TOWER LIMITED - Annual Report 2011

TOWER Limited TOWER Capital Limited Annual Reports 2011

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TOWER Limited TOWER Capital Limited Annual Reports

The TOWER Group has been helping New Zealanders protect and grow the things they value for over 140 years.

We provide comprehensive and innovative insurance, KiwiSaver and investment products through our businesses in New Zealand

TOWER Group

Health & Life Insurance

General Insurance

Investments

KiwiSaver

If you would like to contact TOWER please visit www.tower.co.nz or call TOWER on 0800 808 808. This Annual Report is dated 19 December 2011.

All amounts in this document, unless stated otherwise, are in New Zealand dollars. References to “TOWER” or “the Company” are references to TOWER Limited. References to “TOWER Capital” are to TOWER Capital Limited. References to “TOWER Group” or “Group” are to TOWER and its subsidiaries.

TOWER Limited TOWER Capital Limited Annual Reports

	Introduction
	Highlights 2 Chairman’s report on behalf of directors 3 Business review 4 Guide to TOWER Limited income statement 8 Guide to TOWER Limited balance sheet 9 Our company
	Board of Directors 10 Group executive team 12 Our values and purpose 14 Community commitment 15 Corporate Governance
	Corporate governance at TOWER 16 Audit and risk management at TOWER 22 Remuneration at TOWER 23 Disclosures
	Interests’ disclosures 25 Shareholding and exchange disclosures 28 Other matters 30
	Performance
	TOWER Limited Table of contents 33 TOWER Limited Auditor’s Report 34 TOWER Limited Financial Statements 36 TOWER Capital Limited Table of contents 99 TOWER Capital Limited Auditor’s Report 100 TOWER Capital Limited Financial Statements 102 TOWER Directory 117

This document contains the annual reports of both TOWER Limited (TOWER) and TOWER Capital Limited (TOWER Capital) for the year ended 30 September 2011.

TOWER Capital is a subsidiary of TOWER. On 24 March 2009, the company issued fi xed rate senior unsecured bonds which are listed on the New Zealand Debt Security Market operated by NZX Limited. The bonds have a face value of $81,759,000 and a fi xed rate interest coupon of 8.5%. They are repayable on 15 April 2014. As a member of the TOWER Group, TOWER Capital is dependent on the fi nancial position and performance of TOWER.

INTRODUCTION

Highlights

¡ Total equity increased to $455.5 million
¡ Net asset backing per share increased to $1.72 per share
¡ Strong balance sheet with gearing maintained at 15%
¡ Profi table results across all business segments
¡ Group net profi t after tax of $33.4 million

¡ Annual dividend of 6 cents per share

2 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

INTRODUCTION

Chairman’s report on behalf of directors

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TOWER is in insurance, and it is our business to help our customers manage the risks to their lives

and health, and to their property from external influences.

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WJ Falconer Chairman

TOWER is in insurance, and it is our business to help our customers manage the risks to their lives and health, and to their property from external infl uences. Catastrophe events are included amongst these risks and we must be ready for them when they occur. This requires careful risk management in association with our re-insurers.

The Board is pleased to report that TOWER’s risk management stood up well in the face of successive earthquake catastrophes in Canterbury during the year, and that it was positioned to manage the consequences in terms of reinsurance renewals in an environment buffeted by a massive quake and tsunami in Japan, and fl oods in Australia and Thailand.

This has impacted our profi t for the year under review, but with net profi t after tax at $33.4 million ($58.1 million last year), we can regard the company as in good shape. Total dividends for the year of 6 cents per share, the fi nal 2 cents of which will be paid on 1 February 2012, match our earnings performance.

This dip in earnings interrupts what were emerging as satisfactory trends since the Australian and New Zealand arms of TOWER were separated in 2006, as can be seen from the following table:

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2007 2008 2009 2010 2011
Net profi t
after tax 34.6m 40.5m 50.1m 58.1m 33.4m
Total equity 261.9m 294.2m 404.4m 441.3m 455.5m
Earnings
per share 16.39 21.12 24.31 22.33 12.57
Dividend 6cps 8cps 9cps 10cps 6cps
Net assets
per share $1.38 $1.53 $1.59 $1.69 $1.72
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During the year the company introduced a new functional management structure with the specifi c purposes of making the organisation focused on customer service in sales and claims management, cutting costs in back offi ce functions, and innovative product design and competitive pricing. The events during the year were a baptism of fi re for the new team and structure, but both responded well, giving the Board confi dence that going forward management will maintain the trends achieved since separation.

The Board congratulates management and staff on a year well handled. Their commitments went beyond the norm and served to reinforce our brand and our reputation with customers. Personally, I wish to thank my colleagues on the Board for going out of their way to ensure that best practice governance was sustained, and our investors whose valuable support has continued throughout the year.

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WJ Falconer Chairman

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 3

INTRODUCTION

Business review

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It goes without saying that 2011 has been a very diffi cult year for the insurance industry and for New Zealand as a whole. Despite this, TOWER has come through these turbulent times – we are profi table and maintain a very strong balance sheet.

We are going through a major global economic adjustment with long term interest rates at recent historical lows. The New Zealand economy remains slow with discretionary income for New Zealanders being squeezed. The insurance industry, especially in the Asia Pacifi c region, has experienced major events over the past 18 months - fl oods and hail storms in Australia; earthquakes of a magnitude never experienced before in Christchurch and Japan; and fl oods in Thailand. All of these factors affect both local insurers and the global reinsurance market. The impacts of these events will be felt for some time to come, as increased reinsurance costs will inevitably fl ow through to premiums.

Summary of results – Group

Year ended 30 September

Our 2011 result demonstrates TOWER’s ability to weather turbulent times, remain profitable and present a very strong balance sheet

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Rob Flannagan Group Managing Director

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$ millions 2011 2010 2009
Health & Life 29.5 35.0 31.6
General Insurance 24.8 26.4 17.3
Investments 6.8 2.8 5.8
Business unit net profi t
after tax 61.1 64.2 54.7
Finance & corporate
(6.5) (5.8) (7.8)
expenses
Underlying profi t after tax 54.6 58.4 46.9
Net of Christchurch expense (23.6) (4.5) 0.0
Discount rate effect 2.4 4.2 3.2
Net profi t after tax 33.4 58.1 50.1
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The Group’s profi t after tax but before the impact of earthquakes and movements in the discount rate is $54.6 million, down 6% on last year. When movements in the discount rate and costs of Christchurch earthquakes are included, the Group’s reported net profi t after tax for the year to 30 September 2011 is $33.4 million. Net profi t attributable to shareholders is $33.1 million, a decrease of 43%. I believe this represents a strong result for the Group and I am

4 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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especially pleased that every one of our businesses remained profi table during this diffi cult year. It is equally pleasing to see the beginning of positive impacts from our new functional model which came into effect on 1 February 2011 refl ected in the results from our businesses. It was particularly reassuring to see the early focus on customer service, product design and pricing, new relationship building with intermediaries, and a new approach to advertising.

The Group’s net profi t includes the non-cash effect of movements in the discount rate which is used to value life insurance policy liabilities. These rates have further reduced during the year generating an after tax gain of $2.4 million. The impact of discount rate movements last year was a gain of $4.2 million.

The $23.6 million net impact from Christchurch earthquakes in 2011 includes $12.3 million of incremental reinsurance costs. TOWER successfully placed its 2011/2012 reinsurance programme effective 1 October 2011, but as with the rest of the industry, these came at signifi cant premium level increases.

Total operating revenue for the year was $540.3 million, a decrease of 11% which largely refl ects reduced investment returns on shareholders’ funds during 2011. This decrease results from lower equity returns in 2011 when compared to the prior year.

Total equity for the Group has increased by 3% to $455.5 million at 30 September 2011. Despite major events we have experienced recently, TOWER remains in a strong fi nancial position. The Board declared a fi nal dividend to shareholders of 2 cents per share (fully imputed) which will be paid on 1 February 2012. This brings total dividends for 2011 to 6 cents per share. While this is down on the 10 cents per share paid in 2010, it is refl ective of the lower profi ts generated in the current year.

TOWER Capital is the issuer of $81.7 million of 8.5% fi xed rate unsecured bonds. TOWER Capital paid interest of $7.0 million during the year. Its revenue was $8.2 million, a 0.2% decrease. Net profi t after tax attributable to shareholders is $404,000, a 6.5% decrease.

Group results – three year summary

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0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0
$millions
Net Profi t After Tax Effect of Christchurch Earthquakes
2009 2010 2011
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GENERAL INSURANCE

Despite a very diffi cult year, the general insurance business recorded a net profi t after tax of $2.5 million. While signifi cantly reduced from the $21.9 million recorded to 30 September 2010 it includes after tax net costs of $22.2 million relating to Christchurch. This comprises incremental reinsurance costs of $12.3 million and $9.9 million of net claims costs, including the excess payments made under our reinsurance programme.

Year ended 30 September

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$ millions 2011 2010 2009
Net premiums 184.9 184.7 195.0
Incurred claims (86.4) (94.3) (109.5)
Management and sales
(70.9) (65.9) (71.4)
expenses
Underwriting profi t 27.6 24.5 14.1
Investment income on assets
6.7 8.6 7.2
backing insurance liabilities
Insurance profi t 34.3 33.1 21.3
Investment income on
4.8 5.4 4.0
shareholders' funds
Profi t before tax 39.1 38.5 25.3
Income tax expense (14.4) (12.1) (8.0)
Underlying profi t after tax 24.7 26.4 17.3
Net of Christchurch expense (22.2) (4.5) 0.0
Profi t after tax 2.5 21.9 17.3
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As noted above, the Christchurch earthquakes have had a signifi cant impact during the year, however, the general insurance business has remained profi table. Net premiums have returned to growth, not only through price increases but by arresting the decline in total policy numbers that occurred in recent years. The Pacifi c operations experienced diffi cult economic conditions but managed to maintain underwriting profi tability.

Excluding earthquake effects, underwriting performance in general insurance was up by $3.2 million or 13% on 2010. Management and sales expenses have increased by $5.0 million or 8% compared to last year, however, this refl ects an increased emphasis on customer facing and sales related areas of the business. Lower short term interest rates have resulted in reduced investment returns within the general insurance business.

General Insurance results – three year summary

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0.0 5.0 10.0 15.0 20.0 25.0 30.0
$millions
Net Profi t After Tax Effect of Christchurch Earthquakes
2009 2010 2011
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TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 5

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LIFE INSURANCE

Life insurance underlying profi t excluding the discount rate movement for the year was $18.8 million, a decrease of $8.6 million compared to the same period last year. This result has been impacted by lower interest returns on shareholders’ funds of approximately $10.0 million after tax. The life result includes $1.1 million net expense relating to cover provided by TOWER to families of lives lost in the Christchurch earthquakes.

Year ended 30 September

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$ millions 2011 2010 2009
Net premiums 68.5 64.4 61.5
Incurred claims (80.2) (69.3) (65.0)
Management and sales
(41.0) (41.6) (45.1)
expenses
Movement in policyholder
liabilities 36.5 (20.4) 36.4
Investment income on assets
30.2 93.9 25.9
backing policy liabilities
Insurance profi t 14.0 27.0 13.7
Investment income on
11.1 27.8 5.1
shareholders' funds
Profi t before tax 25.1 54.8 18.8
Income tax (expense)/credit (5.2) (27.3) 1.9
Underlying profi t after tax 19.9 27.5 20.7
Net of Christchurch expense (1.1) 0.0 0.0
Discount rate effect 2.4 4.2 3.2
Profi t after tax 21.2 31.7 23.9
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Net premiums in the life business have continued to grow, as have claims expenses. Investment income reduced across both shareholder and policy holder returns. This primarily refl ects lower equity returns when compared to the prior year. The lower reported insurance profi t is attributable to decreased policy holder investment returns. Income tax expense for the period was $5.2 million compared to $27.3 million for 2010, due to the signifi cantly reduced taxable investment income in the current year.

Net profi t after tax for the life business decreased by $10.5 million, down to $21.2 million, refl ecting the year on year reduction in shareholder investment returns.

Life results - three year summary

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0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
$millions
Net Profi t After Tax Effect of Christchurch Earthquakes
2009 2010 2011
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HEALTH INSURANCE

Despite decreasing policy numbers in the market generally and in those policies covered by TOWER, net premiums in our health business have continued to grow and are up 3% or $4.7 million for the year. Price increases during the year countered the effects of policy number decline and the premium impacts of customers switching to lower cost options that were experienced.

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$ millions 2011 2010 2009
Net premiums 140.6 135.9 131.6
Incurred claims (97.1) (95.3) (83.1)
Management and sales
(36.4) (35.6) (37.0)
expenses
Movement in policyholder
liabilities 1.0 (3.6) (4.3)
Investment income on assets
2.8 8.3 6.3
backing policy liabilities
Insurance profi t 10.9 9.7 13.5
Investment income on
2.9 1.5 2.1
shareholders' funds
Profi t before tax 13.8 11.2 15.6
Income tax expense (4.1) (3.7) (4.7)
Profi t after tax 9.7 7.5 10.9
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Product changes effective from January 2011 have enabled TOWER to reduce annual claims costs by 6% or $5.0 million from September last year. These changes have been successful in restoring the claims to premium ratio. Medical claims infl ation continues to be closely monitored to ensure that we can maintain this profi tability.

Premium pay back is a product that is no longer sold. After a 15 year qualifying period and attaining the age of 60, this product provides customers with a refund of premiums less their claims and other charges. These refunds are fully reserved as the premiums are received.

Investment income overall has reduced due to a lower interest rate environment. The net profi t after tax for health increased 29% to $9.7 million for the year.

Health results – three year summary

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0.0 2.0 4.0 6.0 8.0 10.0 12.0
$millions
Net Profi t After Tax
2009 2010 2011
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6 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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INVESTMENTS

The investment business generated net profi t after tax of $6.8 million for the year, an increase of 143% on the prior year. Key factors infl uencing this result were the improved profi t contribution from lower margin products such as KiwiSaver and lower management and sales expenses refl ecting the benefi ts of restructuring which occurred in 2010.

Year ended 30 September

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$ millions 2011 2010 2009
Total income 38.3 38.1 39.8
Management and sales
expenses (28.4) (34.2) (31.6)
Profi t before tax 9.9 3.9 8.2
Income tax expense (3.1) (1.1) (2.4)
Profi t after tax 6.8 2.8 5.8
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Investments results – three year summary

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0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
$millions
Net Profi t After Tax
2009 2010 2011
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Total KiwiSaver membership has grown by more than 11,000 or 13% over September 2010 levels. TOWER now has more than 99,000 KiwiSaver members. The proportion of non-default scheme members continues to increase. The average value of KiwiSaver funds per member also continues to increase and now stands at $6,796 per member. This is 28% higher than the overall market average of $5,300.

KiwiSaver funds under management have grown by 33% since last year and have reached $673 million as at September 2011. Government Budget changes that were announced earlier in the year and suggestions of some form of KiwiSaver compulsion will be benefi cial in the long term, as contribution rates overall will increase, in turn leading to higher funds under management. TOWER’s total funds under management have grown by $60 million since September 2010 to $3.97 billion.

OUTLOOK

The economic environment continues to be challenging for the insurance industry. Recent events signal a paradigm shift in the industry. I believe the industry needs to reinvent itself by developing affordable and relevant products for individual circumstances.

We are entering a period of infl ationary pressures, particularly in relation to increased building costs in Christchurch and throughout the country. These, coupled with increased reinsurance costs and a low interest rate landscape present challenges for insurers. New regulatory regimes in both insurance and investments require more capital and a continued focus on governance.

TOWER is well placed to weather these turbulent times. There are early indications that our new functional model is beginning to deliver effi ciencies and cost savings originally contemplated. Our core insurance administration system, although late in delivery, has been fully tested and positions us well for profi table growth. The phased ‘go-live’ for the new system commences in December. We are continually looking to enhance our strengths through acquisition.

The challenge for TOWER and the industry is to change, and to meet the needs of our customers through affordable and easily understood products. 2011 was a year when TOWER’s business model has proven its strength. It has been a year when our customers have relied on us to be true to our purpose. We are in the business of protecting people in their time of need and this has been clearly demonstrated through the Christchurch events. We have also delivered value to our shareholders in turbulent times.

TOWER is proudly New Zealand owned and has been protecting the things Kiwis value for over 140 years. TOWER’s balance sheet remains very strong and we are well positioned for growth in 2012 and beyond.

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Rob Flannagan Group Managing Director

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 7

INTRODUCTION

Guide to TOWER Limited income statement

For the year ended 30 September 2011

Presented below is a guide to the income statement and balance sheet for TOWER Limited together with selected management commentary on the 2011 results. The audited TOWER Limited fi nancial statements are presented on pages 33 to 98.

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Group
2011 2010
$000 $000
Revenue
Premium revenue from insurance
contracts 437,793 423,975
Less: Outwards reinsurance expense (61,867) (40,474)
Net premium revenue 375,926 383,501
Investment revenue 68,773 147,564
Fee and other revenue 33,759 33,097
Net operating revenue 478,458 564,162
Expenses
Claims expense 696,262 348,464
Less: Reinsurance recoveries revenue (417,412) (73,583)
Net claims expense 278,850 274,881
(Decrease)/increase in policy liabilities (31,555) 12,324
Management and sales expenses 174,732 173,048
Net claims and operating expenses 422,027 460,253
Financing costs 7,856 7,552
Total expenses 429,883 467,805
Profi t before taxation 48,575 96,357
Tax expense attributed to
policyholders' returns (4,798) (25,700)
Profi t attributed to shareholders
before taxation 43,777 70,657
Tax (expense)/credit attributed to
shareholders' profi ts (10,397) (12,592)
Profi t for the year 33,380 58,065
Profi t attributed to:
Shareholders 33,066 57,554
Minority interests 314 511
33,380 58,065
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Net premium revenue comprises gross premium revenue from insurance contracts less related reinsurance expenses. Increased sales and hardening premium rates positively impacted premium revenue, while outwards reinsurance expenses were negatively impacted by the cost of back up reinsurance.

Investment revenue comprises interest, dividends, distributions, and realised and unrealised gains/losses from TOWER’s investment holdings. Year on year movements largely result from lower realised and unrealised gains on interest rate swaps and forward currency contracts, and current year unrealised losses on equity securities, compared with unrealised gains in 2010.

Claims expense comprises the gross cost of claims (including those incurred but not reported). Christchurch earthquake claims have signifi cantly increased 2011 claims expense.

Reinsurance recoveries revenue comprises amounts due from reinsurers in respect of claims incurred. They reduce gross claims expense to determine the net claims position. Reinsurance recoveries in relation to Christchurch claims have signifi cantly increased the balance due from reinsurers in 2011.

Policy liabilities decreased due to negative movements in life insurance contracts resulting from a reduction in TOWER Life NZ reserves and the increase in TOWER Health & Life deferred acquisition costs associated with writing new business.

Tax expense attributable to policyholders’ returns decreased as a result of lower taxable investment income, the write back of a prepaid tax discount (which had increased 2010 tax expense), and the write-off of deferred tax liabilities relating to Australasian equity gains, which are no longer taxable to the policyholder.

Tax expense attributable to shareholders’ profi ts decreased due to the lower profi t before taxation attributed to shareholders.

8 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

INTRODUCTION

Guide to TOWER Limited balance sheet

As at 30 September 2011

Assets	Group 2011 2010 $000 $000	Group 2011 2010 $000 $000	Receivables largely comprises reinsurance recovery receivables which increased due to Christchurch outstanding claims. Also included are outstanding insurance premiums and trade receivables, which increased in part due to higher insurance premium rates charged.
Cash and cash equivalents	223,981	207,842	Financial assets comprise f xed interest, equities
Receivables Financial assets at fair value through prof t or loss Derivative f nancial assets Liabilities ceded under reinsurance Property, plant and equipment Prepaid tax assets Current tax assets Deferred acquisition costs Investments in subsidiaries Deferred tax assets Intangible assets Total Assets	612,959 883,645 75,080 20,026 6,298 12,795 7,347 42,383 - 19,294 72,741 1,976,549	218,271 953,818 71,217 16,065 6,629 25,587 - 43,587 - 19,606 55,022 1,617,644	and property securities and have decreased due to movements in call deposit holdings, reductions in General Insurance f xed interest holdings to fund up- stream dividends, and reduced overseas equity fund values in TOWER Life NZ. Derivative f nancial assets comprise interest rate swaps which mitigate interest rate volatility on f oating rate bonds held to back policyholder liabilities by TOWER Life NZ and TOWER Medical Insurance. Pre-paid tax assets relate to tax paid in prior years (not refundable from IRD), which is being used to meet policyholder tax liabilities as they arise. The balance has decreased as it has been used to meet f nal 2010 policyholder tax payable and estimated 2011 policyholder tax payable. Current tax assets relate to tax paid in 2011 by the Group in excess of current tax payable for the year, the benef t of tax losses, and excess credits. It is an asset in 2011 as tax paid exceeds current tax liability, which
Liabilities			was not the case in 2010 (refer current tax liability line for comparative).
Payables Current tax liabilities Provisions Derivative f nancial liabilities Interest bearing liabilities Insurance liabilities Deferred tax liabilities	57,502 - 5,325 1,903 81,263 710,709 48,770	53,896 3,362 8,525 2,044 80,602 328,794 47,510	Intangible assets comprise computer software and goodwill on the Health and General Insurance businesses. Payables increased due to more reinsurance premiums outstanding at year-end, which was partially offset by a reduction in outstanding trade payables. Derivative f nancial liabilities comprise forward foreign exchange contracts used to hedge USD, JPY, GBP and EUR currency exposures to NZD on a global equity
Life insurance contract liabilities	587,476	619,820	portfolio in TOWER Life NZ. Their fair value is a net liability position.
Life investment contract liabilities Total Liabilities	28,084 1,521,032	31,759 1,176,312	Interest bearing liabilities comprise TOWER Capital bonds repayable on 15 April 2014.
Net Assets	455,517	441,332	Insurance liabilities increased due to General Insurance
Equity Contributed equity	567,031	558,762	outstanding claims resulting from Christchurch earthquakes and increases in General Insurance unearned premiums, ref ecting premium rate increases in the second half of 2011.
Accumulated losses Reserves Total equity attributed to	(4,352) (109,688)	(12,021) (108,332)	Life insurance contract liabilities decreased primarily due to reductions in TOWER Life NZ reserves relating to existing business run off, and a reduction in TOWER Health & Life relating to expenses associated with
shareholders	452,991	438,409	writing new business.
Minority interests Total Equity	2,526 455,517	2,923 441,332	Minority interests relate to the 29% share of National Pacif c Insurance Limited not owned by TOWER.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 9

OUR COMPANY

Board of Directors

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BILL FALCONER

LLB, CNZM, DFloD CHAIRMAN Independent Appointed Director: 31 December 2003.

Appointed Chairman: 29 August 2011. Last re-elected 2011.

Bill was appointed Chairman of the Board on 29 August 2011. He was appointed as an independent member of the Board on 31 December 2003 and was last reelected in 2011.

He has had a successful career as a lawyer, company director and in the public service.

Bill is also the Chairman of the Primary Growth Partnership Investment Advisory Panel, Meat Industry Association Holdings Limited and Energy Intellect Limited and a Director of Stream Information Limited and Westfi eld Trust (NZ) Limited.

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MIKE ALLEN

LLB, BCom NON-EXECUTIVE DIRECTOR Not Independent Appointed Director: 29 June 2011.

Mike was appointed to the Board as a non-executive director in June 2011.

Mike has over 25 years experience in investment banking and general management, both in New Zealand and the UK.

Mike is Chairman of Environment Investments Limited and holds a number of directorships throughout New Zealand and overseas. He previously held various senior roles at Southpac Corporation and Westpac in New Zealand.

Mike resides in Auckland, New Zealand.

Bill resides in Cambridge, New Zealand.

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ROB FLANNAGAN

ACA, OPM (Harvard), AMInstD, JP EXECUTIVE DIRECTOR Not independent Appointed Director: 25 March 2008.

Rob was appointed Chief Executive Offi cer of TOWER New Zealand in October 2006. In March 2008, he was appointed to the Board and now holds the position of Group Managing Director.

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

He 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.

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MIKE JEFFERIES

BCom, CA NON-EXECUTIVE DIRECTOR Not independent Appointed Director: 19 December 2006. Last re-elected 2009.

Board Committees: Member of Audit and Compliance Committee and Member of Investment Committee.

Mike joined the Board in December 2006. He is a chartered accountant with extensive experience in fi nance and investment and is a senior executive of the Guinness Peat Group.

Mike is currently Chairman of Touch Holdings Limited and a director of Ozgrowth Limited, Metals X Limited, ClearView Wealth Limited and Capral Limited.

Mike resides in Perth, Australia.

Rob resides in Auckland, New Zealand.

10 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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JOHN SPENCER

BCom, FCA NON-EXECUTIVE DIRECTOR Independent Appointed Director: 1 October 2003. Last re-elected 2011. Board Committees: Chairman of Audit and Compliance Committee and Member of Remuneration and Appointments Committee.

John joined the Board in October 2003 and 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 Tainui Group Holdings Limited, WEL Networks Limited and New Zealand Railways Corporation, a Director of DairyNZ Limited, Disputes Resolution Services Limited and Board advisor to Mitre 10 (New Zealand) Limited.

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SUSIE STALEY

LLB (Otago), FNZIM, FInstD NON-EXECUTIVE DIRECTOR Independent Appointed Director: 1 October 1999. Last re-elected 2010.

Board Committees: Chairman of Remuneration and Appointments Committee and Member of Investment Committee

Susie was elected to TOWER Corporation’s Board in 1996. 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 Chatsford Management Limited, Board advisor to the University of Otago School of Business, Member of the Performance and Risk Advisory Group to Ministry of Transport and Chair of iD Fashion Week Inc.

Susie resides in Dunedin, New Zealand.

John resides in Wellington, New Zealand.

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DENIS WOOD

MA (Hons) NON-EXECUTIVE DIRECTOR Independent Appointed Director: 27 May 2005. Last re-elected 2009.

Board Committees: Chairman of Investment Committee, Member of Audit and Compliance Committee, Member of Remuneration and Appointments Committee

Denis was appointed to the 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 Healthcare Auckland Limited, and a Director of Genesis Power Limited and The Colonial Motor Company Limited.

Denis resides in Auckland, New Zealand.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 11

OUR COMPANY

Group executive team

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MICHAEL BOGGS CA CHIEF OPERATING OFFICER Appointed: 16 February 2011

Michael joined TOWER in February 2011 as Chief Operating Offi cer. He is responsible for the shared service functions of the TOWER Group, including Finance, Actuarial and HR. In addition, Michael is responsible for the leadership of TOWER’s businesses in the Pacifi c Islands which contribute positively to the Group’s operating results.

A qualifi ed chartered accountant, Michael began his career in public practice. He has had previous executive roles leading fi nance and business functions in major telecommunications and technology organisations. Michael has designed and led large change programmes focussed on revenue growth, cost effi ciency and merger and acquisition activity.

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BRONWYN WALSH BCom LLB (Hons) COMPANY SECRETARY AND COMPLIANCE MANAGER Appointed: 28 April 2009

Bronwyn is Company Secretary for the TOWER Board and is responsible for investor relations, including maintaining and enhancing relations between the company, shareholders, regulators and the broader stakeholder community. She is also responsible for strategic oversight and management of the Legal and Group Risk & Compliance functions including brand management.

Bronwyn was previously a corporate solicitor specialising in mergers and acquisitions, securities law and general commercial advice.

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TONY DIXON

CHIEF INFORMATION OFFICER Appointed: 1 November 2006

Tony is responsible for the Group’s IT (computer technologies) and IT related strategy along with the enterprise project offi ce and group procurement. Tony has an accounting degree from the UK.

Tony has been in the IT industry for almost 40 years, having completed large IT related projects for companies such as Air New Zealand, Gen-i/Telecom and Microsoft and the Blue Star group of companies. Prior to joining TOWER, Tony has been CEO of Blue Star automation, National software manager for Digital Corporation and acting head of customer services at Telecom/Gen-i.

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SAM STUBBS

CHIEF EXECUTIVE OFFICER – INVESTMENTS

Appointed: 4 February 2008

Sam is responsible for management of all wholesale, retail and KiwiSaver funds. He is also responsible for investment management of TOWER Group funds. Sam was responsible for capital raising for large corporate clients in European and Asian capital markets, and for the establishment of asset management businesses in the Asia Pacifi c region. He was also a strategic consultant for Goldman Sachs to key clients in the Asia Pacifi c region.

12 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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ANTONY VRIENS

MBA, MBCHB GENERAL MANAGER PRODUCT AND PRICING Appointed: 6 December 2010

Antony is responsible for all aspects of the product lifecycle, and overall pricing for the TOWER range of products across personal lines, life, health and managed funds.

Antony has 9 years experience in fi nancial services, predominantly in the Life and Superannuation space in both New Zealand and Australia, leading all aspects of the insurance and savings value chain including Distribution, Operations, and Product and Marketing. Antony has designed and implemented major business improvement programmes, and led these with a particular focus on ease of customer experience, simplicity, and easier consumer understanding. Prior to taking this role at TOWER, Antony was General Manager Risk at Asteron.

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MONICA MATHIS

GENERAL MANAGER MARKETING AND DISTRIBUTION Appointed: 1 January 2011

Monica is responsible for the sales and distribution strategy for the full suite of TOWER products including insurance, investments and KiwiSaver. Monica is also responsible for the marketing communication strategy to support all distribution sales channels including internal and external communications.

Monica has 25 years experience in fi nancial services gained in United Kingdom, Australia and New Zealand.

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DEBBIE ERYE

GENERAL MANAGER CUSTOMER SERVICES Appointed: 1 February 2011

Debbie joined TOWER in May 2005 and was promoted to the TOWER Executive team in February 2011 as General Manager – Customer Services. She is responsible for the development of a customer centric approach to servicing TOWER’s customers across all TOWER’s product and distribution channels. She oversees the core servicing teams including contact centre, claims, underwriting, customer payments and new business.

Debbie has more than 25 years experience in the insurance industry, with previous senior roles in risk management, customer service and operations. Debbie has designed and led major change programmes, including those focused on management of insourced and outsourced operations.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 13

OUR COMPANY

Our values and purpose

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Our values

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Take ownership

We are empowered to take ownership and be accountable for our actions.

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Open and honest

At TOWER we value and expect openness, honesty, respect, integrity and fairness.

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Working as one

We work as one team, always collaborating to achieve the one TOWER goals.

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Empathy in all that we do

We walk in the shoes of our customer and strive to do the right thing both by our customers and ourselves.

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Raising the bar

We are striving to raise the bar in insurance and investments excellence. We are committed to innovating and continuously improving our products and our service.

Our purpose

By deeply understanding the lives and communities of our customers, we will be the local insurance expert and wealth manager you can rely on to protect and grow your assets. TOWER, keeping promises for over 140 years.

14 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

OUR COMPANY

Community commitment

This year we amended our strategic framework and refreshed our values and our purpose. Our values are a guide to how we behave and the actions we take for the betterment of our customers, staff and shareholders. Our purpose is our roadmap for success. It defi nes who we are and what we want to achieve. Our framework will help determine our roles and responsibilities. It will underpin our decision making and priority setting, and it will direct how we all work and interact together.

Our values and our purpose form the core of our strategic framework and the foundation upon which TOWER is built. Much thought and discussion has gone into what we as a company stand for and what we are aiming to achieve – customer centricity being the number one goal. These values and our purpose refl ect all parts of our business, including New Zealand and the Pacifi c Islands, where we have businesses in Fiji, Samoa, American Samoa, Cook Islands, Tonga and Papua New Guinea.

TOWER’s community commitment

TOWER understands the importance and the value of our communities. TOWER’s community commitment and contribution can be seen across a wide spectrum of sponsorships that enhance the lives of New Zealanders on a daily basis.

TOWER has a relationship with the Men’s Health Trust. This trust is a non-profi t organisation that is committed to ensuring that all New Zealand men take responsibility for their own health. TOWER became the major sponsor of the Trust’s corporate programme which targets awareness of men’s health issues through education in the workplace, with the goal of reducing early male mortality.

TOWER is also a passionate supporter of the Royal New Zealand Ballet, a world class company. In this, our tenth year of partnership with the Royal New Zealand Ballet, we presented the highly popular TOWER Tutus on Tour – this time including a children’s ballet. It is a biennial season where the ballet company effectively splits into two and simultaneously travels the length and breadth of New Zealand – performing to sell out audiences in almost 50 towns and smaller communities across heartland New Zealand.

TOWER also continues to support a number of other events, including various awards and conferences.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 15

CORPORATE GOVERNANCE

Corporate Governance at TOWER

The Board and senior management 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. TOWER Capital Limited has the same Board as TOWER Limited. As part of the TOWER Group, it operates under the same corporate governance regime. Therefore, governance practices and disclosures that apply to TOWER Limited are also applied to TOWER Capital Limited (where relevant).

Compliance with governance requirements and recommendations

For the reporting period to 30 September 2011, TOWER considers its corporate governance practices have adhered to the NZX Corporate Governance Best Practice Code; the New Zealand Securities Commission Corporate Governance Principles and Guidelines and the ASX Corporate Governance Council Principles and Recommendations as outlined in this corporate governance section. Copies of the principal governance documents and more detail about TOWER’s governance practices are available on TOWER’s website at www.tower.co.nz under ‘Corporate Governance’.

Role of the 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 18 and 19). 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 effi cient decision-making and the Code of Ethics ensures decision-making is in accordance with TOWER’s values. These documents can be found on TOWER’s website at www.tower.co.nz under ‘Corporate Governance’.

its roles and responsibilities, is required to have appropriate regard to TOWER values, the concerns of its shareholders, its relationships with signifi cant 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, fi nancial targets and capital expenditure plans;
assessing and monitoring performance, including management’s performance against the strategic objectives, operating plans and fi nancial targets;
approving all changes to the Group’s corporate structure where these are of strategic importance;
determining Group fi nancial 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 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.

Role of senior executives

The day-to-day leadership and management of the Group is undertaken by the Group Managing Director and senior management. The Group Managing Director is solely accountable to the Board for management performance. The Group Managing Director has also formally delegated decision making to senior management within their areas of responsibility and subject to quantitative limits to ensure consistent and effi cient decision-making across the Group. Senior management has 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 subdelegate certain authorities to their direct reports. The Board meets regularly with management to provide strategic guidance for TOWER and effective oversight of management.

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 fulfi lling

16 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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BOARD COMPOSITION, NOMINATIONS AND APPOINTMENTS

Board composition

At 30 November 2011, the Board included six nonexecutive directors and the Group Managing Director. The TOWER Constitution requires a minimum of six directors and provides for a maximum of nine. Directors’ profi les are on pages 10 to 11.

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 TOWER and to ensure the Board works effectively. The Committee is also responsible for the Board protocols which have been established to facilitate the effective operation of the Board. Current directors contribute signifi cant commercial, fi nancial, legal and investment skills to the Board.

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 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. Bill Falconer was appointed Chairman of TOWER following the resignation of Tony Gibbs on 29 August 2011, who had held the position of Chairman since his appointment 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 (the Board aims to have a mix of skilled directors with particular competencies in the insurance and fi nancial services sector);
the extent to which those skills complement the skills of existing directors;
their ability to devote suffi cient 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 offi cers’ 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 briefi ngs 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. Directors receive comprehensive board papers and briefi ng information before board meetings, including a report from the Group Managing Director and divisional reports from the senior management of each business unit. Directors have unrestricted access to management and any additional information they consider necessary for informed decision making. The Company Secretary is usually the fi rst point of contact for such requests.

Senior management also attends 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 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 Principles and Recommendations, the Board Protocols defi ne 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:

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 17

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reasonably infl uence, 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. At the date of these reports, the Board considers that four of the directors are independent, namely: Bill Falconer, John Spencer, Susie Staley and Denis Wood. The Board considers that Mike Jefferies and Mike Allen are not independent as a result of their appointment to the Board by Guinness Peat Group, a substantial shareholder of TOWER.

The ASX Corporate Governance Council Principles and Recommendations recommend that the Chairman should be an independent director. Bill Falconer is considered an independent director.

In accordance with TOWER’s Constitution, directors with an actual or potential confl ict of interest on particular issues are required to disclose the confl ict 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 offi ce each year by rotation and, if they choose, stand for re-election by shareholders at the Annual Meeting. Directors who retire each year are those who have been in offi ce longest since their last election. If two directors have held offi ce for equal terms and cannot agree who will retire, it is determined by lot. The Group Managing Director is not required to retire by rotation.

In addition, all directors appointed by the Board since the last Annual Meeting to fi ll a casual vacancy must stand for election. Shareholders will be provided with relevant information on the directors standing for reelection 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 regularly reviews its own composition and performance and that of board committees in accordance with the terms of the Board Charter (which also includes a review of the Board structure, policies, board succession, delegations and the necessity for and composition of the committees). The Remuneration and Appointments Committee is responsible for the regular performance management and annual appraisal of the Group Managing Director, individual directors and senior executives. Evaluations may be carried out by an external consultant.

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 and Market Manipulation Policy 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 26.

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.

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 specifi c issues as required by the Board.

The Committees are governed by written terms of reference, which detail their specifi c 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.tower.co.nz.

The Committees make recommendations to the Board. They have no decision-making ability except where expressly provided by the Board. The Board is required to annually confi rm the membership and Chairmanship of each of the committees. The experience and skills of individual committee members are set out in the directors’ profi les on pages 10 to 11. Member attendance at each committee meeting is set out on page 20.

Audit and Compliance Committee

MEMBERS: JOHN SPENCER (CHAIRMAN), MIKE JEFFERIES AND DENIS WOOD

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

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

18 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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independently and objectively review the fi nancial information presented by management to the Board, the external auditors and the public;
review draft half year and annual fi nancial 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 be satisfi ed as to its independence;
review the effectiveness and effi ciency of management processes, Group risk management and internal fi nancial 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 Committee meets with the internal auditors four times during the fi nancial year and with the external auditors at least twice.

The Terms of Reference require that the committee has a minimum of three suitably qualifi ed 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 is also required to provide an annual report summarising committee’s activities, fi ndings, recommendations and results for the past year.

Remuneration and Appointments Committee

MEMBERS: SUSIE STALEY (CHAIRMAN), JOHN SPENCER AND DENIS WOOD

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;

Following each meeting the Chairman of the Committee provides a report to the Board. The Chairman is also required to provide an annual report summarising committee activities, fi ndings, recommendations and results for the past year.

The Company’s remuneration policies for directors and senior executives are set out on pages 23 and 24.

Investment Committee

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

The Investment Committee has various duties and responsibilities, including:

reviewing the investment policy for TOWER shareholder and policyholder funds;
reviewing the 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 fi nancial 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 qualifi ed 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. Following each meeting the Chairman of the Committee provides a report to the Board. The Chairman is also required to provide an annual report summarising the committee activities, fi ndings, recommendations and results for the past year.

Following each meeting the Chairman of the Committee provides a report to the Board. The Chairman is also required to provide an annual report summarising the committee activities, fi ndings, recommendations and results for the past year.

the composition and structure of the Board;
performance evaluations of the Board and directors; 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 qualifi ed non-executive directors, the majority of whom are independent. The Board appoints the Chairman of the Committee.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 19

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BOARD AND COMMITTEE MEETING ATTENDANCE

The Board held eight scheduled meetings during the year from 1 October 2010 – 30 September 2011. Director attendance at board and committee meetings is set out below. The Group Managing Director attends all committee meetings and the Chief Operating 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.

2010/2011 TOWER Limited Directors’ attendance record

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----- Start of picture text -----

TOWER Limited Audit and Compliance Remuneration and Investment
Board Committee Appointments Committee Committee
Number of meetings Number of meetings Number of meetings Number of meetings
attended attended attended attended
Meetings Held 8 5 1 3
Mike Allen [ 1] 4 - - -
Tony Gibbs [ 2] 5 - 1 -
Bill Falconer [ 3] 8 4 - -
Rob Flannagan 8 - - -
Mike Jefferies 8 5 - 3
John Spencer 8 5 - -
Susie Staley 8 - 1 3
Denis Wood [ 4] 8 1 - 3
----- End of picture text -----

1 Mr Allen was appointed as a director of TOWER on 29 June 2011

2 Mr Gibbs resigned as a director of TOWER on 29 August 2011

3 Mr Falconer resigned as a member of the Audit and Compliance Committee on 29 August 2011

4 Mr Wood was appointed as a member of the Audit and Compliance Committee on 29 August 2011

PROMOTING ETHICAL AND RESPONSIBLE BEHAVIOR

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 fi nancial 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 interests interfere or appear to interfere with the interests of TOWER;
using a person’s position at TOWER or TOWER’s information or property for personal gain;
safeguarding the confi dentiality of all TOWER nonpublic 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 and Market Manipulation 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.

20 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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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 and Market Manipulation Policy is available on TOWER’s website at www.tower.co.nz.

Compliance policy

TOWER’s approach to compliance is recorded in the TOWER Compliance Policy. The Policy sets out the key compliance responsibilities of TOWER’s directors, executives, staff and contractors in all their business dealings. The Policy promotes TOWER’s commitment to sound corporate governance by strongly endorsing a responsible compliance environment for its entire staff. TOWER recognises that a responsible approach to corporate governance and compliance provides a foundation for business reputation and stakeholder confi dence. A copy of the Policy is available on TOWER’s website at www.tower.co.nz.

Market and shareholder communication

TOWER recognises that public confi dence 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, proactive communication programme with shareholders and the wider investment community to encourage their participation in TOWER. TOWER believes this communication programme assists in creating a fully informed market and enhances shareholder value. The Policy provides that only authorised spokespersons can communicate on behalf of TOWER with the investment community, shareholders and the media. A copy of the Policy is available on TOWER’s website at www.tower.co.nz.

Announcements

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

Full year results are announced in late November;
Annual reports are released in late December;
TOWER’s Notice of Annual Meeting is sent to shareholders in late December or mid January;
Half year results are announced in late May; and
Half year reports are released in late June.

Credit Rating

Global rating organisation A.M. Best Company issued the following ratings of companies in the TOWER Group at 29 July 2011:

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.) Limited Financial Strength Rating A- (Excellent) Issuer Credit Rating a-

TOWER Limited Issuer Credit Rating bbb-

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 fi nancial results, changes in profi t forecasts and other material market announcements require Board approval. TOWER’s website, www.tower.co.nz, 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. It also has a comprehensive corporate governance section for shareholders.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 21

CORPORATE GOVERNANCE

Audit and Risk Management at TOWER

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 identifi cation, assessment, mitigation, management and acceptance, and a regular review of risk is carried out across the Group. These processes are incorporated into the regular strategic review process. TOWER management regularly reports during the year to the Board as to the effectiveness of TOWER’s management of its material business risks.

Internal audit

TOWER contracts an independent chartered accounting fi rm to carry out the internal audit function reporting to the Chairman of the Audit and Compliance Committee and with 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 Policy is available on TOWER’s website at www. tower.co.nz 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 certifi cation of its continued independence, and in particular confi rm 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.

Details of PwC fees for audit and other services provided to the TOWER Group are set out in note 10(A) of the TOWER Limited fi nancial 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. Where indicated copies are available on TOWER’s website at www.tower.co.nz under the ‘Corporate Governance’ section.

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.

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).

PwC was re-appointed as auditor by shareholders at the Annual Meeting in 2011 to audit the TOWER and TOWER Group fi nancial 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 fi nancial statements. The Board also has a formal External Audit Independence Policy that includes the provision of non-audit services by the external auditor. This policy specifi es which services the external auditor may and may not provide TOWER. The Policy is overseen by the Audit and Compliance Committee.

22 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

CORPORATE GOVERNANCE

Remuneration at TOWER

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.

TOWER has different policies for remunerating the non-executive directors as opposed to the Group Managing Director and senior executives. The following section discusses TOWER’s remuneration policies and arrangements for non-executive directors, the Group Managing Director, the senior executives and staff in general.

Role of the Remuneration and Appointments Committee

In respect of remuneration the Remuneration and Appointments Committee is responsible for assisting and advising the Board in relation to, amongst other things:

remuneration strategy, structure and policy;
remuneration of the Group Managing Director;

The remuneration policy for non-executive directors does not include participation in either a share or share option plan.

Retirement allowances

Directors were previously entitled to a retirement allowance on their retirement from the 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 was 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: Susie Staley $101,101 to be paid on retirement. To be eligible for a retirement allowance a Director needed to be in offi ce for at least three years prior to 1 October 2003. For this reason no other Director is eligible for a retirement allowance.

setting non-executive directors’ remuneration;
setting Board committee members’ fees and;
determining remuneration packages of senior executives, following recommendations from the Group Managing Director.

Non-executive director remuneration

The Board’s policy is to remunerate directors at a similar level to comparable Australasian companies, with a small premium to refl ect the complexity of the insurance and fi nancial services sector. At the Annual Meeting in February 2004 shareholders approved an increase in non-executive director annual remuneration to the current maximum of NZ$900,000 per annum. TOWER seeks external advice when reviewing Board remuneration. The Remuneration and Appointments Committee is responsible for reviewing directors’ fees. Non-executive directors are also paid additional annual fees for sitting on Board committees.

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Board/Committee Chairman Member
Base fee – Board of Directors $130,000 $78,570
Audit and Compliance Committee $15,000 $9,000
Remuneration and Appointments
$7,500 $5,000
Committee
Investment Committee $7,500 $5,000
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2011 2010
Director’s Director’s
Fees $ Other $ Fees $ Other $
Mike Allen 13,095 - - -
Tony Gibbs 126,042 - 137,500 -
Bill Falconer 93,806 - 107,970 -
Rob Flannagan - 1,255,600 - 1,216,800
Mike Jefferies 92,570 - 92,570 -
John Spencer 93,987 - 110,570 -
Susie Staley 94,028 - 105,570 -
Denis Wood 87,237 - 86,070 -
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Notes:

Mike Allen was appointed a director of TOWER on 29 June 2011
Tony Gibbs resigned as a director of TOWER on 29 August 2011 and earned a prorated amount of fees to that date.
Fees include base fees and additional fees earned in the fi nancial year for one-off tasks and additional appointments, including participation in due diligence committees.

Additional fees may be paid to non-executive directors for one-off tasks and/or additional appointments where required, for example, sitting on a due diligence committee. No additional fees are paid to directors in relation to their roles as directors of TOWER Capital.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 23

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Group managing director and senior executive remuneration

The Board’s policy for remunerating the Group Managing Director and other key executives is to provide market based remuneration packages comprising a blend of fi xed and incentive based remuneration with clear links between individual and Company performance, and reward. Remuneration packages currently comprise a mixture of fi xed and performance-based remuneration in the form of a group profi t share. The Group Remuneration and Appointments Committee reviews the Group Managing Director’s and other senior executives’ remuneration packages at least annually.

The policy is intended to encourage meeting the short and long term objectives for TOWER. Rob Flannagan was appointed Chief Executive Offi cer of the 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 in the directors’ remuneration and benefi ts table on page 23 is his total remuneration paid in the year ended 30 September 2011 and consists of base salary of $850,000 and a short term performance incentive of $405,600 paid in respect of the company’s performance in the prior year. No short term performance incentive is payable in respect of the year ended 30 September 2011. He also has a long term incentive in the form of the Tranche E share options as disclosed in note 36 to the TOWER Limited fi nancial statements.

The Board has issued options to senior executives across the Group as part of its remuneration policies for senior executives. The options may only be exercised if the hurdle of a 10% per annum compounding increase in the TOWER share price less any distributions is achieved.

Employee remuneration

Set out in the following table are the number of employees or former employees of a member of the Group, not being directors or former directors, who received remuneration and other benefi ts valued at or exceeding $100,000 for the year ended 30 September 2011. 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 $ 2010/11 2009/10
100,000 109,999 27 13
110,000 119,999 30 17
120,000 129,999 20 20
130,000 139,999 18 24
140,000 149,999 19 25
150,000 159,999 8 8
160,000 169,999 7 7
170,000 179,999 2 6
180,000 189,999 6 4
190,000 199,999 1 3
200,000 209,999 - -
210,000 219,999 3 4
220,000 229,999 2 2
230,000 239,999 4 1
240,000 249,999 1 2
250,000 259,999 5 4
260,000 269,999 1 2
270,000 279,999 2 1
280,000 289,999 3 2
290,000 299,999 1 1
300,000 309,999 3 3
320,000 329,999 1 1
340,000 349,999 1 -
360,000 369,999 1 -
410,000 419,999 1 -
420,000 429,999 - 1
440,000 449,999 1 -
470,000 479,999 1 -
540,000 549,999 - 1
560,000 569,999 - 1
570,000 579,999 - 2
590,000 599,999 - 1
600,000 609,999 1 -
640,000 649,999 1 -
670,000 679,999 1 -
710,000 719,999 - 1
720,000 729,999 - 1
1,000,000+ 1 1
Total 173 159
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24 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

DISCLOSURES

Interests’ 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 by shareholders. An ‘interested’ director may not vote on a matter in which he or she is interested unless the Director is required to sign a certifi cate 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 fi nancial year directors of TOWER and TOWER Capital disclosed interest, or a cessation of interest (indicated by (C)), in the following entities pursuant to section 140 of the Companies Act 1993. No disclosures were made by directors of any other members of the Group.

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Mike Allen Breakwater Consulting Limited Director
Breakwater Investments Limited Director
Coats plc Director
Environment Investments Limited Chairman
Godfrey Hirst NZ Limited Director
Guinness Peat Group plc Director
Innofl ow Australia Limited Director
Innofl ow IP Limited Director
NZ Windfarms Limited Director
NZWL - TRH Limited Director
PGG Wrightson Finance Limited Chairman (C)
Retirement Villages NZ Limited Director
Stableburn Farms Limited Director
Systems 77 Limited Director
Tainui Group Holdings Limited Director
Waikato-Tainui Fisheries Limited Director
Tony Gibbs Aeneid Seventeen Limited Director
Ezypeel Mandarins Limited Director
Turners & Growers Limited Chairman (C)
Bill Falconer Energy Intellect Limited Chairman
Karapiro 2010 Limited Chairman
Meat Industry Association Holdings Limited Chairman
Primary Growth Partnership Investment Advisory Panel Chairman
Stream Information Limited Director
Westfi eld Trust (NZ) Limited Director
Mike Jefferies Capral Limited Director
ClearView Wealth Limited Director
Metals X Limited Director
OzGrowth Limited Director
Touch Holdings Limited Chairman
John Spencer AsureQuality Limited Chairman (C)
DairyNZ Limited Director
Dispute Resolution Services Limited Director
Mitre10 (New Zealand) Limited Board Advisor
New Zealand Railways Corporation Chairman
Tainui Group Holdings Limited Chairman
Telfer Young Limited Chairman (C)
WEL Networks Limited Chairman
Susie Staley Chatsford Management Limited Chairman
Denis Wood Genesis Power Limited Director
Mercy Healthcare Auckland Limited Chairman
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TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 25

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During the fi nancial year, no member of the Group entered into any transactions in which 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 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 the Interests Register pursuant to section 162 of the Companies Act 1993.

Use of company information by directors

No member of the Board, 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 2011 TOWER Limited directors held the following interests in the Company’s shares:

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Ordinary Shares
Director Benefi cial Associated Persons
Mike Allen - 90,499,166
Tony Gibbs [ 1] 6,383
Bill Falconer 12,174
Rob Flannagan 755
Mike Jefferies 3,363 90,499,166
John Spencer 21,115
Susie Staley 8,405
Denis Wood 125,458
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1 Mr Gibbs resigned as a director of TOWER on 29 August 2011

Rob Flannagan also holds 3,000,000 Tranche E share options, details of which are disclosed in note 36 to the TOWER Limited Financial Statements and, in his capacity as a director of the trustee of the TOWER Executive Share Option Plan, 4,300,000 share options held by the trustee.

Directors’ trading in TOWER securities

Directors disclosed the following acquisitions (and no disposals) of relevant interests in TOWER securities during the fi nancial year pursuant to section 148 of the Companies Act 1993. All acquisitions were under TOWER’s dividend reinvestment plan. All interests are benefi cial. Following Mike Allen’s appointment, TOWER’s Insider Trading and Market Manipulation Policy has prohibited him from purchasing any TOWER shares.

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Number
Director Date acquired Consideration
Tony Gibbs [ 1] 25/01/2011 183 $1.95
4/07/2011 160 $1.53
Rob Flannagan 25/01/2011 22 $1.95
4/07/2011 19 $1.53
Mike Jefferies 25/01/2011 100 $1.95
4/07/2011 88 $1.53
John Spencer 25/01/2011 604 $1.95
4/07/2011 528 $1.53
Susie Staley 25/01/2011 240 $1.95
4/07/2011 210 $1.53
Denis Wood 25/01/2011 3,589 $1.95
4/07/2011 3,139 $1.53
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1 Mr Gibbs resigned as a director of TOWER on 29 August 2011

At 30 September 2011, TOWER Capital directors held the following benefi cial interests in TOWER Capital Senior Bonds:

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Director Holding $
Tony Gibbs [ 1] 1,000,000
Bill Falconer 50,000
John Spencer 50,000
Susie Staley 65,000
Denis Wood 75,000
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1 Mr Gibbs resigned as a director of TOWER on 29 August 2011

Buy-backs

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

26 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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TOWER subsidiary company director disclosures The following persons held offi ce as directors of subsidiary companies at 30 September 2011. Those who retired during the year are indicated with an (R).

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TOWER Capital Limited AI Gibbs (R) , WJ Falconer, RA Flannagan, ML Jefferies, JL Spencer, SA Staley, DM Wood,
M.N Allen
TOWER Financial Services Group Limited RA Flannagan, EJ O’Sullivan (R), M Boggs, B Walsh
TOWER Option Scheme Limited RA Flannagan, EJ O’Sullivan(R), M Boggs, B Walsh
TOWER Investments Limited RA Flannagan, EJ O’Sullivan(R), M Boggs, B Walsh
The National Insurance Company of New Zealand Ltd RA Flannagan, EJ O’Sullivan(R), M Boggs, B Walsh
TOWER New Zealand Limited RA Flannagan, EJ O’Sullivan(R), M Boggs, B Walsh
TOWER Asset Management Limited RA Flannagan, EJ O’Sullivan (R), ME Parrot, A J K Stubbs, M Boggs
TOWER Managed Funds Limited RA Flannagan, EJ O’Sullivan (R), ME Parrot, A J K Stubbs, M Boggs
TOWER Employee Benefi ts Limited RA Flannagan, EJ O’Sullivan (R), ME Parrot, A J K Stubbs, M Boggs
TOWER Managed Funds Investments Limited RA Flannagan, EJ O’Sullivan (R), ME Parrot, A J K Stubbs, M Boggs
TOWER Health & Life Limited RA Flannagan, EJ O’Sullivan (R), SJ Boomert (R), JE Douglas (R), M Boggs, B Walsh
TOWER Insurance Limited RA Flannagan, EJ O’Sullivan (R), SJ Boomert (R), JE Douglas (R), M Boggs, B Walsh
TOWER Life (N.Z.) Limited RA Flannagan, EJ O’Sullivan (R), SJ Boomert (R), JE Douglas (R), M Boggs, B Walsh
TOWER Medical Insurance Limited RA Flannagan, EJ O’Sullivan (R), SJ Boomert (R), JE Douglas (R), M Boggs, B Walsh
National Insurance Company (Holdings) Limited RA Flannagan, JE Douglas (R), P Absell, M Boggs
TOWER Insurance (Fiji) Limited RA Flannagan, JE Douglas (R), P Absell, M Boggs
Southern Pacifi c Insurance Company (Fiji) Limited RA Flannagan, JE Douglas (R), P Absell, M Boggs
TOWER Insurance (Cook Islands) Limited RA Flannagan, JE Douglas (R), M Boggs, B Walsh
TOWER Insurance (PNG) Limited RA Flannagan, J E Douglas (R), W Beilby, G McIlwain, M Boggs
Southern Cross Marine Limited RA Flannagan, J E Douglas (R), W Beilby, M Boggs
National Pacifi c Insurance Limited JE Douglas (R), M Reid, LAC Ting, D Williamson, A Parkinson(R), RA Flannagan, M Boggs
National Pacifi c Insurance (Tonga) Ltd JE Douglas (R), M Reid, LAC Ting, D Williamson, A Parkinson(R), RA Flannagan, M Boggs
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Apart from TOWER Capital and 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 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 24. Auditor fees are paid on behalf of the Group as disclosed in the fi nancial statements.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 27

DISCLOSURES

Shareholder and exchange disclosures

Shareholder analysis

TOWER’s shares are quoted on both the NZSX and ASX. As at 30 November 2011, 32,286 TOWER shareholders held less than A$500 of TOWER shares (ie, less than a marketable parcel as defi ned in the ASX Listing Rules), holding a total of 7,191,952 TOWER shares.

Total voting securities

As at 30 November 2011, TOWER had 265,176,580 ordinary shares and 4,300,000 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 7 holders of options.

Substantial security holders

At 30 November 2011, Guinness Peat Group plc held 90,499,166 ordinary shares and was the only substantial security holder in TOWER.

Principal shareholders

The names and holdings of the 20 largest registered TOWER shareholders as at 30 November 2011 are:

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Rank Name Shares % of Units
1. ITHACA (CUSTODIANS) LIMITED 90,499,166 34.13
2. ACCIDENT COMPENSATION CORPORATION - NZCSD 11,157,167 4.21
3. TEA CUSTODIANS LIMITED - NZCSD 8,078,320 3.05
4. HSBC NOMINEES (NEW ZEALAND) LIMITED A/C STATE STREET - NZCSD 7,590,601 2.86
5. CITIBANK NOMINEES (NEW ZEALAND) LIMITED - NZCSD 6,381,499 2.41
6. NEW ZEALAND SUPERANNUATION FUND NOMINEES LIMITED - NZCSD 6,364,524 2.40
7. JPMORGAN CHASE BANK NA - NZCSD 5,872,167 2.21
8. HSBC NOMINEES (NEW ZEALAND) LIMITED - NZCSD 5,572,036 2.10
9. FNZ CUSTODIANS LIMITED 5,391,775 2.03
10. NATIONAL NOMINEES LIMITED 5,083,556 1.92
11. JP MORGAN NOMINEES AUSTRALIA LIMITED 4,338,806 1.64
12. AMP INVESTMENTS STRATEGIC EQUITY GROWTH FUND - A/C NZCSD 4,039,311 1.52
13. CITICORP NOMINEES PTY LIMITED 3,243,890 1.22
14. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 2,358,234 0.89
15. INVESTMENT CUSTODIAL SERVICES LIMITED 1,992,937 0.75
16. CUSTODY AND INVESTMENT NOMINEES LIMITED - A/C NZCSD 1,944,263 0.73
17. ASTERON LIFE LIMITED - NZCSD 1,642,875 0.62
18. CITICORP NOMINEES PTY LIMITED 1,497,294 0.56
19. NATIONAL NOMINEES NEW ZEALAND LIMITED - NZCSD 1,406,179 0.53
20. NZGT NOMINEES LIMITED - AIF EQUITY FUND - A/C NZCSD 1,232,415 0.46
Totals: 175,687,015 66.25
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28 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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TOWER Limited Shareholder Statistics (as at 30 November 2011)

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Size of holdings Number of holders % Number of shares %
1 to 1,000 43,764 80.33 14,671,040 5.53
1,001 to 5,000 8,289 15.21 16,936,877 6.39
5,001 to 10,000 1,224 2.25 8,731,282 3.29
10,001 to 100,000 1,105 2.03 26,932,678 10.16
100,001 and over 97 0.18 197,904,703 74.63
Total 54,479 100 265,176,580 100
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TOWER Limited Optionholder Statistics (as at 30 November 2011)

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Size of holdings Number of holders % Number of options %
1 to 1,000 - - - -
1,001 to 5,000 - - - -
5,001 to 10,000 - - - -
10,001 to 100,000 3 42.85 300,000 6.97
100,001 and over 4 57.15 4,000,000 93.03
Total 7 100 4,300,000 100
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TOWER Capital Limited Bondholder Statistics (as at 30 November 2011)

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Size of holdings Number of holders % $ bonds %
1 to 5,000 225 12.91 1,125,000 1.37
5,001 to 10,000 455 26.1 4,391,000 5.37
10,001 to 50,000 875 50.2 24,901,000 30.46
50,001 to 100,000 118 6.77 10,064,000 12.31
100,001 and over 70 4.02 41,278,000 50.49
Total 1,743 100 81,759,000 100
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TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 29

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 below, TOWER securities are freely transferable under New Zealand law.

The New Zealand Takeovers’ Code imposes a general rule by 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 defi ned 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 Offi ce’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)

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

On 27 May 2010, NZX Regulation approved TOWER’s application for a waiver from NZSX Listing Rule 7.11.1. Listing Rule 7.11.1 requires that an issuer making an issue must proceed to allotment within fi ve business days after the latest date on which applications for securities close. Applications to participate in TOWER’s dividend reinvestment plan (DRP) close on the record date for each dividend to which the DRP applies, and the issue price is calculated over the 5 business days following the record date. This means that the issue of TOWER shares under the DRP, cannot meet the timetable specifi ed by Rule 7.11.1.

NZX Regulation granted TOWER a waiver from Listing Rule 7.11.1 on the basis that:

TOWER must allot shares pursuant to the DRP on the same day that dividends are paid to shareholders who do not elect to participate in the DRP; and
if the DRP does not proceed to allotment, and money is returned to subscribers, TOWER will refund any such monies to those who have elected to participate in the DRP at the same time as shareholders who do not elect to participate in the DRP.

Donations

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

Dividend and Dividend Reinvestment Plan

A fi nal dividend of 2 cents per share, net of tax, is due to be paid by TOWER on 1 Febuary 2012 (Payment Date) to all shareholders on the register as at 5pm on Friday 20 January 2012 (Record Date). No dividend is proposed to be paid by TOWER Capital.

Shareholders with a New Zealand or Australian address on the Company’s register will be able to elect to participate in the Company’s Dividend Reinvestment Plan (DRP) up to the Record Date. Ordinary shares will be issued on the Payment Date to all shareholders who elect to participate in the DRP at a strike price equal to 97.5% of the volume weighted average price of the Company’s ordinary shares on NZX on the fi ve trading days following the Record Date. The cash dividend that would otherwise be payable to these shareholders will be applied to pay up the issue price on the shares issued under the DRP. The shares issued under the DRP will rank equally with all existing ordinary shares of the Company.

If the shareholder is tax resident in New Zealand, the dividend will be fully credited with imputation credits at the ratio of 28/72 or 38.89%, being 0.7778 cents per share. TOWER will withhold resident withholding tax where applicable.

If the shareholder is tax resident in a jurisdiction other than New Zealand where the non-resident withholding tax rate is 15% or more and holds a shareholding of less than 10% in TOWER, the dividend will be credited with imputation credits of 0.4249 cents per share and a supplementary dividend of 0.3529 cents will be paid. The total ratio of the imputation credits and supplementary dividend is 28/72 or 38.89%. TOWER will withhold non-resident withholding tax where applicable.

If the shareholder is not tax resident in New Zealand and their shareholding interest in TOWER is either 10% or more, or less than 10% and the non-resident withholding tax rate is less than 15%, the dividend

30 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

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will be fully credited with imputation credits at the ratio of 28/72 or 38.89%, being 0.7778 cents per share.

No franking credits will be attached.

Shareholders with a New Zealand or Australian address on the Company’s register can elect in respect of any future dividends that may be declared by TOWER:

to participate in the DRP by completing a Participation Notice. A Participation Notice and the DRP Offer Document can be obtained by contacting the Share Registry, Computershare Investor Services; or
to be paid in cash by direct credit to their nominated bank account by completing a dividend instruction form, which can also be obtained by contacting Computershare Investor Services.

The Annual Report is signed on behalf of the Board by

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Bill Falconer Chairman

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Rob Flannagan Group Managing Director

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 31

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32 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

TOWER Limited Financial Statements

For the year ended 30 September 2011

Auditor’s Report	Auditor’s Report	34
Income statements		36
Statements of comprehensive income		37
Balance sheets		38
Statements of changes in equity		39
Statements of cash f ows		41
Notes to the f nancial statements		42
1.	Summary of signif cant accounting policies	42
2.	Critical accounting judgements and estimates	47
3.	Impact of amendments to NZ IFRS	48
4.	Underlying prof t after tax	49
5.	Premium revenue	49
6.	Investment revenue	50
7.	Fee and other revenue	50
8.	Claims expense	51
9.	Movement in policy liabilities	51
10.	Other expenses	52
11.	Taxation	53
12.	Receivables	56
13.	Intangible assets	57
14.	Investment in subsidiaries	58
15.	Deferred acquisition costs	59
16.	Property, plant and equipment	60
17.	Payables	61
18.	Provisions	61
19.	Interest bearing liabilities	62
20.	Insurance liabilities	62
21.	Contributed equity	63
22.	Accumulated losses	63
23.	Reserves	64

24.	Net assets per share	64
25.	Distributions to shareholders	64
26.	Segmental reporting	65
27.	Life insurance business	66
28.	General and health insurance business	74
29.	Financial instruments categories	80
30.	Risk management and f nancial instrument
	information	82
31.	Capital risk management	90
32.	Operating leases	91
33.	Cash and cash equivalents	91
34.	Contingent liabilities	92
35.	Capital commitments	92
36.	Share based payments	92
37.	Transactions with related parties	94
38.	Disclosures on asset restrictions and
	managed assets	96
39.	Guaranteed returns on funds invested –
	life insurance companies	96
40.	Investment linked and non-investment linked
	business of life insurance companies	97
41.	Earnings per share	97
42.	Impact of Christchurch earthquakes	98
43.	Subsequent events	98

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 33

PERFORMANCE

TOWER Limited Independent Auditor’s Report

For the year ended 30 September 2011

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Independent Auditors’ Report

to the shareholders of TOWER Limited

Report on the Financial Statements

We have audited the fi nancial statements of TOWER Limited on pages 36 to 98, which comprise the balance sheets as at 30 September 2011, the income statements, statements of comprehensive income, statements of changes in equity and statements of cash fl ows for the year then ended, and the notes to the fi nancial statements that include a summary of signifi cant accounting policies and other explanatory information for both the Company and the Group. The Group comprises the Company and the entities it controlled at 30 September 2011 or from time to time during the fi nancial year.

Directors’ Responsibility for the Financial Statements

The Directors are responsible for the preparation of these fi nancial statements in accordance with generally accepted accounting practice in New Zealand and that give a true and fair view of the matters to which they relate and for such internal controls as the Directors determine are necessary to enable the preparation of fi nancial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these fi nancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. These standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Company’s and the Group’s preparation of fi nancial statements that give a true and fair view of the matters to which they relate, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s and the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the fi nancial statements.

We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion.

We have no relationship with, or interests in, TOWER Limited or any of its subsidiaries other than in our capacities as auditors and providers of other assurance, taxation and advisory services. These services have not impaired our independence as auditors of the Company and the Group.

34 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Independent Auditor’s Report

For the year ended 30 September 2011

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Independent Auditors’ Report

TOWER Limited

Opinion

(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 fi nancial position of the Company and the Group as at 30 September 2011, and their fi nancial performance and cash fl ows for the year then ended.

Report on Other Legal and Regulatory Requirements

We also report in accordance with Sections 16(1)(d) and 16(1)(e) of the Financial Reporting Act 1993. In relation to our audit of the fi nancial statements for the year ended 30 September 2011:

(i) we have obtained all the information and explanations that we have required; and
(ii) in our opinion, proper accounting records have been kept by the Company and the Group as far as appears from an examination of those records.

Restriction on Distribution or Use

This report is made solely to the Company’s shareholders, as a body, in accordance with Section 205(1) of the Companies Act 1993. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters which we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed.

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Chartered Accountants Auckland 24 November 2011

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 35

PERFORMANCE

TOWER Limited Income Statements

For the year ended 30 September 2011

		Group	Company
		2011 2010	2011	2010
	Note	$000 $000	$000	$000
Revenue
Premium revenue from insurance contracts		437,793 423,975	-	-
Less: Outwards reinsurance expense		(61,867) (40,474)	-	-
Net premium revenue	5	375,926 383,501	-	-
Investment revenue	6	68,773 147,564	21,572	32,921
Fee and other revenue	7	33,759 33,097	-	-
Net operating revenue		478,458 564,162	21,572	32,921
Expenses
Claims expense		696,262 348,464	-	-
Less: Reinsurance recoveries revenue		(417,412) (73,583)	-	-
Net claims expense	8	278,850 274,881	-	-
(Decrease)/increase in policy liabilities	9	(31,555) 12,324	-	-
Management and sales expenses	10(A)	174,732 173,048	679	581
Net claims and operating expenses		422,027 460,253	679	581
Financing costs	10(B)	7,856 7,552	-	-
Total expenses		429,883 467,805	679	581
Prof t before taxation		48,575 96,357	20,893	32,340
Tax expense attributed to policyholders' returns	11(A)	(4,798) (25,700)	-	-
Prof t attributed to shareholders before taxation		43,777 70,657	20,893	32,340
Tax (expense)/credit attributed to shareholders' prof ts	11(A)	(10,397) (12,592)	(880)	232
Prof t for the year	4	33,380 58,065	20,013	32,572
Prof t attributed to:
Shareholders		33,066 57,554	20,013	32,572
Minority interests		314 511	-	-
		33,380 58,065	20,013	32,572
Basic and diliuted earnings per share	41	Cents Cents 12.57 22.33

The above income statements should be read in conjunction with the accompanying notes.

36 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Statements of Comprehensive Income

		Group	Company
		2011	2010 2011	2010
	Note	$000	$000 $000	$000
Prof t for the year	4	33,380	58,065 20,013	32,572
Other comprehensive income:
Currency translation differences		(629)	2,073 -	-
Other comprehensive (loss)/income net of taxation		(629)	2,073 -	-
Total comprehensive income for the year		32,751	60,138 20,013	32,572
Total comprehensive income attributed to:
Shareholders		32,378	59,906 20,013	32,572
Minority interests		373	232 -	-
		32,751	60,138 20,013	32,572

The above statements of comprehensive income should be read in conjunction with the accompanying notes.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 37

PERFORMANCE

TOWER Limited Balance Sheets

As at 30 September 2011

		Group	Company
		2011 2010	2011	2010
	Note	$000 $000	$000	$000
Assets
Cash and cash equivalents	33	223,981 207,842	89,939	85,420
Receivables	12	612,959 218,271	3,281	16,380
Financial assets at fair value through prof t or loss	29	883,645 953,818	-	-
Derivative f nancial assets	29	75,080 71,217	-	-
Liabilities ceded under reinsurance	27	20,026 16,065	-	-
Property, plant and equipment	16	6,298 6,629	-	-
Prepaid tax assets	11(B)	12,795 25,587	2,111	2,111
Current tax assets		7,347 -	1,560	-
Deferred acquisition costs	15	42,383 43,587	-	-
Investments in subsidiaries	14	- -	215,145	215,010
Deferred tax assets	11(C)	19,294 19,606	-	-
Intangible assets	13	72,741 55,022	-	-
Total Assets		1,976,549 1,617,644	312,036	318,921
Liabilities
Payables	17	57,502 53,896	198,747	207,849
Current tax liabilities		- 3,362	-	-
Provisions	18	5,325 8,525	-	-
Derivative f nancial liabilities	29	1,903 2,044	-	-
Interest bearing liabilities	19	81,263 80,602	-	-
Insurance liabilities	20	710,709 328,794	-	-
Deferred tax liabilities	11(C)	48,770 47,510	-	-
Life insurance contract liabilities	27	587,476 619,820	-	-
Life investment contract liabilities	27	28,084 31,759	-	-
Total Liabilities		1,521,032 1,176,312	198,747	207,849
Net Assets		455,517 441,332	113,289	111,072
Equity
Contributed equity	21	567,031 558,762	567,031	558,762
Accumulated losses	22	(4,352) (12,021)	(342,786)	(337,402)
Reserves	23	(109,688) (108,332)	(110,956)	(110,288)
Total equity attributed to shareholders		452,991 438,409	113,289	111,072
Minority interests		2,526 2,923	-	-
Total Equity		455,517 441,332	113,289	111,072

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Bill Falconer Chairman

John Spencer Director

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

38 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Statements of Changes in Equity

For the year ended 30 September 2011

Group	Attributed to shareholders Contributed equity Accumulated losses Reserves Total Minority interest Total equity $000 $000 $000 $000 $000 $000
Year ended 30 September 2011 At the beginning of the year Comprehensive income Prof t for the year Currency translation differences
	558,762 (12,021) (108,332) 438,409 2,923 441,332

	- 33,066 - 33,066 314 33,380
	- - (688) (688) 59 (629)
Total comprehensive income Transactions with shareholders Shares issued under dividend reinvestment plan Shares issued under employee share options scheme Movement in share based payment reserve Dividends paid Minority interest dividend paid Movement in treasury shares	- 33,066 (688) 32,378 373 32,751

	7,628 - - 7,628 - 7,628
	608 - - 608 - 608
	- 802 (668) 134 - 134
	- (26,199) - (26,199) - (26,199)
	- - - - (770) (770)
	33 - - 33 - 33
Total transactions with shareholders	8,269 (25,397) (668) (17,796) (770) (18,566)
At the end of the year	567,031 (4,352) (109,688) 452,991 2,526 455,517
Year ended 30 September 2010 At the beginning of the year Comprehensive income Prof t for the year Currency translation differences	547,680 (35,128) (110,795) 401,757 2,691 404,448 - 57,554 - 57,554 511 58,065 - - 2,352 2,352 (279) 2,073
Total comprehensive income Transactions with shareholders Shares issued under dividend reinvestment plan Shares issued under employee share options scheme Movement in share based payment reserve Dividends paid Movement in treasury shares	- 57,554 2,352 59,906 232 60,138 10,526 - - 10,526 - 10,526 426 - - 426 - 426 - 227 111 338 - 338 - (34,674) - (34,674) - (34,674) 130 - - 130 - 130
Total transactions with shareholders	11,082 (34,447) 111 (23,254) - (23,254)
At the end of the year	558,762 (12,021) (108,332) 438,409 2,923 441,332

The above statements of changes in equity should be read in conjunction with the accompanying notes.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 39

PERFORMANCE

TOWER Limited Statements of Changes in Equity (continued)

For the year ended 30 September 2011

	Contributed equity	Accumulated losses	Reserves	Total equity
Company	$000	$000	$000	$000
Year ended 30 September 2011
At the beginning of the year	558,762	(337,402)	(110,288)	111,072
Comprehensive income
Prof t for the year	-	20,013	-	20,013
Total comprehensive income	-	20,013	-	20,013
Transactions with shareholders
Shares issued under dividend reinvestment plan	7,628	-	-	7,628
Shares issued under employee share options scheme	608	-	-	608
Movement in share based payment reserve	-	802	(668)	134
Dividends paid	-	(26,199)	-	(26,199)
Movement in treasury shares	33	-	-	33
Total transactions with shareholders	8,269	(25,397)	(668)	(17,796)
At the end of the year	567,031	(342,786)	(110,956)	113,289
Year ended 30 September 2010
At the beginning of the year	547,680	(335,527)	(110,399)	101,754
Comprehensive income
Prof t for the year	-	32,572	-	32,572
Total comprehensive income	-	32,572	-	32,572
Transactions with shareholders
Shares issued under dividend reinvestment plan	10,526	-	-	10,526
Shares issued under employee share options scheme	426	-	-	426
Movement in share based payment reserve	-	227	111	338
Dividends paid	-	(34,674)	-	(34,674)
Movement in treasury shares	130	-	-	130
Total transactions with shareholders	11,082	(34,447)	111	(23,254)
At the end of the year	558,762	(337,402)	(110,288)	111,072

The above statements of changes in equity should be read in conjunction with the accompanying notes.

40 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Statements of Cash Flows

	Group	Company
	2011	2010 2011	2010
	Note $000	$000 $000	$000
Cash f ows from operating activities
Premiums received	439,689	423,565 -	-
Interest received	38,823	39,179 3,551	3,096
Dividends received	2,623	2,418 18,000	32,400
Investment income	27,266	47,740 -	-
Non-life company fee income	33,719	33,097 -	-
Reinsurance received	34,390	31,447 -	-
Reinsurance paid	(56,652)	(42,945) -	-
Claims expenses	(320,580)	(337,646) -	-
Payments to suppliers and employees	(187,441)	(168,320) -	(14)
Interest paid	(6,533)	(6,952) -	-
Income tax paid	(9,950)	(5,220) -	-
Net cash (outf ow)/inf ow from operating activities	33(B) (4,646)	16,363 21,551	35,482
Cash f ows from investing activities
Net receipts for f nancial assets	63,564	116,689 -	-
Net payments for purchase of property, plant and equipment and intangible assets	(23,647)	(21,812) -	-
Net cash inf ow from investing activities	39,917	94,877 -	-
Cash f ows from f nancing activities
Proceeds from issue of share capital	1,224	528 -	528
Dividends paid	(18,572)	(24,144) (18,572)	(24,144)
Payment of supplementary dividends	(1,014)	(1,142) (1,014)	(1,142)
Payment of minority interest dividends	(770)	- -	-
Repayment of FuturePlan debenture	-	(25,021) -	-
Net advances from subsidiaries	-	- 2,554	(9,696)
Net cash outf ow from f nancing activities	(19,132)	(49,779) (17,032)	(34,454)
Net increase in cash and cash equivalents	16,139	61,461 4,519	1,028
Cash and cash equivalents at the beginning of year	207,842	146,381 85,420	84,392
Cash and cash equivalents at the end of year	33(A) 223,981	207,842 89,939	85,420

Note:

to subsidiaries. TOWER considers that knowledge of gross receipts and payments is not essential to understanding the activities of TOWER and it is considered acceptable to report only the net cash fl ows 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 the value of the sales are immaterial.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 41

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

TOWER Limited (The Company) is a profi t-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 is an issuer under the Financial Reporting Act 1993. The Company and its subsidiaries together are referred to in this fi nancial report as TOWER, or the Group, or the consolidated entity. The address of its registered offi ce is 22 Fanshawe Street, Auckland, New Zealand.

The fi nancial 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 Financial Reporting Standards (NZ IFRS) and other applicable fi nancial reporting standards, as appropriate for profi t- oriented entities.

Insurance contracts include those where the insured benefi t is payable on the occurrence of a specifi ed event such as death, injury or disability caused by accident or illness. The insured benefi t is either not linked or only partly linked to the market value of the investments held by the life insurer, and the fi nancial risks are substantially borne by the life insurer. Any products that do not meet the defi nition of a life insurance contract are classifi ed as life investment contracts.

Life investment contracts include investment-linked contracts where the benefi t 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 specifi c assets, the contractual arrangements are such that the investment-linked 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 benefi ts, both vested and unvested, are treated as expenses when incurred and liabilities until paid.

SPECIFIC ACCOUNTING POLICIES

The fi nancial statements were authorised for issue by the Board of Directors on 24 November 2011. Entity’s owners or others do not have power to amend after issue.

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 Pacifi c Islands region.

Compliance with International Financial Reporting Standards (IFRS)

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

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

(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 specifi c 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

PRINCIPLES OF CONSOLIDATION

The consolidated fi nancial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 September 2011 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 fi nancial 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, income statement and statement of comprehensive income.

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

INVESTMENT IN SUBSIDARIES

Investments in subsidiaries are accounted for at cost less impairment. Cost also includes direct attributable costs of investment.

PRINCIPLES UNDERLYING THE CONDUCT OF LIFE INSURANCE BUSINESS

The life insurance operations of the Group comprise the selling and administration of contracts which are classifi ed 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 signifi cant insurance risk. Insurance risk is defi ned as signifi cant if and only if an insured event could cause an insurer to pay signifi cant additional benefi ts in any scenario, excluding scenarios that lack commercial substance.

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) Health and General insurance contracts

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 using the effective interest method.

(iv) Fair value gains and losses

Fair value gains and losses on fi nancial assets at fair value through profi t or loss are recognised through the income statement in the period in which they arise.

42 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

(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 notifi cation 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) Health and General insurance contracts

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

(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 identifi able 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 classes of business based on appropriate cost drivers, including number of new policies issued and related premiums, number of new units issued, mean balance 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.

 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 benefi t. A comparison to recoverable value is carried out annually, with any variance below carrying value taken to the income statement in that year.

(iii) 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) REINSURANCE RECOVERIES

Reinsurance recoveries are recognised as revenue. Amounts recoverable are assessed in accordance with the terms of the reinsurance contracts, which is in a manner similar to the assessment of outstanding claims. Recoveries are measured as the present value of the expected future receipts, calculated on the same basis as the provision for outstanding claims.

(I) FINANCING COSTS

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

(J) TAXATION

(i) Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profi t 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 fi nancial 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 profi ts 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 profi t nor the accounting profi t.

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.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 43

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(v) Life Insurance tax

From 1 July 2010, life insurers have been subject to a new tax regime. Two tax bases are maintained; the shareholder base which is subject to tax on life risk products (premiums less claims) and net investment income from shareholder funds, and the policyholder base which is subject to tax on net investment income from policyholder funds. The life insurer pays tax on both bases at the prevailing corporate tax rate of 30% (2010: 30%). As the life insurer is taxed as proxy for the policyholder, returns to policyholders are tax exempt.

Transitional provisions are included in the new regime which effectively maintains the historical tax treatment for most policies in force on 30 June 2010 for a period of time (fi ve years in most cases). Under the previous tax regime, the life offi ce base was subject to tax on investment income less expenses plus underwriting income, and tax was calculated on the policyholder base as benefi ts accrued to policyholders under the policies. The life insurer paid tax on the higher of the two bases at the company tax rate of 30% (2010: 30%).

(vi) 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 fl ows are included in the statements of cash fl ows on a net basis to the extent that the GST is not recoverable and has been included in the expense or asset.

(K) FOREIGN CURRENCY

(i) Functional and presentation currencies

The individual fi nancial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates. The consolidated Group fi nancial statements are presented in New Zealand dollars and rounded off to the nearest thousand dollars.

(ii) Transactions and balances

In preparing the fi nancial 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 fi nancial assets held at fair value through profi t 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 fi nancial 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 comprehensive income and the statement of changes in equity.

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and are translated at the closing rate with movements recorded through the Foreign Currency Translation Reserve in the statement of changes in equity.

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

(L) CASH AND CASH EQUIVALENTS

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

(M) RECEIVABLES

Receivables are recognised initially at fair value and subsequently at amortised cost using the effective interest method. Due to the short term nature of these assets the recoverable value, i.e. allowing for doubtful debts, will be the fair value.

(N) 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.

amount.
Computer equipment Furniture & f ttings	3-5 years 5 years
Motor vehicles	5 years
Buildings	50-100 years
Leasehold property improvements	3-12 years

(O) 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 including life insurance contract liabilities and life investment contract liabilities;
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 measured at fair value through profi t 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, fi xed 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 fi xed 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; and,
receivables are carried at amortised cost less any impairment, which is the best estimate of fair value as they are settled within a short period.

44 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

(P) EARNINGS PER SHARE

(i) Basic earnings per share

Basic earnings per share is calculated by dividing the profi t 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 fi gures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other fi nancing 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.

(Q) 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 identifi able 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 benefi t from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.

Any impairment is recognised immediately in the income statement.

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.

Internally generated intangible assets are recorded at cost which includes all the directly attributable costs necessary to create, produce and prepare the asset capable of operating in the manner intended by management. Amortisation of internally generated intangible assets begins when the asset is available for use and is amortised on a straight line basis over the estimated useful life. General use computer software 3-5 years Core operating system software 10 years

(R) IMPAIRMENT OF NON FINANCIAL ASSETS

Assets that have an indefi nite useful life are not subject to amortisation and are tested bi-annually for impairment. Assets with a fi nite 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 identifi able cash fl ows (cash generating units).

(S) ACQUISITION OF ASSETS

Identifi able 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.

(T) DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS

The Group classifi es its fi nancial assets in the following categories: at fair value through profi t or loss and loans and receivables. The classifi cation depends on the purpose for which the fi nancial assets were acquired. Management determines the classifi cation of its fi nancial assets at initial recognition.

All purchases and sales of fi nancial assets classifi ed as fair value through profi t 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 receivables are recognised at settlement date, which is the date that the assets are delivered or received.

(i) Loans and receivables

Loans and receivables are non-derivative fi nancial assets with fi xed 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 initially at fair value plus transactions costs and subsequently at amortised cost using the effective interest method less any impairment.

(ii) Financial assets at fair value through profi t or loss

Financial assets at fair value through profi t or loss comprise of fi nancial assets that are either held for trading or designated on initial recognition at fair value through profi t or loss. A fi nancial asset is classifi ed 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 signifi cantly reduce measurement or recognition inconsistencies or if related fi nancial assets or liabilities are managed and evaluated on a fair value basis.

Financial assets at fair value through profi t 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 fi nancial assets.

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

(iii) Fair value

The fair value of the Group’s fi nancial assets and liabilities that are measured at fair value is determined based on available market prices or using appropriate valuation methods if these are not traded in an active market. Financial instruments carried at fair value are categorised into the three level fair value hierarchy based on signifi cance of inputs used in the measurement. Level 1 includes inputs of quoted prices in active markets for identical assets or liabilities. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly. Level 3 includes inputs for the assets or liabilities that are not based on observable market data.

(iv) Offsetting fi nancial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

(v) Derecognition

Financial assets are derecognised when the rights to receive cash fl ows from the investments have expired or have been transferred and the group has transferred substantially all risks and rewards of ownership.

(U) IMPAIRMENT OF FINANCIAL ASSETS

Financial assets, with the exception of those measured at fair value

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 45

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

through profi t 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 fl ows of the asset have been impacted as a result of one or more events that occurred after the initial recognition of the fi nancial asset.

For fi nancial 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 fl ows, discounted at the original effective interest rate.

For all fi nancial 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 notifi cation 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 fi nancial 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.

(V) LEASED ASSETS

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

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

(W) INTEREST BEARING LIABILITIES

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 liability is recognised over the term of the liability.

(X) PAYABLES

These amounts represent liabilities for goods and services provided to the Group prior to the end of the fi nancial year which are unsettled. Payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

(Y) 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 outfl ow of resources will be required to settle the obligation. Provisions are recognised at the best estimate of future cash fl ows discounted to present value where the effect is material.

(Z) 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 outfl ows to be made in respect of services provided up to the balance date. In determining the present value of future cash outfl ows, 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.

(AA) CAPITAL GUARANTEES

Derivatives embedded in other fi nancial 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. A separate instrument with the same terms as the embedded derivative would meet the defi nition of a derivative.

(AB) LIFE INSURANCE LIABILITIES

The Group’s life insurance liabilities are split between life insurance contracts and life investment contracts. Life insurance contracts are accounted for in accordance with the requirements of NZ IFRS 4 Insurance Contracts. Life investment contracts are accounted for in accordance with NZ IAS 18 Revenue and NZ IAS 39 Financial Instruments: Recognition and Measurement.

Life insurance contracts are those contracts that transfer signifi cant insurance risk. Life investment contracts are those contracts with no insurance risk, but which give rise to a fi nancial asset/and or liability under NZ IAS 39. Contracts that contain a discretionary participating feature are also classifi ed as life insurance contracts.

(i) Life investment contract liabilities

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

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

(ii) Life insurance contract liabilities

The fi nancial 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 profi t margin’, is recognised over the life of the contract in a manner that refl ects the pattern of risk accepted from the policyholder ‘the service’, hence the term Margin on Services.

Life insurance contract liabilities are determined using either the projection method or accumulation method as referred to in note 27. Under the projection method the policy liability is calculated as the net present value of these projected cash fl ows using best estimate assumptions about the future. When the benefi ts under the life insurance contract liability are linked to the assets backing it, the discount rate applied is based on the expected future earnings rate on those assets. Where the benefi ts 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.

(AC) GENERAL AND HEALTH INSURANCE LIABILITIES

General insurance outstanding claims are measured at the central estimate of the present value of expected future payments after allowing for infl ation and superimposed infl ation and discounted

46 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

at the risk free rate. Health insurance outstanding claims are measured at the central estimate of the present value of expected future payments after allowing for historical claims cost escalation and discounted at the risk free rate. In addition a risk margin is added to the claims provision to recognise the inherent uncertainty of the central estimate.

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.

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 defi ciencies in the income statement arising from the carrying amount of the unearned premium liability less any related deferred acquisition costs and intangible assets not meeting the estimated future claims under current insurance conditions. Liability adequacy testing is performed at a portfolio level of contracts that are subject to broadly similar risks and are managed together as a single portfolio.

(AD) PREMIUM PAYBACK LIABILITY

For health premium payback business an additional unearned premium liability has been established representing the accrued amount of premium expected to be repaid to policyholders. This liability is discounted at the risk-free rate and a liability adequacy test has been performed incorporating a risk margin to cover uncertainty in the central estimate.

(AE) CONTRIBUTED EQUITY

(i) Ordinary share capital

Ordinary shares issued by the Group are classifi ed 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.

(AF) 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 specifi c 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.

(AG) SEGMENT REPORTING

An operating segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other operating segments. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (CODM) who reviews the operating results on a regular basis and makes decisions on resource allocation and assessing performance. The chief operating decision-maker has been identifi ed as the Company’s Board of Directors.

(AH) COMPARATIVES

Where necessary, comparative information has been reclassifi ed 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 qualifi ed 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 benefi ts and administering these insurance contracts;
mortality and morbidity experience on life insurance products, including enhancements to policyholder benefi ts;
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 profi tability from those products. Details of specifi c actuarial policies and methods are set out in note 27.

(B) CLAIMS LIABILITIES UNDER HEALTH AND 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 fi nal outcome will prove to be different from the original liability established.

The estimation of claims incurred but not reported (IBNR) is

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 47

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

2. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (CONTINUED)

generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notifi ed 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 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;
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 notifi ed 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 specifi c assumptions used in deriving the outstanding claims liability at year end are detailed in note 28 and note 42 with regards to the impact of the Christchurch earthquakes.

(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 refl ective 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.

3. IMPACT OF AMENDMENTS TO NZ IFRS

(A) 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 2011 or later periods, and the Group has not early adopted them:

NZ IAS 24, ‘Related party disclosures’ (effective from 1 January 2011). The revised standard amends the defi nition of a related party. The amendment is not expected to have a material impact on the fi nancial statements.
NZ IFRS 9 ‘Financial Instruments’ (effective from 1 January 2013). The standard is the fi rst step in replacing NZ IAS 39 and introduces requirements for classifying and measuring fi nancial assets and liabilities. The Company is in the process of evaluating the potential effect of this standard.
NZ IFRS 13 ‘Fair value measurement’ (effective from 1 January 2013). The standard replaces the guidance on fair value measurement in existing IFRS literature with a single standard. The standard is not expected to have a material impact on the fi nancial statements.
NZ IFRS 10 ‘Consolidated Financial statements’ (effective from 1 January 2013). The standard requires a parent to present consolidated fi nancial statements as those of a single economic entity, replacing the requirements previously contained in IAS 27 Consolidated and Separate Financial Statements. The standard is not expected to have a material impact on the fi nancial statements.
NZ IFRS 12 ‘Disclosure of Interests in Other Entities’ (effective from 1 January 2013). The standard requires extensive disclosure of information that enables users of the fi nancial statements to evaluate the nature of, and risks associated with, interests in other entities. The Company is in the process of evaluating the potential effect of this standard.
Harmonisation Amendments (effective from 1 July 2011). This amends multiple standards to harmonise NZ IFRS with IFRS and Australian Accounting Standards. The Company is in the process of evaluating the potential effect of the amendments.
Improvements to NZ IFRS 2010 includes various amendments effective for periods beginning on or after 1 January 2011 and are not expected to have a material impact on the fi nancial statements.

(B) STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS EFFECTIVE 2011 OR EARLY ADOPTED BY THE GROUP.

The Group has early adopted the following new and amended IFRS’s as of the 1 October 2010:

NZ IFRS 7, ‘Financial instruments’ (effective retrospectively from 1 January 2011). The amendment emphasises the interaction between quantitative and qualitative disclosures about the nature and extent of risks associated with fi nancial instruments. The change in accounting policy has not resulted in additional disclosures.

48 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

4. UNDERLYING PROFIT AFTER TAX

Underlying profi t after tax is presented to provide a more meaningful comparison of the Group’s profi t for the reported fi nancial years. The movement in the discount rate during the 2011 and 2010 fi nancial years impacted the individual life risk policy liabilities and increased Group profi t after tax. 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 led to a change in the value of individual life risk policy liabilities, generating a net gain of $2,394,000 in the year (2010: $4,217,000).

	Group	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
Underlying prof t after tax	30,986	53,848 20,013	32,572
Add:
Discount rate effect before tax	3,420	5,999 -	-
Income tax on discount rate effect	(1,026)	(1,782) -	-
Discount rate effect after tax	2,394	4,217 -	-
Prof t for the year	33,380	58,065 20,013	32,572
5. PREMIUM REVENUE
Life insurance premiums	88,884	86,326 -	-
Life investment premiums	396	469 -	-
Total life premiums	89,280	86,795 -	-
Less: Deposits recognised as an increase in policy liabilities	(419)	(3,598) -	-
Life insurance contract premiums recognised as revenue	88,861	83,197 -	-
General insurance premiums	208,328	204,844 -	-
Health insurance premiums	140,604	135,934 -	-
Premium revenue from insurance contracts	437,793	423,975 -	-
Less: Reinsurance expense	(61,867)	(40,474) -	-
Total net premium revenue	375,926	383,501 -	-

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 49

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

	Group	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
6. INVESTMENT REVENUE
Fixed interest securities (1)
Interest income	38,890	36,366 3,572	521
Net realised gain	2,517	2,821 -	-
Net unrealised gain	2,285	2,112 -	-
Equity securities (1)	43,692	41,299 3,572	521
Dividend income	2,623	2,418 18,000	32,400
Net realised loss	(3,074)	(1,817) -	-
Net unrealised (loss)/gain	(7,775)	17,497 -	-
Property securities (1)	(8,226)	18,098 18,000	32,400
Property income	2,302	2,234 -	-
Net realised gain	426	6 -	-
Net unrealised gain	1,871	4,105 -	-
Other (2)	4,599	6,345 -	-
Other investment income	172	10,040 -	-
Net realised gain	22,737	33,714 -	-
Net unrealised gain	5,799	38,068 -	-
Total investment revenue	28,708	81,822 -	-
Total investment revenue	43,987	51,058 21,572	32,921
Total net realised gain	22,606	34,724 -	-
Total net unrealised gain	2,180	61,782 -	-
	68,773	147,564 21,572	32,921
7. FEE AND OTHER REVENUE
Investment and management fees	33,596	32,973 -	-
Other revenue	163	124 -	-
Total fee and other revenue	33,759	33,097 -	-

(1) The income and loss in these categories has been generated by fi nancial assets designated on initial recognition at fair value through profi t or loss.

(2) Other investment income has been generated by derivative fi nancial assets and fi nancial liabilities classifi ed as held for trading at fair value through profi t or loss.

50 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

Group
Company
2011
2010
2011
2010
$000
$000
$000
$000
8. CLAIMS EXPENSE
Life insurance claims
93,570
120,491
-
-
Life investment contract payments
3,238
3,528
-
-
Total life claims and payments
96,808
124,019
-
-
Less: Withdrawals recognised as a decrease in policy liabilities
(11,386)
(37,314)
-
-
Life insurance claims recognised as expense
85,422
86,705
-
-
General insurance claims
513,768
166,452
-
-
Health insurance claims
97,072
95,307
-
-
Claims expense
696,262
348,464
-
-
Less: Reinsurance recoveries revenue
(417,412)
(73,583)
-
-
Total net claims expense
278,850
274,881
-
-
9. MOVEMENT IN POLICY LIABILITIES
(Decrease)/increase in life insurance contract liabilities
(28,179)
8,479
-
-
(Decrease)/increase in life investment contract liabilities
(834)
2,168
-
-
(Decrease)/increase in non-current health insurance contract liabilities
(2,542)
1,677
-
-
(Decrease)/increase in policy liabilities
(31,555)
12,324
-
-

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 51

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

Group	Company	Company
2011	2010 2011	2010
$000	$000 $000	$000
10. OTHER EXPENSES (A) MANAGEMENT AND SALES EXPENSES Life insurance contracts Policy acquisition expenses: Commission 13,677	13,995 -	-
Other acquisition expenses 2,372	2,623 -	-
Policy maintenance expenses: Commission 6,654	6,011 -	-
Other maintenance expenses 4,524	4,694 -	-
Investment management expenses 266	480 -	-
Total life insurance expenses 27,493	27,803 -	-
Life investment contracts Policy maintenance expenses: Commission 11	16 -	-
Other acquisition expenses -	12 -	-
Total life investment expenses 11	28 -	-
Other non-life expenses 147,228	145,217 679	581
Total management and sales expenses 174,732	173,048 679	581
Included in total management and sales expenses are the following: Amortisation of non-life deferred acquisition costs 22,124	22,132 -	-
Bad debts written off 123	55 -	-
Change in provision for doubtful debts 323	25 -	-
Amortisation of software 2,307	2,039 -	-
Depreciation: Off ce equipment and furniture 634	1,046 -	-
Motor vehicles 305	251 -	-
Computer equipment 2,649	2,050 -	-
Directors’ fees 632	640 632	640
Employee benef ts expense 66,836	58,198 -	-
Net loss on fair value of employee share option derivative 948	165 -	-
Loss on disposal of property, plant and equipment 364	- -	-
Restructuringcosts -	1,041 -	-
Auditor’s remuneration Fees paid to Company’s auditor: Audit of f nancial statements 1,087	928 -	-
Other assurance related services -	6 -	-
Tax related services 20	20 -	-
Non-assurance advisory related services 239	56 -	-
Fees paid to subsidiary's auditors: Audit of f nancial statements 25	23 -	-
Non-assurance advisory related services in the current year relate to work performed on internal forecasting models and other projects.
In the prior year services relate predominantly to work performed in relation to growth and	acquisition opportunities for the Group and
other minor projects. (B) FINANCING COSTS Interest expense 7,612	7,552 -	-
Other costs 244	- -	-
Total f nancing costs 7,856	7,552 -	-

52 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

	Group	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
11. TAXATION
(A) CURRENT TAX EXPENSE
Analysis of taxation expense
Current taxation	11,523	17,597 863	(780)
Deferred taxation	2,111	20,565 14	-
Under provided in prior years	1,561	130 3	548
Income tax expense/(benef t) for the year	15,195	38,292 880	(232)
Income tax expense attributed to policyholders	4,798	25,700 -	-
Income tax expense/(benef t) attributed to shareholders	10,397	12,592 880	(232)
	15,195	38,292 880	(232)
The tax expense/(benef t) recognised can be reconciled to the accounting prof t as follows:
Prof t before taxation	48,575	96,357 20,893	32,340
Income tax at the current rate of 30% (2010: 30%)	14,573	28,907 6,268	9,702
Taxation effect of non deductible expenses / non-assessable revenue:
Life insurance companies permanent differences	1,995	11,117 -	-
Change in tax rates	(681)	(1,614) 15	-
Recognition of prior period current tax	1,561	130 (3)	548
Non taxable Policyholder Australasian equity (gains)/losses	3,055	- -	-
Release of deferred tax liability on Policyholder Australasian equity (gains)/losses	(2,870)	- -	-
Non deductible losses/ (income) from PIEs	1,406	(1,766) -	-
Benef t of imputation credits received	(517)	(364) -	-
Deduction available on redemption of Futureplan Debenture	-	(2,656) -	-
Non deductible expenditure	513	374 -	-
Non taxable dividend from subsidiaries	-	- (5,400)	(9,720)
Adjustment to value of prepaid tax assets	(4,590)	4,590 -	-
Other	750	(426) -	(762)
Income tax expense/(benef t)	15,195	38,292 880	(232)

The Group taxation expense/(benefi t) includes both tax on shareholder profi ts and on returns attributed to policyholders. The allocation of tax expense between shareholders and policyholders has been disclosed in the income statement.

In May 2010 legislation was passed to reduce the company tax rate from 30% to 28%. This is effective for the Group from 1 October 2011. The fi nancial effect of the change in tax rate has been taken into account in these fi nancial statements and reduces deferred tax assets and liabilities by $681,000 (2010: $1,614,000) on a net basis.

(B) PREPAID TAX ASSETS

A prepaid tax asset of $12,795,000 (2010: $25,587,000) is recognised in the fi nancial statements of the Group as at 30 September 2011, $2,111,000 of which is recognised by the Company (2010: $2,111,000). The Group prepaid tax asset balance recognised is after the amount expected to be utilised to meet the policyholders’ current tax liabilities. The amount recognised in 2011 includes a write-back of the $4,590,000 impairment made in 2010. The prepaid tax asset balance is predominately owned by the policyholders and refl ects the amount now expected to be utilised to meet future policyholder tax liabilities as they arise. A refund of the prepaid tax is no longer being sought from Inland Revenue. At this time it is estimated that prepaid tax will be fully utilised by the end of the 2014 fi nancial year. Changes in taxation laws or the Group’s business activities could impact the timeframe for utilisation of the prepaid tax asset.

Analysed as:

Analysed as:
Current Non current	5,061 25,587 7,734 -	844 2,111 1,267 -
	12,795 25,587	2,111 2,111

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 53

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

11. TAXATION (CONTINUED)
		Charged/		Reclassif ed		Closing
	Opening	(credited)	Reclassif ed	from		balance
	balance at	to income	to current	policyholder		at 30
	1 October	statement	tax	reserves	September
Group	$000	$000	$000	$000		$000
(C) DEFERRED TAX ASSETS AND LIABILITIES
2011
Movements in deferred tax assets
Provisions and accruals	2,576	(1,161)	-	-		1,415
Insurance Liabilities	16,624	(938)	-	-		15,686
Fair value	-	1,682	-	-		1,682
Other	406	105	-	-		511
Total deferred tax assets	19,606	(312)	-	-		19,294
Movements in deferred tax liabilities
Deferred acquistion costs	14,782	(730)	-	-		14,052
Fair value	609	(609)	-	-		-
Unrealised gains	4,104	(2,810)	-	-		1,294
Life insurance contract liabilities	27,610	5,077	-	-		32,687
Other	405	781	(449)	-		737
Total deferred tax liabilities	47,510	1,709	(449)	-		48,770
Net deferred tax	(27,904)	(2,021)	449	-		(29,476)
2010
Movements in deferred tax assets
Provisions and accruals	2,872	(296)	-	-		2,576
Unrealised losses	16,979	(16,979)	-	-		-
Insurance Liabilities	12,282	4,342	-	-		16,624
Other	517	(111)	-	-		406
Total deferred tax assets	32,650	(13,044)	-	-		19,606
Movements in deferred tax liabilities
Deferred acquistion costs	15,571	(789)	-	-		14,782
Fair value	202	407	-	-		609
Unrealised gains	-	4,104	-	-		4,104
Life insurance contract liabilities	22,924	3,316	-	1,370		27,610
Other	(78)	483	-	-		405
Total deferred tax liabilities	38,619	7,521	-	1,370		47,510
Net deferred tax	(5,969)	(20,565)	-	(1,370)		(27,904)
				Group
				2011		2010
				$000		$000
Net deferred tax
Expected to crystallise in the next 12 months				(893)		1,686
Not expected to crystallise in the next 12 months				(28,583)		(29,590)
				(29,476)		(27,904)

Deferred tax liabilities of $2,828,000 have not been recognised in respect of temporary differences associated with investments in subsidiaries (2010: $2,001,000).

54 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

	Group
	2011	2010
	$000	$000
(D) IMPUTATION CREDIT ACCOUNT
Balance at 1 October	382	19,584
Attached to dividends received	163	520
Income tax paid/(refunded)	6,403	(1,279)
Attached to dividends paid	(9,793)	(11,178)
UOMI settlement debit	-	(3,133)
Transfers to policyholder credit account during the period	-	(5,499)
Transfer from policyholder credit account on cessation	(351)	1,367
Other	(201)	-
Balance at 30 September	(3,397)	382
The Group imputation credit account ref ects the imputation credits held by the Company as the representative member of the		Group.
(E) POLICYHOLDER CREDIT ACCOUNT
Balance at 1 October	-	400
Overestimation of previous years policyholder tax liability	(351)	3,348
Previous year's policyholder tax liability	-	(7,880)
Transfer from imputation credit account during the period	-	5,499
Transfer to imputation account on cessation	351	(1,367)
Balance at 30 September	-	-

Under the life insurance taxation regime in existence prior to 30 June 2010, the Policyholder Credit Account enabled TOWER Life (NZ) Limited to satisfy the income tax liability on policyholder income, by the Company electing to transfer imputation credits from the Imputation Credit Account to the Policyholder Credit Account.

The Taxation (International Taxation, Life Insurance and Remedial Matters) Act 2010 was passed on 6 October 2009. This Act results in policyholder tax liabilities arising on or after 1 July 2010 being met by the Company directly by payment of tax, rather than using Policyholder Credits. The 2010 fi nancial statements included the estimated policyholder tax for the 9 months ended 30 June 2010 and the estimated fi nal transfer of the Policyholder Credit Account balance to the Imputation Credit Account on cessation at 30 June 2010. The entries included for 2011 refl ect adjustments necessary to reach the fi nal policyholder tax position to 30 June 2010.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 55

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

	Group	Company	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
12. RECEIVABLES
Reinsurance recovery receivables	464,032	81,008 -	-
Outstanding premiums and trade receivables	125,786	118,582 -	-
Unsettled investment sales	596	523 -	-
Unearned commission	9,672	8,678 -	-
Related party receivables	-	- 2,951	16,071
Other	12,873	9,480 330	309
Total receivables	612,959	218,271 3,281	16,380
Analysed as:
Current	247,098	217,736 3,281	16,380
Non current	365,861	535 -	-
	612,959	218,271 3,281	16,380
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	127,843	120,316 -	-
Allowance for doubtful debts	(2,057)	(1,734) -	-
	125,786	118,582 -	-
Balance at 1 October	1,734	1,958 -	-
Provisions added during the year	1,744	1,448 -	-
Impairment loss recognised during the year	(126)	- -	-
Provisions released during the year	(1,295)	(1,672) -	-
Balance at 30 September	2,057	1,734 -	-

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.

56 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

Goodwill Group $000	Software Acquired Internally developed Under development Total $000 $000 $000 $000
13. INTANGIBLE ASSETS Year ended 30 September 2011 Cost: At 1 October 2010 30,811 Additions -


	1,386 14,289 21,572 68,058
	1,404 715 17,907 20,026
At 30 September 2011 30,811	2,790 15,004 39,479 88,084
Accumulated amortisation: At 1 October 2010 - Amortisation charge -
	(889) (12,147) - (13,036)
	(875) (1,432) - (2,307)
At 30 September 2011 -	(1,764) (13,579) - (15,343)
At 30 September 2011 At cost 30,811 Accumulated amortisation -
	2,790 15,004 39,479 88,084
	(1,764) (13,579) - (15,343)
Net book value at 30 September 2011 30,811	1,026 1,425 39,479 72,741
Year ended 30 September 2010 Cost: At 1 October 2009 30,811 Additions - Transfers -	1,091 12,282 5,072 49,256 295 1,086 16,500 17,881 - 921 - 921
At 30 September 2010 30,811	1,386 14,289 21,572 68,058
Accumulated amortisation: At 1 October 2009 - Amortisation charge - Transfers -	(588) (9,490) - (10,078) (301) (1,738) - (2,039) - (919) - (919)
At 30 September 2010 -	(889) (12,147) - (13,036)
At 30 September 2010 At cost 30,811 Accumulated amortisation -	1,386 14,289 21,572 68,058 (889) (12,147) - (13,036)
Net book value at 30 September 2010 30,811	497 2,142 21,572 55,022

Impairment testing for goodwill

Goodwill has been allocated to two individual cash-generating units (operating units) of the Group: health insurance and general insurance. The carrying amount of goodwill allocated to each of the cash generating units is shown below:

	Health	General
	Insurance	Insurance	Total
	$000	$000	$000
2011
Carrying amount of goodwill	13,067	17,744	30,811
2010
Carrying amount of goodwill	13,067	17,744	30,811

The amount of goodwill is subject to bi-annual impairment testing at the cash-generating unit level. No impairment loss has been recognised in 2011 as a result of the impairment review for each unit (2010: Nil).

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 57

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

13. INTANGIBLE ASSETS (CONTINUED)

Impairment review method overview

General Insurance

The recoverable amount of the general insurance business has been assessed with reference to its appraisal value to determine its value in use. A base discount rate of 10.4% was used in the calculation (2010: 11%) other assumptions used are consistent with the actuarial assumptions in note 28 in respect of TOWER Insurance. The projected cash fl ows have been determined using a steady average growth rate of 4% (2010: 4%). The cash fl ows were projected over the expected life of the policies. The projected cash fl ows are determined based on past performances and management expectations for market developments.

Health Insurance

The recoverable amount of the health insurance business has been assessed using its appraisal value calculation to determine its value in use. Cash fl ows for in-force business were projected over the expected life of the policies and a discount rate of 11% (2010: 11.5%) was applied. Other assumptions used are consistent with the actuarial assumptions in note 28 in respect of TOWER Medical. A multiple of 4 (2010: 4) was applied to the value of one year’s new business and added to the value of in-force business to determine the appraisal value. The appraisal value has been determined with reference to best estimate assumptions based on company experience and management expectations of market developments.

Sensitivity to changes in assumptions

Management considers that the recoverable amounts from the general and health insurance businesses, as determined by the appraisal values, will exceed the carrying values under a reasonable range of adverse scenarios.

	Group	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
14 INVESTMENT IN SUBSIDIARIES
Investments in controlled entities carried at cost	-	- 215,145	215,010

The table below lists TOWER Limited subsidiary companies. All subsidiary companies have a balance date of 30 September. Principal trading subsidiary companies at 30 September 2011 and 2010 are as follows:

Holdings	Holdings
Name of Company 2011	2010	Nature of Business
Incorporated in New Zealand TOWER Asset Management Limited 100%	100%	Investment management services
TOWER New Zealand 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 (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 Financial Services Group Limited 100%	100%	Holding company
TOWER Option Scheme Limited 100%	100%	Trustee for executive share options
TOWER Capital Limited 100%	100%	Holding company for f xed rate senior unsecured bonds
TOWER Employee Benef ts Limited 100%	100%	Holding company
TOWER Managed Funds Investment 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 Pacif c Insurance Limited 71%	71%	Fire and general insurance

58 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

Group
Company
2011
2010
2011
2010
$000
$000
$000
$000
15. DEFERRED ACQUISITION COSTS
Balance at 1 October
43,587
45,096
-
-
Acquisition costs deferred during the year
20,920
20,623
-
-
Current period amortisation
(22,124)
(22,132)
-
-
Balance at 30 September
42,383
43,587
-
-
Analysed as:
-
-
Current
20,011
23,363
-
-
Non current
22,372
20,224
-
-
42,383
43,587
-
-

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 59

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

		Off ce	Group
	Land and	equipment	Motor	Computer
	buildings	and furniture	vehicles	equipment	Total
	$000	$000	$000	$000	$000
16. PROPERTY, PLANT AND EQUIPMENT
Year ended 30 September 2011 Cost: At 1 October 2010 Additions Disposals Foreign exchange movements	1,936 - - 2	7,653 760 (986) 33	1,595 340 (131) 98	7,161 2,652 (413) 8	18,345 3,752 (1,530) 141
At 30 September 2011	1,938	7,460	1,902	9,408	20,708
Accumulated Depreciation: At 1 October 2010 Depreciation charge Disposals Foreign exchange movements	- - - -	(6,152) (634) 536 (54)	(724) (305) 121 (61)	(4,840) (2,649) 392 (40)	(11,716) (3,588) 1,049 (155)
At 30 September 2011	-	(6,304)	(969)	(7,137)	(14,410)
At 30 September 2011 At cost Accumulated depreciation	1,938 -	7,460 (6,304)	1,902 (969)	9,408 (7,137)	20,708 (14,410)
Net book value at 30 September 2011	1,938	1,156	933	2,271	6,298
Year ended 30 September 2010
Cost:
At 1 October 2009	1,895	6,855	964	6,140	15,854
Additions	24	1,270	712	1,984	3,990
Disposals	-	(472)	(88)	(47)	(607)
Foreign exchange movements	17	-	7	5	29
Transfers	-	-	-	(921)	(921)
At 30 September 2010	1,936	7,653	1,595	7,161	18,345
Accumulated Depreciation:
At 1 October 2009	-	(5,540)	(543)	(3,741)	(9,824)
Depreciation charge	-	(1,046)	(251)	(2,050)	(3,347)
Disposals	-	465	74	36	575
Foreign exchange movements	-	(31)	(4)	(4)	(39)
Transfers	-	-	-	919	919
At 30 September 2010	-	(6,152)	(724)	(4,840)	(11,716)
At 30 September 2010
At cost	1,936	7,653	1,595	7,161	18,345
Accumulated depreciation	-	(6,152)	(724)	(4,840)	(11,716)
Net book value at 30 September 2010	1,936	1,501	871	2,321	6,629

The parent company does not hold any property, plant and equipment.

60 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

	Group	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
17. PAYABLES
Trade payables	22,571	25,949 -	-
Reinsurance payables	12,931	7,716 -	-
Unsettled investment purchases	188	480 -	-
Other payables	21,812	19,751 2,014	1,884
Related party payables	-	- 196,733	205,965
Total payables	57,502	53,896 198,747	207,849
Analysed as:
Current	57,167	53,308 198,747	207,849
Non current	335	588 -	-
	57,502	53,896 198,747	207,849

As at 30 September 2011 unsettled investment purchases included a $167,000 balance of the NZ brokers account for NZ equities (2010: $459,000). The asset is recognised under fi nancial assets at fair value through profi t and loss.

18. PROVISIONS
Employee benef ts	5,268 7,484 -	-
Restructuring	57 1,041 -	-
Total provisions	5,325 8,525 -	-
Analysed as:
Current	5,325 8,525 -	-
	5,325 8,525 -	-

Movement in provisions

Restructuring
Opening balance at 1 October	1,041 - -	-
Additions	- 1,041 -	-
Amount used	(984) - -	-
Closing balance at 30 September	57 1,041 -	-

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 61

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

Group	Company
2011	2010 2011	2010
$000	$000 $000	$000
19. INTEREST BEARING LIABILITIES Fixed rate senior unsecured bonds 83,219	83,220 -	-
Unamortised capitalised costs (1,956)	(2,618) -	-
81,263	80,602 -	-
Analysed as: Current 732	799 -	-
Non current 80,531	79,803 -	-
81,263	80,602 -	-

Fixed rate senior unsecured bonds

On 24 March 2009, the Group issued $81,759,000 of fi xed rate senior unsecured bonds, bearing a fi xed interest rate of 8.5% per annum. The bonds mature on 15 April 2014.

The above total of $81,263,000 includes $1,459,819 of accrued interest (2010: $1,460,433). The Group capitalised $3,499,000 of costs associated with the issuance of the bonds. These costs are amortised over the fi ve year term of the bonds using the effective interest method. The bonds are carried at amortised cost using the effective interest method. The amortised issuance costs during the period to 30 September 2011 were $661,181 (2010: $601,005).

The fair value of fi xed rate senior unsecured bonds as at 30 September 2011 is $86,109,000 (2010: $85,464,000). This has been estimated using the method outlined in note 30 (D).

20. INSURANCE LIABILITIES Unearned premiums – general insurance 108,430 99,604 -	-
Unearned premiums – health 15,959 15,290 -	-
Outstanding claims – general and health insurance 522,633 151,804 -	-
Outstanding claims – life and other 10,016 5,884 -	-
Non-current health insurance contract liability 53,671 56,212 -	-
710,709 328,794 -	-
Analysed as: Current 255,175 267,610 Non current 455,534 61,184 -	-
710,709 328,794 -	-
The table below includes a reconciliation of unearned premiums as at balance date:
Unearned premiums - general insurance Opening balance at 1 October 2010 99,604 96,914 Premiums written 217,154 207,535 -	-
Premiums earned (208,328) (204,844) -	-
Closing balance at 30 September 2011 108,430 99,604 -	-
Unearned premiums - health and disability Opening balance at 1 October 2010 15,290 15,645 Premiums written 141,273 135,579 -	-
Premiums earned (140,604) (135,934) -	-
Closing balance at 30 September 2011 15,959 15,290 -	-

62 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

Group
Company
2011
2010
2011
2010
$000
$000
$000
$000
21. CONTRIBUTED EQUITY
Ordinary share capital (fully paid)
567,031
558,795
567,031
558,795
Less: Treasury shares
-
(33)
-
(33)
Total contributed equity
567,031
558,762
567,031
558,762
Number of shares
Number of shares
Represented by:
Ordinary shares
265,176,580
260,631,787
265,176,580
260,631,787
Less: Treasury shares
-
(20,276)
-
(20,276)
265,176,580
260,611,511
265,176,580
260,611,511
Movements in ordinary shares
Balance at 1 October
260,631,787
254,882,993
260,631,787
254,882,993
Dividend reinvested shares issued
4,250,669
5,423,186
4,250,669
5,423,186
Employee share options scheme shares issued
294,124
325,608
294,124
325,608
Balance at 30 September
265,176,580
260,631,787
265,176,580
260,631,787
$000
$000
$000
$000
Movements in ordinary share capital
Balance at 1 October
558,795
547,843
558,795
547,843
Dividend reinvested shares issued
7,628
10,526
7,628
10,526
Employee share options scheme shares issued
608
426
608
426
Balance at 30 September
567,031
558,795
567,031
558,795
Movements in treasury shares
Balance at 1 October
33
163
33
163
Movement in treasury shares during the year
(33)
(130)
(33)
(130)
Balance at 30 September
-
33
-
33
Number of shares
Number of shares
Represented by:
Treasury shares
-
20,276
-
20,276
All shares rank equally with one vote attached to each share.
Group
Company
2011
2010
2011
2010
$000
$000
$000
$000
22. ACCUMULATED LOSSES
Balance at 1 October
(12,021)
(35,128)
(337,402)
(335,527)
Net prof t for the year
33,066
57,554
20,013
32,572
Transfer from share based payments reserve
802
227
802
227
Dividends paid
(26,199)
(34,674)
(26,199)
(34,674)
Balance at 30 September
(4,352)
(12,021)
(342,786)
(337,402)

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 63

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

Group	Company
2011	2010 2011	2010
$000	$000 $000	$000
23. RESERVES Foreign currency translation reserve (FCTR) Balance at 1 October 1,956	(396) -	-
Currency translation differences arising during the year (688)	2,352 -	-
Balance at 30 September 1,268	1,956 -	-

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 profi t and loss when the net investment is disposed of.

Share based payments reserve
Balance at 1 October	2,712 2,601 2,712	2,601
Net movement in share based payments reserve	(668) 111 (668)	111
Balance at 30 September	2,044 2,712 2,044	2,712

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 Offi ce (ATO). It will be carried forward indefi nitely as a non equity style reserve to meet the requirements of the ATO.

requirements of the ATO.
Total reserves	(109,688) (108,332) (110,956)	(110,288)
	Group Company
	2011 2010 2011	2010
24. NET ASSETS PER SHARE
Net assets per share (dollars)	1.72 1.69 0.43	0.43
Net tangible assets per share (dollars)	1.55 1.59 0.43	0.43

Net assets per share represents the value of the Group’s total assets divided by the number of ordinary shares on issue at the balance date. Net tangible assets per share represents the net assets per share adjusted for the effect of intangible assets and deferred tax balances.

25. DISTRIBUTIONS TO SHAREHOLDERS

On 25 November 2010 the Board of Directors declared a dividend for the 2010 fi nancial year of 6 cents per share. The total amount payable was $16,277,649 including supplementary dividend, of which $5,221,002 was paid in TOWER shares under the dividend reinvestment plan and $11,056,647 paid in cash. The dividend was paid on 25 January 2011.

An interim dividend was declared by the Board of Directors on the 26 May 2011 for the half year ended 31 March 2011 of 4.0 cents per share. The total amount payable was $10,936,000 of which $2,407,000 was paid in TOWER shares under the dividend reinvestment plan and $8,529,000 paid in cash. The dividend was paid on 4 July 2011.

64 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

					Other
					(Holding
					companies
	Health	Life	General		and
	Insurance	Insurance	Insurance	Investments	eliminations)	Total
	$000	$000	$000	$000	$000	$000
26. SEGMENTAL REPORTING 30 September 2011 Revenue Revenue - external Revenue - internal	146,536 -	113,601 -	179,184 240	33,788 4,566	5,349 (4,806)	478,458 -
Total revenue	146,536	113,601	179,424	38,354	543	478,458
Earnings before interest, tax, depreciation and amortisation Interest expense Depreciation and amortisation	13,781 - -	25,070 - (12)	39,380 - (248)	9,920 - (5)	3,765 (7,612) (5,630)	91,916 (7,612) (5,895)
Prof t before income tax Income tax(expense)/credit(1)	13,781 (4,150)	25,058 (5,149)	39,132 (14,380)	9,915 (3,098)	(9,477) 2,964	78,409 (23,813)
Prof t for the year before discount rate and Christchurch effect Add discount rate(2) Less Christchurch earthquakes(3)	9,631 - -	19,909 2,394 (1,106)	24,752 - (22,208)	6,817 - -	(6,513) - (296)	54,596 2,394 (23,610)
Prof t for the year	9,631	21,197	2,544	6,817	(6,809)	33,380
Total assets Total liabilities Acquisition of property, plant and equipment, intangibles and other non current assets	165,558 94,853 -	852,341 672,012 -	794,764 665,970 370	34,133 9,442 -	129,753 78,755 23,408	1,976,549 1,521,032 23,778
30 September 2010
Revenue
Revenue - external	146,026	186,070	197,811	32,535	1,720	564,162
Revenue - internal	-	-	316	4,807	(5,123)	-
Total revenue	146,026	186,070	198,127	37,342	(3,403)	564,162
Earnings before interest, tax, depreciation and
amortisation	11,221	54,854	38,792	3,996	3,073	111,936
Interest expense	-	-	-	-	(7,552)	(7,552)
Depreciation and amortisation	-	(61)	(343)	(25)	(4,957)	(5,386)
Prof t before income tax	11,221	54,793	38,449	3,971	(9,436)	98,998
Income tax(expense)/credit(1)	(3,696)	(27,358)	(12,071)	(1,189)	3,634	(40,680)
Prof t for the year before discount rate and
Christchurch effect	7,525	27,435	26,378	2,782	(5,802)	58,318
Add discount rate(2)	-	4,217	-	-	-	4,217
Less Christchurch earthquakes(3)	-	-	(4,470)	-	-	(4,470)
Prof t for the year	7,525	31,652	21,908	2,782	(5,802)	58,065
Total assets	149,426	829,409	430,799	27,047	180,963	1,617,644
Total liabilities	88,352	711,571	283,129	9,253	84,007	1,176,312
Acquisition of property, plant and equipment,
intangibles and other non current assets	-	341	1,068	109	20,353	21,871

(1)Tax expense of individual segments has been impacted by intercompany reclassifi cations which have been eliminated for management and segmental reporting. This has a nil impact on the Group.

(2)The discount rate effect, as discussed in note 4, has been adjusted for tax and shown separately to provide a more meaningful comparison between the reported periods.

(3)The effect of Christchurch earthquakes adjusted for tax has been separately disclosed to show their impact on the business segments.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 65

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

26. SEGMENTAL REPORTING (CONTINUED)

(A) DESCRIPTION OF SEGMENTS AND OTHER SEGMENT INFORMATION

The operating segments are based on assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other operating segments.

Management has determined the operating segments based on the internal reporting reviewed by the Board of Directors (Chief Operating Decision Maker) for the purpose of making decisions on resource allocation and assessing performance.

Health insurance includes all health insurance in New Zealand. Life insurance includes all life and disability insurance in New Zealand. General Insurance includes all general insurance services in New Zealand and the Pacifi c Islands. Investments include all wealth management services in New Zealand. Other includes head offi ce expenses, fi nancing costs and eliminations.

TOWER Group operates predominantly in one geographical segment, New Zealand. The operations in Australia and the Pacifi c region do not represent a signifi cant part of the Group’s operations or hold material non-current assets.

The Group is domiciled in New Zealand. Revenue from external customers in New Zealand is $450,550,000 (2010: $523,366,000) and total revenue from external customers from other countries is $27,908,000 (2010: $40,796,000).

The Group does not derive revenue from an individual policy holder or intermediary that represents 10% or more of the Group’s total revenue.

(B) RECONCILIATION OF SEGMENTAL PROFIT

For management purposes, the Group reclassifi es some deferred acquisition costs and the gain or loss recognised on individual life risk policyholder liabilities from the movement in discount rates (refer note 4) differently from the requirements of NZ IFRS. This impacts the profi t before tax of the segments. The table below represents a reconciliation of total segmental profi t before tax to Group profi t before tax recorded in the income statement.

	2011	2010
	$000	$000
Total segmental prof t before tax	78,409	98,998
Adjustments to:
Deferred acquisition costs	-	(2,254)
Discount rate	3,420	5,999
Christchurch earthquakes(3)	(33,254)	(6,386)
Total Group prof t before tax	48,575	96,357

	Group	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
27. LIFE INSURANCE BUSINESS
(A) POLICY LIABILITIES
Life insurance contract liabilities
Value of policy liabilities – Projection Method
Future policy benef ts	879,290	843,387 -	-
Future bonuses	158,914	167,558 -	-
Future expenses	182,433	168,864 -	-
Reinsurance	(6,212)	(5,348) -	-
Future prof t margins	194,586	180,595 -	-
Future premiums	(874,714)	(793,027) -	-
Value of policy liabilities – Accumulation Method	534,297	562,029 -	-
Future policy benef ts	9,447	16,858 -	-
Unvested policy benef ts	23,707	24,867 -	-
Net policy liabilities - life insurance contracts	567,451	603,754 -	-

66 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

==> picture [471 x 343] intentionally omitted <==

----- Start of picture text -----

||||||
|---|---|---|---|---|
|Group|Company|
|2011|2010|2011|2010|
|$000|$000|$000|$000|
|Reconciliation of movements in life insurance contract policy|
|liabilities|
|Gross life insurance liabilities at 1 October|619,820|641,753|-|-|
|Increase in liabilities ceded under reinsurance|3,961|1,615|-|-|
|(Decrease)/increase in life insurance contract liabilities recognised in|(28,179)|7,108|-|-|
|the income statement|
|Deposits recognised as an increase in policy liabilities|23|3,130|-|-|
|Withdrawals recognised as a decrease in policy liabilities|(8,149)|(33,786)|-|-|
|Gross life insurance liabilities at 30 September|587,476|619,820|-|-|
|Life investment contract liabilities|
|Value of policy liabilities – Accumulation Method|
|Future policy benefi ts|28,084|31,759|-|-|
|Gross policy liabilities - life investment contracts|28,084|31,759|-|-|
|Reconciliation of movements in investment contract policy|
|liabilities|
|Gross life investment contract liabilities at 1 October|31,759|32,650|-|-|
|(Decrease)/increase in life investment contract liabilities recognised in|(834)|2,168|-|-|
|the income statement|
|Deposits recognised as an increase in policy liabilities|396|469|-|-|
|Withdrawals recognised as a decrease in policy liabilities|(3,237)|(3,528)|-|-|
|Gross life investment contract liabilities at 30 September|28,084|31,759|-|-|

----- End of picture text -----

The Group has designated life investment contract liabilities at fair value through profi t or loss. The impact on the fair value of these liabilities resulting from changes in credit risk recognised during the year is nil (2010: nil), except where the fair value of investment assets backing these liabilities is impacted by changes in credit risk. Any such impact on the investment assets is refl ected in the movement in the fair value of these contracts.

==> picture [471 x 226] intentionally omitted <==

----- Start of picture text -----

||||||
|---|---|---|---|---|
|Total gross policy liabilities|615,560|651,579|-|-|
|Liabilities ceded under reinsurance|
|Balance at 1 October|16,065|14,450|-|-|
|Movement in income statement|3,961|1,615|-|-|
|Balance at 30 September|20,026|16,065|-|-|
|Net policy liabilities|595,534|635,514|-|-|
|Gross policy liabilities analysed as:|
|Current|19,088|20,192|-|-|
|Non current|596,472|631,387|-|-|
|615,560|651,579|-|-|
|Liabilities ceded under reinsurance analysed as:|
|Current|3,198|3,928|-|-|
|Non current|16,828|12,137|-|-|
|20,026|16,065|-|-|

----- End of picture text -----

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 67

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

27. LIFE INSURANCE BUSINESS (CONTINUED)
	Group	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
(B) ANALYSIS OF LIFE INSURANCE AND LIFE INVESTMENT
CONTRACT RESULTS
Life insurance contracts
Planned prof t margins	11,653	14,815 -	-
Experience loss	1,896	(75) -	-
Capitalised loss recognition	(372)	12 -	-
Investment earnings on assets in excess of policy liabilities of life
companies	7,748	15,625 -	-
Operating prof t after tax attributable to shareholders arising from
life insurance contracts	20,925	30,377 -	-
Life investment contracts
Planned prof t margins	47	47 -	-
Experience prof t	225	266 -	-
Operating prof t after tax attributable to shareholders arising from
life investment contracts	272	313 -	-

(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)).

		TOWER Life (NZ) TOWER Health	& Life
		2011 2010 2011	2010
		$000 $000 $000	$000
Solvency requirement	A	695,743 758,865 131,795	130,395
Represented by:
Policy liabilities		674,191 695,680 (102,356)	(85,033)
Other liabilities		18,700 57,272 40,998	34,668
Solvency reserve	B	2,852 5,913 193,153	180,760
Solvency requirement		695,743 758,865 131,795	130,395
Assets available to meet solvency reserve:		52,643 50,647 227,527	209,579
Solvency reserve:	B	2,852 5,913 193,153	180,760
Excess assets		49,791 44,734 34,374	28,819
Coverage of required solvency reserve		18.5 8.6 1.2	1.2

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.

In determining the 2010 solvency margin for TOWER Health & Life Limited the actuary has included as admissible assets intercompany balances of $37,100,000 that relate to the settling of intercompany tax balances. These were settled in full subsequent to 30 September 2010 but prior to the completion of the 2010 fi nancial statements.

Under the new Prudential (Insurance Supervision) Act 2010 enacted

on the 7 September 2010, the Group will be subject to new solvency requirements issued by the Reserve Bank of New Zealand. The Group expects to meet the new solvency requirements that will apply under the new prudential supervision regime.

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

The effective date of the policy liabilities and solvency reserves calculation is 30 September 2011. The Chief Actuary, John Feyter, BSc, FNZSA, FIA has calculated policy liabilities for TOWER Life (NZ) Limited and TOWER Health & Life Limited. The actuary is satisfi ed as to the accuracy of the data from which the policy liabilities have been determined.

68 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

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 the life insurance business of TOWER Life (NZ) Limited and TOWER Health & Life Limited have been determined in accordance with Professional Standard No.3 “Determination of Life Insurance Policy Liabilities” issued by the New Zealand Society of Actuaries. 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.

Valuation of policy liabilities

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

The value of policy liabilities may also include a component for profi t 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 specifi c 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 profi table. 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 fl ows (premiums, investment income, redemptions or benefi t payments, expenses) plus profi t margins to be released in future periods, to establish the value of policy liabilities. The value of expected future premiums is deducted from the value of expected benefi t and expense payments to arrive at the obligation to policy owners.

(ii) Accumulation method

The accumulation method is only used if the results are not materially different from the projection 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 fl uctuation reserves subject to a minimum of the current surrender value.

Methods used

Where the policy liability is determined by the projection method, actuarial standards require profi t to be related to one or more fi nancially measurable indicators of the provision of service (or related income) called ‘profi t carriers’. The profi t carriers adopted for the major product groups are shown in the table below:

prof table. Where costs are deferred, they are recovered premiums or charges receivable in the future.	from
		PROFIT CARRIERS
		(for business valued using projection
MAJOR PRODUCT GROUPS	METHOD	method)
Traditional participating	Projection	Cost of supportable bonus
Traditional non-participating, renewal and level term and	Projection	Expected death claims
mortgage repayment insurance
Annuities	Projection	Expected annuity payments
Individual lump sum life insurance risk (life, temporary and	Projection	Expected claims
permanent disability and trauma) and disability income
protection insurance
Non-participating investment account	Accumulation
Group risk insurances and renewable insurances	Accumulation

(b) Disclosure of assumptions

The following table summarises the key assumptions used in the calculation of policy liabilities, together with notes on any signifi cant changes in the assumptions:

REQUIRED ASSUMPTION	BASIS OF ASSUMPTION (By product group)	ASSUMPTION
Discount rates for	As the value of benef ts is contractually linked to the	The discount rates used are as follows:
participating business	performance of assets, a discount rate based on the market return on the asset backing policy liabilities is used. The discount rate assumed in calculating policyholder liabilities was derived from the expected long term average	September 2011 : 4.7% net of tax September 2010 :4.7% net of tax from 1 October 2010 to 30 September 2011 and 4.9% net of tax from 1 October 2011 onward
	rates of return for the asset pool backing this business,
	based on the benchmark asset mix. Discount rates
	assumed are net of taxation and investment expense.
Discount rates for non-	Risk free discount rates have been adopted for	The discount rates used are as follows:
participating life insurance contracts	life insurance contracts where the benef ts are not contractually linked to the performance of backing asset pools. The risk free discount rates have been determined based on swap rates, depending on the nature structure and term of the contract liabilities. Discount rates are	Risk Business (discount rates gross of tax) September 2011: 4.4% September 2010: 4.7% Annuities (discount rates net of tax)
	assumed net of investment management expenses.	September 2011: 3.0% September 2010: 3.2%
Inf ation	Benef t indexation is before allowance for the proportion of	Benef t Indexation
	policyholders who take up indexation.	September 2011 2.0%
		September 2010 2.0%

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 69

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

27. LIFE INSURANCE BUSINESS (CONTINUED)

REQUIRED ASSUMPTION	BASIS OF ASSUMPTION (By product group)	ASSUMPTION
Future expenses	Future maintenance expenses have been set based on	Per policy expenses
	experience analyses conducted by the various companies	Participating Business:
	as well as the actuary’s expectations of future expense	September 2011: $97 p.a.
	levels.	September 2010: $93 p.a.
	Future investment expenses have been assumed to be	Risk business:
	at the same percentage of assets under management as	September 2011: $153 to $225 p.a.
	currently applies.	September 2010: $143 to $197 p.a.
		Annuities:
		September 2011: $68 p.a.
		September 2010: $111 p.a.
Rates of taxation	Rates of taxation have been assumed to remain as under	The corporate tax rate used is:
	current legislation or legislation substantively enacted at	September 2011: 28%
	the valuation date.	September 2010: 30% for 2011 year
	Risk policy liabilities have been calculated on a gross of	28% for future years
	tax basis. As such there is no allowance for tax within	GST rate:
	those policy liabilities (excluding GST).	September 2011: 15%
	GST has been allowed for at the current rate applicable.	September 2010: 10%
Mortality – participating	Mortality assumption is based on NZ97 table adjusted for	Factors applied to NZ97:
business	company experience.	September 2011: 46% to 77%
	No changes were made to assumptions at	September 2010: 46% to 77%
	September 2011.
Mortality – risk products	Mortality assumption is based on NZ07 table adjusted	Factors applied to NZ07:
	for company experience. No changes were made to	September 2011: 52% to 84% for non-
	assumptions at September 2011.	smokers. Additional loading for smokers.
		September 2010: 52%to 84% for non-
		smokers. Additional loading for smokers.
Mortality – annuities	Mortality assumption is based on PML80C10 table	Historical and Future Improvement factors:
	projected to 1994 and adjusted for company experience.	September 2011: 1% to 3% p.a. depending
	Factors were applied to take into account both historical	on age and sex.
	(from 1994) and prospective mortality improvement.	September 2010: 1% to 3% p.a. depending
	A small change was made at September 2011 to increase	on age and sex.
	mortality improvement factors for middle ages.
Disability – lump sum	Based upon recent company and reinsurer experience	September 2011: 105% to 139% of
	adjusting for different product def nitions. Some wholesale	reinsurance tables
	schemes use specif c company experience.	September 2010: 105% to 139% of
		reinsurance tables
Disability income	Standard morbidity tables (CIDA) adjusted for company	September 2011: CIDA85 adjusted
	experience. Specif c company experience is used for	September 2010: CIDA85 adjusted
	certain wholesale schemes.
Discontinuances	Assumed discontinuance rates vary by sub-grouping within	Annual discontinuance rates for main risk
	a class and vary according to the length of time tranches	product lines:
	of business have been in-force and other relevant factors.	September 2011: 7.5% to 13.5% p.a.
	There has been no material change to discontinuance rates	September 2010: 7.5% to 13.5% p.a.
	as at September 2011.	In both years additional discontinuances were
		assumed for ages over 65 years.
Surrender values	Surrender values are based on current practice.

70 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

Rates of future supportable Assumed future supportable bonus rates included in Future supportable bonus rates as a participating benefi ts policyholder liabilities were set such that the present value percentage of Sum Assured: of policyholder liabilities, allowing for the shareholders’ September 2011: 0.65% to 2.1% right to participate in distributions, equals the value of September 2010: 0.65% to 2.1% assets supporting the business. Future supportable bonus rates as a Distributions are split between policyholders and percentage of Reversionary Bonus: shareholders with the valuation allowing for shareholders September 2011: 1.1% to 1.9% to share in distributions. The rate of shareholder September 2010: 1.1% to 1.9% participation assumed is 25% of the value of bonuses Future terminal bonus: distributed to participating policyholders subject to policy September 2011: 6.4% to 30.1% conditions. September 2010: 7.1% to 30.8% Additional policy bonuses will emerge from the assets representing policyholders’ unvested benefi ts. Premium rates Premium rates are assumed to be equivalent to those During 2011 there was an increase in premium being charged by the company at the reporting date. rates of 3% for some lines of yearly renewable term life insurance business. The assumed premium rates refl ect this increase.

Effect of changes in actuarial assumptions during the reporting period

The liabilities for life insurance contracts include the value of future profi t margins that are to be released over future reporting periods. The impact of assumption changes on non participating business are absorbed by the future profi t margins, provided suffi cient 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 profi t 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 profi t margins are insuffi cient 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 assumption changes for life insurance contracts made during the year is shown below.

	Change	Change in next	Change in	Change in
	in future	f nancial year's	current period	current period
	shareholder	shareholder	contract	shareholder
	prof t margins	planned prof t	liability	prof t
	$000	$000	$000	$000
2011
Assumption change
Mortality and Morbidity	(388)	(45)	372	(372)
Discontinuances	(1,188)	(61)	-	-
Expenses	(1,113)	(186)	29	(6)
Tax	-	-	-	-
Other	4,059	363	-	-
2010
Assumption change
Mortality and Morbidity	5,412	1,197	-	-
Discontinuances	(194)	(15)	29	(6)
Expenses	(109)	(117)	(169)	34
Tax	2,901	172	(797)	159
Other	2,575	365	-	-

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 71

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

27. LIFE INSURANCE BUSINESS (CONTINUED)

(c) Sensitivity analysis

Sensitivity analysis is conducted to quantify the exposure to risk of change in the key underlying variables.

Variable	Impact of movement in underlying variable
Expense risk	An increase in the level or inf ationary growth of expenses over assumed levels will decrease prof t and
	shareholder equity.
Interest rate risk	Depending on the prof le of the investment portfolio, the investment income of the Group will decrease as interest
	rates decrease. This may be offset to an extent by changes in the market value of f xed interest investments. The
	impact on prof t and shareholder equity depends on the relative prof les of assets and liabilities, to the extent that
	these are not matched.
Mortality rates	For insurance contracts providing death benef ts, greater mortality rates would lead to higher levels of claims,
	increasing associated claims costs and therefore reducing prof t and shareholder equity.
Morbidity rates	The cost of health-related claims depends on both the incidence of policyholders becoming temporarily or
	totally and permanently disabled and, in the case of temporary disablement, the duration which they remain
	temporarily disabled. Higher than expected incidence and duration would increase claim costs, reducing prof t
	and shareholder equity.
Discontinuance	The impact of the discontinuance rate assumption depends on a range of factors including the type of
	contract, the surrender 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 prof t 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 benef ts which are not contractually linked to the underlying assets, the Group is exposed to market risk.

The valuations included in the reported results are calculated using certain assumptions about these variable as disclosed above. The movement in any key variable will impact the performance and equity of the Group. The table below describes how the change in each assumption will affect the insurance liabilities and show an analysis of the sensitivity of the profi t or loss and equity net of reinsurance to changes in assumptions.

Variable	Change in following f nancial year’s shareholder prof t and equity net of reinsurance
	2011 2010 + 10% - 10% + 10% - 10% $000 $000 $000 $000
Mortality Morbidity claims costs Annuitant mortality Lapses and surrenders Renewal expenses	(997) 997 (932) 932 (635) 635 (603) 603 (175) 175 (197) 197 (1,083) 1,083 (979) 979 (971) 971 (885) 885

The impact from changes to interest rates has been refl ected in note 30(F).

(d) Solvency requirements

Separate to policy liabilities recognised in the balance sheet, the life insurance companies maintain suffi cient capital to meet solvency requirements. These are amounts required to provide protection against the impact of fl uctuations 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-fi nancial 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.

Key objectives in managing insurance risk are;

(i) To ensure sound business practices are in place for underwriting risks and claims management;

(ii) To achieve a target return on capital that is invested in order to take on insurance risk;

(iii) To ensure solvency and capital requirements are met.

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

72 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

are adhered to. Claims are managed to ensure timely and correct (iv) Terms and conditions of life insurance contracts payment in accordance with policy conditions. Claims experience The nature of the terms of the insurance contracts written by the is reviewed regularly and appropriate actuarial reserves are Group is such that certain external variables can be identifi ed on established. which related cash fl ows for claim payments depend. The tables (iii) Reinsurance management procedures below provide an overview of the key variables upon which the amount of related cash fl ows are dependent.

(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.

		Nature of compensation for	Key variables affecting future
Type of contract	Details of contract workings	claims	cash f ows
Non-participating life	Guaranteed benef ts paid on	Benef ts, def ned by the insurance	Mortality, morbidity, lapses,
insurance contracts with	death, permanent and temporary	contract are determined by the	expenses and market earnings on
f xed and guaranteed	disablement or maturity that are	contract and not directly affected	assets backing the liabilities
terms (Term Life and	f xed and guaranteed and not at	by the performance of underlying
Disability including	the discretion of the issuer.	assets or the performance of the
renewable term)		contracts as whole.
Life annuity contracts	These policies provide a	The amount of the guaranteed	Longevity, benef t inf ation,
	guaranteed regular income for the	regular income is set at inception	expenses and market earnings on
	life of the insured in return for an	of the policy including any	assets backing the liabilities
	initial single premium.	indexation.
Traditional life insurance	These policies include a def ned	Benef ts arising from the	Mortality, morbidity, lapses,
contracts with	initial guaranteed sum assured	discretionary participation feature	expenses and market earnings on
discretionary participating	that is payable on death. The	are based on the performance	assets backing the liabilities
benef ts (endowment and	guarantee amount is increased	of a specif ed pool of contracts
whole of life)	throughout the duration of the	or a specif ed type of contract.
	policy by the addition of bonuses	Operating prof t arising from
	annually that once added are not	these contracts is allocated
	removed. An additional (terminal)	between the policyholders
	bonus is payable on claims paid	and shareholders. The amount
	as a result of death or maturity.	allocated to policyholders is held
	Terminal bonus amounts are not	as an unvested policy liability until
	guaranteed.	it is distributed to policyholders
		via bonuses.
Investment account	The gross value of the premiums	The payment of the account	Fees, lapses, expenses and
contracts with	received is invested in the	balance is generally guaranteed,	market earnings on assets
discretionary participating	investment account with fees	although it may be subject	backing the liabilities
features	and premiums for any associated	to certain penalties on early
	insurance cover being deducted	termination. On certain contracts
	from the account balance. Interest	withdrawals can be deferred over
	is credited regularly.	limited time periods.

(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.

The table below shows the estimated timing of future cash outfl ows 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 to two	Two to three	Three to f ve	Over f ve
				one year	years	years	years	years
			$000	$000	$000	$000	$000	$000
30	September	2011	170,319	4,178	4,674	3,972	8,143	149,352
30	September	2010	214,150	9,656	8,626	8,124	14,616	173,128

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 73

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

		Group	Group			Company
		2011		2010		2011	2010
		$000		$000		$000	$000
28. GENERAL AND HEALTH INSURANCE BUSINESS
(A) ANALYSIS OF GENERAL AND	HEALTH INSURANCE
OPERATING RESULT
Premium revenue		348,931		340,778		-	-
Outward reinsurance expense		(41,102)		(21,651)		-	-
Net premium income		307,829		319,127		-	-
Claims expense		610,840		261,759		-	-
Reinsurance recoveries		(402,087)		(56,540)		-	-
Net claims incurred		208,753		205,219		-	-
Acquisition costs		41,353		33,878		-	-
Other underwriting expenses		56,480		59,224		-	-
Movement in actuarial reserves		(2,542)		1,677		-	-
Underwriting result		3,785		19,129		-	-
Investment income		17,403		24,155		-	-
Operating prof t before taxation		21,188		43,284		-	-
Analysis of general and health underwriting result
Prof t from general and health insurance		21,188		43,284		-	-

		2011			2010
	Risks borne in Risks borne in		Risks	borne in	Risks borne in
	current year	prior years Total	current year		prior years		Total
	$000	$000 $000		$000	$000		$000
(B) NET CLAIMS INCURRED
Gross claims expense
Direct claims - undiscounted	515,196	103,142 618,338		259,943		42	259,985
Movement in discount	(450)	(7,048) (7,498)		(3)	1,777		1,774
Gross claims expense	514,746	96,094 610,840		259,940	1,819		261,759
Reinsurance and other recoveries
Reinsurance and other recoveries revenue - undiscounted	(312,937)	(90,908) (403,845)		(64,830)	8,047		(56,783)
Movement in discount	43	1,715 1,758		(27)		270	243
Reinsurance recoveries	(312,894)	(89,193) (402,087)		(64,857)	8,317		(56,540)
Net claims incurred	201,852	6,901 208,753		195,083	10,136		205,219

Current year amounts relates to risks borne in the current fi nancial year. Prior period amounts relate to a reassessment of the risks borne in all previous fi nancial years related to Christchurch earthquake. Refer to note 42.

74 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

==> picture [470 x 131] intentionally omitted <==

----- Start of picture text -----

||||||
|---|---|---|---|---|
|Group|Company|
|2011|2010|2011|2010|
|$000|$000|$000|$000|
|Central estimate of expected present value of future|
|payments for claims incurred|86,785|78,778|-|-|
|Risk margin|7,432|5,691|-|-|
|Claims handling costs|6,191|5,292|-|-|
|100,408|89,761|-|-|
|Discount|(19,142)|(13,402)|-|-|
|Outstanding claims liability|81,266|76,359|-|-|

----- End of picture text -----

(C) OUTSTANDING CLAIMS

(a) Assumptions adopted in calculation of general and health insurance provisions

Estimates of the outstanding claims as at 30 September 2011 have been carried out by the following Actuaries:

General Insurance: P. Davies, B.Bus.Sc, FNZSA, FIA; and
Health Insurance: J. Feyter , B.Sc, FNZSA, FIA

The actuarial assessments are in accordance with the standards of the New Zealand Society of Actuaries. The Actuaries were satisfi ed as to the nature, suffi ciency and accuracy of the data used to determine the outstanding claims liability.

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.

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

==> picture [471 x 210] intentionally omitted <==

----- Start of picture text -----

||||
|---|---|---|
|2011|2010|
|Infl ation rates varied from|0.5% to 5.25%|1.5% to 8.0%|
|Infl ation rates for succeeding year|0.5% to 4.5%|1.5% to 8.0%|
|Infl ation rates for following years|0.5% to 5.25%|1.5% to 8.0%|
|Discount rates varied from|3.0% to 7.8%|4% to 6.5%|
|Discount rates for succeeding year|3.0% to 7.8%|4% to 6.5%|
|Discount rates for following years|3.0% to 7.8%|4% to 6.5%|
|Claims handling expense ratio|1.7% to 14.5%|1.4% to 11.1%|
|Risk margin|5% to 20%|5% to 20%|
|The weighted average expected term to settlement of outstanding claims based on historical trends is:|
|Short tail claims|within 1 to 2 years|within 1 to 2 years|
|Long tail claims in the Pacifi c Islands|1.05 to 2.45 years|1.5 to 2.5 years|
|Australian long tail claims|14.1 years|8.1 to 8.4 years|
|Inwards reinsurance|15.9 years|in excess of 10 years|

----- End of picture text -----

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 infl ationary 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 infl ation.

Discount rate

General insurance outstanding claims liabilities are discounted at a rate equivalent to that inherent in a portfolio of risk free fi xed interest securities with coupon and redemption cash fl ows exactly matching the projected infl ation claim cash fl ows.

General insurance outstanding claims liabilities are discounted to present value using a risk free rate based on ten year 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 diversifi cation between classes of business. For this purpose the portfolio has been assumed to comprise of fi ve separate components whose variability will offset each other. Assumptions were made for independent and systemic variance in accordance with accepted actuarial practise.

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

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 75

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

28. GENERAL AND HEALTH INSURANCE BUSINESS (CONTINUED)

	2011	2010
	Gross Reinsurance Net Gross	Reinsurance	Net
	$000 $000 $000 $000	$000	$000
Reconciliation of movements
in discounted outstanding
claims liability
Balance brought forward	151,805 (75,446) 76,359 105,746	(31,728)	74,018
Effect of change in foreign
exchange rates	(3,565) 1,236 (2,329) (5,441)	288	(5,153)
Effect of changes in assumptions	3,205 (579) 2,626 3,498	(690)	2,808
Increase in claims incurred/
(recoveries) anticipated over year	(2,078) - (2,078) 909	-	909
Incurred claims recognised in the
income statement	612,917 (402,088) 210,829 260,849	(56,540)	204,309
Claim (payment) / recoveries during
the year	(239,651) 35,510 (204,141) (213,756)	13,225	(200,531)
Balance carried forward	522,633 (441,367) 81,266 151,805	(75,446)	76,359
Reconciliation of undiscounted
claims to liability for outstanding
claims
Outstanding claims undiscounted	49,974 (4,731) 45,243 39,926	(2,769)	37,157
Discount	(21,881) 2,739 (19,142) (14,382)	981	(13,401)
Outstanding claims	28,093 (1,992) 26,101 25,544	(1,788)	23,756
Short tail outstanding claims	55,165		52,603
Total outstanding claims as per
balance sheet	81,266		76,359

(b) Sensitivity analysis

Sensitivity analysis is conducted to quantify the exposure to risk of change in the key underlying variables. The movement in any key variable will impact the performance and equity of the Group. The table below describes how the change in each assumption will affect the insurance liabilities and show an analysis of the sensitivity of the profi t or loss and equity net of reinsurance to changes in assumptions.

		Change in following f nancial	Change in following f nancial
		year’s shareholder	prof t and
		equity net of reinsurance
		2011	2010
Variable	Movement	$000	$000
Claim settlement period	+ 0.5 years	(310)	(290)
	- 0.5 years	303	290
Claims expenses ratio	increase of 1%	106	85
	decrease of 1%	(106)	(85)
Inf ation rates	increase of 1%	1,412	834
	decrease of 1%	(1,176)	(719)
Discount rates	increase of 1%	(1,240)	(759)
	decrease of 1%	1,472	872

The net cash outfl ow for general and health insurance liabilities expected to occur in the next 12 months is $63,534,000 (2010: $60,658,000).

76 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

(D) RISK MANAGEMENT POLICIES AND PROCEDURES

The fi nancial 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, fi nancial risk, compliance risk, fi scal risk and operational risk, refer to note 30. Notes on the policies and procedures employed in managing these risks in the general insurance business are set out below.

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

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

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

(b) Terms and conditions of insurance contracts that have a material effect on amount timing and uncertainty of cash fl ows

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.

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

(c) Concentration of insurance risk

Risk	Source of concentration	Risk Management measures
An accumulation of risks arising from a	Insured property concentrations	Accumulation risk modelling, reinsurance
natural 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	Response by a multitude of the Group’s	Purchase of reinsurance clash protection
business in the one event	policies to the one event, for example
	a construction liability and professional
	indemnity policy

(d) 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 fi ve most recent years.

Ultimate claims cost estimate	Incident year
	Prior 2007 2008 2009 2010 2011 Total $000 $000 $000 $000 $000 $000 $000
At end of incident year One year later Two years later Three years later Four years later Current estimate of ultimate claims cost Cumulative payments	186,567 196,169 198,692 194,063 201,291 185,026 195,309 199,165 190,654 - 183,498 194,597 197,123 - - 183,255 122,985 - - - 119,339 - - - - 182,969 194,127 197,123 190,654 201,291 (54,112) (51,783) (42,203) (22,641) (2,059)
Undiscounted central estimate Discount to present value	30,637 1,597 60 2,510 4,968 47,013 86,785 (17,938) (78) (143) (180) (359) (444) (19,142)
Discounted central estimate Claims handling expense Risk margin	12,699 1,519 (83) 2,330 4,609 46,569 67,643 6,191 7,432
Net outstanding claims liabilities Reinsurance recoveries on outstanding claims liabilities and other recoveries	81,266 441,367
Gross outstanding claims liabilities	522,633

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 77

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

28. GENERAL AND HEALTH INSURANCE BUSINESS (CONTINUED)

(E) LIABILITY ADEQUACY TEST

Liability adequacy tests are performed to determine whether the unearned premium liability is suffi cient to cover the present value of the expected cash fl ows arising from rights and obligations under current insurance contracts, plus an additional risk margin to refl ect the inherent uncertainty in the central estimate. The future cash fl ows are future claims, associated claims handling costs and other administration costs relating to the business.

If the unearned premium liability less related deferred acquisition costs exceeds the present value of the expected future cash fl ows plus the additional risk margin to refl ect the inherent uncertainty in the central estimate then the unearned premium liability is deemed to be suffi cient. The risk margins applied to future claims were determined with the objective of achieving at least 75% probability of suffi ciency of the unexpired risk liability.

	Central estimate claim % of premium	Risk Margin	Risk Margin
	2011 2010	2011	2010
General Insurance	49.5% 51.7%	10.2%	10.2%
Health Insurance	62.29% 60.55%	8.75%	8.75%

A Liability Adequacy Test was performed on the non-current health insurance contract liability. The liability was suffi cient at 30 September 2011 (2010: Suffi cient). Details of this test are outlined is paragraph (H) below.

(F) INSURER FINANCIAL STRENGTH RATING

TOWER Insurance Limited has an insurer fi nancial strength rating of ‘A-’ (Excellent) issued by AM Best Company Limited.

TOWER Medical Insurance Limited is not required to obtain a insurer fi nancial strength credit rating.

(G) REINSURANCE PROGRAMME

Reinsurance programmes are structured to adequately protect the general insurance companies’ solvency and capital positions. The adequacy of reinsurance cover is modelled on assessing TOWER’s exposure under a range of scenarios. The plausible scenario that has the most fi nancial signifi cance for TOWER is a major Wellington earthquake. Each year, as part of setting the coming year’s reinsurance cover, comprehensive modelling of the event probability and amount of the Group’s exposure is undertaken.

(H) NON-CURRENT HEALTH INSURANCE CONTRACT LIABILITY

A number of the Group’s health insurance policies have a benefi t whereby policyholders receive a proportion 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. In 2011 the liability was determined based on the discounted value of the accumulated excess of premiums over claims at individual policy level. A liability adequacy test with a risk margin to cover uncertainty in the central estimate is also applied to confi rm the suffi ciency of the liability in aggregate. In 2010 the liability was determined using a cash fl ow projection.

Assumptions Used in the Calculation of the Liability and associated Liability Adequacy Test:

	2011	2010
Liability
Discount rate for succeeding year	2.77% net of tax	4.73% gross of tax
Discount rate for following years	2.77% net of tax	4.73% gross of tax
Lapse Rate until 3 years from premium payback date	1% p.a.	n.a.
Lapse Rate within 3 years of premium payback date	0% to 1% p.a.	n.a.
Liability Adequacy Test/Cash f ow projection
Discount rate for succeeding and following years
Claims and Premium Inf ation rate for succeeding and following years	9% p.a.	8%
Lapse rates	0% to 25% p.a.	4% to 25% p.a.
GST rate	15%	12.5%
Income Tax rate	28%	30%
Administration expense per member	$74.20	$100 plus 2.85% premium per policy
Expense Inf ation for succeeding and following years	2% p.a.	3% p.a.

78 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

The table below includes the reconciliation of the liability as at the reporting date.

Group	Company
2011	2010 2011	2010
$000	$000 $000	$000
Balance at 1 October 56,212	54,536 -	-
New funding 5,924	6,821 -	-
Benef ts paid (11,954)	(13,293) -	-
Other 3,489	8,148 -	-
Balance at 30 September 53,671	56,212 -	-

			Total	Less than	One to two	Two to three	Three to f ve	Over f ve
				one year	years	years	years	years
			$000	$000	$000	$000	$000	$000
30	September	2011	53,671	9,444	8,475	4,862	7,217	23,673
30	September	2010	56,212	9,693	7,515	7,158	7,506	24,340

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 79

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

29. FINANCIAL INSTRUMENTS CATEGORIES

Total Loans and receivables Group $000 $000	Fair value through prof t or loss
	Designated Held for trading $000 $000
As at 30 September 2011 Financial assets Cash and cash equivalents 223,981 223,981 Reinsurance recoveries receivable 464,032 464,032 Outstanding premiums and trade receivables 125,786 125,786 Unsettled investments sale 596 596 Other receivables 6,656 6,656 Derivative f nancial assets 75,080 - Investment in equity securities 180,277 - Investment in f xed interest securities 614,830 - Investment in property securities 88,538 -

	- -
	- -
	- -
	- -
	- -
	- 75,080
	180,277 -
	614,830 -
	88,538 -
Total f nancial assets 1,779,776 821,051	883,645 75,080
As at 30 September 2010 Financial assets Cash and cash equivalents 207,842 207,842 Reinsurance recoveries receivable 81,008 81,008 Outstanding premiums and trade receivables 118,582 118,582 Unsettled investments sale 523 523 Other receivables 7,105 7,105 Derivative f nancial assets 71,217 - Investment in equity securities 221,701 - Investment in f xed interest securities 646,600 - Investment in property securities 85,517 -	- - - - - - - - - - - 71,217 221,701 - 646,600 - 85,517 -
Total f nancial assets 1,440,095 415,060	953,818 71,217

80 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

	Total Group $000	Fair value through prof t or loss Financial liabilities at amortised cost Designated Held for trading $000 $000 $000 - - 22,260 - - 12,931 - - 188 - - 12,769 - - 81,263 - 1,903 - 28,084 - - 28,084 1,903 129,411 - - 24,972 - - 7,716 - - 480 - - 12,908 - - 80,602 - 2,044 - 31,759 - - 31,759 2,044 126,678 Total Loans and receivables $000 $000 89,939 89,939 330 330 2,951 2,951 93,220 93,220 85,420 85,420 16,380 16,380 101,800 101,800
	As at 30 September 2011 Financial liabilities Trade payables 22,260 Reinsurance payables 12,931 Unsettled investment purchases 188 Other payables 12,769 Interest bearing liabilities 81,263 Derivative f nancial liabilities 1,903 Life investment contract liabilities 28,084
	Total f nancial liabilities 159,398
	As at 30 September 2010 Financial liabilities Trade payables 24,972 Reinsurance payables 7,716 Unsettled investment purchases 480 Other payables 12,908 Interest bearing liabilities 80,602 Derivative f nancial liabilities 2,044 Life investment contract liabilities 31,759
	Total f nancial liabilities 160,481
	Company
	As at 30 September 2011 Financial assets Cash and cash equivalents Other receivables Related party receivable
	Total f nancial assets
	As at 30 September 2010 Financial assets Cash and cash equivalents Related party receivable
	Total f nancial assets

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 81

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

29. FINANCIAL INSTRUMENTS CATEGORIES (CONTINUED)

		Financial
		liabilities at
		amortised
	Total	cost
Company	$000	$000
As at 30 September 2011
Financial liabilities
Other payables	2,014	2,014
Related party payables	196,733	196,733
Total f nancial liabilities	198,747	198,747
As at 30 September 2010
Financial liabilities
Other payables	1,884	1,884
Related party payables	205,965	205,965
Total f nancial liabilities	207,849	207,849

30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION

The fi nancial condition and operating results of the Group are affected by a number of key fi nancial and non-fi nancial risks. Financial risks include market risk, credit risk, fi nancing and liquidity risk. The nonfi nancial risks include insurance risk, compliance risk and operational risk. The Group’s objectives and policies in respect of insurance risks are disclosed in notes 27 and 28, while the managing of fi nancial and other non fi nancial risks are 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 business managers are responsible for managing their risks including operational and compliance risk. The consolidated entity’s exposure to all high and critical risks is reviewed by the Group Risk and Compliance team 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 effi ciency of management processes, group risk management and internal fi nancial 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 benefi ts 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:

reviewing investment policy for TOWER shareholder and policyholder funds;
reviewing the risk management policy and statements in respect of investment management, including the derivative policy;
considering the establishment, adjustment or deletion of limits and counter-party approvals, and the scope of fi nancial 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.

(A) MARKET RISK

Market risk is the risk of change in the fair value of fi nancial instruments from fl uctuations 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 specifi c to an individual fi nancial instrument or its issuer or factors affecting all fi nancial instruments traded in a market.

(i) Currency risk

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

TOWER’s principal transactions are carried out in New Zealand Dollars and its exposure to foreign exchange risk arises primarily with respect to the Pacifi c Island General Insurance business, which does not form a signifi cant 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 fi nancial statements of foreign operations.

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 Australian and US dollars, Japanese Yen, Euro and British Pounds. The notional amounts and contractual cash fl ows of these derivatives are included in (E) below.

The impact of reasonably possible changes in the currency risk on the Group shareholders’ profi t and equity is included in (F) below.

(ii) Interest rate risk

Interest rate risk is the risk that the value or future value cash fl ows of a fi nancial instrument will fl uctuate 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 2011 there were no interest rate swaps in place in relation to external borrowings (2010: Nil). The Group manages interest rate risk

82 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

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 fi xed interest portfolios used to back outstanding claims liabilities and those outstanding claims. Interest rate risk is managed by matching the duration profi les of investment assets and outstanding claim liabilities.

Health insurance

Interest rate risk arises in health insurance to the extent that there is a mismatch between fi xed interest portfolios used to back the health non-current liabilities and those health noncurrent liabilities. Interest rate risk is managed by matching the duration profi les of investment assets and health non-current 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 assets backing those liabilities. These mismatches could impact current period operating profi ts.

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

For non-participating life insurance contracts, the mismatch between risk free discount rates used in the policy liability calculations and the backing asset values.
For a portion of the life investment contract business, the mismatch between the value of the fi nancial instrument liabilities (including the discount rates used in their calculation, if applicable) and the backing asset values.

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 price risk because of its investments in publicly traded equity securities and other unit trusts.

Price risk is managed by diversifi cation of the investment portfolio, which is done in accordance with the limits set by 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 fi nancial 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 fi nancial institutions as well as credit exposure to trade customers or other counterparties. For banks and fi nancial 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 take into account customers’ fi nancial position, past experience and other relevant factors. Overall exposure to credit risk is monitored on group basis in accordance with limits set by the Board.

The parent company has no signifi cant exposure to credit risk.

(i) Credit risk concentration

Concentration of credit risk exists when the Group enters into contracts or fi nancial 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 signifi cant concentrations of credit risk are outlined by industry type below.

(iii) Price risk Price risk is the risk of loss resulting from the decline in prices The signif cant concentrat industry type below.	ions of credit risk are outlined by	ions of credit risk are outlined by
	Carrying value
	2011	2010
	$000	$000
New Zealand government	59,573	50,890
Other government agencies	165,602	134,241
Banks	645,265	623,167
Financial institutions	14,662	14,111
Other non-investment related receivable	579,443	200,861
Other industries	35,278	98,718
Total f nancial assets with credit exposure	1,499,823	1,121,988
(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, which is as follows:
Cash and cash equivalents	223,981	207,842
Loans and receivables	597,070	206,732
Financial assets at fair value through prof t or loss	603,692	636,197
Derivative f nancial assets	75,080	71,217
Total credit risk	1,499,823	1,121,988

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

The credit quality of fi nancial 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:

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 83

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION (CONTINUED)

Carrying value	Carrying value
2011	2010
$000	$000
Credit exposure by credit rating AAA 213,948	87,212
AA 589,169	608,480
A 16,142	139,440
BBB 578	1,814
Below BBB 4,851	9,590
Total counterparties with external credit rating by Standard and Poor's 824,688	846,536
Group 1 560,174	159,242
Group 2 537	24,874
Group 3 95,693	74,942
Total counterparties with no external credit rating 656,404	259,058
Total f nancial assets neither past due nor impaired with credit exposure 1,481,092	1,105,594

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 Pacifi c region investment markets through its Pacifi c Islands operations to comply with 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’ and unrated categories above.

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

None of the fi nancial assets that are fully performing have been renegotiated in the past year (2010: Nil).

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

The Group considers that fi nancial 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
	Less than 30 days 31 to 60 days 61 to 90 days Over 90 days Total $000 $000 $000 $000 $000
As at 30 September 2011 Reinsurance recoveries receivable Outstanding premiums and trade receivables
	2,494 1,307 729 2,532 7,062
	4,063 3,104 1,530 2,972 11,669
Total	6,557 4,411 2,259 5,504 18,731
As at 30 September 2010 Reinsurance recoveries receivable Outstanding premiums and trade receivables	1,981 315 477 3,791 6,564 3,126 2,486 1,418 2,800 9,830
Total	5,107 2,801 1,895 6,591 16,394

The parent company does not have past due fi nancial assets as at 30 September 2011 (2010: Nil).

(vi) Financial assets that are individually impaired

	Carrying value
	2011	2010
	$000	$000
Outstanding premiums and trade receivables	-	68
Total	-	68

84 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

For policies with a surrender or investment value, outstanding premiums are supported by the underlying assets invested. When outstanding premiums reach the value of the surrender or investment value, the assets are realised and offset against the outstanding debt. Policies with no surrender value are lapsed when outstanding premiums exceed a set value and the outstanding premiums are written off.

(C) FINANCING AND LIQUIDITY RISK

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

To mitigate fi nancing and liquidity risk the Group treasury function maintains suffi cient liquid assets to ensure that the Group can meet its debt obligations and other cash outfl ows on a timely basis.

(i) Financial liabilities and guarantees by contractual maturity

The table below summarises the Group’s fi nancial liabilities and guarantees 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 fl ows that include interest payments and exclude the impact of netting agreements.

		Total			Two to
	Carrying	contractual	Less than	One to	three	Three to	Over f ve	No
	value	cash f ows	one year	two years	years	f ve years	years	maturity
Group	$000	$000	$000	$000	$000	$000	$000	$000
As at 30 September 2011
Financial liabilities and
guarantees
Trade payables	22,260	22,260	22,260	-	-	-	-	-
Reinsurance payables	12,931	12,931	12,931	-	-	-	-	-
Unsettled investment purchases	188	188	188	-	-	-	-	-
Other payables	12,769	12,769	12,434	253	82	-	-	-
Derivative f nancial liabilities(2)	1,903	91,417	91,417	-	-	-	-	-
Interest bearing liabilities	81,263	99,409	6,950	6,950	85,510	-	-	-
Life investment contract liabilities	28,084	28,084	-	-	-	-	-	28,084
Funds invested guarantee	958	958	-	-	-	-	-	958
Total f nancial liabilities and guarantees	160,356	268,016	146,180	7,203	85,592	-	-	29,042
As at 30 September 2010
Financial liabilities and
guarantees
Trade payables	24,972	24,972	24,972	-	-	-	-	-
Reinsurance payables	7,716	7,716	7,716	-	-	-	-	-
Unsettled investment purchases	480	480	480	-	-	-	-	-
Other payables	12,908	12,908	12,320	253	253	82	-	-
Derivative f nancial liabilities(1)	1,652	4,351	(1,122)	(629)	(289)	178	6,213	-
Interest bearing liabilities	80,602	106,360	6,950	6,950	6,950	85,510	-	-
Life investment contract liabilities	31,759	31,759	-	-	-	-	-	31,759
Funds invested guarantee	8,918	8,918	7,996	-	-	-	-	922
Total f nancial liabilities and guarantees	169,007	197,464	59,312	6,574	6,914	85,770	6,213	32,681

(1) In 2010 derivative fi nancial liabilities excludes the employee share option derivative of $392,000

(2) Please see note 30E for total cash fl ows for forward foreign exchange contracts

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 85

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION (CONTINUED)

	Carrying value	Total contractual cash f ows	Less than one year	No maturity
Company	$000	$000	$000	$000
As at 30 September 2011
Financial liabilities
Related party payables	196,733	196,733	-	196,733
Other payables	2,014	2,014	2,014	-
Total f nancial liabilities	198,747	198,747	2,014	196,733
As at 30 September 2010
Financial liabilities
Related party payables	205,965	205,965	-	205,965
Other payables	1,884	1,884	1,884	-
Total f nancial liabilities	207,849	207,849	1,884	205,965

(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 fi nancial instruments traded in active markets is based on quoted market prices at balance date. The fair value of fi nancial instruments that are not traded in an active market is determined using valuation techniques. Valuation techniques used to value life investments contract liabilities are described in notes 27. Refer below for details of valuation methods used for each remaining category of fi nancial assets and liabilities.

The carrying amounts of all fi nancial assets and liabilities reasonably approximate their fair values with the exception of senior unsecured bonds which is disclosed in note 19.

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

(i) Cash and cash equivalents

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

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

The fair value of fi nancial assets at fair value through profi t or loss is determined by reference to their quoted price at the reporting date.

(iii) Loans and receivables and other fi nancial liabilities held at amortised cost

Carrying values of loans and receivables, adjusted for impairment values, and carrying values of other fi nancial liabilities held at amortised cost reasonably approximate their fair values.

reference to the quoted market price of the underlying equity securities

(v) Interest bearing liabilities

The fair value of senior unsecured bonds is determined by reference to the quoted market price of the underlying debt securities.

Financial instruments that are measured in the balance sheet at fair value (excluding short term amounts held at a reasonable approximation of fair value), are categorised by the following fair value measurement hierarchy levels:

Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 3—Inputs for that asset or liability that are not based on observable market data (i.e. unobservable inputs)

The following tables present the Group’s assets and liabilities categorised by fair value measurement hierarchy levels.

86 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

	Total	Level 1	Level 2
Group	$000	$000	$000
As at 30 September 2011
Assets
Derivative f nancial assets	75,080	-	75,080
Investment in equity securities	180,277	48,934	131,343
Investments in f xed Interest securities	614,830	-	614,830
Investments in property securities	88,538	-	88,538
Total f nancial assets	958,725	48,934	909,791
Liabilities
Derivative f nancial liabilities	1,903	-	1,903
Life investment contract liabilities	28,084	-	28,084
Total f nancial liabilities	29,987	-	29,987
As at 30 September 2010
Assets
Derivative f nancial assets	71,217	-	71,217
Investment in equity securities	221,701	51,225	170,476
Investments in f xed Interest securities	646,600	-	646,600
Investments in property securities	85,517	-	85,517
Total f nancial assets	1,025,035	51,225	973,810
Liabilities
Derivative f nancial liabilities	2,044	-	2,044
Life investment contract liabilities	31,759	-	31,759
Total f nancial liabilities	33,803	-	33,803

The fair value of fi nancial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for fi nancial assets held by the Group is the current bid price. These instruments are included in Level 1.

The fair value of fi nancial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specifi c estimates. If all signifi cant inputs required to fair value an instrument are observable, the instrument is included in Level 2.

If one or more of the signifi cant inputs is not based on observable market data, the instrument is included in Level 3. The Group does not hold any Level 3 investment assets.

Specifi c valuation techniques used to value fi nancial instruments include:

(E) DERIVATIVE FINANCIAL INSTRUMENTS

The Group utilises derivative fi nancial instruments to reduce investment risk. Specifi cally, 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 signifi cant short-term risk.

Derivative fi nancial instruments used by the Group include interest rate swaps and foreign exchange forward contracts. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The fair values of interest rate swaps are calculated by discounting estimated future cash fl ows 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 fi nancial 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:

Quoted market prices or dealer quotes for similar instruments.
The fair value of interest rate swaps is calculated as the present value of the estimated future cash fl ows based on observable yield curves.
Other techniques, such as discounted cash fl ow analysis, are used to determine fair value for remaining fi nancial instruments.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 87

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION (CONTINUED)

Average contracted f xed	Average contracted f xed	Notional principal	amount	Fair value
Received f xed pay f oating rates contracts 2011 %	2010 %	2011 $000	2010 $000	2011 $000	2010 $000
Less than 1 year 4%	0%	2,000	-	12	-
1 to 2 years 0%	7%	-	3,500	-	134
2 to 5 years 0%	8%	-	7,900	-	1,077
over 5 years 6%	7%	404,700	518,750	75,068	68,612
		406,700	530,150	75,080	69,823

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 fl ows because the impact of discounting is not signifi cant.

	Total
	contractual	Less than
	cash f ows	one year
Group	$000	$000
As at 30 September 2011
Forward foreign exchange contracts
Outf ow	91,417	91,417
Inf ow	89,514	89,514
As at 30 September 2010
Forward foreign exchange contracts
Outf ow	87,972	87,972
Inf ow	87,714	87,714

(F) SENSITIVITY ANALYSIS

The analysis below demonstrates the impact of changes in interest rates, exchange rates and equity prices on the Group’s shareholder profi t 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 profi t after tax and equity is included in the table below. The sensitivity analysis assumes changes in interest rates only. All other variables are held constant.

	2011 2010 Impact on Impact on
	prof t after tax equity prof t after tax equity $000 $000 $000 $000
Change in variables +50 basis points -50 basis points	(5,055) (5,055) (3,600) (3,600) 5,213 5,213 3,650 3,650

88 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

This analysis assumes that the sensitivity applies to the closing market yields of fi xed interest investments. A parallel shift in the yield curve is assumed.

The risks assumed and methods used for deriving sensitivity information and signifi cant 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 profi t to movements in interest rates.

	2011 2010 Impact on Impact on
	prof t after tax equity prof t after tax equity $000 $000 $000 $000
Change in variables +50 basis points -50 basis points	(3,331) (3,331) (1,842) (1,842) 3,331 3,331 1,811 1,811

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 profi t after tax and equity. The analysis assumes changes in foreign currency rates only, with all other variables held constant. The potential impact on the profi t 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.

	2011 2010 Impact on Impact on
	prof t after tax equity prof t after tax equity $000 $000 $000 $000
Change in variables 10% appreciation of New Zealand dollar 10% depreciation of New Zealand dollar	(56) (56) (116) (116) 56 56 116 116

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 signifi cant 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 profi t or loss.

The table below demonstrates the impact of a 10% movement in New Zealand equities on the profi t 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 fl ow through to the policyholder.

	2011 2010 Impact on Impact on
	prof t after tax equity prof t after tax equity $000 $000 $000 $000
Change in variables +10% in New Zealand equities -10% in New Zealand equities	133 133 158 158 (133) (133) (158) (158)

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 89

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

30. RISK MANAGEMENT AND FINANCIAL INSTRUMENT INFORMATION (CONTINUED)

The dollar impact of the change in New Zealand equities is determined by applying the sensitivity to the value of New Zealand equities. The risks assumed and methods used for deriving sensitivity information and signifi cant variables have been applied consistently over the two reporting periods included in the analysis.

(iv) Other price

Other price sensitivity includes sensitivity to unit price fl uctuations. Unit price risk is the risk that the fair value of investments in property fund units and international equities held in unit trusts will decrease as a result of changes in the value of these units. The Group holds all of its investments in property securities, international equities and other unit trusts at fair value through profi t 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 profi t after tax and equity of the Group. The potential impact is assumed as at the reporting date.

	2011 2010 Impact on Impact on
	prof t after tax equity prof t after tax equity $000 $000 $000 $000
Change in variables +10% property funds and other unit trusts -10% property funds and other unit trusts +10% in International equities -10% in International equities	1,498 1,498 1,456 1,456 (1,498) (1,498) (1,456) (1,456) 5,059 5,059 5,043 5,043 (5,059) (5,059) (5,043) (5,043)

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 signifi cant 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 suffi cient to enable it to continue as a going concern in order to provide returns for shareholders and benefi ts for other stakeholders of the Group.

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

	Group
	2011	2010
	$000	$000
Interest bearing liabilities (Note 19)	81,263	80,602
TOWER shareholder equity	452,991	438,409
Total capital resources	534,254	519,011

The life and health insurance businesses of the Group measure 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. 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 specifi ed 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.

90 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

32. OPERATING LEASES

	Group		Company
	2011	2010	2011	2010
As lessee	$000	$000	$000	$000
Rent paid under non-cancellable operating leases during
the year	4,029	3,871	-	-
Rent payable under non-cancellable operating leases to the
end of the lease terms are:
– Not later than one year	5,238	5,036	-	-
– Later than one year and not later than f ve years	6,527	10,702	-	-
– Later than f ve years	16	132	-	-
	11,781	15,870	-	-

Operating lease payments represent the future rentals payable for offi ce space under current leases. Leases are for an average of four years with rental rates reviewed every three to six years.

33. CASH AND CASH EQUIVALENTS

(A) RECONCILIATION OF CASH AT THE END OF THE YEAR

Cash at bank and in hand	8,990	8,132	2,201	1,087
Deposits at call	214,991	199,710	87,738	84,333
Total cash and cash equivalents	223,981	207,842	89,939	85,420

The effective interest rate for deposits at call is 3.0% (2010: 3.5%) and the balances primarily mature within three months of balance date.

(B) RECONCILIATION OF PROFIT FOR THE PERIOD TO NET CASH FLOWS FROM OPERATING ACTIVITIES

Net prof t after tax for the year	33,380 58,065	20,013	32,572
Add/(less) non-cash items
Depreciation of property, plant and equipment	3,588 3,347	-	-
Amortisation of software	2,307 2,039	-	-
Change in life insurance and life investment contract liabilities	(39,980) (24,440)	-	-
Unrealised gain on f nancial assets	(2,180) (61,782)	-	-
Share based payments expense and movement in fair value of
employee share option derivative	1,082 58	-	-
Decrease in deferred tax	1,572 21,935	-	-
Loss on repayment of FuturePlan debenture	- 2,276	-	-
Loss on disposal of property, plant and equipment	364 -	-	-
Intercompany income	- -	-	3,000
133 1,498 20,013 (Less)/add movements in working capital (excluding the effects of exchange differences on consolidation)			35,572
Increase in receivables	(390,839) (39,927)	(21)	(263)
Increase in payables	383,316 39,464	1,559	173
Decrease in taxation	2,083 14,728	-	-
Add other items classif ed as f nancing activities	(5,440) 14,265	1,538	(90)
Decrease in capitalised costs	661 600	-	-
Net cash (outf ows)/inf ows from operating activities	(4,646) 16,363	21,551	35,482

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 91

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

34. CONTINGENT LIABILITIES

The Group has no contingent liabilities as at reporting date (2010: nil).

35. CAPITAL COMMITMENTS

The Group has no capital commitments at reporting date related to software under development (2010: $980,000).

36. SHARE BASED PAYMENTS

The Company has eight active 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 benefi ts, 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 B	Tranche C	Tranche D	Tranche E
Exercise price after rights issue	$2.04	$2.04	$2.46	$1.94
Grant date	9-Aug-05	9-Aug-05	4-Apr-06	1-Oct-06
Vesting date	9-Aug-08	9-Aug-09	3-Apr-09	16-Oct-09
Expiry date	9-Aug-11	9-Aug-12	4-Apr-12	6-Oct-12
Expected volatility	20%	20%	20%	20%
Risk free rate	5.71%	5.71%	5.71%	5.71%
Amount expensed during 2011 year ($000)	-	-	-	-
Amount expensed during 2010 year ($000)	-	-	-	25
Terms of share schemes	Tranche F	Tranche G	Tranche H	Tranche I
Exercise price after rights issue	$2.10	$1.38	$1.48	$1.93
Grant date	11-Dec-07	5-Dec-08	19-Jan-09	22-Dec-09
Vesting date	1-Dec-10	1-Dec-11	19-Jan-12	3-Dec-12
Expiry date	1-Dec-13	1-Dec-14	19-Jan-15	2-Dec-15
Expected volatility	20%	40%	40%	30%
Risk free rate	5.71%	4.88%	4.47%	6.03%
Amount expensed during 2011 year ($000)	43	46	-	45
Amount expensed during 2010 Year ($000)	228	52	12	21

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 signifi cant 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. No share options were issued in 2011, the weighted average fair value of options presented under Tranche I in 2010 was $1,148,400.

92 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

The following reconciles the share options outstanding at the beginning and end of the year.

30 September 2011	Number of options Weighted average exercise price Tranche A Tranche B Tranche C Tranche D Tranche E
Outstanding at start of year Forfeited Exercised	- 300,000 300,000 500,000 3,000,000 $1.97
	- - - (200,000) - $1.96
	- (300,000) (300,000) - - $2.04
Outstanding at the end of the year	- - - 300,000 3,000,000 $1.97
Exercisable at the end of the year	- - 300,000 3,000,000 $2.00
	Tranche F Tranche G Tranche H Tranche I
Outstanding at start of year Forfeited	1,000,000 400,000 100,000 600,000 $1.97
	(500,000) (200,000) (100,000) (300,000) $1.96
Outstanding at the end of the year	500,000 200,000 - 300,000 $1.97
Exercisable at the end of the year	500,000 - - - $2.00
30 September 2010	Number of options Tranche A Tranche B Tranche C Tranche D Tranche E
Outstanding at start of year Exercised	446,608 300,000 300,000 500,000 3,000,000 $1.93 (446,608) - - - $1.31
Outstanding at the end of the year	- 300,000 300,000 500,000 3,000,000 $1.97
Exercisable at the end of the year	- 300,000 300,000 500,000 3,000,000 $2.02
	Tranche F Tranche G Tranche H Tranche I
Outstanding at start of year Granted	1,000,000 400,000 100,000 - $1.93 - - - 600,000 $1.93
Outstanding at the end of the year	1,000,000 400,000 100,000 600,000 $1.97

Tranches B to C have been fully vested and exercised as at 30 September 2011. Tranches D to F have been fully vested as at 30 September 2011. The weighted average share price at the date of exercise of share options was $2.02 (2010: $2.34).

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 93

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

37. TRANSACTIONS WITH RELATED PARTIES

The Group holds a number of equity securities portfolios across a large number of New Zealand and overseas entities. A signifi cant 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.

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 above.

(A) SUBSIDIARIES

During the year there have been transactions between TOWER Limited and its subsidiaries. Balances outstanding are payable on demand. Related party receivable and payable balances of TOWER Limited at the reporting date were as follows:

	2011	2010	Nature of	Type of
Related party	$000	$000	Relationship	Transaction
TOWER Financial Services Group Limited	(178,453)	(178,453)	Subsidiary	Advance
TOWER New Zealand Limited	(18,280)	(18,744)	Subsidiary	Advance
TOWER Health & Life Limited	-	(5,023)	Subsidiary	Tax losses
TOWER Life (NZ) Limited	-	(2,812)	Subsidiary	Interest
TOWER New Zealand Limited	-	(145)	Subsidiary	Tax losses
TOWER Insurance Limited	-	(113)	Subsidiary	Tax losses
TOWER Life (NZ) Limited	-	7,504	Subsidiary	Tax losses
TOWER consolidated tax group members	1,945	4,056	Subsidiary	Tax losses
TOWER Asset Management Limited	-	3,387	Subsidiary	Tax losses
TOWER Option Scheme Limited	1,006	399	Subsidiary	Advance

The receivable owing from the TOWER consolidated tax group members in 2011 of $1,945,000 (2010: $4,056,000), represents the benefi t of tax losses offset by TOWER Limited as a member of the TOWER consolidated tax group. All subsidiary companies incorporated in New Zealand listed in note 14, except for TOWER Investments Limited and TOWER Option Scheme Limited are members 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	-	(31,800)	Subsidiary	Settlement/Advance
TOWER New Zealand Limited	699	(15,560)	Subsidiary	Settlement/Advance
TOWER Health & Life Limited	-	(5,023)	Subsidiary	Tax Losses
TOWER New Zealand Limited	-	(145)	Subsidiary	Tax Losses
TOWER Insurance Limited	-	(113)	Subsidiary	Tax Losses
TOWER Financial Services Group Limited	18,000	32,400	Subsidiary	Dividend
TOWER Life (NZ) Limited	-	7,504	Subsidiary	Tax Losses
TOWER Asset Management Limited	-	3,387	Subsidiary	Tax Losses
TOWER Option Scheme Limited	608	399	Subsidiary	Settlement/Advance

94 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Limited Notes to the Financial Statements

(B) TRUSTS ADMINISTERED AND MANAGED BY THE GROUP

During the year the Group received investment management and other fees of $26,694,000 (2010:$25,443,000) from the following Trusts administered and managed by the Group:

Future Plan Freedom Plan TOWER Cash Fund GAM Global Gateway GAM Multi-trading Fund PIMCO Global Commodity Fund Bond Plus Mortgage Plus TOWER International Equity Focus Int’l Equity TOWER NZ Equity Trust TAM International Asia Unit Trust TOWER KiwiSaver TAM FDR Bond Trust Investment Linked Superannuation Fund TAM International Equity Growth TOWER Property Fund TOWER Australian Equity Fund TAM International Bond Trust – CV TOWER Fixed Interest PIE Fund TOWER Core International Bond Fund Focus NZ Shares Fund TAM International Equity Trust Focus Fixed Income Fund TOWER Cash Fund PIE Focus Cash Fund TOWER NZ Equity PIE Fund Focus Conservative Fund TOWER Global Fund Focus Growth Fund TOWER Multi Sector Focus Cash Enhanced Fund TOWER LifeSaver

All fees were calculated in accordance with the relevant management agreements pertaining to the related party involved. Amounts receivable as at 30 September 2011 due from the related parties above were $2,577,000 (2010: $2,507,000).

(C) KEY MANAGEMENT PERSONNEL COMPENSATION

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

	Group		Company
	2011	2010	2011	2010
	$000	$000	$000	$000
Salaries and other short-term employee benef ts	4,222	4,194	-	-
Termination benef ts	613	-	-	-
Share based payments	76	247	-	-
Independent directors fees	632	640	632	640
	5,543	5,081	632	640

Information regarding individual directors and executives compensation is provided in the Corporate Governance section of the Annual Report.

(D) 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 (2010: Nil).

(E) 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 Limited & TOWER Capital Limited Annual Reports 2011 | 95

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

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 suffi cient equity remains for the ongoing operation of the business.

Managed assets

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

	Group
	2011	2010
	$000	$000
Superannuation funds	1,338,846	1,194,230
Unit trust and group investment funds	1,919,795	1,961,125
	3,258,641	3,155,355
Assets per balance sheet	1,976,549	1,617,644
Total assets under management	5,235,190	4,772,999

Arrangements are in place to ensure that the asset management activities of these funds continue to be managed separately from TOWER’s fi nancial 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:

Capital	Protected Plan	-	7,996
VITAL		958	922
Total		958	8,918

96 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

40. INVESTMENT LINKED AND NON-INVESTMENT LINKED BUSINESS OF LIFE INSURANCE COMPANIES

	Group
	2011	2010
	Investment linked Non- investment linked	Investment linked	Non- investment linked
	$000 $000	$000	$000
Investment assets	28,084 771,652	31,759	721,961
Other assets	- 129,919	-	209,092
Policyholder liabilities	(28,084) (587,476)	(31,759)	(626,430)
Other liabilities	- (57,632)	-	(69,350)
Net assets	- 256,463	-	235,273
Retained earnings	- 176,967	-	155,304
Net premium revenue	- 68,097	-	64,375
Investment revenue	(193) 45,708	2,897	113,776
Net claims expense	- (70,096)	-	(69,663)
Other operating expenses	(238) (44,920)	(194)	(42,007)
Change in policyholder liabilities	834 28,179	(2,168)	(8,479)
Operating prof t before taxation	403 26,968	535	58,002
Taxation (expense)/credit	(131) (6,043)	(222)	(27,625)
Operating prof t after taxation	272 20,925	313	30,377

Investment revenue allocated to policyholders was $193,000 (2010: $2,897,000).

41. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the net profi t 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 profi t 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.

There was no dilutive impact of outstanding share options on basic earnings per share for 2011 (2010: Nil).

	Group
	2011	2010
	$000	$000
Prof t attributable to shareholders	33,066	57,554
	Number of	Number of
	shares	shares
Weighted average number of ordinary shares for basic and diluted earnings per share	263,042,500	257,797,915
	Cents	Cents
Basic and diluted earnings per share	12.57	22.33

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 97

PERFORMANCE

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2011

42. IMPACT OF CHRISTCHURCH EARTHQUAKES

Following the Christchurch earthquakes which occurred during the 2011 fi nancial year, TOWER has, consistent with its policy on reinsurance, purchased additional cover to maintain its reinsurance position. The high cost of reinsurance cover, together with net claims and other costs associated with the Christchurch earthquakes, has increased TOWER’s expenses in the 2011 fi nancial year.

For the year ended 30 September 2011 these costs amounted to $23,610,000 after taxation and have been expensed in the 30 September 2011 fi nancial statements. Costs associated with the 4 September 2010 event amounted to $4,470,000 after taxation and were expensed in the 30 September 2010 fi nancial statements.

The after taxation impact of the Christchurch earthquakes are presented below.

	Group	Company
	2011	2010 2011	2010
	$000	$000 $000	$000
Additional costs associated with Christchurch earthquakes
Christchurch earthquakes claims	402,045	67,336 -	-
Reinsurance recoveries	(386,834)	(62,336) -	-
Claims expenses net of reinsurance recoveries revenue	15,211	5,000 -	-
Reinsurance expense	17,622	1,386 -	-
Management and sales expenses	421	- -	-
Income tax impact	(9,644)	(1,916) -	-
Impact of Christchurch earthquakes after tax	23,610	4,470 -	-

Assumptions adopted in calculation of insurance provisions of outstanding claims

There are considerable estimation uncertainties surrounding measurement of gross claims liabilities and related reinsurance recoveries in respect of Christchurch earthquake claims. While assumptions used in calculating Christchurch earthquake insurance provisions are consistent with those outlined in note 28 (with the exception of superimposed infl ation rates which have been assumed at 6%) the following uncertainties have been considered when determining earthquake provisions: impact of Earthquake Commission cover reinstatement; impact and application of revised Department of Building and Housing building standard guidelines, in particular, relating to foundations; and extended claims development periods.

Given the nature of estimation uncertainties noted above, TOWER’s actual claims experience may deviate from gross outstanding claims provisions recorded at 30 September 2011. Any changes to estimates and claims provisions will be adjusted in the accounting period in which they occur.

Reinsurance

TOWER confi rmed the successful placement of its reinsurance programme for the 2011/12 fi nancial year on 3 October 2011. Consistent with its policy on reinsurance the programme involves cover for two catastrophe events. The excess for an event has increased from NZ$5 million to NZ$6.7 million for the 2011/12 fi nancial year.

Earthquake Commission

The Government announced on 11 October 2011 that the compulsory Earthquake Commission (EQC) levy is to treble to 15 cents per $100 of insured value from February 2012 to maximum of $207 per policy per year. The increase in levy is the fi rst step in a 30 year plan to rebuild the National Disaster Fund, which was eliminated by the Christchurch earthquakes.

A High Court decision in September 2011 requiring the EQC to make payments on multiple disasters in one year has resulted in a shortfall to the National Disaster Fund of $1.2 billion.

TOWER remains in a strong position, as evidenced by its ability to deal with the Christchurch related claims that have arisen. The company’s policies will continue to offer earthquake cover across the whole of New Zealand, including Christchurch.

43. SUBSEQUENT EVENTS

On 24 November 2011 the Directors declared a dividend of 2.0 cents per share. The dividend will be paid on 1 February 2012. The estimated dividend payable including supplementary dividend is $5,512,148. TOWER’s dividend reinvestment plan will operate for the dividend. The last date for receipt of the election notice for participation is 20 January 2012.

Due to changes in the programme, and a signifi cant increase in premium levels charged by reinsurers, TOWER’s total reinsurance premiums for the 2011/12 year will be higher than in previous years. The Company has increased premium rates, consistent with the market.

98 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

TOWER Capital Limited Financial Statements

For the year ended 30 September 2011

Auditor’s Report
100
Statement of comprehensive income
102
Balance sheet
103
Statement of changes in equity
104
Statement of cash f ows
105
Notes to the f nancial statements
106
1.
Summary of signif cant accounting policies
106
2.
Impact of amendments to NZ IFRS
107
3.
Other expenses
107
4.
Interest income
107
5.
Taxation
108
6.
Related party transactions
109
7.
Interest bearing liabilities
109
8.
Contributed equity
110
9.
Retained earnings
110
10. Tangible assets value per bond
110
11. Segmental reporting
110
12. Financial instruments categories
110
13. Risk management information
111
14. Reconciliation of prof t for the year to net cash
f ows from operating activities
114
15. Contingent liabilities
114
16. Capital commitments
114
17. Subsequent events
114

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 99

PERFORMANCE TOWER Capital Limited Independent Auditor’s Report For the year ended 30 September 2011

==> picture [65 x 47] intentionally omitted <==

Independent Auditors’ Report

to the shareholder of TOWER Capital Limited

Report on the Financial Statements

We have audited the fi nancial statements of TOWER Capital Limited on pages 102 to 114, which comprise the balance sheet as at 30 September 2011, the statement of comprehensive income, statement of changes in equity and statement of cash fl ows for the year then ended, and the notes to the fi nancial statements that include a summary of signifi cant accounting policies and other explanatory information.

Directors’ Responsibility for the Financial Statements

Auditors’ Responsibility

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Company’s preparation of fi nancial statements that give a true and fair view of the matters to which they relate, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the fi nancial statements.

We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion.

We have no relationship with, or interests in, TOWER Capital Limited other than in our capacities as auditors and providers of other assurance, taxation and advisory services. These services have not impaired our independence as auditors of the Company.

100 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Capital Limited Independent Auditor’s Report

For the year ended 30 September 2011

==> picture [65 x 47] intentionally omitted <==

Independent Auditors’ Report

TOWER Capital Limited

Opinion

(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 fi nancial position of the Company as at 30 September 2011, and its fi nancial performance and cash fl ows for the year then ended.

Report on Other Legal and Regulatory Requirements

We also report in accordance with Sections 16(1)(d) and 16(1)(e) of the Financial Reporting Act 1993. In relation to our audit of the fi nancial statements for the year ended 30 September 2011:

(i) we have obtained all the information and explanations that we have required; and
(ii) in our opinion, proper accounting records have been kept by the Company as far as appears from an examination of those records.

Restriction on Distribution or Use

This report is made solely to the Company’s shareholder, as a body, in accordance with Section 205(1) of the Companies Act 1993. Our audit work has been undertaken so that we might state to the Company’s shareholder those matters which we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholder, as a body, for our audit work, for this report or for the opinions we have formed.

==> picture [142 x 41] intentionally omitted <==

Chartered Accountants Auckland 24 November 2011

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 101

PERFORMANCE

TOWER Capital Limited Statement of Comprehensive Income

For the year ended 30 September 2011

	Note	2011 2010 $000 $000
Investment revenue
Interest income	4	8,209 8,221
Total investment revenue		8,209 8,221
Operating expenses
Operating expenses	3	21 108
Total operating expenses		21 108
Financing costs
Interest expense		6,951 6,951
Amortisation of capitalised costs		660 601
Total f nancing costs		7,611 7,552
Prof t before tax		577 561
Income tax expense	5(a)	(173) (129)
Total prof t and comprehensive income for the year attributed to shareholders		404 432

The statement of comprehensive income should be read in conjunction with the accompanying notes.

102 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE TOWER Capital Limited Balance Sheet As at 30 September 2011

		2011	2010
	Note	$000	$000
Assets
Cash and cash equivalents		953	3
Related party receivables	6	83,975	84,697
Total assets		84,928	84,700
Liabilities
Payables		-	38
Related party payables	6	1,341	1,965
Current tax liabilities		372	349
Interest bearing liabilities	7	81,263	80,602
Deferred tax liabilities	5(b)	548	746
Total liabilities		83,524	83,700
Net assets		1,404	1,000
Equity
Retained earnings	9	1,404	1,000
Total equity		1,404	1,000

==> picture [119 x 66] intentionally omitted <==

==> picture [118 x 32] intentionally omitted <==

Bill Falconer John Spencer Chairman Director

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

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 103

PERFORMANCE

TOWER Capital Limited Statement of Changes in Equity

For the year ended 30 September 2011

	TOTAL EQUITY
	Retained Earnings
	2011	2010
	$000	$000
At the beginning of the year	1,000	568
Comprehensive income for the year
Prof t for the year	404	432
At the end of the year	1,404	1,000

The Statement of changes in equity should be read in conjunction with the accompanying notes.

104 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE TOWER Capital Limited Statement of Cash Flows

For the year ended 30 September 2011

	2011 2010 Note $000 $000
Cash f ows from operating activities
Interest received	8,209 8,221
Interest paid	(6,951) (6,951)
Payments to suppliers and employees	(58) (70)
Net cash inf ow from operating activities	14 1,200 1,200
Cash f ows from investing activities
Net advances to related parties	(250) (1,199)
Net cash outf ow from investing activities	(250) (1,199)
Net increase in cash and cash equivalents	950 1
Cash and cash equivalents at the beginning of the year	3 2
Cash and cash equivalents at the end of the year	953 3

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 105

PERFORMANCE

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of the fi nancial report are set out below.

TOWER Capital Limited (‘Company’) is a profi t-oriented company incorporated and domiciled in New Zealand. The Company was incorporated to undertake an issue of debt securities with the purpose of on-lending the proceeds within the TOWER Limited consolidated Group (the ‘TOWER Group’). The address of its registered offi ce is 22 Fanshawe Street, Auckland, New Zealand.

BASIS OF PREPARATION

This general purpose fi nancial report has been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (‘NZ GAAP’). It complies with the New Zealand Equivalents to International Financial Reporting Standards (‘NZ IFRS’) and other applicable fi nancial reporting standards as appropriate for profi t-oriented entities.

The fi nancial statements were authorised for issue by the Board of Directors on 24 November 2011. Entities owners or others do not have power to amend after issue.

Compliance with International Financial Reporting Standards (IFRS)

The fi nancial statements and notes of TOWER Capital Limited comply with International Financial Reporting Standards ‘IFRS’.

The fi nancial statements have been prepared on a historical cost basis with any exceptions noted in the accounting policies below.

SPECIFIC ACCOUNTING POLICIES

(A) INVESTMENT REVENUE

Interest income is recognised on an effective interest method basis.

(B) EXPENSES

Expenses are recognised in the period they are incurred.

basis to the extent that the GST is not recoverable and has been included in the expense or asset.

(F) FUNCTIONAL AND PRESENTATION CURRENCY

The fi nancial statements are presented in the currency of the primary economic environment in which the Company operates, being New Zealand dollars.

(G) CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand and deposits held at call with fi nancial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignifi cant risk of changes in value.

(H) 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.

(I) FINANCIAL INSTRUMENTS AND FAIR VALUE

The Company classifi es its fi nancial assets in the following category: loans and receivables. The classifi cation depends on the purpose for which the fi nancial assets were acquired. Management determines the classifi cation of its fi nancial assets at initial recognition. Loans and receivables are recognised at settlement date, which is the date that the assets are delivered or received. Loans and receivables

Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted on an active market. The Company’s loans and receivables comprise related party 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.

(C) FINANCING COSTS

Financing costs include interest on external debt and the amortisation of transaction costs and are recognised on an effective interest method basis.

(D) TAXATION

(i) Current tax

(ii) Tax consolidation

TOWER Capital Limited is part of the 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.

(iii) Income tax expense

(J) IMPAIRMENT OF FINANCIAL ASSETS

Financial assets are assessed for indicators of impairment at each reporting date. Financial assets are impaired when there is objective evidence that the estimated future cash fl ows of the asset have been impacted as a result of one or more events that occurred after the initial recognition of the fi nancial asset.

In respect of fi nancial assets carried at amortised cost, with the exception of trade receivables, the impairment loss is reversed through the statement of comprehensive income 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.

(E) GST

(K) INTEREST BEARING LIABILITIES

Interest bearing debt is initially measured at fair value, net of transaction costs incurred, and is 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.

106 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2011

(L) PAYABLES

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

(M) PROVISIONS

Provisions are only recognised when the Company 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 outfl ow of resources will be required to settle the obligation. Provisions are recognised at the best estimate of future cash fl ows discounted to present value where the effect is material.

(N) CONTRIBUTED EQUITY

Ordinary shares issued by the Company are classifi ed as equity and are recognised at fair value less direct issue costs.

(O) SEGMENT REPORTING

An operating segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other operating segments. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decisionmaker (CODM) who reviews the operating results on a regular basis and makes decisions on resource allocation and assessing performance. The chief operating decision-maker has been identifi ed as the Company’s Board of Directors.

2. IMPACT OF AMENDMENTS TO NZ IFRS

(A) STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN EARLY ADOPTED BY THE GROUP.

NZ IAS 24, ‘Related party disclosures’ (effective from 1 January 2011). The revised standard amends the defi nition of a related party. The amendment is not expected to have a material impact on the fi nancial statements.
NZ IFRS 7 ‘Financial Instruments: Disclosures – Appendix E (effective 1 April 2011). The amendment has replaced the term ‘fi nancial institution’ with ‘deposit taker’ as defi ned by the Reserve Bank of New Zealand Act. The Company is in the process of evaluating the potential effect of this standard.
NZ IFRS 9 ‘Financial Instruments’ (effective from 1 January 2013). The standard is the fi rst step in replacing NZ IAS 39 and introduces requirements for classifying and measuring fi nancial assets and liabilities. The Company is in the process of evaluating the potential effect of this standard.
NZ IFRS 13 ‘Fair value measurement’ (effective from 1 January 2013). The standard replaces the guidance on fair value measurement in existing IFRS literature with a single standard. The standard is not expected to have a material impact on the fi nancial statements.
Harmonisation Amendments (effective from 1 July 2011). This amends multiple standards to harmonise NZ IFRS with IFRS and Australian Accounting Standards. The Company is in the process of evaluating the potential effect of the amendments.
Improvements to NZ IFRS 2010 includes various amendments effective for periods beginning on or after 1 January 2011 and are not expected to have a material impact on the fi nancial statements.
(B) STANDARDS, AMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS EFFECTIVE 2011 OR EARLY ADOPTED BY THE GROUP.
The Group has early adopted the following new and amended IFRS’s as of 1 October 2010:
NZ IFRS 7, ‘Financial instruments’ (effective retrospectively from 1 January 2011). The amendment emphasises the interaction between quantitative and qualitative disclosures about the nature and extent of risks associated with fi nancial instruments. The change in accounting policy has not resulted in additional disclosures.

3. OTHER EXPENSES

Fees paid to the Company’s auditor

No fees for audit or other services were paid by TOWER Capital Limited to its auditor during the year (2010: nil). TOWER New Zealand Limited paid all fees for audit services provided to TOWER Capital Limited.

	2011	2010
	$000	$000
4. INTEREST INCOME
Interest income - external	33	-
Interest income - related party	8,176	8,221
Total investment income	8,209	8,221

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 107

PERFORMANCE

TOWER Capital Limited Notes to the Financial Statements For the year ended 30 September 2011

5. TAXATION
		2011	2010
		$000	$000
(A) ANALYSIS OF TAXATION EXPENSE
Current taxation		(371)	617
Deferred taxation		198	(746)
Income tax expense		(173)	(129)
Prof t before taxation		577	561
Income tax expense at current rate of 30%		173	168
Change in tax rates		-	(39)
Income tax expense		173	129
(B) DEFERRED TAX
		Charged/
		(credited) to
	Opening	statement of	Closing
	balance at 1	comprehensive	balance at
	October	income	30 September
2011	$000	$000	$000
Movements in deferred tax liabilities
Unamortised capitalised bonds issue costs	746	(198)	548
Total deferred tax liabilities	746	(198)	548
Net deferred tax	(746)	-	(548)
2010
Movements in deferred tax liabilities
Unamortised capitalised bonds issue costs	-	746	746
Total deferred tax liabilities	-	746	746
Net deferred tax	-	(746)	(746)
		2011	2010
		$000	$000
Deferred liabilities are analysed as
Expected to crystallise in the next 12 months		204	198
Not expected to crystallise in the next 12 months		344	548
		548	746

108 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2011

6. RELATED PARTY TRANSACTIONS

The Company is immediately and ultimately owned by TOWER Limited. All members of the TOWER Group are considered to be related parties of the Company. Related party receivable and payable balances of TOWER Capital Limited at the reporting date were as follows:

	2011	2010	Nature of	Type of
Related party	$000	$000	Relationship	Transaction
			Subsidiary of
TOWER Financial Services Group Limited	83,975	83,975	TOWER Limited	Loan/Advance
			Subsidiary of
TOWER New Zealand Limited	(1,341)	(1,965)	TOWER Limited	Advance
			Subsidiary of
TOWER Asset Management Limited	-	313	TOWER Limited	Advance
			Subsidiary of
TOWER Insurance Limited	-	409	TOWER Limited	Advance

The Company issued a loan to TOWER Financial Services Group Limited (TFSG) of $81,759,000 on 24 March 2009, bearing a fi xed interest rate of 10% per annum. The loan is payable on demand and the above total includes accrued interest of $2,060,775 (2010: $2,060,775). The balance owing to TOWER New Zealand Limited represents the expenses paid on behalf of the Company during the period. The balance is noninterest bearing and is payable on demand.

Related party transactions with TOWER Capital Limited during the year were as follows:

			Subsidiary of
TOWER Financial Services Group Limited	8,176	8,221	TOWER Limited	Interest on loan
			Subsidiary of	Other expenses
TOWER New Zealand Limited	623	(7,552)	TOWER Limited	and advances
			Subsidiary of	Tax losses
TOWER Asset Management Limited	-	313	TOWER Limited	offset
			Subsidiary of	Tax losses
TOWER Insurance Limited	-	409	TOWER Limited	offset
			2011	2010
			$000	$000
7. INTEREST BEARING LIABILITIES
Fixed rate senior unsecured bonds			83,219	83,220
Unamortised capitalised costs			(1,956)	(2,618)
			81,263	80,602
Analysed as:
Current			732	799
Non current			80,531	79,803
			81,263	80,602

Fixed rate senior unsecured bonds

On 24 March 2009, the Company issued $81,759,000 of fi xed rate senior unsecured bonds, bearing a fi xed interest rate of 8.5% per annum. The bonds mature on 15 April 2014.

The above total of $81,263,000 includes $1,459,819 of accrued interest (2010: $1,460,433). The Company capitalised $3,499,000 of costs associated with the issuance of the bonds. These costs are amortised over the fi ve year term of the bonds using the effective interest method. The bonds are carried at amortised cost using the effective interest method. The amortised costs during the period to 30 September 2011 were $661,181 (2010: $601,005).

The fair value of fi xed rate senior unsecured bonds as at 30 September 2011 is $86,109,000 (2010: $85,464,000), this has been estimated using the method outlined in Note 13 (d).

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 109

PERFORMANCE

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2011

	Number of shares	Number of shares
	2011	2010
8. CONTRIBUTED EQUITY
Issued share capital (ordinary shares)	1,000	1,000
Shares have been issued for nil consideration on incorporation. Each share ranks equally with one vote attached to each share.
	2011	2010
	$000	$000
9. RETAINED EARNINGS
Opening balance	1,000	568
Net prof t for the year	404	432
Closing balance	1,404	1,000
	2011	2010
	$	$
10. TANGIBLE ASSETS VALUE PER BOND
Tangible assets per bond	1.04	1.04

Tangible assets per bond represents the value of the Company’s total assets divided by the number of fi xed rate senior unsecured bonds on issue as at 30 September.

11. SEGMENTAL REPORTING

TOWER Capital Limited operates in one single business class having undertaken a bond issue to raise funds for use in operations of TOWER Group. The chief operating decision maker is considered to be the Board of Directors. The Board meet regularly with management to provide strategic guidance for the Company. The Company operates predominately in one geographical segment, New Zealand. Consequently no segmental information is presented.

12. FINANCIAL INSTRUMENTS CATEGORIES

	Total	Loans and receivables
Financial Assets	$000	$000
As at 30 September 2011
Cash and cash equivalents	953	953
Related party receivables	83,975	83,975
Total f nancial assets	84,928	84,928
As at 30 September 2010
Cash and cash equivalents	3	3
Related party receivables	84,697	84,697
Total f nancial assets	84,700	84,700

110 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2011

		Financial
		liabilities at
		amortised
	Total	cost
Financial Liabilities	$000	$000
As at 30 September 2011
Interest bearing liabilities	81,263	81,263
Related party payables	1,341	1,341
Total f nancial liabilities	82,604	82,604
As at 30 September 2010
Payables	38	38
Interest bearing liabilities	80,602	80,602
Related party payables	1,965	1,965
Total f nancial liabilities	82,605	82,605

13. RISK MANAGEMENT INFORMATION

The fi nancial condition and operating results of the Company are affected by a number of key fi nancial risks. Financial risks include market risk, credit risk, and fi nancing and liquidity risk.

These risks are managed through the parent company’s (TOWER Limited) risk management policy which is approved by the Board and applies to all companies in the Group, including the Company. Various procedures are put in place to control and mitigate the risks faced by the Company depending on the nature of the risk. The Company’s exposure to all high and critical risks is reviewed by the Group Risk and Compliance team and this exposure is reported quarterly to the Group Audit and Compliance Committee.

The Board has delegated to the TOWER Group Audit and Compliance Committee the responsibility to review the effectiveness and effi ciency of management processes, the TOWER Group and the Company’s risk management and internal fi nancial controls and systems as part of their duties.

(A) MARKET RISK

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

(i) Interest rate risk

Interest rate risk is the risk that the value or future cash fl ows of a fi nancial instrument will fl uctuate because of changes in interest rates.

The Board is responsible for the management of the interest rate risk arising from external borrowings. Interest on external borrowings is fi xed therefore mitigating the cash fl ow risk arising from changes in interest rates.

(ii) 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 Company’s functional currency.

The Company is not exposed to currency risk, as there are no assets, liabilities or transactions which are denominated in a currency that is not the Company’s functional currency.

(iii) Price risk

Price risk is the risk of loss resulting from the decline in prices of equity securities or other assets. The Company is not exposed to the price risk because it holds no investments in publicly traded equity securities.

(B) CREDIT RISK

The Company’s exposure to credit risk is limited to deposits held with banks and other fi nancial institutions as well as credit exposure to related party receivables or other counterparties. For banks and fi nancial institutions the minimum credit rating accepted by the Company is ‘A’.

(i) Credit risk concentration

Concentration of credit risk exists when the Company enters into contracts or fi nancial 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. The Company manages concentration of credit risk by credit rating, industry type and individual counterparty.

The credit risk concentration is within one company located in New Zealand. The signifi cant concentrations of credit risk are outlined by industry type below.

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 111

PERFORMANCE

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2011

13. RISK MANAGEMENT INFORMATION (CONTINUED)

	Carrying value
	2011 2010 $000 $000
Banks	953 3
Related party receivable	83,975 84,697
Total f nancial assets with credit exposure	84,928 84,700

(ii) Maximum exposure to credit risk

The Company’s maximum exposure to credit risk without taking account of any collateral or any other credit enhancements is the carrying amount of the fi nancial assets held by the Company at the reporting date, which is as follows:

Asset
Cash and cash equivalents	953	3
Related party receivable	83,975	84,697
Total credit risk	84,928	84,700

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

Credit exposure by credit rating
AA	953	3
Related parties with no credit rating	83,975	84,697
	84,928	84,700

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

None of the fi nancial assets that are fully performing has been renegotiated in the past period (2010: nil).

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

(C) FINANCING AND LIQUIDITY RISK

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

To mitigate fi nancing and liquidity risk the Company maintains suffi cient current assets to ensure that it can meet its debt obligations and other cash outfl ows on a timely basis.

Financial assets and liabilities by expected and contractual maturity

The tables below summarise the Company’s fi nancial assets and liabilities into relevant maturity groups based on the remaining period at the balance date to the contractual and expected maturity date. All amounts disclosed are expected or contractual undiscounted cash fl ows that include interest payments and exclude the impact of netting agreements.

The maturity table based on the expected cash fl ows is presented below for the purposes of disclosing the cash fl ows that are actually expected to occur over the life of the Company’s fi nancial assets and liabilities.

112 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

PERFORMANCE

For the year ended 30 September 2011

TOWER Capital Limited Notes to the Financial Statements

		Total
	Carrying	expected	Less than	One to two	Two to three	Three to
	value	cash f ows	one year	years	years	four years
	$000	$000	$000	$000	$000	$000
As at 30 September 2011
Financial assets
Cash and cash equivalents	953	953	953	-	-	-
Related party receivables	83,975	102,188	8,176	8,176	85,836	-
Total f nancial assets	84,928	103,141	9,129	8,176	85,836	-
Financial liabilities
Interest bearing liabilities	81,263	99,410	6,950	6,950	85,510	-
Related party payables	1,341	1,341	1,341	-	-	-
Total f nancial liabilities	82,604	100,751	8,291	6,950	85,510	-
As at 30 September 2010
Financial assets
Cash and cash equivalents	3	3	3	-	-	-
Related party receivables	84,697	110,364	8,176	8,176	8,176	85,836
Total f nancial assets	84,700	110,367	8,179	8,176	8,176	85,836
Financial liabilities
Payable	38	38	38	-	-	-
Interest bearing liabilities	80,602	106,360	6,950	6,950	6,950	85,510
Related party payables	1,965	1,965	1,965	-	-	-
Total f nancial liabilities	82,605	108,363	8,953	6,950	6,950	85,510

The table below presents the maturity analysis of the Company’s fi nancial assets and liabilities on a contractual cash fl ow basis.

		Total
	Carrying	contractual	Less than	One to two	Two to three	Three to
	value	cash f ow	one year	years	years	four years
	$000	$000	$000	$000	$000	$000
As at 30 September 2011
Financial assets
Cash and cash equivalents	953	953	953	-	-	-
Related party receivables	83,975	83,975	83,975	-	-	-
Total f nancial assets	84,928	84,928	84,928	-	-	-
Financial liabilities
Interest bearing liabilities	81,263	99,410	6,950	6,950	85,510	-
Related party payables	1,341	1,341	1,341	-	-	-
Total f nancial liabilities	82,604	100,751	8,291	6,950	85,510	-
As at 30 September 2010
Financial assets
Cash and cash equivalents	3	3	3	-	-	-
Related party receivables	84,697	84,697	84,697	-	-	-
Total f nancial assets	84,700	84,700	84,700	-	-	-
Financial liabilities
Payable	38	38	38	-	-	-
Interest bearing liabilities	80,602	106,360	6,950	6,950	6,950	85,510
Related party payables	1,965	1,965	1,965	-	-	-
Total f nancial liabilities	82,605	108,363	8,953	6,950	6,950	85,510

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 113

PERFORMANCE

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2011

13. RISK MANAGEMENT INFORMATION (CONTINUED)

(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. The fair value of fi nancial instruments that are not traded in an active market is determined using valuation techniques referred to below:

The carrying amounts of all fi nancial assets and liabilities reasonably approximate their fair values with the exception of senior unsecured bonds which is disclosed in note 7.

The following methods and assumptions were used by the Company in estimating the fair values of fi nancial instruments.

(i) Cash and cash equivalents

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

(ii) Related party receivables and payables

Carrying values of related party receivables and payables reasonably approximate their fair values.

(iii) Interest bearing liabilities

by reference to the average quoted market price of the underlying debt securities at the end of the period.

(E) SENSITIVITY ANALYSIS

No sensitivity analysis has been disclosed as there is no impact on the shareholder profi t after tax or equity from changes in interest rates, exchange rates and equity prices. Cash, related party loans and interest bearing liabilities are held at amortised cost and subject to fi xed interest rates. Other related party balances are interest free payables.

(F) CAPITAL RISK MANAGEMENT

The Company manages its capital to ensure that it will be able to continue as a going concern and have the required liquidity to meet its interest payments obligation to the Bond holders. The company’s overall strategy is consistent with that of TOWER Group, which the Company is part of, and is overseen by the TOWER Group Board of Directors.

The capital structure of the Company consists of debt and retained earnings.

	2011	2010
	$000	$000
As at 30 September Interest bearing liabilities	81,263	80,602
Retained earnings	1,404	1,000
Total capital resources	82,667	81,602
	2011	2010
	$000	$000
14. RECONCILIATION OF PROFIT FOR THE YEAR TO NET CASH FLOWS FROM
OPERATING ACTIVITIES
Net prof t after tax for the year	404	432
Add/(less) non cash items
(Decrease)/increase in deferred tax	(198)	746
Add/(less) movements in working capital
(Decrease)/Increase in payables	(39)	38
Decrease in taxation	23	106
Decrease/(increase) in receivables	349	(722)
Add other items classif ed as f nancing activities	333	(578)
Decrease in capitalised costs	661	600
Net cash inf ow from operating activities	1,200	1,200

15. CONTINGENT LIABILITIES

There were no contingent liabilities as at 30 September 2011 (2010: nil).

16. CAPITAL COMMITMENTS

There were no capital commitments as at 30 September 2011 (2010: nil).

17. SUBSEQUENT EVENTS

There have been no material events subsequent to 30 September 2011.

114 | TOWER Limited & TOWER Capital Limited Annual Reports 2011

Notes

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 115

Notes

116 |

TOWER Limited & TOWER Capital Limited Annual Reports 2011

TOWER Directory

BOARD OF DIRECTORS

Bill Falconer CNZM (Chairman) Rob Flannagan (Group Managing Director)

Mike Allen Mike Jefferies John Spencer Susie Staley Denis Wood

CHIEF OPERATING OFFICER Michael Boggs

COMPANY SECRETARY

Bronwyn Walsh

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

Australia

C/- PricewaterhouseCoopers Nominees (N.S.W) Pty Ltd PricewaterhouseCoopers Darling Park Tower 2 Level 1 201 Sussex Street Sydney NSW 2000 Australia

AUDITORS

PricewaterhouseCoopers

BANKERS

Westpac New Zealand Limited

SOLICITORS

DLA Phillips Fox

ENQUIRIES

For customer enquiries, call TOWER on 0800 808 808 or visit www.tower.co.nz

For investor enquiries: Telephone: +64 9 369 2000 Email: [email protected] Website: www.tower.co.nz

COMPANY NUMBERS

TOWER Limited (Incorporated in New Zealand) NZ Incorporation 979635 ARBN 088 481 234

TOWER Capital Limited NZ Incorporation 2198245

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 Facsimile New Zealand: +64 9 488 8787

Australia (TOWER Limited Shareholders)

Computershare Investor Services Pty Limited

Yarra Falls, 452 Johnston Street Abbotsford VIC 3067

GPO Box 2975EE Melbourne Vic 3000

Freephone within Australia: 1800 501 366

Telephone Australia: +61 3 9415 5000 Facsimile Australia: +61 3 9473 2500

Email: [email protected]

Website:

www.computershare.co.nz/investorcentre You can also manage your holdings electronically by using Computershare’s secure website www.computershare. co.nz/investorcentre

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

TOWER recommends shareholders elect to have any payments direct credited to their nominated bank account in New Zealand or Australia to minimise the risk of fraud and misplacement of cheques. Bondholders payments are made in New Zealand dollars only and TOWER also recommends that all interest payments are direct credited to your nominated bank account in New Zealand.

Please quote your CSN number or shareholder number when contacting Computershare.

The TOWER Limited and TOWER Capital Limited Annual Reports for the year ended 30 September 2011 are available on the TOWER website: www.tower.co.nz

TOWER Limited & TOWER Capital Limited Annual Reports 2011 | 117

Registrar

TOWER Limited & Computershare Investor Services Limited TOWER Capital Limited Freephone within New Zealand: 0800 222 065 Investor Relations Telephone New Zealand: +64 9 488 8777 Telephone: +64 9 369 2000 Freephone within Australia: 1800 501 366 Facsimile: +64 9 369 2160 Telephone Australia: +61 3 9415 5000 Email: [email protected] Email: [email protected] Website: www.tower.co.nz Website: www.computershare.co.nz/investorcentre

AI assistant

TOWER LIMITED — Annual Report 2011

65971_rns_2011-12-19_8ec9809b-3b31-45ed-93ab-ae15ad66c3d0.pdf

TOWER Group

Health & Life Insurance

General Insurance

KiwiSaver

TOWER Limited TOWER Capital Limited Annual Reports

Contents

Highlights

Business review

Summary of results – Group

Group results – three year summary

GENERAL INSURANCE

General Insurance results – three year summary

LIFE INSURANCE

Life results - three year summary

HEALTH INSURANCE

Health results – three year summary

INVESTMENTS

Investments results – three year summary

OUTLOOK

Board of Directors

BILL FALCONER

MIKE ALLEN

ROB FLANNAGAN

MIKE JEFFERIES

JOHN SPENCER

SUSIE STALEY

DENIS WOOD

TONY DIXON

SAM STUBBS

ANTONY VRIENS

MONICA MATHIS

DEBBIE ERYE

Our values

Take ownership

Open and honest

Working as one

Empathy in all that we do

Raising the bar

Our purpose

TOWER’s community commitment

Corporate Governance at TOWER

Compliance with governance requirements and recommendations

Role of the Board of Directors

Role of senior executives

BOARD COMPOSITION, NOMINATIONS AND APPOINTMENTS

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

BOARD COMMITTEES

Audit and Compliance Committee

MEMBERS: JOHN SPENCER (CHAIRMAN), MIKE JEFFERIES AND DENIS WOOD

Remuneration and Appointments Committee

MEMBERS: SUSIE STALEY (CHAIRMAN), JOHN SPENCER AND DENIS WOOD

Investment Committee

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

BOARD AND COMMITTEE MEETING ATTENDANCE

2010/2011 TOWER Limited Directors’ attendance record

PROMOTING ETHICAL AND RESPONSIBLE BEHAVIOR

Ethical and responsible behaviour

Insider trading

Compliance policy

Market and shareholder communication

Announcements

Credit Rating

Audit and Risk Management at TOWER

Internal audit

Group corporate governance policies and procedures

External audit

Role of the Remuneration and Appointments Committee

Retirement allowances

Non-executive director remuneration

Group managing director and senior executive remuneration

TOWER LIMITED Annual Report 2011