TOWER LIMITED

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TOWER Annual Report 2009

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TOWER Limited Annual Report 2009

Annual Report for the financial year ended 30 September 2009

Contents
Chairman’s Letter	3
Business Review	4
TOWER’s Community Commitment	6
Corporate Governance	7
Financial Statements	25
TOWER Directory	80

TOWER Group

Health & Life Insurance General Insurance Investments KiwiSaver

This Annual Report is dated 18 December 2009. All amounts in this Annual Report, unless stated otherwise, are in New Zealand dollars.

Highlights

PROfiT AfTER TAx $50.1 miLLiOn (uP 23.8%)
EARninGs PER sHARE 24.3 CEnTs (uP 21.2%)
imPROvEd REsuLTs fROm HEALTH & LifE (uP 19.7%), GEnERAL insuRAnCE (uP 16.9%) And invEsTmEnTs (uP 56.7%)
RETuRn On sHAREHOLdERs’ funds 16.1% (uP fROm 14.7%)
dividEnd fOR sHAREHOLdERs inCREAsEd TO 9 CEnTs PER sHARE (uP 12.5%)

TOWER Annual Report 2009

Chairman’s Letter

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Dear Shareholder

The fi nancial year to 30 September 2009 saw a continuation of TOWER’s strong performance in a market that remained uncertain.

The $50.1 million net profi t after tax confi rms the ongoing improvement in performance shown by the Group over the three years since the de-merger of TOWER Australia. It is 23.8% up on the result for 2008, representing a return of just over 16% on average shareholders’ funds.

The outlook for TOWER is positive. We have withstood the economic downturn and have delivered a first rate result.

These very pleasing results refl ect the benefi ts of continuing to focus on the fundamentals and the combined efforts of TOWER’s committed staff who work hard to achieve the group’s strategies.

In light of the improved result, the Board has declared an after tax dividend of 9 cents per share, which will be fully tax credited and paid on the recently increased capital. The dividend is an increase on the 8 cents per share paid for the previous year. Taking into account the new shares issued following the September 2009 rights issue, it is an effective increase of 49%. The dividend will be paid on 2 February 2010.

Earlier in the year, TOWER undertook an issue of 5 year Fixed Rate Unsecured Senior Bonds, and used the $80 million raised to repay existing short term bank debt. Then, in September, an issue of new shares was completed, raising $81 million of new capital. This issue was over-subscribed by 47%. Having successfully completed these capital raisings, TOWER is now in a very good position to take advantage of strategic opportunities as they arise.

The outlook for TOWER is positive. We have withstood the economic downturn and have delivered a fi rst rate result. The TOWER team will remain focused on the disciplines that have delivered this performance.

I wish to thank our staff and management for their contributions to the 2009 result. Finally, on behalf of the Board I thank you, the shareholders, for your investment in TOWER and for your continuing support.

A I (Tony) Gibbs CNZM Chairman

TOWER Annual Report 2009

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We will look at strategic opportunities to grow that deliver shareholder value

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Business Review

Rob Flannagan Group Managing Director

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I am very pleased to comment on the excellent performance of the business in the year to 30 September 2009.

Profi t growth was achieved in all three divisions – Health & Life, General Insurance, and Investments. This is the product of a continuing focus on getting the basics right.

Summary of results - Group

Year ended 30 September

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$million % Change 2009 2008
Health & Life +19.7 31.6 26.4
General Insurance +16.9 17.3 14.8
Investments +56.7 5.8 3.7
Business unit net profi t +21.8 54.7 44.9
after tax
Finance & corporate -20.0 (7.8) (6.5)
expenses
Underlying profi t after tax +22.3 46.9 38.4
Discount rate effect +52.4 3.2 2.1
Net Profi t after tax +23.8 50.1 40.5
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The net profi t after tax includes the non-cash effect of movements in the discount rate, which is outside our control. Underlying profi t has also increased over last year to $46.9 million – an increase of 22.3%.

Group results - three year summar y

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0.0 10.0 20.0 30.0 40.0 50.0 60.0
$millions
2007 2008 2009
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TOWER’s strategies have proven to be appropriate in what has continued to be a turbulent and challenging economic and fi nancial environment. As a New Zealand and Pacifi c Islands business, we are able to focus on the best actions to take in our local markets.

Management is focused on identifying opportunities that will add shareholder value. At the same time, the businesses will continue to apply the disciplines that have been introduced to successfully improve results over the last three years.

HEALTH & LifE

TOWER Health & Life continued its solid performance with overall earnings of $31.6 million. The discount rate effect added a further $3.2 million.

Premiums in the health business grew by 4.3% to reach $131.6 million, while management expenses were closely controlled and reduced by 9.8%. Disciplined pricing and claims management also contributed to an 87.9% increase in profi t after tax.

Analysis of profi t – Health

Year ended 30 September

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$million % Change 2009 2008
Net premiums +4.3 131.6 126.2
Incurred claims -7.5 (83.1) (77.3)
Management and sales +9.8 (37.0) (41.0)
expenses
Movement in policyholder liabilities +49.4 (4.3) (8.5)
Underwriting result 7.2 (0.6)
Investment income -16.8 8.4 10.1
Profi t before tax 15.6 9.5
Income tax expense -27.0 (4.7) (3.7)
Profi t after tax +87.9 10.9 5.8
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Health results - three year summary

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0.0 2.0 4.0 6.0 8.0 10.0 12.0
$millions
2007 2008 2009
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In the life business, premiums grew by 4.4% to $61.5 million and profi t after tax increased by 5.3%. Overall expenses increased due to increased commission volumes. There was signifi cant sales growth of 70% as a result of continued improvments in distribution relationships.

With good business fundamentals and strong growth momentum, TOWER Health & Life is well positioned to meet the growing demand of New Zealanders for life and health insurances.

Analysis of profi t – Life

Year ended 30 September

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$million % Change 2009 2008
Net premiums +4.4 61.5 58.9
Incurred claims +4.6 (65.0) (68.1)
Management and sales -23.6 (45.1) (36.5)
expenses
Movement in policyholder +9.6 36.4 33.2
liabilities
Underwriting result (12.2) (12.5)
Investment income +179.3 31.0 11.1
Profi t before tax 18.8 (1.4)
Income tax credit -91.4 1.9 22.0
Underlying profi t after tax +0.5 20.7 20.6
Discount rate effect +52.4 3.2 2.1
Profi t after tax +5.3 23.9 22.7
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4 TOWER Annual Report 2009

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With good business fundamentals and strong growth momentum, TOWER Health & Life is well positioned to meet the growing demand of new Zealanders for life and health insurances.

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Our focus on the direct market and product diversifi cation has provided strong growth and we continue to invest in this area.

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James Douglas CEO General Insurance

Steve Boomert CEO Health & Life

Life results - three year summary

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0.0 5.0 10.0 15.0 20.0 25.0 30.0
$millions
GEnERAL insuRAnCE
2007 2008 2009
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The Pacifi c islands produced a strong result notwithstanding the tsunami in Samoa on 30 September and fl ooding in Fiji. New Zealand’s underwriting result continues to improve and, combined with a solid investment return, drove much of the improved year-on-year performance. Profi t after tax increased 16.9% to $17.3 million.

Analysis of profi t - General Insurance

Year ended 30 September

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$million % Change 2009 2008
Net premiums +3.0 195.0 189.3
Incurred claims +2.7 (109.5) (112.5)
Management and sales -7.5 (71.4) (66.4)
expenses
Underwriting result 14.1 10.4
Investment income +1.8 11.2 11.0
Profi t before tax 25.3 21.4
Income tax expense -21.2 (8.0) (6.6)
Profi t after tax +16.9 17.3 14.8
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General Insurance results - three year summary

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0.0 4.0 8.0 12.0 16.0 20.0
$millions
2007 2008 2009
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Our consistent themes of product diversifi cation and focus on direct sales, combined with systems and process improvements, continues to position General Insurance for sustainable growth in the direct channel. Overall the claims ratio improved to 56.2%, refl ecting no signifi cant weather events in New Zealand, whilst the expense ratio has increased as a result of continued investment in direct growth.

invEsTmEnTs

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Investments for
future growth have
been made in our
sales, client service
and compliance
teams.
Sam Stubbs
CEO Investments
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Analysis of profi t - Investments

Year ended 30 September

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$million % Change 2009 2008
Total income -5.1 53.6 56.5
Management expenses +9.7 (38.1) (42.2)
Sales expenses +20.7 (7.3) (9.2)
Profi t before tax 8.2 5.1
Income tax expense -71.4 (2.4) (1.4)
Profi t after tax +56.7 5.8 3.7
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Investments results - three year summary

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0.0 2.0 4.0 6.0 8.0
$millions
2007 2008 2009
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2009 has proven to be the most volatile year for fi nancial markets in living memory. While there has been a signifi cant recovery in the second half of the year and lower interest rates continue to support equity markets worldwide, we remain cautious regarding the strength of the recovery.

TOWER Investments will continue to invest with a conservative, value based style. We focus more on what could go wrong rather than what could go right and this has proved to be appropriate in 2009, with upper quartile performances in most asset classes.

2009 has been a year of comprehensive fund rationalisation and we have increased our focus on higher growth products. Investments for future growth have been made in our sales, client service and compliance teams.

Our KiwiSaver business continues to grow. As at 30 September, we have almost 77,000 KiwiSavers and $326.4 million of funds under management.

OuTLOOK

Having delivered another improved performance in a very challenging economic environment, TOWER is confi dent that the outlook is positive. Management will continue to apply the disciplines on which we have focused over the last three years in our core businesses of health & life insurance, general insurance, and funds management.

We will look at strategic opportunities to grow that deliver shareholder value, and consider that the fundamentals are in place for the business to take advantage of the right opportunity.

TOWER Investments delivered an increased profi t after tax of $5.8 million, an increase of 56.7%. This was a strong result, refl ecting our focus on product rationalisation and cost control.

Rob Flannagan Group Managing Director

TOWER Annual Report 2009

TOWER’s Community Commitment

TOWER is a company that believes in being involved in the community where it does business. it is a responsibility that we embrace.

Every day TOWER receives dozens of approaches for support. These are as diverse as they are important to those who send them to us. These requests come from every corner of the country – many inspire us with their endeavours, others remind us of the challenges some face. All carry the trademark Kiwi “can do, will do” attitude – and are proof of the energy New Zealanders contribute to their society in so many ways.

New Zealand towns and communities, bringing the excitement of dance to every corner of our country. In early 2010 audiences will be treated to the dynamic triple bill, the “TOWER Season of ‘Here to There’ ” in eight cities across New Zealand.

TOWER companies also continue to individually support a small number of events, including awards and conferences, and organisations such as Bowls New Zealand.

TOWER continues to support the Royal New Zealand Ballet. TOWER has presented a “TOWER Season” with the ballet company for eight years and this year was proud to present TOWER Tutus on Tour. This brilliant season visited almost 50

TOWER Group senior management

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From left to right: Tony Dixon - Chief Information Officer, Steve Boomert - CEO Health & Life, Rob Flannagan - Group Managing Director, Sam Stubbs - CEO Investments, James Douglas - CEO General Insurance, Eric O’Sullivan - Group Chief Financial Officer

6 TOWER Annual Report 2009

Corporate Governance

TOWER’s Board and the management team have a responsibility to achieve the highest standards of corporate performance, ethical behaviour and accountability. The Board has adopted and developed corporate governance structures and practices that are consistent with best practice and ensure the integrity of the governance framework, with continual reassessment of its practices against these standards. Where developments arise in corporate governance, the Board is committed to review TOWER’s practices and incorporate changes where appropriate to ensure TOWER maintains best practice governance structures.

Compliance with Governance Requirements and Recommendations

As TOWER securities are listed on the New Zealand and Australian Stock Exchanges, TOWER adheres to the NZX Limited (NZX) NZSX Listing Rules; the NZX Corporate Governance Best Practice Code; the New Zealand Securities Commission Corporate Governance Principles and Guidelines; the Australian Stock Exchange Limited (ASX) Listing Rules; and the ASX Corporate Governance Council Best Practice Recommendations.

For the reporting period to 30 September 2009, TOWER considers its corporate governance practices have complied with the NZX Corporate Governance Best Practice Code and the ASX Corporate Governance Council Best Practice Recommendations.

Copies of the principal governance documents and more detail about TOWER’s governance practices are available on TOWER’s website at www.towerlimited.com under ‘Corporate Governance’.

How TOWER’s Business Practices Reflect Corporate Governance Best Practice

Role of the TOWER Board of Directors

The Board, elected by TOWER shareholders, is responsible for the performance of the TOWER Group as a whole. In practice, this is achieved through formal delegation to the Group Managing Director and to its three Board committees (Audit

and Compliance Committee, Remuneration and Appointments Committee, and Investment Committee – the role of each of these committees is outlined on pages 13 and 14).

The day-to-day leadership and management of the Group is undertaken by the Group Managing Director and senior executives. The Group Managing Director has also formally delegated certain functions to senior management to ensure consistent and efficient decision-making across the Group. Executives have no power to do anything which the Group Managing Director cannot do pursuant to his delegations. Within this formal delegation framework those executives who report directly to the Group Managing Director have authority to sub-delegate certain authorities to their direct reports. The Board meets regularly with management to provide strategic guidance for TOWER and effective oversight of management.

Each year the Board holds a strategy session with senior management to review TOWER’s business direction. The application of these strategies within each business area is reviewed regularly at Board meetings.

The Board is primarily governed by the Board Charter, Board Protocols and the Code of Ethics. The Board Charter records the Board’s roles and responsibilities, the Board Protocols describe internal Board procedures for efficient decisionmaking and the Code of Ethics ensures decision-making is in accordance with TOWER’s values. These documents can be found under ‘Corporate Governance’ on TOWER’s website at www.towerlimited.com.

The Board Charter records that the primary role of the Board is to effectively represent and promote the interests of shareholders with a view to enhancing growth and returns across the Group, adding long-term value to TOWER shares. The Board, when fulfilling its roles and responsibilities, is required to have appropriate regard to TOWER values, the concerns of its shareholders, its relationships with significant stakeholders and the communities and environment in which it operates.

The Board reserves certain functions to itself. These include:

determining the Group’s strategic objectives, and approving annual operating plans, financial targets and capital expenditure plans;
assessing and monitoring performance, including management’s performance against the strategic objectives, operating plans and financial targets;
approving all changes to the Group’s corporate structure where these are of strategic importance;
determining Group financial and treasury strategies and policies, including approving all dividend policies and distributions to shareholders, lending and borrowing, tax, and investment and foreign exchange policies;
determining the Group risk management policies and

TOWER Annual Report 2009

framework and the Group information technology strategies and policies;

approving capital expenditure, operating expenditure, asset acquisitions and divestments, and settlement of legal proceedings, in all cases where this is outside the normal course of business and/or above delegated limits;
approving all transactions relating to major business and company acquisitions, mergers and divestments; and
approving the appointment and remuneration of the Group Managing Director.

Board Composition, nominations and Appointments

Board composition

At 30 September 2009 the Board included six non-executive Directors and the Group Managing Director. The TOWER Constitution requires a minimum of six Directors and a maximum of nine.

The Remuneration and Appointments Committee is responsible for identifying Directors for appointment to the Board to ensure there is an appropriate blend of commercial skills and experience to govern and add value to the TOWER businesses. The Committee is also responsible for the Board Protocols which have been established to facilitate the effective operation of the Board. Current Directors contribute significant commercial, financial, legal and investment skills to the Board. Directors’ profiles are on pages 10 to 12.

Role of Chairman

The Chairman’s role is to lead and manage the Board so that it operates effectively, and to facilitate interaction between the Board and the Group Managing Director. The Group Managing Director is charged with the day-to-day leadership and management of the TOWER Group.

The Chairman of the Board is elected by the Directors. The Board supports the separation of the roles of Chairman and Group Managing Director and these roles have always been separate at TOWER. Tony Gibbs was appointed Chairman of TOWER Limited on 19 December 2006.

Nominations, appointments and ongoing education

The Remuneration and Appointments Committee recommends to the Board suitable candidates for appointment as Directors. The Committee will consider, among other things:

the candidate’s experience as a director;
their skills, expertise and competencies (including in the financial services industry);
the extent to which those skills complement the skills of existing Directors;
their ability to devote sufficient time to the directorship; and
the candidate’s reputation and integrity.

On appointment to the Board, Directors receive a formal letter of appointment outlining their duties and obligations and are provided induction information about TOWER in the form of a Director’s Manual. The Director’s Manual contains historical background on TOWER and its operations, information about how the Group is structured, details of the Company’s directors’ and officers’ insurance, the Board Charter and other TOWER corporate governance policies. The induction process also involves one-on-one discussions with the Chairman, other Directors and briefings from senior management to help new Directors participate actively in Board decision-making at the earliest opportunity.

To ensure ongoing education, Directors are regularly informed of developments that affect TOWER’s industry and business environment, as well as company and legal issues that impact the Directors themselves. The Directors receive comprehensive board papers and briefing information before Board meetings, including a report from the Group Managing Director and

divisional reports from the CEO of each business unit. Directors have unrestricted access to management and any additional information they consider necessary for informed decisionmaking. The Company Secretary is usually the first point of contact for such requests.

Senior management also attend Board meetings in order to provide presentations to the Board and answer any queries Directors may have. This allows the Board to understand the practical issues affecting TOWER and the impact of these issues on its performance.

Directors are expected to develop their skills, competencies and industry knowledge by taking responsibility for their continuing education.

A Director may obtain independent professional advice relating to the affairs of TOWER or his/her responsibilities as a Director or Board Committee member. Where the Director has the approval of the Board Chairman or Committee Chairman to obtain independent professional advice, TOWER will meet the reasonable costs of the advice.

Director Independence

The Board Protocols require that a majority of the Board are independent Directors. The Board regularly assesses the independence of each Director based on the interests disclosed by them. For this purpose Directors are required to immediately advise the Board of any new or changed relationships so the Board can make this assessment.

Based on the NZX Listing Rules and the ASX Corporate Governance Council Best Practice Recommendations, the Board Protocols define a Director as being independent if he/she is a Non-executive Director who does not have any direct or indirect interest or relationship that could, or could reasonably be perceived to:

reasonably influence, in a material way, his/her decisions relating to TOWER; or
materially interfere with his/her ability to act in the company’s best interests.

Examples of relationships that remove independence are relationships with a material TOWER customer, supplier, professional advisor or substantial shareholder. Currently, the Board considers that four of the Directors are independent, namely: Bill Falconer, John Spencer, Susie Staley and Denis Wood. The Board considers that Tony Gibbs and Mike Jefferies are not independent as a result of their appointment to the TOWER Board by Guinness Peat Group, a substantial shareholder of TOWER.

In accordance with TOWER’s Constitution, Directors with an actual or potential conflict of interest on particular issues are required to disclose the conflict and may still attend meetings but will abstain from voting on that issue.

Retirement and re-election

At least one-third of the total number of Directors must retire from office each year by rotation and, if they choose, stand for re-election by shareholders at the Annual Meeting. The Directors who retire each year are those who have been in office longest since their last election. If two Directors have held office for equal terms and cannot agree who will retire, it is determined by lot.

In addition, all Directors appointed by the Board since the last Annual Meeting to fill a casual vacancy must stand for election. Shareholders will be provided with relevant information on the Directors standing for re-election prior to the Annual Meeting to enable them to make informed decisions when voting.

Board and Committee Performance Review

The Board recognises that the performance of the Directors, and Board Committees are crucial to TOWER’s success and to the interests of shareholders. The Board reviews its

TOWER Annual Report 2009

own composition and performance and that of the Board Committees in accordance with the terms of the Board Charter. The Remuneration and Appointments Committee is responsible for the performance management and annual appraisal of the Group Managing Director and individual Directors. Evaluations may be carried out by an external consultant. Further details regarding the Group Managing Director’s remuneration are set out on page 15.

Director share ownership

All Directors are required by the company’s constitution to hold TOWER shares. Directors and management are required to comply with TOWER’s Insider Trading Guidelines when purchasing and disposing of TOWER securities. The number of shares held by each Director and their dealings in TOWER securities during the fi nancial year are disclosed on page 21 of the Regulatory Disclosures section.

Indemnities and Insurance

TOWER has given Deeds of Indemnity to Directors for potential liabilities and costs they may incur for acts or omissions in their capacity as Directors. Directors’ and Offi cers’ liability insurance is in place for Directors and employees acting on behalf of TOWER and its subsidiaries. While the insurance covers risks arising out of acts or omissions of Directors and employees acting for TOWER, it does not cover dishonest, fraudulent or malicious acts or omissions, or criminal liability.

Attendance at Board and Committee Meetings

The Board held nine scheduled meetings during the year from 1 October 2008 - 30 September 2009 and 5 special meetings. Director attendance at the Board meetings is set out on page 14. The Group Managing Director attends all Committee meetings and the Group Chief Financial Offi cer attends meetings of the Audit and Compliance Committee and Investment Committee. The Company Secretary attends all Board and Committee meetings, and is responsible for taking accurate minutes of each meeting and ensuring that Board procedures are observed.

TOWER Board of directors

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Back row: Bill Falconer, John Spencer, Susie Staley, Denis Wood, Mike Jefferies. Front row: Tony Gibbs - Chairman, Rob Flannagan - Group Managing Director

TOWER Annual Report 2009

Corporate Governance – directors’ Profi les

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TOnY GiBBs

CNZM, FInstD

Chairman. Non-Executive.

Appointed: 27 March 2003. Last Re-elected: 2007

Board Committee Memberships: Chairman of Remuneration and Appointments Committee

Not independent

Tony was elected to TOWER’s board in 2003 and brings more than 25 years history of a diverse range of management and directorship experience to the board covering mergers, acquisitions, divestments and restructuring.

Tony is the Chairman of Turners & Growers Limited and a director of various other companies including: Coats plc, Coats Holdings Limited, Guinness Peat Group plc, and Guinness Peat Group New Zealand Limited.

Tony was previously Chairman of a number of companies including: AGB McNair Limited, Tyndall Life NZ Limited, Turners Auctions Limited, Tenon Limited and The New Zealand Guardian Trust Company Limited (Deputy Chairman). He has also held numerous other directorships in Australasia.

Tony resides at Matakana, Auckland, New Zealand.

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ROB fLAnnAGAn

ACA OPM (Harvard) AMInstD JP

Group Managing Director

Appointed: 25 March 2008

Rob was appointed as Chief Executive Offi cer of TOWER New Zealand in October 2006. His appointment was a key milestone as in November 2006 TOWER moved to separate its New Zealand and Australian businesses with Rob assuming leadership of the New Zealand business. In March 2008, Rob was appointed to the Board and now holds the position of Group Managing Director.

From a professional perspective, Rob is a qualifi ed chartered accountant, a graduate of Harvard Business School and serves as a Justice of the Peace.

Rob brings a wealth of expertise to his leadership of TOWER. His diverse range of experience in senior management positions has been both within and outside of the fi nancial services industry and he has also been a key participant in the formation and start up of a number of businesses. He was a partner of Arthur Young Chartered Accountants until 1981 and was an in-demand guest lecturer for Auckland University’s MBA Programmes.

Rob was co-founder of Medic Aid, a medical insurance company which at its time became the second largest medical insurer after Southern Cross. Subsequently, his senior executive roles have included Managing Director of the New Zealand Guardian Trust Company Ltd as well as serving as Director of Group Initiatives for Royal Sun Alliance responsible for coordinating Group Strategic Planning, E-Business, Marketing and Communications, Group Purchasing, Risk Management and Group Projects. Rob was appointed CIO of Royal & Sun Alliance.

Rob resides in Auckland, New Zealand.

10 TOWER Annual Report 2009

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BiLL fALCOnER LLB, CNZM, DFloD

Non-Executive Director

Appointed: 31 December 2003. Last Re-elected : 2008

Board Committee Memberships: Member of Audit and Compliance Committee.

Independent

Bill joined the TOWER Board in December 2003. Bill has had a successful career as a public servant, lawyer and Company Director.

Bill is currently chairman of the Waterfront Partnership, the Meat Industry Association, the Primary Growth Partnership Investment Advisory Panel and New Zealand Rowing, and a Director of Westfi eld Trust (NZ) Limited and the New Zealand Symphony Orchestra.

Bill resides in Cambridge, New Zealand.

miKE JEffERiEs BCom, CA

Non–Executive Director

Appointed: 19 December 2006. Last Reelected : 2009.

Board Committee Memberships: Member of Audit and Compliance Committee, Member of Investment Committee

Not independent

Mike joined the TOWER board in December 2006. He is a chartered accountant with extensive experience in fi nance and investment and is a senior executive of GPG. Mike is currently Chairman of TAFMO Limited and a Director of Ozgrowth Limited and Metals X Limited.

Mike resides in Perth, Australia.

JOHn sPEnCER BCom, FCA

Non-Executive Director

Appointed: 1 October 2003. Last Re-elected : 2008

Board Committee Memberships: Chairman of Audit and Compliance Committee.

Independent

John joined the TOWER Board in October 2003 and has been the Chairman of the Audit and Compliance Committee since December 2003. John brings to the Board signifi cant fi nancial and commercial expertise gained over many years from senior management positions with a number of major companies in New Zealand and overseas.

Prior to the formation of Fonterra, John was the Chief Executive Offi cer of New Zealand Dairy Group.

John is Chairman of WEL Networks Limited, Tainui Group Holdings Limited, Telfer Young Limited and AsureQuality Limited, Deputy Chairman of Solid Energy New Zealand Limited and a Director of Allied Nationwide Finance Ltd, DairyNZ Limited, and the Legal Services Agency.

John is a past Director of NIWA, Waikato Regional Airport, the Accounting Standards Review Board and the Institute of Chartered Accountants, receiving the ‘Valued Contribution to the Profession’ award in 2002.

John resides in Wellington, New Zealand.

TOWER Annual Report 2009 11

susiE sTALEY LLB (Otago), FNZIM, FInstD

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Non-Executive Director

Appointed: 1 October 1999. Last Re-elected : 2007.

Board Committee Memberships: Member of Remuneration and Appointments Committee, Member of Investment Committee

Independent

Susie was elected to TOWER Corporation’s Board in 1996. Susie served on several due diligence committees for the Group and was chairman of the capital raising programme in 2003 and the TOWER separation project in 2006.

A property and business lawyer, Susie is a partner of Staley Cardoza Lawyers. She has a background in strategic management and brings a wide range of business and corporate experience to the Board. Susie is currently Chairman of Maritime New Zealand and Chatsford Management Limited, a Director of Allied Nationwide Finance Ltd, and a trustee of University of Otago Foundation Trust.

Susie was formerly the Chairman of Ngai Tahu Property Management Limited, and a Director of Dunedin International Airport and PGG Wrightson Limited.

Susie resides in Dunedin, New Zealand.

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dEnis WOOd

MA (Hons)

Non-Executive Director

Appointed: 27 May 2005. Last Re-elected : 2009

Board Committee Memberships: Chairman of Investment Committee

Independent

Denis was appointed to the TOWER Board in May 2005. Denis previously had a career in investment banking and has extensive experience in investment management, corporate restructuring, strategic planning and capital raising. Denis is the Chairman of Mercy Hospice Auckland Limited and a director of Genesis Power Limited.

Denis resides in Auckland, New Zealand.

12 TOWER Annual Report 2009

Corporate Governance – Board Committees

The Board has three standing Committees: the Audit and Compliance Committee, the Remuneration and Appointments Committee, and the Investment Committee. Other Committees are established from time to time to examine specific issues as required by the Board.

The Committees are governed by written terms of reference, which detail their specific functions and responsibilities. The terms of reference for each Committee are reviewed annually. Copies of each Committee’s terms of reference are available on the TOWER website at www.towerlimited.com.

The Committees make recommendations to the Board. They have no decision-making ability except where expressly provided by the Board. The Board annually confirms the membership and Chairmanship of each of the Committees. The experience and skills of the individual Committee members are set out in the Directors’ profiles on pages 10 to 12. Member attendance at each Committee meeting is set out on page 14.

Audit and Compliance Committee

MEMBERS: JOHN SPENCER (CHAIRMAN), BILL FALCONER AND MIKE JEFFERIES

TOWER has a structure to independently verify and safeguard the integrity of the Group’s financial reporting. The principal components of this are the Audit and Compliance Committee, the external and internal auditors, and the certifications provided to the Board by senior management.

Terms of Reference of the Audit and Compliance Committee include the following duties and responsibilities:

independently and objectively review the financial information presented by management to the Board, the external auditors and the public;
review draft half year and annual financial statements and the external auditor’s report, and make recommendations to the Board as to their adoption;
oversee the performance of the external auditor and to be satisfied as to its independence;
review the effectiveness and efficiency of management processes, Group risk management and internal financial controls and control systems;
monitor and review compliance with regulatory and statutory
requirements and obligations;
monitor the internal audit function and receive regular reports from the internal auditors on risks, exposures and compliance;
maintain open and direct lines of communication with the external and internal auditors; and
make recommendations to the Board as to the appointment of the external auditors.

The Audit and Compliance Committee meets with the internal auditors four times during the financial year and with the external auditors at least twice.

The Terms of Reference require that the Committee has a minimum of three suitably qualified Non-Executive Directors, the majority of whom are independent. The Board appoints the

Chairman of the Committee, who cannot also be Chairman of the Board.

Following each meeting the Chairman of the Committee provides a report to the Board. The Chairman also provides an annual report summarising the Committee’s activities, findings, recommendations and results for the past year.

Remuneration and Appointments Committee

MEMBERS: TONY GIBBS (CHAIRMAN) AND SUSIE STALEY.

The Remuneration and Appointments Committee advises the Board in respect of a number of matters, including:

the appointment and succession of Board Directors, and Director remuneration; and
the Group Managing Director and senior executive appointments, termination, performance appraisal and remuneration.

The Terms of Reference for the Remuneration and Appointments Committee require that the Committee comprises suitably qualified Non-Executive Directors. The Board appoints the Chairman of the Committee.

The company’s remuneration policies for Directors and Senior Executives are set out on pages 14 and 15.

investment Committee

MEMBERS: DENIS WOOD (CHAIRMAN), MIKE JEFFERIES AND SUSIE STALEY

The Investment Committee has various duties and responsibilities, including:

reviewing investment policy for TOWER shareholder and policyholder funds;
reviewing risk management policy and statements in respect of investment management, including derivative policy;
considering the establishment, adjustment or deletion of limits and counter-party approvals, and the scope of financial instruments to be used in the management of TOWER’s investments;
reviewing the appointment of external investment managers;
monitoring investment and fund manager performance; and
monitoring compliance with investment policies and client mandates.

The Terms of Reference for the Investment Committee require that the Committee comprise a minimum of two suitably qualified Non-Executive Directors. The Board appoints the Chairman of the Committee, who must be a Non-Executive Director but cannot also be Chairman of the Board.

TOWER Annual Report 2009

Corporate Governance – Attendance and Remuneration

2008/2009 TOWER Limited directors’ Attendance Record

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TOWER Investment Remuneration & Audit & Compliance
Limited Committee Appointments Committee Committee
Number of Board Number of Number of Number of
Meetings Attended Meetings Attended Meetings Attended Meetings Attended
Meetings Held 14 3 2 4
Tony Gibbs 13 - 1 -
Bill Falconer 13 - 1 [] 4
Rob Flannagan 14 - - -
Mike Jefferies 11 2 - 4
John Spencer 13 - - 4
Susie Staley 13 3 2 -
Denis Wood 13 3 - -
----- End of picture text -----*

* As alternate for Tony Gibbs

Remuneration

TOWER’s remuneration policies aim to attract and retain talented and motivated Directors and employees who will contribute to enhanced Group performance. TOWER aims to provide employees with remuneration that is competitive, equitable and related to the achievement of individual, team and business unit objectives. TOWER rewards high performing staff for providing superior performance.

The following section discusses TOWER’s remuneration policies and arrangements for Non-Executive Directors, the senior executives and staff in general.

The Remuneration and Appointments Committee role

The Remuneration and Appointments Committee is responsible for assisting and advising the Board in relation to:

remuneration strategy, structure and policy;
remuneration of the Group Managing Director;
setting Non-Executive Directors’ remuneration;
setting Board Committee Members’ fees and;
determining remuneration packages of Senior Executives, following recommendations from the Group Managing Director.

14 TOWER Annual Report 2009

Non-executive Directors

The Board’s policy 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 Meeting in February 2004 shareholders approved an increase in Director remuneration to the current maximum of NZ$900,000 per annum. TOWER seeks external advice when reviewing Board remuneration. The Remuneration and Appointments Committee is responsible for reviewing Directors’ fees.

The annual fees currently paid are as follows:

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Board Chairman $85,000 for chairing the
TOWER Limited Board
Non-Executive Directors $50,000 for sitting on the
TOWER Limited Board
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Non-Executive Directors are paid additional annual fees for sitting on Board Committees as follows:

Audit & Compliance Committee

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|||
|---|---|
|Chairman|$15,000|
|Members|$9,000|
|Remuneration & Appointments Committee|
|Chairman|$7,500|
|Members|$5,000|
|Investment Committee|
|Chairman|$7,500|
|Members|$5,000|

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2008/2009 Directors’ Remuneration and Benefits

TOWER Limited Board

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2009 2008
Director’s Other $ Director’s Other $
Fees $ Fees $
Tony Gibbs 137,500 - 137,500 -
Bill Falconer 87,570 - 87,570 -
Rob Flannagan - 1,216,800 - 1,155,000
Mike Jefferies 92,570 - 92,570 -
John Spencer 93,570 - 93,570 -
Susie Staley 88,570 - 88,570 -
Denis Wood 86,070 - 86,070 -
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Rob Flannagan was appointed Chief Executive Officer of the TOWER Group in August 2006 and became the Group Managing Director in March 2008. The Group Managing Director does not receive director’s fees. The amount shown above is his total remuneration for the full year ended 30 September 2009 and consists of base salary of $811,200 and a short term performance incentive of $405,600. He also has a long term incentive in the form of the Tranche E share options as disclosed in note 36 to the financial statements.

Additional fees may be paid to Non-Executive Directors for oneoff tasks and/or additional appointments where required, for example, sitting on a due diligence committee.

The remuneration policy for Non-Executive Directors does not include participation in either a share or share option plan.

Retirement Allowances

Particular TOWER Directors are entitled to a retirement allowance on their retirement from the TOWER Board. At the 2004 Annual Meeting shareholders approved an increase in the maximum amount of Directors’ fees. In exchange for the increase and to provide greater transparency for remuneration the Board resolved that retirement allowances would cease to accrue from 1 October 2003. Allowances are paid as a lump sum on retirement from the Board. The retirement allowance is calculated by dividing the relevant Director’s number of years service by nine and multiplying the result by the Director’s remuneration for a three year period.

The retirement allowances which have accrued are:

$101,101 to be paid on Susie Staley retirement.

Note: To be eligible for a retirement allowance a Director needs to be in office for at least three years prior to 1 October 2003. For this reason no other TOWER Directors are eligible for a retirement allowance.

TOWER Annual Report 2009 15

Employee remuneration:

Set out below are the number of employees or former employees, not being directors or former directors, who received remuneration valued at or exceeding $100,000 for the year ended 30 September 2009. Remuneration includes redundancy payments and termination payments made during the year to employees whose remuneration would not otherwise have been included in the table.

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Bands
From $ To $ 2008/2009 2008/2007
100,000 109,999 28 12
110,000 119,999 24 15
120,000 129,999 11 16
130,000 139,999 15 18
140,000 149,999 20 8
150,000 159,999 5 6
160,000 169,999 5 7
170,000 179,999 4 6
180,000 189,999 6 4
190,000 199,999 3 3
200,000 209,999 1 -
210,000 219,999 3 2
220,000 229,999 5 -
230,000 239,999 2 1
240,000 249,999 1 2
250,000 259,999 1 3
260,000 269,999 3 3
270,000 279,999 2 2
280,000 289,999 - 1
290,000 299,999 1 -
310,000 319,999 3 2
320,000 329,999 1 1
330,000 339,999 1 -
340,000 349,999 - 1
360,000 369,999 - 1
370,000 379,999 1 -
380,000 389,999 - 1
400,000 409,999 1 -
450,000 459,999 - 1
460,000 469,999 - 1
470,000 479,999 - 2
560,000 569,999 2 -
600,000 609,999 - 1
640,000 649,999 1 -
800,000 809,999 1 -
Total 151 120
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16 TOWER Annual Report 2009

Corporate Governance – Audit and Risk management at TOWER

Risk management

TOWER has established a framework to identify, assess, monitor and manage risk. At the forefront of this are the internal audit and compliance processes, and the comprehensive risk management process for each operating company. The Risk Management Policy establishes the framework to ensure a formal and consistent process of risk identification, assessment, mitigation, management and acceptance, and a regular review of risk is carried out across the Group. Each company has documented its key risks and action plans to mitigate them. These processes are incorporated into the regular strategic review process.

TOWER is committed to ensuring that all reasonable measures are taken to maintain a responsible compliance environment through which legislative obligations are fully met. The Compliance Policy establishes a framework to implement and monitor compliance.

The Audit and Compliance Committee is responsible for monitoring Group risks and exposures, and compliance with statutory obligations. The executive management team regularly reports to the Committee on risk management.

internal audit

TOWER contracts the independent Chartered Accounting firm Ernst & Young to carry out the Internal Audit function. Ernst & Young report to the Chairman of the Audit and Compliance Committee and have full access to other Committee members and the Board. The Committee approves the Internal Audit Policy that governs the internal audit function across the Group.

The Internal Audit Policy formally records the delegations the Audit and Compliance Committee has made to the Internal Auditor in relation to the internal control systems and processes of the Group businesses. The Audit and Compliance Committee approves the appointment of the Internal Auditor following the Group Managing Director’s recommendation.

The internal auditors help the Board and the Group exercise good corporate governance and meet their regulatory obligations by providing them with independent assurance of the adequacy and effectiveness of internal control systems and processes within TOWER. The internal auditors have unrestricted access to TOWER information and staff, and are completely independent of the activities and operations they audit.

PwC was re-appointed as auditor by shareholders at the Annual Meeting in 2009 to audit the TOWER and TOWER Group Financial Statements.

A formal engagement letter with PwC sets out the respective obligations and responsibilities of PwC and the company in relation to preparation and audit of financial statements, and the integrity of the Group’s financial systems. The Board also has a formal External Audit Independence Policy that includes the provision of non-audit services by the external auditor. This policy specifies which services the external auditor may and may not provide TOWER. The policy is overseen by the Audit and Compliance Committee. The External Audit Independence Policy is available on TOWER’s website at www.towerlimited.com under the ‘Corporate Governance’ section.

Non-audit services provided by PwC to the Group during the accounting period did not, in TOWER’s opinion, affect auditor independence. PwC is also required to provide the Audit and Compliance Committee with an annual certification of its continued independence, and in particular confirm that it has not carried out any engagements during the year which would impair its professional independence.

Representatives from TOWER’s external auditor will be present at the Annual Meeting and will be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report.

PwC was paid NZ$910,000 for audit-related work and $179,000 for non-audit related work. (Refer to Note 9(A) of the Financial Statements).

Group Corporate Governance Policies and Procedures

To support the Board’s aims of developing and fostering corporate governance practices which are consistent with best practice, TOWER has developed a number of Group corporate governance policies that apply to all Directors and employees of TOWER. Summaries of some of these policies are discussed on the following page and where indicated copies are available on TOWER’s website at www.towerlimited.com under the Corporate Governance section.

External Audit

The TOWER Board is fully committed to ensuring the quality and independence of the external audit process. As part of this process TOWER encourages full and frank disclosure and discussions between the Board, TOWER’s internal auditors, management and the external auditor (PricewaterhouseCoopers (PwC)).

TOWER Annual Report 2009 17

Corporate Governance – Regulatory disclosures

Regulatory disclosures

Ethical and Responsible Behaviour

TOWER is committed to meeting its legal and other obligations to stakeholders, including shareholders, employees, customers, policyholders and the wider community.

Maintaining TOWER’s reputation for honesty and fairness is crucial to its success as a financial services business. The Board has adopted a Code of Ethics which is an important tool for achieving these aims as it sets out the minimum standards of conduct and behaviour TOWER expects of its Directors, executives and employees and requires them to adhere to these standards. The Code of Ethics is available to staff both on the TOWER website and through the induction process. The types of behaviour addressed in the Code of Ethics include:

avoiding situations in which personal interest interfere or appear to interfere with the interests of TOWER;
using a person’s position at TOWER’s or TOWER’s information or property for personal gain;
safeguarding the confidentiality of all TOWER non-public information; and
complying with all applicable legal requirements and ensuring that behaviour is appropriate while conducting TOWER’s business.

Any person who becomes aware of a breach or suspected breach of the Code of Ethics is required to report it to their manager immediately and the Company Secretary, who will investigate and take appropriate action as necessary.

In addition to the Code of Ethics TOWER has a Whistleblower Policy which is applicable to all staff. The policy sets out TOWER’s approach to the way in which suspicions/allegations of fraud, corruption and/or misconduct within the Group are to be reported by staff and how TOWER will deal with such incidents. The Policy provides that TOWER will ensure that a person who, in good faith, makes an allegation of misconduct under the Policy will not be personally disadvantaged by having made the report.

Insider Trading

Legal restrictions and TOWER’s Insider Trading Policy do not allow trading and dealing in TOWER securities while Directors and employees are in possession of information that has not been released to the public and that is likely to have a material effect on the price of TOWER securities. There are supplementary guidelines for Directors and designated employees (usually senior executives) requiring prior consent to trade, and specifying periods when trading is allowed (following half year and full year announcements). A copy of TOWER’s Insider Trading Policy is available on TOWER’s website at www.towerlimited.com.

Compliance Policy

Compliance Policy. The Policy sets out the key compliance responsibilities of TOWER’s Directors, executives, staff and contractors in all their business dealings. The Charter promotes TOWER’s commitment to sound corporate governance by strongly endorsing a responsible compliance environment for all of its staff. TOWER recognises that a responsible approach to corporate governance and compliance provides a foundation for business reputation and stakeholder confidence.

Market and Shareholder Communication

TOWER recognises that public confidence in the integrity of TOWER is based on continuous, full and open disclosure of information about its activities to the market and relevant stakeholders. TOWER’s Corporate Disclosure Policy provides for a planned, pro-active communication programme with shareholders and the wider investment community. A copy of TOWER’s Corporate Disclosure Policy is available on TOWER’s website at www.towerlimited.com. TOWER believes this communication programme assists in creating a fully informed market and enhances shareholder value. TOWER’s Corporate Disclosure Policy provides that only authorised spokespersons can communicate on behalf of TOWER with the investment community, shareholders and the media.

TOWER has policies and procedures in place designed to ensure that:

all investors have equal and timely access to material information concerning TOWER;
company announcements are factual and presented in a clear and balanced way; and
TOWER complies with the continuous disclosure requirements of the ASX and NZX.

The Company Secretary is accountable for compliance with disclosure obligations. Announcements of financial results, changes in profit forecasts and other material market announcements require Board approval.

TOWER’s corporate website, www.towerlimited.com, provides information to shareholders and investors about the Group. The website includes copies of past Annual Reports, results announcements, media releases (including NZX and ASX announcements), and general TOWER information.

Announcements

TOWER makes the following regular announcements to the market and shareholders:

full year results are announced in late November;
TOWER’s Annual Report is released in late December;
TOWER’s Notice of Annual Meeting is sent to shareholders in late December;
half year results are announced in late May; and
TOWER’s Half Year Report is released in late June.

TOWER’s approach to compliance is recorded in the TOWER

TOWER Annual Report 2009

Credit Rating

Global rating organisation A.M. Best Company has issued the following ratings of companies in the TOWER Group as at 3 August 2009:

TOWER Health & Life Limited Financial Strength Rating A- (Excellent) Issuer Credit Rating a-
TOWER Insurance Limited Financial Strength Rating A- (Excellent) Issuer Credit Rating a-
TOWER Life (N.Z.) Limite d
Financial Strength Rating A- (Excellent) Issuer Credit Rating a-
TOWER Limited

Issuer Credit Rating bbb-

Shareholder Analysis

TOWER’s shares are quoted on both the NZX and ASX. As at 30 November 2009, 28,370 TOWER shareholders held less than A$500 of TOWER shares (ie, less than a marketable parcel as defined in the ASX Listing Rules), holding a total of 5,430,305 TOWER shares.

Total Voting Securities

As at 30 November 2009, TOWER had 254,882,993 ordinary shares and 6,046,608 share options on issue. TOWER’s ordinary shares each carry a right to vote on any resolution on a poll at a meeting of shareholders. Holders of ordinary shares may vote at a meeting in person, or by proxy, representative or attorney. Voting may be conducted by show of hands or poll. Share options issued under the TOWER Executive Share Option Plan do not carry any right to vote. There are currently 16 holders of options.

Substantial Security Holders

According to notices given to the Company pursuant to the Securities Markets Act 1988, as at 30 November 2009, the following security holders are a substantial security holder in TOWER and hold a ‘relevant interest’ in the number of securities noted:

Guinness Peat Group plc. Notice dated 11 August 2008 has been given in relation to 67,127,936 ordinary shares (34.988%). (The registered holder is Ithaca (Custodians) Limited and the number of shares held as at 30 November 2009 is stated in the following table.)
Orbis Investment Management (Australia) Pty Ltd. Notice dated 2 October 2009 has been given in relation to 19,603,944 ordinary shares (7.68%).

Principal Shareholders

The names and holdings of the 20 largest registered TOWER shareholders as at 30 November 2009 are:

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Name Ordinary Shares %
1 Ithaca (Custodians) Limited 89,199,166 35.00
2 Tea Custodians Limited - NZCSD 11,927,694 4.68
3 HSBC Custody Nominees (Australia) Limited 8,608,498 3.38
4 Accident Compensation Corporation - NZCSD 6,729,798 2.64
5 HSBC Nominees (New Zealand) Limited A/C State Street - NZCSD 6,527,315 2.56
6 National Nominees Limited 6,366,146 2.50
7 ANZ Nominees Limited - NZCSD 5,842,241 2.29
8 JP Morgan Nominees Australia Limited 5,790,543 2.27
9 National Nominees New Zealand Limited - NZCSD 5,747,684 2.26
10 Citibank Nominees (New Zealand) Limited - NZCSD 5,017,612 1.97
11 New Zealand Superannuation Fund Nominees Limited - NZCSD 4,902,443 1.92
12 AMP Investments Strategic Equity Growth Fund - NZCSD 3,798,464 1.49
13 Asteron Life Limited - NZCSD 2,355,440 0.92
14 ANZ Nominees Limited 1,699,097 0.67
15 Forsyth Barr Custodians Limited 1,631,538 0.64
16 New Zealand Equity Nominee Pool - NZCSD 1,500,599 0.59
17 FNZ Custodians Limited 1,331,819 0.52
18 NZGT Nominees Limited - AIF Equity Fund - NZCSD 1,057,815 0.42
19 Investment Custodial Services Limited 965,436 0.38
20 Portfolio Custodian Limited 850,080 0.33
Total 171,849,428 67.42
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Shareholder Statistics (as at 30 November 2009)

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Domicile Number of Holders % Number of Shares %
New Zealand 41,014 72.64 213,567,657 83.79
Australia 14,670 25.98 40,244,761 15.79
Rest of World 781 1.38 1,070,575 0.42
Total 56,465 100.00 254,882,993 100.00
Size of Holdings Number of holders % Number of shares %
1-1,000 45,758 81.04 15,269,956 5.99
1,001 - 5,000 8,554 15.15 17,349,666 6.82
5,001 - 10,000 1,145 2.03 7,984,233 3.13
10,001 - 100,000 943 1.67 22,289,402 8.74
100,001 and over 65 0.11 191,989,736 75.32
Total 56,465 100.00 254,882,993 100.00
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TOWER Annual Report 2009

Optionholder Statistics (as at 30 November 2009)

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Size of Holdings Number of Holders % Number of options %
1 - 1,000 - - - -
1,001 - 5,000 - - - -
5,001 - 10,000 - - - -
10,001 - 100,000 3 18.75 265,304 4.39
100,001 and over 13 81.25 5,781,304 95.61
Total 16 100.00 6,046,608 100.00
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TOWER Limited disclosures

Interests Register

Each company in the Group is required to maintain an Interests Register in which the particulars of certain transactions and matters involving the Directors must be recorded. The Interests Register for TOWER Limited is available for inspection on request.

An ‘interested’ Director may not vote on a matter in which

he or she is interested unless the Director is required to sign a certificate in relation to that vote pursuant to the Companies Act 1993, or the matter relates to a grant of an indemnity pursuant to s162 of the Companies Act 1993.

General disclosures of interest

During the financial year Directors disclosed interest, or a cessation of interest, in the following entities pursuant to section 140 of the Companies Act 1993.

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Tony Gibbs Aeneid Seventeen Limited Director
Coats plc Director
Coats Holdings Limited Director
Ezypeel Mandarins Limited Director
GPG Forests Limited Director
GPG Shares Limited Director
Guinness Peat Group New Zealand Limited Director
Guinness Peat Group plc Director
Ithaca Custodians Limited Director
Staveley Inc Chairman (R)
Turners & Growers Fresh Limited Director
Turners & Growers Limited Chairman
Bill Falconer FastForward Ltd Director (R)
Hellaby Holdings Ltd Chairman
Meat Industry Association Chairman
New Zealand Symphony Orchestra Director
Oyster Bay Marlborough Vineyards Ltd Chairman (R)
Primary Growth Partnership Investment Advisory Panel Chairman
Waterfront Partnership Chairman
Westfield Trust NZ Ltd Director
Mike Jefferies Metals X Ltd Director
OzGrowth Ltd Director
TAFMO Ltd Chairman
John Spencer Allied Nationwide Finance Ltd Director
AsureQuality Ltd Chairman
DairyNZ Ltd Director
Tainui Group Holdings Ltd Chairman
Telfer Young Ltd Chairman
Solid Energy New Zealand Deputy Chairman
WEL Networks Ltd Chairman
Susie Staley Allied Nationwide Finance Ltd Director
Global Technologies NZ Director (R)
Maritime New Zealand Chairman
University of Otago Foundation Trust Trustee
Denis Wood Mercy Hospice Auckland Ltd Chairman
Radius Health Group Chairman (R)
Genesis Power Ltd Director
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20 TOWER Annual Report 2009

Specific disclosures of interests

During the financial year, TOWER did not enter into any transactions in which TOWER directors were interested. Accordingly, no disclosures of interest were made.

Indemnity and Insurance

In accordance with section 162 of the Companies Act 1993 and the constitution of the Company, the Company has provided insurance for and indemnities to, directors and employees of the TOWER Group for losses from actions undertaken in the course of their duties. The insurance includes indemnity costs and expenses incurred to defend an action that falls outside

the scope of the indemnity. Particulars have been entered in TOWER’s Interests Register pursuant to section 162 of the Companies Act 1993.

Use of Company information by Directors

No member of the Board of TOWER Limited, nor of any subsidiary, issued a notice requesting to use information received in his or her capacity as a Director which would not have otherwise been available to that Director.

Directors’ shareholdings

At 30 September 2009 directors held the following interests in the Company’s shares:

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Ordinary Shares
Director Beneficial Associated Persons
Tony Gibbs 5,822 89,199,166
Bill Falconer 12,540
Rob Flannagan 688
Mike Jefferies 3,049 89,199,166
John Spencer 19,261
Susie Staley 7,688
Denis Wood 114,446
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Rob Flannagan also holds 3 million Tranche E share options, details of which are disclosed in note 36 to the financial statements and, in his capacity as a director of the trustee of the TOWER Executive Share Option Plan, has an interest in 97,960 shares and 6,046,608 share options held by the trustee.

Directors’ trading in TOWER securities

TOWER Limited Directors disclosed the following acquisitions (and no disposals) of relevant interests in TOWER securities during the financial year pursuant to section 148 of the Companies Act 1993. All interests are beneficial.

Director	Date	Number acquired	Consideration
Tony Gibbs	28/09/091	5,196 shares	$1.34 per share
	09/09/09	5,000 rights	$0.24 per right
	09/02/092	28 shares	$1.61 per share
Bill Falconer	28/09/091	1,850 shares	$1.34 per share
	04/09/09	4,770 shares	$1.59 per share
	09/02/092	256 shares	$1.61 per share
Rob Flannagan	28/09/091	164 shares	$1.34 per share
	09/02/092	24 shares	$1.61 per share
Mike Jefferies	28/09/091	726 shares	$1.34 per share
	09/02/092	132 shares	$1.61 per share
John Spencer	28/09/091	4,586 shares	$1.34 per share
	09/02/092	666 shares	$1.61 per share
Susie Staley	28/09/091	1,826 shares	$1.34 per share
	09/02/092	265 shares	$1.61 per share
Denis Wood	28/09/091 09/02/092	27,249 shares 3,959 shares	$1.34 per share $1.61 per share

1 Shares issued under rights issue

2 Shares issued under dividend reinvestment plan

Buy-backs

TOWER is not, at the date of this Annual Report, undertaking any on-market share buy-backs.

TOWER Annual Report 2009 21

TOWER subsidiary Company director disclosures

The following persons held office as directors of subsidiary companies at 30 September 2009. Those who retired during the year are indicated with an (R).

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TOWER Capital Limited A I Gibbs, W J Falconer, R A Flannagan, M L Jefferies, J L Spencer, S A Staley, D M Wood
TOWER Financial Services Group Limited R A Flannagan, E J O’Sullivan
TOWER Corporation Holdings Limited R A Flannagan, E J O’Sullivan
TOWER Option Scheme Limited R A Flannagan, E J O’Sullivan
TOWER Investments Limited R A Flannagan, E J O’Sullivan
The National Insurance Company of New Zealand Limited R A Flannagan, E J O’Sullivan
TOWER Bourke Street Limited R A Flannagan, E J O’Sullivan
TOWER New Zealand Limited R A Flannagan, E J O’Sullivan
TOWER Asset Management Limited R A Flannagan, E J O’Sullivan, M E Parrot, A J K Stubbs
TOWER Managed Funds Limited R A Flannagan, E J O’Sullivan, M E Parrot, A J K Stubbs
TOWER Employee Benefits Limited R A Flannagan, E J O’Sullivan, M E Parrot, A J K Stubbs
TOWER Managed Funds Investments Limited R A Flannagan, E J O’Sullivan, M E Parrot, A J K Stubbs
TOWER Health & Life Limited R A Flannagan, E J O’Sullivan, S J Boomert, J E Douglas
TOWER Insurance Limited R A Flannagan, E J O’Sullivan, S J Boomert, J E Douglas
TOWER Life Limited R A Flannagan, E J O’Sullivan, S J Boomert, J E Douglas
TOWER Life (N.Z.) Limited R A Flannagan, E J O’Sullivan, S J Boomert, J E Douglas
TOWER Medical Insurance Limited R A Flannagan, E J O’Sullivan, S J Boomert, J E Douglas
Australian Equitable Insurance Company Pty Limited R A Flannagan, E J O’Sullivan, R L Parker
Southern Pacific Insurance Company Pty Limited R A Flannagan, E J O’Sullivan, R L Parker
National Insurance Company (Holdings) Limited R A Flannagan, J E Douglas, R D Warburton, P Absell, D M Webster (R)
TOWER Insurance (Fiji) Limited R A Flannagan, J E Douglas, R D Warburton, P Absell, D M Webster (R)
Southern Pacific Insurance Company (Fiji) Limited R A Flannagan, J E Douglas, R D Warburton, P Absell, D M Webster (R)
TOWER Insurance (Cook Islands) Limited R A Flannagan, J E Douglas, R D Warburton, D M Webster (R)
TOWER Insurance (PNG) Limited R A Flannagan, J E Douglas, R D Warburton, W Beilby, G McIlwain, D M Webster (R)
Southern Cross Marine Limited R A Flannagan, J E Douglas, R D Warburton, W Beilby, D M Webster (R)
National Pacific Insurance Limited J E Douglas, R D Warburton, M Reid, N Paul Snr, L A C Ting, D Williamson
National Pacific Insurance (Tonga) Limited J E Douglas, R D Warburton, M Reid, N Paul Snr, L A C Ting, D Williamson
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In relation to TOWER Limited’s subsidiary companies the Companies Act 1993 requires TOWER to disclose, during the year to 30 September 2009, particulars of entries in the Interests Register, the total remuneration and value of other benefits paid to subsidiary Directors, the number of employees who received remuneration of more than $100,000, donations made by the subsidiaries and amounts paid to the auditors.

Apart from some overseas subsidiaries, which are required to have local residents as Directors, no wholly-owned subsidiary has Directors who are not employees of TOWER. No employee appointed as a Director of a subsidiary receives any remuneration or other benefits in his/her role as a Director. The number of such employees who receive remuneration of more than $100,000 is included in the remuneration table on page 16. Auditor fees are paid on behalf of the Group as disclosed in the financial statements.

During the financial year there were no entries in any TOWER subsidiary company Interest Register pursuant to section 140 of the Companies Act 1993.

which an acquisition of more than 20% of the voting rights in TOWER or an increase of an existing holding to 20% or more can only occur in certain permitted ways. These include a full or partial takeover offer in accordance with the Takeovers Code, an acquisition or an allotment approved by an ordinary resolution of shareholders, a creeping acquisition (in defined circumstances and compulsory acquisition once a shareholder owns or controls 90% or more of the voting rights in TOWER).

The New Zealand Overseas Investment Act and related regulations determine certain Investments in New Zealand by overseas persons. Generally the Overseas Investment Office’s consent is required if an ‘overseas person’ acquires TOWER shares or an interest in TOWER shares of 25% or more of the shares on issue or, if the overseas person already holds 25% or more, the acquisition increases that holding.

The New Zealand Commerce Act is likely to prevent a person from acquiring TOWER shares if the acquisition would or would be likely to, substantially lessen competition in a market.

Corporations Act 2001 (Australia)

Other matters

Limits on Acquisition of Securities under New Zealand law

TOWER undertook to the ASX, at the time it granted TOWER a full listing (July 2002), to include the following information in its Annual Report. Except for the limitations detailed as follows TOWER securities are freely transferable under New Zealand law.

The New Zealand Takeovers’ Code imposes a general rule by

TOWER is not subject to Chapters 6, 6A, 6B or 6C of the Corporations Act 2001 (Australia) dealing with the acquisition of shares (such as substantial holdings and takeovers).

Waivers

NZX Regulation granted TOWER waivers from NZSX Listing Rule 7.10.5 and 9.2.1 in relation to the rights issue undertaken in September 2009. The waiver from NZSX Listing Rule 7.10.5

22 TOWER Annual Report 2009

permitted eligible shareholders to make applications in excess of their pro rata entitlement under the rights issue, with any shares not taken up by holders of rights allocated under an excess subscription facility. The waiver from NZSX Listing Rule 9.2.1 enabled the underwriter of the rights issue to enter into an early commitment arrangement with TOWER’s substantial security holder Guinness Peat Group without TOWER having to seek shareholder approval. The arrangement was required to be treated as part of a related series of transactions that included the rights issue, which was a material transaction under NZSX Listing Rule 9.2.1.

At TOWER’s request, NZX Regulation placed a trading halt on TOWER shares when trading opened on NZX on 24 August 2009 pending the release of TOWER’s announcement of the rights issue, which occurred upon confirmation of filing of offer documentation in Australia.

Donations

The TOWER Group did not make any donations during the financial year.

Financial Statements

The financial statements for the year ended 30 September 2009 are set out on pages 25 to 78. At 30 September, the net assets per share were $1.59 (2008: $1.53) and the net tangible assets per share were $1.46 (2008: $1.36). A dividend of 9 cents per share will be paid on 2 February 2010. Elections to participate in TOWER’s dividend reinvestment plan must be received by the record date, which is 15 January 2010.

Annual Meeting of Shareholders

TOWER Limited’s Annual Meeting of Shareholders will be held at the Ellerslie Events Centre, 80-100 Ascot Avenue, Greenlane East, Auckland, New Zealand on Tuesday 9 February 2010 at 10am.

This Annual Report is signed on behalf of the Board by

A I (Tony) Gibbs CNZM Chairman

Rob Flannagan Group Managing Director

TOWER Annual Report 2009

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24 TOWER Annual Report 2009

financial statements

For the year ended 30 September 2009

Auditors’ report	Auditors’ report	26
Income statements		28
Balance sheets		29
Statements of changes in equity		30
Statements of cash fows		31
Notes to the fnancial statements		32
1	Summaryof signifcant accounting policies	32
2	Critical accounting judgements and estimates	36
3	Underlying proft after tax	37
4	Premium revenue	37
5	Investment revenue	38
6	Fee and other revenue	38
7	Claims expense	38
8	Movement inpolicyholder liabilities	38
9	Other expenses	39
10	Taxation	40
11	Receivables	43
12	Investmentproperty	43
13	Intangible assets	44
14	Investment in subsidiaries	45
15	Deferred acquisition costs	46
16	Property, plant and equipment	46
17	Payables	47
18	Provisions	47
19	Interest bearingliabilities	48
20	Insurance liabilities	48
21	Other liabilities	48
22	Contributed equity	49
23	Accumulated losses	50

24	Reserves	50
25	Distribution to shareholders	50
26	Segmental reporting	51
27	Life insurance business	52
28	General and health insurance business	59
29	Financial instruments categories	62
30	Risk management and fnancial instrument information	65
31	Capital risk management	71
32	Operatingleases	71
33	Cash and cash equivalents	72
34	Contingent liabilities	72
35	Capital commitments	72
36	Share basedpayments	73
37	Transactions with relatedparties	75
38	Disclosures on asset restrictions and managed assets	76
39	Guaranteed returns on funds invested – life insurance
	companies	76
40	Investment linked and non-investment linked business
	of life insurance companies	76
41	Earningsper share	77
42	Impact of amendments to NZ IFRS	77
43	Subsequent events	78

TOWER Annual Report 2009

Auditors’ Report

PricewaterhouseCoopers PricewaterhouseCoopers Tower 188 Quay Street Level 22 Reception Level 8 Mail Centre Private Bag 92162 Auckland New Zealand Telephone +64 9 355 8000 Facsimile +64 9 355 8001

Auditors’ Report to the shareholders of TOWER Limited We have audited the financial statements on pages 28 to 78. The financial statements provide information about the past financial performance and cash flows of the Company and Group for the year ended 30 September 2009 and their financial position as at that date. This information is stated in accordance with the accounting policies set out on pages 32 to 36.. Directors’ Responsibilities

The Company’s Directors are responsible for the preparation and presentation of the financial statements which give a true and fair view of the financial position of the Company and Group as at 30 September 2009 and their financial performance and cash flows for the year ended on that date. Auditors’ Responsibilities

We are responsible for expressing an independent opinion on the financial statements presented by the Directors and reporting our opinion to you. Basis of Opinion

An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing:

(a) the significant estimates and judgements made by the Directors in the preparation of the financial statements; and (b) whether the accounting policies are appropriate to the circumstances of the Company and Group, consistently applied and adequately disclosed. We conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

We have no relationship with or interests in the Company or any of its subsidiaries other than in our capacities as auditors and providers of other assurance and advisory services.

26 TOWER Annual Report 2009

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Auditors’ Report

Unqualified Opinion

We have obtained all the information and explanations we have required.

In our opinion:

(a) proper accounting records have been kept by the Company as far as appears from our examination of those records; and

(b) the financial statements on pages 28 to 78:
(i) comply with generally accepted accounting practice in New Zealand;

(ii) comply with International Financial Reporting Standards; and (iii) give a true and fair view of the financial position of the Company and Group as at 30 September 2009 and their financial performance and cash flows for the year ended on that date.

Our audit was completed on 25 November 2009 and our unqualified opinion is expressed as at that date.

Chartered Accountants Auckland

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TOWER Annual Report 2009

Income Statements

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
Note $000 $000 $000 $000
Revenue from continuing operations
Premium revenue from insurance contracts 423,759 406,924 - -
Less: Outwards reinsurance expense (35,442) (29,924) - -
Net premium revenue 4 388,317 377,000 - -
Investment revenue 5 59,151 37,395 169,159 192
Fee and other revenue 6 34,312 40,404 - -
Net operating revenue 481,780 454,799 169,159 192
Expenses
Claims expense 308,467 283,162 - -
Less: Reinsurance recoveries revenue (38,468) (15,827) - -
Net claims expense 7 269,999 267,335 - -
Decrease in policyholder liabilities 8 (38,599) (28,045) - -
Amortisation expense 13 2,599 1,721 - -
Management and sales expenses 9(a) 179,008 180,971 666 695
Net claims and operating expenses 413,007 421,982 666 695
Financing costs 9(b) 8,297 8,140 - -
Total expenses 421,304 430,122 666 695
Profit/(loss) before taxation 60,476 24,677 168,493 (503)
Tax (expense)/credit attributed to policyholders' returns 10(a) (3,764) 13,775 - -
Profit/(loss) before taxation attributed to shareholders 56,712 38,452 168,493 (503)
Tax (expense)/credit attributed to shareholders' profits 10(a) (6,627) 2,016 152 1,758
Profit for the year 50,085 40,468 168,645 1,255
Profit attributable to:
Shareholders 49,537 40,460 168,645 1,255
Minority interests 548 8 - -
3 50,085 40,468 168,645 1,255
Cents Cents
Basic earnings per share 41 24.31 20.06
Diluted earnings per share 41 24.31 20.04
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The above income statements should be read in conjunction with the accompanying notes.

28 TOWER Annual Report 2009

Balance Sheets

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
Note $000 $000 $000 $000
Assets
Cash and cash equivalents 33 146,381 58,292 84,392 2,651
Receivables 11 141,253 126,269 248,863 260,664
Financial assets at fair value through profit or loss 29 1,076,595 1,099,027 - -
Derivative financial assets 53,410 42,044 - -
Liabilities ceded under reinsurance 27 19,971 18,405 - -
Investment property 12 - 2,449 - -
Property, plant and equipment 16 6,030 5,786 - -
Prepaid tax assets 10(c) 34,732 42,737 - -
Current tax assets 1,164 - - -
Deferred acquisition costs 15 45,096 49,761 - -
Investments in subsidiaries 14 - - 190,172 189,041
Deferred tax assets 10(d) 32,650 37,511 - -
Intangible assets 13 39,178 37,309 - -
Total Assets 1,596,460 1,519,590 523,427 452,356
Liabilities
Payables 17 62,123 63,098 421,673 583,151
Current tax liabilities - 5,640 - -
Other liabilities 21 22,745 21,505 - -
Provisions 18 7,594 9,453 - -
Derivative financial liabilities 21,305 6,927 - -
Interest bearing liabilities 19 80,002 87,559 - -
Insurance liabilities 20 279,700 265,446 - -
Deferred tax liabilities 10(d) 38,619 40,090 - -
Life insurance contract liabilities 27 647,274 690,568 - -
Life investment contract liabilities 27 32,650 35,084 - -
Total Liabilities 1,192,012 1,225,370 421,673 583,151
Net Assets/(Liabilities) 404,448 294,220 101,754 (130,795)
Equity
Contributed equity 22 547,680 465,323 547,680 465,323
Accumulated losses 23 (35,128) (66,453) (335,527) (485,960)
Reserves 24 (110,795) (107,670) (110,399) (110,158)
Total equity attributed to shareholders 401,757 291,200 101,754 (130,795)
Minority interests 2,691 3,020 - -
Total Equity/(Deficit) 404,448 294,220 101,754 (130,795)
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The financial statements were approved for issue by the Board on 25 November 2009.

AI (Tony) Gibbs Chairman

John Spencer Director

The above balance sheets should be read in conjunction with the accompanying notes.

TOWER Annual Report 2009

Statements of Changes in Equity

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
Note $000 $000 $000 $000
Total equity/(deficit) at the beginning of year 294,220 261,897 (130,795) (122,013)
Movements in accumulated losses:
Profit for the year attributable to the shareholders 49,537 40,460 168,645 1,255
Dividend paid 23 (19,467) (14,844) (19,467) (14,844)
Transfer from share based payments reserve 23 1,372 - 1,372 -
Other 23 (117) (390) (117) (91)
Total movements in accumulated losses 31,325 25,226 150,433 (13,680)
Movements in reserves:
Exchange differences on translation of foreign operations 24 (2,884) 2,895 - -
Movement in share based payments reserve 24 (241) 170 (241) 170
Total movements in reserves (3,125) 3,065 (241) 170
Total recognised income and expense for year 28,200 28,291 150,192 (13,510)
Transactions with equity holders in their capacity as equity holders:
Shares issued 22 82,257 4,991 82,257 4,991
Treasury shares 22 100 (263) 100 (263)
Change in minority interest (329) (696) - -
Movements in equity for the year 110,228 32,323 232,549 (8,782)
Total equity/(deficit) at the end of year 404,448 294,220 101,754 (130,795)
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The above statements of changes in equity should be read in conjunction with the accompanying notes.

30 TOWER Annual Report 2009

Statements of Cash Flows

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
Note $000 $000 $000 $000
Cash flows from operating activities
Premiums received 420,764 408,890 - -
Interest received 43,384 50,073 112 192
Dividends received 6,964 18,935 - -
Investment income 17,105 31,154 - -
Non-life company fee income 42,663 53,746 - -
Reinsurance received 17,178 13,040 - -
Reinsurance paid (29,082) (29,924) - -
Claims expenses (294,770) (273,547) - -
Payments to suppliers and employees (184,441) (181,862) (10) (223)
Interest paid (8,519) (7,626) - -
Income tax paid (5,871) (5,449) - -
Net cash inflow/(outflow) from operating activities 33(b) 25,375 77,430 102 (31)
Cash flows from investing activities
Net proceeds/(payments) for financial assets 10,722 (66,620) - -
Net payments for purchase of property, plant and equipment (6,137) (7,506) - -
and intangible assets
Net cash inflow/(outflow) from investing activities 4,585 (74,126) - -
Cash flows from financing activities
Proceeds from issue of share capital 81,795 1,081 81,795 1,081
Proceeds from issue of fixed rate senior unsecured bonds 81,759 - - -
Payment of rights issue costs (465) - - -
Payment of issue costs of fixed rate senior unsecured bonds (3,499) - - -
Repayment of borrowings (85,000) - - -
Payment of dividend (16,157) (10,607) (16,157) (10,607)
Net advances to subsidiaries - - 16,001 9,904
Net cash inflow/(outflow) from financing activities 58,433 (9,526) 81,639 378
Net increase/(decrease) in cash and cash equivalents 88,393 (6,222) 81,741 347
Cash and cash equivalents at the beginning of year 57,988 64,210 2,651 2,304
Cash and cash equivalents at the end of year 33(a) 146,381 57,988 84,392 2,651
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Note:

The statements of cash flows present the net changes in cash flow for financial assets, property, plant and equipment and intangible assets. TOWER considers that knowledge of gross receipts and payments is not essential to understanding certain activities of TOWER and it is considered acceptable to report only the net changes in cash flow for these items. This is based on the fact that either the turnover of these items is quick, the amounts are large, and the maturities are short or, in the case of property, plant and equipment and intangible assets, the value of the sales are immaterial.

The above statements of cash flows should be read in conjunction with the accompanying notes.

TOWER Annual Report 2009

Notes to the Financial Statements

For the year ended 30 September 2009

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been applied to all the periods presented, unless otherwise stated.

TOWER Limited (Company) is a profit-oriented company incorporated in New Zealand under the New Zealand Companies Act 1993. The Company is listed on the New Zealand and Australian Stock Exchanges. The Company and its subsidiaries together are referred to in this financial report as TOWER, or the Group or the consolidated entity.

The financial report of the Company and the Group has been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP). It complies with New Zealand Equivalents to International Reporting Standards (NZ IFRS) and other applicable financial reporting standards, as appropriate for profit-oriented entities.

The financial statements were authorised for issue by the Board of Directors on 25 November 2009.

The principal activity of the TOWER Limited Group is providing health, life and general insurance and investment management services. The Group predominantly operates in New Zealand with some of its general insurance operations based in the Pacific Islands region.

Compliance with International Financial Reporting Standards (IFRS) The consolidated financial statements and notes of TOWER Limited comply with International Financial Reporting Standards (IFRS).

The financial statements have been prepared on a fair value basis with any exceptions noted in the accounting policies below.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 September 2009 and the results of all subsidiaries for the year then ended.

Subsidiaries are all those entities over which the consolidated entity has control, being the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the consolidated entity controls another entity.

The results of any subsidiaries acquired during the year are consolidated from the date on which control is transferred to the consolidated entity and the results of any subsidiaries disposed of during the year are consolidated up to the date control ceases.

The acquisition of controlled entities is accounted for using the purchase method of accounting. The share of net assets of controlled entities attributable to minority interests is disclosed separately in the balance sheet and income statement.

Intercompany transactions and balances between Group entities are eliminated on consolidation.

PRINCIPLES UNDERLYING THE CONDUCT OF LIFE INSURANCE BUSINESS

The life insurance operations of the Group comprise the selling and administration of contracts which are classified as either life insurance contracts or life investment contracts. Contracts that include both investment and insurance elements are separated into these two elements and reported accordingly.

Life insurance contracts involve the acceptance of significant insurance risk. Insurance risk is defined as significant if and only if an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. Insurance contracts include those where the insured benefit is payable on the occurrence of a specified event such as death, injury or disability caused by accident or illness. The insured benefit is either not linked or only partly linked to the market value of the investments held by the life insurer, and the financial risks are substantially borne by the life insurer. Any products that do not meet the definition of a life insurance contract are classified as life investment contracts.

Life investment contracts include investment-linked contracts where the benefit amount is directly linked to the market value of the investments held. While the underlying assets are registered in the name of the life insurer and the investment-linked policy owner has no direct access to the specific assets, the contractual arrangements are such that the investmentlinked policy owner bears the risks and rewards of the investment performance. The life insurer derives fee income from the administration of investment-linked policies.

Participating policy owner benefits, both vested and unvested, are treated as expenses when incurred and liabilities until paid.

SPECIFIC ACCOUNTING POLICIES

(A) PREMIUM REVENUE

(i) Life insurance contracts

Premiums on life insurance contracts are separated into their revenue and deposit components. Where it is not practicable to split out the two components all premiums have been recognised as revenue. Where policies provide for the payment of amounts of premiums on specific due dates, such premiums are recognised as revenue when due. Unpaid premiums are recognised as revenue only during the days of grace or where secured by the surrender values of the policies concerned. Other premiums are recognised as revenue on a cash received basis.

(ii) Life investment contracts

Under life investment contracts the life companies receive deposits from policyholders which are then invested on behalf of the policyholders. No premiums are recognised as revenue. Fees deducted from members accounts are accounted for as fee revenue.

(iii) General insurance

Premium revenue is recognised in the period in which the premiums are earned during the term of the contract.

The proportion of premiums not earned in the income statement at the reporting date is recognised in the balance sheet as unearned premium liability.

Premiums on unclosed business are brought to account using estimates based on the previous year’s actual unclosed business with due allowance made for any changes in the pattern of new business and renewals.

(B) FEE AND OTHER REVENUE

Fee revenue on investment contracts and other services provided by the Group is recognised in the period the services are provided.

(C) INVESTMENT REVENUE

Investment revenue is recognised as follows:

(i) Dividends and distributions

Revenue is recognised on an accrual basis when the right to receive payment is established.

(ii) Property income

Property income is recognised on an accrual basis.

(iii) Interest income

Interest income is recognised on an effective interest method.

(iv) Fair value gains and losses

Fair value gains and losses on financial assets at fair value through profit or loss are recognised through the income statement.

(D) CLAIMS ExPENSE

(i) Life insurance contracts

Claims are recognised when the liability to a policyholder under a life insurance contract has been established or upon notification of the insured event. Claims are separated into their expense and withdrawal components. Claims on risk business are treated as an expense and are recognised when a liability to the policyholder is established.

(ii) Life investment contracts

There is no claims expense in respect of investment contracts. Surrenders and withdrawals which relate to life investment contracts are treated as a movement in life investment contract liabilities. Other claim amounts are similar to withdrawals and as such do not relate to the provision of services or the bearing of risk. Accordingly, they are not expenses and are treated as movements in life insurance contract liabilities.

(iii) General insurance contracts

Claims expenses are recognised when claims are notified with the exception of claims incurred not reported for which a provision is estimated (discussed in Note 2(B)).

32 TOWER Annual Report 2009

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(E) BASIS OF ExPENSE APPORTIONMENT

All operating expenses in respect of life insurance or life investment contracts have been apportioned between policy acquisition, policy maintenance and investment management expenses with regard to the objective when incurring the expense and the outcome achieved.

The apportionment process is adopted by applying the following methodology:

(i) Expenses that can be directly identifiable and attributable to a particular class of business are not apportioned.
(ii) Commission expenses that cannot be allocated to a class of business, for example volume bonuses, are apportioned on the basis of new business and renewal commissions of each class, allowing for limits implied by the basis of adviser remuneration.
(iii) Investment expenses are apportioned to the classes of business on the mean balance of assets under management.
(iv) Other expenses that cannot be allocated to a particular class of business are apportioned to the classes of business based on appropriate cost drivers, including number of new policies issued and related premiums, number of new units issued, mean balances of assets under management, average number of policies in-force and time and activity based allocations.

(F) POLICY ACqUISITION COSTS

(i) Life insurance contracts

The actuary, in determining the life insurance contract liabilities, takes account of the deferral and future recovery of acquisition costs which are capitalised by way of movement in life insurance contract liabilities, then amortised over the period in which they will be recoverable.

(ii) Other contracts

Policy acquisition costs comprise the costs of acquiring new business, including commission, advertising, policy issue and underwriting costs, agency expenses and other sales costs. Acquisition costs are initially recorded in the income statement, with any amounts to be deferred then taken to the balance sheet as a Deferred Acquisition Cost (DAC). Deferred acquisition costs are recognised for the products noted below.

(iii) Superannuation and medical products

The acquisition costs of establishing contracts for certain superannuation and medical products are deferred. These costs are amortised over the periods of expected future benefit. A comparison to recoverable value is carried out annually, with any variance below carrying value taken to the income statement in that year.

(iv) General insurance products

Acquisition costs incurred in obtaining general insurance contracts are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in subsequent reporting periods.

Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the general insurance contracts to which they relate. This pattern of amortisation corresponds to the earning pattern of the corresponding premium revenue.

(G) OUTWARDS REINSURANCE

Premiums ceded to reinsurers under reinsurance contracts are recorded as an outwards reinsurance expense and are recognised over the period of indemnity of the reinsurance contract. Accordingly, a portion of outwards reinsurance premium is treated at balance date as a prepayment.

(H) FINANCING COSTS

Financing costs include interest on external debt (borrowing costs), the impact from hedging borrowing costs and amortisation of transaction costs.

(I) TAxATION

(i) Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

(ii) Deferred tax

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities settled, based on the tax rates enacted or substantively enacted for each jurisdiction. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences or unused tax losses can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of the other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.

(iii) Tax consolidation

TOWER Limited and its New Zealand wholly-owned subsidiaries comprise a New Zealand tax consolidated Group of which TOWER Limited is the head entity. All members of the tax consolidated group are jointly and severally liable for the tax liabilities of the Group.

(iv) Income tax expense

The income tax expense is the tax payable on taxable income for the current period, based on the income tax rate for each jurisdiction and adjusted for changes in deferred tax assets and liabilities attributable to temporary differences and unused tax losses.

(v) GST

All revenues, expenses and certain assets are recognised net of goods and services taxes (GST) except where the GST is not recoverable. In these circumstances the GST is included in the related asset or expense. Receivables and payables are reported inclusive of GST. The net GST payable to or recoverable from the tax authorities as at balance date is included as a receivable or payable in the balance sheet.

Cash flows are included in the statements of cash flows on a net basis to the extent that the GST is not recoverable and has been included in the expense or asset.

(J) FOREIGN CURRENCY

(i) Functional and presentation currencies

The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates. The consolidated Group financial statements are presented in New Zealand dollars.

(ii) Transactions and balances

In preparing the financial statements of the individual entities transactions denominated in foreign currencies are translated into the reporting currency using the exchange rates in effect at the transaction dates. Monetary items receivable or payable in a foreign currency, including forward exchange contracts, are translated at reporting date at the closing exchange rate.

Translation differences on non-monetary items such as financial assets held at fair value through profit or loss are reported as part of their fair value gain or loss.

Exchange differences arising on the settlement or retranslation of monetary items at year end exchange rates are recognised in the income statement.

(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 sheet 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. Exchange differences are taken to the Foreign Currency Translation Reserve and recognised in 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.

TOWER Annual Report 2009 33

Notes to the Financial Statements

For the year ended 30 September 2009

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

(K) CASH AND CASH EqUIVALENTS

Cash and cash equivalents includes cash on hand and deposits held at call with financial institutions, other short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within interest bearing liabilities on the balance sheet.

(L) RECEIVABLES

Receivables are recognised initially at fair value. Due to the short term nature of these assets the recoverable value, i.e. allowing for doubtful debts, will be the fair value.

(M) PROPERTY, PLANT AND EqUIPMENT

Property, plant and equipment is initially recorded at cost including transaction costs and subsequently measured at cost less any subsequent accumulated depreciation and impairment losses.

Depreciation is calculated using the straight line method to allocate their 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.

eater than its recoverable amount.
Computer equipment	3-5 years
Furniture & fttings	5 years
Motor vehicles Buildings	5 years 50-100 years
Leasehold property improvements	3-12 years

(N) ASSETS BACKING INSURANCE BUSINESS

The Group has determined that:

all assets of the life insurance companies are assets backing the policy liabilities of the life insurance business;
all assets within the general insurance companies are held to back general insurance liabilities, with the exception of property, plant and equipment and investments in operating subsidiaries; and
all assets within the health insurance company are held to back health insurance liabilities, with the exception of property, plant and equipment and investments in operating subsidiaries.

As these assets are managed under the Group’s Risk Management Statement on a fair value basis and are reported to the Board on this basis, they have been valued at fair value through profit or loss wherever the applicable standard allows.

Fair value is determined as follows:

cash assets and bank overdrafts are carried at face value which approximates fair value;
shares, fixed interest securities, options and units in trusts listed on stock exchanges are valued at the quoted bid price of the instrument at balance sheet date;
unlisted fixed interest securities are recorded at amounts based on valuations using rates of interest equivalent to the yields obtainable on comparable traded investments at balance date;
unlisted unit trusts are recorded at fund managers’ quoted redemption prices;
receivables are carried at book value, which is the best estimate of fair value as they are settled within a short period; and
directly held investment property, which is property held to earn rentals and/or for capital appreciation and is not occupied by the Group, is carried at fair value supported by valuations carried out annually.

(O) EARNINGS PER SHARE

(i) Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the Company, excluding any costs of servicing

equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the year, adjusted for bonus elements of ordinary shares issued during the year.

(ii) Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

(P) INTANGIBLES

(i) Goodwill

Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the entity acquired, at the date of acquisition.

Following initial recognition, goodwill on acquisition of a business combination is not amortised but is tested for impairment bi-annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with NZ IAS 14 ‘Segment Reporting’.

Any impairment is recognised immediately.

On disposal of an entity the carrying value of any associated goodwill is included in the calculation of the gain or loss on sale.

(ii) Software

Application software is recorded at cost less accumulated amortisation and impairment. Amortisation is charged on a straight line basis over the estimated useful life of the software.

General use computer software 3-5 years Core operating system software 10 years

(q) IMPAIRMENT OF NON FINANCIAL ASSETS

Assets that have an indefinite useful life are not subject to amortisation and are tested bi-annually for impairment. Assets with a finite useful life are subject to amortisation and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell, and value in use.

For the purposes of assessing impairment assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units).

(R) ACqUISITION OF ASSETS

Identifiable assets acquired and liabilities assumed in business combination are measured at fair value at acquisition date with any excess of cost over the fair value of the net assets acquired recognised as goodwill on the balance sheet.

If there is negative goodwill then this is recognised directly in the Income Statement.

(S) DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS

The Group classifies its financial assets in the following categories: at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial assets were acquired.

34 TOWER Annual Report 2009

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Management determines the classification of its financial assets at initial recognition.

All purchases and sales of financial assets classified as fair value through profit or loss that require delivery within the timeframe established by regulation or market convention (‘regular way’ purchases and sales) are recognised at trade date, which is the date the Group commits to purchase or sell the assets. Loans and deposits are recognised at settlement date, which is the date that the assets are delivered or received.

(i) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss comprise of financial assets that are either held for trading or designated on initial recognition at fair value through profit or loss. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or if so designated by management. Designation by management takes place when it is necessary to eliminate or significantly reduce measurement or recognition inconsistencies or if related financial assets or liabilities are managed and evaluated on a fair value basis.

Financial assets at fair value through profit or loss are stated at fair value, with any resultant gain or loss recognised in the income statement. The net gain or loss recognised in the income statement includes any dividend or interest earned on the financial assets.

Derivatives are categorised as held for trading unless they are designated as hedges. All derivatives entered into by the Group are classified as held for trading as the Group does not apply hedge accounting.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. The Group’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet. Loans and receivables are measured at amortised cost using the effective interest method less any impairment.

(T) IMPAIRMENT OF FINANCIAL ASSETS

Financial assets, with the exception of those measured at fair value through profit or loss, are assessed for indicators of impairment at each reporting date. Financial assets are impaired when there is objective evidence that the estimated future cash flows of the asset have been impacted as a result of one or more events that occurred after the initial recognition of the financial asset.

For financial assets carried at amortised cost, the amount of the impairment is the difference between the assets’ carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate.

For all financial assets, other than trade receivables, the carrying amount is reduced by the impairment loss directly. For trade receivables the carrying amount is reduced via an allowance account, against which an uncollectible trade receivable is written off.

A trade receivable is deemed to be uncollectible upon notification of insolvency of the debtor or upon receipt of similar evidence that the Group will be unable to collect the amount. Changes in the carrying amount of the allowance account are recognised in the income statement.

A previously recognised impairment loss is reversed when, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was initially recognised.

In respect of financial assets carried at amortised cost, with the exception of trade receivables, the impairment loss is reversed through the income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Subsequent recoveries of trade receivables previously written off are credited against the allowance account.

(U) LEASED ASSETS

(i) As lessor

Rental income on operating leases is recognised as income in the periods the services are provided and the amounts are receivable.

Initial direct costs incurred in initiating the lease are added to the carrying value of the leased asset and amortised on a straight line basis over the term of the lease.

(ii) As lessee

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease payments are recognised as an expense in the periods the services are received over the period of the lease.

Benefits received and receivable for entering into an operating lease are recognised on a straight line basis over the term of the lease.

(V) BORROWINGS

Interest bearing debt and overdrafts are initially measured at fair value, net of transaction costs incurred and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds, net of transaction costs, and the settlement or redemption of borrowings is recognised over the term of the borrowings.

(W) PAYABLES

These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unsettled.

(x) PROVISIONS

Provisions are only recognised when the Group has a present legal or constructive obligation as a result of a past event or decision, and it is more likely than not that an outflow of resources will be required to settle the obligation. Provisions are recognised at the best estimate of future cash flows discounted to present value where the effect is material.

(Y) EMPLOYEE ENTITLEMENTS

Provision is made for employee entitlements for services rendered up to the balance date. This includes salaries, wages, bonuses, annual leave and long service leave, but excludes share-based payments. Liabilities arising in respect of employee entitlements expected to be settled within 12 months of the reporting date are measured at their nominal amounts. All other employee entitlements are measured at the present value of the estimated future cash outflows to be made in respect of services provided up to the balance date. In determining the present value of future cash outflows, discount rates used are based on the interest rates attaching to government securities which have terms to maturity approximating the terms of the related liability.

(Z) CAPITAL GUARANTEES

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not measured at fair value with changes in fair value recognised in the income statement.

(AA) LIFE INVESTMENT CONTRACT LIABILITIES

These contracts are designated at inception as at fair value through profit or loss and subsequently measured at fair value with any change in value being recognised in the income statement. Fair value is the current account balance plus investment fluctuation reserves subject to a minimum of current surrender value.

The Group designates these investment contracts to be measured at fair value through profit or loss because it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets and liabilities or recognising gains or losses on different basis.

(AB) LIFE INSURANCE CONTRACT LIABILITIES

The financial reporting methodology used to determine the value of life insurance contract liabilities is referred to as Margin on Services (MoS).

Under MoS the excess of premium received over claims and expenses (‘the profit margin’) is recognised over the life of the contract in a manner that reflects the pattern of risk accepted from the policyholder (‘the service’), hence the term Margin on Services. The movement in life insurance contract liabilities recognised in the income statement reflects the planned release of this margin.

Life insurance contract liabilities are ordinarily determined using a projection method, whereby estimates of policy cash flows (premiums, benefits, expenses and profit margins to be released in future periods) are projected into the future. The policy liability is calculated as the net present value of these projected cash flows using best estimate assumptions about the future. When the benefits under the life insurance contract liability are

TOWER Annual Report 2009 35

Notes to the Financial Statements

For the year ended 30 September 2009

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

linked to the assets backing it, the discount rate applied is based on the expected future earnings rate on those assets. Where the benefits are not linked to the performance of the backing assets, a risk free discount rate is used. The risk free discount rate is determined by the Chief Actuary based on the zero coupon swap rates, depending on the nature, structure and term of the contract liabilities.

The assumptions used in the calculation of the policy liabilities are reviewed at each reporting date.

of segments operating in other economic environments.

(AG) INVESTMENT PROPERTY

Investment property, which is property held to earn rentals and capital appreciation, is measured at its fair value at the reporting date. Gains or losses arising from changes in the fair value of investment property are included in profit or loss in the period in which they arise.

(AH) CODE OF CONDUCT DISCLOSURE - CHIEF ACTUARY

(AC) GENERAL INSURANCE LIABILITIES

Outstanding claims are measured at the central estimate of the present value of expected future payments after allowing for inflation and superimposed inflation and discounted at the risk free rate.

The expected future payments include those in relation to claims reported but not yet paid, claims incurred but not yet reported (IBNR), claims incurred but not enough reported (IBNER) and anticipated claims handling costs. Claims handling costs include costs that can be associated directly with individual claims, such as legal and other professional fees, and costs that can only be indirectly associated with individual claims, such as claims administration costs. In addition a risk margin is added to the claims provision to recognise the inherent uncertainty of the central estimate.

Provision has been made for the estimate of claim recoveries from third parties in respect of general insurance business. Liability adequacy testing is performed in order to recognise any deficiencies in the income statement arising from the carrying amount of the unearned premium liability less any related deferred acquisition costs and intangible assets not meeting the estimated future claims under current insurance conditions. Liability adequacy is performed at a portfolio level of contracts that are subject to broadly similar risks and are managed together as a single portfolio.

(AD) CONTRIBUTED EqUITY

(i) Ordinary share capital

Ordinary shares issued by the Group are classified as equity and are recognised at fair value less direct issue costs.

(ii) Treasury shares

Where TOWER acquires its own equity instruments (treasury shares), these are deducted from equity and accounted for at weighted average cost. No gain or loss is recognised in the income statement on purchase, sale, issue or cancellation of the Group’s own equity instruments.

(AE) SHARE BASED PAYMENTS

The Group issues share based compensation packages to senior executives as part of their remuneration packages.

These options are measured at fair value at grant date and expensed over the period during which the employee becomes unconditionally entitled to the options, based on the estimate of shares that will eventually vest. Fair value at grant date is measured using a binomial model, taking into account the specific conditions of the options issued. The determination of fair value excludes the impact of any non-market vesting conditions which are allowed for in assumptions about the number of options that are expected to be exercisable. When an expense is recognised there is an equal and opposite entry made to the share option reserve in equity. When the options are exercised the receipt of the exercise price is transferred to share capital.

Where there is a tax deduction allowable in relation to the share option scheme this is recognised in the income statement, to the extent of the tax credit commensurate to the expense recognised in the income statement, with the balance reported through the share option reserve in equity.

Where terms are changed during the period that increase the cost of the options then this is recognised over the remaining vesting period. Where terms are changed during the period that decrease the cost of the options then there is no change to the expense recognised.

(AF) SEGMENT REPORTING

A business 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 business segments. A geographical segment is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different to those

TOWER’s Chief Actuary’s remuneration includes bonuses that are, in part, dependent upon the reported profits of the Group. The policy liabilities are assessed by him therefore impact his total remuneration.

(AI) COMPARATIVES

Where necessary, comparative information has been reclassified to achieve consistency in disclosure with the current year.

2. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

The Group makes estimates and assumptions in respect of certain key assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key areas where critical accounting estimates are applied are noted below.

(A) POLICY LIABILITIES

Policy liabilities for life insurance contracts are computed using statistical or mathematical methods, which are expected to give approximately the same results as if an individual liability was calculated for each contract. The computations are made by suitably qualified personnel on the basis of recognised actuarial methods, with due regard to relevant actuarial principles. The methodology takes into account the risks and uncertainties of the particular classes of life insurance business written. Deferred policy acquisition costs are connected with the measurement basis of life insurance liabilities and are equally sensitive to the factors that are considered in the liability measurement.

The key factors that affect the estimation of these liabilities and related assets are:

the cost of providing benefits and administering these insurance contracts;
mortality and morbidity experience on life insurance products, including enhancements to policyholder benefits;
discontinuance experience, which affects the Group’s ability to recover the cost of acquiring new business over the lives of the contracts; and
the amounts credited to policyholders’ accounts compared to the returns on invested assets through asset-liability management and strategic and tactical asset allocation.

In addition, factors such as regulation, competition, interest rates, taxes, securities market conditions and general economic conditions affect the level of these liabilities. In some contracts, the Group shares experience on mortality, morbidity, persistency and investment results with its customers, which can offset the impact of these factors on profitability from those products. Details of specific actuarial policies and methods are set out in Note 27.

(B) CLAIMS LIABILITIES UNDER GENERAL INSURANCE CONTRACTS

Provision is made at the end of the year for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported to the Group.

The estimated cost of claims includes direct expenses to be incurred in settling claims gross of the expected value of salvage and other recoveries. The Group takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established.

The estimation of claims incurred but not reported (‘IBNR’) is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the Group, where more information about the claim event is generally available. IBNR claims may often not be apparent to the insured until many years after the events giving rise

TOWER Annual Report 2009

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to the claims has happened. In calculating the estimated cost of unpaid claims the Group uses a variety of estimation techniques, generally based on statistical analyses of historical experience, which assumes that the development pattern of the current claims will be consistent with past experience. Allowance is made, however, for changes or uncertainties which may create distortions in the underlying statistics or which may cause the cost of unsettled claims to increase or reduce when compared with the cost of previously settled claims including:

changes in Group processes which might accelerate or slow down the development and (or) recording of paid or incurred claims, compared with statistics from previous periods;
changes in the legal environment;
the effects of inflation;
changes in the mix of business;
the impact of large losses;
movements in industry benchmarks; and
medical and technological developments.

A component of these estimation techniques is usually the estimation of the cost of notified but not paid claims. In estimating the cost of these the Group has regard to the claim circumstances as reported, any information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods.

Large claims impacting each relevant business class are generally assessed separately, being measured on a case by case basis or projected separately in order to allow for the possible distortive effect of the development and incidence of these large claims.

Where possible the Group adopts multiple techniques to estimate the required level of provisions. This assists in giving greater understanding of the trends inherent in the data being projected. The projections given by the various methodologies also assist in setting the range of possible outcomes. The most appropriate estimation technique is selected taking into account the characteristics of the business class and the extent of the

development of each accident year.

Provisions are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based on the gross provisions.

Details of specific assumptions used in deriving the outstanding claims liability at year end are detailed in Note 28.

(C) ASSETS ARISING FROM REINSURANCE CONTRACTS

Assets arising from reinsurance contracts are also computed using the above methods. In addition, the recoverability of these assets is assessed on a periodic basis to ensure that the balance is reflective of the amounts that will ultimately be received, taking into consideration factors such as counterparty and credit risk. Impairment is recognised where there is objective evidence that the Group may not receive amounts due to it and these amounts can be reliably measured.

(D) PREPAID TAx ASSET

Refer to Note 10 for an explanation on assumptions supporting the carrying value of prepaid tax assets.

3. UNDERLYING PROFIT AFTER TAx

Underlying profit after tax is presented to provide a more meaningful comparison of the Group’s profit for the reported financial years. The movement in the discount rate during the 2009 and 2008 financial years impacted values of the individual life risk policy liabilities and increased Group profit after tax. This impact has been shown separately below to facilitate comparison.

The discount rate applied to value individual life risk policy liabilities (included within life insurance contract liabilities in Note 27) is based on the current risk-free interest rates. The decline in the risk-free interest rates during the year has lead to a change in the value of individual life risk policy liabilities, generating a net gain of $3.148m in the year (2008: $2.074m).

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
3. UNDERLYING PROFIT AFTER TAx
Profit for the year 50,085 40,468 168,645 1,255
(Less)/add:
Discount rate effect before tax (3,129) (1,902) - -
Income tax on discount rate effect (19) (172) - -
Discount rate effect after tax (3,148) (2,074) - -
Underlying profit after tax 46,937 38,394 168,645 1,255
4. PREMIUM REVENUE
Life insurance contract premiums 87,410 83,435 - -
Less: Deposits recognised as an increase in policy liabilities (9,971) (8,859) - -
Life insurance contract premiums recognised as revenue 77,439 74,576 - -
General insurance premiums 214,619 206,116 - -
Health insurance premiums 131,701 126,232 - -
423,759 406,924 - -
Less: Reinsurance ceded (35,442) (29,924) - -
Total net premium revenue 388,317 377,000 - -
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TOWER Annual Report 2009 37

Notes to the Financial Statements

For the year ended 30 September 2009

Group	Company	Company
2009	2008 2009	2008
$000	$000 $000	$000
5. INVESTMENT REVENUE Fixed interest securities Interest income 43,384 Net gains on revaluation of fxed interest securities designated at fair value through proft or loss 7,327	50,073 159 50,655 -	192 -
50,711 Equity securities Dividend income 6,964 Net losses on revaluation of listed equity securities designated at fair value through proft or loss (10,018)	100,728 159 18,935 169,000 (57,532) -	192 - -
(3,054) Property securities Property income 158 Net (lossses)/gains on revaluation of property securities designated at fair value through proft or loss (10,635)	(38,597) 169,000 109 - 2,127 -	- - -
(10,477) Other investment income Other investment income 3,520 Net gains/(losses) on fair value of fnancial assets and liabilities at fair value through proft or loss held for trading 18,451	2,236 - 1,306 - (28,278) -	- - -
21,971 Total investment income 54,026 Total net gains/(losses) on revaluation of fnanical assets at fair value through proft or loss 5,125	(26,972) - 70,423 169,159 (33,028) -	- 192 -
Total investment revenue 59,151	37,395 169,159	192
6. FEE AND OTHER REVENUE Investment and management fees 34,312	40,404 -	-
Total fee and other revenue 34,312	40,404 -	-
7. CLAIMS ExPENSE Life insurance claims 91,644 Life investment contract payments 2,846	92,274 - 5,867 -	- -
Total life claims and payments 94,490 Less: Withdrawals recognised as a decrease in policy liabilities (15,769)	98,141 - (16,827) -	- -
Life insurance claims recognised as expense 78,721 General insurance claims 146,621 Health insurance claims 83,125	81,314 - 124,519 - 77,329 -	- - -
308,467 Less: Reinsurance recoveries revenue (38,468)	283,162 - (15,827) -	- -
Total net claims expense 269,999	267,335 -	-
8. MOVEMENT IN POLICY LIABILITIES Decrease in life insurance contract liabilities (40,662) Decrease in life investment contract liabilities (117) Increase in non-current health insurance contract liabilities 2,180	(30,154) - (4,816) - 6,925 -	- - -
(38,599)	(28,045) -	-

TOWER Annual Report 2009

	Group	Company	Company
	2009	2008 2009	2008
	$000	$000 $000	$000
9. OTHER ExPENSES (A) MANAGEMENT AND SALES ExPENSES Life insurance contracts Policy acquisition expenses: Commission Other acquisition expenses Policy maintenance expenses: Commission Other maintenance expenses Investment management expenses	11,863 5,262 5,249 8,671 223	5,376 - 5,765 - 5,046 - 6,955 - - -	- - - - -
Total life insurance expenses Life investment contracts Policy maintenance expenses: Commission Other acquisition expenses	31,268 21 11	23,142 - 18 - 11 -	- - -
Total life investment expenses Other non-life expenses	32 147,708	29 - 157,800 666	- 695
Total management and sales expenses	179,008	180,971 666	695
Included in total management and sales expenses are the following:
Amortisation of non-life deferred acquisition costs	14,998	12,766 -	-
Bad debts written off	507	26 -	-
Depreciation:
Offce equipment and furniture	1,339	1,588 -	-
Motor vehicles	116	83 -	-
Computer hardware	1,461	541 -	-
Directors’ fees	602	602 602	602
Donations	-	1 -	-
Employee benefts expense	65,689	66,164 -	-
Net loss on fair value of employee share option derivative	383	712 -	-
Loss on disposal of property, plant and equipment	385	- -	-
Restructuring costs	-	389 -	-
Net foreign exchange loss	-	3 -	-
Auditors remuneration
Fees paid to parent auditors:
Audit of fnancial statements	910	750 -	-
Other assurance related services	111	138 -	-
Non-assurance related services	68	151 -	-
(B) FINANCING COSTS Interest expense Other costs	8,006 291	7,756 - 384 -	- -
Total fnancing costs	8,297	8,140 -	-

TOWER Annual Report 2009

Notes to the Financial Statements

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
10. TAxATION
(A) CURRENT TAx ExPENSE
Analysis of taxation expense
Current taxation 9,442 9,449 (152) (1,581)
Deferred taxation 2,752 (23,754) - (177)
Over provided in prior years (1,803) (1,486) - -
Income tax expense/(benefit) for the year 10,391 (15,791) (152) (1,758)
Income tax expense/(benefit) attributed to policyholders 3,764 (13,775) - -
Income tax expense/(benefit) attributed to shareholders 6,627 (2,016) (152) (1,758)
10,391 (15,791) (152) (1,758)
The tax expense/(benefit) recognised can be reconciled to the accounting profit as follows:
Profit/(loss) before taxation 60,476 24,677 168,493 (503)
Income tax at the current rate of 30% (2008: 33%) 18,143 8,143 50,548 (166)
Taxation effect of non deductible expenses / non-assessable revenue:
Life insurance companies permanent differences (5,718) (3,599) - -
Change in tax rates - 2,278 - (18)
Recognition of prior period current tax (1,803) (1,486) - -
Utilisation of previously unrecognised tax losses - (7,401) - -
Non life insurance companies permanent differences - (1,096) - (1,574)
Non deductible losses/(income) from PIEs 4,669 (7,987) - -
Benefit of imputation credits received (573) (4,643) - -
Non deductible expenditure 1,024 - - -
Release of non taxable provision (5,351) - - -
Non taxable dividend from subsidiaries - - (50,700) -
Income tax expense/(benefit) 10,391 (15,791) (152) (1,758)
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The Group taxation expense/(benefit) includes both tax on shareholder profits and on returns attributed to policyholders. The allocation of tax expense between shareholders and policyholders has been disclosed in the income statement.

(B) THE TAxATION (INTERNATIONAL TAxATION, LIFE INSURANCE AND REMEDIAL MATTERS) ACT 2009

The Taxation (International Taxation, Life Insurance and Remedial Matters) Act 2009 was passed on 6 October 2009. This Act will affect the taxation of TOWER Group’s life insurance business. The new regime will result in more tax to pay for new term life business issued from 1 July 2010 and existing term life business once the grand-parenting provisions cease. TOWER Group has estimated that the impact of the new regime in the current period is immaterial and is currently reviewing the options available to mitigate the impact on future profits.

(C) PREPAID TAx ASSET

Under the existing New Zealand life insurance tax rules the Group is required to pay tax in relation to its own profits and on behalf of policyholders. Tax paid by the Group on its taxable profits can be used to satisfy the policyholder tax liability. Due to tax on policyholder liabilities exceeding tax on Group taxable profits it has been necessary to prepay income tax resulting in a prepaid tax asset of $34.732m in 2009 (2008: $42.737m).

The directors undertook an exercise to assess the appropriateness of the carrying value of the asset including the likely period over which the Group was expected to utilise this prepaid tax asset using the following assumptions:

tax rate of 30% for all years;
a conservative estimate of growth in TOWER operating profits after 2009;
utilisation of prepaid tax against future policyholder tax liabilities; and
realisation of investment assets occurring on implementation of the new tax regime in 2010, based on investment values as at 30 September 2009.

Based on the above assumptions the Directors estimated the prepaid tax asset would be recovered in full against future Group tax liabilities by the 2015 financial year (2008: 2018). Changes in the above assumptions could impact on the timeframe in which the prepaid tax asset would be utilised by the Group. If the actual tax liabilities of the Group and policyholders differed from Directors’ estimates by 20% the prepaid tax asset would be fully utilised between 2014 - 2016.

While the Directors have considered the timeframe for realisation of the prepaid tax asset based on future profits from the Group’s existing business activities, the timeframe for realising the prepaid tax asset can also be affected by future actions such as business acquisitions or further changes in tax legislation.

Under the current tax regime, the prepaid tax can be used to satisfy tax liabilities on future Group taxable profits. A change in the tax regime applying to life insurance companies from 1 July 2010 allows the prepaid tax to be used to meet policyholder tax liabilities arising after this date. This prepaid tax is not affected by shareholder continuity requirements.

40 TOWER Annual Report 2009

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			Group
		Charged/		Reclassifed
	Opening	(credited)		from	Closing
	balance at 1	to income	Credited to	policyholder	balance at 30
	October	statement	equity	reserves	September
	$000	$000	$000	$000	$000
(D) DEFERRED TAx ASSETS AND LIABILITIES
2009
Movements in deferred tax assets
Provisions and accruals	4,381	(1,509)	-	-	2,872
Unrealised losses	18,814	(1,835)	-	-	16,979
Policyholder reserves	13,606	(1,324)	-	-	12,282
Other	710	(193)	-	-	517
Total deferred tax assets	37,511	(4,861)	-	-	32,650
Movements in deferred tax liabilities
Deferred costs	16,908	(1,337)	-	-	15,571
Fair value	974	(772)	-	-	202
Deferred tax in policyholder reserves	22,208	-	-	716	22,924
Other	-	-	(78)	-	(78)
Total deferred tax liabilities	40,090	(2,109)	(78)	716	38,619
Net deferred tax	(2,579)	(2,752)	78	(716)	(5,969)
2008
Movements in deferred tax assets
Provisions and accruals	4,820	(439)	-	-	4,381
Unrealised losses	12,868	5,946	-	-	18,814
Policyholder reserves	14,497	(891)	-	-	13,606
Tax losses	11,885	(11,885)	-	-	-
Other	3,270	(2,035)	(525)	-	710
Total deferred tax assets	47,340	(9,304)	(525)	-	37,511
Movements in deferred tax liabilities
Deferred costs	16,131	777	-	-	16,908
Fair value	7,668	(6,694)	-	-	974
Unrealised gains	27,141	(27,141)	-	-	-
Deferred tax in policyholder reserves	18,785	-	-	3,423	22,208
Total deferred tax liabilities	69,725	(33,058)	-	3,423	40,090
Net deferred tax	(22,385)	23,754	(525)	(3,423)	(2,579)
				Group
				2009	2008
				$000	$000
Net deferred tax Expected to crystallise in the next 12 months Not expected to crystallise in the next 12 months				15,184 (21,153)	1,822 (4,401)
				(5,969)	(2,579)

Deferred tax liabilities have not been recognised in respect of temporary differences totalling $1.261m associated with investments in subsidiaries.

TOWER Annual Report 2009

Notes to the Financial Statements

For the year ended 30 September 2009

10. TAxATION (CONTINUED)

Deferred tax on policy liabilities

Life insurance policy liabilities represent the net present value of estimated future cash flows and planned profit margins. Using the margin on services methodology, planned after tax profit margins are recognised in the income statement over the period services are provided to policyholders. A deferred tax liability of $22.924m (2008: $22.208m) has been separately disclosed and included in the deferred tax liabilities balance representing taxable temporary differences which are implicitly embedded within life insurance policy liabilities.

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Group
2009 2008
$000 $000
(E) IMPUTATION CREDIT ACCOUNT
Balance at 1 October 14,003 12,765
Attached to dividends received 1,074 6,930
Taxation paid 7 84
Income tax refunded - (30)
Transfers from/(to) policyholder credit account 4,500 (5,746)
Balance at 30 September 19,584 14,003
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The Group imputation credit account reflects the imputation credits held by the Parent as the representative member.

(F) POLICYHOLDER CREDIT ACCOUNT

Balance at 1 October - Overestimation of previous years' policyholder tax liability 9,000 Previous year's policyholder tax liability (4,100) Transfer (to)/from imputation credit account (4,500)	3,254 - (9,000) 5,746
Balance at 30 September 400	-

The Policyholder Credit Account enables TOWER Life (NZ) Limited to satisfy the income tax liability on policyholder income for the year. The Company does this by electing to transfer imputation credits from the Imputation Credit Account to the Policyholder Credit Account subject to a number of tax rules. The balance in the Policyholder Credit Account is available to meet any policyholder tax liability.

The policyholder tax liability is based on actuarial calculations which are finalised after year end. The Policyholder Credit Account disclosure includes the estimated policyholder tax liability for the current year and imputation credits transferred in the current year.

42 TOWER Annual Report 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
11. RECEIVABLES
Reinsurance recovery receivables 38,872 17,070 - -
Outstanding premiums and trade receivables 90,476 95,602 - -
Unsettled investment sales 346 847 - -
Unearned comission 8,622 9,090 - -
Related party receivables - - 248,818 260,639
Other 2,937 3,660 45 25
Total receivables 141,253 126,269 248,863 260,664
Analysed as:
Current 140,718 125,734 248,863 260,664
Non current 535 535 - -
141,253 126,269 248,863 260,664
Outstanding premiums and trade receivables above are presented net of allowance for credit losses and impairment. Movement in the allowance for
credit losses and impairment during the reporting period was as follows:
Outstanding premiums and trade receivables 92,434 97,681 - -
Allowance for doubtful debts (1,958) (2,079) - -
90,476 95,602 - -
Balance at 1 October 2,079 2,211 - -
Provisions added during the year 1,574 1,490 - -
Provisions released during the year (1,695) (1,622) - -
Balance at 30 September 1,958 2,079 - -
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The allowance for credit losses and impairment in relation to trade receivables is provided for based on estimated recoverable amounts determined by reference to current customer circumstances and past default experience. In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the date the credit was initially granted up to the reporting date. The Group has provided fully for receivables over 120 days past due. Trade receivables between 60 and 120 days past due are provided for based on estimated irrecoverable amounts determined by reference to past due default experience.

12. INVESTMENT PROPERTY

At fair value Balance at 1 October Reclassifed as property, plant and equipment Other adjustments	2,449 2,158 - (2,538) - - 89 291 -	- - -
Balance at 30 September	- 2,449 -	-

Investment property was reclassified as property, plant and equipment on 1 April 2009.

TOWER Annual Report 2009 43

Notes to the Financial Statements

For the year ended 30 September 2009

		Group
	Goodwill	Software	WIP	Total
	$000	$000	$000	$000
13. INTANGIBLE ASSETS
Year ended 30 September 2008
Net book value at 1 October 2007	30,811	2,903	-	33,714
Additions at cost	-	3,877	1,439	5,316
Amortisation expense	-	(1,721)	-	(1,721)
Net book value at 30 September 2008	30,811	5,059	1,439	37,309
At 30 September 2008
At cost	30,811	12,538	1,439	44,788
Accumulated amortisation	-	(7,479)	-	(7,479)
Net book value at 30 September 2008	30,811	5,059	1,439	37,309
Year ended 30 September 2009
Net book value at 1 October 2008	30,811	5,059	1,439	37,309
Additions at cost	-	836	3,633	4,469
Disposals	-	(1)	-	(1)
Amortisation expense	-	(2,599)	-	(2,599)
Net book value at 30 September 2009	30,811	3,295	5,072	39,178
At 30 September 2009
At cost	30,811	13,373	5,072	49,256
Accumulated amortisation	-	(10,078)	-	(10,078)
Net book value at 30 September 2009	30,811	3,295	5,072	39,178

Impairment testing for goodwill

The amount of goodwill is subject to bi-annual impairment testing at the cash generating unit level.

	TOWER	TOWER	Total
	Medical	Insurance
	$000	$000	$000
2009
Carrying amount of goodwill	13,067	17,744	30,811
2008
Carrying amount of goodwill	13,067	17,744	30,811

Key financial indicators are considered when testing the Group’s goodwill for impairment. These include cash flows, growth in written premium volumes and the net assets of the business units. Group business units’ valuations have been conducted on assumptions consistent with actuarial assumptions in Note 28 in respect of TOWER Medical and TOWER Insurance.

An analysis of these key indicators and other valuations performed for the current year confirms that at 30 September 2009 there is no impairment of the value of goodwill (2008: Nil).

44 TOWER Annual Report 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
14. INVESTMENTS IN SUBSIDIARIES
Investments in controlled entities carried at cost - - 190,172 189,041
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TOWER Limited holds its subsidiary companies under a holding company, TOWER Financial Services Group Limited. All subsidiary companies have a balance date of 30 September.

Principal trading subsidiary companies at 30 September 2009 and 2008 are as follows:

Holdings		Nature of Business
Name of Company 2009	2008
Incorporated in New Zealand TOWER Asset Management Limited 100%	100%	Investment management services
TOWER Corporation Holdings Limited 100%	100%	Management services
TOWER Health & Life Limited 100%	100%	Term, disability and medical insurance
TOWER Insurance Limited 100%	100%	Fire and general insurance
TOWER Investments Limited 100%	100%	Holding company
TOWER Life Limited 100%	100%	Holding company
TOWER Life (N.Z.) Limited 100%	100%	Life insurance and superannuation management
TOWER Managed Funds Limited 100%	100%	Life insurance administration and personal superannuation management
TOWER Medical Insurance Limited 100%	100%	Medical insurance
TOWER New Zealand Limited 100%	100%	Holding company
TOWER Option Scheme Limited 100%	100%	Trustee for executive share options
TOWER Capital Limited* 100%	-	Holding company for fxed rate senior unsecured bonds
TOWER Employee Benefts Limited 100%	100%	Holding company
TOWER Managed Funds Investment Limited 100%	100%	Holding company
TOWER Bourke Street Limited 100%	100%	Holding company
Incorporated in Australia Australian Equitable Insurance Company Pty Limited 100%	100%	Holding company
Southern Pacifc Insurance Company Pty Limited 100%	100%	Holding company
Incorporated in Fiji TOWER Insurance (Fiji) Limited 100%	100%	Fire and general insurance
Incorporated in Cook Islands TOWER Insurance (Cook Islands) Limited 100%	100%	Fire and general insurance
Incorporated in PNG TOWER Insurance (PNG) Limited 100%	100%	Fire and general insurance
Incorporated in Samoa National Pacifc Insurance Limited 70%	70%	Fire and general insurance

*TOWER Capital Limited was incorporated on 18 December 2008

TOWER Annual Report 2009 45

Notes to the Financial Statements

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
15. DEFERRED ACqUISITION COSTS
Balance at 1 October 49,761 51,567 - -
Acquisition costs deferred during the year 10,333 10,960 - -
Current period amortisation (14,998) (12,766) - -
Balance at 30 September 45,096 49,761 - -
Analysed as:
Current 13,547 15,160 - -
Non current 31,549 34,601 - -
45,096 49,761 - -
Group
Office
Land and equipment Computer
buildings and furniture Motor vehicles equipment Total
$000 $000 $000 $000 $000
16. PROPERTY, PLANT AND EqUIPMENT
Year ended 30 September 2008
Net book value at 1 October 2007 - 4,345 120 910 5,375
Additions - 138 270 2,555 2,963
Disposals - (278) (23) (219) (520)
Foreign exchange movements - 188 26 (34) 180
Depreciation charge - (1,588) (83) (541) (2,212)
Net book value at 30 September 2008 - 2,805 310 2,671 5,786
At 30 September 2008
At cost - 12,637 895 29,719 43,251
Accumulated depreciation - (9,832) (585) (27,048) (37,465)
Net book value at 30 September 2008 - 2,805 310 2,671 5,786
Year ended 30 September 2009
Net book value at 1 October 2008 - 2,805 310 2,671 5,786
Reclassified from investment property 2,538 - - - 2,538
Additions - 155 284 1,220 1,659
Disposals - (325) (25) (24) (374)
Foreign exchange movements (643) 19 (32) (7) (663)
Depreciation charge - (1,339) (116) (1,461) (2,916)
Net book value at 30 September 2009 1,895 1,315 421 2,399 6,030
At 30 September 2009
At cost 1,895 6,855 964 6,140 15,854
Accumulated depreciation - (5,540) (543) (3,741) (9,824)
Net book value at 30 September 2009 1,895 1,315 421 2,399 6,030
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The parent company does not hold any property, plant and equipment.

46 TOWER Annual Report 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
17. PAYABLES
Trade payables 33,101 36,307 - -
Reinsurance payables 10,188 6,458 - -
Unsettled investment purchases 248 306 - -
Other payables 18,586 20,027 1,712 1,646
Related party payables - - 419,961 581,505
Total payables 62,123 63,098 421,673 583,151
Analysed as:
Current 62,123 62,993 421,673 583,151
Non current - 105 - -
62,123 63,098 421,673 583,151
As at 30 September 2009 unsettled investment purchases were made up of a $0.226m balance of the NZ brokers account for NZ equities
(2008: $0.285m). The asset is recognised under financial assets at fair value through profit and loss.
18. PROVISIONS
Employee benefits 7,594 9,326 - -
Other - 127 - -
Total provisions 7,594 9,453 - -
Analysed as:
Current 7,594 9,453 - -
Non current - - - -
7,594 9,453 - -
Movement in provisions
Movements in each class of provision other than employee benefits during the financial year are set out below:
Other provisions
Opening balance at 1 October 127 724 - -
Additions - 127 - -
Amount used (127) - - -
Reversal of unused amount - (724) - -
Closing balance at 30 September - 127 - -
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TOWER Annual Report 2009 47

Notes to the Financial Statements

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
19. INTEREST BEARING LIABILITIES
Overdraft - 304 - -
Bank loan - 87,255 - -
Fixed rate senior unsecured bonds 83,220 - - -
Unamortised capitalised costs (3,218) - - -
Total interest bearing liabilities 80,002 87,559 - -
Analysed as:
Current 860 2,559 - -
Non current 79,142 85,000 - -
80,002 87,559 - -
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Bank loan

The bank loan was fully repaid in June 2009.

Fixed rate senior unsecured bonds

On 24 March 2009, the Group issued $81.759m of fixed rate senior unsecured bonds, bearing a fixed interest rate of 8.5% per annum. The bonds mature on 15 April 2014. The bonds are carried at amortised cost using the effective interest method. The fixed rate senior unsecured bonds balance above includes $1.461m of accrued interest. The Group capitalised $3.499m of costs associated with the issuance of the bonds. These costs are amortised over the five year term of the bonds using the effective interest rate method. The amortised costs to 30 September 2009 were $0.281m. The fair value of unsecured bonds as at 30 September 2009 is $83.535m, this has been estimated using the method outlined in Note 30 (D).

20. INSURANCE LIABILITIES

Unearned premiums – general insurance Unearned premiums – health and disability Outstanding claims – general and health insurance Outstanding claims – life and other	96,914 103,044 15,645 15,446 74,017 80,649 93,124 66,307	- - - - - - - -
	279,700 265,446	- -
Analysed as: Current Non current	197,322 168,866 82,378 96,580	- - - -
	279,700 265,446	- -
21. OTHER LIABILITIES FuturePlan debenture Other	22,745 21,457 - 48	- - - -
	22,745 21,505	- -
Analysed as: Current Non current	22,745 21,505 - -	- - - -
	22,745 21,505	- -

TOWER Life (NZ) Limited has issued a debenture to the TOWER Future Plan. The debenture is maintained in a separate fund within TOWER Life (NZ) Limited. Interest on the debenture is directly linked to the investment earnings of this fund. The debenture has no fixed repayment term.

48 TOWER Annual Report 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
22. CONTRIBUTED EqUITY
Ordinary share capital (fully paid) 547,843 465,586 547,843 465,586
Less treasury shares (163) (263) (163) (263)
Total contributed equity 547,680 465,323 547,680 465,323
Represented by: Number of shares Number of shares
Ordinary shares (no par value) 254,882,993 191,992,041 254,882,993 191,992,041
Less treasury shares (97,960) (101,526) (97,960) (101,526)
254,785,033 191,890,515 254,785,033 191,890,515
Movements in ordinary share capital
Balance at 1 October 191,992,041 189,348,179 191,992,041 189,348,179
Dividend reinvested shares issuance 2,055,865 1,715,782 2,055,865 1,715,782
Employee share options scheme shares issuance 148,660 928,080 148,660 928,080
Rights issue 60,686,427 - 60,686,427 -
Balance at 30 September 254,882,993 191,992,041 254,882,993 191,992,041
Movements in ordinary share capital $000 $000 $000 $000
Balance at 1 October 465,586 460,595 465,586 460,595
Dividend reinvested shares issuance 3,310 3,658 3,310 3,658
Employee share options scheme shares issuance 257 1,333 257 1,333
Rights issue net of capitalised costs 78,690 - 78,690 -
Balance at 30 September 547,843 465,586 547,843 465,586
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All shares rank equally with one vote attached to each share.

On 28 September 2009, TOWER Limited issued 60,686,427 ordinary shares pursuant to a 5 for 16 Rights Issue at a value of $1.34 per share. The Company raised $81.320m and incurred $2.630m of costs in relation to the Issue.

Movements in treasury shares

Movements in treasury shares
Balance at 1 October Movement in treasury shares during the year	263 - 263 (100) 263 (100)	- 263
Balance at 30 September	163 263 163	263
Represented by:	Number of shares Number of shares
Treasury shares (no par value)	97,960 101,526 97,960	101,526

TOWER Annual Report 2009 49

Notes to the Financial Statements

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
23. ACCUMULATED LOSSES
Accumulated losses
Balance at 1 October (66,453) (91,680) (485,960) (472,280)
Net profit for the year 49,537 40,460 168,645 1,255
Transfer from share based payments reserve 1,372 - 1,372 -
Dividend paid (19,467) (14,844) (19,467) (14,844)
Other (117) (389) (117) (91)
Balance at 30 September (35,128) (66,453) (335,527) (485,960)
24. RESERVES
Foreign currency translation reserve (FCTR)
Balance at 1 October 2,488 (407) - -
Currency translation differences arising during the year (2,884) 2,895 - -
Balance at 30 September (396) 2,488 - -
Exchange differences arising on translation of foreign controlled entities are taken to the FCTR as described in Note 1(J). The reserve is recognised in
profit and loss when the net investment is disposed of.
Share based payments reserve
Balance at 1 October 2,842 2,672 2,842 2,672
Net movement in share based payments reserve (241) 170 (241) 170
Balance at 30 September 2,601 2,842 2,601 2,842
The share based payments reserve is used to recognise the fair value of options issued but not exercised.
Separation reserve (113,000) (113,000) (113,000) (113,000)
The separation reserve was created at the time of the demerger in 2007 of the New Zealand and Australian businesses in accordance with the ruling
provided by the Australian Tax Office (ATO). It will be carried forward indefinitely as a non equity style reserve to meet the requirements of the ATO.
Total reserves (110,795) (107,670) (110,399) (110,158)
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25. DISTRIBUTION TO SHAREHOLDERS

On 20 November 2008 the Board of Directors declared a dividend for the 2008 financial year of 8.0 cents per share. The dividend was paid on 9 February 2009.

50 TOWER Annual Report 2009

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				Other
		General		(Holding companies and
	Health & Life	Insurance	Investments	eliminations)	Total
	$000	$000	$000	$000	$000
26. SEGMENTAL REPORTING
2009
Proft for the year	34,797	17,292	5,763	(7,767)	50,085
Less discount rate(1)	(3,148)	-	-	-	(3,148)
Underlying proft for the year	31,649	17,292	5,763	(7,767)	46,937
Revenue
Revenue - external	233,435	206,662	39,297	2,386	481,780
Revenue - internal	-	-	14,313	(14,313)	-
Total revenue	233,435	206,662	53,610	(11,927)	481,780
Total assets	1,071,491	388,185	56,933	79,851	1,596,460
Total liabilities	877,504	248,642	27,284	38,582	1,192,012
Acquisition of property, plant and equipment, intangibles and other non current assets	-	402	43	5,683	6,128
Depreciation and amortisation	1,216	1,213	611	2,475	5,515
2008
Proft for the year	28,508	14,801	3,659	(6,500)	40,468
Less discount rate(1)	(2,074)	-	-	-	(2,074)
Underlying proft for the year	26,434	14,801	3,659	(6,500)	38,394
Revenue
Revenue - external	208,108	200,620	43,118	2,953	454,799
Revenue - internal	-	408	11,751	(12,159)	-
Total revenue	208,108	201,028	54,869	(9,206)	454,799
Total assets	1,043,644	384,643	65,072	26,231	1,519,590
Total liabilities	905,042	235,143	41,139	44,046	1,225,370
Acquisition of property, plant and equipment, intangibles and other non current assets	508	460	404	6,907	8,279
Depreciation and amortisation	1,067	1,336	726	804	3,933

(1) The discount rate effect, as discussed in Note 3, has been adjusted for tax and shown separately to provide a more meaningful comparison between the reported periods.

Description of segments

Health & Life includes all health, life and disability insurance in New Zealand. General Insurance includes all general insurance services in New Zealand and Pacific Islands. Investments includes all wealth management services in New Zealand. Other includes head office expenses, financing costs and eliminations.

Geographical segments

TOWER Group operates predominantly in one geographical segment, New Zealand. The operations in Australia and the Pacific region do not represent a significant part of the Group’s operations.

TOWER Annual Report 2009 51

Notes to the Financial Statements

For the year ended 30 September 2009

	Group	Company	Company
	2009	2008 2009	2008
	$000	$000 $000	$000
27. LIFE INSURANCE BUSINESS (A) POLICY LIABILITIES Life insurance contract liabilities Value of policy liabilities – Projection Method Future policy benefts Future bonuses Future expenses Reinsurance Future proft margins Future premiums	822,070 148,893 199,595 (10,855) 210,252 (791,995)	817,552 - 185,246 - 150,309 - (10,869) - 288,311 - (807,570) -	- - - - - -
Value of policy liabilities – Accumulation Method Future policy benefts Unvested policy benefts	577,960 47,486 24,782	622,979 - 49,234 - 22,159 -	- - -
Net policy liabilities - life insurance contracts	650,228	694,372 -	-
Reconciliation of movements in life insurance contract policy liabilities Gross life insurance liabilities at 1 October Increase in liabilities ceded under reinsurance Decrease in life insurance contract liabilities recognised in the income statement Deposits recognised as an increase in policy liabilities Withdrawals recognised as a decrease in policy liabilities Other adjustments including foreign exchange	690,568 1,566 (40,662) 9,442 (12,923) (717)	724,424 - 2,494 - (30,154) - 8,187 - (10,960) - (3,423) -	- - - - - -
Gross life insurance liabilities at 30 September	647,274	690,568 -	-
Life investment contract liabilities Value of policy liabilities – Accumulation Method Future policy benefts	32,650	35,084 -	-
Net policy liabilities - life investment contracts	32,650	35,084 -	-
Reconciliation of movements in investment contract policy liabilities Gross life investment contract liabilities at 1 October Decrease in life investment contract liabilities recognised in the income statement Deposits recognised as an increase in policy liabilities Withdrawals recognised as a decrease in policy liabilities	35,084 (117) 529 (2,846)	45,095 - (4,816) - 671 - (5,866) -	- - - -
Gross life investment contract liabilities at 30 September	32,650	35,084 -	-
Total gross policy liabilities	679,924	725,652 -	-

52 TOWER Annual Report 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
Liabilities ceded under reinsurance
Balance at 1 October 18,405 15,911 - -
Movement in income statement 1,566 2,494 - -
Balance at 30 September 19,971 18,405 - -
Deferred tax liability included within policy liabilities 22,924 22,208 - -
Net policy liabilities 682,877 729,455 - -
Analysed as:
Current - - - -
Non current 682,877 729,455 - -
682,877 729,455 - -
(B) ANALYSIS OF LIFE INSURANCE AND LIFE INVESTMENT
CONTRACT RESULTS
Life insurance contracts
Planned profit margins 16,719 15,180 - -
Experience profits 3,765 2,511 - -
Capitalised loss (reversal)/recognition (9) 6 - -
Other movement - (239) - -
Investment earnings on assets in excess of policy liabilities of life companies 3,201 4,889 - -
Operating profit after tax attributable to shareholders arising from the 23,676 22,347 - -
life insurance contracts
Life investment contracts
Planned profit margins 200 200 - -
Experience profits 14 104 - -
Operating profit after tax attributable to shareholders arising from life 214 304 - -
investment contracts
(C) SOLVENCY REqUIREMENTS OF LIFE FUNDS
The minimum equity required to be retained to meet solvency requirements over and above the policy liabilities for each of the life insurance companies
in the Group is shown below. The shareholder equity retained in each of the life insurance companies exceeds these minimum requirements (see Note
27(D)(d)).
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	TOWER Life (NZ) TOWER Health & Life	TOWER Life (NZ) TOWER Health & Life
Solvency requirement	A 743,636 764,679 92,770	89,274
Represented by: Policy liabilities Other liabilities Solvency reserve	706,656 728,401 (43,477) 35,710 36,278 12,237 B 1,270 - 124,010	(21,105) 9,413 100,966
Solvency requirement	743,636 764,679 92,770	89,274
Assets available to meet solvency reserve: Solvency reserve: Solvency reserve:	49,945 48,463 134,114 B 1,270 - 124,010	113,994 100,966
Excess assets	48,675 48,463 10,104	13,028
Coverage of required solvency reserve	39.3 n/a 1.1	1.1

TOWER Annual Report 2009

Notes to the Financial Statements

For the year ended 30 September 2009

27. LIFE INSURANCE BUSINESS (CONTINUED)

The solvency requirement (A) is calculated in accordance with Professional Standard No. 5.01 ‘Solvency Reserving for Life Insurance Business’ issued by the New Zealand Society of Actuaries. The solvency reserve (B) represents the assets required to be held in excess of policy and other liabilities in order to meet the solvency requirement. For TOWER Life (NZ) Limited, no significant additional assets are required, the policy and other liabilities being sufficient to meet the solvency requirement.

(D) SUMMARY OF SIGNIFICANT ACTUARIAL METHODS AND ASSUMPTIONS - LIFE INSURANCE

The effective date of the policy liabilities and solvency reserves calculation is 30 September 2009. The Chief Actuary, Herwig Raubal, FIAA, FNZSA has calculated policy liabilities for TOWER Life (NZ) Limited and TOWER Health & Life Limited. The actuary is satisfied as to the accuracy of the data from which the policy liabilities have been determined.

This note summarises the assumptions made and the methods adopted for the calculation of policy liabilities and solvency requirements.

(a) Policy liabilities

Policy liabilities for life insurance business have been determined in accordance with Professional Standard No.3 ‘Determination of Life Insurance Policy Liabilities’ issued by the New Zealand Society of Actuaries for TOWER Life (NZ) Limited and TOWER Health & Life Limited. This standard requires that policy liabilities be calculated on the basis of best estimate assumptions and in a way that allows for the release of planned margins as services are provided to policyholders.

The value of policy liabilities may also include a component for profit margins on existing business that will be earned as services are provided to policy owners over the time the relevant policies are held with the Company.

The Company incurs costs in selling new policies. Any costs not recovered by specific charges received from the policy owner at inception are normally deferred. New business selling costs (or acquisition costs) related to the acquisition of new business are deferred as long as the underlying policies are expected to be profitable. Where costs are deferred, they are recovered from premiums or charges receivable in the future.

Methods used to value policy liabilities

(i) Projection method

The projection method uses expected cash flows (premiums, investment income, redemptions or benefit payments, expenses and profits) to establish the value of policy liabilities. The value of expected future premiums is deducted from the value of expected benefit and expense payments to arrive at the obligation to policy owners.

(ii) Accumulation method

Under the accumulation method for risk policies the policy liability is the sum of the unearned premiums, outstanding claims plus an allowance for claims incurred but not yet reported. For investment policies, the policy liability is determined as the policy account balance including accrued interest to the balance date, plus investment fluctuation reserves subject to a minimum of the current surrender value.

Methods used

Valuation of policy liabilities

Policy liabilities comprise the amount required to pay the expected future benefits and expenses after receiving expected future premiums and investment earnings.

Where the policy liability is determined by the projection method, actuarial standards require profit to be related to one or more financially measurable indicators of the provision of service (or related income) called ‘profit carriers’. The profit carriers adopted for the major product groups are shown in the table below:

MAJOR PRODUCT GROUPS	METHOD	PROFIT CARRIERS
		(for business valued using projection method)
Traditional participating	Projection	Cost of supportable bonuses
Traditional non-participating, renewal and level term and mortgage repayment insurance	Projection	Expected death claims
Annuities	Projection	Expected annuity payments
Individual lump sum life insurance risk (life, temporary and permanent disability and trauma) and disability income protection insurance	Projection	Expected claims
Non-participating investment account	Accumulation
Investment linked	Accumulation
Group risk insurances and renewable insurances	Accumulation

54 TOWER Annual Report 2009

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27. LIFE INSURANCE BUSINESS (CONTINUED)

(D) SUMMARY OF SIGNIFICANT ACTUARIAL METHODS AND ASSUMPTIONS - LIFE INSURANCE (CONTINUED)

(b) Disclosure of assumptions

*(b) Disclosure of assumptions*	*(b) Disclosure of assumptions*
The following table summarises the key assumptions used in the calculation of policy liabilities, together		with notes on any signifcant changes in the
assumptions:
REqUIRED ASSUMPTION	BASIS OF ASSUMPTION (By product Group)	SIGNIFICANT CHANGES
Discount rates for	As the value of benefts is contractually linked to the performance	The discount rates used are as follows:
participating business	of assets, a discount rate based on the market return on the assets backing policy liabilities is used. The discount rate assumed in	September 2009	5.2%
	calculating policyholder liabilities was derived from the expected long term average rates of return for the assets pool backing this business,	September 2008	5.7%
	based on the benchmark asset mix. Discount rates assumed are net of
	taxation and investment expenses.
Discount rates for non-	Risk free discount rates have been adopted for life insurance contracts	The discount rates used, net of tax are as
participating life insurance	where the benefts are not contractually linked to the performance of	follows:
contracts	backing asset pools. The risk free discount rates have been determined based on swap rates, depending on the nature structure and term of	September 2009	4.1% to 4.2%
	the contract liabilities. Discount rates are assumed net of investment management expenses.	September 2008	4.4% to 4.7%
Infation	Beneft indexation is before allowance for the proportion of	Beneft Indexation
	policyholders who take up indexation.	September 2009	2.0%
		September 2008	2.0%
Future expenses	Future maintenance expenses have been set based on experience	None
	analyses conducted by the various companies as well as the actuary’s
	expectations of future expense levels.
	Future investment expenses have been assumed to be at the same
	percentage of assets under management as currently applies.
Rates of taxation	Rates of taxation have been assumed to remain as under current	Allowance has been made for the Taxation
	legislation or legislation substantively enacted at the valuation date.	(International Taxation, Life Insurance and
		Remedial Matters) Act 2009. For the life
		business premium increases and/or cost
		reductions suffcient to fully offset any
		additional tax payable have been assumed.
Mortality – risk products	Standard mortality tables, primarily NZ97 in New Zealand. These are	Traditional product multiples have been
	adjusted for company experience.	reduced by 3% to allow for mortality
		improvements to next year. Rates on the
		TOWER Health and Life business, Funeral Plan
		and some MRI classes have been increased in
		line with recent experience.
Mortality – annuities	Standard mortality tables (New Zealand use PML80C10) adjusted for	None
	company experience.
Disability – lump sum	Based upon recent company and reinsurer experience adjusting for	None
	different product defnitions. Some wholesale schemes use specifc
	company experience.
Disability income	Standard morbidity tables (IAD89-93) adjusted for company	None
	experience. Specifc company experience is used for certain wholesale
	schemes.
Discontinuances	Discontinuance rates have been assumed to be consistent with the	For health and life business renewable to
	experience of recent years. Assumed discontinuance rates vary by	advanced ages, a discontinuance rate of 20%
	sub-grouping within a class and vary according to the length of time	pa has been introduced for lives insured over
	tranches of business have been in-force and other relevant factors.	age 65.
Surrender values	Surrender values are based on current practice.	None
Rates of future supportable	Assumed future supportable bonus rates included in policyholder	None
participating benefts	liabilities were set such that the present value of policyholder
	liabilities, allowing for the shareholders’ right to participate in
	distributions, equals the value of assets supporting the business.
	Distributions are split between policyholders and shareholders with	None
	the valuation allowing for shareholders to share in distributions.
	The rate of shareholder participation assumed is generally at the
	maximum allowable of 25% of the value of bonuses distributed to
	participating policyholders subject to policy conditions.
	Additional policy bonuses will emerge from the assets representing	None
	policyholders’ unvested benefts.

TOWER Annual Report 2009

For the year ended 30 September 2009

Notes to the Financial Statements

27. LIFE INSURANCE BUSINESS (CONTINUED)

(D) SUMMARY OF SIGNIFICANT ACTUARIAL METHODS AND ASSUMPTIONS - LIFE INSURANCE (CONTINUED)

Effect of changes in actuarial assumptions during the reporting period

The liabilities for life insurance contracts include the value of future profit margins that are to be released over future reporting periods. The impact of assumption changes on non participating business are absorbed by the future profit margins, provided sufficient future margins exist, such that there is no change in the contract liability in the current period. For participating business, the impact of assumption changes is absorbed by the value of future supportable bonus. The current period contract liability is impacted by the change in cost of current period supportable bonus.

The impact of the assumption changes in the current period on future profit margins in respect of life insurance contracts (excluding new business contracts which are measured using assumptions at the valuation date) are shown below.

Where the value of future profit margins are insufficient to absorb the assumption changes, the resulting losses are recognised in the current year via a change in the contract liability. These losses may be reversed in subsequent periods should experience improve.

The life insurance contract liability calculations include the use of published market yields, such as government bond and swap rates. The changes in these yields do not represent actuarial assumption changes and they impact both life insurance contract liabilities and asset values as at the balance date. The impact of assumption changes for life insurance contracts made during the year is shown below.

	Change in future Change in next fnancial year's Change in current period Change in current period
	shareholder shareholder contract shareholder
	proft margins planned proft liability proft
	$000 $000 $000 $000
Assumption change
Mortality and Morbidity (870) (86) (174) 35
Discontinuances	(74,338) (1,814) - -
Expenses	2,991 (16) (111) 22
Other	(1,630) (70) - -
VARIABLE	IMPACT OF MOVEMENT IN UNDERLYING VARIABLE
Expense risk	An increase in the level or infationary growth of expenses over assumed levels will decrease proft and shareholder equity.
	Depending on the profle of the investment portfolio, the investment income of the Group will decrease as interest rates
Interest rate risk	decrease. This may be offset to an extent by changes in the market value of fxed interest investments. The impact on proft
	and shareholder equity depends on the relative profles of assets and liabilities, to the extent that these are not matched.
Mortality rates	For insurance contracts providing death benefts, greater mortality rates would lead to higher levels of claims, increasing associated claims cost and therefore reducing proft and shareholder equity.
	The cost of health-related claims depends on both the incidence of policyholders becoming temporarily or totally and
Morbidity rates	permanently disabled and, in the case of temporary disablement, the duration which they remain temporarily disabled. Higher
	than expected incidence and duration would be likely to increase claim costs, reducing proft and shareholders equity.
	The impact of the discontinuance rate assumption depends on a range of factors including the type of contract, the surrender
Discontinuance	value basis (where applicable) and the duration in force. For example, an increase in discontinuance rates at earlier durations of life insurance contracts usually has a negative effect on proft and shareholder equity. However, due to the interplay between
	the factors, there is not always an adverse outcome from an increase in discontinuance rates.
Market risk	For benefts which are not contractually linked to the underlying assets, the Group is exposed to market risk.

(c) Sensitivity analysis

The liabilities included in the reported results are calculated using certain assumptions about key variables as disclosed above. Sensitivity analysis is conducted to assess the impact of actual experience being different to that assumed in the calculation of liabilities. Movements in any key variable will impact the profit and shareholder equity of the Group. The tables below describe how a change in actual experience relative to that expected will affect next financial year’s expected shareholder profit.

		CHANGE IN NExT FINANCIAL YEAR’S SHAREHOLDER
NEW ZEALAND VARIABLE	MOVEMENT	PROFIT NET OF REINSURANCE
		$000
Mortality	Adverse movement of 10%	(841)
Morbidity claims costs	Adverse movement of 10%	(618)
Annuitant mortality	Adverse movement of 10%	(179)
Lapses and surrenders	Adverse movement of 10%	(578)
Renewal expenses	Adverse movement of 10%	(857)

The impact from changes to interest rates has been reflected in Note 30 (F).

56 TOWER Annual Report 2009

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(d) Solvency requirements

Separate to the policy liabilities recognised in the balance sheet, the life insurance companies maintain sufficient capital to meet solvency requirements. These are amounts required to provide protection against the impact of fluctuations and unexpected adverse circumstances on the life insurance companies.

The methodology and bases for determining the Solvency Requirement are in accordance with the requirements of ‘Professional Standard No. 5.01 Solvency Reserving for Life Insurance Business’ issued by the New Zealand Society of Actuaries.

(e) Life insurance risk

The life insurance business of the Group involves a number of non-financial risks concerned with the pricing, acceptance and management of the mortality, morbidity and longevity risks accepted from policyholders. Financial risks involving the Group are in Note 30.

Insurance risks are controlled through the use of underwriting procedures and adequate premium rates and policy charges, all of which are approved by the Chief Actuary. Tight controls are also maintained over claims management practices to ensure the correct and timely payment of insurance claims.

(i) Underwriting management procedures

Underwriting is managed by a separate department with underwriting limits in place to enforce appropriate risk selection criteria. The Group provides appropriate training and development of underwriting staff. Individual policies carrying insurance risk are underwritten on their merits and are generally not issued without having been examined and underwritten individually. Group risk insurance policies are underwritten on the merits of an employee group as a whole, subject to certain limits for individual members.

(ii) Claim management procedures

Claims are managed through a dedicated claims team, with appropriate training and development of staff to ensure procedures are adhered to. Claims are managed to ensure timely and correct payment in accordance with policy conditions. Claims experience is reviewed regularly and appropriate actuarial reserves are established.

(iii) Reinsurance management procedures

The company holds appropriate reinsurance arrangements to limit exposure to individual and catastrophe risks. All reinsurance arrangements are approved by the Chief Actuary.

(iv)Terms and conditions of life insurance contracts

The nature of the terms of the insurance contracts written by the Group is such that certain external variables can be identified on which related cash flows for claim payments depend. The tables below provide an overview of the key variables upon which the amount of related cash flows are dependent.

	DETAILS OF CONTRACT	NATURE OF COMPENSATION	KEY VARIABLES AFFECTING
TYPE OF CONTRACT	WORKINGS	FOR CLAIMS	FUTURE CASH FLOWS
Non-participating life insurance contracts with fxed and guaranteed terms (Term Life and Disability including renewable term)	Guaranteed benefts paid on death, permanent and temporary disablement or maturity that are fxed and guaranteed and not at the discretion of the issuer.	Benefts, defned by the insurance contract are determined by the contract and not directly affected by the performance of underlying assets or the performance of the contracts as whole.	Mortality, morbidity, lapses, expenses and market earnings on assets backing the liabilities
Life annuity contracts	These policies provide a guaranteed regular income for the life of the insured in return for an initial single premium.	The amount of the guaranteed regular income is set at inception of the policy including any indexation.	Longevity, beneft infation, expenses and market earnings on assets backing the liabilities
Traditional life insurance contracts with discretionary participating benefts (endowment and whole of life)	These policies include a clearly defned initial guaranteed sum assured that is payable on death. The guarantee amount is increased throughout the duration of the policy by the addition of bonuses annually that once added are not removed. An additional (terminal) bonus is payable on claims paid as a result of death or maturity. Terminal bonus amounts are not guaranteed.	Benefts arising from the discretionary participation feature are based on the performance of a specifed pool of contracts or a specifed type of contract. Operating proft arising from these contracts is allocated between the policyholders and shareholders. The amount allocated to policyholders is held as an unvested policy liability until it is distributed to policyholders via bonuses.	Mortality, morbidity, lapses, expenses and market earnings on assets backing the liabilities
	The gross value of the premiums	The payment of the account
	received is invested in the	balance is generally guaranteed,
Investment account contracts with discretionary participating features	investment account with fees and premiums for any associated insurance cover being deducted	although it may be subject to certain penalties on early termination. On certain contracts	Fees, lapses, expenses and market earnings on assets backing the liabilities
	from the account balance. Interest	withdrawals can be deferred over
	is credited regularly.	limited time periods.

TOWER Annual Report 2009 57

Notes to the Financial Statements

For the year ended 30 September 2009

27. LIFE INSURANCE BUSINESS (CONTINUED)

(D) SUMMARY OF SIGNIFICANT ACTUARIAL METHODS AND ASSUMPTIONS - LIFE INSURANCE (CONTINUED)

(f) Concentration of insurance risk

The Group aims to maintain a portfolio of policyholders with a broad spread of insurance risk types, ages, sexes, occupation classes and geographical locations for the individual and group risk business. The Group uses reinsurance to limit the insurance risk exposure for any one individual. The Group risk business unit offers insurance in respect of groups of employees. The Group is exposed to a greater risk of loss from events affecting a location where groups of insured employees work. The Group has purchased catastrophe reinsurance to limit the exposure from any one group event.

(g) Liquidity risk and future net cash outflows

The table below shows the estimated timing of future cash outflows resulting from life insurance contract liabilities. This includes estimated future claims offset by expected future premiums and reinsurance recoveries. All values are discounted to the valuation date.

			Total	Less than one	One to two years	Two to three	Three to fve	Over fve years
				year		years	years
			$000	$000	$000	$000	$000	$000
30	September	2009	168,032	13,640	14,029	11,919	20,413	108,031
30	September	2008	189,252	16,701	16,896	15,924	25,891	113,840

28. GENERAL AND HEALTH INSURANCE BUSINESS

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
(A) ANALYSIS OF GENERAL AND HEALTH INSURANCE OPERATING
RESULT
Premium revenue 346,320 332,348 - -
Outwards reinsurance expense (19,497) (16,837) - -
Net premium income 326,823 315,511 - -
Claims expense 229,746 201,848 - -
Reinsurance recoveries (25,979) (3,295) - -
Net claims incurred 203,767 198,553 - -
Acquisition costs 39,801 42,141 - -
Other underwriting expenses 60,257 64,132 - -
Movement in actuarial reserves 2,237 1,213 - -
Underwriting result 20,761 9,472 - -
Investment income 20,117 21,439 - -
Operating profit before taxation 40,878 30,911 - -
Analysis of general and health underwriting result
Profit from general and health insurance 40,878 30,911 - -
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58 TOWER Annual Report 2009

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2009 2008
Risks borne Risks borne Risks borne Risks borne
in current in prior in current in prior
year years Total year years Total
$000 $000 $000 $000 $000 $000
(B) NET CLAIMS INCURRED
Gross claims expense
Direct claims - undiscounted 219,349 8,433 227,782 188,014 11,382 199,396
Movement in discount 45 1,919 1,964 (77) 2,529 2,452
Gross claims expense 219,394 10,352 229,746 187,937 13,911 201,848
Reinsurance and other recoveries
Reinsurance and other recoveries revenue -
undiscounted (23,349) (2,863) (26,212) (844) (2,421) (3,265)
Movement in discount 26 207 233 3 (33) (30)
Reinsurance recoveries (23,323) (2,656) (25,979) (841) (2,454) (3,295)
Net claims incurred 196,071 7,696 203,767 187,096 11,457 198,553
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Current year amounts relates to risks borne in the current financial year. Prior period amounts relate to a reassessment of the risks borne in all previous financial years.

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
Central estimate of expected present value of future 80,971 88,783 - -
payments for claims incurred
Risk margin 5,335 4,822 - -
Claims handling costs 4,792 4,660 - -
91,098 98,265 - -
Discount (17,081) (17,616) - -
Outstanding claims liability 74,017 80,649 - -
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(C) OUTSTANDING CLAIMS

Assumptions adopted in calculation of general and health insurance provisions

Estimates of the outstanding claims as at 30 September 2009 have been carried out by the following Actuaries:

� General Insurance - P. Davies, B.Bus.Sc, FNZSA, FIA, AIA, AIAA; and

� Health Insurance - H Raubal, BEc, FIAA, FNZSA

The actuarial assessments are in accordance with the standards of the Society of Actuaries of New Zealand. The Actuaries were satisfied as to the nature, sufficiency and accuracy of the data used to determine the outstanding claims.

The following assumptions have been made in determining net outstanding claims liabilities:

tstanding claims. et outstanding claims liabilities:
2009	2008
1.5% to 8%	1.5% to 8%
4% to 9%	4% to 7%
1.4% to 13%	1.4% to 13%
5% to 50%	5% to 20%
anding claims based on historical trends is: within 1 year	within 1 year
1.1 to 2.5 years	1.6 to 2.9 years
6.9 to 7.9 years	6.6 to 6.8 years
in excess of 10	in excess of 10
years	years

The weighted average expected term to settlement of outstanding claims based on historical trends is:

TOWER Annual Report 2009 59

Notes to the Financial Statements

For the year ended 30 September 2009

28. GENERAL AND HEALTH INSURANCE BUSINESS (CONTINUED)

(C) OUTSTANDING CLAIMS (CONTINUED)

Inflation rate

Insurance costs are subject to inflationary pressures. Inflation assumptions for all general insurance classes of business are based on current economic indicators.

For motor, property and health classes, for example, claim costs are related to the inflationary pressures of the materials and goods insured as well as labour costs to effect repairs. These costs are expected to increase at a level between appropriate Consumer Price Index (CPI) indices and wage inflation.

Discount rate

General insurance outstanding claims liabilities are discounted at a rate equivalent to that inherent in a portfolio of riskless fixed interest securities with coupon and redemption cash flows exactly matching the projected inflation claim cash flows.

General insurance outstanding claims liabilities are discounted to present value using a risk free rate based on the government bond rate in New Zealand.

Claims handling expense

The estimate of outstanding claims liabilities incorporates an allowance for the future cost of administrating the claims. This allowance is determined after analysing historical claim related expenses incurred by the classes of business.

Risk margin

The overall risk margin is determined allowing for diversification between classes of business and the relative uncertainty of the outstanding claims estimate for each class.

The assumptions regarding uncertainty for each class were applied to the net central estimates and the results were aggregated allowing for diversification in order to arrive at an overall provision which is intended to have a 75% probability of sufficiency.

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2009 2008
Gross Reinsurance Net Gross Reinsurance Net
$000 $000 $000 $000 $000 $000
Reconciliation of movements in discounted
outstanding claims liability
Balance brought forward 87,273 (6,624) 80,649 78,511 (5,695) 72,816
Effect of change in foreign exchange rates (637) (1,935) (2,572) 1,874 671 2,545
Effect of changes in assumptions 676 77 753 132 (142) (10)
Incurred claims recognised in the income statement 223,750 (25,979) 197,771 197,784 (3,294) 194,490
Claim (payment) / recoveries during the year (205,317) 2,733 (202,584) (191,028) 1,836 (189,192)
Balance carried forward 105,745 (31,728) 74,017 87,273 (6,624) 80,649
Reconciliation of undiscounted claims to liability for
outstanding claims
Outstanding claims undiscounted 41,056 (3,556) 37,500 50,469 (1,845) 48,624
Discount (16,157) 738 (15,419) (18,122) 505 (17,617)
Outstanding claims 24,899 (2,818) 22,081 32,347 (1,340) 31,007
Short tail outstanding claims 51,936 49,642
Total outstanding claims as per balance sheet 74,017 80,649
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Sensitivity analysis

The impact of change in key variables on the outstanding claims liability is set out below. Each change has been calculated in isolation to other changes.

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2009 2008
IMPACT IMPACT
Variable MOVEMENT $000 $000
Claim settlement period + 0.5 years (271) (282)
- 0.5 years 271 282
Claims expenses ratio increase of 1% 277 93
decrease of 1% (277) (93)
Inflation rates increase of 1% 978 937
decrease of 1% (755) (812)
Discount rates increase of 1% (801) (765)
decrease of 1% 935 892
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60 TOWER Annual Report 2009

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(D) RISK MANAGEMENT POLICIES AND PROCEDURES

The financial condition and operations of the general insurance business are affected by a number of key risks including insurance risk, interest rate risk, currency risk, market risk, financial risk, compliance risk, fiscal risk and operational risk. Notes on the policies and procedures employed in managing these risks in the general insurance business are set out below.

(i) Objectives in managing risks arising from insurance contracts and policies for mitigating those risks

The risk management activities include prudent underwriting, pricing, and management of risk, together with claims management, reserving and investment management. The objective of these disciplines is to enhance the financial performance of the insurance operations.

The key policies in place to mitigate risk arising from writing general insurance contracts include:

comprehensive management information systems and actuarial models using historical information to calculate premiums and monitor claims;
monitoring natural disasters such as earthquakes, floods, storms and other catastrophes using models; and
the use of reinsurance to limit the Group’s exposure.

(ii) Terms and conditions of insurance contracts that have a material effect on amount timing and uncertainty of cash flows

The terms and conditions attaching to insurance contracts affect the level of insurance risk accepted by the Group. Certain policies within the health insurance business have premium payback clauses that allow for the return of premiums after claim payments. These liabilities are matched with suitable assets.

(iii) Concentration of insurance risk

RISK	SOURCE OF CONCENTRATION	RISK MANAGEMENT MEASURES
An accumulation of risks arising from a natural	Insured property concentrations	Accumulation risk modeling, reinsurance
peril		protection
A large property loss	Fire or collapse affecting one building or a	Maximum acceptance limits, property risk
	group of adjacent buildings	grading, reinsurance protection
Inclusion of multiple classes of casualty business	Response by a multitude of the Group's policies	Purchase of reinsurance clash protection
in the one event	to the one event, for example a construction
	liability and professional indemnity policy

(iv) Development of claims

The following table shows the development of net undiscounted outstanding claims relative to the current estimate of ultimate claims costs for the five most recent years.

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INCIDENT YEAR
Prior 2005 2006 2007 2008 2009 Total
Ultimate claims cost estimate $000 $000 $000 $000 $000 $000 $000
At end of accident year - 166,672 179,089 186,567 196,169 198,692
One year later - 165,217 176,203 185,026 195,309 -
Two years later - 164,751 175,426 183,498 - -
Three years later - 164,431 175,350 - - -
Four years later - 164,177 - - - -
Current estimate of ultimate claims cost - 164,177 175,350 183,498 195,309 198,692
Cumulative payments - (56,713) (56,641) (54,547) (46,862) (15,529)
Undiscounted central estimate 26,791 157 1,005 1,561 5,789 45,668 80,971
Discount to present value (15,408) 7 (18) (17) 23 (6) (15,419)
Discounted central estimate 11,383 164 987 1,544 5,812 45,662 65,552
Claims handling expense 3,982
Risk margin 4,483
Net outstanding claims liabilities 74,017
Reinsurance recoveries on outstanding claims
31,728
liabilities and other recoveries
Gross outstanding claims liabilities 105,745
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The 2007 year development of claims figures for the health insurance operations have been revised to incorporate the effect of excess policies on the ultimate claim cost estimates.

(E) LIABILITY ADEqUACY TEST

The liability adequacy test has identified a surplus for each portfolio of contracts that are subject to broadly similar risks and are managed together as a single portfolio.

The risk margin adopted in performing the liability adequacy test is 75%. The outstanding claims liability is set 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.

(F) INSURER FINANCIAL STRENGTH RATING

TOWER Insurance Limited has an insurer financial strength rating of ‘A-‘ (Excellent) issued by AM Best Company Limited. TOWER Medical Insurance Limited is not required to obtain a credit rating.

TOWER Annual Report 2009

Notes to the Financial Statements

For the year ended 30 September 2009

28. GENERAL AND HEALTH INSURANCE BUSINESS (CONTINUED)

(G) REINSURANCE PROGRAMME

Reinsurance programmes are structured to adequately protect the general insurance companies’ solvency and capital positions. The adequacy of reinsurance cover is based on assessing TOWER’s exposure in the worst possible scenario. The worst possible scenario for TOWER is a major Wellington earthquake. Each year, as part of setting the coming year’s reinsurance premium, comprehensive modelling of the event probability and amount of the Group’s exposure is undertaken.

(H) NON-CURRENT HEALTH INSURANCE CONTRACT LIABILITY

A number of the Group’s health insurance policies have a benefit whereby policyholders receive the sum of premiums paid less claims received over the life of their policy, ‘premium payback’, if certain conditions are met. This liability represents a long term health insurance contract liability which is determined at each reporting period using a number of assumptions in respect of the expected life of the contracts and payout rates. The table below includes the reconciliation of the liability as at the reporting date.

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
Balance at 1 October 52,356 45,431 - -
New funding 6,868 6,619 - -
Benefits paid (9,251) (6,004) - -
Other 4,563 6,310 - -
Balance at 30 September 54,536 52,356 - -
29. FINANCIAL INSTRUMENTS CATEGORIES
The analysis of financial assets and liabilities into their categories and classes is set out in the following tables.
Loans and Fair value through profit or loss
Total
receivables Designated Held for trading
GROUP $000 $000 $000 $000
As at 30 September 2009
Financial assets
Cash and cash equivalents 146,381 146,381 - -
Reinsurance recoveries receivable 38,872 38,872 - -
Outstanding premiums and trade receivables 90,476 90,476 - -
Unsettled investments sale 346 346 - -
Other receivables 596 596 - -
Derivative financial assets 53,410 - - 53,410
Investment in listed equity securities 209,511 - 209,511 -
Investment in fixed interest securities 787,471 - 787,471 -
Investment in property securities 79,613 - 79,613 -
Total financial assets 1,406,676 276,671 1,076,595 53,410
As at 30 September 2008
Financial assets
Cash and cash equivalents 58,292 58,292 - -
Reinsurance recoveries receivable 17,070 17,070 - -
Outstanding premiums and trade receivables 95,602 95,602 - -
Unsettled investments sale 847 847 - -
Other financial assets 3,508 3,508 - -
Derivative financial assets 42,044 - - 42,044
Investment in listed equity securities 229,392 - 229,392 -
Investment in fixed interest securities 779,498 - 779,498 -
Investment in property securities 90,137 - 90,137 -
Total financial assets 1,316,390 175,319 1,099,027 42,044
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TOWER Annual Report 2009



	Total GROUP $000
	As at 30 September 2009 Financial liabilities Trade payables 33,101 Reinsurance payables 10,188 Unsettled investment purchases 248 Other payables 11,490 Interest bearing liabilities 80,002 Derivative fnancial liabilities 21,305 Life investment contract liabilities 32,650 FuturePlan debenture 22,745
	Total fnancial liabilities 211,729
	As at 30 September 2008 Financial liabilities Trade payables 36,307 Reinsurance payables 6,458 Unsettled investment purchases 306 Other payables 20,027 Interest bearing liabilities 87,559 Derivative fnancial liabilities 6,927 Life investment contract liabilities 35,084 FuturePlan debenture 21,457
	Total fnancial liabilities 214,125

TOWER Annual Report 2009 63

Notes to the Financial Statements

For the year ended 30 September 2009

29. FINANCIAL INSTRUMENTS CATEGORIES (CONTINUED)

	Total	Loans and receivables
COMPANY	$000	$000
As at 30 September 2009
Financial assets
Cash and cash equivalents	84,392	84,392
Other receivables	45	45
Related party receivable	248,818	248,818
Total fnancial assets	333,255	333,255
As at 30 September 2008
Financial assets
Cash and cash equivalents	2,651	2,651
Other receivables	25	25
Related party receivable	260,639	260,639
Total fnancial assets	263,315	263,315
		Financial
		liabilities at
	Total	amortised cost
COMPANY	$000	$000
As at 30 September 2009
Financial liabilities
Other payables	1,712	1,712
Related party payables	419,961	419,961
Total fnancial liabilities	421,673	421,673
As at 30 September 2008
Financial liabilities
Other payables	1,646	1,646
Related party payables	581,505	581,505
Total fnancial liabilities	583,151	583,151

64 TOWER Annual Report 2009

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30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION

The financial condition and operating results of the Group are affected by a number of key financial and non-financial risks. Financial risks include market risk, credit risk and financing and liquidity risk. The nonfinancial risks include insurance risk, compliance risk and operational risk. The Group’s objectives and policies in respect of non-financial risks are disclosed in the Notes 27 and 28, while the managing of financial risk is set out in the remainder of this section.

TOWER’s objective is to satisfactorily manage these risks in line with the Group’s risk management policy which is approved by the Board. Various procedures are put in place to control and mitigate the risks faced by the Group depending on the nature of the risk. The consolidated entity’s exposure to all risks is monitored by the Group Risk and Compliance Manager and this exposure is reported quarterly to the Group Audit and Compliance Committee.

The Board has delegated to the Group Audit and Compliance Committee the responsibility to review the effectiveness and efficiency of management processes, group risk management and internal financial controls and systems as part of their duties.

Financial risks are generally monitored and controlled by selecting appropriate assets to back policy liabilities. The assets are regularly monitored to ensure that there are no material asset and liability mismatching issues and other risks such as liquidity risk and credit risk are maintained within acceptable limits. For those life insurance and life investment contracts where the benefits paid are directly impacted by the value of the underlying assets, the Group is exposed to the risk of future decreased asset management fees as a result of a decline in assets under management.

The Board has delegated to the Group Investment Committee the responsibility for:

Compliance risk and operational risk are both monitored by internal committees and report regularly to the Board.

(A) MARKET RISK

Market risk is the risk of change in the fair value of financial instruments from fluctuations in the foreign exchange rates (currency risk), market interest rates (interest rate risk) and market prices (price risk), whether such change in price is caused by factors specific to an individual financial instrument or its issuer or factors affecting all financial instruments traded in a market.

The Group Investment Committee determines the levels of market risk it accepts by reviewing:

(i) Currency risk

Currency risk is the risk of loss resulting from changes in exchange rates when applied to assets and liabilities or future transactions denominated in a currency that is not the Group’s functional currency.

TOWER’s principal transactions are carried out in New Zealand Dollars and its exposure to foreign exchange risk arises primarily with respect to the Pacific Island General Insurance business, which does not form a significant part of the Group’s operations.

TOWER generally elects to not hedge the capital invested in overseas entities, thereby accepting the foreign currency translation risk on invested capital.

The Group Investment Committee sets limits for the management of currency risk arising from its investments based on prudent international asset management practice. Regular reviews are conducted to ensure that these limits are adhered to. In accordance with this policy, TOWER does not hedge the currency risk arising from translation of the financial statements of foreign operations.

a financial instrument will fluctuate because of changes in interest rates.

The Board is responsible for the management of the interest rate risk arising from external borrowings. As at 30 September 2009 there were no interest rate swaps in place in relation to external borrowings (2008: Nil). The Group manages interest rate risk arising from its interest bearing investments in accordance with Group Investment Committee approved policies.

General insurance

Interest rate risk arises in general insurance to the extent that there is a mismatch between the fixed interest portfolios used to back the outstanding claims liabilities and those outstanding claims. The interest rate risk is managed by matching the duration profiles of the investment assets and the outstanding claim liabilities.

Life insurance

Interest rate risk and other market risks arise in life insurance to the extent that there is a mismatch between the policyholder liabilities and the assets backing those liabilities. These mismatches could impact current period operating profits.

The primary areas of mismatch for the Group’s life insurance business are:

Interest rate and other market risks are managed by the Group through a strategic asset allocation policy and an investment management policy that has regard to policyholder expectations and risks and to target surplus for both capital adequacy and solvency as advised by the Chief Actuary.

(iii) Price risk

Price risk is the risk of loss resulting from the decline in prices of equity securities or other assets. The Group is exposed to the price risk because of its investments in publicly traded equity securities and other unit trusts.

The price risk is managed by diversification of the investment portfolio, which is done in accordance with the limits set by the investment mandates and monitored by the Group Investment Committee.

(B) CREDIT RISK

Credit risk is the risk of loss that arises from a counterparty failing to meet their contractual commitment in full and on time, or from losses arising from the change in value of a trading financial instrument as a result in changes in credit risk of that instrument.

The Group’s exposure to credit risk is limited to deposits and investments held with banks and other financial institutions as well as credit exposure to trade customers or other counterparties. For banks and financial institutions the minimum credit rating accepted by the Group is ‘A’. Independent ratings are used for customers that are rated by rating agencies. For customers with no external ratings, internally developed minimum credit quality requirements are applied, which takes into accounts customers’ financial position, past experience and other relevant factors. The overall exposure to credit risk is monitored on group basis in accordance with the limits set by the Board.

30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION (CONTINUED)

(i) Credit risk concentration

Concentration of credit risk exists when the Group enters into contracts or financial instruments with a number of counterparties that are engaged in similar business activities or exposed to similar economic factors that might affect their ability to meet contractual obligations. TOWER manages concentration of credit risk by credit rating, industry type and individual counterparty.

The significant concentrations of credit risk are outlined by industry type below.

The Group enters into forward foreign exchange contracts in accordance with its investment policies as economic hedges of foreign currency exposure in investments in international equities through its holdings in international equities funds. The main foreign currencies exposure of the funds is to the Australian and US dollars, Japanese Yen, Euro and British Pounds. The notional amounts and contractual cash flows of these derivatives are included in (E) below.

The impact of reasonably possible changes in the currency risk on the Group shareholders’ profit and equity is included in (F) below.

(ii) Interest rate risk

Interest rate risk is the risk that the value or future value cash flows of

TOWER Annual Report 2009 65

Notes to the Financial Statements

For the year ended 30 September 2009

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CARRYING VALUE
2009 2008
$000 $000
New Zealand government 39,316 30,484
Other government agencies 39,391 10,696
Banks 749,733 655,539
Other non-investment related receivable 133,808 108,140
Other industries 95,496 233,677
Total financial assets with credit exposure 1,057,744 1,038,536
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(ii) Maximum exposure to credit risk The Group’s maximum exposure to credit risk without taking account of any collateral or any other credit enhancements is the carrying amount of financial assets held by the Group at the reporting date, which is as follows:

Cash and cash equivalents 146,381 Loans and receivables 130,289 Financial assets at fair value through proft or loss 727,664 Derivative fnancial assets 53,410	58,292 117,027 821,173 42,044
Total credit risk 1,057,744	1,038,536

(iii) Credit quality of financial assets that are neither past due nor impaired

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if applicable) or to historical information about counterparty default rates:

Credit exposure by credit rating

AAA AA A BBB Below BBB	36,943 37,807 541,705 727,920 303,406 102,230 2,739 4,737 5,710 8,995
Total counterparties with external credit rating by Standard and Poor's	890,503 881,689
Group 1 Group 2 Group 3	112,493 94,934 - 6,032 10,503 11,956
Total counterparties with no external credit rating	122,996 112,922
Total fnancial assets neither past due nor impaired with credit exposure	1,013,499 994,611

Group 1 - trade debtors outstanding for less than 6 months

Group 2 - trade debtors outstanding for more than 6 months with no defaults in the past

Group 3 - unrated investments

TOWER invests in a number of Pacific region investment markets through its Pacific Islands operations to comply with the local statutory requirements and in accordance with TOWER investment policies. These investments relate to the general insurance business of the Group and generally have low credit ratings representing the majority of the value included in the ‘Below BBB’ category above.

66 TOWER Annual Report 2009

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(iv) Financial assets that would otherwise be past due whose terms have been renegotiated

None of the financial assets that are fully performing has been renegotiated in the past year.

(v) Financial assets that are past due but not impaired

The Group considers that financial assets are past due if payments have not been received when contractually due. At the reporting date, the total of carrying value of past due but not impaired assets held by the Group is as follows:

		Past	due but not impaired	due but not impaired
	Less than
	31 days	31 to 60 days	61 to 90 days	Over	90 days	Total
	$000	$000	$000		$000	$000
As at 30 September 2009
Reinsurance recoveries receivable	3,486	375	1,435		3,388	8,684
Outstanding premiums and trade receivables	3,493	2,102	924		2,837	9,356
Other fnancial assets	-	-	-		26,206	26,206
Total	6,979	2,477	2,359		32,431	44,246
As at 30 September 2008
Reinsurance recoveries receivable	1,984	926	-		2,874	5,784
Outstanding premiums and trade receivables	7,644	2,537	1,841		3,895	15,917
Other fnancial assets	-	223	64		24,754	25,041
Total	9,628	3,686	1,905		31,523	46,742

The parent company does not have past due financial assets as at 30 September 2009 (2008: Nil).

(vi) Financial assets that are individually impaired

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CARRYING VALUE
2009 2008
$000 $000
Outstanding premiums and trade receivables 148 11
Other receivables 215 91
Total 363 102
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Outstanding premiums are covered by the underlying assets invested. When outstanding premiums reach a predetermined percentage of the value of the assets invested, the assets are realised and offset against the outstanding debt. Assets invested relate to investments in fixed interest, equities and unit linked funds.

(C) FINANCING AND LIqUIDITY RISK

Financing and liquidity risk is the risk that the Group will not be able to meet its cash outflows or refinance debt obligations, as they fall due, because of lack of liquid assets or access to funding on acceptable terms.

To mitigate financing and liquidity risk the Group treasury function maintains sufficient liquid assets to ensure that the Group can meet its debt obligations and other cash outflows on a timely basis.

(i) Financial liabilities by contractual maturity

The table below summarises the Group’s financial liabilities into relevant maturity groups based on the remaining period at the balance date to the contractual maturity date. All amounts disclosed are contractual undiscounted cash flows that include interest payments and exclude the impact of netting agreements.

TOWER Annual Report 2009 67

Notes to the Financial Statements

For the year ended 30 September 2009

30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION (CONTINUED)

		Total	Less	One	Two	Three	Over
	Carrying value	contractual cash fows	than one year	to two years	to three years	to fve years	fve years	No maturity
GROUP	$000	$000	$000	$000	$000	$000	$000	$000
As at 30 September 2009
Financial liabilities
Trade payables	33,101	33,101	33,101	-	-	-	-	-
Reinsurance payables	10,188	10,188	10,188	-	-	-	-	-
Unsettled investment purchases	248	248	248	-	-	-	-	-
Other payables	11,490	11,490	11,490	-	-	-	-	-
Derivative fnancial liabilities(1)	20,634	38,213	(3,613)	628	2,533	6,701	31,964	-
Interest bearing liabilities	80,002	113,309	6,950	6,950	6,950	92,459	-	-
Life investment contract liabilities	32,650	32,650	-	-	-	-	-	32,650
FuturePlan debenture	22,745	22,745	22,745	-	-	-	-	-
Total fnancial liabilities	211,058	261,944	81,109	7,578	9,483	99,160	31,964	32,650
As at 30 September 2008
Financial liabilities
Trade payables	36,307	36,307	36,307	-	-	-	-	-
Reinsurance payables	6,458	6,458	6,458	-	-	-	-	-
Unsettled investment purchases	306	306	306	-	-	-	-	-
Other payables	20,027	20,027	20,027	-	-	-	-	-
Derivative fnancial liabilities(1)	5,872	5,872	5,872	-	-	-	-	-
Interest bearing liabilities	87,559	96,229	7,703	88,526	-	-	-	-
Life investment contract liabilities	35,084	35,084	-	-	-	-	-	35,084
FuturePlan debenture	21,457	21,457	21,457	-	-	-	-	-
Total fnancial liabilities	213,070	221,740	98,130	88,526	-	-	-	35,084
(1)Derivative fnancial liabilities exclude	the employee	share option	derivative of $0.671m (2008: $1.055m)
						Total
					contractual		Less than
				Carrying value	cash	fows	one year	No maturity
COMPANY				$000		$000	$000	$000
As at 30 September 2009
Financial liabilities
Related party payables				419,961	419,961		-	419,961
Other payables				1,712		1,712	1,712	-
Total fnancial liabilities				421,673	421,673		1,712	419,961
As at 30 September 2008
Financial liabilities
Related party payables				581,505	581,505		-	581,505
Other payables				1,646		1,646	1,646	-
Total fnancial liabilities				583,151	583,151		1,646	581,505

68 TOWER Annual Report 2009

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(D) FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair value of financial instruments traded in active markets is based on quoted market prices at balance date. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. Valuation techniques used to value life investments contract liabilities and general and health insurance liabilities are described in Notes 27 and 28, respectively. Refer below for details of valuation methods used for each remaining category of financial assets and liabilities. The carrying amounts of all financial assets and liabilities reasonably approximate their fair values with the exception of senior unsecured bonds.

The following methods and assumptions were used by TOWER in estimating the fair values of financial instruments.

(i) Cash and cash equivalents

The carrying amount of cash and cash equivalents reasonably approximates its fair values.

(ii) Financial assets at fair value through profit or loss and held for trading

The fair value of financial assets at fair value through profit or loss is determined by reference to their quoted price at the reporting date. The fair value of property investments is determined by reference to external valuations.

(iii) Loans and receivables, trade and other payables

Carrying values of loans and receivables, adjusted for impairment values, and carrying values of trade and other payables reasonably approximate their fair values.

(v) Interest bearing liabilities

The carrying value of the unsecured bank loan and bank overdraft reasonably approximate their fair values that have been estimated applying a discounted cash flow approach to future principal and interest payments using the market rate of interest at the latest repricing date. The fair value of senior unsecured bonds is determined by reference to the quoted market price of the underlying debt securities.

(E) DERIVATIVE FINANCIAL INSTRUMENTS

The Group utilises derivative financial instruments to reduce investment risk. Specifically, derivatives are used to achieve cost effective short-term re-weightings of asset class, sector and security exposures and to hedge portfolios, as an economic hedge, when a market is subject to significant short-term risk.

Derivative financial instruments used by the Group include interest rate swaps and foreign exchange forward contracts. The Group also has a derivative liability of $0.671m related to the employee share option scheme (2008: $1.055m).

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The fair value of interest rate swaps are calculated by discounting estimated future cash flows based on the terms and maturity of each contract using market interest rates. The average interest rate is based on the outstanding balances at the start of the financial year.

The table below details the notional principal amounts (amounts used to calculate payments made on swap contracts), fair values and remaining terms of interest rate swap contracts outstanding as at reporting date:

(iv) Derivative financial liabilities

The fair value of derivative financial liabilities is determined by the reference to the quoted market price of the underlying equity securities.

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Average contracted fixed interest Notional principal amount Fair value
RECEIVED FIxED PAY FLOATING 2009 2008 2009 2008 2009 2008
RATE CONTRACTS % % $000 $000 $000 $000
Less than 1 year 8% - 4,000 - 106 -
1 to 2 years - 8% - 4,000 - 75
2 to 5 years 7% 7% 9,400 1,500 952 14
over 5 years 7% 8% 568,750 486,650 27,071 41,586
582,150 492,150 28,129 41,675
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The foreign exchange forward contracts are settled on a gross basis. All contracts mature within 12 months of the reporting date and their carrying values reasonably approximate undiscounted cash flows because the impact of discounting is not significant.

	Total contractual	Less than one
	cash fows	year
GROUP	$000	$000
As at 30 September 2009
Forward foreign exchange contracts
Outfow	65,371	65,371
Infow	70,017	70,017
As at 30 September 2008
Forward foreign exchange contracts
Outfow	87,308	87,308
Infow	81,806	81,806

TOWER Annual Report 2009 69

Notes to the Financial Statements

For the year ended 30 September 2009

30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION (CONTINUED)

(F) SENSITIVITY ANALYSIS

The analysis below demonstrates the impact of changes in interest rates, exchange rates and equity prices on the Group’s shareholder profit after tax and equity. The analysis is based on changes in economic conditions that are considered reasonably possible at the reporting date. The potential impact is assumed as at the reporting date.

(i) Interest rate

The impact of a 50 basis point change in New Zealand and international interest rates as at the reporting date on the Group’s profit after tax is included in the table below. In the previous year the impact of 100 basis point change was assumed. The sensitivity analysis assumes changes in interest rates only. All other variables are held constant.

only. All other variables are held constant.
	2009 2008 IMPACT ON IMPACT ON proft after tax equity proft after tax	equity
	$000 $000 $000	$000
Change in variables
+50 basis points (2008: +100 basis points)	(3,026) (3,026) (5,003)	(5,003)
-50 basis points (2008: -100 basis points)	3,086 3,086 5,033	5,033

This analysis assumes that the sensitivity applies to the closing market yields of fixed interest investments. A parallel shift in the yield curve is assumed. The risks assumed and methods used for deriving sensitivity information and significant variables have been applied consistently over the reporting period included in the analysis.

The impact of changes in market interest rates presented here excludes insurance contract liabilities, which are also affected by the changes in market interest rates that determine the discount rates applicable to these contracts. The table below provides a sensitivity analysis in respect of changes in interest rates as applied to insurance contract liabilities. A combined effect is necessary to appreciate the sensitivity of the Group’s profit to movements in interest rates.

in interest rates.
Change in variables
+50 basis points (2008: +100 basis points)	(1,383) (1,383)	1,347	1,347
-50 basis points (2008: -100 basis points)	1,275 1,275	(1,494)	(1,494)

Sensitivity to interest rates has been assessed by reference to internal investigations of the movement in insurance contract liabilities to movements in discount rates consistent with that used for internal management reporting.

(ii) Foreign currency

The table below demonstrates the impact of a 10% movement of currency rates against the New Zealand dollar on the Group’s shareholder profit after tax and equity. The analysis assumes changes in foreign currency rates only, with all other variables held constant. The potential impact on the profit and equity of the Group is due to the changes in fair value of currency sensitive monetary assets and liabilities as at the reporting date.

Change in variables
10% appreciation of New Zealand dollar	(179) (179)	(65)	(65)
10% depreciation of New Zealand dollar	179 179	65	65

The dollar impact of the change in currency movements is determined by applying the sensitivity to the value of the unhedged international assets.

The risks assumed and methods used for deriving sensitivity information and significant variables have been applied consistently over the reporting period included in the analysis.

(iii) Equity price

Equity price risk is the risk that the fair value of equities will decrease as a result of changes in levels of equity indices and the value of individual stocks. The Group holds all of its equities at fair value through profit or loss.

The table below demonstrates the impact of a 10% movement in New Zealand equities on the profit after tax and equity of the Group. The potential impact is assumed as at the reporting date. The analysis below excludes investment linked business, which is disclosed in Note 40. Investment linked business can be excluded because any asset movement will flow through to the policyholder.

Change in variables
+10% in New Zealand equities	177 177	86	86
-10% in New Zealand equities	(177) (177)	(86)	(86)

The dollar impact of the change in the New Zealand equities is determined by applying the sensitivity to the value of the New Zealand equities.

The risks assumed and methods used for deriving sensitivity information and significant variables have been applied consistently over the two reporting periods included in the analysis.

70 TOWER Annual Report 2009

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(iv) Other price

Other price sensitivity includes sensitivity to unit price fluctuations. The unit price risk is the risk that the fair value of investments in property fund units and international equities held in unit trust will decrease as a result of changes in the value of these units. The Group holds all of its investments in property securities, international equities and other unit trusts at fair value through profit or loss.

The table below demonstrates the impact of a 10% movement in the value of property funds, international equities and other unit trusts on the profit after tax and equity of the Group. The potential impact is assumed as at the reporting date.

	2009 2008 IMPACT ON IMPACT ON proft after tax equity proft after tax	equity
	$000 $000 $000	$000
Change in variables
+10% property funds and other unit trusts	2,302 2,302 1,709	1,709
-10% property funds and other unit trusts	(2,302) (2,302) (1,709)	(1,709)
+10% in International equities	4,552 4,552 4,123	4,123
-10% in International equities	(4,552) (4,552) (4,123)	(4,123)

International equity assets are held via a unit trust which invests in a number of different countries. The sensitivity for each individual country is small so a breakdown by country has not been provided.

The risks assumed and methods used for deriving sensitivity information and significant variables have been applied consistently over the two reporting periods included in the analysis.

31. CAPITAL RISK MANAGEMENT

The Group’s objective when managing capital is to ensure that the Group’s level of capital is sufficient to enable it to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders of the Group.

The Group’s capital resources include ordinary equity and interest bearing liabilities.

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Group
2009 2008
$000 $000
Interest bearing liabilities (Note 19) 80,002 87,599
TOWER shareholder equity 401,757 291,200
Total capital resources 481,759 378,799
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The life and health insurance businesses of the Group measure the adequacy of their capital against published capital standards. The life insurance companies apply the ‘New Zealand Society of Actuaries Professional Standard No.5 Solvency Reserving for Life Insurance Business for this purpose, whilst TOWER Medical Insurance Limited applies the Solvency Standard issued by the Health Funds Association of New Zealand. There is no prescribed capital standard for general insurers in New Zealand. TOWER Insurance measures its capital against internally set targets.

Each insurance subsidiary within the Group is required to hold assets in excess of the levels specified by the various standards so as to ensure that they continue to meet the minimum requirements under a reasonable range of adverse scenarios. The Group’s capital management strategy forms part of the Group’s broader strategic planning process overseen by the Group Audit and Compliance Committee. Refer Notes 27 and 28 for details of statutory capital management of the Group.

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
32. OPERATING LEASES
As lessee
Rent paid under non-cancellable operating leases during the year 3,838 4,012 - -
Rent payable under non-cancellable operating leases to the end of the lease
terms are:
� Not later than one year 4,365 5,027 - -
� Later than one year and not later than five years 12,981 17,977 - -
� Later than five years 465 967 - -
17,811 23,971 - -
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Operating lease payments represent the future rentals payable for office space under current leases. Leases are for an average of four years with rental rates reviewed every three to six years.

TOWER Annual Report 2009

Notes to the Financial Statements

For the year ended 30 September 2009

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
33. CASH AND CASH EqUIVALENTS
Cash at bank and in hand 15,258 22,028 3,072 2,651
Deposits at call 131,123 36,264 81,320 -
Total cash and cash equivalents 146,381 58,292 84,392 2,651
The effective interest rate for deposits at call is 3.12% (2008: 7.92%) and the balances primarily mature within three months of balance date.
(A) RECONCILIATION TO CASH AT THE END OF THE YEAR
The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows:
Balances as above 146,381 58,292 84,392 2,651
Bank overdraft (note 19) - (304) - -
Balances per statements of cash flow 146,381 57,988 84,392 2,651
(B) RECONCILIATION OF PROFIT FOR THE PERIOD TO NET CASH FLOWS FROM OPERATING ACTIVITIES
Profit after tax 50,085 40,468 168,645 1,255
Add/(less) non cash items
Depreciation 2,916 2,212 - -
Amortisation of intangibles 2,599 1,721 - -
Change in life insurance and life investment contract liabilities (24,870) (22,711) - -
Net loss on financial assets at fair value through profit or loss 9,449 65,002 - -
Share based payments expense 1,132 170 - -
Decrease/(increase) in deferred tax 3,392 (19,806) (153) (667)
Loss on disposal of property, plant and equipment 385 - - -
Intercompany income - - (168,435) (406)
45,088 67,056 57 182
(Less)/add movements in working capital (excluding the effects of exchange differences on consolidation)
(Increase)/decrease in receivables (20,021) 8,176 (21) (25)
(Decrease)/increase in payables (532) (475) 66 (188)
Decrease in taxation 1,353 2,542 - -
(19,200) 10,243 45 (213)
(Less)/add other items classified as investing / financing activities
(Decrease)/increase in interest accrued (513) 131 - -
Net cash inflows/(outflows) from operating activities 25,375 77,430 102 (31)
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34. CONTINGENT LIABILITIES

In February 2004, the Inland Revenue Department (IRD) refunded TOWER $30.000m in respect of overpaid tax. The IRD believed that it ought not to have paid this refund and the matter was referred to the IRD Adjudications Unit which, on 25 February 2009, ruled that the refund should not have been issued. Legal proceedings were commenced, however the matter has now been resolved satisfactorily and on 16 November 2009, a Notice of Discontinuance was filed confirming that the parties will not be pursuing this dispute. The resolution of this matter has no impact on TOWER Limited’s financial statements.

35. CAPITAL COMMITMENTS

There were no capital commitments as at 30 September 2009 (2008: Nil).

72 TOWER Annual Report 2009

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36. SHARE BASED PAYMENTS

The Company has eight executive share option schemes. Each is equity settled and has differing conditions which are set out in the tables below. The exercise prices are set at the average of the share price for the 5 days before grant date. Subject to the discretion of the Board, options are forfeited if an employee leaves the Group before the options vest.

Vesting requirements of each tranche include service and performance conditions. The performance condition is based on a market condition such as total shareholder return achieved at the end of each reporting period. Tranche E is also subject to a non-market based performance hurdle. The holders of the options are not entitled to dividend or have other shareholder benefits, including voting rights.

The grant date fair value for options was estimated by using a binomial pricing model. The main inputs to the model were as follows:

TERMS OF SHARE SCHEMES	TRANCHE A	TRANCHE B	TRANCHE C	TRANCHE D
Exercise price after rights issue	$1.31	$2.04	$2.04	$2.46
Grant date	31-Mar-04	9-Aug-05	9-Aug-05	4-Apr-06
Vesting date	1-Apr-07	9-Aug-08	9-Aug-09	3-Apr-09
Expiry date	31-Mar-10	9-Aug-11	9-Aug-12	4-Apr-12
Expected volatility	20%	20%	20%	20%
Risk free rate	5.71%	5.71%	5.71%	5.71%
Amount expensed during the year ($000)	-	-	76	120
	TRANCHE E	TRANCHE F	TRANCHE G	TRANCHE H
Exercise price after rights issue	$1.94	$2.10	$1.38	$1.48
Grant date	1-Oct-06	11-Dec-07	5-Dec-08	19-Jan-09
Vesting date	16-Oct-09	1-Dec-10	1-Dec-11	19-Jan-12
Expiry date	6-Oct-12	1-Dec-13	1-Dec-14	19-Jan-15
Expected volatility	20%	20%	40%	40%
Risk free rate	5.71%	5.71%	4.88%	4.47%
Amount expensed during the year ($000)	798	122	13	3

The exercise price has been reduced to maintain the value of the share options after the rights issue which was completed on 28 September 2009. The fair value remains unchanged after the rights issue as the reduction of the exercise price is to preserve the value of the share option before and after the rights issue.

Expected volatility was determined by looking at the performance of the share price over a number of periods ranging from six months to two years adjusted to remove significant impacts arising from one off events.

The expected life is based on best estimates of management allowing for non-transferability, exercise restrictions and behavioural considerations.

TOWER Annual Report 2009 73

Notes to the Financial Statements

For the year ended 30 September 2009

36. SHARE BASED PAYMENTS (CONTINUED)

36. SHARE BASED PAYMENTS (CONTINUED)
		Number of options			Weighted(1)
					average
	TRANCHE A	TRANCHE B	TRANCHE C	TRANCHE D	exercise price
2009
Outstanding at start of year	708,608	300,000	366,660	500,000	$2.19
Exercised	(262,000)	-	(66,660)	-	$1.55
Outstanding at end of year	446,608	300,000	300,000	500,000	$1.93
Exercisable at end of year	446,608	300,000	300,000	500,000	$1.96
2009	TRANCHE E	TRANCHE F	TRANCHE G	TRANCHE H
Outstanding at start of year	3,000,000	1,200,000	-	-	$2.19
Granted	-	-	400,000	100,000	$1.49
Forfeited	-	(200,000)	-	-	$2.19
Outstanding at end of year	3,000,000	1,000,000	400,000	100,000	$1.93
2008	TRANCHE A	TRANCHE B	TRANCHE C	TRANCHE D
Outstanding at start of year	1,862,172	500,000	500,000	900,000	$2.07
Exercised	(1,071,216)	(133,320)	-	-	$1.48
Forfeited	(82,348)	(66,680)	(133,340)	(400,000)	$2.34
Outstanding at end of year	708,608	300,000	366,660	500,000	$2.19
Exercisable at end of year	708,608	300,000	-	-	$1.62
2008	TRANCHE E	TRANCHE F	TRANCHE G	TRANCHE H
Outstanding at start of year	3,000,000	-	-	-	$2.07
Granted	-	1,500,000	-	-	$2.19
Forfeited	-	(300,000)	-	-	$2.34
Outstanding at end of year	3,000,000	1,200,000	-	-	$2.19

(1) The weighted average exercise price for outstanding and exercisable share options at the end of the year has been adjusted for the impact of the rights issue. Tranches A to D have fully vested as at the reporting date 30 September 2009. The weighted average share price at the date of exercise of share options was $1.68 (2008: $2.21).

74 TOWER Annual Report 2009

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37. TRANSACTIONS WITH RELATED PARTIES

The majority of TOWER’s related party transactions result solely from normal dealings of entities in their capacity as a financial services provider and asset manager and are therefore not recorded in this note. Shares and other financial securities have been traded between TOWER Limited, its subsidiaries, unit trusts and superannuation funds where TOWER Limited or its subsidiaries have an interest. Trade amounts owing between related parties are payable under normal commercial terms.

Guinness Peat Group Plc (GPG) holds approximately 35% of TOWER’s shares, which makes it a related party to the Group. The Group did not have any material transactions or balances with GPG during the year, other than in the normal course of its investment activities, as discussed below.

The Group holds a number of equity securities portfolios across a large number of New Zealand and overseas entities. A significant part of these investments are held by TOWER Life (NZ) Limited for the purposes of meeting the requirements of the life insurance business of the Group. These portfolios, which are managed by specialist investment managers within TOWER, may from time to time include investments in companies that themselves have a shareholding in the Group.

(A) SUBSIDIARIES

During the year there have been transactions between TOWER Limited and its subsidiaries, which have been conducted on an arms length basis. Related party receivable and payable balances of TOWER Limited at the reporting date were as follows:

Related party	2009 $000	2008 $000	Nature of Relationship	Type of Transaction
TOWER Corporation Holdings Limited	(3,435)	(14,505)	Subsidiary	Loan
TOWER Life Limited	(416,526)	(567,000)	Subsidiary	Loan
TOWER Financial Services Group Limited	237,473	249,447	Subsidiary	Advance
TOWER consolidated tax group members	11,345	11,192	Subsidiary	Tax losses

The receivable owing from the TOWER consolidated tax group members of $11.345m (2008: $11.192m) represents the benefit of tax losses offset by TOWER Limited as a member of the TOWER consolidated tax group.

TOWER Limited enters into transactions with its related parties in the normal course of business. Transactions during the year included partial settlement of intercompany balances and intercompany dividends as shown below:

TOWER Financial Services Group Limited	(181,237)	(9,641)	Subsidiary	Settlement/
				Advance
TOWER Financial Services Group Limited	169,000	-	Subsidiary	Dividend
TOWER Corporation Holdings Limited	(11,231)	(275)	Subsidiary	Settlement/
				Advance
TOWER Life Limited	150,474	-	Subsidiary	Settlement

B) KEY MANAGEMENT PERSONNEL COMPENSATION

The remuneration of key management personnel during the year was as follows:

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Group Company
2009 2008 2009 2008
$000 $000 $000 $000
Salaries and other short-term employee benefits 3,792 3,695 - -
Termination benefits 333 448 - -
Share based payments 950 311 - -
Independent directors fees 602 602 602 602
5,677 5,056 602 602
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Information regarding individual directors and executives compensation is provided in the Corporate Governance section of the Annual Report.

C) LOANS TO KEY MANAGEMENT PERSONNEL

There have been no loans made to directors of the Company and other key management personnel of the Group, including their personally related parties (2008: Nil).

D) OTHER TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL

Key management also hold various policies and accounts with TOWER Group companies. These are operated in the normal course of business on normal customer terms.

TOWER Annual Report 2009

Notes to the Financial Statements

For the year ended 30 September 2009

38. DISCLOSURES ON ASSET RESTRICTIONS AND MANAGED ASSETS

Restrictions on assets

Investments and other assets held in each of the life insurance companies can only be used to meet the liabilities and expenses of that company, to acquire investments to further the business of the company or as distributions to shareholders. Distributions may be made to shareholders only when regulatory capital requirements are met and sufficient equity remains for the ongoing operation of the business.

Managed assets

TOWER conducts investment and other fiduciary activities that result in the holding or placing of assets on behalf of individuals, managed funds, trusts, retirement benefit plans and other institutions. These assets are not the property of TOWER and accordingly are not included in these financial statements.

The value of assets subject to funds management and other fiduciary activities were

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Group
2009 2008
$000 $000
Superannuation funds 990,082 807,854
Unit trust and group investment funds 1,879,846 2,137,991
2,869,928 2,945,845
Assets per balance sheet 1,596,460 1,519,590
Total assets under management 4,466,388 4,465,435
Arrangements are in place to ensure that the asset management activities of these funds continue to be managed separately from TOWER’s financial
services and life insurance operations.
39. GUARANTEED RETURNS ON FUNDS INVESTED – LIFE INSURANCE COMPANIES
TOWER or its subsidiaries guarantee capital contributed by policyholders together with any declared dividends for the following funds. At balance date
the policy liabilities of these funds were:
TOWER Life (NZ)
Capital Preservation Fund 29,123 30,764
Capital Protected Plan 8,462 9,295
VITAL 1,642 1,713
Total 39,227 41,772
40. INVESTMENT LINKED AND NON-INVESTMENT LINKED BUSINESS OF LIFE INSURANCE COMPANIES
Group
Non- Non-
Investment investment Investment investment
linked linked linked linked
2009 2008 2009 2008
$000 $000 $000 $000
Investment assets 32,650 779,190 35,084 801,701
Other assets - 81,019 - 77,797
Policyholder liabilities (32,650) (650,228) (35,084) (694,372)
Other liabilities - (45,621) - (44,828)
Net assets - 164,360 - 140,298
Retained earnings - 125,736 - 101,654
Net premium revenue - 61,495 - 61,489
Investment revenue/(loss) 317 31,344 (5,711) 16,001
Net claims expense - (66,232) - (68,781)
Other operating expenses (297) (45,434) (467) (36,803)
Change in policyholder liabilities 117 40,662 4,816 30,154
Operating profit/(deficit) before taxation 137 21,835 (1,362) 2,060
Taxation credit 77 1,841 1,666 20,287
Operating profit after taxation 214 23,676 304 22,347
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Arrangements are in place to ensure that the asset management activities of these funds continue to be managed separately from TOWER’s financial services and life insurance operations.

TOWER Annual Report 2009

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41. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the net profit attributed to shareholders of the Company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares held as treasury shares.

Diluted earnings per share is calculated by dividing the net profit attributed to shareholders of the Company by the weighted average number of ordinary shares on issue during the year adjusted for the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

Basic and diluted earnings per share is based on the weighted average number of shares adjusted for the effect of the bonus element of the rights issue.

	Group
	2009	2008
	$000	$000
Proft attributed to shareholders	49,537	40,460
	Number of	Number of
	Shares	Shares
Weighted average number of ordinary shares for basic earnings per share	203,779,890	201,745,118
Effect of dilution:
Share Options	-	237,688
Weighted average number of ordinary shares adjusted for the effect of dilution	203,779,890	201,982,806
	Cents	Cents
Basic earnings per share	24.31	20.06
Diluted earnings per share	24.31	20.04

42. IMPACT OF AMENDMENTS TO NZ IFRS

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group.

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 October 2009 or later periods, and the Group has not early adopted them:

NZ IAS 1 (Amendment) ‘Presentation of financial statements’ (effective from 1 January 2009). The revised NZ IAS 1 requires an entity to present all owner changes in equity, separately from non-owner changes in equity, in a statement of changes in equity.

All non-owner changes in equity (i.e. comprehensive income) are required to be presented in one statement of comprehensive income or two statements (an income statement and a statement of comprehensive income). Components of comprehensive income are not permitted to be presented in the statement of changes in equity. This is not expected to have a material impact on the Group. The Group will apply NZ IAS 1 (Amendment) from 1 October 2009.

NZ IFRS 8, ‘Operating segments ‘ (effective from 1 January 2009). NZ IFRS 8 replaces NZ IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. The Group will apply NZ IFRS 8 from 1 October 2009.
NZ IAS 27 (Revised), ‘Consolidated and separate financial statements’, (effective from 1 July 2009). The revised standard requires that investments in subsidiaries, jointly controlled entities and associates accounted for in accordance with IAS 39 in the parent’s separate financial statements should continue to be measured in accordance with IAS 39 when classified as held for sale (or included in a disposal group classified as held for sale). The Group will apply NZ IAS 27 (Revised) prospectively to transactions with non-controlling interests from 1 October 2010.
NZ IFRS 2 (Amendment), ‘Share-based payment’ (effective from 1 January 2009). The amended standard deals with vesting conditions and cancellations. It restricts the definition of a vesting condition to service conditions and performance conditions only. All other features of a share-based payment are non-vesting conditions. The non-vesting and market conditions are included when estimating the fair value of equity granted. All cancellations, whether by the entity or by other parties,

should receive the same accounting treatment. The Group will apply NZ IFRS 2 (Amendment) from 1 October 2009. It is not expected to have a material impact on the Group’s financial statements.

NZ IFRS 3 (Revised), ‘Business combinations’ (effective from 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement.

There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the noncontrolling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Group will apply NZ IFRS 3 (Revised) prospectively to all business combinations from 1 October 2009.

NZ IAS 36 (Amendment), ‘Impairment of assets’ (effective from 1 January 2009). The amended standard extends the disclosures requirements of estimates used to determine recoverable amount of cash-generating units containing goodwill or intangible assets with indefinite useful lives, equivalent to those for value-in-use calculation.

This disclosure is required when discounted cash flows are used to estimate fair value less costs to sell. The Group will apply the NZ IAS 36 (Amendment) and provide the required disclosure where applicable for impairment tests from 1 October 2009.

NZ IAS 38 (Amendment), ‘Intangible assets’(effective from 1 January 2009). The amendments clarify the circumstances in which an entity can recognise a prepayment asset for advertising or promotional expenditure. Recognition of an asset would be permitted up to the point at which the entity has the right to access the goods purchased or up to the point of receipt of services. The Group will apply the NZ IAS 38 (Amendment) from 1 October 2009. It is not expected to have a material impact on the Group’s financial statements.
NZ IAS 32 (Amendment), ‘Financial instruments: Presentation’ and NZ IAS 1 (Amendment), ‘Presentation of Financial Statements - Puttable Financial Instruments and Obligations arising on liquidation’ (effective from 1 January 2009). The revisions provide a limited scope exceptions for puttable instruments to be classified as equity if they fulfil a number of specified features. The amendments to the standards will have no impact on the financial position or performance of the Group, as the roup has not issued such instruments.
NZ IFRS 7 (Amendment), ‘Financial Instruments: Disclosures’ (effective

TOWER Annual Report 2009 77

Notes to the Financial Statements

For the year ended 30 September 2009

from 1 January 2009). The amendment requires disclosure of all the level of the fair value hierarchy into which fair value measurements are categorised based on a three level fair value hierarchy for financial instruments. In addition, the amendment provides further clarification around liquidity risk disclosures and additional quantitative disclosures based on liquidity risk of financial liabilities. The Group will apply NZ IFRS 7 (Amendment) from 1 October 2009.

43. SUBSEqUENT EVENTS

On 25 November 2009 the Directors declared a dividend of 9 cents per share. The dividend will be paid on 2 February 2010.

TOWER Annual Report 2009

Notes

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TOWER Annual Report 2009

2009 TOWER Directory

TOWER Limited

ARBN 088 481 234 Incorporated in New Zealand

REGISTERED OFFICE

New Zealand

Level 11 TOWER Centre 22 Fanshawe Street PO Box 90347 Auckland Telephone: +64 9 369 2000 Facsimile: +64 9 369 2160 Email:[email protected] Website: www.towerlimited.com

Australia

80 Alfred Street North Sydney NSW 2060 Telephone: +61294489000

COMPANY SECRETARY

Bronwyn Walsh

TOWER INSURANCE LIMITED

Level 11 TOWER Centre 22 Fanshawe Street PO Box 90347 Auckland New Zealand Telephone: +64 9 369 2000 Freephone: 0800 808 808 Facsimile: +64 9 369 2129 Website: www.tower.co.nz

TOWER HEALTH & LIFE LIMITED

Level 11 TOWER Centre 22 Fanshawe Street PO Box 90347 Auckland New Zealand Telephone: +64 9 369 2000 Freephone: 0800 754 754 Facsimile: +64 9 369 2129 Website: www.tower.co.nz

TOWER INVESTMENTS LIMITED

SHARE REGISTRAR

New Zealand

Computershare Investor Services Limited Level 2, 159 Hurstmere Road, Takapuna, North Shore Private Bag 92119 Auckland 1142 Freephone within New Zealand: 0800 222 065 Telephone New Zealand: +64 9 488 8777 Email: [email protected] Website: www.computershare.co.nz/investorcentre

Australia

Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford VIC 3067

GPO Box 242 Melbourne Vic 3001 Telephone Australia: +61 3 9415 4083 Freephone within Australia: 1800 501 366

INVESTOR RELATIONS

Email:[email protected] Website: www.towerlimited.com

AUDITOR

PricewaterhouseCoopers

BANKERS

ANZ National Bank Limited

SOLICITORS

DLA Phillips Fox

Level 11 TOWER Centre 22 Fanshawe Street PO Box 90347 Auckland New Zealand

Telephone: +64 9 369 2000 Freephone: 0800 808 808 Facsimile: +64 9 369 2129 Website: www.tower.co.nz www.towerkiwiplan.co.nz

Shareholders with enquiries regarding share transactions, changes of address or dividend payments should contact the Share Registrar in the country in which their shares are registered. Shareholdings can also be managed electronically by using Computershare’s secure website.

This website enables shareholders to view share balances, change addresses, and update payment and tax information, and report options.

TOWER recommends shareholders elect to have any cash dividend payments direct credited to their nominated bank account in New Zealand or Australia to minimise the risk of fraud and misplacement of cheques.

Please quote your CSN or shareholder number when contacting our registrar.

The TOWER Limited Annual Report for the year ended 30 September 2009 is available on the TOWER website: www.towerlimited.com

80 TOWER Annual Report 2009

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TOWER Limited

Telephone: +64 9 369 2000 Facsimile: +64 9 369 2160 Email: [email protected] Website: www.towerlimited.com

SHARE REGISTRAR

Insurance Investments KiwiSaver

Computershare Investor Services Limited Freephone within New Zealand: 0800 222 065 Telephone New Zealand: +64 9 488 8777 Freephone within Australia: 1800 501 366 Telephone Australia: +61 3 9415 5000 Email: [email protected] Website: www.computershare.co.nz/investorcentre

AI assistant

TOWER LIMITED — Annual Report 2009

65971_rns_2009-12-17_8d848303-036b-422f-8d44-63b8011815cf.pdf

TOWER Limited Annual Report 2009

Contents

TOWER Group

Highlights

Dear Shareholder

The outlook for TOWER is positive. We have withstood the economic downturn and have delivered a first rate result.

We will look at strategic opportunities to grow that deliver shareholder value

Business Review

Summary of results - Group

HEALTH & LifE

Analysis of profi t – Health

Health results - three year summary

Analysis of profi t – Life

Life results - three year summary

Analysis of profi t - General Insurance

General Insurance results - three year summary

invEsTmEnTs

Analysis of profi t - Investments

Investments results - three year summary

OuTLOOK

TOWER’s Community Commitment

TOWER is a company that believes in being involved in the community where it does business. it is a responsibility that we embrace.

TOWER Group senior management

Corporate Governance

Role of the TOWER Board of Directors

Board composition

Role of Chairman

Nominations, appointments and ongoing education

Director Independence

Retirement and re-election

Board and Committee Performance Review

Director share ownership

Indemnities and Insurance

Attendance at Board and Committee Meetings

TOWER Board of directors

Corporate Governance – directors’ Profi les

TOnY GiBBs

Chairman. Non-Executive.

Not independent

ROB fLAnnAGAn

Group Managing Director

Non-Executive Director

Independent

Non–Executive Director

Not independent

Non-Executive Director

Independent

Non-Executive Director

Independent

dEnis WOOd

Non-Executive Director

Independent

Corporate Governance – Board Committees

Audit and Compliance Committee

MEMBERS: JOHN SPENCER (CHAIRMAN), BILL FALCONER AND MIKE JEFFERIES

Remuneration and Appointments Committee

MEMBERS: TONY GIBBS (CHAIRMAN) AND SUSIE STALEY.

investment Committee

MEMBERS: DENIS WOOD (CHAIRMAN), MIKE JEFFERIES AND SUSIE STALEY

Corporate Governance – Attendance and Remuneration

2008/2009 TOWER Limited directors’ Attendance Record

Remuneration

The Remuneration and Appointments Committee role

Non-executive Directors

Audit & Compliance Committee

2008/2009 Directors’ Remuneration and Benefits

Retirement Allowances

Employee remuneration:

Corporate Governance – Audit and Risk management at TOWER

Risk management

internal audit

Group Corporate Governance Policies and Procedures

External Audit

Regulatory disclosures

Ethical and Responsible Behaviour

Insider Trading

Compliance Policy

TOWER LIMITED Annual Report 2009