change in
results. This IT transformation and the new platform underpin
Tower’s strategy to become a digital challenger brand.
It will accelerate growth opportunities by combining existing
data with that of Tower’s partners to get a full understanding
of customers and actively targeting niche customer
segments with compelling and appropriately priced
propositions. It will also improve the customer experience
with simpler, improved products, reduced wait times and
fully digital self-service capability.
After working at pace to deliver against aggressive timeframes
Tower has successfully delivered and launched our new
platform and the IT transformation is now concluding.
The first phase which enabled the sale of new business on
the new system went live in May. It was a core foundation
piece of the programme and continues to run well.
Delivery of Phase 2 has now been completed and includes:
1. Rationalisation of insurance products
2. Commencing the 12 months migration of existing
customers to the new platform
3. Launching a customer self-service portal, allowing
customers to manage their insurance online, just like
online banking
4.
Implementing online claims management modules
enabling customers to lodge and manage their
claims online
12
Tower Limited annual report 2019
13
The Youi acquisition
In September it was
announced that Tower
Insurance Limited signed
a Portfolio Transfer
Agreement for the purchase
of Youi NZ Pty Ltd’s insurance
portfolio, subject to
regulatory approvals.
Under this agreement, Tower Insurance
will acquire Youi NZ’s approximately
34,000 in-force policies for a total purchase
price of NZ$13 million.
A number of steps in this process have been completed
and a formal application has been lodged with the RBNZ.
The purchase of Youi’s portfolio will accelerate Tower’s
growth. The portfolio is well underwritten and utilises
a risk-based pricing approach which is in line with the
company’s own underwriting excellence and will also
deliver a positive shift in the mix of the insurance portfolio.
The acquisition drives shareholder value through realisation
of scale benefits with intention to incorporate the portfolio
into Tower’s existing reinsurance cover, and management
expenses at marginal cost. Youi will contribute approximately
$2m to Underlying NPAT, $4m pre-amortisation of goodwill,
reflecting the pro rata inclusion of 9 months of its full year.
This acquisition firmly positions Tower as a challenger brand
and together with the successful completion of the IT
transformation, will deliver growth, build scale and leverage
the investment in IT.
Canterbury update
Tower continues to make
solid progress settling claims
in Canterbury. On 1 October
2018, Tower had 163 open
claims remaining and in the
intervening 12 months,
Tower closed 117 Canterbury
earthquake claims.
Tower continues to receive higher than
expected new over-cap claims from the
EQC as a result of past performance,
poor workmanship and faulty repairs.
While the number of Canterbury earthquake claims continues
to reduce steadily, new over-cap claims from the EQC continue
to be a source of upward pressure on the Canterbury valuations,
with additional uncertainty managed through solvency capital
held by Tower.
Tower’s gross outstanding claims have reduced significantly,
demonstrating that solid progress is being made. In addition,
the amount of IBNR / IBNER and risk margin has increased from
95% to 148% of case estimates.
14
Tower Limited annual report 2019
$ MILLION
Case estimates
IBNR/IBNER1
Risk margin
Additional risk margin
Actuarial provisions
Gross outstanding claims
Ratio of provisions to case estimates2
Sep 19
20.8
18.0
7.8
5.0
30.8
51.6
148%
Mar 19
29.7
20.3
9.0
5.0
34.3
64.0
115%
1. IBNR (‘Incurred but not reported’) / IBNER (‘Incurred but not enough reported’) includes claims handling expenses
2. Ratio of IBNR / IBNER plus risk margin to case estimates
Sep 18
37.5
21.4
9.0
5.0
35.4
72.9
95%
15
Solvency position
Looking to the future
Tower’s strategic plan has
driven change and
transformed the business.
The work completed over
the past few years has set
the company up well for the
future and focus is now
firmly on delivering
shareholder value.
The coming 12 months is the transition year
that will ensure the full benefits of Tower’s
new IT platform are delivered from FY21.
One of the biggest priorities this year is to migrate ~ 350,000
customers to the new IT platform, which will be completed by
the end of the 2020 calendar year.
Tower will continue driving growth, building on the past seven
consecutive halves of growth by continuing to price more fairly,
delivering amazing claims experiences and improving efficiency
and profitability.
Along with a shift to a more agile operating model, benefits will
be achieved progressively over the coming year, but FY21 is
where the full benefits of our investment in technology will be
fully realised.
In FY21 complex legacy systems that currently take significant
resource to manage and maintain can be decommissioned.
Growth opportunities will accelerate and the customer
experience will improve. Combined with a push to move 50
– 70% of all transactions online, this will deliver significant cost
savings and productivity gains.
The new platform enables innovation and rapid response
to customer needs. It will allow the company to take new
products to market faster, to test and learn and drive growth
in new areas.
In the Pacific, a new operations centre will support local teams
through improved product, pricing and underwriting capability
to ensure growth is sustainable.
In short, Tower’s customer centred strategy will continue to be
driven forward, with a focus on raising the bar for the industry by
putting customers first and using new technology.
What has been achieved and the plan that is in place sets the
company up well for the future and will build trust, drive growth
and deliver shareholder value.
In September 2019, Tower announced that additional capital of
$47.2m was needed to facilitate a change in Tower Insurance’s
licence condition and the acquisition of the Youi NZ portfolio.
It was agreed that given the likelihood of litigation and
associated delay in receiving funds, the EQC receivable has
been excluded from Tower Insurance’s solvency calculations.
Tower Insurance consulted with RBNZ to understand likely
capital requirements to support the acquisition and on-going
business of Youi NZ, with discussion also covering Tower
Insurance’s existing solvency capital. This included
conversations on Tower Insurance’s EQC receivable, which at
the time formed part of Tower Insurance’s solvency capital.
Tower Insurance remains confident in the recovery of the EQC
receivable and is firmly committed to its collection to the
maximum extent possible.
Accordingly, the RBNZ modified Tower Insurance’s licence
conditions to remove the receivable from its solvency
calculations with effect from 31 October 2019.
Following the successful completion of the capital raise and this
change in licence condition, Tower Insurance remains in a
strong capital position with Actual Solvency Capital well above
RBNZ minimum requirements. This will reduce by $13m
following completion of the Youi purchase.
Tower Insurance Limited solvency position, adjusted
for certain events after 30 September 2019 ($m)
ASC=155.9
49.3
ASC=136.5
28.2
50.0
50.0
58.3
56.6
45.0
53.0
13.0
ASC=134.9
31.9
50.0
53.0
TIL NZ as at 30
September 2018
TIL NZ as at 30
September 2019
Capital raise
proceeds
injected into TIL1
Remove EQC
from solvency
calculations1
Purchase of
Youi2
TIL NZ pro forma
post capital raise
and Youi3
MSC
Licence condition
Solvency margin
1. Occurred 31 October 2019
2. Purchase of Youi portfolio is subject to regulatory approval
3. Reflects pro forma impact of capital raise, removal of EQC receivable from solvency calculations, purchase of Youi
portfolio and a reduction in MSC recognising the additional risk margin of $5m that was applied at 31 October 2019
4. ASC - Actual Solvency Capital, MSC - Minimum Solvency Capital
16
Tower Limited annual report 2019
17
Conduct and culture
Celebrating the diversity of our people
Diversity, Inclusion and
Belonging are an integral
part of Tower’s culture.
Tower’s business is spread
across 15 sites in 9 different
countries and Tower
recognises the value
of employees.
Tower believes that having a diverse
group of individuals working together
helps the company better meet the
needs of customers and helps build
a high-performance culture. Tower’s
culture is built on mutual respect,
teamwork and diversity of thought
and background.
Over the past year, Tower celebrated the diversity of its people
through a number of initiatives, including:
• Recognition of importance and meaning of Waitangi Day and
Chinese New Year on Workplace
• International Women’s Day joint speaking event with guest
speaker and Associate Professor Siouxsie Wiles MNZM, a
microbiologist and science communicator from Auckland
University alongside Kanah Andrews-Nahu, Tower’s
community brand ambassador and junior NZ weightlifting
champion
• Widespread participation in the national event for Gumboot
Friday, the ‘I Am Hope’ mental health awareness campaign
• Significant participation in Pink Shirt Day with pink worn
and pink morning teas held to drive awareness about anti-
bullying in support of this national campaign
• Influential women leaders took part in a breakfast event to
hear insights from Tower board member
• One year celebration of our Lean In circles empowering and
connecting people across Tower to help with personal and
professional development.
• Tongan, Samoan, Cook Islands and Fijian Language
Weeks (from May – October) were recognised with internal
communications and activities at sites in NZ and the Pacific
• Participation in national fundraising day for Tower’s
community sponsorship partner with outstanding uptake by
teams who had to profile a Paralympic sport
• Recognition of Te Wiki o Te Reo Māori (Māori Language
Week) with activations and internal communications thanks
to the support of our newly formed Te Roopū Māori group
• Held our first annual volunteer week in partnership with
Sustainable Coastlines, enabling over 60 employees to
use their Volunteer Leave time to clean up beaches in and
around Auckland
• Marked Mental Health Awareness Week with speaking
opportunities for our people to learn more about how to
monitor and improve their mental health
• Rainbow Tick accreditation achieved and celebration
breakfast with guest speaker Anika Moa
• Diwali celebrations– excellent uptake with Diwali events in
Auckland, Rotorua, Christchurch and across the Pacific Islands
Tower recognises that
confidence in the insurance
industry is at an all-time low
and while the company
acknowledges that it has
been part of the problem
before, it is firmly committed
to improving and being part
of an industry that is trusted
to deliver good outcomes
for customers.
Pleasingly, thanks to an already embedded
customer-centred strategy, progress has
been made, but there remains a lot still to do.
As part of the conduct and culture review that all insurers
were asked to undertake, Tower looked at every aspect of its
business and strategy. This formed the basis of a report and
action plan to ensure better customer outcomes are delivered
across all facets of the business.
This report and action plan has been delivered to the Tower
Board. It reinforces the good things we have in place, but also
highlighted issues that need further investigation.
Tower takes its position as a challenger brand seriously and sees
this position as an opportunity to raise the bar for customers.
The work being undertaken at Tower is centred on disrupting
industry norms and making things better for customers by:
• Simplifying policy wording and coverage to ensure it is easy
to understand and in plain English
• Increasing transparency and education on risk and how
insurance is priced
• Removing tricky, catch-all questions to give
customers certainty
• Delivering amazing claims experiences that remove
complexity and worry
These actions, along with others across the business are a core
part of Tower’s strategy and will deliver better customer
outcomes and increased customer trust.
Customers and shareholders should be confident that
Tower is committed to improving and creating a better,
fairer insurance industry.
18
Tower Limited annual report 2019
19
Board of Directors
Michael Stiassny
LLB, BCom, FCA, CFInstD
Chairman
Graham Stuart
BCom (Hons), MS, FCA
Non-Executive Director
Non-Executive Director
Independent
Steve Smith
BCom, CA, Dip Bus (Finance), CFInstD
Non-Executive Director
Independent
Warren Lee
BCom, CA
Non-Executive Director
Independent
Wendy Thorpe
BA (French), BBus (Accounting),
Grad Dip, Applied Fin & Inv,
Harvard AMP, FFin, GAICD
Marcus Nagel
MBA (International Management),
MBA (Banking and Finance)
Non-Executive Director
Independent
Appointed Director: 24 May 2012
Appointed Director: 24 May 2012
Appointed Director: 26 May 2015
Non-Executive Director
Not Independent
Appointed Director: 12 October 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 Chairman of Ngati Whatua Orakei
Whai Rawa Limited and is a director of
a number of other companies.
Michael resides in Auckland,
New Zealand.
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 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 Māori Economic
Development Panel.
Graham resides in Auckland,
New Zealand.
20
Tower Limited annual report 2019
Warren has extensive experience in the
international financial services industry.
Warren’s two most recent executive
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 currently a non-executive director of
MetLife Limited, MyState Limited and
Go Hold Limited. 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.
Independent
Appointed Director: 14 January 2019
Appointed Director: 1 March 2018
Wendy had an extensive executive career
in Financial Services leading technology
and operations in insurance and wealth
management. Her most recent executive
role was as Group Executive, Operations
for AMP Ltd, and she was previously
Chief Operations Officer and Chief
Information Officer for AXA in Australia.
Wendy is also Chair of Online Education
Services, and a Non-Executive Director
of Ausgrid, Peoples’ Choice Credit Union,
Epworth Healthcare and Very Special
Kids. Wendy has a Bachelor of Arts
from LaTrobe University, a Bachelor of
Business from Swinburne University and a
Graduate Diploma in Applied Finance and
Investment from the Securities Institute of
Australia. She completed the Advanced
Management Program at Harvard
Business School, is a Fellow of the
Financial Services Institute of Australasia
and a Graduate member of the Australian
Institute of Company Directors.
Wendy resides in Melbourne, Australia.
Marcus has significant insurance
industry experience.
For a decade he has performed senior
leadership roles for Zurich in Europe
and globally. In his last role at Zurich,
he served as the Chief Executive Officer
of Zurich Germany managing both
life insurance and general insurance
businesses. He has also held the
position of Vice Chairman of the joint
venture with ADAC, Germany largest
Automotive Club, Chairman of the direct
insurer DA Direct and Chairman of the
life insurer, Zurich Deutscher Herold.
Prior to that, he also managed the
independent financial adviser/broker
business for Zurich Global Life.
Marcus holds a Masters Degree in
Banking and Finance from Goethe
University in Frankfurt, Germany and
Master of International Management
from the Arizona State University
Thunderbird School of Global
Management in Arizona, United States
of America. Marcus was nominated by
Bain Capital Credit LP (Bain Capital) to
represent Bain Capital’s stake in Tower
(Bain Capital hold 19.99% of Tower’s
ordinary shares) and his appointment
was supported by the Tower Board.
Marcus resides in Schindellegi, Switzerland.
21
Tower Limited
Consolidated Financial Statements
For the year ended 30 September 2019
Tower Limited
Independent Auditor’s Report
For the year ended 30 September 2019
Independent auditor’s report
To the shareholders of Tower Limited
We have audited the consolidated financial statements which comprise:
• the consolidated balance sheet as at 30 September 2019;
• the consolidated income statement for the year then ended;
• the consolidated statement of comprehensive income for the year then ended;
• the consolidated statement of changes in equity for the year then ended;
• the consolidated statement of cash flows for the year then ended; and
• the notes to the consolidated financial statements, which include a summary of accounting policies.
Our opinion
In our opinion, the accompanying consolidated financial statements of Tower Limited (the Company),
including its subsidiaries (the Group), present fairly, in all material respects, the financial position of
the Group as at 30 September 2019, its financial performance and its cash flows for the year then
ended in accordance with New Zealand Equivalents to International Financial Reporting Standards
(NZ IFRS) and International Financial Reporting Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs
(NZ)) and International Standards on Auditing (ISAs). Our responsibilities under those standards are
further described in the Auditor’s responsibilities for the audit of the consolidated financial
statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
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.
Our firm carries out other services for the Group. These services are assurance services in respect of
solvency and regulatory insurance returns and agreed upon procedures in respect of voting at the
Annual Shareholders Meeting and a regulatory insurance return. In addition, certain partners and
employees of our firm may deal with the Group on normal terms within the ordinary course of trading
activities of the Group. These matters have not impaired our independence as auditor of the Group.
PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand
T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz
Contents
Independent Auditors’ Report
23 – 28
Consolidated Income Statement
Consolidated Statement of
Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
29
30
31
32
33
Notes to the Financial Statements
34 – 77
22
Tower Limited annual report 2019
23
Tower Limited
Independent Auditor’s Report
For the year ended 30 September 2019
Tower Limited
Independent Auditor’s Report
For the year ended 30 September 2019
Our audit approach
Overview
An audit is designed to obtain reasonable assurance whether the consolidated
financial statements are free from material misstatement.
Overall Group materiality: $3.4 million, 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 a generally accepted benchmark for insurance companies. The 1% is based on
our professional judgement, noting that it is also within the range of commonly
accepted revenue related thresholds.
We have determined that there are three key audit matters:
• Valuation of outstanding claims
• Valuation of Earthquake Commission (EQC) receivable in respect of
Canterbury earthquake claims
• Recoverability of the deferred tax asset arising from tax losses
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 consolidated financial statements as a whole as set out
above. These, together with qualitative considerations, helped us to determine the scope of our audit,
the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both
individually and in aggregate on the consolidated financial statements as a whole.
Audit scope
We designed our audit by assessing the risks of material misstatement in the consolidated 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 consolidated financial statements as a whole, taking into account the structure of the
Group, the accounting processes and controls, and the industry in which the Group operates.
Our Group audit focused on the most financially significant subsidiary, which contributes
approximately 83% of the Group’s premium revenue. We performed audit procedures over material
balances and transactions of the non-significant subsidiaries and the consolidation of the Group’s
subsidiaries.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in
our audit of the consolidated financial statements of the current year. These matters were addressed in
the context of our audit of the consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matter
How our audit addressed the
key audit matter
(1) Valuation of outstanding claims
(2019 $124,060,000, 2018 $148,976,000)
We considered the valuation of outstanding
claims a key audit matter because this involves a
complex estimation process and significant
judgements and assumptions that management
make in estimating future claims payments.
These include the estimate of claims that have
been reported but there is uncertainty over the
amount which will be settled and those incurred
at the reporting date but not yet reported to the
Group. There is generally less information
available in relation to these claims and such
claims require the use of informed estimates of
the quantum of loss. Small changes in
assumptions can lead to significant movements
in claim reserves. Key actuarial assumptions for
non Canterbury claims are inflation rate,
discount rate and claims handling expense ratio.
Outstanding claims in relation to Canterbury
earthquakes have a greater degree of uncertainty
and judgement. This mainly arises due to
Earthquake Commission (EQC) reporting new
claims to the Group which have gone over the
$100,000 statutory liability cap (over cap
claims), how damages are allocated between the
four major earthquake events, expected claims
costs for open claims and estimates of future
claims handling cost.
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.
Historical claims data is a key input to the
actuarial estimates. Accordingly, we:
o evaluated the design effectiveness and tested
controls over claims processing;
o assessed a sample of claim case estimates at
the year end to check that they were
supported by appropriate management
assessment and documentation;
o assessed on a sample basis the accuracy of
the previous claim case estimates by
comparing with actual amount settled during
the year and analysed escalation in the claim
case estimate to determine whether it is
based on new information available during
the year;
o inspected a sample of claims paid during the
year to confirm that they were supported by
appropriate documentation and approved
within delegated authority limits; and
o tested the integrity of data used in the
actuarial models by agreeing the relevant
model inputs to source.
Together with our actuarial experts, we:
o considered the work and findings of the
actuaries engaged by the Group;
o evaluated the actuarial models and
methodologies used by comparing with
generally accepted models and
methodologies applied in the sector and with
the prior year;
o assessed key actuarial judgements and
assumptions and challenged them by
comparing with our expectations based on
the Group’s experience, our own sector
knowledge and independently observable
industry trends; and
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Tower Limited annual report 2019
25
Tower Limited
Independent Auditor’s Report
For the year ended 30 September 2019
Tower Limited
Independent Auditor’s Report
For the year ended 30 September 2019
Key audit matter
Relevant references in the consolidated
financial statements.
Refer to notes B2, B3 and B5 to the consolidated
financial statements, which also describes the
elements that make up this balance.
(2) Valuation of Earthquake Commission
(EQC) receivable in respect of
Canterbury earthquake claims (2019
$69,900,000, 2018 $68,400,000)
We considered the valuation of EQC receivable a
key audit matter because significant
management judgement is required to estimate
expected recoveries from EQC in respect of land
and building damage. Management use
independent technical and actuarial experts to
calculate the amount receivable.
This receivable is dependent on the ultimate
contribution by the EQC to the land and building
damage arising from the Canterbury earthquake
events in terms of its statutory liability under the
Earthquake Commission Act 1993. The quantum
is highly dependent on the agreement with EQC
on allocation of liability for damage between
these events, in particular the September 2010
and February 2011 events, the quality of
information available in respect of the damage to
each property, the time taken to settle with EQC
and risk associated with litigation.
Relevant references in the consolidated
financial statements
Refer to notes B3 and E1 to the consolidated
financial statements.
How our audit audit addressed the
key audit matter
o
assessed the risk margin, by comparing to
known industry practices. In particular we
focused on the assessed level of uncertainty
in the central estimate.
Together with our actuarial expert, we:
o assessed management’s approach to estimate
the EQC receivable;
o reviewed external legal counsel advice and
independent technical experts’ conclusions;
o evaluated the work performed by Tower’s
actuary and understood the assumptions
applied in allocation of cost between the four
major Canterbury earthquake events and the
risk margin setting process. We compared
these assumptions with sector peers and
obtained evidence for any significant
variances; and
o considered the range of expected recoveries
from which the amount recognised as due
from EQC has been determined and assessed
whether in the current circumstances a
different receivable amount would be
appropriate.
Key audit matter
How our audit audit addressed the
key audit matter
(3) Recoverability of the deferred tax
asset arising from tax losses (2019
$24,527,000, 2018 $30,685,000)
The majority of the Group’s deferred tax asset
arises from past tax losses. We considered
recoverability of the deferred tax asset a key
audit matter because utilisation of the asset is
sensitive to the Group’s expected future
profitability and the sufficient continuity of the
ultimate shareholders. Management judgement
is involved in forecasting the timing and
quantum of future taxable profits, which are
inherently uncertain, and whether it is probable
the tax losses will be utilised in the foreseable
future.
Relevant reference in the consolidated financial
statements
Refer to note D5 to the consolidated financial
statements.
Together with our tax experts, we:
o understood 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:
o assessment of the Canterbury
earthquakes claims and related
reinsurance;
o other recoveries (assessment of the
recoverability of the receivables from
EQC); and
o other expense reduction and income
initiatives (in particular the IT
transformation programme).
o compared previous budget results with
actual results to assess the reliability of
managements forecasts;
o considered the reasonableness of the
assumptions in the FY20 strategic plan on
the forecast utilisation of tax losses; and
o assessed whether the Group is entitled to
offset the tax losses against future taxable
profits.
Information other than the consolidated financial statements and
auditor’s report
The Directors are responsible for the annual report. Our opinion on the consolidated financial
statements does not cover the other information included in the annual report and we do not and will
not express any form of assurance conclusion on the other information. At the time of our audit, there
was no other information available to us.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information and, in doing so, consider whether the other information is materially inconsistent
with the consolidated financial statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated. 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.
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26
Tower Limited annual report 2019
27
Tower Limited
Independent Auditor’s Report
For the year ended 30 September 2019
Tower Limited
Consolidated Income Statement
For the year ended 30 September 2019
Revenue
Premium revenue
Less: Outwards reinsurance expense
Net premium revenue
Investment revenue
Fee and other revenue
Net operating revenue
Expenses
Claims expense
Less: Reinsurance and other recoveries revenue
Net claims expense
Management expenses
Sales commission expenses
Impairment of reinsurance receivable
Financing expenses
Total expenses
Profit / (loss) before taxation
Tax (expense) / benefit
Profit / (loss) for the year
Profit / (loss) attributed to:
Shareholders
Non-controlling interest
Basic and diluted profit / (loss) per share (cents)
NOTE
2019
$000
2018
$000
B1
C1
B2
D1
D1
D2
D5
F5
344,995
(54,975)
290,020
7,519
5,818
323,093
(54,251)
268,842
7,125
5,755
303,357
281,722
190,699
200,467
(14,985)
175,714
81,084
20,252
–
312
(23,835)
176,632
70,542
19,488
22,511
570
277,362
289,743
25,995
(9,190)
16,805
16,565
240
16,805
CENTS
4.73
(8,021)
1,295
(6,726)
(6,773)
47
(6,726)
CENTS
(2.11)
Responsibilities of the Directors for the consolidated financial
statements
The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of
the consolidated financial statements in accordance with NZ IFRS and IFRS, and for such internal
control as the Directors determine is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Directors are responsible for assessing the
Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the Directors either intend to liquidate
the Group or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the consolidated financial
statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial
statements, as a whole, are free from material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (NZ) and ISAs will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these consolidated financial statements.
A further description of our responsibilities for the audit of the 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 Karen Shires.
For and on behalf of:
Chartered Accountants
20 November 2019
Auckland
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63
28
Tower Limited annual report 2019
29
The above statement should be read in conjunction with the accompanying notes.
Tower Limited
Consolidated Statement of
Comprehensive Income
For the year ended 30 September 2019
Tower Limited
Consolidated Balance Sheet
As at 30 September 2019
NOTE
2019
$000
2018
$000
NOTE
2019
$000
2018
$000
Profit / (loss) for the year
16,805
(6,726)
Other comprehensive profit / (loss)
Items that may be reclassified to profit or loss
Currency translation differences
Items that will not be reclassified to profit or loss
Gain on asset revaluation
Deferred income tax relating to asset revaluation
Other comprehensive profit net of tax
Total comprehensive profit / (loss) for the year
Total comprehensive profit / (loss) attributed to:
Shareholders
Non-controlling interest
E3
D5
793
305
(32)
1,066
17,871
17,538
333
17,871
42
434
(81)
395
(6,331)
(6,474)
143
(6,331)
Assets
Cash and cash equivalents
Receivables
Investments
Derivative financial assets
Deferred acquisition costs
Property, plant and equipment
Intangible assets
Current tax assets
Deferred tax assets
Total assets
Liabilities
Payables
Provisions
Unearned premiums
Outstanding claims & additional risk margin
Borrowings
Current tax liabilities
Deferred tax liabilities
Total liabilities
Net assets
Equity
Contributed equity
Accumulated losses
Reserves
Total equity attributed to shareholders
Non-controlling interest
Total equity
The consolidated financial statements were approved for issue by the Board on 20 November 2019.
Michael P Stiassny
Chairman
Graham R Stuart
Director
C2
E1
C3
C5
D3
E3
E2
D5
D5
E5
E6
B4
B5
C4
D5
D5
F1
F2
67,018
256,295
229,172
–
23,736
9,104
74,211
13,589
30,308
102,001
259,607
198,000
271
22,595
8,510
45,042
13,831
36,376
703,433
686,233
75,907
6,802
187,855
124,060
14,931
229
991
80,375
5,789
175,551
148,976
–
174
589
410,775
411,454
292,658
274,779
447,543
(41,504)
(115,182)
290,857
1,801
292,658
447,543
(58,077)
(116,155)
273,311
1,468
274,779
30
Tower Limited annual report 2019
31
The above statement should be read in conjunction with the accompanying notes.The above statement should be read in conjunction with the accompanying notes. Tower Limited
Tower Limited
Consolidated Statement of Changes in Equity
For the year ended 30 September 2019
Consolidated Statement of Cash Flows
For the year ended 30 September 2019
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 2019
At the beginning of the year
Comprehensive income
Profit for the year
Currency translation differences
Gain on asset revaluation
Deferred income tax relating to asset revaluation
Total comprehensive income
Transactions with shareholders
Other
Total transactions with shareholders
E3
D5.5
447,543
(58,077)
(116,155)
273,311
1,468
274,779
–
–
–
–
–
–
–
16,565
–
–
–
16,565
8
8
–
700
305
(32)
973
–
–
16,565
240
16,805
700
305
(32)
93
–
–
793
305
(32)
17,538
333
17,871
8
8
–
–
8
8
At the end of the year
447,543
(41,504)
(115,182)
290,857
1,801
292,658
Year Ended 30 September 2018
At the beginning of the year
Comprehensive income (loss)
Profit / (loss) for the year
Currency translation differences
Gain on asset revaluation
Deferred income tax relating to asset revaluation
Total comprehensive income / (loss)
Transactions with shareholders
Net proceeds of capital raise
Other
Total transactions with shareholders
At the end of the year
382,172
(51,299)
(116,454)
214,419
1,325
215,744
E3
D5.5
–
–
–
–
–
F1
65,371
–
65,371
(6,773)
–
–
–
(6,773)
–
(5)
(5)
–
(54)
434
(81)
299
–
–
–
(6,773)
(54)
434
(81)
47
96
–
–
(6,726)
42
434
(81)
(6,474)
143
(6,331)
65,371
(5)
65,366
–
–
–
65,371
(5)
65,366
447,543
(58,077)
(116,155)
273,311
1,468
274,779
Cash flows from operating activities
Premiums received
Interest received
Net realised investment gain (loss)
Fee and other income received
Reinsurance received
Reinsurance paid
Claims expenses
Payments to suppliers and employees
Income tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Net payments for financial assets
Payments for purchase of property, plant and equipment and intangible assets
Disposal of property, plant and equipment and intangible assets
Net cash (outflow) from investing activities
Cash flows from financing activities
Gross proceeds from issue of share capital
Cost of capital issuance
Facility fees and interest paid
Repayment of borrowings
Proceeds from borrowings
Payment of non-controlling interest dividends
Net cash inflow from financing activities
Net (decrease) increase in cash and cash equivalents
Effect of foreign exchange rate changes
Cash and cash equivalents at the beginning of year
Cash and cash equivalents at the end of the year
Accounting policy
NOTE
2019
$000
2018
$000
343,411
319,329
8,141
42
5,818
18,421
(55,968)
(201,663)
(91,095)
(2,453)
24,654
8,010
(605)
5,285
45,780
(52,327)
(231,843)
(80,614)
(2,831)
10,184
(36,665)
(37,627)
–
(6,815)
(19,802)
73
(74,292)
(26,544)
–
–
(352)
–
15,000
–
14,648
(34,990)
7
102,001
67,018
70,838
(5,467)
(734)
(30,000)
–
–
34,637
18,277
(152)
83,876
102,001
C6
F1
F1
C2
Tower considers that knowledge of gross receipts and payments of financial assets 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 2019
33
The above statement should be read in conjunction with the accompanying notes.The above statement should be read in conjunction with the accompanying notes. Part A – Introduction
This section provides introductory information that is helpful to an overall understanding of the financial statements, including an explanation of
Tower’s group structure and the areas of critical accounting judgements and estimates included in the financial statements. It also includes a
summary of Tower’s financial performance by operating segment.
A1 Reporting Entity and Basis of Preparation
Entities reporting
The financial statements presented are those of Tower Limited (the Company) and its subsidiaries. The Company and its subsidiaries together are
referred to in this financial report as Tower or the Group. The address of the Company’s registered office is 45 Queen Street, Auckland,
New Zealand.
During the periods presented, the principal activity of the Group was provision of general insurance. The Group predominantly operates in
New Zealand with some of its operations based in the Pacific Islands region.
The financial statements were authorised for issue by the Board of Directors on 20 November 2019. The entity’s owners or others do not have power to
amend the financial statements after issue.
Statutory base
Tower Limited is a company incorporated in New Zealand under the Companies Act 1993 and listed on the NZX Main Board and the Australian
Securities Exchange. The Company is a reporting entity under Part 7 of the Financial Markets Conduct Act 2013.
Basis of preparation
The Company is a for profit entity and the financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting
Practice (NZ GAAP). They comply with International Financial Reporting Standards (IFRS) 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.
Changes in comparatives
Refer to Note G5 for details of change in comparatives. Changes relate to presentation of certain notes only. There is no change to net assets or the
2018 income statement.
A2 Consolidation
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. Non-controlling interests in the
results and equity of subsidiaries are shown separately in the consolidated income statement, statement of comprehensive income, statement of
changes in equity and balance sheet respectively. Acquisition related costs are expensed as incurred.
When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the
change in carrying amount recognised in profit or loss.
Intercompany transactions and balances between Group entities are eliminated on consolidation.
A2 Consolidation (continued)
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 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
statement 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 statement of comprehensive income and the statement 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 statement of comprehensive income and the statement 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 statement 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 statement.
Subsidiaries
The table below lists Tower Limited’s principal subsidiary companies and controlled entities. All entities have a balance date of 30 September.
NAME OF COMPANY
COUNTRY
INCORPORATED IN
HOLDINGS
2019
2018
NATURE OF BUSINESS
Incorporated in New Zealand
Tower Financial Services Group Limited
Tower Insurance Limited
Tower New Zealand Limited
NZ
NZ
NZ
Incorporated Overseas
Tower Insurance (Cook Islands) Limited
Cook Islands
Tower Insurance (Fiji) Limited
Tower Insurance (PNG) Limited
National Pacific Insurance Limited
Tower Insurance (Vanuatu) Limited
Fiji
PNG
Samoa
Vanuatu
100%
100%
100%
100%
100%
100%
71%
100%
100%
100%
100%
100%
100%
100%
71%
100%
Holding company
General insurance
Management services
General insurance
General insurance
General insurance
General insurance
General insurance
34
Tower Limited annual report 2019
35
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019
A3 Critical Accounting Judgements and Estimates
A4 Segmental Reporting
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.
Canterbury earthquake claims estimation
The valuation of net outstanding claims is an area of significant judgement and estimation. Key assumptions are the expected number and cost of new
overcap claims and expected costs, including expected building costs, associated with settling existing open claims. Other elements of judgement are
the quantum of closed claims reopening, apportionment of claim costs between the four main earthquake events, future claim management expenses
and assessment of the risk margin.
Key elements of judgement included within recoveries estimations are: the collectability of reinsurance recoveries; 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 B3 for further detail on the Canterbury Earthquakes.
EQC recoveries
The valuation of the EQC receivable is an area of significant accounting estimation and judgement. The amount received could be more or less,
depending on the allocation of liability for damage, the quality of assessment information, the time taken to settle and the risks involved in litigation,
therefore the Directors have taken extensive advice from independent experts in confirming the appropriateness of the valuation recorded.
Refer to Note B3 for further detail.
Deferred taxation
Deferred tax assets are recognised for all unused tax losses to the extent it is probable that taxable profits will be available against which the losses can
be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised based on the likely
timing and quantum of future taxable profits.
This assessment is completed on the basis of the approved strategic plans of Tower Insurance Limited and subsidiaries. If future profits do not occur as
expected, or there is a significant change in ownership, Tower may not be able to utilise all of these tax losses.
Refer to Note D5 for further detail.
Capitalised IT development costs
Capitalisation of IT development costs is an area of 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 recognition, impairment
indicators, economic useful life, and previous Board impairment decisions.
Refer to Note E2 for further details on intangible assets.
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 E2 for further details of key assumptions used.
NEW ZEALAND
GENERAL
INSURANCE
$000
PACIFIC ISLANDS
GENERAL
INSURANCE
$000
NEW ZEALAND
CORPORATE
$000
Year Ended 30 September 2019
Revenue
Premium revenue
Less: Outwards reinsurance expense
Investment revenue
Fee and other revenue
Net operating revenue
Profit before interest, tax, depreciation and amortisation
Interest expense
Depreciation and amortisation
Profit (loss) before income tax
Income tax credit (expense)
Profit (loss) for the year
Total assets 30 September 2019
Total liabilities 30 September 2019
Acquisition of property, plant and equipment and intangibles
Year Ended 30 September 2018
Revenue
Premium revenue
Less: Outwards reinsurance expense
Investment revenue
Fee and other revenue
Total revenue
Profit (loss) before interest, tax, depreciation and amortisation
Interest expense
Depreciation and amortisation
Profit (loss) before income tax
Income tax credit (expense)
Profit (loss) for the year
Total assets 30 September 2018
Total liabilities 30 September 2018
Acquisition of property plant and equipment and intangibles
285,677
(37,816)
6,106
2,042
59,318
(17,159)
930
1,906
256,009
44,995
16,431
–
(1,125)
15,306
(5,557)
9,749
480,694
334,809
652
266,111
(38,804)
6,061
1,967
235,335
(10,590)
–
(1,027)
(11,617)
2,751
(8,866)
480,664
345,406
173
12,602
–
(473)
12,129
(4,565)
7,564
98,455
58,842
1,206
56,982
(15,447)
14
1,625
43,174
3,964
–
(482)
3,482
(2,016)
1,466
95,072
63,224
603
TOTAL
$000
344,995
(54,975)
7,519
5,818
303,357
34,479
(312)
(8,172)
25,995
(9,190)
16,805
703,433
410,774
38,201
323,093
(54,251)
7,125
5,755
281,722
(756)
(570)
(6,695)
(8,021)
1,295
(6,726)
–
–
483
1,870
2,353
5,446
(312)
(6,574)
(1,440)
932
(508)
124,284
17,123
36,343
–
–
1,050
2,163
3,213
5,870
(570)
(5,186)
114
560
674
110,497
2,824
19,026
686,233
411,454
19,802
The impairment of reinsurance receivable of $22.5m in 2018 was incurred in the New Zealand General Insurance segment.
36
Tower Limited annual report 2019
37
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 A4 Segmental Reporting (continued)
Accounting policy
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 (CEO) who reviews the operating results on a regular basis and makes decisions on resource allocation and assessing performance.
Description of segments and other segment information
Tower operates predominantly in two geographical segments, New Zealand and the Pacific region. New Zealand segment comprised general
insurance business written in New Zealand. Pacific Islands segment includes general insurance business with customers in Pacific Islands written
by Tower subsidiaries and branch operations. New Zealand Corporate includes head office expenses, financing costs, intercompany eliminations
and recharges.
The Group does not derive revenue from any individual or entity that represents 10% or more of the Group’s total revenue.
Part B – Revenue and Claims
This section provides information about Tower’s insurance related financial performance. Tower operates as a general insurance company and its insurance
operations drive its performance and financial position.
Tower collects premiums from customers in exchange for providing insurance coverage over their assets and activities. These premiums are recognised as
revenue when they are earned by Tower, with a liability for unearned premiums recognised on the balance sheet.
When customers suffer a loss that is covered by their policy, Tower will make payments to customers or suppliers, which it recognises as claims expenses.
To ensure that Tower’s obligations to customers are properly recorded within the financial statements, Tower recognises provisions for outstanding claims.
Accounting policy
Claims expense is recognised when claims are notified. Provision is made for the estimated cost of claims incurred but not settled at balance date,
including the cost of claims incurred but not yet reported (IBNR) to the Group.
The estimated cost of claims includes direct expenses incurred in settling claims. 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 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 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 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.
To manage Tower’s risk and optimise its returns, Tower reinsures some of its exposure with reinsurance companies. The premiums paid to reinsurers are
recognised as an expense, while recoveries from reinsurers are recognised as revenue.
Provisions are calculated net of any reinsurance recoveries. Gross provisions are estimated by adding the expected reinsurance recovery to the
net provisions. Details of specific assumptions used in deriving the outstanding claims liability at year end are detailed in Note B5.
B1 Premium Revenue
Gross written premiums
Less: Gross unearned premiums
Premium revenue
Accounting policy
2019
$000
2018
$000
356,767
(11,772)
344,995
336,109
(13,016)
323,093
Reinsurance and other recoveries on claims expense are recognised as revenue. Recoveries are measured as the present value of expected
future receipts.
B3 Canterbury Earthquakes
As at 30 September 2019 Tower has 109 claims remaining to settle (2018: 163 claims) as a result of earthquakes impacting the Canterbury region during
2010 and 2011.
The table below presents a financial representation of Tower’s outstanding claims provision at 30 September 2019 in relation to the four main
earthquake events.
Canterbury earthquake insurance liability provisions
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 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.
Insurance liabilities
Gross outstanding claims
Additional risk margin
2019
$000
2018
$000
(46,600)
(5,000)
(51,600)
(67,900)
(5,000)
(72,900)
B2 Net Claims Expense
Canterbury earthquake claims (4 key events)
Additional risk margin release
Other claims
Total net claims expense
NOTE
B3
B3
2019
$000
2018
$000
8,400
–
167,314
175,714
10,100
(5,000)
171,532
176,632
The Board is 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. 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.
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 2019. Any further changes to estimates will be recorded in the accounting period when
they become known.
38
Tower Limited annual report 2019
39
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019
B3 Canterbury Earthquakes (continued)
Additional risk margin
As at 30 September 2019, the Board has maintained an additional risk margin of $5.0m (30 September 2018: $5.0m) over and above the provision of the
Appointed Actuary, which is set at the 75th percentile probability of sufficiency. The Board will continue to review this additional risk margin each half
year and the $5.0m is expected to be released once the Canterbury outstanding claims liability has sufficiently run off.
The table below presents a financial representation of Tower’s outstanding reinsurance receivables at 30 September 2019 in relation to the four main
earthquake events.
Canterbury earthquake reinsurance receivables
Reinsurance recovery receivables
Reinsurance recoveries on risk margin
Receivable from reinsurers
EQC recovery receivable
2019
$000
3,900
900
4,800
2018
$000
7,100
800
7,900
Tower has recognised a receivable of $69.9m from the EQC (2018: $68.4m) related to the Canterbury earthquake claims. This receivable is a disputed
amount, and is largely the result of differences between the Tower and EQC approaches to allocation of damage to properties across the four
Canterbury events.
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.
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.
Tower’s approach to allocation is based on extensive advice from independent experts (both external legal advisers and technical experts) including the
modelling of damage for properties where primary evidence is very limited or not held. Tower’s position is that: (a) there is a portfolio of approximately
3,000 properties in respect of which Tower made payments and where a reallocation is required, and (b) within that portfolio, there are a significant
number of properties where part of Tower’s contribution ought to have been made by EQC instead.
Tower’s estimate of the gross amount receivable from EQC is, based on independent expert review, higher than the reported $69.9m. The Appointed
Actuary has reviewed the independent experts’ allocations for reasonableness, and then applied actuarial approaches that recognise the inherent risk
and uncertainty in the recovery of the gross amount receivable to determine a central estimate. The Appointed Actuary then applied a risk margin of
$9.4m to arrive at a 75th percentile probability of recovery (2018: $10.1m).
The resultant valuation is that which is carried in the financial statements, and includes an allowance for anticipated future legal costs. The valuation
does not include any allowance for interest and certain other costs that the EQC may be required to pay Tower, which would be additional to the final
principal amount for which EQC may be liable.
$16.9m of the receivable from EQC is payable to reinsurers if the full amount is recovered. This has been allowed for in payables (2018: $16.4m).
Tower acknowledges that the EQC receivable is an area of significant accounting estimation and judgement. The amount received could be more or
less, depending on the allocation of liability for damage between the four events and between EQC and Tower, the quality of assessment information
available in respect of each property, the time taken to settle with EQC, and the risks involved in litigation.
While Tower has issued proceedings against the EQC in regards to land damage and is currently seeking to settle the building dispute using an
alternative dispute resolution process, there remains a prospect of continued (land recoveries) and new (building recoveries) litigation against the EQC
which would take time.
While the Directors have taken extensive advice from independent experts in determining the appropriateness of the valuation recorded, it should be
noted that the inherent risk and uncertainty in the recovery of the receivable is such that there remains risk that any amount ultimately recovered may
be less than the amount of the receivable carried in the financial statements.
EQC recovery receivable
EQC related to closed claims
EQC related to open claims
Risk margin on EQC receivable
Receivable from EQC
EQC payable to reinsurers on closed claims
EQC payable to reinsurers on open claims
Risk margin on EQC payable to reinsurers
EQC payable to reinsurers
Receivable from EQC net of reinsurance
Cumulative impact of Canterbury earthquakes
NOTE
2019
$000
77,300
2,000
(9,400)
69,900
(18,700)
(500)
2,300
(16,900)
53,000
2018
$000
74,000
4,500
(10,100)
68,400
(17,900)
(1,000)
2,500
(16,400)
52,000
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 including EQC
Claim expense net of reinsurance recoveries
Reinsurance expense
Additional risk margin
Cumulative impact of Canterbury earthquakes before tax
Income tax
Cumulative impact of Canterbury earthquakes after tax
Recognised in current period (net of tax)
Net claims expense
Additional risk margin release
Impairment of receivables
The catastrophe reinsurance cover headroom remaining is included in the table below.
Date of event
June 2011
December 2011
NOTE
2019
$000
2018
$000
(916,890)
(905,840)
725,823
(191,067)
723,173
(182,667)
B2
B2
D2
(25,045)
(5,000)
(221,112)
62,580
(158,532)
(6,048)
–
–
(6,048)
(25,045)
(5,000)
(212,712)
60,228
(152,484)
(7,272)
3,600
(15,660)
(19,332)
CATASTROPHE REINSURANCE
COVER REMAINING
2019
$000
253,300
486,600
2018
$000
255,700
486,900
Tower has exceeded its catastrophe reinsurance limit in relation to the September 2010 and February 2011 events.
40
Tower Limited annual report 2019
41
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 B5 Other Insurance Disclosures
B5.1 Net claims expense
2019
2018
RISKS BORNE IN
CURRENT YEAR
$000
RISKS BORNE IN
PRIOR YEARS
$000
TOTAL
$000
RISKS BORNE IN
CURRENT YEAR
$000
RISKS BORNE IN
PRIOR YEARS
$000
TOTAL
$000
Gross claims expense
Direct claims – undiscounted
177,786
12,913
190,699
188,452
12,035
200,487
Movement in discount
Total gross claims expense
Reinsurance and other recoveries
Reinsurance and other recoveries
– undiscounted
Movement in discount
Total reinsurance recoveries
–
–
–
(60)
40
(20)
177,786
12,913
190,699
188,392
12,075
200,467
(9,793)
–
(9,793)
(5,192)
–
(5,192)
(14,985)
(20,073)
–
–
(14,985)
(20,073)
(3,762)
–
(3,762)
(23,835)
–
(23,835)
Net claims expense
167,993
7,721
175,714
168,319
8,313
176,632
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 B2 and B3.
B5.2 Outstanding claims
(a) Assumptions adopted in calculation of insurance liabilities
The estimation of outstanding claims as at 30 September 2019 has been carried out by the following Actuaries:
Rick Shaw, B.Sc. (Hons), FIAA, Appointed Actuary; and
John Feyter, B.Sc., 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.
B3 Canterbury Earthquakes (continued)
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 EARTHQUAKES
CHANGE
VARIABLE
SEP 2010
$M
FEB 2011
$M
JUN 2011
$M
DEC 2011
$M
30-SEP-19
$M
30-SEP-18
$M
+ 50%
- 50%
+ 20%
- 20%
+ 20%
- 20%
+ 20%
- 20%
(1.6)
1.6
(1.5)
1.5
0.1
(0.1)
7.1
(7.2)
(2.9)
2.8
(3.6)
3.6
1.2
(1.2)
2.1
(2.1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4.5)
4.4
(5.1)
5.1
1.3
(1.3)
9.2
(9.3)
(0.9)
0.9
(10.0)
9.9
1.6
(1.6)
8.8
(8.8)
Outstanding claims:
(i) Change to costs arising from new overcap
claims
(ii) Changes to expected claims costs for open
claims
Receivables:
Reinsurance recovery receivables
(iii) Recoveries from EQC in respect of land
damage
(iv) Recoveries from EQC in respect of building
costs
(i)
(ii)
The volume of new overcap claims received from the EQC (i.e. claims above the EQC limit) is a source of uncertainty. This sensitivity is
calculated as future new overcaps ultimately being +/- 50% to that currently in the Canterbury earthquake insurance liability provisions.
Unexpected development of open claims is also a source of uncertainty. This sensitivity is calculated as the outstanding cost of open claims
being +/- 20% to that currently in the Canterbury earthquake insurance liability provisions.
(iii) & (iv) As outlined in note B3, the EQC Receivable is a source of significant uncertainty. A number of factors could vary the ultimate amount received
from EQC including, but not limited to, (a) changes in apportionment of damage across events, and (b) differences in assessment of liability
for damage across properties. This sensitivity is calculated as the ultimate amount received from EQC being +/- 20% to that currently carried
in the financial statements.
B4 Unearned Premiums
Opening balance
Premiums written
Premiums earned
Foreign exchange movements
Closing balance
2019
$000
175,551
356,767
2018
$000
162,342
336,109
(344,995)
(323,093)
532
187,855
193
175,551
The majority of unearned premiums is a current liability as at 30 September 2019.
Accounting policy
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.
42
Tower Limited annual report 2019
43
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019
B5 Other Insurance Disclosures (continued)
The following assumptions have been made in determining net outstanding claims liabilities (excluding Canterbury earthquakes):
B5 Other Insurance Disclosures (continued)
The following analysis is in respect of the insurance liabilities:
Inflation rates varied from
Inflation rates for succeeding year
Inflation rates for following years
Discount rates varied from
Discount rates for succeeding year
Discount rates for following years
Weighted average claims handling expense ratio
Weighted average risk margin
Please refer to Note B3 for details on Canterbury earthquakes.
2019
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
7.2%
6.8%
2018
0.0%
0.0%
0.0%
0.0% – 2.5%
0.0% – 2.5%
0.0% – 2.5%
5.5%
8.6%
The weighted average expected term to settlement of outstanding claims (except for Canterbury earthquake claims) based on historical trends is:
Short tail claims within 1 year
Long tail claims in the Pacific Islands
Inflation and discount rate
2019
2018
within 1 year
within 1 year
1.0 to 1.8 years
1.0 to 1.8 years
Insurance costs are subject to inflationary pressures. The valuation implicitly assumes that future inflation will be similar to that experienced in recent
years. Nil explicit additional inflation has been assumed. Similarly a nil discount rate has been used.
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 measure of the volatility is referred to as the coefficient of variation (CoV), defined as
the standard deviation of the distribution of future cash flows divided by the mean.
Risk margins are calculated by jurisdiction. The risk margin for all classes when aggregated is less than the sum of the individual risk margins. This
reflects the benefit of diversification. The measure of the parameter used to derive the diversification benefit is referred to as correlation, which is
adopted with regard to industry analysis, historical experience and actuarial judgement.
The risk margins applied to future claims payments are determined with the objective of achieving 75% probability of sufficiency for both the
outstanding claims liability and the unexpired risk liability.
Central estimate of expected present value of future payments for claims incurred
Risk margin
Additional risk margin – Canterbury
Claims handling costs
Discount
Net outstanding claims
2019
$000
87,017
11,562
5,000
7,024
2018
$000
95,425
12,936
5,000
6,901
110,603
120,262
–
(271)
110,603
119,991
Reconciliation of movements in discounted outstanding claim liabilities
2019
2018
GROSS
$000
REINSURANCE
$000
NET
$000
GROSS
$000
REINSURANCE
$000
NET
$000
Balance brought forward
148,976
(28,985)
119,991
181,156
(33,429)
147,727
Effect of change in foreign exchange rates
489
(368)
121
71
(99)
(28)
Incurred claims recognised
in the income statement
190,699
(14,985)
175,714
200,467
(23,835)
176,632
Claims paid and reinsurance recoveries raised
Total outstanding claims
(216,104)
124,060
30,881
(13,457)
(185,223)
110,603
(232,718)
148,976
28,378
(28,985)
(204,340)
119,991
Reconciliation of movements in undiscounted claims to outstanding claim liabilities
Long tail outstanding claims
Short tail outstanding claims
Total outstanding claims
Accounting policy
GROSS
$000
4,460
119,600
124,060
2019
REINSURANCE
$000
(79)
(13,378)
(13,457)
NET
$000
4,381
106,222
110,603
GROSS
$000
3,461
145,515
148,976
2018
REINSURANCE
$000
(80)
(28,905)
(28,985)
NET
$000
3,381
116,610
119,991
Outstanding claims are calculated at the central estimate of the present value of expected future payments allowing for inflation implicit in
historical trends. There is no discounting applied. 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.
44
Tower Limited annual report 2019
45
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 B5 Other Insurance Disclosures (continued)
(b) Sensitivity analysis
B5 Other Insurance Disclosures (continued)
B5.4 Liability adequacy test
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
Total outstanding claim liabilities
B5.3 Development of claims
2019
$000
2018
$000
46,797
24,430
16,957
22,419
110,603
50,771
25,762
17,955
25,503
119,991
The following table shows the development of net outstanding claims relative to the current estimate of ultimate claims costs for the five most
recent years:
PRIOR
$000
2015
$000
2016
$000
2017
$000
2018
$000
2019
$000
TOTAL
$000
Liability adequacy tests are performed for each country 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 2019 were sufficient for all businesses except Fiji and NPI where small deficits were recognised. The total deficit recognised as a
charge against deferred acquisition cost was $331,000 (2018: sufficient).
Central estimate claim % of premium
Risk margin
Refer to Note B5.3 for additional information on central estimate and risk margin.
B5.5 Insurer financial strength rating
2019
%
42.9%
10.0%
2018
%
44.9%
11.3%
Tower Insurance Limited has an insurer financial strength rating of ‘A-’ (Excellent), stable outlook, issued by international rating agency AM Best
Company Inc. with an effective date of 8 March 2019.
B5.6 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.
ULTIMATE CLAIMS COST ESTIMATE
At end of incident year
One year later
Two years later
Three years later
Four years later
125,260
130,904
139,670
144,337
147,526
B5.7 Assets backing insurance business
126,431
129,629
141,577
142,126
126,267
131,713
142,946
127,746
131,446
127,243
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.
Current estimate of ultimate claims cost
127,243
131,446
142,946
142,126
147,526
Cumulative payments
(126,781)
(129,768)
(140,951)
(137,420)
(102,854)
Undiscounted central estimate
33,504
462
1,678
1,995
4,706
44,672
87,017
Claims handling expense
Risk margin
Additional risk margin – Canterbury
Net outstanding claim liabilities
Reinsurance recoveries on outstanding claim
liabilities and other recoveries
Gross outstanding claim liabilities
7,024
11,562
5,000
110,603
13,457
124,060
Prior year numbers have been restated at current year exchange rates to reflect the underlying development of claims.
B5.8 Underwriting Profit
Gross written premium
Gross earned premium
Reinsurance expense
Net premium revenue
Net claims expense
Management expenses related to underwriting
Sales commission expenses
Underwriting profit
2019
$000
356,767
344,995
(54,975)
290,020
(175,714)
(77,603)
(20,252)
16,451
2018
$000
336,109
323,093
(54,251)
268,842
(176,632)
(68,013)
(19,488)
4,709
46
Tower Limited annual report 2019
47
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 Part C – Financial Instruments and Liquidity
C2 Cash and Cash Equivalents
Funds provided by shareholders and collected as premiums are invested by Tower, providing a financial return and also ensuring that Tower’s
obligations to pay claims and expenses can be met.
This section provides information about Tower’s financial instruments, including information about the cash and investments that Tower holds,
its approach to managing risk for these financial instruments, and its cash flows.
C1 Investment Revenue
Fixed interest securities
Interest income
Net realised gain (loss)
Net unrealised gain (loss)
Total fixed interest securities
Equity securities
Net unrealised gain (loss)
Total equity securities
Property securities
Net unrealised gain (loss)
Total property 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
Accounting policy
2019
$000
8,141
(262)
(333)
7,546
–
–
–
–
304
(331)
(27)
8,141
42
(664)
7,519
2018
$000
8,010
146
596
8,752
(745)
(745)
–
–
(751)
(131)
(882)
8,010
(605)
(280)
7,125
Investment revenue is recognised as follows:
(i)
Interest income on fixed interest securities
Interest income is recognised using the effective interest method.
(ii) 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 and equity 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 at fair value through
profit or loss.
Cash at bank and in hand
Deposits at call
Restricted cash
Total cash and cash equivalents
Accounting policy
2019
$000
34,563
31,428
1,027
67,018
2018
$000
45,986
55,561
454
102,001
Cash and cash equivalents includes cash on hand and deposits held at call with financial institutions, other short-term, highly liquid investments
that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts.
The average interest rate at 30 September 2019 for deposits at call is 1.74% (2018: 2.25%). There was no offsetting within cash and cash equivalents
(2018: nil).
Restricted cash
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 $1.0m (2018: $0.5m) 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 $0.3m (2018: $0.2m) recorded within
Insurance liabilities for Tower’s portion of multi-unit outstanding claims; and $0.7m (2018: $0.3m) recorded within Payables as held on behalf of other
insurers in respect of SPP claims.
C3 Investment Assets
Fixed interest securities
Equity securities
Property securities
Total investment assets
2019
$000
2018
$000
228,527
197,367
611
34
599
34
229,172
198,000
48
Tower Limited annual report 2019
49
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 C4 Borrowings
As at 30 September 2019
Bank facilities (drawn)
Bank facilities (drawn)
Bank facilities (drawn)
Bank facilities (undrawn)
Total borrowings
As at 30 September 2018
CURRENCY
INTEREST
RATE
ROLLOVER DATE
(DRAWN) /
MATURITY DATE
(UNDRAWN)
FACE
VALUE
$000
UNAMORTISED
COSTS
$000
CARRYING
VALUE
$000
NZD
NZD
NZD
NZD
3.60%
3.14%
3.15%
11-Oct-19
16-Dec-19
31-Dec-19
5,000
5,000
5,000
Variable
27-Mar-23
15,000
Bank facilities (undrawn)
NZD
Variable
9-Sep-19
50,000
Total borrowings
Analysed as
Current
Non current
Total borrowings
Accounting policy
FAIR
VALUE
$000
5,001
5,000
5,000
–
15,001
–
–
2018
$000
–
–
–
–
–
–
(69)
(69)
–
–
5,000
5,000
5,000
(69)
14,931
–
–
2019
$000
14,931
–
14,931
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.
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.
The following table represents the change in borrowings:
Opening balance
Drawdown of credit facility
Repayment of credit facility
Closing balance
Standby credit facility
2019
$000
–
15,000
2018
$000
30,000
–
–
(30,000)
15,000
–
During March 2019, the Company entered into a new $30.0m cash advance facility with Bank of New Zealand. This new general facility is primarily for
the development and acquisition of Tower’s information technology platforms, software and related assets. The facility limit will decrease from the initial
$30.0m to $25.0m on 1 July 2020; to $20.0m on 1 July 2021; and to $15.0m on 1 July 2022.
All borrowings are unsecured. They are subject to terms and conditions, including financial covenants, that are normal market practice for facilities of
this nature. The Company has fully complied with all covenants during the year ended 30 September 2019.
C5 Financial Instruments
C5.1 Financial instrument categories
Accounting policy
Financial assets and liabilities are classified in the following categories: at fair value through profit or loss; financial assets at amortised cost;
and financial liabilities at amortised cost. The classification depends on the purpose for which the financial assets and liabilities were acquired.
Management determines the classification of its financial assets and liabilities at initial recognition.
(i) Financial assets at amortised cost
Financial assets at amortised cost are measured initially at fair value plus transaction costs and subsequently at amortised cost using the effective
interest method less any impairment. Financial assets within the scope of NZ IFRS 9 are managed to collect contractual cash flows and their
contractual terms generate cash flows that are solely payments of principal (and interest, if any).
The Group’s financial assets at amortised cost comprise trade and other receivables and cash and cash equivalents (held by the Corporate
entities). They are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market.
(ii) Financial liabilities at amortised cost
Financial liabilities at amortised cost are measured initially at fair value plus transaction costs and subsequently at amortised cost less any
impairment. There was no change to this categorisation as a result of the transition to NZ IFRS 9.
The Group’s financial liabilities at amortised cost comprise debt facilities and trade and other payables. They are non-derivative financial liabilities
with fixed or determinable payments that are not quoted on an active market.
(iii) Financial assets and liabilities at fair value through profit or loss
Financial assets at fair value through profit or loss (i.e. investments) are stated at fair value, with any resultant gain or loss recognised in the income
statement. The net gain or loss recognised in the income statement includes any dividend or interest earned on the financial assets. Assets that
are subsequently measured at their fair value through profit or loss are not subject to impairment considerations under the expected credit loss
model of NZ IFRS 9.
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. Tower’s financial instruments that are classified at fair
value through profit or loss on initial recognition, and which are subsequently re-measured to fair value at each reporting date, are classified
on this basis because they back general insurance liabilities and measuring them at fair value significantly reduces a potential measurement
inconsistency which would arise if the assets were measured at amortised cost or fair value through other comprehensive income.
All derivatives entered into by the Group are categorised at fair value through profit or loss unless they are designated as hedges.
(iv) 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.
(v) Derecognition
Financial assets are derecognised when the rights to receive cash flows have expired or have been transferred and the Group has transferred
substantially all risks and rewards of ownership.
50
Tower Limited annual report 2019
51
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 C5 Financial Instruments (continued)
C5.2 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 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.
(ii) Financial assets at fair value through profit or loss
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.
(iii) Financial assets and other financial liabilities held at amortised cost
Carrying values of financial assets, adjusted for impairment values, and carrying values of other financial liabilities held at amortised cost reasonably
approximate their fair values.
(iv) Derivative financial assets and liabilities
The fair value of derivative financial assets and liabilities is determined by reference to market accepted valuation techniques using observable market
inputs.
C5 Financial Instruments (continued)
The analysis of financial assets and liabilities into their categories and classes is set out in the following tables:
As at 30 September 2019
Assets
Cash and cash equivalents
Trade and other receivables
Investments
Derivative financial assets
Total financial assets
Liabilities
Trade and other payables
Borrowings
Total financial liabilities
As at 30 September 2018
Assets
Cash and cash equivalents
Trade and other receivables
Investments
Derivative financial assets
Total financial assets
Liabilities
Trade and other payables
Borrowings
Total financial liabilities
Accounting policy
AT AMORTISED COST
AT FAIR VALUE
THROUGH PROFIT OR LOSS
TOTAL
$000
FINANCIAL
ASSETS
$000
FINANCIAL
LIABILITIES
$000
FINANCIAL
ASSETS
$000
FINANCIAL
LIABILITIES
$000
67,018
253,023
229,172
–
10,906
253,023
–
–
549,213
263,929
–
–
–
–
–
42,146
14,931
57,077
–
–
–
42,146
14,931
57,077
56,112
–
229,172
–
285,284
–
–
–
–
–
–
–
–
–
–
–
AT AMORTISED COST
AT FAIR VALUE
THROUGH PROFIT OR LOSS
TOTAL
$000
FINANCIAL
ASSETS
$000
FINANCIAL
LIABILITIES
$000
FINANCIAL
ASSETS
$000
FINANCIAL
LIABILITIES
$000
102,001
255,779
198,000
271
27,095
255,779
–
–
556,051
282,874
–
–
–
–
–
50,590
–
50,590
–
–
–
50,590
–
50,590
74,906
–
198,000
271
273,177
–
–
–
–
–
–
–
–
–
–
–
Cash and cash equivalents held by Tower are financial assets which are within the scope of NZ IFRS 9. The classification has been established
based on the assessment of business model and the contractual cash flow characteristics of the cash and cash equivalents held.
Cash and cash equivalents held by Tower’s corporate entities are held in order to collect contractual cash flows and give rise to cash flows that
are solely payments of principal and interest therefore classified at amortised cost.
Cash and cash equivalents held by Tower’s insurance companies are held in order to back general insurance liabilities and meet its obligations
and therefore classified at fair value through profit or loss.
52
Tower Limited annual report 2019
53
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 C5 Financial Instruments (continued)
The following tables present the Group’s assets and liabilities categorised by fair value measurement hierarchy levels.
As at 30 September 2019
Assets
Investment in equity securities
Investments in fixed interest securities
Investments in property securities
Investments
Derivative financial assets
Total financial assets
As at 30 September 2018
Assets
Investment in equity securities
Investments in fixed interest securities
Investments in property securities
Investments
Derivative financial assets
Total financial assets
TOTAL
$000
LEVEL 1
$000
LEVEL 2
$000
LEVEL 3
$000
611
228,527
34
229,172
–
229,172
599
197,367
34
198,000
271
198,271
–
–
–
–
–
–
–
–
–
–
–
–
–
228,527
34
228,561
–
228,561
–
197,367
34
197,401
271
197,672
611
–
–
611
–
611
599
–
–
599
–
599
The Level 3 category includes investment in equity securities of $611,000 (2018: $599,000). This investment is in unlisted shares of a company which
provides reinsurance to Tower. The fair value is calculated based on the net assets of the company from the most recently available financial
information, adjusted for market conditions. The following table represents the changes in Level 3 instruments:
C5 Financial Instruments (continued)
C5.3 Impairment of financial assets
Accounting policy
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. NZ IFRS 9 requires entities to estimate and account for expected credit losses (ECL) for all relevant financial assets not at fair value through
profit and loss (FVTPL). The group has adopted and applied the simplified model for ECL on trade receivables. Premium and reinsurance receivables
are accounted for in accordance with NZ IFRS 4.
For financial assets carried at amortised cost, the impairment is calculated as a provision for expected credit losses (ECLs). The provision for ECLs is
based on the difference between the cash flows due in accordance with the contract and the cash flows that Tower expects to receive. Any shortfall
is discounted at an approximation to the asset’s original effective interest rate. The assessment of ECLs is performed based on historical credit loss
experience adjusted for forward-looking factors specific to debtors and the economic environment.
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 a provision 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 provision 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 provision for credit losses and impairment.
C6 Reconciliation of Profit / (Loss) for the Period to Net Cash Flows From Operating Activities
Opening balance
Total gains and losses recognised in profit or loss
Foreign currency movement
Disposals
Closing balance
INVESTMENT IN
EQUITY SECURITIES
2019
$000
599
–
12
–
611
2018
$000
1,412
(745)
(46)
(22)
599
Profit (loss) for the year
Adjusted for non-cash items
Depreciation of property, plant and equipment
Amortisation of software
Impairment of reinsurance receivables
Unrealised loss on financial assets
Movement on disposal of property, plant and equipment
Change in deferred tax
The following table shows the impact of increasing or decreasing the combined inputs used to determine the fair value of the investment by 10%:
As at 30 September 2019
Investment in equity securities
As at 30 September 2018
Investment in equity securities
CARRYING
AMOUNT
$000
FAVOURABLE
CHANGES OF 10%
UNFAVOURABLE
CHANGES OF 10%
611
599
61
60
(61)
(60)
Adjusted for movements in working capital (excluding the effects of exchange differences on consolidation)
Change in receivables
Change in payables
Change in taxation
Adjusted for other items classified as investing / financing activities
Facility fees and interest paid
2019
$000
16,805
1,598
6,572
–
664
–
6,439
15,273
(2,012)
(6,061)
297
(7,776)
352
352
2018
$000
(6,726)
1,499
5,195
21,750
280
(50)
(3,404)
25,270
4,907
(13,279)
(722)
(9,094)
734
734
Net cash inflows from operating activities
24,654
10,184
54
Tower Limited annual report 2019
55
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 Part D – Management Expenses and Taxation
D3 Deferred Acquisition Costs
To grow and operate its business, Tower incurs management expenses, including payments to employees, suppliers and commission payments to
third parties.
This section includes information about Tower’s management expenses and taxation.
D1 Analysis of Expenses
Employee benefits expense (1)
Sales commission expense
Administration expense
Marketing expense
Amortisation of software
Lease expenses
Other expenses
Depreciation
Auditors fees
Directors' fees
Acquisition proposal expenses
Bad debts written off
(Gain) on disposal of property, plant and equipment
Net change in indirect deferred acquisition costs
Claims related management expenses reclassified to claims expense (2)
Total management and sales expenses
2019
$000
64,653
20,252
17,509
8,770
6,579
4,245
2,436
1,591
600
584
–
52
(20)
(968)
(24,947)
101,336
2018
$000
59,610
19,488
13,276
7,411
5,195
3,393
3,341
1,499
603
515
302
232
(50)
(1,634)
(23,151)
90,030
(1) Personnel costs are net of capitalised labour costs of $19.2m (2018: $10.8m) in relation to internally generated software assets.
(2) Claims handling expenses do not include costs in relation to Kaikoura earthquake or Canterbury earthquake related claims, as these are charged to
provisions created in previous years.
D2 Impairment of Reinsurance Receivable
On 28 February 2018, Tower Limited announced it had entered into a settlement agreement with Peak Re regarding an adverse development cover
policy entered into in 2015. Under the settlement agreement Tower received $22.0m of the $43.75m claimed under the reinsurance contract and all
sums claimed in the arbitration proceeding. This has resulted in a write off of the residual amount of $21.75m. This amount along with associated
professional fees of $0.76m have been recorded in the Consolidated Income Statement as Impairment of reinsurance receivables.
No impairment expense has been recognised in 2019.
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
Accounting Policy
2019
$000
22,595
44,977
(43,836)
23,736
2018
$000
20,961
39,555
(37,921)
22,595
23,736
22,595
–
–
23,736
22,595
Acquisition costs incurred in obtaining general insurance contracts are deferred and recognised as assets where they can be reliably measured and
where it is probable that they will give rise to premium revenue that will be recognised in subsequent reporting periods.
Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the general insurance
contracts to which they relate. This pattern of amortisation corresponds to the earning pattern of the corresponding premium revenue.
D4 Operating Leases
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
Accounting policy
2019
$000
2018
$000
3,025
6,777
–
9,802
3,286
7,701
–
10,987
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
one to three years.
56
Tower Limited annual report 2019
57
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 D5 Tax
Accounting Policy
Current tax
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).
Deferred tax
Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences
between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.
Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities
settled, based on the tax rates enacted or substantively enacted for each jurisdiction. Deferred tax assets are recognised to the extent that it is probable
that taxable profits will be available against which deductible temporary differences or unused tax losses can be utilised. Such assets and liabilities are
not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of the other assets
and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.
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.
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.
Tax consolidation
Tower Limited and its subsidiaries are part of a single consolidated group for New Zealand tax purposes, with the exception of Tower Insurance Limited.
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.
Imputation credit account
D5 Tax (continued)
D5.1 Tax expense
Current tax
Deferred tax
Under (over) provided in prior years
Total tax expense (benefit)
The tax expense (benefit) can be reconciled to the accounting profit or loss as follows:
Profit / (loss) before tax from continuing operations
Income tax at the current rate of 28%
Tax effect of:
Prior period adjustments
Non-deductible expenditure/non-assessable income
Foreign tax credits written off
Other
Total tax expense (benefit)
D5.2 Current tax assets
Current
Non-current
Total current tax assets
2019
$000
2,757
6,407
26
9,190
25,995
7,279
26
(522)
2,149
258
9,190
2019
$000
1,551
12,038
13,589
2018
$000
2,714
(3,463)
(546)
(1,295)
(8,021)
(2,246)
(546)
120
1,372
5
(1,295)
2018
$000
1,575
12,256
13,831
A non-current tax asset of $12,038,000 is recognised in the financial statements of the Group as at 30 September 2019 in relation to excess tax payments
made in previous years (2018: $12,256,000). Non-current tax assets are expected to be recovered from 2022, as determined by the Board approved
operational plan for financial years 2020 to 2023. A current tax asset of $1,551,000 is recognised in relation to excess tax payments made in the Pacific
Islands over and above the estimated tax liabilities for the year (2018: $1,575,000).
D5.3 Current tax liabilities
Current tax liabilities of $229,000 relate to taxes payable to off-shore tax authorities in the Pacific Islands (2018: $174,000).
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.
D5.4 Imputation credits
The Group imputation credit account reflects the imputation credits held by the Company as the representative member of the Group.
Imputation credits available for use in subsequent reporting periods
2019
$000
271
2018
$000
489
58
Tower Limited annual report 2019
59
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 OPENING
BALANCE AT
1 OCTOBER
$000
(CHARGED)
CREDITED
TO INCOME
STATEMENT
$000
(CHARGED)
CREDITED TO
COMPREHENSIVE
INCOME
$000
CLOSING
BALANCE AT
30 SEPTEMBER
$000
Part E – Other Balance Sheet Items
This section includes information about assets and liabilities not included elsewhere, including receivables, non-current assets, payables
and provisions.
D5 Receivables (continued)
D5.5 Deferred tax assets and liabilities
For the Year Ended 30 September 2019
Movement in deferred tax assets
Provisions and accruals
Property, plant and equipment
Tax losses
Other
Total deferred tax assets
Set-off of deferred tax liabilities pursuant to NZ IAS 12
Net deferred tax assets
Movement in deferred tax liabilities
Deferred acquisition costs
Other
Total deferred tax liabilities
Set-off of deferred tax liabilities pursuant to NZ IAS 12
Net deferred tax liabilities
For the Year Ended 30 September 2018
Movement in deferred tax assets
Provisions and accruals
Property, plant and equipment
Tax losses
Other
Total deferred tax assets
Set-off of deferred tax liabilities pursuant to NZ IAS 12
Net deferred tax assets
Movement in deferred tax liabilities
Deferred acquisition costs
Other
Total deferred tax liabilities
Set-off of deferred tax liabilities pursuant to NZ IAS 12
Net deferred tax liabilities
2,841
7,826
30,685
763
42,115
1,308
(142)
(6,158)
(763)
(5,755)
(5,739)
(589)
(6,328)
(306)
(377)
(683)
2,265
7,781
26,958
778
37,782
(5,078)
(299)
(5,377)
576
45
3,727
(15)
4,333
(661)
(209)
(870)
–
–
–
–
–
–
(32)
(32)
–
–
–
–
–
–
(81)
(81)
4,149
7,684
24,527
–
36,360
(6,052)
30,308
(6,045)
(998)
(7,043)
6,052
(991)
2,841
7,826
30,685
763
42,115
(5,739)
36,376
(5,739)
(589)
(6,328)
5,739
(589)
Recognition of deferred tax assets is a key area of judgement. Management expects to utilise the tax losses against future taxable profits over the next
three years. Management had expected to utilise the tax losses against future profits over the following four years as at 30 September 2018.
Deferred tax liabilities have been recognised in respect of temporary differences associated with investments in subsidiaries (2018: nil).
E1 Receivables
Premium receivables
Reinsurance and other recoveries
Unearned reinsurance premiums
Trade receivables
EQC receivables
Prepayments
Other
Total receivables
NOTE
B3
2019
$000
153,883
19,316
8,794
181,993
70,263
2,572
1,467
2018
$000
141,578
35,741
8,475
185,794
69,272
2,657
1,884
256,295
259,607
Premium receivables represent net amounts owed to Tower (including GST) by policyholders. The majority of the amounts outstanding are not due.
Accounting policy
All receivables (except for Prepayments and Other) reflect rights arising under insurance and reinsurance contracts as defined in NZ IFRS 4 Insurance
Contracts. These are recognised initially at transaction price and subsequently at amortised cost, less provision for impairment. A provision for
impairment is established when there is objective evidence that Tower will not be able to collect all amounts due according to the original terms of
the receivable.
The table below shows the reconciliation of the allowance for credit losses and impairment of premium receivables at the reporting date.
Opening balance
Provisions added during the year
Provisions released during the year
Foreign exchange movements
Closing balance
2019
$000
(646)
(586)
136
(4)
(1,100)
2018
$000
(805)
(208)
362
5
(646)
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.
Analysed as
Current
Non current
Total receivables
Collectability of trade receivables
2019
$000
2018
$000
183,667
72,628
256,295
185,133
74,474
259,607
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.
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.
60
Tower Limited annual report 2019
61
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019
E1 Receivables (continued)
Earthquake Commission Receivables
Earthquake Commission receivables included $69.9m relating to the Canterbury earthquake provision as disclosed in Note B3 (2018: $68.4m) and
$0.4m relating to the Kaikoura region earthquake (2018: $0.9m).
E2 Intangible Assets
Year Ended 30 September 2019
Cost:
Opening balance
Additions
Disposals
Transfers
Transfers to Property, plant and equipment
Closing balance
Accumulated amortisation:
Opening balance
Amortisation charge
Amortisation on disposals
Closing balance
Net book value
At cost
Accumulated amortisation
Closing net book value
Year Ended 30 September 2018
Cost:
Opening balance
Additions
Disposals
Transfers
Transfers to Property, plant and equipment
Closing balance
Accumulated amortisation:
Opening balance
Amortisation charge
Closing balance
Net book value
At cost
Accumulated amortisation
Closing net book value
GOODWILL
$000
ACQUIRED
$000
SOFTWARE
INTERNALLY
DEVELOPED
$000
UNDER
DEVELOPMENT
AND WORK IN
PROGRESS
$000
17,744
–
–
–
–
5,382
–
(223)
30,289
–
37,645
–
(10,021)
20,822
–
17,744
35,448
48,446
–
–
–
–
17,744
–
17,744
(4,698)
(1,391)
223
(5,866)
35,448
(5,866)
29,582
(33,533)
(5,136)
10,021
(28,648)
48,446
(28,648)
19,798
17,744
5,097
37,045
–
–
–
–
–
–
285
–
–
–
600
–
22,502
36,343
–
(51,111)
(647)
7,087
–
–
–
–
7,087
–
7,087
4,484
19,026
(74)
(885)
(49)
TOTAL
$000
83,273
36,343
(10,244)
–
(647)
108,725
(38,231)
(6,527)
10,244
(34,514)
108,725
(34,514)
74,211
64,370
19,026
(74)
–
(49)
17,744
5,382
37,645
22,502
83,273
–
–
–
17,744
–
17,744
(4,501)
(197)
(4,698)
5,382
(4,698)
684
(28,535)
(4,998)
(33,533)
37,645
(33,533)
4,112
–
–
–
22,502
–
22,502
(33,036)
(5,195)
(38,231)
83,273
(38,231)
45,042
E2 Intangible Assets (continued)
Software
Accounting policy
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
Software additions includes spend incurred as part of Tower’s IT transformation programme, which has implemented a new core insurance platform,
enhanced digital integration for customers and improved operational systems in areas such as reinsurance and customer communications. Software
additions also includes spend outside of the IT transformation programme, including to extend the life of other IT systems that are not being replaced,
develop Tower’s data insight tools and upgrade Tower’s IT infrastructure.
Impairment testing for software under development
Tower has been carrying out an IT transformation programme during the year ended 30 September 2019 (the Simplification Programme), which has
included the development of a new core IT platform, digital enhancements, communications technology and work to extend the useful life of other IT
assets. Many of the developments are now in use, and therefore the capitalised assets relating to the completed phases of work have been transferred
out of Software Under Development. However at year end, Software Under Development includes some remaining components of the Simplification
Programme which are still being developed, as well as work in progress on other less material software projects. Software Under Development is
subject to impairment testing. However, as Management cannot practicably differentiate the benefits for components still under development from the
benefits for all components of the Simplification Programme, Management has performed an impairment test over all the assets developed or being
developed by the Simplification Programme.
In assessing the recoverable amount for these assets, Management has used a value in use basis, with cash flow valuation over a period of 10 years (4
years cash flow projection and 6 years terminal growth) (2018: 5 years), which reflects Management’s assessment of the expected useful life for the core
system assets derived from the Simplification Programme. The cash flows are derived from the four year projections developed for Tower’s most recent
operating plans (for the year ended 30 September 2020), which separately identify the additional revenue and expense savings expected to be
generated by the Simplification Programme. These assumptions are determined from a variety of sources, including Management’s past experience,
the comparison of key metrics to industry baselines, the sensitivity of revenues to changes in drivers, and analysis of current expenditure that can be
reduced. Management has used a terminal growth rate of 2% for cash flow projections beyond the four year period covered by Tower’s operating plans.
The valuation used a discount rate of 11% (2018: 12%). No impairment loss has been recognised in the year ended 30 September 2019 (2018: Nil).
Goodwill
Accounting policy
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.
Impairment testing for goodwill
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
2019
$000
17,744
2018
$000
17,744
62
Tower Limited annual report 2019
63
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 E2 Intangible Assets (continued)
Goodwill is subject to impairment testing at the cash-generating unit level and no impairment loss has been recognised in 2019 as a result of the
impairment review (2018: Nil). 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 12.5% was used in the calculation (2018: 13%). Other assumptions used are consistent with the
actuarial assumptions in Note B5 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% (2018:
2%). 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.
E3 Property, Plant and Equipment (continued)
Accounting policy
Measurement of 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.
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.
E3 Property, Plant and Equipment
For the Year Ended 30 September 2019
Cost
Opening balance
Additions
Revaluations
Disposals
Foreign exchange movements
Closing balance
Accumulated depreciation
Opening balance
Depreciation
Disposals
Foreign exchange movements
Closing balance
Closing balance
Cost / revaluation
Accumulated depreciation
Net book value
For the Year Ended 30 September 2018
Cost
Opening balance
Additions
Revaluations
Disposals
Foreign exchange movements
Closing balance
Accumulated depreciation
Opening balance
Depreciation
Disposals
Foreign exchange movements
Closing balance
Closing balance
Cost / revaluation
Accumulated depreciation
Net book value
LAND AND
BUILDINGS
$000
OFFICE
EQUIPMENT AND
FURNITURE
$000
MOTOR
VEHICLES
$000
COMPUTER
EQUIPMENT
$000
3,404
8,876
1,268
15,010
TOTAL
$000
28,558
1,858
305
(2,444)
(141)
28,136
97
–
(91)
(117)
1,157
862
–
(2,110)
(122)
13,640
(1,029)
(14,581)
(20,048)
(112)
87
102
(952)
1,157
(952)
205
1,371
65
–
(165)
(3)
1,268
(1,083)
(38)
176
(84)
(461)
2,109
108
(1,591)
2,436
171
(12,825)
(19,032)
13,640
(12,825)
815
28,136
(19,032)
9,104
14,804
198
–
(9)
17
27,493
776
434
(188)
43
15,010
28,558
(14,100)
(503)
2
20
(18,713)
(1,499)
193
(29)
337
305
–
36
4,082
–
–
–
–
–
4,082
–
4,082
562
–
(243)
62
9,257
(4,438)
(1,018)
240
(39)
(5,255)
9,257
(5,255)
4,002
2,948
8,370
–
434
–
22
513
–
(14)
7
3,404
8,876
–
–
–
–
–
(3,530)
(958)
15
35
3,404
–
3,404
8,876
(4,438)
4,438
1,268
(1,029)
239
15,010
(14,581)
429
28,558
(20,048)
8,510
Computer equipment
Furniture & fittings
Motor Vehicles
Buildings
3-5 years
5-9 years
5 years
50-100 years
Leasehold property improvements
3-12 years
Measurement of 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.
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 11 September 2019 by Rolle Associates, registered valuers in Fiji. There has been no material movement in the valuation
between 11 September 2019 and 30 September 2019. 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 between 6.0% and 9.6% (2018: between 7.5% and 9.5%).
Had land and buildings been recognised under the cost model the carrying amount would have been $1,557,733 (2018: $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.
E4 Capital Commitments
As at 30 September 2019, the Group has capital commitments of $0.2m relating to the implementation and delivery of a new ERP system (2018: nil),
$0.9m relating to new IT equipment and hardware (2018: nil), $0.5m relating to the implementation and delivery of a new insurance policy management
system (2018: $13.9m) and $0.1m relating to a new automated reinsurance system (2018: nil).
E5 Payables
Trade payables
Reinsurance payables
Payable to other insurers
Investment settlement balances
GST payable
Other payables
Total payables
Analysed as:
Current
Non current
Total payables
2019
$000
12,624
22,394
725
–
18,395
21,769
75,907
59,007
16,900
75,907
2018
$000
16,028
23,388
268
5,099
16,272
19,320
80,375
63,975
16,400
80,375
(4,438)
(1,029)
(14,581)
(20,048)
The non-current portion of payables relates to payments due to reinsurers in relation to the disputed EQC receivables, refer to Note B3 for further details.
64
Tower Limited annual report 2019
65
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 E5 Payables (continued)
Accounting policy
Payables 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.
E6 Provisions
Employee benefits
Total provisions
Analysed as:
Current
Non current
Total provisions
Accounting policy
2019
$000
6,802
6,802
6,406
396
6,802
2018
$000
5,789
5,789
5,402
387
5,789
Provisions are 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.
Part F – Capital and Risk Management
This section provides information about Tower’s capital structure and its approaches to managing risk.
F1 Contributed Equity
Opening balance
Issue of share capital
Costs of capital raise
Total contributed equity
Represented by:
Ordinary shares (issued and fully paid)
Opening balance
Issued shares
Total shares on issue
2019
$000
447,543
–
–
447,543
2018
$000
382,172
70,838
(5,467)
447,543
2019
NUMBER
OF SHARES
2018
NUMBER
OF SHARES
337,324,300
168,662,150
–
168,662,150
337,324,300
337,324,300
F2 Reserves
Foreign currency translation reserve (FCTR)
Opening balance
Currency translation differences arising during the year
Closing balance
Separation Reserve
Opening balance
Closing balance
Asset revaluation reserve
Opening balance
Gain on revaluation
Deferred tax on revaluation
Closing balance
Total reserves
Accounting policy
FCTR
2019
$000
(4,397)
700
(3,697)
2018
$000
(4,343)
(54)
(4,397)
(113,000)
(113,000)
(113,000)
(113,000)
1,242
305
(32)
1,515
(115,182)
889
434
(81)
1,242
(116,155)
Exchange differences arising on translation of foreign controlled entities and net investment of a foreign entity are taken to the foreign currency
translation reserve. The reserve is recognised in profit or loss when the net investment is disposed.
Separation reserve
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.
Asset revaluation reserve
The asset revaluation reserve is used to recognise unrealised gains on the value of land and buildings above initial cost.
F3 Capital Risk Management & Solvency
Solvency requirements
For the year ending 30 September 2019, and through the comparative period, the Reserve Bank of New Zealand had imposed a license condition that
Tower Insurance Limited was required to maintain a minimum solvency margin of at least $50.0m.
TOWER INSURANCE LIMITED
TOWER INSURANCE LIMITED GROUP
UNAUDITED
2019
$000
UNAUDITED
2018
$000
155,894
136,476
56,598
99,296
275%
58,298
78,178
234%
AUDITED
2019
$000
182,197
73,276
108,921
249%
AUDITED
2018
$000
156,765
74,344
82,421
211%
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.
There were no Tower Limited dividend payments during the year ended 30 September 2019 (2018: nil).
Actual solvency capital
Minimum solvency capital
Solvency margin
Solvency ratio
Effective from 31 October 2019, the license condition was amended so that Tower Insurance Limited is required to maintain a minimum solvency margin
of at least $50.0m in respect of all assets and liabilities except for Specified Excluded Assets. Specified Excluded Assets are the assets net of
reinsurance in respect of the disputed EQC recoveries, referred to in note B3. Also during October 2019, Tower Insurance Limited issued $45m of
ordinary share capital. If the change to the license condition and the share issue had both applied at 30 September 2019, the net impact would have
been a reduction in Tower Insurance Limited’s solvency margin by $7.6m.
66
Tower Limited annual report 2019
67
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 F3 Capital Risk Management & Solvency (continued)
Capital risk management
The Group’s objective when managing capital is to ensure that the level of capital is sufficient to meet the Group’s statutory solvency obligations
including on a look forward basis to enable it to continue as a going concern in order to meet the needs of its policyholders, to provide returns for
shareholders, and to provide benefits for other stakeholders of the Group. The Group’s capital resources include shareholders’ equity.
F5 Earnings per Share
Profit / (loss) attributable to shareholders
Tower shareholder equity
Standby credit facility (undrawn)
Total capital and liquidity resources
NOTE
C4
2019
$000
290,857
15,000
305,857
2018
$000
273,311
50,000
323,311
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. During the year ended 30 September 2019 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.
F4 Net Assets per Share
Net assets per share
Net tangible assets per share
Accounting Policy
2019
$
0.87
0.56
2018
$
0.81
0.57
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.
2019
$000
16,565
2018
$000
(6,773)
2019
NUMBER
OF SHARES
2018
NUMBER
OF SHARES
Weighted average number of ordinary shares for basic and diluted earnings per share*
350,442,688
321,195,736
Basic and diluted (loss) earnings per share*
2019
CENTS
4.73
2018
CENTS
(2.11)
* Additional 84,322,958 shares from the fully underwritten pro rata 1 for 4 rights offer, with a shortfall bookbuild (the Rights Offer) was settled in October
2019 (refer to Note G4). The issue price of NZ$0.56 per share under the Rights Offer represented a 19% discount to the share price of NZ$0.69 per share
as at 15 October 2019, which is date immediately prior to the exercise of rights become available. As a result, 13,118,388 shares issued as part of the
Rights Offer were treated as bonus issue which has been adjusted in the weighted average number of ordinary shares on issues in both 2019 and 2018
in accordance with NZ IAS 33. The 2018 basic earnings per shares has been restated to (2.11) cents (2018: (2.20) cents).
There was no dilutive impact on basic earnings per share for 2019 (2018: nil).
Accounting Policy
Basic earnings per share is calculated by dividing the net profit/(loss) 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/(loss) 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.
Reconciliation to net tangible assets is provided below:
F6 Risk Management
Net assets
Less: deferred tax
Less: intangible assets
Net tangible assets
2019
$000
292,658
(29,317)
(74,211)
189,130
2018
$000
274,779
(35,787)
(45,042)
193,950
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.
Tower Limited’s objective is to satisfactorily manage these risks in line with the Board approved Group Risk and Compliance policy. Various procedures
are put in place to control and mitigate the risks faced by the Group. Business managers are responsible for understanding and managing their risks
including operational and compliance risk. The consolidated entity’s exposure to all high and critical risks is reported monthly to the Board and quarterly
to the Audit and Risk Committee.
The Board has delegated to the Audit and Risk Committee the responsibility to review the effectiveness and efficiency of management processes,
internal audit services, risk management and internal financial controls and systems as part of their duties. The Risk and Compliance team is in place in
an oversight and advisory capacity and to manage the risk and compliance framework.
Financial risks are generally monitored and controlled by selecting appropriate assets to back policy liabilities. The assets are regularly monitored to
ensure that there are no material asset and liability mismatching issues and other risks such as liquidity risk and credit risk are maintained within
acceptable limits.
The Board has responsibility for:
— reviewing investment policies for Tower Limited funds;
— reviewing the Treasury Policy which includes our strategy for investment management and the use of derivatives;
— 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.
These requirements and associated processes are articulated in the Board approved Treasury Policy applicable to Tower Limited which is itself
reviewed every two years, with the next review due in May 2020.
68
Tower Limited annual report 2019
69
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 F6 Risk Management (continued)
F6.1 Insurance risk
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. Notes on the policies and procedures employed in managing
these risks are set out below.
(a) Objectives in managing risks arising from insurance contracts and policies for mitigating those risks
The risk management activities include prudent underwriting, pricing, and management of risk, together with claims management, reserving and
investment management. The objective of these disciplines is to enhance the financial performance of the insurance operations and to ensure sound
business practices are in place for underwriting risks and claims management.
The key controls 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
SOURCE OF CONCENTRATION
RISK MANAGEMENT MEASURES
An accumulation of risks
arising from a natural peril
A large property loss
F6.2 Market risk
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
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.
(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.
The Group’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. The Group generally elects to not hedge the capital invested in overseas entities, thereby accepting the foreign
currency translation risk on invested capital.
The Group also has foreign exchange risk on payments to suppliers that are denominated in other currencies. Tower may hedge future payments,
where appropriate, and provided that the timing and amount of those transactions can be estimated with a reasonable degree of certainty.
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 of 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 strategic asset allocation and approved investment management guidelines
that have 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
F6 Risk Management (continued)
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 table F6.3(iii).
(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
Other non-investment related receivables
Total financial assets with credit exposure
(ii) Maximum exposure to credit risk
CARRYING VALUE
2019
$000
9,513
109,834
198,831
47,266
183,123
548,567
The Group’s maximum exposure to credit risk without taking account of any collateral or any other credit enhancements, is as follows:
(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:
Cash and cash equivalents
Receivables
Investments
Derivative financial assets
Total credit risk
Credit exposure by credit rating
AAA
AA
A
BBB
Below BBB
2018
$000
919
107,752
227,180
32,186
187,382
555,419
2018
$000
102,001
255,780
197,367
271
CARRYING VALUE
2019
$000
67,018
253,022
228,527
–
548,567
555,419
CARRYING VALUE
2019
$000
2018
$000
111,950
137,433
25,063
–
15,102
289,548
85,321
180,394
16,484
–
13,020
295,219
172,492
177,302
–
5,997
178,489
69,900
537,937
–
4,418
181,720
68,400
545,339
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.
Total counterparties with external credit ratings
F6.3 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 of 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, reinsurance receivables from
reinsurers, as well as credit exposure to customers or other counterparties. Credit exposure in respect of the Group’s New Zealand 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-’. Overall exposure to credit risk is monitored on a Group basis in accordance with
limits set by the Board.
Group 1
Group 2
Group 3
Total counterparties with no external credit rating
EQC Recovery Receivable
Total financial assets neither past due nor impaired with credit exposure
Group 1 – Receivables outstanding for less than 6 months
Group 2 – Receivables outstanding for more than 6 months with no defaults in the past
Group 3 – Unrated investments
70
Tower Limited annual report 2019
71
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 F6 Risk Management (continued)
(iv) Financial assets that would otherwise be past due whose terms have been renegotiated
No financial assets have been renegotiated in the past year (2018: 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:
As at 30 September 2019
Reinsurance recoveries receivable
Outstanding premiums
Total
As at 30 September 2018
Reinsurance recoveries receivable
Outstanding premiums
Total
(vi) Financial assets that are individually impaired
Outstanding premiums
Total
F6.4 Financing and liquidity risk
LESS THAN
30 DAYS
$000
–
5,552
5,552
–
5,526
5,526
31 TO 60 DAYS
$000
61 TO 90 DAYS
$000
OVER 90 DAYS
$000
TOTAL
$000
–
3,371
3,371
27
1,422
1,449
78
991
1,069
–
2,641
2,641
–
638
638
–
464
464
CARRYING VALUE
2019
$000
–
–
78
10,552
10,630
27
10,053
10,080
2018
$000
–
–
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.
As at 30 September 2019
Financial liabilities
Trade payables
Reinsurance payables
Other payables
Borrowings
Total
As at 30 September 2018
Financial liabilities
Trade payables
Reinsurance payables
Other payables
Total
CARRYING VALUE
$000
TOTAL
CONTRACTUAL
CASH FLOWS
$000
LESS THAN
ONE YEAR
$000
GREATER THAN
ONE YEAR
$000
13,350
22,394
6,403
14,931
57,078
16,296
23,388
10,906
50,590
13,350
22,394
6,358
14,976
57,078
16,296
23,388
10,906
50,590
13,350
5,494
6,358
14,976
40,178
16,296
6,988
10,906
34,190
–
16,900
–
–
16,900
–
16,400
–
16,400
F6 Risk Management (continued)
F6.5 Derivative financial instruments
The Group utilises derivative financial instruments to reduce investment risk. Specifically, derivatives are used to achieve cost effective short-term
re-weightings of asset class, sector and security exposures and to hedge portfolios, as an economic hedge, when a market is subject to significant
short-term risk.
Derivative financial instruments used by the Group include interest rate swaps, foreign exchange forward contracts and foreign exchange options.
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, fair values and remaining terms of derivatives outstanding as at the reporting date:
Less than 1 year
1 to 2 years
2 to 5 years
Over 5 years
F6.6 Sensitivity analysis
AVERAGE CONTRACTED
FIXED INTEREST
NOTIONAL
PRINCIPAL AMOUNT
2019
%
0%
0%
0%
0%
2018
%
0%
0%
2%
0%
2019
$000
–
–
–
–
–
2018
$000
23,555
–
–
–
23,555
FAIR VALUE
2019
$000
–
–
–
–
–
2018
$000
271
–
–
–
271
The analysis below demonstrates the impact of changes in interest rates, exchange rates and equity prices on profit/(loss) after tax and equity. 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/(loss) after tax and equity is
included in the table below. The sensitivity analysis assumes changes in interest rates only. All other variables are held constant.
Change in variables
+ 50 basis points
- 50 basis points
2019
IMPACT ON:
PROFIT
AFTER TAX
$000
(688)
761
EQUITY
$000
(688)
761
2018
IMPACT ON:
PROFIT
AFTER TAX
$000
(696)
768
EQUITY
$000
(696)
768
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.
(ii) Foreign currency
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.
Change in variables
10% appreciation of New Zealand dollar
10% depreciation of New Zealand dollar
2019
IMPACT ON:
PROFIT
AFTER TAX
$000
438
(535)
EQUITY
$000
(3,332)
3,666
2018
IMPACT ON:
PROFIT
AFTER TAX
$000
129
(158)
EQUITY
$000
(2,641)
2,905
The dollar impact of the change in currency movements is determined by applying the sensitivity to the value of the foreign currency 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.
72
Tower Limited annual report 2019
73
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 F6 Risk Management (continued)
(iii) 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.
Change in variables
+ 10% property funds and other unit trusts
- 10% property funds and other unit trusts
2019
IMPACT ON:
2018
IMPACT ON:
PROFIT
AFTER TAX
$000
EQUITY
$000
PROFIT
AFTER TAX
$000
2
(2)
2
(2)
2
(2)
EQUITY
$000
2
(2)
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.
Part G – Other Disclosures
This section includes additional disclosures which are required by financial reporting standards.
G1 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 (1)
Total fees paid to auditors
2019
$000
528
46
12
586
14
600
2018
$000
531
47
11
589
14
603
(1)
Audit of financial statements includes fees for both the audit of annual financial statements and the review of interim financial statements. The audit
of Tower Insurance (Vanuatu) Limited was performed by Law Partners (2018: Law Partners).
(2) Other assurance related services includes annual solvency return assurance and Pacific Island regulatory return audits.
(3) Agreed procedures on Pacific Island regulatory return and Annual Shareholders’ Meeting procedures.
G2 Transactions With Related Parties
The remuneration of key management personnel during the year was as follows:
Salaries and other short term employee benefits paid
Independent director fees
Accounting policy
2019
$000
5,720
584
6,304
2018
$000
4,117
515
4,573
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity,
directly or indirectly, including any director (whether executive or otherwise) of that entity.
Tower considers key management personnel to consist of the Board of Directors, Chief Executive Officer and executive leadership team. Information
regarding individual director and executive compensation is provided in the Corporate Governance section of the annual report.
There have been no loans made to directors of the Company and other key management personnel of the Group, including their personally related
parties (2018: nil).
Key management hold various policies and accounts with Tower Group companies. These are operated in the normal course of business on normal
customer terms.
G3 Contingent Assets And Liabilities
The Group may, from time to time, pursue claims through legal processes against other parties during the course of business that give rise to the
possibility of an inflow of economic benefits where the outcome is uncertain. These items are judged to be contingent assets. All contingent assets are
continually assessed to ensure that when the realisation of income is virtually certain, an appropriate related asset is recognised.
The Group is also 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.
No contingent assets or liabilities are judged to be sufficiently material to require individual disclosure.
G4 Subsequent Events
Purchase of Youi NZ Pty Ltd’s Portfolio
Tower Insurance Limited has entered into an agreement for the purchase of Youi NZ Pty Ltd’s insurance portfolio, subject to regulatory approval. Under
this agreement, Tower Insurance Limited will acquire Youi NZ’s approximately 34,000 inforce policies for a total purchase price of NZ$13m, plus
transaction and migration costs, with Tower policy renewals to be offered as current Youi NZ policies expire. This is subject to regulatory approvals and
the acquisition is expected to settle prior to the end of the 2019 calendar year.
Tower Insurance Limited is purchasing the customer relationships (and associated assets and liabilities) and not the systems or processes that Youi NZ
uses to run its business. Therefore, the transaction is being treated as the purchase of an intangible asset rather than a business combination. After
initial recognition, the cost model will be adopted to measure the asset.
Change in Licence Condition
The Reserve Bank of New Zealand has modified Tower Insurance’s licence conditions to remove the disputed EQC receivable from Tower Insurance’s
solvency calculation to reflect the increased likelihood of litigation and associated delay in receiving the funds. This took effect from 31 October 2019.
While the EQC receivable is excluded from the solvency calculations, it remains on the balance sheet at a net $53.1m (2018: $52.0m).
Capital Raise
To facilitate the purchase of the Youi NZ portfolio and the change to licence condition noted above, Tower Limited raised $47.3m capital via a pro-rata
renounceable entitlement offer after balance date. Capital was raised at a ratio of 1 new share for every 4 existing shares held at an issue price of
NZ$0.56 (or AUD$0.54 for eligible Australian shareholders). These funds were received on the 23 October 2019.
Corporate Structure
Tower Limited is giving active consideration to simplifying its corporate structure to make Tower Insurance Limited the listed parent. If this is not feasible
Tower Limited has agreed with RBNZ that Tower Insurance Limited will have a majority of directors independent of the listed parent company by 30
September 2020.
74
Tower Limited annual report 2019
75
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 G5 Change In Comparatives
Comparative information has been reclassified to achieve consistency with the current year presentation. Changes relate to the presentation of certain
notes only. There is no change to net assets or the 2018 profit.
Note Disclosure – Financial Instruments
Within note C5, there has been a reclassification of cash and cash equivalents from financial assets at amortised cost to financial assets at fair value
through profit or loss in line with the requirement of NZ IFRS 4 Insurance Contracts. Cash and cash equivalents measured at amortised cost have
reduced by $74.9m, and cash and cash equivalents measured at fair value through profit or loss has increased by $74.9m. This reclassification has no
impact on the cash and cash equivalent balance disclosed in the Consolidated Balance Sheet.
Note Disclosure – Financial Instruments
G6 Impact of Amendments to NZ IFRS (continued)
G6.1 New and amended standards adopted (continued)
NZ IFRS 15 Revenue from Contracts with Customers
NZ IFRS 15 Revenue from Contracts with Customers was adopted by the Group from 1 October 2018 and replaces NZ IAS 18 Revenue and related
interpretations. NZ IFRS 15 introduces a single model for the recognition of revenue based on when an entity satisfies the contractual performance
obligations by transferring a promised good and service to a customer. It does not apply to insurance contracts and financial instruments. Hence the
majority of Tower’s revenue is not impacted by this change.
The revenue stream that is within the scope of NZ IFRS 15 is disclosed as part of “Fee and other revenue” and relates to the provision of insurance
administration activities of $0.9m (2018: $0.8m). There has been no material change in the measurement of this revenue stream as the existing
recognition and measurement of revenue under the applicable contracts meets the requirements under the new standard. The remaining balance
within “Fee and other revenue” relates to reinsurance commission income, which is within the scope of NZ IFRS 4 Insurance Contracts.
Within note F6.3 (iii), total counterparties with external credit ratings of AA has been adjusted down by $2.7m and total counterparties with no external
credit rating (Group 3) has been adjusted up by $2.7m. This is to correct a misclassification in the 2018 amounts.
G6.2 New and amended standards issued but not yet effective
G6 Impact of Amendments to NZ IFRS
G6.1 New and amended standards adopted
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 2019 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.
The following new Accounting Standards, the adoption of which had no material financial impact on the Group, are applicable for the current reporting period.
NZ IFRS 16 Leases
NZ IFRS 9 Financial Instruments
For Tower, NZ IFRS 9 Financial Instruments became effective for the period beginning on 1 October 2018, replacing the existing accounting requirements for
financial instruments under IAS 39 Financial Instruments: Recognition and Measurement. NZ IFRS 9 introduces changes to the classification and measurement
of financial instruments, replaces the ‘incurred loss’ impairment model with a new ‘expected loss’ model when recognising expected credit losses on financial
assets, and imposes new general hedge accounting requirements. NZ IFRS 9 specifically excludes from its scope the rights and obligations arising from
insurance contracts, as defined under NZ IFRS 4 Insurance Contracts.
Tower has applied NZ IFRS 9 retrospectively, with no material change to the carrying amount of its financial instruments when measured under the
requirements of NZ IFRS 9.
Tower’s financial instruments that are classified at fair value through profit or loss on initial recognition, and which are subsequently re-measured to fair value at
each reporting date, are classified on this basis because they back general insurance liabilities and measuring them at fair value significantly reduces a
potential measurement inconsistency which would arise if the assets were measured at amortised cost or fair value through other comprehensive income.
Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured
at amortised cost. Tower assesses the expected credit losses on a forward looking basis, and have amended the impairment methodology for subsequent
measurement depending on whether there has been a significant increase in credit risk.
The measurement bases of Tower’s financial assets and liabilities under NZ IAS 39 and NZ IFRS 9, showing changes in classification of Tower’s financial
instruments, are as follows:
ASSET/LIABILITY
MEASUREMENT BASIS
UNDER NZ IAS 39
MEASUREMENT BASIS
UNDER NZ IFRS 9
CARRYING AMOUNT UNDER
NZ IAS 39 AND NZ IFRS9*
Cash and cash equivalents held by corporate entities
Amortised cost
Amortised cost
Cash and cash equivalents held by insurance companies**
Investments
Claim recoveries
Derivative financial assets
Fair value through
profit or loss
Fair value through
profit or loss
Fair value through
profit or loss
Fair value through
profit or loss
Amortised cost
Amortised cost
Fair value through
profit or loss
Fair value through
profit or loss
Trade and other payables
Amortised cost
Amortised cost
Borrowings
Amortised cost
Amortised cost
* The reclassifications of the financial instruments on adoption of NZ IFRS 9 did not result in any material changes to carrying amounts.
** Refer to note G5 for changes in comparatives.
10,906
56,112
229,172
5,097
0
34,393
14,931
NZ IFRS 16 Leases is effective for periods beginning on or after 1 January 2019. Tower will apply the standard for the year ending 30 September 2020
using the modified retrospective approach. Therefore, the cumulative effect of adopting NZ IFRS 16 will be recognised as an adjustment to the opening
balance of retained earnings on 1 October 2019, with no restatement of comparative information. The standard replaces the current guidance in NZ IAS
17 Leases. Under NZ IAS 17, a lessee was required to make a distinction between a finance lease, which is recognised on balance sheet, and an
operating lease, which is not recognised on the 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 most lease contracts. Following adoption of NZ IFRS 16, the treatment of leases for Tower’s office buildings,
motor vehicles, and other equipment will change. The expected impact of the changes on Tower’s financial statements is an increase to assets of
approximately $10.4m, an increase to liabilities of approximately $12.2m and a decrease to retained earnings of approximately $1.8m. There will also be
some impact on the pattern of expense recognition for leases, which is not expected to be material. This is based on lease commitments and discount
rates at 30 September 2019.
NZ IFRS 17 Insurance Contracts
NZ IFRS 17 Insurance Contracts is effective for periods beginning on or after 1 January 2022 (subject to approval of proposed one year delay). Tower will
apply the standard for the year ending 30 September 2023. The standard replaces the current guidance in NZ IFRS 4 Insurance Contracts, and
establishes the principles for recognition, measurement, presentation and disclosure of insurance contracts. Tower assessment of the impact of
adopting NZ IFRS 17 is ongoing, however it is expected that the majority of Tower’s insurance contracts will meet the requirements of the simplified
approach. However, there are expected to be significant changes in the presentation of the financial standards and disclosures. Due to the complexity
of the requirements within the standard the final impact may not be determined until global interpretations and regulatory responses to the new
standard are developed.
76
Tower Limited annual report 2019
77
Tower LimitedNotes to the Consolidated Financial StatementsFor the year ended 30 September 2019 Corporate Governance
at Tower Limited (Tower)
79
| Diversity
The below table provides a quantitative breakdown as to
the gender composition of Tower’s Directors and Officers
2018-2019
NUMBER
% BY
GROUP
2017-2018
NUMBER
% BY
GROUP
Board of Directors
Male
Female
Executive leadership team1
Male
Female
Senior leadership team2
Male
Female
Employees
Male
Female
Total company3
Male
Female
Total employees
83%
17%
56%
44%
68%
32%
42%
58%
44%
56%
80%
20%
75%
25%
58%
42%
41%
59%
42%
58%
5
1
5
4
19
9
263
359
287
372
659
4
1
6
2
21
15
241
366
268
366
634
1 ‘Executive Leadership Team’ includes the Chief Executive Officer,
and those employees who report directly to the Chief Executive Officer.
2 ‘Senior Leadership Team’ is the second level of employees below
the Chief Executive Officer, who report directly to the Executive
Leadership Team.
3 ‘Total Company’ figures do not include the Board of Directors.
Both the 2017-2018 and 2018-2019 figures include Tower’s Pacific
Island subsidiaries.
The Board is committed to achieving the highest standards of
GROUP
This section of the Annual Report provides
an overview of the corporate governance
principles, policies and processes adopted
and followed by Tower’s Board
corporate governance, ethical behaviour, and accountability
and has implemented corporate governance practices that
are consistent with best practice. Where developments arise
in corporate governance, the Board reviews Tower’s practices
and incorporates change where appropriate.
For the reporting period to 30 September 2019, the Board
considers that Tower’s corporate governance practices
have materially adhered to the NZX Corporate Governance
Code (NZX Code). Further information about the extent
to which Tower has complied with each of the NZX Code
recommendations is set out in Tower’s corporate governance
statement, available on Tower’s website at https://www.tower.
co.nz/investor-centre/corporate-governance/policies.
The following policies and company documentation are
also available on Tower’s website (https://www.tower.co.nz/
investor-centre/corporate-governance/policies):
• Tower Limited Constitution
• Board Charter
• Board Protocols
• Audit & Risk Committee Terms of Reference
• Remuneration & Appointments Committee
Terms of Reference
• Director and Executive Remuneration Policy
• Insider Trading and Market Manipulation Policy
• Corporate Disclosure Policy
• External Audit Independence Policy
• Health and Safety Policy
• Code of Ethics Policy
• Diversity Policy
80
Tower Limited annual report 2019
Evaluation from the Board on Tower’s
performance with respect to its diversity policy
The Board developed a new diversity policy in August 2019
which requires the Board to set measurable diversity and
inclusion objectives. The new diversity policy can be viewed
at https://www.tower.co.nz/investor-centre/corporate-
governance/policies.
The measurable diversity and inclusion objectives were
also set by the Board in August 2019 under the following
categories and progress will be reported in respect of FY20:
The Chief Executive Officer and Chief Financial Officer
attend all Board meetings. The Chief Executive Officer,
Chief Financial Officer and Chief Risk Officer attend all
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 are observed.
Director attendance at these meetings is set out below.
2018/2019 Tower Limited directors’ attendance
record
• Gender diversity
• Age and career progression
• Ethnicity and Pacific and Māori inclusion
• LGBTIQ+ identification and inclusion
• Accessibility
Meetings held (to 30 September 2019)
B
O
A
R
D
The Board considers Tower has performed well over the past
12 months, in respect of Tower’s diversity policy in place at the
time of last year’s annual report, acknowledging the number
of initiatives implemented support of diversity and inclusion,
including the achievement of the Rainbow Tick accreditation
(as detailed further at page 19 of this annual report and
Tower’s corporate governance statement).
Michael Stiassny
Steve Smith
Graham Stuart
Warren Lee
Wendy Thorpe
Marcus Nagel*
I
I
L
M
T
E
D
I
A
P
P
O
N
T
M
E
N
T
S
C
O
M
M
T
T
E
E
I
A
N
D
R
E
M
U
N
E
R
A
T
O
N
I
C
O
M
M
T
T
E
E
I
A
N
D
R
S
K
I
A
U
D
T
I
7
7
7
6
7
7
6
3
3
3
3
3
3
2
T
O
w
E
R
14
14
14
14
14
14
9
| Board Committees
The Board has the following committees:
Audit and Risk Committee
Members: Graham Stuart (Chair), Michael Stiassny,
Steve Smith, Warren Lee, Wendy Thorpe, Marcus Nagel.
Remuneration and Appointments Committee
Members: Michael Stiassny (Chair), Graham Stuart,
Steve Smith, Warren Lee, Wendy Thorpe, Marcus Nagel.
Other committees
Tower’s Board has the ability to establish additional
sub-committees from time to time.
Board and Committee meeting attendance
* Marcus Nagel was appointed on 14 January 2019.
| Statutory Disclosures
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
financial services sector. At the Annual Shareholders’ Meeting
in February 2004 shareholders approved an increase in
non-executive director annual remuneration to the current
maximum of NZ$900,000 per annum.
Tower seeks external advice when reviewing Board
remuneration. The Remuneration and Appointments
Committee is responsible for reviewing directors’ fees.
Non-executive directors are also paid additional annual
fees for sitting on certain Board Committees.
The following numbers of Board and Committee meetings
BOARD/COMMITTEE
were held during the year from 1 October 2018 to
30 September 2019:
• Board meetings – 14
• Audit and Risk Committee meetings – 7
• Remuneration and Appointments Committee – 3
Base fee – Board of directors
Audit and Risk Committee
CHAIR
MEMBER
$130,000
$78,570
$15,000
$9,000
Remuneration and Appointments Committee1
–
–
1 The Board determined that from 1 December 2012 no fees would be
payable for sitting on the Remuneration and Appointments Committee
Additional fees may be paid to non-executive directors for
one-off tasks and/or additional appointments where required.
81
2018/2019 directors’ remuneration and
benefits of Tower and its subsidiaries
Amounts in the table below reflect fees paid and accrued
for the year ended 30 September 2019.
Fees include base fees and additional fees in the financial
Mr Harding has been awarded an STI payment of $260,000
for the year ended 30 September 2019 (52% of achievement
criteria) and was awarded an STI of $280,000 for the year
ended 30 September 2018 (56% of achievement criteria).
•
Employee remuneration
The table below sets out the number of employees or former
Substantial product holders
(as at 30 September 2019)
employees of Tower, excluding directors and former directors,
The names and holdings of Tower’s substantial product
who received remuneration and other benefits valued at or
holders based on notices filed with Tower under the Financial
Mr Harding is not entitled to any Long Term Incentive payments.
exceeding $100,000 for the years ended 30 September 2019
Markets Conduct Act 2013 as at 30 September 2019 were:
year for one-off tasks and additional appointments.
The table below sets out the remuneration payments to
Mr Harding in the years ended 30 September 2019 and 2018.
FOR THE YEAR TO 30 SEPTEMBER
Base salary
Compensation for changes to contractual terms1
Short term incentive payments2
Total renumeration3
2018
$000
800
300
280
2019
$000
773
0
0
1,380
773
1 Compensation for changes to contractual terms relates to a one-off
retention payment to extend Mr Harding’s fixed term contract, from
December 2019 to December 2020.
2 STI for the year ended 30 September 2019 will be paid in the year
ended 30 September 2020. The STI payment made in the year ended
30 September 2019 related to the year ended 30 September 2018.
The STI payment in respect of the year ended 30 September 2017
was made in September 2017, and so there were no STI payments
in the year ended 30 September 2018.
3 In addition to the above, Mr Harding has an expense allowance for
travel and accommodation of $145,000 for 2019 (2018: $120,000).
Due to timing differences and prepayments, actual amount paid
in 2019 was $217,000 (2018: $131,000).
DIRECTORS’ REMUNERATION AND BENEFITS OF TOwER LIMITED
FOR THE YEAR TO 30 SEPTEMBER 2019
Michael Stiassny
Graham Stuart
Steve Smith
Warren Lee
Wendy Thorpe
Marcus Nagel
FEES (NZ$)
139,000
93,570
87,570
87,570
87,570
69,326
DIRECTORS’ REMUNERATION AND BENEFITS OF TOwER LIMITED SUBSIDIARIES
FOR THE YEAR TO 30 SEPTEMBER 2019
Alden Godinet1
Rodney Reid1
Isikeli Tikoduadua2
FEES
$7,250
$7,250
$18,000
1 Fees earned in capacity as director of National Pacific Insurance
Limited. NPI fees are paid in Western Samoan Tala.
2 Fees earned in capacity as director of Tower Insurance (Fiji) Limited.
Tower Insurance (Fiji) Limited fees are paid in Fijian Dollars.
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
variable remuneration, with clear links between individual and
company performance, and reward. The Remuneration and
Appointments Committee reviews the remuneration packages
of the Chief Executive Officer and other key executives at least
annually. This approach is intended to encourage Tower’s
executives to meet Tower’s short and long term objectives.
The Chief Executive Officer, Mr Harding, is remunerated
through a combination of fixed base pay, variable
performance incentives and contractual entitlements
to allowances for travel and accommodation.
The maximum Short Term Incentive (STI) payable
to Mr Harding is currently $500,000 per annum.
The achievement of STI is based on Tower reaching
target or stretch criteria on a combination of key financial
and non-financial operational performance measures.
The core financial targets are Gross Written Premium and
Net Profit After Tax. The Board varies the non-financial
targets year to year in line with operational plans to include
factors such as risk metrics, staff engagement and customer
satisfaction; and specific outcomes for major projects,
such as Tower’s IT transformation programme.
and 2018. Remuneration includes base salary, performance
payments and redundancy or other termination payments.
The table does not include company contributions of 3% of
gross earnings for those individuals who are members of a
KiwiSaver scheme. The remuneration bands are expressed in
New Zealand Dollars.
NAME
Bain Capital Credit LP
Salt Funds Management Limited
Accident Compensation
Corporation
New Zealand Funds Management
Limited on behalf of itself and its
wholly owned subsidiary New
Zealand Funds Superannuation
Limited
Westpac Banking Corporation
TOTAL ORDINARY SHARES1
67,464,858
45,223,493
32,621,151
17,690,793
9,173,589
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, which may differ from the stated
holdings below.
Principal shareholders (as at 28 November 2019)
The names and holdings of the 20 largest registered Tower
shareholders as at 28 November 2019 were:
NAME TOTAL ORDINARY SHARES
%
Dent Issuer Designated Activity Company
84,329,386 19.99
Accident Compensation Corporation
40,874,866
9.69
HSBC Nominees (New Zealand) Limited
37,492,302
8.89
Citibank Nominees (New Zealand) Limited
28,796,506
6.83
BNP Paribas Nominees (NZ) Limited
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