Tower Limited
Annual Report
Over the past year...
Added over 18,000 risks to our core New Zealand portfolio
Grew GWP in our core New Zealand portfolio by 11.9%
Launched risk based pricing, resulting in 4% growth in larger, low risk areas like Auckland and Taranaki, while reducing our exposure in extreme risk areas by an annualised figure of 17%
Increased sales through digital channels to 45% of new business in September 2018, up from less than 10% in FY16
Hit the half way point of our major technology upgrade with new business to be on sale on the new platform midway through the 2019 calendar year

Looking back on a year of transformation, strong growth and customer confidence.

Tower has a history spanning nearly 150 years. What started as a conversation to provide fairer, local insurance to those who called New Zealand home is now the Tower Insurance of today.

As we transform into a challenger brand, we once again find ourselves in a position where we’re challenging the market and offering Kiwis a genuinely different choice for insurance.

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

For almost 150 years Tower has been insuring New Zealanders, and over the course of those years, has transformed and changed considerably.

A little over two years ago, we embarked on our latest – and arguably most difficult – transformation to date, to reposition the business as a contemporary, challenger brand, underpinned by a customer-focused, digital-first strategy to successfully compete in the 21st century.

We recognised that we hold a unique position in the New Zealand insurance market. We have a solid existing customer base, yet plenty of room to continue growing and acquiring market share from the two large incumbents.

Over the past 18 months, research has shown us that customers are unhappy with insurers. Our goal is to challenge industry norms to change this because we believe this customer dissatisfaction provides us with opportunity.

Our ambitious plan is all about New Zealanders and Pacific Islanders being able to see Tower in a new light, and for Tower to set the bar for how insurance “should” be. We believe that delivering unique customer value through amazing claims experiences will be our key differentiator and will build strength and long-term value in our business.

Our focus on customers and the creation of new products and processes will enable amazing claims experiences and allow us to reach our challenger brand aspiration faster. This will be supported with continued refinement of our underwriting, enhanced operational efficiency and the replacement of our core IT platform.

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2018 Summary
Features of half year 2018
  • Transformation of core business well underway and driving strong GWP growth in the core New Zealand book of 11.9% on the prior year, and strong volume growth, with 18,192 risks added to the core New Zealand book1.

  • Claims costs increased due to severe weather in the Pacific along with some prior year development in New Zealand and other cost impacts. Each of these is well understood and pricing and underwriting responses either already implemented or in train to improve performance through the coming year.

  • Major technology upgrade progressing well, with replacement of core platform with leading technology tracking well.

  • Reported full year loss of $6.7 million impacted by
    - $16.2 million after-tax impact from Peak Re settlement
    - $11 million before-tax impact from weather and large events
    - Minor adjustment to Canterbury provisions, resulting in a $3.6 million after-tax impact

  • Continued positive progress closing Canterbury earthquake claims, with open claims almost halved, down to 163, from 323 on October 1 2017

  1. Following the end to Tower’s distribution relationship with Kiwibank on 4 April 2018, the ‘core’ portfolio now refers to the NZ business excluding the ANZ Bank and Kiwibank portfolios. The FY17 comparative has been restated to be consistent with this approach.

Full year summary

Tower has strong underlying New Zealand and Pacific businesses and the 2018 Financial Year has seen the continued delivery against its strategy to transform.

With a focus clearly on simplifying and improving all aspects of our business to differentiate the company, strong growth in GWP and customer numbers, contained expenses and a major technology upgrade progressing well, demonstrates that transformation is well underway.

The implementation of risk-based pricing and continued improvements in digital channels added 18,192 new risks2 to Tower’s core New Zealand portfolio, seeing core NZ GWP for the year grow 11.9% contributing to total GWP of $336 million.

Tower reported a loss after tax of $6.7 million for the year ended 30 September 2018 (FY18), narrowing from a loss of $8 million for the year ended 30 September 2017 (FY17).

The strong growth of $23.7m in gross written premium and $13.1m in net earned premium has been offset by storm activity, higher claims costs, the resolution of the Peak Re dispute as well as an increase in ultimate incurred claims for Canterbury.

Severe storm activity in New Zealand and the Pacific resulted in an $11 million before-tax impact to underlying profit, seeing it decline to $13.6 million, from $18 million in the year prior.

Claims costs increased over the 2018 financial year, with weather in the Pacific the most significant impact along with some prior year development in New Zealand and other cost impacts. Each of these is well understood and pricing and underwriting responses either already implemented or in train to improve performance through the coming year.

Severe weather across the Pacific increased claims costs significantly in FY18. Cyclone Gita impacted Tonga heavily, while Cyclones Keni and Josie impacted Fiji, resulting in a 10.4 percentage point uplift on the Pacific FY17 claims ratio. Reinsurance is being utilised to minimise impacts of weather along with ongoing refinement of products and underwriting criteria.

New Zealand claims expenses also increased over the 2018 financial year due to a number of claims challenges, however, these are being countered with pricing and underwriting responses to improve performance.

A continued focus on non-personnel costs saw the management expense ratio decrease almost 1% to 39%, while still allowing further investment in the business.

Tower’s Pacific premium remains stable and in line with the same period in the prior year, however, underlying profit of $2.2 million has been impacted by Cyclones Gita, Josie and Keni and a small number of commercial fires.

Tower continues to make solid progress settling claims in Canterbury, reducing open claims by 160. On October 1 2017, Tower had 323 open claims remaining. In the intervening 12 months, the number of open Canterbury Earthquake claims was reduced to 163, with 318 claims were closed, however, 115 new claims from the EQC were received and 43 claims were reopened.

  1. In prior years Tower has reported volumes using policy numbers as the relevant metric. Tower has changed to using risk numbers as the key metric in FY18 to align with internal management reporting and to better illustrate risk exposures, e.g., where one policy might cover several risks.

Transformation momentum is accelerating

Tower holds a unique position in the New Zealand insurance market, with a solid existing customer base, yet plenty of room to grow. A clear strategic plan to continue transforming and growing the business by delivering a compelling, challenger proposition to the market will see Tower turn industry norms upside down and revolutionise the way customers interact with the company.

The achievements seen to date show that there is a powerful platform for future growth with progress seen in crucial areas:

  • Focus on customers has delivered strong growth

  • Management expenses ratio has reduced, while continuing to invest

  • Major technology upgrade progressing well

  • Increases to claim costs well understood with action taken to offset inflation

Focus on customers driving growth

Overview

  • Strong GWP growth of 11.9% in core book with total GWP growing strongly at 7.6%

  • Growth in risks in core New Zealand book increased significantly by 18,192

  • 45% of new business sales online in September 2018, up from less than 10% during FY16

  • New approach to pricing combined with simple and easy products driving impressive customer growth and improved mix

Tower’s focus on customers has seen continued growth in its core New Zealand portfolio in FY18, with 18,192 risks added to the core book and GWP increasing 11.9%.

With Tower’s new product suite fully available online, and continued refinement and optimisation of the digital sales channels, more customers are choosing Tower, delivering a significant uplift in new business sales, with 45% of new business sales online in September 2018, up from less than 10% in FY16.

In the Pacific, Samoa, American Samoa and the Solomon and Cook Islands have returned to growth thanks to additional underwriting, pricing and marketing support for local teams. However, this growth has been offset by the continued remediation of the Papua New Guinea portfolio to reduce risk and exposure which will lead to improved profitability.

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

  • Ongoing pricing improvements in New Zealand motor, house and contents portfolios to offset increased claims costs

  • Constant refinement of underwriting criteria enabling more granular assessment to improve profitability of portfolio

  • Attracting new, profitable customers with improved and targeted offerings;

  • Building and refining Tower’s digital offering and online sales process

  • The creation of the Pacific operations centre, centralising back office functions, ensuring that the pricing and underwriting approach is consistent and minimises claims leakage

New Zealand and Pacific claims expenses

Overview

  • Claims costs increased across New Zealand and Pacific

  • Inflation is well understood and has been addressed through pricing and underwriting responses already implemented or in train to improve performance through the coming year

  • Strengthened underwriting and risk selection in the Pacific to improve profitability

New Zealand claims expenses increased in FY18 due to a number of claims challenges, however, these challenges are well understood and swift action has been taken to address each of them.

Throughout the year an increase in the development of open FY17 claims was experienced. The reserving model used didn’t respond well during the claims backlog experienced due to storms, understating expected development of claims in FY17. This resulted in a 1.2 percentage point increase in the claims ratio and the reserving methodology has now been updated accordingly.

Tower’s new, simpler products have resulted in a decrease in NZ House claim frequency, however, this positive result has been offset by an increase in severity, driven by a number of large house fires and the increased costs relating to increasing Health & Safety costs and asbestos testing requirements which is an industry-wide issue driven by regulatory change. In response to these issues Tower has strengthened pricing and improved its underwriting criteria and expects to see improved outcomes in the coming year.

Supply chain constraints and inflation continues to impact the industry with increasingly advanced technology in cars seeing the cost of repair rise. Tower is addressing motor claims inflation through pricing and more granular underwriting.

A higher cost per claim in Tower’s NZ Contents book is also linked to the increase in house fires and work has been completed to actively address this through improved pricing and underwriting.

In the Pacific, severe weather increased claims costs significantly in FY18. Cyclone Gita impacted Tonga heavily, while Cyclones Keni and Josie impacted Fiji, resulting in a 10.4 percentage point uplift on Tower’s FY17 Pacific claims ratio.

In Fiji, an increase in claims expenses mostly relates to motor claims inflation and in Tower’s National Pacific Insurance business, a small number of large commercial fires have driven the claims ratio higher.

Reinsurance is being utilised to minimise impacts of weather and constant refinement of Tower’s pricing, product offering and underwriting criteria in response to weather events and claims inflation means that Tower expects to see its claims ratio excluding large events to revert to prior year levels.

Major technology upgrade underway

The key to accelerating Tower’s transformation is a new IT platform that enables the simplification of products and processes. This will remove complexity for frontline teams and enable the delivery of a unique and revolutionary customer experience.

Combined with Tower’s push to move 50 - 70% of all transactions online, removing complexity from the business will deliver significant cost savings and productivity gains.

Tower is now approaching the half way mark of this programme and progress to date is in line with expections. This programme is complex and includes legacy replacement, digital enhancement and product rationalisation. The programme remains on track to deliver in the first half of the 2019 calendar year.

At the half way point costs are within tolerances, however like all projects of this nature there remains risk and complexity in the delivery. Tower’s robust governance controls include a focus on managing delivery risk and cost trade-off.

Key benefits to be seen from Tower’s new IT platform include the ability to:

  • Create and deliver a unique customer experience

  • Quickly deliver simple, customer focussed products

  • Target specific, profitable customer segments through granular, and automated pricing and underwriting

  • Charge fairer and more accurate premiums through improved access to, and use of, internal and external data

  • Easily trial new products and pricing

  • Rationalise products and reduce claims costs by improving the customer claims journey and overall claims management

  • Significantly reduce our cost base and realise large productivity gains by moving low value transactions online

  • Add value through improved employee engagement

Tower’s approach to implementing this new IT platform is designed to deliver on a dual purpose – accelerate transformation and protect and realise shareholder value.

Tower’s robust governance approach and clear roadmap forward will enable Tower to commence selling new business on the new platform in the first half of the 2019 calendar year. Once new business is live, migration of the existing book can start.

Solvency position

Tower holds significant capital over and above the minimum regulatory requirement.

As at 30 September 2018, following the Peak re settlement and the weather events earlier this year, Tower Insurance Limited held approximately $78 million of solvency margin, $28 million above RBNZ requirements and equivalent to 234% of minimum solvency capital. An additional $25 million in corporate cash is also held by Tower Limited.

Tower retains access to undrawn debt facilities and has a preference to fund remaining IT investment from debt.

Outlook

Tower is transforming, and is focussed on progressing initiatives that will continue accelerating momentum and deliver long-term shareholder value.

Tower has provided a one-off guidance for FY19 to demonstrate its confidence in the strategy and performance of its underlying business. Tower’s guidance for underlying NPAT in FY19 is in excess of $22m.

This includes the following assumptions:

  • Continued momentum in revenue growth and sales through improved digital channels

  • Underwriting and pricing changes will be implemented, continuing to drive improvement in mix of risk, as well as addressing inflation

  • Pacific contribution will return to normal levels

  • The management expenses ratio will be maintained at a steady level

  • The Aggregate excess will be fully utilised for weather events

Accordingly, Tower’s Board has determined that in FY19, Tower will pay a dividend of 50% to 70% of reported NPAT where prudent to do so.

Tower is being transformed and the work underway will deliver significant long-term value.

Transformation

Over the past two years we’ve spoken about the significant opportunity that exists in the Tower business. Our clear strategic plan is seeing us realise this potential with our transformation into a digital challenger brand well underway.

Our desire to step outside the confines of a traditional insurer to challenge industry norms, along with our dynamic size means that we can make decisions faster and capitalise on opportunities quicker and more efficiently than our competitors.

There are many similarities between the New Zealand and Australian insurance industries where two large multi-nationals hold a high percentage of the market. In Australia, challenger brands entered and achieved significant growth thanks to their ability to quickly deliver something unique and targeted to customers.

Over the past 18 months, research has shown us that customers are unhappy with insurers. Our goal is to challenge industry norms to change this because we believe this customer dissatisfaction provides us with opportunity.

We believe that delivering unique customer value through amazing claims experiences will be our key differentiator and will build strength and long-term value in our business.

Further increasing our focus on customers and creating products, systems and processes that enable amazing claims experiences, combined with continued refinement of our underwriting, ensuring we operate excellently and replacing our core IT platform will enable us to reach our challenger brand aspiration faster.

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Delivering against our challenger strategy will enable us to achieve our uplifted, medium-term operating targets of:
Customer and Community

Our transformation is driven by our purpose to set things right for our customers and communities.

Over the past 18 months we’ve spent time working with our customers to understand their frustrations and what they think a Tower of the future could look like.

As a result of this work, we’ve come to a firm belief that customers deserve better and we have refined our customer proposition to start offering customers a truly different choice for insurance.

We are removing jargon filled policies and making our award winning policies even simpler. Not only does this benefit our customers, it reduces the complexity and leakage that comes from having over 400 different products.

We will continue with our push for fairer pricing which will allow us to grow in the large low risk areas, like Auckland and Taranaki, that had previously been subsidising those in high-risk areas. We have communicated this change openly and honestly, receiving positive feedback about our approach and we will continue operating and educating the community in this way – transparently.

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Our People

The positive results we’ve delivered in the underlying business are being driven by our people and a noticeable change in our culture.

We actively encourage our people to do things differently and challenge the traditions and norms of the industry in which we operate. Pleasingly, we are seeing positive shifts in our culture measures as well as steady increases in employee engagement measures over the past two years.

This passion to do things differently has seen our people initiate and drive a number of projects that have improved our performance thanks to improving customer experience, reducing the amount of duplication occurring in our back offices and a number of diversity and inclusion initiatives.

In 2018 we held our first annual Buddy Up day, where employees from across the business buddied up with our frontline teams to understand our current customer experience and the steps we’re taking to improve this. Activities like this signal a shift in our culture toward one that is more customer centric and focussed on delivering on our strategy.

Throughout 2018 our employees also helped us celebrate International Women’s Day, Diwali, the Paralympics New Zealand Spirit of Gold Day, Chinese New Year, Christmas, Matariki, Eid Mubarak, Te Wiki O Te Reo Maori, Tongan Language Week, the Auckland pride parade and launched a women’s networking and development initiative, Lean-In.

In the coming year, our focus on diversity and inclusion and improving culture and engagement will increase with a continued drive to make Tower recognised as an employer of choice.

Being an employer of choice is an important strategic decision for us as it enables us to attract and retain employees who continuously improve and reinvigorate the business and what we do for our customers.