Tower Limited
Annual Report
Over the past year, we...
Added over 17,000 risks to our core New Zealand portfolio
Grew GWP in our core New Zealand portfolio by 9.1%
Increased sales through digital channels to over 50% of new business in September 2019, up from less than 10% in FY16
Delivered and launched a new IT platform that underpins the future of Tower

The Tower of today is well placed to challenge the industry , deliver better outcomes for customers and drive shareholder value

Born and bred in New Zealand, Tower Insurance has been supporting New Zealand communities with their insurance needs for 150 years.

2019 marks Tower’s 150th birthday and while our heritage is important to us, we’ve set our sights on the future and on becoming the challenger in the New Zealand insurance sector.

Chair and CEO Report
Michael Stiassny Chair
Richard Harding Chief Executive Officer

Over the past four years Tower has completely transformed, into a company that is increasingly profitable and achieving growth by challenging and breaking industry norms.

In this time, the business has been simplified and improved through the identification and execution of a clear and purposeful strategy. The goal of the Tower Board and management team is to recreate a profitable company that delivers shareholder value and it is clear that the work being delivered is achieving these outcomes.

Our reported result of $16.8m is a significant achievement and a $23.5m improvement on last year, with underlying profit after tax increasing $13.8m on the prior year, to $27.4m.

This return to profitability is thanks to a strategy that is focused on making things easier and better for customers. Our customer centred strategy provides a unique platform to continue driving growth and rebuild trust by setting the bar for how insurance “should” be.

Our determination to deliver something better to customers is being noticed and this is driving solid growth. Gross Written Premium in the core New Zealand portfolio increased by 9.1%, and total GWP reached $356.8 million across New Zealand and the Pacific.

We believe that risk-based pricing is a fairer way to price insurance and its continued implementation, along with improved underwriting and a benign weather environment has significantly reduced claims costs.

2019 Summary
Full year summary

Three years of improving results and solid growth achieved

  • Tower continues to deliver solid growth, which has led to a $23.5m improvement in profit. Growth has continued in the core NZ book and digital sales remain strong.

  • Tower’s claims ratio has improved significantly thanks to initiatives that have improved underwriting and pricing, and benign weather across New Zealand and the Pacific.

  • Tower’s Pacific business has returned to historic norms, with the region returning to profit one the back of sustainable growth and reduced claims expenses.

  • Tower has delivered its major technology transformation programme, officially launching its IT platform, with positive early signs being seen.

  • As previously signalled, a slight uplift in management expenses was experienced as the IT transformation concludes.

  • Continued positive progress closing Canterbury earthquake claims, with 109 claims remaining open at 30 September 2019.

Focus on customers driving growth

Overview

  • Solid 9.1% GWP growth in core NZ portfolio with total group GWP growing at 6.1%

  • Growth in risks in core New Zealand book increased significantly by 17,716

  • Over 50% of new business sales online in September 2019, up from less than 10% during FY16

  • Continued risk-based pricing approach combined with simple and easy products driving impressive customer growth and improved mix

In a market dominated by overseas-owned and controlled insurers, Tower is offering customers a genuinely different, better alternative, and this focus is driving solid growth in the core book.

Over 17,000 risks have been added to Tower’s core New Zealand portfolio over the past year with this continued momentum driving GWP growth in the core New Zealand portfolio 9.1%, with total GWP in New Zealand growing 6.8%.

Tower’s efforts to become a digital insurer continue to pay dividends, with 51% of new business coming through digital channels in September 2019. This compares to less than 10% during 2016.

Tower has recently improved its digital claims lodgement process and delivered innovations like a claims chatbot, Charlie, which has resulted in 27% of claims being lodged online in September 2019, evidence that digital is the way of the future.

Growth in the Pacific has returned to historical levels with Vanuatu, Tonga, Samoa, American Samoa and the Cook Islands returning to growth thanks to additional underwriting, pricing and marketing support for local teams. However, this growth was offset by more disciplined growth in Papua New Guinea, remediation of the Fiji motor portfolio and nationalisation of the Worker’s Compensation and Comprehensive Third Party schemes in Fiji.

This positive result across Tower’s businesses is being achieved through a combination of factors, including:

  • Continued execution of risk-based pricing and simpler policies that customers can understand

  • Constant refinement of underwriting criteria enabling more granular assessment

  • Strong retention through our digital and phone channels, and

  • Attracting new, profitable customers with improved and targeted offerings

The growth that has been achieved is the result of offering customers simpler insurance at a fair price and over the coming twelve months Tower sees a positive growth and pricing environment in New Zealand and the Pacific, which will lead to further improved profitability.

Underwriting excellence delivering improvements
  • Underwriting excellence driving good customer and business results

  • Risk based pricing is delivering benefits

  • Improving reinsurance ratio

  • Increased protection with savings reinvested to reduce exposure and volatility

Tower is focussed on achieving underwriting excellence which continues to play a vital part in the delivery of the company’s strategy and improving results.

Over the past 12 months, significant steps have been made toward achieving underwriting excellence, with the company having:

  • Implemented better risk selection and underwriting processes

  • Continued to focus on claims leakage and recoveries

  • Launched and continued to refine plain language products that have won awards, providing greater clarity to customers and employees at claims time

  • Implemented new data practices to enable accurate monitoring of the portfolio

This relentless focus on underwriting excellence has helped shift Tower’s portfolio to a more balanced mix and improve claim frequency. This is particularly noticeable in the NZ house product with sustained improvements in claims frequency over the past four years, a result of clear products and benefits for customers.

Tower led the way 18 months ago with risk-based pricing and removing cross-subsidisation between low and high-risk customers. Risk based pricing has resulted in the growth of Tower’s portfolio in Auckland while also reducing exposure to high-risk areas by 16%.

Tower’s fairer approach to pricing has also allowed the company to grow exposure by 4% in the larger, low risk areas like Auckland, Hamilton and Taranaki.

The reduction of extreme risk policies, combined with already completed changes in our Wellington portfolio has reduced the amount of reinsurance cover required.

Tower has taken significant steps to ensure exposure to large events and the resulting volatility is reduced by reinvesting savings back into its reinsurance programme.

Tower has:

  • Catastrophe cover to $783m, for catastrophic events in excess of 1 in 1000years

  • Increased pre-paid catastrophic event coverage from two events to three

  • Limited Tower’s exposure to catastrophe to $10m per event

  • Capped Tower’s exposure to storm and other events at $10m, up to a limit of $30m

Tower’s approach to underwriting excellence is working and will continue to deliver growth and reinsurance efficiency in future.

Improved New Zealand and Pacific claims expenses

Overview

  • Claims costs improved across New Zealand and Pacific

  • Underwriting and pricing initiatives have delivered significant improvements

  • Benign weather across NZ and Pacific contributed to improvement

  • Continued targeting of core insurance activity to offset inflation

New Zealand claims expenses have decreased significantly over the past 12 months with a number of underwriting and pricing initiatives helping to offset inflation.

There are four key factors that have contributed to this result:

  1. Last year, an adjustment relating to the 2017 financial year increased the base claims ratio, this was a one-off issue for FY 2018

  2. While in prior years, severe weather has impacted claims costs, benign weather this year resulted in a 2.7% decrease in Tower’s claims ratio

  3. New, simpler products have contributed to a reduction in NZ Contents claim frequency. While Tower’s risk-based pricing approach is delivering benefits in NZ house, this has been offset by a higher frequency of large house fires in the second half of FY 2019

  4. Good weather also means more people out exploring New Zealand and as a result, there has been an increase in claims frequency in the motor portfolio.

In the Pacific, a number of severe weather events over the past few years have impacted claims ratios. However, this part of the business has now returned to historical norms.

Improvements in claims costs have been delivered through targeted underwriting and pricing initiatives across key markets, and, combined with a benign weather environment, have resulted in a 22.7 percent decrease in our Pacific claims ratio.

Continued repricing of the Fiji motor book has led to improved profitability. Although slightly softer growth than previously seen, this was an important step to ensure future growth remains sustainable and claims costs were controlled.

Remediation of the Papua New Guinea portfolio to reduce risk and exposure is now complete and this portfolio has returned to profitability.

While these results are pleasing and significant improvements have been delivered, focus remains on refining Tower’s products and pricing approach to ensure continued management of claims costs.

Building capability while controlling costs

Overview

  • Uplift in expenses as IT transformation concludes

  • Additional spend directed towards growth and reducing risk

Tower has previously signalled a slight uplift in expenses as Tower’s IT transformation concluded. The finalisation of this piece of work has increased the group management expense ratio by 1.4%, which includes increased headcount in frontline teams, the running of dual systems and the delivery of a tailored customer migration process.

Tower is investing in the business to drive long term value, and as outlined previously, a major component of this is new technology and moving customers to a new IT platform.

Managing customers through the migration process is one of the most important parts of this technology transformation and along with investment in frontline teams, a tailored customer management approach will help to reduce risk, maximise retention and manage customer impact.

These costs will continue over the next 12 months as customers are migrated to the new platform. Following this, it is expected that costs of between $5m – $7m pre-tax can be removed from Tower’s expense base, and along with other productivity gains, the company will be operating at or near its target MER of less than 35%.

IT transformation concluding

Overview

  • New IT platform delivered and launched successfully

  • Customer migration underway, to be complete by December 2020

  • IT transformation will drive growth and continued shift to digital delivery.

18 months ago Tower announced its commitment to invest in a new technology platform that will deliver a step change in results. This IT transformation and the new platform underpin Tower’s strategy to become a digital challenger brand.

It will accelerate growth opportunities by combining existing data with that of Tower’s partners to get a full understanding of customers and actively targeting niche customer segments with compelling and appropriately priced propositions. It will also improve the customer experience with simpler, improved products, reduced wait times and fully digital self-service capability.

After working at pace to deliver against aggressive timeframes Tower has successfully delivered and launched our new platform and the IT transformation is now concluding.

The first phase which enabled the sale of new business on the new system went live in May. It was a core foundation piece of the programme and continues to run well.

Delivery of Phase 2 has now been completed and includes:

  1. Rationalisation of insurance products

  2. Commencing the 12 months migration of existing customers to the new platform

  3. Launching a customer self-service portal, allowing customers to manage their insurance online, just like online banking

  4. Implementing online claims management modules enabling customers to lodge and manage their claims online.

Customer migration has commenced and will be complete by the end of the 2020 calendar year. Moving around 350,000 customers to a core set of 12 products will deliver significant benefits to customers and improve the efficiency of the business.

The new platform enables the company to rapidly test and learn on all aspects of insurance. What used to take weeks and months can now be tested and delivered almost instantly. Pricing changes that used to take months of coding can now be made, delivered and monitored in the same day.

It allows products to be built quickly, tested with customers and modified on an ongoing basis. It supports the push to move 50 - 70% of all transactions online which will deliver better customer outcomes and significant cost savings and productivity gains.

Along with the reduction in number of products from over 400, to just 12 core products, increased automation and moving low value transactions online, efficiency will improve.

Costs for the programme were in line with previously advised amounts and at this stage, the total cost to deliver the core platform is estimated to be $47.6m.

The Youi acquisition

In September it was announced that Tower Insurance Limited signed a Portfolio Transfer Agreement for the purchase of Youi NZ Pty Ltd’s insurance portfolio, subject to regulatory approvals.

Under this agreement, Tower Insurance will acquire Youi NZ’s approximately 34,000 in-force policies for a total purchase price of NZ$13 million.

A number of steps in this process have been completed and a formal application has been lodged with the RBNZ.

The purchase of Youi’s portfolio will accelerate Tower’s growth. The portfolio is well underwritten and utilises a risk-based pricing approach which is in line with the company’s own underwriting excellence and will also deliver a positive shift in the mix of the insurance portfolio.

The acquisition drives shareholder value through realisation of scale benefits with intention to incorporate the portfolio into Tower’s existing reinsurance cover, and management expenses at marginal cost. Youi will contribute approximately $2m to Underlying NPAT, $4m pre-amortisation of goodwill, reflecting the pro rata inclusion of 9 months of its full year.

This acquisition firmly positions Tower as a challenger brand and together with the successful completion of the IT transformation, will deliver growth, build scale and leverage the investment in IT.

Canterbury update

Tower continues to make solid progress settling claims in Canterbury. On 1 October 2018, Tower had 163 open claims remaining and in the intervening 12 months, Tower closed 117 Canterbury earthquake claims.

Tower continues to receive higher than expected new over-cap claims from the EQC as a result of past performance, poor workmanship and faulty repairs.

While the number of Canterbury earthquake claims continues to reduce steadily, new over-cap claims from the EQC continue to be a source of upward pressure on the Canterbury valuations, with additional uncertainty managed through solvency capital held by Tower.

Tower’s gross outstanding claims have reduced significantly, demonstrating that solid progress is being made. In addition, the amount of IBNR / IBNER and risk margin has increased from 95% to 148% of case estimates.

Solvency position

In September 2019, Tower announced that additional capital of $47.2m was needed to facilitate a change in Tower Insurance’s licence condition and the acquisition of the Youi NZ portfolio.

Tower Insurance consulted with RBNZ to understand likely capital requirements to support the acquisition and on-going business of Youi NZ, with discussion also covering Tower Insurance’s existing solvency capital. This included conversations on Tower Insurance’s EQC receivable, which at the time formed part of Tower Insurance’s solvency capital.

Tower Insurance remains confident in the recovery of the EQC receivable and is firmly committed to its collection to the maximum extent possible.

It was agreed that given the likelihood of litigation and associated delay in receiving funds, the EQC receivable has been excluded from Tower Insurance’s solvency calculations.

Accordingly, the RBNZ modified Tower Insurance’s licence conditions to remove the receivable from its solvency calculations with effect from 31 October 2019.

Following the successful completion of the capital raise and this change in licence condition, Tower Insurance remains in a strong capital position with Actual Solvency Capital well above RBNZ minimum requirements. This will reduce by $13m following completion of the Youi purchase.

Looking to the Future

Tower’s strategic plan has driven change and transformed the business. The work completed over the past few years has set the company up well for the future and focus is now firmly on delivering shareholder value.

The coming 12 months is the transition year that will ensure the full benefits of Tower’s new IT platform are delivered from FY21.

One of the biggest priorities this year is to migrate ~ 350,000 customers to the new IT platform, which will be completed by the end of the 2020 calendar year.

Tower will continue driving growth, building on the past seven consecutive halves of growth by continuing to price more fairly, delivering amazing claims experiences and improving efficiency and profitability.

Along with a shift to a more agile operating model, benefits will be achieved progressively over the coming year, but FY21 is where the full benefits of our investment in technology will be fully realised.

In FY21 complex legacy systems that currently take significant resource to manage and maintain can be decommissioned.

Growth opportunities will accelerate and the customer experience will improve. Combined with a push to move 50 - 70% of all transactions online, this will deliver significant cost savings and productivity gains.

The new platform enables innovation and rapid response to customer needs. It will allow the company to take new products to market faster, to test and learn and drive growth in new areas.

In the Pacific, a new operations centre will support local teams through improved product, pricing and underwriting capability to ensure growth is sustainable.

In short, Tower’s customer centred strategy will continue to be driven forward, with a focus on raising the bar for the industry by putting customers first and using new technology.

What has been achieved and the plan that is in place sets the company up well for the future and will build trust, drive growth and deliver shareholder value.

Conduct and culture

Tower recognises that confidence in the insurance industry is at an all-time low and while the company acknowledges that it has been part of the problem before, it is firmly committed to improving and being part of an industry that is trusted to deliver good outcomes for customers.

Pleasingly, thanks to an already embedded customer-centred strategy, progress has been made, but there remains a lot still to do.

As part of the conduct and culture review that all insurers were asked to undertake, Tower looked at every aspect of its business and strategy. This formed the basis of a report and action plan to ensure better customer outcomes are delivered across all facets of the business.

This report and action plan has been delivered to the Tower Board. It reinforces the good things we have in place, but also highlighted issues that need further investigation.

Tower takes its position as a challenger brand seriously and sees this position as an opportunity to raise the bar for customers.

The work being undertaken at Tower is centred on disrupting industry norms and making things better for customers by:

  • Simplifying policy wording and coverage to ensure it is easy to understand and in plain English

  • Increasing transparency and education on risk and how insurance is priced

  • Removing tricky, catch-all questions to give customers certainty

  • Delivering amazing claims experiences that remove complexity and worry.

These actions, along with others across the business are a core part of Tower’s strategy and will deliver better customer outcomes and increased customer trust.

Customers and shareholders should be confident that Tower is committed to improving and creating a better, fairer insurance industry.

Celebrating the diversity of our people

Diversity, Inclusion and Belonging are an integral part of Tower’s culture. Tower’s business is spread across 15 sites in 9 different countries and Tower recognises the value of employees.

Tower believes that having a diverse group of individuals working together helps the company better meet the needs of customers and helps build a high-performance culture. Tower’s culture is built on mutual respect, teamwork and diversity of thought and background.

Over the past year, Tower celebrated the diversity of its people through a number of initiatives, including:

  • Recognition of importance and meaning of Waitangi Day and Chinese New Year on Workplace

  • International Women’s Day joint speaking event with guest speaker and Associate Professor Siouxsie Wiles MNZM, a microbiologist and science communicator from Auckland University alongside Kanah Andrews-Nahu, Tower’s community brand ambassador and junior NZ weightlifting champion

  • Widespread participation in the national event for Gumboot Friday, the ‘I Am Hope’ mental health awareness campaign

  • Significant participation in Pink Shirt Day with pink worn and pink morning teas held to drive awareness about anti-bullying in support of this national campaign

  • Influential women leaders took part in a breakfast event to hear insights from Tower board member

  • One year celebration of our Lean In circles empowering and connecting people across Tower to help with personal and professional development.

  • Tongan, Samoan, Cook Islands and Fijian Language Weeks (from May – October) were recognised with internal communications and activities at sites in NZ and the Pacific

  • Participation in national fundraising day for Tower’s community sponsorship partner with outstanding uptake by teams who had to profile a Paralympic sport

  • Recognition of Te Wiki o Te Reo Māori (Māori Language Week) with activations and internal communications thanks to the support of our newly formed Te Roopū Māori group

  • Held our first annual volunteer week in partnership with Sustainable Coastlines, enabling over 60 employees to use their Volunteer Leave time to clean up beaches in and around Auckland

  • Marked Mental Health Awareness Week with speaking opportunities for our people to learn more about how to monitor and improve their mental health

  • Rainbow Tick accreditation achieved and celebration breakfast with guest speaker Anika Moa

  • Diwali celebrations– excellent uptake with Diwali events in Auckland, Rotorua, Christchurch and across the Pacific Islands.