More annual reports from Tower Limited:
2023 Report TOWER LIMITED
ANNUAL REPORT 2021
OUR STRATEGIC PRIORITIES
UPDATE FROM THE CHAIR & CEO
2021 YEAR IN REVIEW
—GOOD GROWTH IN A CHALLENGING ENVIRONMENT
• Results achieved while navigating the challenges
• Impact of external factors
• Good growth in customers and premium
• Sharp focus on claims management
• Product, pricing, & underwriting enhanced through data
• Investing in digital platform for efficiency & scalability
• Management expenses improving while continuing to invest
• Strong capital & solvency, delivering shareholder returns
LOOKING FORWARD—LONG TERM GROWTH & IMPROVEMENT
• Supporting our people & communities
• Well positioned to deliver dividends & growth
BOARD OF DIRECTORS
CONSOLIDATED FINANCIAL STATEMENTS
• Financial Statements
• Notes to the consolidated financial statements
INDEPENDENT AUDITOR'S REPORT
APPOINTED ACTUARY'S REPORT
CORPORATE GOVERNANCE AT TOWER LIMITED
• Tower Directory
• Registrar
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04
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07
08
09
10
14
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80
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91
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OUR STRATEGIC PRIORITIES
OUR STRATEGIC PRIORITIES
03
1
OUR VISION — To deliver
beautifully simple & rewarding
experiences that our people
& customers rave about
5
2
4
3
OUR STRATEGIC
PRIORITIES
1. CUSTOMER FOCUS
A relentless focus on customer
relationships. We will deliver
beautifully simple and rewarding
experiences through new rewards,
products and offerings that make
sense and drive value.
2. DIGITAL & DATA
Our significant investment in cloud-based
information technology allows us to use
digital and data to deepen our relationships
with our customers. At the same time, we
will use our digital and data strengths to
attract new customers.
3. TALENT & AGILE
Tower will embrace agile and talent. We need
the best people to grow our business capability
and to keep up the pace of innovation. This
means making sure Tower remains a great
place to work and a place where talent wants to
be. Our move to agile is already underway and
we are seeing benefits in our delivery cadence.
4. CAPITAL STRENGTH
We will maintain a strong capital and solvency
structure. Tower is committed to being a
financially robust business that delivers value
to customers and shareholders. Our solvency
margin is strong and higher than required by
the Reserve Bank of New Zealand.
5. PARTNER EVERYWHERE
Wherever possible Tower will work with
partners. We will nurture and develop
partnerships with the best organisations.
They will help us to continue to innovate
and improve our delivery.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 04
UPDATE FROM CHAIR & CEO
UPDATE FROM CHAIR & CEO
05
UPDATE FROM
CHAIR & CEO
After a challenging year, our unique technology & distribution footprint
have positioned Tower well to grow and deliver shareholder value.
Tackling the challenges
The insurance industry has faced an
incredibly challenging year. It has been
characterised by a marked increase in
large events and large house claims,
as well as lower investment income
and pandemic induced inflationary
pressures swiftly leading to increased
business as usual claims costs.
Tower has not been immune.
These challenges which were
emerging at the half year, continued
to put pressure on profits during the
second half. Consequently, in the year
to 30 September 2021, underlying
profit including large events was
$20.8 million (m), compared to
$28.4m in the prior year. Reported
profit including large events was
$19.3m, up from $11.2m at the full
year 2020 (which included a $9.5m
impact from the settlement with the
Earthquake Commission). It has been a
tough year, and we acknowledge and
share our shareholders’ frustration.
We are well underway addressing
these issues and their impact on
profitability across the business.
Most significantly, we have already
implemented rating and underwriting
changes including the introduction of
a full house fire replacement cap and
risk‐based pricing for inland flooding.
These actions are a substantial
response, and their benefit will continue
to be realised throughout FY22.
Strong and well capitalised
Above all, Tower remains a resilient,
strong and well capitalised business.
Accordingly, we announced that based
on Tower’s ordinary dividend policy
of paying 60 to 80% of cash earnings
where it is prudent to do so, the Board
declared a final dividend of 2.5 cents
per share, to be paid on the 2nd of
February 2022, bringing total dividends
for FY21 to 5 cents per share.
In March this year, the Reserve Bank
lowered Tower’s solvency condition
from $50m to $25m in recognition of
Tower’s decreasing risk related to the
Canterbury earthquakes. As at 30th
September, Tower’s New Zealand
Parent solvency ratio was 271% and
the company was holding $56.6m
above its target solvency margin.
Considering current opportunities
and our capital position, the Board
has proposed the return of $30.4m
in excess capital to shareholders, by
way of a compulsory share buyback,
under a Court Scheme of Arrangement.
This is subject to shareholder approval,
High Court approval and Inland
Revenue approval.
Positioned for long-term growth
Tower is delivering on its innovation and
growth strategy. Our flagship Tower
Direct business and unique partnership
distribution capability continue to go
from strength to strength. The Pacific
business has proven remarkably
resilient through Covid and digitisation
will lead to further improvements in
efficiency and competitiveness. Our
leading technology partnerships are
enabling the business to be increasingly
nimble in responding to challenges and
capitalising on opportunities.
As we all recognise, it’s been a difficult
year on many fronts. However, despite
this, we are paying a dividend, we
remain strong and well capitalised, and
we have achieved sustained premium
growth, reaching a milestone this year,
with Tower writing more than $400m
in premiums.
These hard won victories are a credit
to Tower’s focused strategy and
the dedication of the people who
implement it. In short, even with the
obstacles of 2021, Tower continues to
be well positioned for long term growth.
MICHAEL
STIASSNY
Chairman
BLAIR
TURNBULL
CEO
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 06
2021 YEAR IN REVIEW
2021 YEAR IN REVIEW
07
2021 YEAR IN REVIEW
—GOOD GROWTH IN A
CHALLENGING ENVIRONMENT
Our leading online presence, combined
with our unique partnerships, is helping
to deliver consistent growth ahead of
the market in New Zealand.
Tower’s FY21 results were achieved
while navigating a challenging external
environment. Our investments in technology
mean we are well placed to respond rapidly
with rating and underwriting actions to
address these challenges.
We are pleased to resume
shareholder dividends after a
five-year hiatus. The total dividend
represents a dividend pay-out
ratio of 80% of cash earnings and
reflects our strong capital position.
Considering current
opportunities and the
company’s capital
position, the Board has
proposed the return of
$30.4m excess capital
to shareholders by
way of a compulsory
share buyback.
REPORTED PROFIT AFTER TAX ($M)
$19.3m
$16.8
$11.2
$19.3
FY19
FY20
FY21
UNDERLYING NPAT ($M)
$35.4
$7.0
$28.4
$28.4
$0.9
$27.4
$30.8
$10.0
$20.8
FY19
FY20
FY21
Underlying NPAT ($m)
Large events
Underlying NPAT does not have a standardised meaning under
Generally Accepted Accounting Practice (GAAP). Consequently
it may not be comparable to similar measures presented
by other reporting entities and is not subject to audit or
independent review. Underlying NPAT is derived from reported
profit after tax adjusted for any large or non-recurring items
that may obscure trends in Towers underlying performance. For
FY21 these are adjustments in relation to Canterbury impact,
Insurance Face decommissioning and SaaS impact.
Results achieved while
navigating the challenges
Tower’s journey to deliver a beautifully simple
and rewarding customer experience through
an innovative, quality product range, enabled
through digital, data and leading partnerships
is gaining momentum.
These gains have supported reported profit after tax up 72%,
from $11.2m in FY20. Underlying net profit after tax (including
large events) was at $20.8m, versus $28.4m in FY20 reflecting
the combined impact of an increase in large events and large
house claims, Covid-related claims costs inflation, and lower
investment income.
Tower’s combined operating ratio increased 2.7% during the
prior year to 91.4%, reflecting claims inflationary pressure and
higher large events.
Offering customers a simple and rewarding experience
through our leading technology platform has helped grow
Tower’s gross written premium (GWP) to a milestone $404m,
up 5% on the same period last year.
Key successes include reaching a $42.1m settlement with
EQC and the Reserve Bank recognising our decreasing risk
related to the Canterbury earthquakes by reducing our licence
condition, from $50m to $25m. We also further simplified our
structure, placing us on a solid foundation to deliver long term
earnings, dividends, and sustained growth.
By continuing to scale our cloud-based digital and data
platforms, and enhancing our Tower Pacific and Partnerships
business, we are heading in a positive direction in line with
our strategy. In future, we’ll keep offering a versatile, varied
product suite, coupled with greater customer satisfaction
and engagement, to deliver improved retention and growth.
Our focus on exceptional customer service remains
unchanged, underpinned by investment in growing and
developing our amazing Tower team.
TOWER LIMITED ANNUAL REPORT 2021TOWER LIMITED ANNUAL REPORT 2021 08
2021 YEAR IN REVIEW
2021 YEAR IN REVIEW
09
Impact of
external factors
NET INVESTMENT
INCOME (PRE-TAX)
LARGE HOUSE
CLAIMS
$0.2m 92
VS $5.3M
PRIOR YEAR
VS 57
PRIOR YEAR
LARGE EVENTS (PRE-TAX)
$13.9m
VS $9.7M PRIOR YEAR
Insurance, by nature, is an industry that
involves managing risks, accidents, and
weather events on a daily basis.
Large events are a source of volatility for New Zealand
and the Pacific that are likely to become more pronounced
with the impacts of climate change.
This year featured an unusual and challenging
combination of external events that weighed on our
FY21 profits, including:
• Seven large events contributed to $13.9m in
costs, compared with $9.7m in FY20
• Large house claims rose significantly to 92, from
CLAIMS INFLATION (PRE-TAX)
57 in FY20
$7.1m
• Inflation was responsible for $7.1m additional
business-as-usual claims costs.
• Our net investment income before tax dropped
INCREASE IN CLAIMS EXPENSE
$5.1m to $0.2m
Covid-induced supply chain issues have impacted
New Zealand and the Pacific, resulting in significant delays
in resolving some motor, home and contents claims.
While the impact of any one of these factors alone
would be sustainable in a normal year, with the ongoing
effects of the pandemic, this was not a normal year.
MOVEMENT IN UNDERLYING NPAT ($M)
$28.4
$-3.0
$-6.9
$-5.1
$5.6
$2.3
$20.8
190
216
$-3.7
190
$3.3
216
190
FY20
underlying
NPAT
Large
events
Higher large
house claims
Claims
inflation
Investment
income
Covid-19
claims
reduction
Business
growth
Reduced
commission
FY21
Underlying
NPAT
Good growth in
customers & premium
Despite this year’s challenges, we have
experienced growth ahead of the market,
particularly in New Zealand, where gross
written premium (GWP) rose by 7.9%
to $350m.
This was achieved through a combined effort of offering a
well-balanced mix of market premium ratings and attracting
new Tower customers. Overall customers grew 5% to
304,000, increasing market share to 9.2%. This growth also
reflects improvements in customer satisfaction, shown by
an improved net promoter score (NPS) of 43%, compared
with 27% last year.
Tower Direct leapt from strength to strength, recording
132,000 My Tower registrations this year, up substantially
on 45,000 in 2020. The portfolio grew to $273m, and now
includes the ANZ legacy portfolio, which is still migrating
customers over to Tower.
Prioritising business partnerships also delivered growth,
as our Partnerships business begins to transform from
a more traditional model to usher in a portfolio of new
technology-led organisations.
Our Pacific business remained resilient, despite GWP
declining by 10%, primarily because of Covid-associated
economic challenges. We were proud to become the first
insurer with a digital presence in the Pacific, after launching
our cloud-based platform in Fiji. This online offering will
expand across the Pacific to bring more alignment between
the New Zealand and Pacific business units moving forward.
CUSTOMERS
304,000
+5% ON PRIOR YEAR
MY TOWER REGISTRATIONS
132,000
VS 45K PRIOR YEAR
TOWER NZ PERSONAL LINES MARKET SHARE
8.3%
FY19
9.1%
9.2%
FY20
FY21
GWP GROWTH BY BUSINESS UNIT ($M)
$357
$60
$107
$190
$385
$59
$110
$216
FY19
FY20
$404
$54
$77
$273
43%
FY21
Direct
Partnerships
Pacific
NET PROMOTER SCORE
NZ GWP GROWTH
43%
7.9%
VS 27% PRIOR YEAR
TO $350 GWP
7.9%
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021
10
2021 YEAR IN REVIEW
2021 YEAR IN REVIEW
11
Sharp focus on
claims management
FY21 saw a combined 5% increase in the BAU
claims loss ratio and large events loss ratio.
The resultant 54% of net earned premium (NEP)
is the highest claims loss ratio since 2018.
The impact of inflation
We anticipated that Covid may cause inflationary pressures,
particularly for motor. However, it wasn’t until the FY21 March
quarter that evidence of inflation emerged and it has since
accelerated rapidly.
The average motor claim has increased 6% and the average
house claim is up 7% on FY20.
Supply chain issues for new vehicles have driven up the value
of second-hand vehicles by 13% year on year, significantly
increasing the cost of total loss motor claims. While the
inflationary impact on motor parts and repairs hasn’t been
as dramatic, the full impact may not yet have been felt, with
significant delays in completing repairs due to supply chain
issues with motor parts.
Double-digit inflation is materially impacting the cost of
building materials.
Tower has increased premiums across motor and home to
offset inflation. We are also working closely with supply
chain partners to enhance efficiencies and moderate the
impact on customers as much as possible.
TOTAL CLAIMS RATIO
56%
4%
52%
51%
3%
48%
48%
0%
48%
49%
3%
46%
54%
4%
50%
FY17
FY18
FY19
FY20
FY21
BAU
Large events
LARGE EVENTS CLAIMS ($M)
(BASED ON EVENT DATE)
$21.5
$13.1
$25.4
$9.7
$26.3
$14.1
$17.5
$9.6
FY17
FY18
$1.8
$1.8
FY19
FY20
FY21
Net incurred
Gross incurred
AVERAGE MOTOR
CLAIMS
AVERAGE HOUSE
CLAIMS
6%
7%
Large events and large house claims
Managing through volatility
Alongside inflationary pressures, in FY21 Tower
experienced the highest number of large house
claims and large event claims for many years.
Large events are a source of volatility for New Zealand
and the Pacific that are likely to become more
pronounced with the impacts of climate change.
The majority of large house claims were fire
related. As a result of this marked increase, Tower
removed the uncapped total loss, house fire benefit,
capping the benefit to 120% of the sum insured.
The majority of large events during the year were
floods in New Zealand. During the year we supported
customers through major floods in West Auckland,
Westport, Motueka, Canterbury, Central Otago
and Napier.
This increase in flooding highlights the importance of
the change we’ve made in how we identify and price
risk appropriately for inland flooding. The changes on
the 10th of November impact all new and renewing
house policies.
For Tower, this volatility is primarily managed by our
aggregate reinsurance programme.
However, the key to managing all these challenges is
also prompt recognition and remedial action.
Automation and data management are at the forefront of
all our remedial action. We are continuously optimising to
better understand our claims, as well as to improve our
claims assessment and management.
Through our leading technology capability, we now have
the ability to act swiftly to adjust ratings and underwriting.
We are also working with data science and risk partners
to better understand the links between large events,
climate change and large house fires in order to help
mitigate and reduce such events in the future.
Napier
flood
Canterbury
flood
Motueka
flood
Westland
flood
GROSS INCURRED LARGE CLAIMS
Helping our customers
through large events
OCT
20
NOV
20
JAN
21
MAY
21
JUNE
21
JULY
21
AUG
21
Lake Ōhau
fires
Central Otago
flood
Papatoetoe
tornado
West
AK flood
$26.3m
CARS
HOMES
166 769
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021
12
2021 YEAR IN REVIEW
2021 YEAR IN REVIEW
13
Core to our strategy is leading
with a quality, innovative product
range which enables us to
deepen our relationships with
customers, improve revenue
and increase retention.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 14
2021 YEAR IN REVIEW
2021 YEAR IN REVIEW
15
Product, pricing &
underwriting enhanced
through data
Our quality, innovative, balanced product
range enables us to deepen our relationships
with customers, improve revenue and
increase retention.
Half of our New Zealand customers now hold multiple
products. These customers stay with Tower approximately
three years longer, compared to those with one product.
This highlights the opportunity to increase existing customers’
purchases, engaging and retaining them for longer.
To further engage customers we launched a series of new
products. This included an end‐to‐end online boat experience
and a new travel product. In the Pacific we also launched new
home and contents, and motor policies.
By enhancing our product set to keep pace with customers’
lifestyles, we can further improve retention rates and build
relationships. For example, our boat offering is already gaining
pace, with around 5,000 new business policies sold this year
and our motor policy sales for EVs have increased by 60%
since February.
While external events prompted the New Zealand loss ratio
to increase to 53.6% for the year, we quickly identified the
emerging challenges, such as construction inflation, and
used our technology platform to quickly adjust and control
our margin.
In November, we launched an innovative address-based
rating tool for flood risk. By investing in detailed modelling to
highlight the flood risk from rivers and rain to Kiwis’ homes,
we’ve been able to better align premium pricing with risk, and
better manage our loss ratio. Customers’ positive response to
this initiative showed our shift to more transparent pricing is a
welcome one.
NZ PRODUCT MIX GWP ($M)
$296
$13
$100
$183
$325
$10
$122
$193
$350
$11
$134
$205
FY19
FY20
FY21
Home & contents
Motor
Other
NZ NEW BUSINESS RISK —
ELECTRIC VEHICLE & BOAT
794
4,932
$205
366
3,118
169
1,659
MAR-21
53.6%
JUN-21
SEP-21
Boat
Electric vehicle
NZ CUSTOMERS WITH
MULTIPLE PRODUCTS
NZ BAU
LOSS RATIO
50%
53.6%
135,000 NZ
CUSTOMERS HAVE
MULTIPLE PRODUCTS
UP 4% ON
PRIOR YEAR
MULTIPLE PRODUCTS HOLDER TENURE
7.9 years
50%
VS 4.8 YEARS FOR A SINGLE PRODUCT HOLDER
Investing in digital
platform for efficiency
& scalability
Central to Tower’s strategy is delivering
beautifully simple and rewarding
customer experiences.
We use data smartly to understand the changing needs of
our customers. By harnessing data insights, we can learn
how to serve our customers better, as well as offer new
products and features.
During 2021, we rolled out 219 technology upgrades to help
refine our service delivery, remove cumbersome legacy
systems, and assist with building deeper relationships with
our customers.
With more than half of all service tasks in New Zealand
now completed digitally (vs 40% last year), and around a
third of claims lodged digitally (vs 23% in the prior year),
the customer and efficiency benefits from our leading
digital and data technology platform are being realised.
Our approach to digital has also underpinned increased
uptake of our My Tower platform. It gives customers the
convenience of managing all aspects of their insurance,
including accessing documents, making payments,
changing excess, and making claims.
TECHNOLOGY SYSTEM RELEASE
52%
219
117
47
FY19
FY20
FY21
NZ SERVICE TASKS COMPLETED DIGITALLY
40%
42%
51%
SEP-20
MAR-21
SEP-21
NZ SERVICE TASKS
COMPLETED
DIGITALLY
TOTAL
CUSTOMERS
MIGRATED TO EIS
80%
80%
80% of Tower customers have now migrated to our cloud-
based, digital EIS platform. This is up on 62% in 2020 and
enables us to scale quickly as we acquire new business.
We remain focused on decommissioning legacy systems,
with a further two decommissioned in this financial year. This
means we anticipate just two remaining by the end of 2022.
Meanwhile, innovative technology releases continue to
trend upwards as we become more agile and responsive in
anticipating customers’ needs.
51%
51%
80%
51%
VS 40% PRIOR YEAR
VS 62% IN SEP 2020
NZ CLAIMS
LODGED DIGITALLY
CORE ADMIN LEGACY
SYSTEMS REMAINING
31%
31%
31%
4
VS 23% PRIOR YEAR
VS 6 IN PRIOR YEAR
2 REMAINING BY
END 2022
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 16
2021 YEAR IN REVIEW
2021 YEAR IN REVIEW
17
Management expenses
improving while
continuing to invest
One in every three dollars of Tower’s
management expenses relates to digital and
data technology. We see this as a valuable
investment to help evolve our customer
experience and accelerate efficiency
improvements throughout the organisation.
During the year, management expense ratio (MER) improved
2% dropping to 37%, thanks to reducing our acquisition costs,
down to 12.6%.
We introduced various cost containment measures this year,
reducing overall management expenses by $3.9m before
tax to $123.3m. This represents a significant saving from the
FY20 figure, $127.2m, and translates into a 2.3% reduction of
MER as a percentage of NEP to 37%.
In addition, a reduction in People expenses of $4.0m before
tax, and other expenses of $0.6m before tax, was achieved in
part through the benefits of the EIS platform implementation.
Net commission reduced $3.2m before tax, driven by
acquisition of the ANZ portfolio, and higher proportional
reinsurance profit share. In addition, the liability adequacy
test resulted in a $2.5m deficiency before tax, requiring an
additional $2.1m expense in FY21 for acquisition costs that
would otherwise have been capitalised.
COMMISSION EXPENSE RATIO (% GEP)
5.0%
3.8%
2.9%
FY19
FY20
FY21
MANAGEMENT EXPENSE RATIO (% NEP)
40%
39%
37%
37%
FY19
12.6%
FY21
FY20
TOWER
MANAGEMENT
EXPENSE RATIO
NET COMMISSION
EXPENSE
REDUCED
37%
22%
12.6%
2% BETTER THAN
PRIOR YEAR
REDUCTION
FOLLOWING BOOK
PURCHASE AND
REINSURANCE
PROFIT
ACQUISITION COST
DIGITAL & DATA
22%
12.6% $1 in $3
VS 13% IN
PRIOR YEAR
OF TOTAL
MANAGEMENT
EXPENSES
TOWER PARENT
SOLVENCY
FULL YEAR
DIVIDEND PAYMENT
271% $21m
BEFORE RETURN
OF CAPITAL
$10.5M TO BE PAID
2 FEB 2022
ORDINARY DIVIDEND POLICY
60-80%
OF CASH EARNINGS WHERE
PRUDENT TO DO SO
PROPOSED CAPITAL RETURN OF
$30.4m
VIA COMPULSORY SHARE BUYBACK
Strong capital &
solvency, delivering
shareholder returns
This year, we were pleased to resume
shareholder dividends after a five-year hiatus
due to resolving claims from the Canterbury
earthquakes.
We paid a 2.5 cents per share dividend at the half year and the
Board has declared another 2.5 cents per share at the full year,
bringing total dividends for FY21 to 5 cents per share. This
represents a dividend pay-out ratio of 80% of cash earnings.
Our New Zealand parent solvency ratio is 271%, which is
$56.6m above our target solvency margin and reflects our
strong capital position.
Proposed compulsory share buyback
Tower proposes returning $30.4m in capital by way of
a compulsory share buyback, under a Court Scheme of
Arrangement of one in every ten shares held at a price of
$0.72 per share. This is a premium of 12% on the closing
price on the 23rd of November of $0.645. This is subject to
obtaining IRD approval that the capital return is not taxable
in New Zealand and is not in lieu of a dividend, in addition to
High Court approval and shareholder approval.
Continuing to seek sensible investment opportunities
We continue to look at sensible acquisitions that are value
accretive for shareholders. This year we acquired the ANZ
legacy portfolio and are finalising the acquisition of the
remaining shares in National Pacific Insurance (NPI). The Tower
subsidiary is headquartered in Samoa and serves people
across Tonga, American Samoa and Samoa.
2.5c dividend bringing
full year to 5c per share
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 18
LOOKING FORWARD
LOOKING FORWARD
19
LOOKING FORWARD—
LONG-TERM GROWTH
& IMPROVEMENT
Despite the headwinds, this year’s results demonstrate
the resilience of our customer and digitally led strategy.
We continue to grow, to drive down expenses, and to
respond quickly to the changing external environment.
We are very focused on addressing
the challenges we’ve identified,
improving profitability and continuing to
leverage our technology, customer and
partnership advantage for growth.
Our core strategy is around personal
lines and small to medium sized
commercial segments in New Zealand
and the Pacific region.
We have a clear and focused set of five
strategic priorities.
We are relentlessly focused on our
customers, deepening our relationships
with them through rewards, new
products and other offerings that make
sense and drive value.
We are leveraging the full capability
of our cloud‐based platform by using
the insights from our data to make
our customers’ lives easier and to
understand their needs better.
We are finding the best people to
partner with to boost our offering,
develop new products, and deliver
services in better ways and
more efficiently.
We understand that our people are
the ultimate drivers of our success
as they are on the front line, building
our customer relationships.
And importantly, we are committed
to maintaining a strong capital and
solvency structure, and delivering
value for shareholders.
We are relentlessly focused on
our customers, deepening our
relationships with them through
rewards, new products and
other offerings that make sense
and drive value.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 20
LOOKING FORWARD
LOOKING FORWARD
21
Our 2022 goal is to offer a world-class digital experience
on one core leading platform, for all our personal lines
customers across New Zealand and the Pacific.
These include corporates, insurtechs, advisory businesses
and our cornerstone partner Trade Me, with whom we
recently renewed our agreement for another five years.
This year, we took an important step towards this aim
by acquiring the remaining shares in NPI.
One of our first steps will be to rebrand NPI to Tower,
coinciding with the launch of the first digital insurance
solution in these markets. We will also complete Tower’s
digital rollout across the Pacific in FY22.
Our agility and digital capabilities are also leading
to new product lines to support the unique needs of
our Pacific customers, as well as growth in this
important market.
In our Partnerships division, we are building a unique
model that relies less on higher commission and more
on our technology capability, customer experience and
balanced referral arrangements with our partners.
For our direct business, a key element of our strategic
focus has been to secure mutually beneficial
partnerships that drive significant growth and quickly
give us capabilities that we would otherwise have to
build from scratch.
Our exciting partnership with Allianz, one of the world’s
largest insurers, has already led to the development of
new pet and travel products this year.
In the coming year we will be working hard on a new
home renovation product. We are also planning to
upgrade our rural and SME offerings.
We’re continuously utilising more than 1.7 billion data
points thanks to over 25 external partners including
Microsoft, EIS, Friss, Amodo and Ushur, who are all
helping us to improve customer outcomes and make
better decisions.
Our 2022 goal is to offer a world-
class digital experience on one
core leading platform, for all our
personal lines customers across
New Zealand and the Pacific.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 22
SUPPORTING OUR PEOPLE & COMMUNITIES
SUPPORTING OUR PEOPLE & COMMUNITIES
23
SUPPORTING OUR PEOPLE
& COMMUNITIES
Our ability to continue to grow, partner and innovate as a leading digital and
data business is only possible with the support of our fantastic team and the
communities we serve.
Supporting our people
While our people can work remotely, we know
it is not easy to navigate the challenges of Covid
lockdowns, both in New Zealand and across the
Pacific. We have put in place several initiatives
to support our people during this time and are
pleased our employee engagement score has
increased to 77%, up 6% on FY20.
Supporting our communities
This year, we started our sustainability journey with
the development of an ESG strategy. This will guide
how Tower manages its environment, social and
governance issues under the following focus areas:
• A diverse and inclusive workplace that builds
people’s physical and emotional wellbeing
• No-surprises, easy to understand insurance
that is accessible and affordable
• Championing informed dialogue about
climate change
• Moving all aspects of our business towards
zero-carbon and zero-waste and ensuring we
have a positive impact on New Zealand and the
Pacific, now and in the future.
Importantly, we have measured our total carbon
emissions across our operations and have set a
science-based target to reduce our Scope 1 and 2
emissions by 21% over five years against FY20.
This year, we also pledged to support scientific
research, education, and innovation via scholarships
for the world’s first Bachelor of Climate Change
degree at the University of Waikato.
We will continue to prioritise and
invest in our people to ensure we
have a diverse, inclusive culture
where everyone can contribute
and feel valued.
We’re partnering with Coastguard
to help out even more Kiwis
on the water by supporting
their operations as well as their
phenomenal volunteers.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 24
WELL POSITIONED TO DELIVER DIVIDENDS & GROWTH
WELL POSITIONED TO DELIVER DIVIDENDS & GROWTH
25
In FY22, our focus is on
driving shareholder value
by accelerating the positive
growth and innovation we
have achieved in FY21.
WELL POSITIONED TO
DELIVER DIVIDENDS
& GROWTH
It’s clear that FY21 was a challenging year
and we have taken decisive actions to deliver
improvements and positive results in FY22.
Tower is a well-capitalised business with a strong balance sheet
and solvency margins. We have delivered customer and premium
growth while further improving our management expense ratio.
We are delighted to have resumed dividends within the year and
propose to return excess capital to shareholders.
In FY22, our focus is on driving shareholder value by accelerating
the positive growth and innovation we have achieved in FY21.
We will continue to take decisive action to address challenges
with claims inflation and climate change risks, and we will
continue to invest in our digital and data platform to drive
efficiency and support growth.
Tower continues
to invest in our
digital and data
platform to drive
efficiency and
support growth.
TOWER LIMITED ANNUAL REPORT 2021TOWER LIMITED ANNUAL REPORT 2021 26
BOARD OF DIRECTORS
BOARD OF DIRECTORS
27
WARREN LEE
MARCUS NAGEL
STEVE SMITH
MICHAEL STIASSNY
GRAHAM STUART
WENDY THORPE
BCom, CA
Non-Executive Director
Independent
Appointed Director: 26 May 2015
MBA (International Management),
MBA (Banking and Finance)
Non-Executive Director
Not Independent
Appointed Director: 14 January 2019
BCom, CA, Dip Bus (Finance), CFInstD
Non-Executive Director
Independent
Appointed Director: 24 May 2012
LLB, BCom, FCA (retired), CFInstD
Chairman
Non-Executive Director
Independent
Appointed Director: 12 October 2012
BCom (Hons), MS, FCA
Non-Executive Director
Independent
Appointed Director: 24 May 2012
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 Avenue
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.
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’s 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.
Steve has been a professional
Director since 2004. He has over
40 years of 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.
Marcus holds a Master’s 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.
Michael is a Fellow of Chartered
Accountants Australia and New
Zealand. Michael is also a Chartered
Fellow and past President of the
Institute of Directors. He has both a
Commerce and Law degree from
the University of Auckland. He is
Chairman of Ngāti Whātua Ōrākei
Whai Rawa Limited and is a director
of a number of other companies
including Tegel Group Holdings Ltd,
and New Talisman Gold Mines Ltd.
Michael 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
seven years.
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.
BOARD
OF DIRECTORS
BA (French), BBus (Accounting), Grad Dip,
Applied Fin & Inv, Harvard AMP, FFin, GAICD
Non-Executive Director
Independent
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 Chair of Online Education
Services, Chair of Epworth Healthcare,
and a Non-Executive Director of
Ausgrid, and Peoples’ Choice Credit
Union. 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.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021
28
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
29
CONSOLIDATED
FINANCIAL
STATEMENTS
Financial statements
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated statement of cash flows
Notes to the consolidated financial statements
1
1.1
1.2
1.3
1.4
2
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
Overview
About this report
Consolidation
Critical accounting judgements and estimates
Segmental reporting
Underwriting activities
Underwriting revenue
Net claims expense
Underwriting expense
Net outstanding claims
Unearned premium liability
Deferred insurance costs
Receivables
Payables
Provisions
2.10
Assets backing insurance liabilities
3
3.1
3.2
3.3
4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Investments
Investment revenue
Investments
Fair value hierarchy
Risk management
Risk management overview
Strategic risk
Insurance risk
Credit risk
Market risk
Liquidity risk
Capital management risk
Operational risk
Regulatory and compliance risk
4.10
4.11
Conduct risk
Cyber risk
Independent Auditor's report,
and Appointed Actuary's report
Independent Auditor's report
Appointed Actuary's report
30
31
32
33
34
34
34
36
36
38
38
39
39
40
44
45
46
47
48
48
48
48
49
49
50
50
50
51
52
53
55
55
56
56
56
57
74
80
5
5.1
5.2
5.3
5.4
5.5
5.6
6
6.1
6.2
6.3
7
7.1
7.2
7.3
7.4
8
8.1
8.2
8.3
8.4
8.5
8.6
8.7
Capital structure
Borrowings
Contributed equity
Reserves
Net tangible assets per share
Earnings per share
Dividends
Other balance sheet items
Property, plant and equipment
Intangible assets
Leases
Tax
Tax expense
Current tax
Deferred tax
Imputation credits
Other information
Notes to the consolidated cash flow statement
Related party disclosures
Auditor's remuneration
Contingent liabilities
Subsequent events
Capital commitments
Impact of new accounting standards and changes in
interpretation of current standards
57
57
57
58
58
59
59
60
60
61
63
66
66
67
67
69
69
69
70
70
70
71
71
71
TOWER LIMITED ANNUAL REPORT 2021TOWER LIMITED ANNUAL REPORT 2021 30
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONSOLIDATED BALANCE SHEET
31
Consolidated statement of comprehensive income
Consolidated balance sheet
FOR THE YEAR ENDED 30 SEPTEMBER 2021
AS AT 30 SEPTEMBER 2021
Gross written premium
Unearned premium movement
Gross earned premium
Outward reinsurance premium
Movement in deferred reinsurance premium
Outward reinsurance premium expense
Net earned premium
Claims expense
Less: Reinsurance and other recoveries revenue
Net claims expense
Gross commission expense
Commission revenue
Net commission expense
Underwriting expense
Underwriting profit
Investment income
Investment expense
Corporate and other income
Corporate and other expense
Impairment of EQC receivable
Financing and other costs
Profit before taxation
Tax expense
Profit after taxation
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 loss net of tax
Total comprehensive profit for the year
Earnings per share:
Basic and diluted earnings per share (cents)
Profit after taxation attributed to:
Shareholders
Non-controlling interests
Total comprehensive profit attributed to:
Shareholders
Non-controlling interests
NOTE
2021
$000
404,681
(9,151)
2.1
395,530
RESTATED
2020
$000
377,159
(4,607)
372,552
(58,030)
810
(57,220)
315,332
(206,767)
25,711
(181,056)
(20,947)
6,457
(14,490)
(89,520)
30,266
5,810
(466)
288
(2,967)
(13,126)
(1,125)
18,680
(7,470)
11,210
(63,767)
1,540
(62,227)
333,303
(228,903)
24,635
(204,268)
(18,058)
6,753
(11,305)
(89,751)
27,979
580
(384)
707
(54)
–
(378)
28,450
(9,135)
19,315
(1,213)
(1,374)
159
(16)
(1,070)
18,245
41
8
(1,325)
9,885
2.1
2.2
2.1
2.3
3.1
2.7
7.1
5.3
5.3
Assets
Cash and cash equivalents
Investments
Receivables
Current tax asset
Deferred tax asset
Deferred insurance costs
Right of use assets
Property, plant and equipment
Intangible assets
Total assets
Liabilities
Payables
Unearned premiums
Outstanding claims
Lease liabilities
Provisions
Current tax liabilities
Deferred tax liabilities
Total liabilities
Net assets
Equity
Contributed equity
Accumulated losses
Reserves
Total equity attributed to shareholders
Non-controlling interests
Total equity
The above statement should be read in conjunction with the accompanying notes.
NOTE
2021
$000
RESTATED
2020
$000
8.1
3.2
2.7
7.2a
7.3a
2.6
6.3a(i)
6.1
6.2
2.8
2.5
2.4
6.3a(ii)
2.9
7.2b
7.3b
5.2
5.3
116,129
277,470
215,853
12,901
24,450
31,967
25,577
9,374
88,592
80,108
237,904
250,746
12,892
28,822
34,667
7,211
10,041
77,847
802,313
740,238
68,905
212,275
122,338
39,421
6,709
170
2,775
452,593
349,720
492,424
(39,995)
(105,385)
347,044
2,676
66,600
203,452
107,747
8,695
9,531
821
1,346
398,192
342,046
492,424
(48,107)
(104,431)
339,886
2,160
349,720
342,046
5.5
4.43
2.58
The financial statements were approved for issue by the Board on 24 November 2021.
18,683
632
19,315
17,729
516
18,245
10,761
449
11,210
9,522
363
9,885
The above statement should be read in conjunction with the accompanying notes.
Michael P Stiassny
Chairman
Graham R Stuart
Director
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021
32
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENT OF CASH FLOWS
33
Consolidated statement of changes in equity
Consolidated statement of cash flows
YEAR ENDED 30 SEPTEMBER 2021
FOR THE YEAR ENDED 30 SEPTEMBER 2021
Year Ended 30 September 2021
Balance as at 30 September 2020
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
Dividends paid
Other
Total transactions with shareholders
At the end of the year
Year Ended 30 September 2020
Balance as at 30 September 2019
Impact of amalgamation
Balance post amalgamation
Adjustment on initial application of NZ IFRS 16
Adoption of accounting policy on cloud computing
arrangements
ATTRIBUTED TO SHAREHOLDERS
CONTRIBUTED
EQUITY
$000
ACCUMULATED
LOSSES
$000
RESERVES
$000
NON-CONTROLLING
INTEREST
$000
TOTAL EQUITY
$000
492,424
(48,107)
(104,431)
2,160
342,046
–
–
–
–
–
–
–
–
492,424
209,990
–
209,990
–
–
18,683
–
–
–
18,683
(10,541)
(30)
(10,571)
(39,995)
(36,101)
107,160
71,059
(1,333)
(3,986)
–
(1,097)
159
(16)
(954)
–
–
–
632
(116)
–
–
516
–
–
–
(105,385)
2,676
19,315
(1,213)
159
(16)
18,245
(10,541)
(30)
(10,571)
349,720
9,808
–
9,808
–
–
1,801
–
185,498
107,160
1,801
292,658
(4)
–
(1,337)
(3,986)
Restated balance at beginning of the year
209,990
65,740
9,808
1,797
287,335
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
Net proceeds of capital raise
Dividends written off
Other
Cancellation of shares on amalgamation
Recognition of shares on amalgamation
Total transactions with shareholders
At the end of the year
–
–
–
–
–
45,000
–
10,761
–
–
–
–
(1,288)
41
8
10,761
(1,239)
(119)
(99)
44
–
–
–
(254,990)
254,990
492,424
(379,424)
(113,000)
282,434
(124,608)
(113,000)
449
(86)
–
–
363
–
–
–
–
–
11,210
(1,374)
41
8
9,885
44,881
(99)
44
–
–
44,826
The above statement should be read in conjunction with the accompanying notes.
Please note, Tower amalgamated its corporate structure on 30 September 2020. Refer to note 5.2 for further information.
Refer to note 8.7 for further information.
Cash flows from operating activities
Premiums received
Interest received
Fees and other income received
Reinsurance and other recoveries received
Settlement of EQC receivable
Motor premium refund payments
Reinsurance paid
Reinsurance paid in relation to settlement of EQC receivable
Claims paid
Employee and supplier payments
Income tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Proceeds from sale of interest-bearing investments
Proceeds from sale of unlisted equity investments
Payments for purchase of interest-bearing investments
Payments for purchase of intangible assets
Payments for purchase of customer relationships
Payments for purchase of property, plant and equipment
Net cash outflow from investing activities
Cash flows from financing activities
Proceeds from share capital issuance
Received from lessor on signing of new lease
Payments for cost of share capital issuance
Dividends paid
Repayment of borrowings
Facility fees and interest paid
Payment relating to principal element of lease liabilities
Net cash (outflow)/ inflow from financing activities
Net increase in cash and cash equivalents
Effect of foreign exchange rate changes
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
The above statement should be read in conjunction with the accompanying notes.
2021
$000
RESTATED
2020
$000
398,601
366,738
5,273
6,328
17,686
52,883
(1,351)
(55,979)
(10,741)
(213,350)
(97,912)
(2,797)
98,641
7,328
7,345
18,035
–
(5,849)
(54,867)
–
(223,751)
(97,499)
(1,317)
16,163
158,509
112,484
572
(191,319)
(8,866)
(14,434)
(3,163)
(58,701)
–
(117,734)
(4,645)
(9,473)
(3,122)
(22,490)
–
47,300
10,945
–
(10,541)
–
(378)
(2,848)
(2,822)
37,118
(1,097)
80,108
116,129
–
(2,419)
–
(15,000)
(1,115)
(3,070)
25,696
19,369
(1,279)
62,018
80,108
492,424
(48,107)
(104,431)
2,160
342,046
The 2021 balance represents the purchase of ANZ's rights and obligations relating to servicing a portfolio of insurance underwritten by Tower. Please refer to note 6.2 for more information.
The comparative 2020 balance reflects the net cashflow associated with the purchase of Youi NZ Pty Ltd's insurance portfolio.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 34
35
Notes to the consolidated financial statements
FOR THE YEAR ENDED 30 SEPTEMBER 2021
OVERVIEW
This section provides information that is helpful to an overall understanding of the financial statements and the areas of critical accounting
judgements and estimates included in the financial statements. It also includes a summary of Tower's operating segments.
1.1 About this Report
a. 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 136 Fanshawe Street, Auckland, New Zealand.
During the periods presented, the principal activity of the Group was the provision of general insurance. The Group predominantly operates in New
Zealand with some of its operations based in the Pacific Islands region.
The financial statements were authorised for issue by the Board of Directors on 24 November 2021. The entity’s owners or others do not have the power
to amend the financial statements after issue.
b. 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.
c. 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), 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.
d. Restatement of comparatives
In April 2021, the IFRS Interpretations Committee (IFRIC) issued an agenda decision 'Configuration or Customisation Costs in a Cloud Computing
Arrangement (NZ IAS 38 Intangible Assets)'. This IFRIC agenda decision clarifies the interpretation on how NZ IAS 38 Intangible Assets applies to
configuration and customisation costs incurred in implementing Software-as-a-Service (SaaS) cloud computing arrangements. Refer to note 8.7 for
further details of change in comparatives.
1.2 Consolidation
a. 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. There have been no acquisitions or disposals
of subsidiaries during the year ended 30 September 2021.
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 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.
1.2 Consolidation (continued)
b. 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 the entities’
functional and reporting currency 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 impact profit after tax in the
consolidated statements of comprehensive income 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 (as part of comprehensive profit) 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
statement of comprehensive income.
c. 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
Parent Company
New Zealand general insurance operations
INCORPORATION
2021
2020
HOLDINGS
Tower Limited (formerly named Tower Insurance Limited)
NZ
Parent
Parent
Subsidiaries
Overseas general insurance operations
Tower Insurance (Cook Islands) Limited
Tower Insurance (Fiji) Limited
Tower Insurance (PNG) Limited
National Pacific Insurance Limited (NPI)
Tower Insurance (Vanuatu) Limited
Management service operations
Tower Services Limited
Cook Islands
Fiji
PNG
Samoa
Vanuatu
100%
100%
100%
71%
100%
100%
100%
100%
71%
100%
NZ
100%
100%
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 36
37
1.3 Critical accounting judgements and estimates
In preparing these financial statements, management is required to make estimates and related assumptions about the future. The estimates and related
assumptions are based on experience and other factors that are considered to be reasonable, and are reviewed on an ongoing basis. Revisions to the
estimates are recognised in the period in which they are revised, or future periods if relevant. The key areas in which estimates and related assumptions
are applied are as follows:
— Net outstanding claims
— Liability adequacy test
— Intangible assets
note 2.4
note 2.5
note 6.2
— Lease liabilities (incremental borrowing rate)
note 6.3a(ii)
— Deferred taxation
— Software-as-a-service arrangements
note 7.3
note 8.7a
COVID-19 Pandemic
An assessment of the impact of COVID-19 on Tower's balance sheet is set out below based on information available at the time of preparing these
financial statements.
BALANCE SHEET
IMPACT
Investments
Receivables
Investments are carried at fair value and reflect a lower interest rate environment.
Immaterial impact. Provision for impairment of premium receivables and "other recoveries" has been updated to
include an allowance for increased non-payment.
Right of Use Assets
Tower has assessed that there is no material impairment to right of use assets.
Intangible assets
No impact. Tower has assessed that its intangible assets have not been impaired.
Deferred acquisition costs
(DAC)
Writedown in DAC due to deficiency reported as a result of the Liability Adequacy Test, partially influenced by
higher claims costs driven by covid-related inflationary pressures.
Unearned premiums
Immaterial impact. Provision for unearned premium cancellation has been updated to include an allowance for
increased non-payment.
Net outstanding claims
Impacts on the quantum of outstanding claims due to supply chain delays and lockdown both slowing the
settlement of claims and, therefore, increasing outstanding balances. An additional risk margin has also been
established, partially to allow for additional uncertainty in the post-covid environment.
RBNZ continues to engage with Tower on its response to COVID-19 and the sufficiency of its capital position. This is part of an ongoing sector-wide
regulatory engagement in response to COVID-19 focused on financial stability, and operational changes/decisions that have customer impacts.
1.4 Segmental reporting
a. Operating segments
Tower operates in two geographical segments, New Zealand and the Pacific region. New Zealand comprises the general insurance business
underwritten in New Zealand. Pacific Islands comprises the general insurance business underwritten in the Pacific by Tower subsidiaries and branch
operations. Other contains balances relating to Tower Services Limited (management services entity), and also includes intercompany eliminations and
group diversification benefits.
The Group does not derive revenue from any individual or entity that represents 10% or more of the Group's total revenue.
1.4 Segmental reporting (continued)
b. Financial performance
Year Ended 30 September 2021
Gross written premium
Gross earned premium – external
Outwards reinsurance expense
Net earned premium
Net claims expense
Net commission expense
Underwriting expense
Underwriting profit
Net investment income
Other expenses
Profit before tax
Profit after tax
Year Ended 30 September 2020
Gross written premium
Gross earned premium – external
Outwards reinsurance expense
Net earned premium
Net claims expense
Net commission expense
Underwriting expense
Underwriting profit
Net investment income
Impairment of EQC receivable
Other expenses
Profit before tax
Profit after tax
c. Financial position
Total assets 30 September 2021
Total assets 30 September 2020
Total liabilities 30 September 2021
Total liabilities 30 September 2020
Definition
NEW ZEALAND
PACIFIC ISLANDS
$000
$000
OTHER
$000
TOTAL
$000
351,058
340,568
(44,918)
295,650
(195,343)
(9,762)
(76,519)
14,026
44
182
14,252
8,855
317,478
311,671
(38,774)
272,897
(162,032)
(12,027)
(76,323)
22,515
4,265
(13,126)
(286)
13,368
8,776
53,623
54,962
(17,309)
37,653
(8,836)
(1,543)
(13,232)
14,042
152
93
14,287
10,533
59,681
60,881
(18,446)
42,435
(19,361)
(2,463)
(13,197)
7,414
769
–
62
8,245
4,789
NEW ZEALAND
PACIFIC ISLANDS
$000
707,368
529,370
401,523
336,192
$000
105,561
105,376
51,688
61,096
–
–
–
–
(89)
–
–
(89)
–
–
(89)
(73)
–
–
–
–
337
–
–
337
310
–
(3,580)
(2,933)
(2,355)
OTHER
$000
(10,616)
105,492
(618)
904
404,681
395,530
(62,227)
333,303
(204,268)
(11,305)
(89,751)
27,979
196
275
28,450
19,315
377,159
372,552
(57,220)
315,332
(181,056)
(14,490)
(89,520)
30,266
5,344
(13,126)
(3,804)
18,680
11,210
TOTAL
$000
802,313
740,238
452,593
398,192
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 (the Chief Executive Officer) who reviews the operating results on a regular basis and makes decisions on resource
allocation and assessing performance.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 38
39
2. UNDERWRITING ACTIVITIES
This section provides information on Tower's underwriting activities.
Tower collects premiums from customers in exchange for providing insurance coverage. 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.
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.
2.1 Underwriting revenue
Composition
Gross written premium
Motor premium refund
Movement in unearned premium liability
Gross earned premium
Reinsurance and other recoveries revenue
Reinsurance commission
Insurance administration services commission
Commission revenue
Underwriting revenue
2021
$000
2020
$000
404,681
384,359
–
(9,151)
(7,200)
(4,607)
395,530
372,552
24,635
5,635
1,118
6,753
25,711
5,242
1,215
6,457
426,918
404,720
In the year ended 30 September 2020, Tower received lower motor vehicle claims in New Zealand due to travel restrictions imposed during the time spent in New Zealand government’s
COVID-19 alert level 3 and 4. On 21st April 2020 Tower Limited committed to returning the benefit of lower New Zealand motor claims to customers through motor vehicle premium refunds.
Total premiums of $7.2m (excluding GST) were refunded to motor customers related to the year ended 30 September 2020. Gross Written Premiums were reduced accordingly and a provision
created (see note 2.9) to recognise this obligation.
Recognition and measurement
Gross earned premium is recognised in the period in which the premiums are earned during the term of the contract, excluding taxes and levies
collected on behalf of third parties. It includes a provision for expected future premium cancellations (which is offset against net premium
receivables, see note 2.7) and customer premium refunds (see note 2.9 for more information). The proportion of premiums not earned in the
consolidated statement of comprehensive income at reporting date is recognised in the consolidated balance sheet as unearned premiums.
Reinsurance and other recoveries on paid claims, reported claims not yet paid, claims incurred but not reported and claims incurred but not
enough reported are recognised as revenue. Recoveries are measured as the expected future receipts and recognised when the claim is incurred.
Reinsurance commission revenue includes reimbursements by reinsurers to cover part of Tower's management and sales expense which are
broadly recognised with the reference premium over the term of the reinsurance agreements. Reinsurance commission income can also include a
proportion of expected profitability of business ceded to the reinsurer. The final value of the variable commission is based on the achievement of a
hurdle rate over time. This revenue is recognised on a systematic basis and reassessed at each reporting date.
Insurance administration services commission includes a percentage of levies collected on behalf of third parties and is recognised at the point
the levy is collected.
2.2 Net claims expense
Composition
EXC. CANTERBURY EARTHQUAKE
CANTERBURY EARTHQUAKE
TOTAL
2021
$000
2020
$000
Gross claims expense
Reinsurance and other recoveries revenue
Net claims expense
228,594
(23,430)
205,164
201,943
(24,698)
177,245
Recognition and measurement
2021
$000
309
(1,205)
(896)
2020
$000
4,824
(1,013)
3,811
2021
$000
2020
$000
228,903
(24,635)
204,268
206,767
(25,711)
181,056
Net claims expense is measured as the difference between net outstanding claims liability at the beginning and end of the financial year plus any
claims payments made net of reinsurance and other recoveries received during the financial year. Please refer to note 2.4 for more information.
Additional disclosures related to the Canterbury earthquake events in 2010 and 2011 are provided in note 2.4.
2.3 Underwriting expense
Composition
People costs
People costs capitalised during the year
Technology
Amortisation
Depreciation
External fees
Marketing
Communications
Miscellaneous
Movement in indirect deferred acquisition costs
Claims-related management expenses reclassified to claims expense
Underwriting expenses
Includes $2.4m (2020: $2.6m) of depreciation on right of use assets. See note 6.3b for further information.
2021
$000
65,042
(3,569)
14,326
12,556
4,712
10,375
8,518
4,007
1,090
892
(28,198)
89,751
RESTATED
2020
$000
72,635
(2,933)
17,383
9,705
4,590
7,137
8,181
3,691
(522)
(1,416)
(28,931)
89,520
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 40
41
2.4 Net outstanding claims
a. Composition
Central estimate of future cash flows
Claims handling expense
Risk margin
Gross outstanding claims
Reinsurance recoveries
Net outstanding claims
Net claim payments within 12 months
Net claim payments after 12 months
Net outstanding claims
EXC. CANTERBURY EARTHQUAKE
CANTERBURY EARTHQUAKE
TOTAL
2021
$000
2020
$000
2021
$000
2020
$000
2021
$000
87,535
5,430
6,724
99,689
(18,970)
80,719
69,687
11,032
80,719
65,475
4,151
4,325
73,951
(9,643)
64,308
56,110
8,198
64,308
16,402
1,314
4,933
22,649
(3,880)
18,769
7,508
11,261
18,769
21,236
1,908
10,652
33,796
(3,246)
30,550
12,220
18,330
30,550
2020
$000
86,711
6,059
14,977
103,937
6,744
11,657
122,338
107,747
(22,850)
99,488
77,195
22,293
99,488
(12,889)
94,858
68,330
26,528
94,858
Includes nil additional (2020: $5.0m) for the Canterbury earthquake over and above the provision of the Appointed Actuary, which is set at the 75th percentile of sufficiency.
The $5.0m has been released as the Canterbury outstanding claims liability has sufficiently run off.
b. Reconciliation of movements in net outstanding claims liability
2021
$000
2020
$000
GROSS
REINSURANCE
NET
GROSS
REINSURANCE
NET
Balance brought forward
Claims expense – current year
Claims expense – prior year
Incurred claims recognised in the consolidated
statement of comprehensive income
Claims paid and reinsurance and other
recoveries raised
107,747
234,675
(5,772)
(12,889)
(22,171)
(2,464)
94,858
212,504
(8,236)
124,060
209,766
(2,999)
(13,457)
(26,084)
373
110,603
183,682
(2,626)
228,903
(24,635)
204,268
206,767
(25,711)
181,056
(213,350)
14,397
(198,953)
(223,654)
26,444
(197,209)
Foreign exchange
Outstanding claims
(962)
277
122,338
(22,850)
(685)
99,488
573
107,747
(165)
(12,889)
408
94,858
2.4. Net outstanding claims (continued)
c. Development of claims
The following table shows the development of net outstanding claims relative to the current estimate of ultimate claims costs for the five most
recent years.
ULTIMATE CLAIMS COST ESTIMATE
PRIOR
$000
2017
$000
2018
$000
2019
$000
2020
$000
2021
$000
TOTAL
$000
At end of incident year
138,574
148,088
One year later
Two years later
Three years later
Four years later
Ultimate claims cost
Cumulative payments
140,610
141,989
142,280
142,701
142,701
145,887
145,763
145,344
–
146,873
143,975
143,121
–
–
157,845
183,450
154,459
–
–
–
–
–
–
–
145,344
143,121
154,459
183,450
(141,779)
(144,586)
(141,541)
(149,522)
(123,772)
Undiscounted central estimate
13,212
922
758
1,580
4,937
59,678
Claims handling expense
Risk margin
Net outstanding claim liabilities
Reinsurance recoveries
Gross outstanding claim liabilities
81,087
6,744
11,657
99,488
22,850
122,338
Prior year numbers have been restated at current year exchange rates to reflect the underlying development of claims.
d. Actuarial information
The estimation of outstanding claims as at 30 September 2021 has been carried out by:
(i) Geoff Atkins, BA (ActuarDc), FIAA, FIAL, FANZIIF, Appointed Actuary – Canterbury earthquake claims; and
(ii) John Feyter, B.Sc., FNZSA – all other outstanding claims
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.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
42
43
2.4. Net outstanding claims (continued)
e. Canterbury earthquakes
Cumulative impact of Canterbury earthquakes
As at 30 September 2021, Tower has 33 claims remaining to settle (2020: 59) as a result of the earthquakes impacting the Canterbury region during
2010 and 2011. The following table presents the cumulative impact of the four main Canterbury earthquake events on the consolidated statement of
comprehensive income. Figures include the EQC settlement which has been received at 30 September 2021.
Earthquake claims estimate net of EQC payments
Reinsurance recoveries
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
Canterbury earthquake impact on profit or loss
Net claims (gain)/expense
Recognition and measurement
2021
$000
RESTATED
2020
$000
(944,418)
732,090
(939,109)
730,885
(212,328)
(208,224)
(25,045)
(25,045)
–
(5,000)
(237,373)
(238,269)
66,464
(170,909)
66,715
(171,554)
2021
$000
2020
$000
(896)
3,811
2.4. Net outstanding claims (continued)
Critical accounting estimates and judgements
Outstanding claims liability (excluding Canterbury Earthquakes)
The estimation of the outstanding claims liability involves a number of key assumptions. Tower's estimation uses Company specific data, relevant industry
data and general economic data for each major class of business. The estimation process factors in a number of considerations including the risks to
which the business is exposed to at a point in time, claim frequency and severity, historical trends in the development of claims as well as legal, social
and economic factors that may affect each class of business.
ASSUMPTION
Expected future claims development proportion
Claims handling expense ratio
Risk margin
Expected future claims development proportion
2021
2020
19.7%
6.7%
9.1%
50.5%
7.1%
7.2%
This is the proportion of additional claims cost that is expected to be recognised in the future for BAU claims that have already been reported.
The assumption is expressed as a proportion of current case estimates for open claims and the resulting amount is recognised in the balance sheet as an
outstanding claims liability. The reduction in the expected future claims proportion has arisen following a change in case estimation process in the year
ended 30 September 2021.
Claims handling expense ratio
This reflects the expected cost to administer future claims. The ratio is calculated based on historical experience of claims handling costs.
Risk margin
Risk margins are calculated for outstanding claims in each country separately and a diversification benefit is calculated taking into account the
uncorrelated effect of random risk. The total risk margin percentage shown is calculated on a weighted average basis. The increase in the risk margin this
year reflects the heightened uncertainty on claim outcomes as a result of the COVID-19 pandemic.
Canterbury earthquake outstanding claims liability
Assumptions are made for the estimation of outstanding claims related to the Canterbury earthquakes. The key assumptions are estimated ultimate
costs (including building costs) for settling open claims, and the numbers of new overcap claims, litigated claims, re-opened claims and their associated
costs. Other elements of judgement include the apportionment of claim costs between the four main earthquake events, future claim management
expenses and assessment of the risk margin.
Gross outstanding claims liability comprises a central estimate of future cash outflows and a risk margin for uncertainty. Tower has not applied a
discount given the short-tail nature of the portfolio and the low interest rate environment.
ASSUMPTION
The outstanding claims liability is measured at the central estimate of future cash outflows relating to claims incurred prior to the reporting date
including direct and indirect claims handling costs. The liability is measured based on the advice of the Appointed Actuary or on valuations which
have been peer reviewed by the Appointed Actuary. It is intended to include no deliberate or unconscious bias toward over or under-estimation.
Given the uncertainty in establishing the liability, it is likely the final outcome will differ from the original liability established. Changes in the claim
estimates are recognised in profit or loss in the reporting period in which the estimates are changed.
The gross outstanding claim liabilities also include a risk margin that relates to the inherent uncertainty in the central estimate of the future
payments. The risk margin represents the amount by which the liability recognised in the financial statements is greater than the actuarial estimate.
Tower currently applies a 75% probability of adequacy to the outstanding claims liability which means there is a 1-in-4 chance all future claim
payments will exceed the overall reserve held.
Uncertainties surrounding the liability estimation process include those relating to the available data, actuarial models and assumptions, the
statistical uncertainty associated with the general insurance run-off process and external risks.
Net outstanding claims liability is calculated by deducting reinsurance and other recoveries from gross outstanding claims. Reinsurance and other
recoveries on outstanding claims are recognised as income with the corresponding asset being recognised on the balance sheet.
2021
$000
2020
$000
38
68
$121,000
$107,000
$2,400,000
$2,800,000
Number of new overcap and new litigated claims
Average cost of new overcap or new litigated claim
Provision for re-opened claims
New overcap and new litigated claims
New overcap claims are typically for properties that have previously been managed by EQC but where damage is now assessed as being more extensive
than previously thought and there is now an insurance claim payable.
New litigated claims are existing or future new claims that are referred to either the Insurance Tribunal or the High Court for resolution. Costs for new
litigated claims are assumed to be substantially higher than costs for other overcap claims. Only a small number of new litigated claims is now expected.
Provision for re-opened claims
Re-opened claims arise where additional liability arises for additional scope not previously identified or where a repair has failed or where another
expense is payable for a claim that is currently closed.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 44
45
2.4. Net outstanding claims (continued)
f. Sensitivity analysis
2.5 Unearned premium liability (continued)
Recognition and measurement
The impact on profit or loss of changes in key assumptions used in the calculation of the outstanding claims liabilities is summarised below. Each change
has been calculated in isolation from the other variables and is stated before income tax.
Outstanding claims excluding Canterbury earthquake
Unearned premium liability is the portion of premiums written that are yet to be earned in the consolidated statement of comprehensive income.
It is calculated based on the term of the risk and in accordance with the expected pattern of the incidence of risk underwritten using an appropriate
pro-rate method.
MOVEMENT IN
ASSUMPTION
+ 10%
- 10%
+ 10%
- 10%
+ 10%
- 10%
MOVEMENT IN
ASSUMPTION
+ 35%
- 35%
+ 20%
- 20%
+ 35%
- 35%
+ 20%
- 20%
Expected future claims development
Claims handling expense ratio
Risk margin
Canterbury earthquake outstanding claims
Number of new overcap or new litigated claims
Change in average cost of a new overcap or new litigated claim
Number of reopened claims
Change in average cost of a reopened claim
2.5 Unearned premium liability
Reconciliation
Opening balance
Premiums written during the year
Premiums earned during the year
Unearned premium movement
Unearned premium balance purchased
Foreign exchange movements
Unearned premium liability
2021
$000
(1,610)
1,610
(920)
920
(840)
840
(480)
480
2020
$000
(2,560)
2,560
(1,460)
1,460
(980)
980
(560)
560
2021
$000
2020
$000
203,452
187,855
404,681
(395,530)
9,151
–
(328)
377,159
(372,552)
4,607
12,003
(1,013)
212,275
203,452
Unearned premium balance acquired through the purchase of customer relationships in the year ended 30 September 2020 (see note 6.2).
The majority of unearned premiums will be earned in the 12 months after 30 September 2021 and therefore are current liabilities. The unearned premium
liability is presented net of cancellation provisions.
IMPACT ON PROFIT OR LOSS
2021
$000
1,339
(1,339)
543
(543)
672
(672)
2020
$000
1,771
(1,771)
415
(415)
431
(431)
Adequacy of unearned premium liability
Tower undertakes a liability adequacy test ("LAT") to determine whether the unearned premium liability is sufficient to pay future claims net of
reinsurance recoveries.
If the present value of expected future net cash flows relating to current insurance contracts, plus a risk margin, exceeds the unearned premium
liabilities less related deferred acquisition costs and intangible assets, then the unearned premium liability is deemed deficient. This deficiency is
immediately recognised in profit or loss. In recognising the deficiency, Tower will first write down any related deferred acquisition costs or intangible
assets before recognising an unexpired risk liability.
The unearned premium liability as at 30 September 2021 was not sufficient for the New Zealand business and a deficiency of $2.0m was recognised
(2020: no deficiency). The unearned premium liabilities for Pacific entities were sufficient with the exception of Fiji and Vanuatu (2020: Fiji, NPI and
Vanuatu) where small deficits were recognised. The total deficit for the group recognised as a charge against deferred acquisition cost was $2.5m
(2020: $0.4m).
IMPACT ON PROFIT OR LOSS
%
2021
2020
45.2%
11.0%
44.5%
10.2%
Central estimate net claims as a % of unearned premium liability
Risk margin as a % of net claims
Critical accounting estimates and judgements
The LAT is conducted using a central estimate of premium liability adjusted for risk margin and it is carried out on an individual country basis.
The test is based on prospective information and so is heavily dependent on assumptions and judgements.
2.6 Deferred insurance costs
Reconciliation
DEFERRED ACQUISITION COSTS
DEFERRED OUTWARDS
REINSURANCE EXPENSE
DEFERRED INSURANCE COSTS
2021
$000
2020
$000
2021
$000
2020
$000
2021
$000
2020
$000
Balance bought forward
25,220
23,736
9,447
8,794
34,667
32,530
Costs deferred
Amortisation expense
Writedown due to LAT deficiency
Foreign exchange movements
Closing balance
40,323
(41,897)
(2,534)
4
21,116
42,136
(40,221)
(440)
9
17,968
(16,428)
–
(136)
25,220
10,851
15,396
(14,586)
–
(157)
9,447
58,291
(58,325)
(2,534)
(132)
31,967
57,532
(54,807)
(440)
(148)
34,667
Deferred insurance costs are expected to be amortised within 12 months from reporting date.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 46
47
2.6 Deferred insurance costs (continued)
Recognition and measurement
2.7 Receivables (continued)
Finance lease receivables
Acquisition costs comprises costs incurred in obtaining and recording general insurance contracts such as advertising expenses, sales expenses
and other underwriting expenses. These costs are initially capitalised and then expensed in line with the earning pattern of the related premium.
Deferred acquisition costs at the reporting date represent the acquisition costs related to unearned premium.
Outwards reinsurance expense reflects premiums ceded to reinsurers and is recognised as an expense in accordance with the pattern of
reinsurance service received. Deferred outwards reinsurance expense at the reporting date represents outwards reinsurance expenses related to
unearned premium.
2.7 Receivables
Composition
Gross premium receivables
Provision for impairment
Premium receivable
Business as usual reinsurance recoveries
Canterbury earthquake reinsurance recoveries
Other recoveries
Reinsurance and other recoveries
EQC receivable
Finance lease receivables
Prepayments
Miscellaneous receivables
Receivables
Receivable within 12 months
Receivable in greater than 12 months
Receivables
2021
$000
2020
$000
177,141
(655)
176,486
20,326
3,880
5,208
29,414
523
4,278
3,279
1,873
171,041
(1,383)
169,658
15,105
3,246
5,262
23,613
52,883
–
2,664
1,928
215,853
250,746
213,432
250,746
2,421
–
215,853
250,746
The EQC receivable for 2021 does not relate to the historic Canterbury earthquakes (CEQ) receivable settled during the period. This receivable relates to non-CEQ receivables.
Recognition and measurement
Receivables (inclusive of GST) are recognised at fair value and are subsequently measured at amortised cost less any impairment.
Tower's premium receivables and reinsurance and other recoveries arise from insurance contracts. These receivables are impaired if there is
objective evidence that Tower will not be able to collect all amounts due according to the original terms of the receivable.
The remainder of Tower's receivables are assessed for impairment based on expected credit losses. The EQC receivable is the only material item
that falls into this category and is discussed further in the sub-note below.
EQC recovery receivable related to Canterbury earthquakes
During the year Tower received $52.9m (excluding GST) in a full and final settlement agreement with EQC regarding the recovery of claims costs related
to the 2010 and 2011 Christchurch earthquakes during the period. Tower fully reimbursed amounts payable to reinsurers of $10.7m and settled other
outstanding costs during the period. Tower's net proceeds from this settlement were $42.1m.
There was nil impairment expense in the year ended 30 September 2021 (2020: $13.1m).
Tower entered a sub-lease for its previous Auckland premises. The sub-lease is for the remaining non-cancellable term of the head lease and therefore
is classified as a finance lease. The profile of the net receipts is illustrated in the table below:
Less than one year
Between one and five years
More than five years
Total undiscounted finance lease receivable
Unearned finance income
Net investment in the finance lease
2.8 Payables
Composition
Trade payables
GST payable
EQC receivable payable to reinsurers
EQC & Fire and Emergency New Zealand levies payable
Reinsurance premium payable
Unsettled investment purchases
Other
Payables
Payable within 12 months
Payable in greater than 12 months
Payables
Recognition and measurement
2021
$000
2020
$000
2,019
2,421
–
4,440
(162)
4,278
–
–
–
–
–
–
2021
$000
2020
$000
10,380
23,264
–
10,857
6,343
11,456
6,605
13,527
20,519
10,741
11,068
3,414
–
7,331
68,905
66,600
68,905
66,600
–
–
68,905
66,600
Payables are recognised where goods or services that have been received or supplied and have been invoiced or formally agreed with the
supplier. Payables are stated at the fair value of the consideration to be paid in the future inclusive of GST. GST payable represents the net amount
payable to the respective tax authorities.
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49
2.9 Provisions
Composition
Annual leave and other employee benefits
Customer premium refunds
Other
Provisions
Payable within 12 months
Payable in greater than 12 months
Provisions
Recognition and measurement
2021
$000
6,709
–
–
6,709
6,235
474
6,709
2020
$000
6,901
2,422
208
9,531
9,157
374
9,531
Tower recognises a provision when it has a present obligation as a result of a past event and it is more likely than not that an outflow of resources
will be required to settle the obligation. Tower's provision represents the best estimate of the expenditure required to settle the present obligation
at the end of the reporting period.
2.10 Assets backing insurance liabilities
Tower has determined that all assets within its insurance companies are held to back insurance liabilities, with the exception of: (i) property, plant and
equipment; (ii) right of use assets, (iii) intangible assets; and (iv) 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 that basis.
3. INVESTMENTS
Tower invests funds collected as premiums and provided by shareholders to ensure it can meet its obligations to pay claims and expenses and to
generate a return to support its profitability. Tower has a low risk tolerance and therefore the majority of its investments are in investment grade
supranational and government bonds, and term deposits.
3.1 Investment income
Interest income
Net realised loss
Net unrealised loss
Investment income
2021
$000
5,148
(2,152)
(2,416)
580
2020
$000
7,328
(1,277)
(241)
5,810
Net realised losses relate to the maturity of fixed interest bonds, with interest coupon rates higher than market rates, purchased at higher than face value.
The corresponding higher interest received is reflected in the interest income amount.
Recognition and measurement
Tower's investment income is primarily made up of realised and unrealised interest income on fixed interest investments and fair value gains or
losses on its investment assets. Both are recognised in the period that they are earned through profit or loss.
3.2 Investments
Fixed interest investments
Equity investment
Property investment
Investments
Recognition and measurement
2021
$000
2020
$000
277,436
237,298
–
34
572
34
277,470
237,904
Tower's investment assets are designated at fair value through profit or loss. Investment assets are initially recognised at fair value and are remeasured to
fair value through profit or loss at each reporting date. Tower's approach to measuring the fair value of these assets is covered in the following note.
Purchases and sales of investments are recognised at the date which Tower commits to buy or sell the assets (i.e. trade date). Investments are
derecognised when the rights to receive future cash flows from the assets have expired, or have been transferred, and substantially all the risks and
rewards of ownership have transferred.
3.3 Fair value hierarchy
Tower designates its investments at fair value through profit or loss in accordance with its Treasury Policy. It categorises its investments into three levels
based on the inputs available to measure fair value:
Level 1
Fair value is calculated using quoted prices in active markets. Tower currently does not have any Level 1 investments.
Level 2
Investment valuations are based on direct or indirect observable data other than quoted prices included in Level 1. Level 2 inputs include: (1)
quoted prices for similar assets or liabilities; (2) quoted prices for assets or liabilities that are not traded in an active market; or (3) other
observable market data that can be used for valuation purposes. Tower investments included in this category include government and
corporate debt, where the market is considered to be lacking sufficient depth to be considered active, and part ownership of a property that
is rented out to staff.
Level 3
Investment valuation is based on unobservable market data. Tower's equity investment in the unlisted reinsurance company Pacific Re was the
only investment in this category. Tower sold the investment to a third party in November 2020 at the carrying value as at 30 September 2020.
As at 30 September 2021
Fixed interest investments
Equity investment
Property investment
Investments
As at 30 September 2020
Fixed interest investments
Equity investment
Property investment
Investments
LEVEL 1
$000
LEVEL 2
$000
LEVEL 3
$000
TOTAL
$000
–
–
–
–
–
–
–
–
277,436
–
34
277,470
237,298
–
34
237,332
–
–
–
–
–
572
–
572
277,436
–
34
277,470
237,298
572
34
237,904
There have been no transfers between levels of the fair value hierarchy during the current financial period (2020: nil).
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51
4. RISK MANAGEMENT
4.3 Insurance risk
Tower is exposed to multiple risks as it works to set things right for its customers and their communities whilst maximising returns for its
shareholders. Everyone across the organisation is responsible for ensuring that Tower's risks are managed and controlled on a day-to-day basis.
4.1 Risk management overview
Tower’s approach to achieving effective risk management is to embed a risk-aware culture where everyone across the organisation (including
contractors and third parties) is responsible for managing risk.
Tower’s Board expresses its appetite for risk in a Risk Appetite Statement, which:
(i) Gives clear concise guidance to management of parameters for risk taking.
(ii) Embeds risk management into strategic and decision-making processes.
(iii) Facilitates risk to be managed at all levels of the organisation through a structured process to identify risk, and the allocation of clear, personal
responsibility for management of identified risks by assigned risk owners.
The Board then approves and adopts: (i) the Risk Management Programme (RMP) which is the central document that explains how Tower effectively
manages risk within the business; and (ii) the Reinsurance Management Strategy (ReMS) which describes the systems, structures, and processes which
collectively ensures Tower's reinsurance arrangements and operations are prudently managed. These documents are approved annually by the Board.
The Board has delegated its responsibility to the Risk Committee to provide oversight of risk management practices and provide advice to the Board and
management when required. In addition, the Risk Committee also monitors the effectiveness of Tower’s risk management function which is overseen by
the Chief Risk Officer (CRO). The CRO provides regular reports to the Risk Committee on the operation of the Risk Management Framework (RMF), the
status of material risks, risk and compliance incidents and risk framework changes.
Tower has embedded an RMF with clear accountabilities and risk ownership to ensure that Tower identifies, manages, mitigates and reports on all key
risks and controls through the three lines of defence model.
(i) First line: Operational management has ownership, responsibility and accountability for directly identifying, assessing, controlling and mitigating key
risks which prevent them from achieving business objectives.
(ii) Second Line: Tower’s Risk and Compliance Functions are responsible for developing and implementing effective risk and compliance management
processes; providing advisory support to the first line of defence and constructively challenging operational management and risk and obligation
owners to ensure positive assurance.
(iii) Third line: Internal audit is responsible and accountable for providing an independent and objective view of the adequacy and effectiveness of the
Group’s risk management, governance and internal control framework. Internal audit, along with other groups such as external audit, report
independently to the Board and/or the Audit Committee.
The RMF is supported by a suite of policies that address the risks and compliance obligations covered in this section.
4.2 Strategic risk
Strategic risk is the risk that internal or external factors compromise Tower's ability to execute its strategy or achieve its strategic objectives. Strategic risk
is managed through:
(i) Monitoring and managing performance against Board-approved plan and targets.
(ii) Board leading an annual strategy and planning process which considers our performance, competitor positioning and strategic opportunities.
(iii) Identifying and managing emerging risks using established governance processes and forums.
Insurance risk is the risk that for any class of risk insured, the present value of actual claims payable will exceed the present value of actual premium
revenues generated (net of reinsurance). This risk is inherent in Tower's operations and arises and manifests through underwriting, insurance
concentration and reserving risk.
a. Underwriting risk
Underwriting risk refers to the risk that claims arising are higher (or lower) than assumed in pricing due to bad experience including catastrophes,
weakness in controls over underwriting or portfolio management, or claims management issues. Tower has established the following key controls to
mitigate this risk:
(i) Use of comprehensive management information systems and actuarial models to price products based on historical claims frequencies and claims
severity averages, adjusted for inflation and modelled catastrophes, trended forward to recognise anticipated changes in claims patterns after
making allowance for other costs incurred by the Group.
(ii) Passing elements of insurance risk to reinsurers. Tower's Board determines a maximum level of risk to be retained by the Group as a whole.
Tower's reinsurance programme is 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.
(iii) Underwriting limits are in place to enforce appropriate risk selection criteria and pricing with specific underwriting authorities that set clear
parameters for the business acceptance.
b. Concentration risk
Concentration risk refers to the risk of underwriting a number of like risks, where the same or similar loss events have the potential to produce claims
from many of Tower's customers at the same time. Tower is particularly subject to concentration risks in the following variety of forms:
(i) Geographic concentration risk – Tower purchases a catastrophe reinsurance programme to protect against a modelled 1-in-1000 years whole of
portfolio catastrophe loss. In addition it takes out additional aggregate reinsurance cover for large events which fall outside the catastrophe
reinsurance programme and tends to cover weather events in New Zealand and across the Pacific.
(ii) Product concentration risk – Tower's business is weighted towards the NZ general insurance market where its risks are concentrated in house
insurance (Home & Contents) and motor insurance. Tower limits its exposure through proportionate reinsurance arrangements. The table below
illustrates the diversity of Tower's operations.
GROSS WRITTEN PREMIUM (%)
NZ
PACIFIC
TOTAL
NZ
PACIFIC
TOTAL
2021
2020
Home & Contents
Motor
Commercial
Liability
Workers compensation
Other
Total
51%
33%
1%
1%
0%
1%
87%
4%
4%
4%
0%
1%
0%
55%
37%
5%
1%
1%
1%
13%
100%
51%
30%
1%
1%
0%
0%
83%
4%
5%
6%
0%
1%
1%
17%
55%
35%
7%
1%
1%
1%
100%
Tower has limited exposure to long-tail classes (which comprises part of "liability" and "workers compensation"). Long-tail classes have increased
uncertainty of the ultimate cost of claims due to the additional period of time to settlement.
c. Reserving risk
Reserving risk is managed through the actuarial valuation of insurance liabilities and monitoring of the probability of adequacy booked reserves. The
valuation of the net central estimate is performed by qualified and experienced actuaries. The central estimate is subject to a comprehensive review at
least annually.
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52
53
4.4 Credit risk
The following table provides further information regarding the ageing of reinsurance recoveries on paid claims at the balance date.
4.4 Credit risk (continued)
Credit risk is the risk of loss that arises when a counterparty fails to meet their financial obligations to Tower in accordance with the agreed terms. Tower's
exposure to credit risk primarily results from transactions with security issuers, reinsurers and policyholders.
a. Investment and treasury
Tower manages its investment and treasury credit risks in line with limits set by the Board:
(i) New Zealand cash deposits that are internally managed are limited to banks with a minimum Standard & Poor's (S&P) AA- credit rating.
(ii) Cash deposits and investments that are managed by external investment managers are limited to counterparties with a minimum S&P A- credit rating.
(iii) Tower holds deposits and invests in Pacific regional investment markets through its Pacific Island operations to comply with local statutory
requirements and in accordance with Tower investment policies. These deposits and investments generally have low credit ratings representing the
majority of the value included in the 'Below BBB' and unrated categories in the table below. This includes deposits and investments with Australian
bank subsidiaries that comprise 88% (2020: 83%) of the "not rated" category.
NOT DUE
$000
1 MONTH
$000
1 TO 2 MONTHS
$000
2 TO 3 MONTHS
$000
OVER 3 MONTHS
$000
TOTAL
$000
PAST DUE
1,352
5,379
–
–
–
–
–
–
–
1,352
99
5,478
As at 30 September 2021
Reinsurance recoveries on paid claims
As at 30 September 2020
Reinsurance recoveries on paid claims
c. Premium receivable
CASH AND CASH EQUIVALENTS
FIXED INTEREST INVESTMENTS
TOTAL
2021
$000
2020
$000
2021
$000
2020
$000
2021
$000
2020
$000
Tower's premium receivable balance primarily relates to policies which are paid on either a fortnightly or monthly basis. Payment default or policy
cancellation – subject to the terms of the policyholder's contract – will result in the termination of the insurance contract eliminating both the credit risk
and insurance risk.
AAA
AA
A
BBB
Below BBB
Not rated
Total
b. Reinsurance
–
–
83,614
55,478
–
–
9,173
23,342
116,129
–
–
5,409
19,221
94,430
143,548
33,100
–
2,226
4,132
106,805
90,859
29,737
–
3,456
6,441
94,430
227,162
33,100
–
11,399
27,474
106,805
146,337
29,737
–
8,865
25,662
80,108
277,436
237,298
393,565
317,406
NOT DUE
$000
1 MONTH
$000
1 TO 2 MONTHS
$000
2 TO 3 MONTHS
$000
OVER 3 MONTHS
$000
TOTAL
$000
PAST DUE
As at 30 September 2021
Net premium receivable
As at 30 September 2020
Net premium receivable
168,843
5,514
1,484
562
83
176,486
162,935
3,705
1,992
986
40
169,658
this includes premiums that are less than 30 days outstanding (which are owed but not past due) of $5.5m (2020: $7.1m).
Tower manages its reinsurance programme in line with the ReMS. Tower seeks to manage the quantum and volatility of insurance risk in order to reduce
exposure and overall cost.
4.5 Market risk
Tower's policy is to only deal with reinsurers with a credit rating of S&P "A-" or better unless local statutory requirements dictate otherwise. Additional
requirements of the policy are for no individual reinsurer to have more than 25% share of the overall programme and Tower is prohibited from offering
inwards reinsurance to external entities. The following table provides details on Tower's exposure to reinsurance recoveries:
AAA
AA
A
BBB
Below BBB
Not rated
Total
OUTSTANDING CLAIMS
PAID CLAIMS
REINSURANCE ON:
2021
$000
–
12,005
10,805
–
–
40
2020
$000
–
6,738
6,106
–
–
29
2021
$000
–
1,028
320
–
–
4
2020
$000
–
3,490
1,986
–
–
2
TOTAL
2021
$000
–
13,033
11,125
–
–
44
2020
$000
–
10,228
8,092
–
–
31
22,850
12,873
1,352
5,478
24,202
18,351
Market risk is the risk of adverse impacts on investment earnings resulting from changes in market factors. Tower's market risk is predominately as a
result of changes in the value of the New Zealand dollar (currency risk) and interest rate movements. Tower's approach to managing market risk is
underpinned by its Treasury Policy as approved by the Board.
a. Currency risk
Tower's currency exposure arises from the translation of foreign operations into Tower's functional currency (currency translation risk) or due to
transactions denominated in a currency other than the functional currency of a controlled entity (operational currency risk). The currencies giving rise to
this risk are primarily the US dollar, Fijian dollar and Papua New Guinea (PNG) kina.
Tower's principal currency risk is currency translation (where movement impacts equity). Tower generally elects not to hedge this risk as it is difficult given
the size and nature of the currency markets in the Pacific. Tower seeks to minimise its net exposure to foreign operational risk by actively seeking to
return surplus cash and capital to the parent company.
Operational currency risk impacts profit and generally arises from:
(i) Procurement of goods and services denominated in foreign currencies. Tower may enter into hedges for future transactions, using authorised
instruments, provided that the timing and amount of those future transactions can be estimated with a reasonable degree of certainty.
(ii) Investment assets managed by the external investment manager that are denominated in foreign currencies. Tower's Board set limits for the
management of currency risk based on prudent asset management practice. Regular reviews are conducted to ensure that these limits are
adhered to.
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55
4.5 Market risk (continued)
The following table demonstrates the impact of the New Zealand dollar weakening or strengthening against the most significant currencies for which
Tower has foreign exchange exposure holding all other variables constant.
New Zealand Dollar – USD
Currency strengthens by 10%
Currency weakens by 10%
New Zealand Dollar – Fijian Dollar
Currency strengthens by 10%
Currency weakens by 10%
New Zealand Dollar – PNG Kina
Currency strengthens by 10%
Currency weakens by 10%
b. Interest rate risk
DIRECT IMPACT ON EQUITY
IMPACT ON PROFIT OR LOSS
2021
$000
2020
$000
2021
$000
2020
$000
(581)
710
(1,667)
2,037
(743)
908
(407)
497
(1,350)
1,650
(1,078)
1,318
23
(28)
(38)
47
30
(36)
17
(20)
(73)
90
57
(70)
Tower is exposed to interest rate risk through its holdings in interest-bearing assets. Interest-bearing assets with a floating interest rate expose Tower to
cash flow interest rate risk, whereas fixed interest investments expose Tower to fair value interest rate risk.
Tower's interest rate risk primarily arises from fluctuations in the valuation of fixed interest investments recognised at fair value and from the underwriting
of general insurance contracts, which creates exposure to the risk that interest rate movements materially impact the fair value of the insurance liabilities.
Interest rate risk arises to the extent that there is a mismatch which arises between the two.
Fixed interest investments are measured at fair value through profit or loss. Movements in interest rates impact the fair value of interest-bearing financial
assets and therefore impact profit or loss (there is no direct impact on equity). The impact of a 0.5% increase or decrease in interest rates on fixed interest
investments is shown below (holding everything else constant). The assumption made for 0.5% decrease in interest rates is that the lower bound is
capped at 0% as negative rates on fixed interest investments are highly unlikely.
Interest rates increase by 0.5%
Interest rates decrease by 0.5%
IMPACT ON PROFIT OR LOSS
2021
$000
(988)
960
2020
$000
(921)
750
Tower manages its interest rate risk through Board-approved investment management guidelines that have regard to policyholder expectations and risks
and to target surplus for solvency as advised by the Appointed Actuary.
4.6 Liquidity risk
Liquidity risk arises where liabilities cannot be met as they fall due as a result of insufficient funds and/or illiquid asset portfolios. Tower mitigates this risk
through maintaining sufficient liquid assets to ensure that it can meet all obligations on a timely basis.
Tower is primarily exposed to liquidity risk through its obligations to make payment for claims of unknown amounts on unknown dates. Fixed interest
investments can generally be readily sold or exchanged for cash to settle claims and are managed in accordance with the policy of broadly matching the
overall maturity profile to the estimated pattern of claim payments. This is illustrated in the table below.
Floating interest rate (at call)
Within 3 months
3 to 6 months
6 to 12 months
After 12 months
Total
4.7 Capital management risk
NET OUTSTANDING CLAIMS LIABILITY
CASH AND INVESTMENTS
2021
$000
2020
$000
2021
$000
2020
$000
–
42,949
17,070
17,176
22,293
99,489
–
32,943
15,140
20,246
26,529
94,858
116,217
75,129
31,890
47,381
122,948
393,565
80,108
36,982
53,797
55,352
91,167
317,406
Capital risk is the risk that capital is insufficient or not of the best form to provide a buffer against losses arising from unanticipated events, while also
maximising the efficient use of capital with a view to enhancing growth and returns and adding long-term value to Tower's shareholders.
Tower has a documented description of its capital management process which sets out Tower's principles, approaches, and processes in relation to
capital management that enables it to operate at an appropriate level of target solvency capital which is within the bounds of Tower's risk appetite.
The capital management process allows the Board, management, rating agencies and the regulator to understand Tower's approach to capital
management, including requirements for formulating capital targets, and monitoring, reporting and remediating capital as required.
The operation of the capital management process is reported annually to the Board, together with a forward-looking estimate of expected capital
utilisation and capital resilience. In addition, Tower carries out stress, reverse stress and scenario testing to ensure the level of capital is appropriate given
its risk appetite.
In October 2020, the Reserve Bank of New Zealand (RBNZ) commenced consultation on a review of the Insurance (Prudential Supervision) Act 2010. The
consultation process is expected to continue through to 2022. Tower has actively participated in the consultation to date, with an ongoing assessment of
the impacts to solvency being performed as information becomes known. As part of the overall process, the RBNZ issued an exposure draft on an interim
solvency standard (ISS) in July 2021 which anticipates the introduction of IFRS 17 during the consultation period. This draft ISS: combines requirements for
life and non-life insurers, which were previously separate standards; proposes enhancements to the transparency of solvency reporting; provides for
increased prudential supervision for insurers operating close to their minimum solvency margin; and imposes changes that would reduce solvency
margins, such as the introduction of an operational risk capital charge. In October 2021, the RBNZ advised that the effective date of the ISS would be
deferred until 2023, and that the feedback received would likely require some changes to the ISS. Tower considers it is not yet possible to provide a
reasonable estimate of the impact of changes to its solvency position from the ISS, as the ISS has not been finalised, the RBNZ has stated that it will
change, and a lack of clarity in certain areas of the draft ISS means that there are different possible interpretations as to the potential impact.
a. Regulatory solvency capital
The Reserve Bank of New Zealand (RBNZ) is the prudential regulator and supervisor of all insurers carrying on insurance business in New Zealand, and is
responsible for administering the Insurance (Prudential Supervision) Act 2010. Tower measures the adequacy of capital against the Solvency Standards
for Non-life Insurance Business published by the RBNZ alongside additional capital held to meet RBNZ minimum requirements and any further capital as
determined by the Board.
Foreign operations are subject to regulatory oversight in the relevant jurisdiction. It is Tower's policy to ensure that each of the licenced insurers in the
Group maintain an adequate capital position within the requirements of the relevant regulator.
During the year ended 30 September 2021, the Group complied with all externally imposed capital requirements (2020: complied).
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57
4.7 Capital management risk (continued)
During the year RBNZ reduced Tower’s required minimum solvency margin, via a license condition, to $25.0m (2020: $50.0m). Tower Limited's Group and
Parent solvency margin are illustrated in the table below.
Actual solvency capital
Minimum solvency capital
Solvency margin
Solvency ratio
2021
$000
2020
$000
PARENT
GROUP
PARENT
GROUP
179,439
66,252
113,187
271%
214,128
79,927
134,201
268%
150,451
52,342
98,109
287%
181,214
65,728
115,486
276%
The solvency presented as of 30 September 2021 does not reflect any possible change to solvency as a result of the RBNZ's Insurance (Prudential
Supervision) Act 2010 review. Policy changes and legislative reforms as a result of this review are expected to come into legislation in 2023 – 2024.
b. Capital composition
The balance sheet capital mix at reporting date is shown in the table below:
Total shareholder equity
Total
c. Financial strength rating
2021
$000
RESTATED
2020
$000
347,044
347,044
339,886
339,886
Tower Limited has an insurer financial strength rating of "A- (Excellent)" and a long-term issuer credit rating of "A-" as affirmed by international rating
agency AM Best Company Inc. with an effective date of 23 April 2021.
4.8 Operational risk
Operational risk is the risk of loss due to inadequate or failed internal processes or systems, human error or from external events.
Tower's approach is to proactively manage our operational risks to mitigate potential customer detriment, regulatory or legal censure, financial and
reputational impacts.
Tower has in place appropriate operational processes and systems, including prevention and detection measures. These include processes which seek
to ensure Tower can absorb and/or adapt to internal or external occurrences that could disrupt business operations.
Management and staff are responsible for identifying, assessing and managing operational risks in accordance with their roles and responsibilities.
Failures in controls are recorded and then actively monitored and managed. Incidents are managed by the first line of defence and overseen by the
second line of defence, with ongoing reporting to management and the Board Risk Committee.
4.9 Regulatory and compliance risk
Regulatory and compliance risk is defined as the risk of legal, regulatory or reputational impacts arising from failure to manage compliance obligations,
or failure to anticipate and prepare for changes in the regulatory environment.
Tower engages with regulators and regularly monitors developments in regulatory requirements to support ongoing compliance.
4.10 Conduct risk
Conduct risk is defined as the risk that conduct may contribute to poor outcomes for customers.
Tower manages Conduct risk through a number of measures including undertaking ongoing product reviews to ensure products are delivering good
customer outcomes, reviewing customer feedback to identify conduct trends or issues, managing vulnerable customers, holding workshops with
frontline staff to identify potential conduct issues and embedding and monitoring controls across the business to deliver good customer outcomes.
There is robust governance in place to oversee Tower's conduct risk management programme including reporting to the Management and Board
Committees.
4.11 Cyber risk
Cyber risk is any risk associated with financial loss, disruption or damage to the reputation of Tower resulting from either the failure, or unauthorised or
erroneous use of its information systems.
Tower’s approach to Cyber risk is to proactively protect against, monitor for and respond to those cyber threats seen to be targeting the organisation.
Tower continues to monitor evolving key cyber risks, which are being discussed and reviewed on a monthly basis through our Management Risk and
Conduct Committee and on a quarterly basis with the Risk and Audit Committee. Risk mitigation is achieved through ongoing investment in Tower’s
Security programme and Tower’s dedicated security function.
5. CAPITAL STRUCTURE
This section provides information about how Tower finances its operations through equity. Tower's capital position provides financial security to its
customers, employees and other stakeholders whilst operating within the capital requirements set by regulators.
5.1 Borrowings
There were no new short term cash advances during the year ended 30 September 2021. The previous facility agreement with a limit of $15m with Bank
of New Zealand expired on 30 September 2020.
Total borrowing costs for the year were nil (2020: $0.8m, none of which were capitalised).
5.2 Contributed equity
Opening balance
Issue of share capital
Cancellation of shares on amalgamation
Recognition of shares on amalgamation
Total contributed equity
Represented by:
Opening balance
Issued shares
Cancellation of shares on amalgamation
Recognition of shares on amalgamation
Total shares on issue
2021
$000
2020
$000
492,424
209,990
–
–
–
492,424
45,000
(254,990)
492,424
492,424
421,647,258
211,107,758
–
–
–
45,000,000
(256,107,758)
421,647,258
421,647,258
421,647,258
On 30 September 2020, Tower Insurance Limited was renamed Tower Limited (the Company) and was amalgamated by way of a short form amalgamation under the Companies Act 1993 with
its ultimate parent, Tower Limited (the prior Tower Limited); its parent, Tower Financial Services Group Limited; and another subsidiary of Tower Limited, Tower New Zealand Limited. At this date
the Company's existing share capital of $255m (including the issue of $45m new share capital) was cancelled without payment or other consideration, and instead the shares of the prior Tower
Limited (of $492m) became the shares of the Company, so that the shareholders of the prior Tower Limited became shareholders of the Company.
Ordinary shares issued by the Company 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 have been no changes in contributed equity during the year.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
58
59
5.3 Reserves
5.5 Earnings per share
Opening balance
Currency translation differences arising during the year
Foreign currency translation reserve
Opening balance
Gain on revaluation
Deferred tax on revaluation
Asset revaluation reserve
Capital reserve
Opening balance
Impact of amalgamation
Separation reserve
Reserves
Recognition and measurement
2021
$000
2020
$000
(4,985)
(1,097)
(6,082)
1,564
159
(16)
1,707
11,990
(3,697)
(1,288)
(4,985)
1,515
41
8
1,564
11,990
(113,000)
–
(113,000)
(105,385)
–
(113,000)
(113,000)
(104,431)
The assets and liabilities of entities whose functional currency is not the New Zealand dollar are translated at the exchange rates ruling at balance
date. Income and expense items are translated at a weighted average of exchange rates over the period approximating spot rates at the
transaction dates. Exchange rate differences are taken to the foreign currency translation reserve.
Tower's land and buildings are valued at fair value less accumulated depreciation. Any surplus on revaluation of these items is transferred directly
to the asset revaluation reserve unless it offsets a previous decrease in value recognised in profit or loss in which case it is recognised in the
consolidated statement of comprehensive income.
On 30 September 2020, the Company was amalgamated with other Tower entities. On this date, the separation reserve was recognised. The
separation reserve was originally created in the prior Tower Limited 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 to meet the requirements
of the ATO.
5.4 Net tangible assets per share
Net tangible assets per share
2021
$
2020
$
0.57
0.56
Net tangible assets per share have been calculated using the net assets as per the balance sheet adjusted for intangible assets (including goodwill) and
deferred tax assets divided by total shares on issue.
Profit attributable to shareholders ($ thousands)
2021
RESTATED
2020
18,683
10,761
Weighted average number of ordinary shares for basic and diluted earnings per share (number of shares)
421,647,258
417,172,654
Basic and diluted earnings per share (cents)
4.43
2.58
The Group has used the ordinary shares of the prior Tower Limited up to 30 September 2020, and of the Company from that date, for the purposes of
calculating the weighted average number of ordinary shares. The prior Tower Limited issued an additional 84,322,958 shares as per its 1-for-4 rights offer
(refer to Note 5.2). The shares were issued at NZ$0.56 which represented a 19% discount to the share price of NZ$0.69 as at 15 October 2019 (the date
immediately prior to the exercise of rights). As a result, 13,118,388 shares issued as part of the rights offer are treated as a bonus issue. The weighted
average number of ordinary shares on issue in both 2020 and 2019 have been adjusted in accordance with NZ IAS 33 Earnings per share.
5.6 Dividends
2021
2020
CENTS PER SHARE
$ THOUSANDS
CENTS PER SHARE
$ THOUSANDS
Final dividend for the year
Interim dividend for the period
–
2.5
–
10,541
–
–
–
–
On 24 November 2021, the Board approved a full year dividend of 2.5 cents per share, with the dividend being payable on 2 February 2022. The
anticipated cash impact of the final dividend is approximately $10.5m.
During the year ended 30 September 2021 no dividends were written off (2020: $0.1m).
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 60
6. OTHER BALANCE SHEET ITEMS
This section provides information about assets and liabilities not included elsewhere.
6.1 Property, plant and equipment
Composition:
30 September 2021
Composition:
Cost
Accumulated depreciation
Property, plant and equipment
Reconciliation:
Opening balance
Depreciation
Additions
Revaluations
Disposals
Foreign exchange movements
Closing balance
30 September 2020
Composition:
Cost
Accumulated depreciation
Property, plant and equipment
Reconciliation:
Opening balance
Depreciation
Additions
Revaluations
Disposals
Foreign exchange movements
Closing balance
Recognition and measurement
LAND AND
BUILDINGS
$000
OFFICE EQUIPMENT
AND FURNITURE
$000
MOTOR VEHICLES
$000
COMPUTER
EQUIPMENT
$000
4,102
–
4,102
4,035
–
–
159
–
(92)
4,102
4,035
–
4,035
4,082
–
–
41
–
(88)
4,035
4,257
(2,289)
1,968
2,989
(928)
1,437
–
(1,527)
(3)
1,968
8,599
(5,610)
2,989
4,002
(1,048)
31
–
21
(17)
2,989
1,616
(847)
769
1,083
(260)
–
–
(34)
(20)
769
1,748
(665)
1,083
205
(205)
1,211
–
(125)
(3)
1,083
17,292
(14,757)
2,535
1,934
(1,106)
1,654
–
56
(3)
2,535
15,622
(13,688)
1,934
815
(751)
2,004
–
(130)
(4)
1,934
TOTAL
$000
27,267
(17,893)
9,374
10,041
(2,294)
3,091
159
(1,505)
(118)
9,374
30,004
(19,963)
10,041
9,104
(2,004)
3,246
41
(234)
(112)
10,041
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 asset's 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.
Furniture & fittings
Leasehold property improvements
Motor vehicles
Computer equipment
5-9 years
3-12 years
5 years
3-5 years
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.
61
TOTAL
$000
145,250
(56,658)
88,592
77,848
(12,556)
24,962
(237)
(1,425)
88,592
121,951
(44,103)
77,848
74,211
(5,536)
68,675
(9,705)
19,041
(43)
(120)
GOODWILL
$000
SOFTWARE
$000
CUSTOMER
RELATIONSHIPS
$000
17,744
–
17,744
17,744
–
–
–
–
17,744
17,744
–
17,744
17,744
–
17,744
–
–
–
–
98,850
(50,323)
48,527
47,866
(8,205)
10,528
(237)
(1,425)
48,527
89,985
(42,119)
47,866
56,467
(5,536)
50,931
(7,721)
4,819
(43)
(120)
28,656
(6,335)
22,321
12,238
(4,351)
14,434
–
–
22,321
14,222
(1,984)
12,238
–
–
–
(1,984)
14,222
–
–
17,744
47,866
12,238
77,848
6.2 Intangible assets
a. Amounts recognised in the balance sheet
30 September 2021
Composition:
Cost
Accumulated amortisation
Intangible assets
Reconciliation:
Opening balance
Amortisation
Additions
Disposals
Transfers
Closing balance
30 September 2020
Composition:
Cost
Accumulated amortisation
Intangible assets
Reconciliation:
Opening balance
Adjustment to opening balance
Restated opening balance
Amortisation
Additions
Disposals
Transfers
Closing balance
Comparative information with respect to Software and related IT projects in progress has been restated due to a change in accounting policies as specified in Note 8.7.
Tower acquired and assumed ANZ's rights and obligations relating to servicing a portfolio of insurance underwritten by Tower. Tower provided insurance for ANZ and National Bank customers
between 1990 and 2009 and continues to cover over 23,000 people under those policies. On completion of the acquisition of the rights and obligations these customers will be insured directly
by Tower under a Tower branded policy. The amount capitalised includes the price paid for acquiring the portfolio outright and associated acquisition costs. The asset will be amortised over a
5- to 10-year period, with the pattern of amortisation being aligned with expected net cashflow benefits over this period.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
62
63
6.2 Intangible assets (continued)
Recognition and measurement
Intangible assets are assets without physical substance. They are recognised as an asset if it is probable that expected future economic benefits
attributable to the asset will flow to Tower and that costs can be measured reliably.
Application software and customer relationships are recorded at cost less accumulated amortisation and impairment. Application software is
amortised on a straight line basis over the estimated useful life of the software. Customer relationships are amortised over the estimated useful life
in accordance with the pattern of economic benefit consumption.
Internally generated intangible assets are recorded at cost which comprise all directly attributable costs necessary to create, produce and prepare
the asset to be 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.
The useful lives for each category of intangible assets with a finite life are as follows:
— capitalised software: 3-5 years for general use computer software and 3-10 years for core operating system software
— customer relationships: 5-10 years
Goodwill (i.e. assets with an indefinite useful life) generated as a result of business acquisition is initially measured as the excess of the purchase
consideration over the fair value of the net identifiable assets and liabilities acquired. Goodwill is not subject to amortisation but is tested for
impairment annually or more frequently where there are indicators of impairment.
Critical accounting estimates and judgements
Tower has determined that the ANZ customer relationship asset consists of two component intangible assets with different useful lives, and these
components are therefore expected to provide a different pattern of benefits to Tower.
The asset components, being 1) a customer relationship asset with a useful life equivalent to the customer base’s expected lifespan of ten years,
and; 2) a non-compete period with a contracted useful life of five years. The estimated capitalised cost related to the ANZ customer relationship
asset has been apportioned between the two asset components by valuing the non-compete at the differential in net present value of the asset
from improved customer retention over the non-compete period, pro-rated over the full asset value. This valuation is calculated with reference to
cash flow forecasts that combine past experience with future expectations based on prevailing and anticipated market factors, expected retention
rate and a discount rate of 12.5%.
b. Impairment testing
An impairment charge is recognised in profit or loss when the carrying value of the asset, or cash-generating unit (CGU), exceeds the calculated
recoverable amount.
(i) Software and customer relationships
Software and customer relationships are reviewed at each reporting date by determining whether there is an indication that the carrying values may
be impaired. If an indication exists, the asset is tested for impairment. A loss is recognised for the amount by which the carrying value exceeds the
asset's recoverable value.
There were no indications of impairment during the year and therefore these assets were not tested for impairment (2020: no indications).
Critical accounting estimates and judgements
The recoverable amount for software and customer relationships is determined by reference to a value in use calculation based on (i) cash flow
forecasts that combine past experience with future expectations based on prevailing and anticipated market factors; and (ii) a discount rate that
appropriately reflects the time value of money and the specific risks associated with the assets.
Value-in-use calculations involve the use of accounting estimates and assumptions to determine the projected net cash flows, which are
discounted using an appropriate discount rate to reflect current market assessment of the risks associated with the assets. An impairment charge
for capitalised software is incurred where there is evidence that the economic performance of the asset is not as intended by management.
Customer relationships represent the present value of future benefits expected to arise from existing customer relationships. The assumptions for
the useful life are based on historical information.
6.2 Intangible assets (continued)
(ii) Goodwill
Goodwill is deemed to have an indefinite useful life and is tested annually for impairment or more frequently where there is an indication that the
carrying value may not be recoverable.
Goodwill is allocated to cash generating units (CGUs) expected from synergies arising from the acquisition giving rise to goodwill. Tower's goodwill is
allocated to the general insurance CGU.
Tower undertook an annual impairment review and no loss has been recognised in 2021 as a result (2020: nil). COVID-19 impacts were again taken
into account when performing the review.
Critical accounting estimates and judgements
The recoverable amount of the New Zealand general insurance business is assessed with reference to its appraisal value, which is a common
practice for insurance companies. A base discount rate of 12.0% was used in the calculation (2020: 10.5%). The cash flows are in line with the
FY22 - FY24 operational plan (2020: FY21 - FY23) and longer term profitability is assumed to continue to grow at 2.5% per annum. The projected
cash flows are determined based on past performance and management's expectations for market developments with a terminal growth rate of
2.5% (2020: 2%).
The overall valuation is sensitive to a range of assumptions including the forecast combined operating ratio used in terminal value calculation,
discount rate, and terminal value long-term growth rate. Reasonable changes to these assumptions will not result in an impairment.
6.3 Leases
a. Amounts recognised in the Balance Sheet
(ii) Right of use assets
30 September 2021
Composition:
Cost
Accumulated depreciation
Right of use assets
Reconciliation:
Opening balance
Depreciation
Additions
Disposals
Revaluations
Impairment
Net foreign exchange movements
Right of use assets
OFFICE SPACE
$000
MOTOR
VEHICLES
$000
TOTAL
$000
26,901
(1,332)
25,569
7,189
(2,404)
24,332
(3,308)
(3)
–
(237)
25,569
25
(17)
8
22
(14)
–
–
–
–
–
8
26,926
(1,349)
25,577
7,211
(2,418)
24,332
(3,308)
(3)
–
(237)
25,577
In August 2021 Tower entered into a new lease with a 10-year term for its Auckland premises. Tower recognised an initial right of use asset of $24.0m and an initial lease liability of $33.3m with
the difference primarily representing lease incentives. Tower has assumed no renewals of the lease past the initial 10-year term for the purposes of the right of use asset and lease liability.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 64
65
6.3 Leases (continued)
30 September 2020
Composition:
Cost
Accumulated depreciation
Right of use assets
Reconciliation:
Opening balance
Depreciation
Additions
Disposals
Revaluations
Impairment
Net foreign exchange movements
Right of use assets
Recognition and measurement
OFFICE SPACE
$000
MOTOR
VEHICLES
$000
9,619
(2,430)
7,189
10,097
(2,518)
961
(1,249)
(96)
(27)
21
7,189
53
(31)
22
86
(68)
4
–
–
–
–
22
TOTAL
$000
9,672
(2,461)
7,211
10,183
(2,586)
965
(1,249)
(96)
(27)
21
7,211
6.3 Leases (continued)
Recognition and measurement
Lease liabilities are recognised at the date Tower has the right to use the corresponding asset. Lease liabilities are initially measured as the present
value of expected lease payments under lease arrangements. Lease liability will include any option to extend where it is reasonably certain that the
option will be exercised. The lease payments are discounted using the incremental borrowing rate as the interest rate in the lease cannot be readily
determined. Incremental borrowing rates used during the year ranged between 1.9% and 3.6% (2020: between 2.3% and 3.6%).
Subsequent repayments are split between principal and interest cost where the finance cost represents the time value of money and is charged to
the profit or loss over the lease period. The discount rate applied is unchanged from the applied at the initial recognition of the lease, unless there
are material changes to the lease.
b. Amounts recognised in the consolidated statement of comprehensive income
CLASSIFICATION
Depreciation and impairment
Underwriting expense & corporate and other expenses
Interest expense
Gain on disposal
Lease expense
Finance costs
Underwriting expense
c. Amounts recognised in the consolidated statement of cash flows
2021
$000
(2,418)
(378)
1,179
(1,617)
2020
$000
(2,598)
(369)
167
(2,800)
2021
$000
2020
$000
(2,848)
(3,070)
Right of use assets are recognised when Tower has the right to use the assets. Right of use assets are measured at cost comprising the initial
measurement of the lease liability adjusted for any lease payments made at or before the commencement date less any lease incentives received;
and indirect costs; and restoration costs. Right of use assets are generally depreciated over the shorter of the asset's useful life and the lease term
on a straight line basis.
Total cash outflow for lease principal payments
(ii) Lease liabilities
Composition:
Current
Non-current
Lease liabilities
Due within 1 year
Due within 1 to 2 years
Due within 2 to 5 years
Due after 5 years
Discount
Lease liabilities
2021
$000
2020
$000
6,082
33,339
39,421
6,082
6,041
12,055
19,514
(4,271)
39,421
2,721
5,974
8,695
2,721
2,584
3,534
418
(562)
8,695
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 66
7. TAX
This section provides information on Tower's tax expense during the year and its position at balance date.
7.1 Tax expense
Composition
Current tax
Deferred tax
Adjustments in respect of prior years
Tax expense
Reconciliation of prima facie tax to income tax expense
Net profit before tax
Prima facie tax expense at 28% (2020: 28%)
Adjustments in respect of prior years
Tax effect of non-deductible expenses and non-taxable income
Foreign tax credits written off
Other
Tax expense
Recognition and measurement
2021
$000
3,745
5,785
(395)
9,135
2021
$000
28,450
7,966
(395)
796
861
(93)
9,135
RESTATED
2020
$000
3,621
3,900
(51)
7,470
RESTATED
2020
$000
18,680
5,230
(51)
788
1,127
376
7,471
Tax expense is calculated on the basis of the applicable tax rates that have been enacted or substantively enacted at the end of the reporting
period in the jurisdictions Tower operates in. There have been no tax rate changes during the year in these jurisdictions. Current tax expense relates
to tax payable for the current financial reporting period while deferred tax will be payable in future periods.
67
2021
$000
2020
$000
12,038
863
12,901
12,038
854
12,892
7.2 Current tax
a. Current tax asset
Excess tax payments related to prior periods
Excess tax payments/tax payable related to current period
Current tax assets
Expected to be recovered from 2024 as per the Board-approved operational plan for 2022 to 2025.
Excess tax payment made in the Pacific Islands during the reporting period.
b. Current tax liability
The current tax liability balance of $170k (2020: $821k) relates to taxes payable to offshore tax authorities in the Pacific Islands.
Recognition and measurement
Overpayment of tax in the current and prior periods is recognised as a current tax asset. Current tax assets are measured at the amount expected
to be recovered from the taxation authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the end of the
reporting period.
7.3 Deferred tax
a. Deferred tax asset
Composition
Tax losses recognised
Software, property, plant and equipment
Leases
Provisions and accruals
Recognised in profit or loss
Impact through other comprehensive income
Recognised in comprehensive profit or loss
Set off of deferred tax liabilities pursuant to NZ IAS 12
Deferred tax asset
Reconciliation of movements
Opening balance
Movements recognised in other comprehensive income
Movements recognised in consolidated statement of comprehensive income
Deferred tax asset pre NZ IAS 12 set off
2021
$000
24,116
2,834
373
4,165
31,488
–
31,488
(7,038)
24,450
RESTATED
2020
$000
25,720
3,744
501
3,882
33,847
1,550
35,397
(6,575)
28,822
2021
$000
2020
$000
35,397
–
(3,909)
31,488
36,360
2,051
(3,014)
35,397
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 68
69
7.3 Deferred tax (continued)
b. Deferred tax liability
Composition
Deferred acquisition costs
Customer relationships
Other
Recognised in profit or loss
Asset revaluation
Recognised in comprehensive profit or loss
Set off of deferred tax liabilities pursuant to NZ IAS 12
Deferred tax liability
Primarily relates to withholding tax on undistributed profit from the Pacific Islands.
Reconciliation of movements
Opening balance
Movements recognised in consolidated statement of comprehensive income
Movements recognised in equity
Deferred tax liability pre NZ IAS 12 set off
Recognition and measurement
7.4 Imputation credits
The Group imputation credit account reflects the imputation credits held by the Company as the representative member of the Group.
2021
$000
(5,481)
(3,433)
(461)
(9,375)
(438)
(9,813)
7,038
(2,775)
2021
$000
(7,921)
(1,876)
(16)
(9,813)
2020
$000
(6,588)
–
(911)
(7,499)
(422)
(7,921)
6,575
(1,346)
2020
$000
(7,043)
(886)
8
(7,921)
Imputation credits available for use in subsequent reporting periods
8. OTHER INFORMATION
This section includes additional disclosures which are required by financial reporting standards.
8.1 Notes to the Consolidated Cash Flow Statement
Composition
Cash at bank
Deposits at call
Restricted cash
Cash and cash equivalents
The average interest rate at 30 September 2021 for deposits at call is 0.25% (2020: 0.47%).
Reconciliation of profit for the year to cash flows from operating activities
Deferred tax is income tax which is expected to be payable or recoverable in the future as a result of the unwinding of temporary differences.
These arise from differences in the recognition of assets and liabilities for financial reporting and from the filing of income tax returns. Deferred tax
is recognised on all temporary differences, other than those arising from (i) goodwill or (ii) from the initial recognition of assets and liabilities in a
transaction (other than in a business combination) that affects neither the accounting nor taxable profit or loss.
At the reporting date, the Group has recognised a deferred tax asset in respect of its unused tax losses of $86.1m (2020: $92.2m).
Deferred tax is calculated at the tax rates that are expected to apply to the year when the liability is settled or the asset realised, based on tax rates
and tax laws that have been enacted or substantively enacted at balance date.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when
they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Critical accounting judgements and estimates
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 Limited and subsidiaries. Tower's ability to utilise these tax
losses depends on the future profitability, changes in ownership and a major change in Tower's business. The enactment of the new business
continuity test in the Income Tax Act 2007 on 30 March 2021 for carrying forward tax losses means that Tower is able to carry forward its tax losses
even if there is a significant shareholding change, as long as the business continuity test is met.
Profit for the year
Adjusted for non-cash items
Depreciation of property, plant and equipment
Depreciation, impairment and disposals of right of use assets
Amortisation of intangible assets
Fair value losses on financial assets
Gain/loss on disposal of fixed assets
Change in deferred tax
Adjusted for movements in working capital
Change in receivables
Change in payables
Change in taxation
Adjusted for financing activities
Facility fees and interest paid
Net cash inflows from operating activities
2021
$000
2020
$000
271
271
2021
$000
2020
$000
88,740
27,389
–
116,129
61,892
18,071
145
80,108
2021
$000
RESTATED
2020
$000
19,315
11,210
2,294
2,418
12,556
4,568
322
5,799
41,612
8,840
539
378
98,641
2,004
2,432
9,706
1,518
–
7,565
(2,659)
(15,314)
(1,414)
1,115
16,163
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 70
71
8.2 Related party disclosures
8.5 Subsequent events
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.
On 24 November 2021, the Board approved a full year dividend of 2.5 cents per share, with the dividend being payable on 2 February 2022 as specified
by Note 5.6. The anticipated cash impact of the final dividend is approximately $10.5m.
Salaries and other short-term employee benefits paid
Termination benefits
Independent director fees
Related party remuneration
2021
$000
5,059
486
723
6,268
2020
$000
4,736
–
624
5,360
Tower insurance products are available to all key management personnel on the same terms as available to other employees. In addition, Tower
purchases indemnity insurance for all directors both past and present covering liabilities and legal expenses incurred whilst in office.
Definition
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.
8.3 Auditor’s remuneration
Audit of financial statements (1)
Other assurance services (2)
Non-assurance agreed procedures (3)
Total fees paid to Group's auditors
Fees paid to subsidiaries' auditors different to Group auditors:
Audit of financial statements (4)
Auditor’s remuneration
2021
$000
2020
$000
599
60
–
659
14
673
550
46
12
608
15
623
(1) Audit of financial statements includes fees for both the audit of annual financial statements and the review of the interim financial statements. PwC Fiji performs the audits of all overseas
incorporated subsidiaries with support of PwC New Zealand and other PwC network firms. $129,600 is paid to other PwC network firms (non New Zealand) for their audit services.
(2) Other assurance services includes annual solvency return assurance and Pacific Island regulatory return audits. The other assurance services for the year ended 30 September 2020 were
completed during the year ended 30 September 2021.
(3) Agreed procedures on Pacific Island regulatory return and Annual Shareholders' Meeting procedures in the year ended 30 September 2020. The non-assurance agreed procedures for the
year ended 30 September 2020 were completed during the year ended 30 September 2021.
(4) The audit of Tower Insurance (Vanuatu) Limited was performed by Law Partners (2020: Law Partners).
8.4 Contingent liabilities
The Group is occasionally subject to claims and disputes as a commercial outcome of conducting insurance business. Provisions are recorded for these
claims or disputes when it is probable that an outflow of resources will be required to settle any obligations. Best estimates are included within claims
reserves for any litigation that has arisen in the usual course of business.
The Group has no other contingent liabilities.
On 24 November 2021, the Board approved $30.4m capital return by way of a compulsory share buyback. The capital return is subject to shareholder
and Court approval.
On 14 October 2021 Tower Limited reached an agreement to increase its shareholding in National Pacific Insurance Limited from 71.39% to 93.88% for a
consideration of $3.4m. Tower Limited has subsequently commenced a process to acquire the remaining 6.12% shareholding.
8.6 Capital commitments
As at 30 September 2021, Tower has nil capital commitments (2020: $0.7m).
8.7 Impact of new accounting standards and changes in interpretation of current accounting standards
a. Issued and effective
Software-as-a-Service (“SaaS”) arrangements
For the year ended 30 September 2021 and its comparative period, the Group has revised its accounting policy in relation to the configuration and
customisation costs incurred in implementing Software as a Service (SaaS) arrangements. These are arrangements in which, as a Group, application
software is accessed over the internet or via a dedicated portal as required. The change in accounting policy resulted from the IFRS Interpretations
Committee pronouncements as to how current accounting standards apply to these types of arrangements in principle, primarily in relation to the
recognition and measurement criteria of IAS 38 Intangible Assets with specific respect to Software and IT related projects in progress.
SaaS arrangements are service contracts providing the Group with the right to access a cloud provider’s application software over a stated time period.
Costs the Group incurs to configure, customise and maintain access to providers’ application software are recognised as operating expenses when
incurred and in accordance with contracted terms.
Impact of accounting policy change
As a result of this change in accounting policy, the Group has determined certain costs that have been capitalised relating to SaaS arrangements should
have been expensed when they were incurred.
The changes are required to be applied retrospectively. Costs capitalised prior to 1 October 2019 that should have been expensed have been adjusted
against opening accumulated losses at 1 October 2019. Costs capitalised in the years ended 30 September 2020 and 30 September 2021 that should
have been expensed have been reclassified to the consolidated statement of comprehensive income. The impact on the financial statements for the
years ended 30 September 2020 and 30 September 2021 is summarised below:
Consolidated statement of comprehensive income
— an increase in technology expenses for the year ended 30 September 2021 of $3.1m (2020: $1.5m).
— a decrease in people costs capitalised during the year ended 30 September 2021 of $0.5m (2020: $1.3m).
— a decrease in amortisation expenses for the year ended 30 September 2021 of $1.5m (2020: $1.1m).
— a decrease in tax expense for the year ended 30 September 2021 of $0.6m (2020: $0.4m).
— an overall decrease in net profit after tax for the year ended 30 September 2021 of $1.5m (2020: $1.3m).
Consolidated balance sheet
— an increase in opening accumulated losses of $7.1m (2020: $3.9m).
— a decrease in intangible assets as at 30 September 2021 of $2.0m (2020: $7.1m).
— an increase in deferred tax assets as at 30 September 2021 of $0.6m (2020: $2.0m).
Consolidated statement of cash flows
— an increase in employee and supplier payments for the year ended 30 September 2021 of $3.5m (2020: $2.7m).
— a decrease in payments for purchase of intangible assets for the year ended 30 September 2021 of $3.5m (2020: $2.7m).
Earnings per share
— a decrease in earnings per share for the year ended 30 September 2021 of 0.34 cents (2020: 0.27 cents).
Adjustment relating to periods before 1 October 2019
— the portion of the decrease to intangible assets above relating to costs capitalised pre 1 October 2019 is $5.5m.
— the portion of the increase to deferred tax assets above relating to costs capitalised pre 1 October 2019 is $1.6m.
— the reduction in opening accumulated losses at 1 October 2019 relating to costs capitalised pre 1 October 2019 is $3.9m.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 72
INDEPENDENT AUDITOR'S REPORT
73
8.7 Impact of new accounting standards and changes in interpretation of current accounting standards
(continued)
b. Issued and not yet effective
NZ IFRS 17 Insurance Contracts is effective for periods beginning on or after 1 January 2023. Tower will apply the standard for the year
ending 30 September 2024, with the comparative period for the year ending 30 September 2023. The standard replaces the current
guidance in NZ IFRS 4 Insurance Contracts, and establishes principles for the recognition, measurement, presentation and disclosure of
insurance contracts. The standard introduces substantial changes in the presentation of financial statements and disclosures, introducing
new balance sheet and income statement line items and increased disclosure requirements compared with existing reporting. Tower has a
programme with dedicated resource to assess the impact of adopting NZ IFRS 17 and to project manage the transition to the new standard
including system development. Tower has completed an initial draft of accounting policies under IFRS 17, with the majority of the impact
assessment and systems development work expected to be completed in the financial year ended 30 September 2022. An initial
assessment has been completed on Tower's contracts, and it is expected that the majority of Tower's insurance contracts will meet the
requirements of the simplified approach available under IFRS 17. However, due to the complexity of the requirements within the standard
and the availability of accounting policy choices as to how the standard is implemented which have not yet been finalised, a full
assessment of the financial impact has not yet been completed.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 74
INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT
75
INDEPENDENT
AUDITOR'S
REPORT
Independent auditor’s report
To the shareholders of Tower Limited
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 2021, 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).
What we have audited
The Group's consolidated financial statements comprise:
● the consolidated balance sheet as at 30 September 2021;
● 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 significant accounting policies
and other explanatory information.
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.
Independence
We are independent of the Group in accordance with Professional and Ethical Standard 1
International Code of Ethics for Assurance Practitioners (including International Independence
Standards) (New Zealand) (PES 1) issued by the New Zealand Auditing and Assurance Standards
Board and the International Code of Ethics for Professional Accountants (including International
Independence Standards) issued by the International Ethics Standards Board for 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 in the areas of assurance over 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.
Key audit matters
Key audit matters are those matters that, in our professional judgement, 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.
PricewaterhouseCoopers, 15 Customs Street West, Private Bag 92162, Auckland 1142, New Zealand
T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 76
INDEPENDENT AUDITOR'S REPORT
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77
Description of the key audit matter
How our audit addressed the key audit matter
Description of the key audit matter
How our audit addressed the key audit matter
(1) Valuation of outstanding claims
(2021: $122,338,000, 2020: $107,747,000)
We considered the valuation of outstanding
claims a key audit matter because this
involves an estimation process combined
with significant judgements and assumptions
made by management to estimate future
cash outflows to settle claims.
The outstanding claims liability includes a
central estimate of the future cash outflows
relating to claims incurred, as at and prior to
the reporting date, and the expected costs of
handling those claims. There is uncertainty
over the amount that reported claims and
claims incurred at the reporting date but not
yet reported to the Group will ultimately be
settled at. The estimation process relies on
the quality of underlying claims data and the
use of informed estimates to determine the
quantum of the ultimate loss.
Key actuarial assumptions applied in the
valuation of outstanding claims include:
● expected future claims development
proportion; and
● claims handling expense ratios
Outstanding claims in relation to the
Canterbury earthquakes have a greater
degree of uncertainty and judgement. This
mainly arises due to the uncertainty as to
further deterioration of open known claims,
the Earthquake Commission (EQC) reporting
of new claims to the Group which have gone
over the $100,000 statutory liability cap (over
cap claims), new litigation claims, reopening
of closed claims, expected claims costs for
open claims and estimates of future claims
management expenses.
Changes in assumptions can lead to
significant movements in the outstanding
claims liability.
Claims data is a key input to the actuarial estimates.
Accordingly, we:
● evaluated the design effectiveness and tested
controls over claims processing;
● assessed a sample of claim case estimates at
the year end to check that they were supported
by appropriate management assessment and
documentation;
● assessed, on a sample basis, the accuracy of
previous claim case estimates by comparing to
the actual amount settled during the year and
analysed any escalation in the claim case
estimate to determine whether such escalation
was based on new information that came
available during the year;
● 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
● tested the integrity of data used in the actuarial
models and calculations by agreeing the
relevant inputs, such as claims data, to source.
Together with our actuarial experts, we:
● considered the work and findings of the
actuaries engaged by the Group;
● evaluated the actuarial models and
methodologies used, and any changes to them,
by comparing with generally accepted models
and methodologies applied in the sector;
● 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
(where applicable), taking into consideration
COVID-19 impacts;
The outstanding claims liability includes a
risk margin that allows for the inherent
uncertainty in the central estimate of future
claim cash outflows. In determining the risk
margin, the Group makes judgements about
the volatility of each class of business written
and the correlation between different
geographical locations.
Refer to note 2.4 to the consolidated
financial statements.
(2) Recoverability of the deferred tax
asset arising from tax losses
(2021: $24,116,000, 2020: $25,720,000)
The majority of the Group’s deferred tax
asset arises from 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 sufficient continuity of the
ultimate shareholders or business continuity.
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 foreseeable
future.
Refer to note 7.3 to the consolidated
financial statements.
● assessed the risk margin as per the
requirements of applicable accounting
standards, by comparing to known industry
practice. In particular we focused on the
assessed level of uncertainty in the central
estimate; and with reference to the inherent
uncertainty in the remaining Christchurch
earthquake claims and its consistency with
prior periods.
In considering the recoverability of the deferred tax
asset arising from tax losses we performed the
following procedures:
● compared the previous management budget
with actual results to assess the reliability of
management’s forecasting;
● considered the reasonableness of the
assumptions in the FY22 operational plan on
the forecast utilisation of tax losses;
● assessed the Group’s ability to maintain
sufficient continuity of the ultimate shareholders
or to meet the business continuity test and
therefore its entitlement to offset the tax losses
against future taxable profits; and
● determined whether it was probable (more likely
than not) that the tax losses would be utilised in
the foreseeable future.
PwC
PwC
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 78
INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT
79
Our audit approach
Overview
Overall group materiality: $3.95 million, which represents approximately 1% of
gross earned premium.
We chose gross earned premium as the benchmark because, in our view, it is
the benchmark against which the performance of the Group is most commonly
measured by users, and is a generally accepted benchmark for insurance
companies.
A full scope audit was performed for the Company based on its financial
significance to the Group. Specified audit procedures and analytical review
procedures were performed on the remaining Group entities.
As reported above, we have two key audit matters, being:
● Valuation of outstanding claims
● Recoverability of the deferred tax asset arising from tax losses
As part of designing our audit, we determined materiality and assessed the risks of material
misstatement in the consolidated financial statements. In particular, we considered where
management made subjective judgements; for example, in respect of significant accounting estimates
that involved making assumptions and considering future events that are inherently uncertain. 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.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement. Misstatements may arise due to fraud or error. They are considered material if,
individually or in aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the consolidated financial statements.
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.
How we tailored our group audit scope
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.
Other information
The Directors are responsible for the other information. The other information comprises the
information included in the Annual Report, but does not include the consolidated financial statements
and our auditor’s report thereon. The Annual Report is expected to be made available to us after the
date of this auditor’s report.
Our opinion on the consolidated financial statements does not cover the other information and we will
not express any form of audit opinion or assurance conclusion thereon.
PwC
PwC 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. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the Directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the Directors for the consolidated financial statementsThe 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, andfor 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 theGroup or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statementsOur 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 consolidated financial statements is located at the External Reporting Board’s website at:https://www.xrb.govt.nz/assurance-standards/auditors-responsibilities/audit-report-1/This description forms part of our auditor’s report. Who we report toThis report is made solely to the Company’s shareholders, as a body. Our audit work has been undertaken so that wemight 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 AccountantsAuckland24 November 2021TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 80
APPOINTED ACTUARY'S REPORT
APPOINTED ACTUARY'S REPORT
81
APPOINTED
ACTUARY'S
REPORT
24 November 2021 The Directors Tower Limited 136 Fanshawe Street Auckland 1010 Dear Directors Review of Actuarial Information contained in the financial statements As required by Section 78 of IPSA the Appointed Actuary, Geoff Atkins of Finity Consulting, has reviewed the actuarial information contained in, or used in the preparation of, the financial statements at 30 September 2021. Geoff Atkins and Finity have no relationship with or interest in Tower other than being a provider of actuarial services. I prepared the actuarial valuation of liabilities remaining from the Canterbury Earthquakes and reviewed the actuarial valuations of insurance liabilities for the New Zealand business and the Pacific Islands businesses. I reviewed the other actuarial information as specified by IPSA in Section 77, including the solvency calculations for the financial statements. No limitations were placed on me in performing the review and all data and information requested was provided. Nothing has come to my attention that would lead me to believe that any of the actuarial information contained in, or used in the preparation of, the financial statements is not appropriate. In my opinion the company has maintained a solvency margin in excess of the minimum required as at 30 September 2021. The report is being provided for the sole use of Tower for the purpose state above. It is not intended, nor necessarily suitable, for any other purpose and should only be relied on for the purpose for which it is intended. Yours sincerely Geoff Atkins Anagha Pasche Appointed Actuary Fellows of the New Zealand Society of Actuaries TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021 82
TOWER LIMITED ANNUAL REPORT 2021
CORPORATE GOVERNANCE & STATUTORY DISCLOSURES
CORPORATE GOVERNANCE & STATUTORY DISCLOSURES
83
CORPORATE GOVERNANCE
& STATUTORY DISCLOSURES
Tower Limited’s (Tower) Board is committed to achieving the highest standards of
corporate governance, ethical behaviour, and accountability and has implemented
corporate governance practices that are consistent with best practice. When there
are developments in corporate governance practices, the Board reviews these
against Tower’s practices and updates Tower’s practices where appropriate.
For the reporting period to 30 September 2021, 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 tower.co.nz/investor-centre.
The following policies and company documentation are
available on Tower’s website (https://www.tower.co.nz/
investor-centre/corporate-governance/policies):
• Tower Limited Constitution
• Corporate Governance Statement
• Board Charter
• Board Protocols
• Audit Committee Terms of Reference
• 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 and Inclusion Policy
STATUTORY DISCLOSURES
DIVERSITY
Gender Diversity
The below table provides a quantitative breakdown
of the gender composition of Tower’s Directors and
Officers and other employee groups as at 30 September
2021, compared to 30 September 2020, including
subsidiaries.
GROUP
% GROUP
NUMBER
% GROUP
NUMBER
30 SEPTEMBER 2021
30 SEPTEMBER 2020
Board of Directors
Males
Females
Executive Leadership team 1
Males
Females
Business Leadership team 2
Males
Females
All Other Employees
Males
Females
All Employees
Males
Females
Total Employees
83%
17%
67%
33%
42%
58%
40%
60%
40%
60%
83%
17%
56%
44%
51%
49%
40%
60%
41%
59%
5
1
6
3
11
15
293
447
310
465
775
5
1
5
4
19
18
230
346
254
368
622
1
‘Executive Leadership Team’ includes the Chief Executive Officer, and those employees
who report directly to the Chief Executive Officer.
2
‘Business Leadership Team’ consists of various senior and specialised roles that are
influential in driving the Tower strategy, but do not report to the Chief Executive Officer.
TOWER LIMITED ANNUAL REPORT 2021 84
85
Diversity performance at Tower
Tower has a diversity policy and measurable diversity
and inclusion objectives under the following categories.
• Gender diversity
• Age and career progression
• Ethnicity and Pacific and Māori inclusion
• LGBTIQ+ identification and inclusion
• Accessibility
There is good female representation overall 60%
Female versus 40% Male, however there is lower female
representation in the Executive team. The Board has noted
the need for a greater focus on gender balance at the
executive level. This is to be achieved through a diversity
and inclusion lens focusing on talent progression and
fair and equitable selection processes. It is recognised
that future Board appointments must also consider more
balanced gender and diversity representation.
Tower's Board considers there has been some good
progress on initiatives focused around the pillars of gender,
culture, sexuality, age and accessibility in FY21. Of note,
significant effort has been invested into achieving the
Domestic Violence Tick and associated programmes
for leaders as well as embedded training and induction
modules for unconscious bias. The Board endorses Tower’s
plan to create further resource groups – for example
`Women in Leadership` and `Flexible Working`. There is high
engagement in other active employee resource culture
groups including the Māori Roopū and Pasifika which are
essentially employee driven (with some facilitation by Tower).
It is apparent that these groups have been successful in
providing focus and support in sustaining and continuing
to develop a diverse culture and increase employee
engagement. Tower has committed to its investment in the
Rainbow community and its re-accreditation of the Rainbow
along with the associated employee resource group.
Initiatives have been put in place around ensuring there is no
barrier for benefits from an age perspective. For instance, the
Employer Kiwisaver Contribution continues for staff over 65.
The new sustainable building on Fanshawe Street is a proud
achievement and improves accessibility for staff with the
provision of lifts, bike parks, wheelchair access, standup
desks and its location generally, on Auckland Transport
routes and close to multiple transport hubs.
Tower has embraced flexibility and now has over 70 people
permanently working from home. The new building design
and capacity has meant that there is more flexibility around
work location and hybrid solutions for certain roles. Tower
has received a recent diversity and inclusion engagement
score of 8.7 out of 10 (against the overall engagement score
of 7.7 for all categories).
DIVERSITY & INCLUSION SCORE
FINANCE BENCHMARK
8.7 0.4 ABOVE
0
GOOD
IN THE MIDDLE RANGE OF THE FINANCE SECTOR
10
BOARD AND BOARD COMMITTEES
Board
During FY21 the Board comprised the following
members:
Michael Stiassny (Chair), Graham Stuart, Steve Smith,
Warren Lee, Wendy Thorpe, Marcus Nagel.
With the exception of Marcus Nagel (who is employed
by Bain Capital Credit LP, Tower’s largest shareholder
as at 30 September 2021), all of the Directors are
considered to be independent directors. Director
independence is assessed in accordance with the
requirements for independence set out in Tower’s
Board and Director Protocols. Those independence
requirements are benchmarked against the RBNZ
and NZX independence requirements.
During FY21 the Board had the following committees:
Audit Committee
Members: Graham Stuart (Chair), Michael Stiassny, Steve
Smith, Warren Lee, Wendy Thorpe, Marcus Nagel.
Risk Committee
Members: Warren Lee (Chair), Michael Stiassny, Graham
Stuart, Steve Smith, 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. During FY21, the
Tower Audit Committee established a Disclosure sub-
committee who met once on 17 May 2021 (members of
which were Graham Stuart (Chair), Michael Stiassny, Steve
Smith, Warren Lee, and Wendy Thorpe). During FY21,
Tower’s Board also established a Results sub-committee
who met twice on 25 November 2020 and 26 May
2021 (members of which were Michael Stiassny (Chair),
Graham Stuart, and Steve Smith).
Board and Committee meeting attendance
The Chief Executive Officer, Chief Financial Officer,
General Counsel and Company Secretary attend all
Board meetings by standing invitation, although they
do not always attend the entire meeting. The Chief
Executive Officer, Chief Financial Officer, Chief Risk Officer,
General Counsel and Company Secretary attend all Audit
Committee and Risk Committee meetings by standing
invitation, but do not always attend the entire meeting.
The Chief Executive Officer, Chief People Officer, General
Counsel, and the Company Secretary have a standing
invitation to attend the W and Appointments Committee
meetings, but may be excluded from the meeting from
time to time as appropriate.
All Board and Committee meetings are attended by an
appropriately qualified person who is responsible for
taking accurate minutes of each meeting and ensuring
that Board and Committee procedures are observed.
Director attendance at Board and Committee meetings
held during the year to 30 September 2021 is set out below:
Tower seeks external advice when reviewing Board
remuneration. The Remuneration and Appointments
Committee is responsible for assisting directors with the
review of directors’ fees.
Annual fees, including an allowance for sitting on Board
Committees, as approved by the Board with effect from
1 October 2020 for Directors of Tower are:
ROLE
Directors 1
Audit Committee member fee
Risk Committee member fee
Remuneration and Appointments
Committee fee2
CHAIR (NZ$)
MEMBER (NZ$)
180,000
100,000
10,000
10,000
Included in
Director Fee
Included in
Director Fee
Nil
Nil
1. The fee of $100,000 for non-executive directors who are members of the Board, and
the fee of $180,000 for the Chair of Tower Limited, includes Audit Committee and Risk
Committee fees.
2. The Board determined that from 1 December 2012 no fees would be payable for sitting on
the Remuneration and Appointments Committee.
Additional fees may be paid to non-executive directors for
one-off tasks and/or additional appointments.
TOWER
LIMITED
REMUNERATION
AND
DISCLOSURE
RESULTS
AUDIT
RISK
APPOINTMENTS
SUB-
SUB-
BOARD
COMMITTEE
COMMITTEE
COMMITTEE
COMMITTEE
COMMITTEE
Remuneration and other benefits received by Directors of
Tower during the year ended 30 September 2021 are:
Meetings held
Michael Stiassny
Steve Smith
Graham Stuart
Warren Lee
Wendy Thorpe
Marcus Nagel
17
17
16
16
17
17
15
Remuneration
4
4
4
4
4
4
4
8
8
8
8
8
8
8
4
4
4
4
4
4
4
1
1
1
1
1
1
N/A
2
2
2
2
N/A
N/A
N/A
Michael Stiassny1
Graham Stuart
Steve Smith
Warren Lee
Wendy Thorpe
Marcus Nagel 2
FEE (NZ$), GST
(IF ANY) EXCLUSIVE
180,000
110,000
100,000
110,000
100,000
100,000
Director Remuneration—Tower and its subsidiaries
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 a
maximum payment of NZ$900,000 per annum for director
fees. In February 2021 at Tower’s Annual Shareholder
Meeting, Tower’s Board Chair announced that, following a
review of current non-executive director’s fees practices
by Ernst & Young, the Board had agreed to raise directors’
fees. The total payment remained below the maximum
of $900,000 approved by shareholders in 2004, so the
decision did not require a shareholder vote.
1. Mr Stiassny also received a further $7,994.30 in travel disbursements during FY21.
2. NZ$ amount shown is converted to, and paid in, Euros (using conversion rate at time of
monthly invoice).
Remuneration and other benefits received by Directors of
Tower subsidiaries in the year to 30 September 2021 are:
Rodney Reid 1
Heseti Vaai 1 ^
Isikeli Tikoduadua 2
Barry Whiteside 2
Ernie Gangloff 3
FEES
7,000
2,125
18,000
20,000
50,000
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.
3. Fees earned in capacity as director of Tower Insurance (PNG) Limited. Tower Insurance
(PNG) Limited fees are paid in Papua New Guinean Kina.
^ Heseti Vaai was a director of National Pacific Insurance Limited for one quarter of FY21.
TOWER LIMITED ANNUAL REPORT 2021 TOWER LIMITED ANNUAL REPORT 2021CORPORATE GOVERNANCE & STATUTORY DISCLOSURESCORPORATE GOVERNANCE & STATUTORY DISCLOSURES 86
87
CEO and senior executive remuneration
FROM
TO
2020
2021
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.
The Chief Executive Officer, Mr Blair Turnbull, is
remunerated through a combination of a base salary of
$650,000 and variable performance incentives including
a Short Term Incentive (STI) and a Long Term Incentive
(LTI). The maximum STI is currently $325,000 per annum
based on meeting key financial and non-financial and
operational performance measures. The maximum LTI per
annum is currently $975,000 (total) should Tower deliver
Total Shareholder Return out performance relative to the
performance of companies within the NZX50 index.
The table below sets out the remuneration and other
benefits received by the Chief Executive Officer, Mr
Turnbull in the year ended 30 September 2021, with
a comparison to the remuneration and other benefits
received by the Chief Executive Officer in the year
ended 30 September 2020, noting that Mr Blair Turnbull
commenced the role of Chief Executive Officer on
1 August 2020.
2021
$000
2020
$000
Base salary Mr Richard Harding, including accrued
annual leave paid out
Compensation for changes to contractual
terms Mr Richard Harding
Short term incentive payments Mr Richard Harding
Base salary Mr Blair Turnbull 1
Total Chief Executive Officer remuneration 2
650
650
850
410
525
100
1,840
1.
In addition to the above, Mr Turnbull was paid a total of $587 for airport parking expenses.
2. Mr Turnbull was eligible for a STI incentive for FY21 of $47,395.83. Mr Turnbull requested,
and the Board agreed, that the STI payment be waived and not paid out. Mr Turnbull was
eligible for a LTI of $260,000 which will be vested and not paid in full until after FY24 as
per the LTI incentive plan.
Employee remuneration
The table below sets out the number of employees or
former employees of Tower, including its subsidiaries,
and excluding directors and former directors, who
received remuneration and other benefits valued at or
exceeding $100,000 for the years ended 30 September
2021, as compared to the year ended 30 September
2020. 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.
100,000
109,999
110,000
119,999
120,000
129,999
130,000
139,999
140,000
149,999
150,000
159,999
160,000
169,999
170,000
179,999
180,000
189,999
190,000
199,999
200,000
209,999
210,000
219,999
220,000
229,999
230,000
239,999
240,000
249,999
250,000
259,999
260,000
269,999
270,000
279,999
280,000
289,999
290,000
299,999
310,000
319,999
320,000
329,999
330,000
339,999
340,000
349,999
350,000
359,999
360,000
369,999
390,000
399,999
400,000
409,999
450,000
459,999
500,000
509,999
530,000
539,999
540,000
549,999
560,000
569,999
610,000
619,999
740,000
749,000
780,000
789,999
1,880,000
1,890,000
21
21
18
18
13
13
6
6
3
3
5
0
3
2
3
2
1
1
2
4
1
0
1
0
0
2
1
1
0
1
0
1
0
0
0
1
1
23
19
16
8
7
8
5
2
1
2
1
1
3
2
0
2
2
0
3
0
0
1
1
2
1
0
0
0
1
0
1
0
1
1
1
0
0
Total
155
109
SECURITY HOLDER INFORMATION
Substantial product holders
(as at 30 September 2021)
Largest shareholdings
(as at 16 November 2021)
The names and holdings of Tower’s substantial product
holders based on notices filed with Tower under the
Financial Markets Conduct Act 2013 as at 30 September
2021 are:
The names and holdings of the 20 largest registered
Tower shareholders as at 16 November 2021 are:
NAME
TOTAL
ORDINARY
SHARES
%UNITS
NAME
TOTAL ORDINARY
SHARES AS AT
30 SEPTEMBER 20211
Dent Issuer Designated Activity Company
84,329,386
19.99
Accident Compensation Corporation
36,610,998
Citibank Nominees (New Zealand) Limited
35,499,067
HSBC Nominees (New Zealand) Limited
21,069,189
Bain Capital Credit LP, Bain Capital Investments
(Europe) Limited and Dent Issuer Designated
Activity Company
Salt Funds Management Limited
Accident Compensation Corporation
Investment Services Group Limited
New Zealand Funds Management Limited on
behalf of itself and its wholly owned subsidiary
New Zealand Funds Superannuation Limited
67,464,858
29,607,771
35,290,324
27,379,134
26,615,216
BNP Paribas Nominees (NZ) Limited
Lennon Holdings Limited
JBWere (NZ) Nominees Limited
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