TOWER LIMITED — Annual Report 2013

Dec 22, 2013

TOWER Limited TOWER Capital Limited

A customer focused general insurer

Annual report 2013

Highlights

General insurance

Year ended 30 September 2013:

2 . $ 79 3m

GWP

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New Zealand 80% Pacific Islands 20%

499,707

Inforce policies

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New Zealand 88%
Pacific Islands 12%
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$19.0m

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1
NORMALISED NPAT
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New Zealand $14.4m Pacific Islands $4.6m

266 2 1 , 7

Clients2

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New Zealand 87% Pacific Islands 13%

Group

Full year profit

$34.4 million

Three business sales

$370 million proceeds

Capital return

$120 million returned $70 million underway

Final 6 cent dividend

Continual focus on capital management

Strategy and operating model refreshed

Foundation for growth being laid

Payout ratio reconfirmed at 90-100%

11 cent total

Earthquake claim rate

Settling above average

Costs to complete the sale of the retained Life business provisioned

1. Normalised excludes $7.1m discontinued Australian business and $15.2m Canterbury earthquakes 2. One customer can be comprised of multiple clients. Restated from half year to include additional contract types

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“I came away from the phone call very satisfied with the TOWER experience and also found the subsequent follow through of sending policy documents very quick and efficient. I thought the service was excellent and thought at least you should know.”

TOWER Customer

2 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Limited TOWER Capital Limited Annual reports

For the year ended 30 September 2013

Introduction

Introduction
Highlights	IFC
Chairman’s report on behalf of directors	4
Business review	6
Outlook	10
Board of Directors	12

“It was so nice to have someone who understands what we were trying to insure, and the best way of going about it. It really did make it enjoyable rather than a hassle. ”

TOWER Customer

Corporate governance and disclosures

Corporate governance and disclosures
Corporate governance at TOWER	14
Audit and risk management at TOWER	20
Remuneration at TOWER	21
Interests’ disclosures	24
Shareholding and exchange disclosures	26
Other matters	27

Performance

Performance
TOWER Limited Table of contents	29
TOWER Limited Auditor’s Report	30
TOWER Limited Financial Statements	32
TOWER Capital Limited Table of contents	81
TOWER Capital Limited Auditor’s Report	82
TOWER Capital Limited Financial Statements	84
TOWER directory	IBC

If you would like to contact TOWER please visit www.tower.co.nz or call TOWER on 0800 808 808. For investor enquiries, call +64 9 369 2000 or email investor.relations@tower.co.nz.

This Annual Report is dated 23 December 2013. 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. This document contains the annual reports of both TOWER Limited (TOWER) and TOWER Capital Limited (TOWER Capital) for the year ended 30 September 2013. TOWER Capital is a subsidiary of TOWER. On 24 March 2009, the company issued fixed 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 fixed 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 financial position and performance of TOWER.

Cover image: Castlepoint lighthouse in the North Island of New Zealand.

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Chairman’s report on behalf of directors Michael Stiassny

Laying foundations for the future

TOWER is now well on the way to becoming the simpler, focused and more agile business we envisaged when we embarked on the strategic review two years ago.

After a sustained period of change as we sought to reshape and resize the business, TOWER is – and will continue to be – a focused Kiwi general insurer offering an attractive, independent alternative to the big foreign brands.

We have delivered a solid result, reporting a $34.4 million net profit after tax for the full year ended 30 September 2013.

Importantly, our results reflect our prudent approach to capital management and this will continue to be a key focus of this Board.

At our half year results announcement in May, we laid out four areas of immediate focus as we finalised our transition to a pure general insurance business.

They were:

• Reducing corporate expenses and maintaining strict cost controls across the business

• Settling the sale of the majority of our Life business and assessing opportunities to divest the remaining Life business

• Completing the Board and management structure review

• Adopting and implementing our general insurance business plan in consultation with the new Chief Executive Officer.

We have made good progress in achieving these objectives.

We have succeeded in reducing finance and corporate expenses by more than $3 million. Further savings are anticipated as we continue to identify efficiencies across the business and are able to reduce overall expenditure.

The Life sale settled on 1 August 2013 and a formal process is currently underway with a number of parties interested in the remaining Life business.

And finally, recently-appointed Chief Executive Officer David Hancock has developed a new management and operating structure that better reflects our needs as a customer-focused general insurer.

Shareholder returns

Our focus remains on ensuring our shareholders benefit from TOWER’s proven ability to maintain an efficient capital structure while delivering strong returns.

Over the year we have sold three businesses realising a total of $370 million and in doing so we have made a significant cash return to our shareholders.

In addition to the $120 million returned to shareholders in April 2013, a further $70 million is planned to be paid in January. This will take the form of a voluntary share buy back.

TOWER remains an attractive yield stock - an unimputed dividend of 6 cents per share will be paid for the six months to September 2013, bringing the annual dividend to 11 cents per share (unimputed). We have confirmed our dividend payout policy ratio at 90% to 100% of NPAT to be implemented moving forward.

Canterbury earthquake recovery

Canterbury remains an important focus for the company and the Board receives regular updates on the progress we are making in settling our claims.

We are pleased to report that TOWER has settled 74% of claims relating to the Canterbury earthquake events – well above the industry average.

We remain on track to complete the majority of claims by the end of 2015.

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TOTAL PROPERTY CLAIMS AS AT OCTOBER 2013
83%
10,412 8,594
Cash settled 65% Work completed 6% In construction 1% Pre-construction 11%
REBUILD PROPERTY CLAIMS AS AT OCTOBER 2013
80%
1,080 867
Cash settled 47% Work completed 5% In construction 4% Pre-construction 24%
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4 TOWER Limited and TOWER Capital Limited annual reports 2013

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Transition to
general
insurer
complete
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Business strategy and design

In July 2013 we appointed David Hancock to the role of Chief Executive Officer of TOWER, following the retirement of previous Group Managing Director Rob Flannagan. David remains an executive director on the TOWER Board.

David and the executive leadership team have worked diligently to develop and begin execution of a refreshed general insurance strategy that we believe will deliver both a better experience for customers and strong returns for shareholders. These are the foundations required to enhance TOWER’s growth potential.

“ David and the executive leadership team have worked diligently to develop and begin execution of a refreshed general insurance strategy that we believe will deliver both a better experience for customers and strong returns for shareholders.”

Michael Stiassny Chairman

Directors

At the Annual Meeting held in March 2013 I was appointed Chairman of the Board, replacing Steve Smith who had been appointed Interim Chairman to lead the Board through a transition phase to the Annual Meeting.

Susie Staley retired from the Board after 12 years of excellent service to TOWER. Susie has played a key role in the significant changes TOWER has undertaken, including, most recently, chairing the due diligence committee over the sale of the Health and Investments businesses. We would like to thank Susie for her contribution to the company.

The Board structure is being reviewed, and we are making a recommendation to reduce the number of directors to reflect the smaller size of the business at the upcoming Annual Meeting.

I would like to thank all the directors for the considerable time and effort they have invested over the past year during a period of continued change for the company. We also acknowledge the efforts of former Group Managing Director, Rob Flannagan who left the business in July. He successfully led the company through the strategic review process and we thank him for his contribution to the company.

Conclusion

Following the divestment of Health, Investments and the majority of our Life business earlier this year, the transition to a general insurance business is now complete and a strong foundation for future growth is being laid. This could not have been achieved without significant effort from the entire TOWER team and on behalf of the Board, I would like to thank them for their support and continued commitment to our customers.

5

Business review David Hancock

Customer focused

Financial summary

TOWER reported a solid performance achieving NPAT of $34.4 million for the full year ended 30 September 2013, compared to $55.8 million in the same period last year. The result has been impacted by a number of abnormal items.

Profit in the general insurance business was $19 million, before abnormal items.

The Life business profit was $12 million, reflecting 10 months of the Life business that was divested during the year and a full year for the remaining Life business.

Profit after tax for Investments and Health were $4 million and $900,000 respectively, with Investments based on six months’ performance and Health based on two.

The sale of the majority of the Life business settled at the beginning of August 2013. TOWER’s remaining Life business is currently in a formal sale process to ascertain whether further value can be created for shareholders.

Finance and corporate expenses reflect a continued reduction and focus, decreasing by $3.2m over the corresponding period. This continues to include the financing costs associated with the bond debt which is on issue.

Solvency

We are currently holding additional capital within our licensed insurers as part of the Reserve Bank of New Zealand (RBNZ) licensing process. This is to cover the risks associated with the Canterbury rebuild and the run-off of the remaining Life business.

In addition, we hold $156.9m of cash and investments outside the licensed insurers and expect to receive a release of $21m from the sale of our Australian liabilities. This will be repatriated to New Zealand, and incorporated into TOWER’s capital management plan.

We will continue to work with the RBNZ regarding the solvency position and Minimum Solvency Margin requirements. Capital management will be an ongoing focus area for TOWER. In addition, we realise that having an effective reinsurance programme in place is critical to the protection of capital and profitability.

Gross Written Premium

Our Gross Written Premium (GWP) for the General Insurance business has increased to $279.3m. The New Zealand business makes up 80% of this and places us fourth in the market with an overall market share of 4.7%.

Of more importance is our position in the key Personal Lines market. TOWER’s market share figures for house and contents are 10.5% and 10.3% respectively. We hold a 6.4% share of the Personal Lines motor market. This highlights the substantial opportunity available to us.

We continue to have a strong presence in the Pacific. Key growth markets are Papua New Guinea and Fiji, which together make up 62% of the Pacific Islands’ GWP. We have identified opportunities to continue to grow in the region through investment in the TOWER brand, along with improved customer and partner engagement. The use of technology will also begin to play a more important role across the Pacific Islands.

Both New Zealand and the Pacific Islands present very real growth opportunities for us.

Canterbury earthquake recovery

TOWER is committed to settling our Canterbury customers’ claims as quickly as possible, to allow them to move forward.

We have peak resources dedicated to Canterbury, with 74% of all claims now settled and closed, well above the industry average.

The coming two years will focus on repairing and rebuilding our customers’ houses – this is requiring close collaboration, with TOWER working with customers and suppliers to provide certainty to our customers and the wider Canterbury community.

We have committed to substantially completing claims settlement by the end of 2015, with a small tail of more complex claims.

We are taking a prudent approach to provisioning, we will continue to undertake quarterly actuarial reviews, and will advise the market on any material changes.

Over the past six months we have undertaken a number of initiatives to ensure we continue to deliver to our customers. We continue to target cash settlements to provide customers with flexibility and certainty, allowing them to move forward.

6 TOWER Limited and TOWER Capital Limited annual reports 2013

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Strong
platform
for growth
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Strategic direction

In recent months, the executive leadership team has been paving the way for future growth by refining our strategic direction. Our first task has been to deliver a business strategy suitable for a slimmed down, single-focused TOWER that would deliver shareholder value.

We have created a robust business strategy underpinned by three key pillars – customer satisfaction, staff engagement and financial performance.

In the longer term, we aim to be recognised as the leading light in New Zealand general insurance. There is a compelling market opportunity for us in this area, particularly given our strong Kiwi heritage in a market that is dominated by foreign insurers.

Our business strategy is comprised of five enablers that will become our areas of focus over the short and medium term, as these offer us the greatest opportunity for growth. These are:

• Value added services

• Product bundling

• Capital efficiencies

• Direct and alliance channels

• Data insights

These five enablers answer the question “What is TOWER going to do differently?” These initiatives provide us with the opportunity to grow our customer base, retain those customers we already have and to enhance our position as a trusted brand.

The next question is “How is TOWER going to achieve these goals?”

Growth and retention of customers is what our business is all about. There are six actions that will set us apart from the pack:

• Ensuring we are easy to do business with

• Understanding our customers and delivering what they want, with a focus on retention

• Taking a collaborative approach and ensuring consistency of service, no matter how our customers choose to do business with us

• Building and managing relationships with those who matter most to us including our alliance partners

• Building our brand and adding meaning to it

• Driving a performance culture within our business

Organisation design is an important part of our new operating model.

We have created a structure built around our customers, where teams work together to achieve shared goals. We are developing a performance-based culture within TOWER that is powered by collaboration. Our four divisions focus on the elements that are needed to deliver value to both our customers and our shareholders:

• Managing our capital (Performance)

• Providing services through people, process and technology (Process)

• Creating market leading products (Product)

• Delivering great customer service (Sales)

Reflecting the strength of our existing TOWER talent pool, we are pleased that the majority of key leadership positions and direct reports have been recruited from within.

Key appointments are:

Chief Financial Officer – Michael Boggs General Manager Service Enablement – Debbie Eyre General Manager Customer Proposition – Mark Savage

We are currently recruiting for a General Manager Customer Interaction, who will complete the Executive Leadership team.

General insurance

The general insurance business has continued to sustain premium growth, with gross earned premiums increasing by $28.3m over the same period last year, more than covering the increased cost of reinsurance.

Next year reinsurance costs will increase further, with the final tranche of pre-earthquake, lower priced, three year rolling covers finishing in 2013. We are, however, beginning to see the cost of reinsurance stabilise, with increased costs into the future only being driven by increased risks and exposure, rather than the significant price increases that we have seen in past.

The loss ratio for ‘business as usual’ claims remains consistent with last year. We experienced $9.6 million, before tax, of large claim events comprising $6.8 million in New Zealand from a series of weather events and $2.8 million from Cyclone Evan in the Pacific.

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The Insurance Council of New Zealand has reported that the 2013 costs of extreme weather events are at the highest level since 2004.

Management and sales expenses are $4.2 million higher than the prior year. $2.3m of this is due to unfavourable exchange movements, with the balance relating to increased sales expenses due to premium growth. The remaining direct management expenses are in line with last year due to one off benefits, given the lower reported performance for the year.

Tax has been impacted by withholding tax payments relating to the repatriation of capital via dividends from the Pacific, and by the write-off of foreign tax credits which cannot be utilised whilst the New Zealand group is in a tax loss position.

During the year, we worked hard on negotiating the sale of the runoff business underwritten by our Australian branch. Subsequent to year-end, the Federal Court of Australia approved the Portfolio Transfer to an Australian-based specialist run-off insurer.

There are a number of abnormal items reflected in the results.

The Investments, Health and Life business sales have now all been completed and settled, however we continue to operationally support a number of these businesses during their transition to full separation.

In the second half of the year, provisions have been made for the sale and separation of the remaining Life business. A formal process with regard to the sale of this business is currently underway.

There are small adjustments in earthquake expenses, however, in the second half of the year there have been no changes in the provisions relating to the February 2011 event.

Analysis of profit - general insurance

FULL YEAR ENDED SEPTEMBER	2013	2012	2012	2011	2011
MILLIONS	$		$		$
Gross earned premiums	267.2	238.9		208.3
Reinsurance	(47.9)	(41.2)		(23.4)
Net premiums	219.3	197.7		184.9
Net incurred claims	(101.3)	(91.3)		(86.4)
Large claim events1	(9.6)	(1.3)		-
Management and sales expenses	(83.0)	(78.8)		(70.9)
Underwriting profit	25.4	26.3		27.6
Investment income	8.1	12.4		11.5
Profit before tax – normal trading	33.5	38.7		39.1
Income tax expense	(14.5)	(11.9)		(14.4)
Profit (loss) after tax before impact of
Canterbury earthquakes and revaluation of Australian liabilities	19.0	26.8		24.7
Impact of Canterbury earthquakes2	(15.2)	(13.6)		(22.2)
Loss from Australia discontinued operation3	(7.1)
Profit (loss) after tax4	(3.3)	13.2		2.5

There has been a re-assessment of the IT systems that are required moving forward, taking into account the significantly reduced size of the business, with an increased write-down included in the second half.

TOWER Life (N.Z.) Limited

The TOWER Life business of over 50,000 policies continues to be administered by our experienced Wellington-based team. More than $10 million of premium income is received annually. The business is made up of participating and non-participating Life insurance policies, annuities and unit linked insurance policies. Policy and shareholder assets are managed under Investment Management Agreements operated by a third party. TOWER is currently considering opportunities to realise value for these run-off portfolios over the short to medium term.

1. Claim events >$1m. FY13 represents Cyclone Evan in Pacific and a series of weather events in New Zealand. FY12 represents New Zealand weather event

2. FY13 includes $14.2m of increase in provision; $0.5m of claims expense; $0.5m reinsurance premiums

3. Includes $6m revaluation of Australian liabilities

4. The impacts of the Canterbury earthquakes and the discontinuation of the Australian business are classified differently in the Group financial statements

8 TOWER Limited and TOWER Capital Limited annual reports 2013

“I felt thoroughly understood and was helped immensely. Thank you.” TOWER Customer

9

Outlook

Looking forward

The New Zealand general insurance industry remains dynamic and highly competitive. You only need to watch an hour of television to see evidence of TOWER’s and our competitors’ activity.

Growth in the New Zealand insurance market (as measured by GWP) is expected to return to levels of around 5%, last seen preCanterbury earthquakes. The industry must continue to work at maintaining affordability of insurance products, especially in light of increased extreme weather events over recent months.

New Zealanders are relatively well insured from a home, contents and motor vehicle perspective, when compared to insurance penetration in many other developed nations. The transition to sum insured cover for homes has been a big focus for us this year. Over the next 12 months we will continue to work with customers to ensure they have appropriate cover, and make it easier for them to assess the insurable value of their homes.

Over the coming year we have a number of strategic priorities to grow our business and drive value to shareholders. These include refreshing our highly recognisable brand, delivering new products and services to the market, taking advantage of new technologies to deliver benefits to our customers, a focus on customer retention and also on cost efficiencies. We will continue to invest in and build our long established and successful operations in the Pacific Islands.

Our key metrics will be the ultimate measure of our success. There are financial measures – financial performance, Net Profit after Tax and Gross Written Premium retention ratios. Other measurements include customer satisfaction through our Voice of the Customer programme and staff engagement through a new annual Aon Hewitt engagement survey.

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realise
TOWER’s
value
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“ We have created a robust business strategy underpinned by three key pillars – customer satisfaction, staff engagement ” and financial performance.

David Hancock

Chief Executive Officer

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As one of New Zealand’s most enduring financial services companies, with a 144-year history, we believe customer-focused TOWER offers an attractive alternative to the big foreign-owned brands that dominate our market.

10 TOWER Limited and TOWER Capital Limited annual reports 2013

“We have been overwhelmingly supported through it all by our wonderful family and many, many very dear friends not forgetting our Claims Managers at both TOWER and Stream who could not have done more for us. ”

TOWER Customer

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Board of directors

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Michael Stiassny LLB, BCom, CA, FInstD Chairman Independent

Appointed Director: 12 October 2012

Last Re-elected: 2013

Appointed Chairman: 21 March 2013 Member of Group Audit and Risk Committee

Chair of Remuneration and Appointments Committee

Michael is a chartered accountant and senior partner of KordaMentha, based in Auckland, which specialises in financial consulting work. He has both a Commerce and Law degree from the University of Auckland. He is currently Chairman of Vector Limited, as well as a director of a number of public and private companies. Michael is Vice President and a Fellow of the Institute of Directors in New Zealand (Inc). Michael resides in Auckland, New Zealand.

David Hancock BBus, GAICD Executive Director

Appointed Non-Executive Director: 16 November 2012

Last Re-elected: 2013

Appointed Executive Director: 2 July 2013

David has over 25 years of broad experience in financial services. This experience includes being a former Executive General Manager at the Commonwealth Bank of Australia, with a variety of roles including capital markets, fixed income and equities. He held several board positions at the bank including Commonwealth Securities (ComSec), as well as external professional board positions. Prior to that he served in roles at JPMorgan where he was a Managing Director with responsibilities in New Zealand, Australia and Asia across various operations. More recently, David was the Interim Chief Executive Officer at Firstfolio Limited, an Australian listed financial services company. David resides in Auckland, New Zealand and Sydney, Australia.

Mike Allen LLB, BCom Non Executive Director Not Independent

Appointed Director: 29 June 2011 Last Re-elected: 2012

Member of Remuneration and Appointments Committee

Mike has over 25 years experience in investment banking and general management, both in New Zealand and the UK. He previously held various senior roles at Southpac Corporation and Westpac in New Zealand. Mike resides in Auckland, New Zealand.

12 TOWER Limited and TOWER Capital Limited annual reports 2013

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Mike Jefferies BCom, CA Non Executive Director Not Independent

Steve Smith BCom, CA, Dip Bus (Finance), AMInstD Non Executive Director Independent

Appointed Director: 19 December 2006

Appointed Director: 24 May 2012 Last Re-elected: 2013

Last Re-elected: 2012

Appointed Interim Chairman: 13 September 2012 to 21 March 2013 Member of Group Audit and Risk Committee

Member of Group Audit and Risk Committee

Member of Remuneration and Appointments Committee

Member of Remuneration and Appointments Committee

Mike is a chartered accountant with extensive experience in finance and investment. He has been an executive for Guinness Peat Group plc for more than 20 years, and holds directorships in both Australia and New Zealand. Mike resides in Perth, Australia.

Steve is a professional Director, with over 30 years business experience including 19 years in investment banking and financial advisory roles. His career has also included being a partner at a leading New Zealand accountancy firm. He has a Bachelor of Commerce and Diploma in Business from the University of Auckland and is a member of both the Institute of Directors in New Zealand and New Zealand Institute of Chartered Accountants. Steve resides in Auckland, New Zealand.

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John Spencer BCom, FCA, CNZM Non Executive Director Independent

Graham Stuart BCom(Hons), MS, CA Non Executive Director Independent

Appointed Director: 1 October 2003 Last Re-elected: 2013

Appointed Director: 24 May 2012 Last Re-elected: 2013

Member of Group Audit and Risk Committee

Chair of Group Audit and Risk Committee

Member of Remuneration and Appointments Committee

Member of Remuneration and Appointments Committee

Graham is currently the Chief Executive of the Sealord Group. With over 25 years management experience, he has held several diverse leadership roles with major corporates. Graham has a Bachelor of Commerce (First Class Hons) from the University of Otago and a Master of Science from Massachusetts Institute of Technology and is a member of the New Zealand Institute of Chartered Accountants. Graham has served on the Food & Beverage Taskforce and the Maori Economic Development Panel. Graham resides in Auckland, New Zealand.

John brings to the Board significant financial 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 Officer of New Zealand Dairy Group. John resides in Wellington, New Zealand.

13

“I just wanted to comment on your excellent sales skills. Because of you selling me RoadWise with my motor policy I was able to get a free tow from Waipu to Auckland when my car broke down last Friday on my way to Russell. That was a great suggestion. ”

TOWER Customer

14 TOWER Limited and TOWER Capital Limited annual reports 2013

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 2013, 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’.

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

The Board reserves certain functions to itself. These include:

• determining the Group’s strategic objectives, and approving annual operating plans, financial targets and capital expenditure plans

• assessing and monitoring performance, including management’s performance against the strategic objectives, operating plans and financial targets

• approving all changes to the Group’s corporate structure where these are of strategic importance

• determining Group financial and treasury strategies and policies, including approving all dividend policies and distributions to shareholders, lending and borrowing, tax, and investment and foreign exchange policies

• determining the Group risk management policies and 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 Chief Executive Officer.

Role of the Board of directors

Role of senior executives

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 Chief Executive Officer and to its two Board Committees (Group Audit and Risk Committee and Remuneration and Appointments Committee – the role of each of these Committees is outlined on pages 17 and 18). Each year the Board holds a strategy session with senior management to review TOWER’s business direction. The application of these strategies is reviewed regularly at Board meetings.

The Board is primarily governed by the Board Charter, Board Protocols and the Code of Ethics. The Board Charter records the Board’s roles and responsibilities, the Board Protocols describe internal board procedures for efficient 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’.

The day-to-day leadership and management of the Group is undertaken by the Chief Executive Officer and senior management. The Chief Executive Officer is solely accountable to the Board for management performance. The Chief Executive Officer has also formally delegated decision making to senior management within their areas of responsibility and subject to quantitative limits to ensure consistent and efficient decision making across the Group. Senior management has no power to do anything which the Chief Executive Officer cannot do pursuant to his delegations. Within this formal delegation framework those executives who report directly to the Chief Executive Officer have authority to sub-delegate certain authorities to their direct reports. The Board meets regularly with management to provide strategic guidance for TOWER and effective oversight of management.

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Board composition, nominations and appointments

Board composition

At 30 November 2013, the Board included six non-executive directors and one executive director being the Chief Executive Officer. The TOWER constitution currently requires a minimum of six directors and provides for a maximum of nine, although shareholders will be asked at the the Annual Meeting to approve a reduction bringing the minimum down to five and the maximum down to eight. Directors’ profiles are on pages 12 and 13.

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 significant commercial, financial, 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 Chief Executive Officer. The Chairman of the Board is elected by the directors. The Board supports the separation of the roles of Chairman and Chief Executive Officer and these roles have always been separate at TOWER. Michael Stiassny was appointed Chairman of TOWER on 21 March 2013 following the resignation of interim Chairman Steve Smith who had held that position since 13 September 2012.

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:

Guidelines for Licensed Insurers issued by the Reserve Bank of New Zealand. This Policy is applied to all directors and relevant officers.

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

To ensure ongoing education, directors are regularly informed of developments that affect TOWER’s industry and business environment, as well as company and legal issues that impact the directors themselves. Directors receive comprehensive board papers and briefing information before Board meetings, including a report from the Chief Executive Officer and reports from senior management. Directors have unrestricted access to management and any additional information they consider necessary for informed decision making.

Senior management also attend Board meetings in order to provide presentations to the Board and answer any queries directors may have. This allows the Board to understand the practical issues affecting TOWER and the impact of these issues on its performance. Directors are expected to develop their skills, competencies and industry knowledge by taking responsibility for their continuing education.

A director may obtain independent professional advice relating to the affairs of TOWER or his/her responsibilities as a director or 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.

• 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 financial services sector)

• the extent to which those skills complement the skills of existing directors

• their ability to devote sufficient time to the directorship, and

• the candidate’s reputation and integrity.

To ensure that the Board appoints directors and officers who have appropriate skills, knowledge, experience and integrity to perform their duties, and to fulfil their roles, TOWER has developed a Fit and Proper Policy benchmarked to the requirements of Insurance (Prudential Supervision) Act 2010 and Fit and Proper Policy

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 define a director as being independent if he/ she is a non-executive director who does not have any direct or indirect interest or relationship that could, or could reasonably be perceived to:

16 TOWER Limited and TOWER Capital Limited annual reports 2013

• reasonably influence, in a material way, his/her decisions relating to TOWER, or

• materially interfere with his/her ability to act in TOWER’s best interests.

Examples of relationships that remove independence are relationships with a material TOWER customer, supplier, professional advisor or substantial shareholder. As at 30 September 2013, the Board considered that four of the directors are independent, namely: John Spencer, Steve Smith, Graham Stuart and Michael Stiassny. The Board also considered that, as at that date, Mike Jefferies and Mike Allen were not independent as a result of their initial appointment to the Board by Guinness Peat Group plc, a substantial shareholder of TOWER up until 30 September 2013.

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

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

Retirement and re-election

During the year Rob Flannagan and Susie Staley resigned from the TOWER Limited and TOWER Capital Boards.

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

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

Board and committee performance review

The Board recognises that the performance of the directors and Board Committees are crucial to TOWER’s success and to the interests of shareholders. The Board 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 Chief Executive Officer, 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 financial year are disclosed on page 25.

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 officers’ 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 currently has two standing committees: the Group Audit and Risk Committee and the Remuneration and Appointments Committee. Other committees are established from time to time to examine specific issues as required by the Board.

The Committees are governed by written terms of reference, which detail their specific functions and responsibilities. The terms of reference for each Committee are reviewed annually. Copies of each Committee’s terms of reference are available on the TOWER website at www.tower.co.nz under ‘Corporate Governance’.

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 confirm the membership and Chairmanship of each of the Committees. The experience and skills of individual Committee members are set out in the directors’ profiles on pages 12 and 13. Member attendance at each Committee meeting is set out on page 18.

Group Audit and Risk Committee

Members: Graham Stuart (Chairman), John Spencer, Mike Jefferies, Steve Smith and Michael Stiassny.

17

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

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

• independently and objectively review the financial information presented by management to the Board, the external auditors and the public

• review draft half year and annual financial statements and the external auditor’s report, and make recommendations to the Board as to their adoption

• the Chief Executive Officer and senior executive appointments, termination, performance appraisal and remuneration.

The Terms of Reference for the Remuneration and Appointments Committee require that the Committee comprises suitably qualified non-executive directors, the majority of whom are independent. The Board appoints the Chairman of the Committee.

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, findings, recommendations and results for the past year.

The Company’s remuneration policies for directors and senior executives are set out on pages 21 to 23.

• oversee the performance of the external auditor and be satisfied as to its independence

• review the effectiveness and efficiency of management processes, Group risk management and internal financial controls and control systems

• monitor and review compliance with regulatory and statutory requirements and obligations

• monitor the internal audit function and receive regular reports from the internal auditors on risks, exposures and compliance

• maintain open and direct lines of communication with the external and internal auditors, and

• make recommendations to the Board as to the appointment of the external auditors.

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

The Terms of Reference require that the Committee has a minimum of three suitably qualified non-executive directors, the majority of whom are independent. The Board appoints the Chairman of the Committee, who cannot also be Chairman of the Board.

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

Remuneration and Appointments Committee

Members: Michael Stiassny (Chairman), Mike Allen, Mike Jefferies, Steve Smith, John Spencer and Graham Stuart.

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

• the appointment and succession of directors, and director remuneration

Board and Committee meeting attendance

There were 10 scheduled Board meetings during the year from 1 October 2012 to 30 September 2013. In addition, there were 10 supplemental meetings to consider matters related to the strategic review undertaken by TOWER and the associated sales of business units. Director attendance at Board and Committee meetings is set out below. The Chief Executive Officer attends all Board and Committee meetings. The Chief Financial Officer attends all Board meetings and the Group Audit and Risk Committee meetings, along with an appropriately qualified person who is responsible for taking accurate minutes of each meeting and ensuring that Board procedures are observed.

2012/2013 TOWER Limited directors’ attendance record

	BOARD	TOWER LIMITED	MEETINGS	BOARD UNSCHEDULED	TOWER LIMITED	RISK COMMITTEE	GROUP AUDIT AND	COMMITTEE5	GROUP INVESTMENT	COMMITTEE	DUE DILIGENCE	COMMITTEE	AND APPOINTMENTS	REMUNERATION
Meetings held		10			10		4		3		10			1
Michael Allen		10			8									1
Rob Flannagan1		7			10						10			1
David Hancock2		9			8		2		2		2			1
Michael Jefferies		10			9		4		2		8			1
Steve Smith		10			8		2		1		9			1
John Spencer		8			8		4							1
Susie Staley3		4			6				1		8			1
Michael Stiassny4		10			10		3				6			1
Graham Stuart		9			8		3							1

• the composition and structure of the Board

• performance evaluations of the Board and individual directors, and

• 1 Rob Flannagan resigned as a director of TOWER on 2 July 2013

• 2 David Hancock was appointed as a director of TOWER on 16 November 2012

• 3 Susie Staley resigned as a director of TOWER on 21 March 2013

• 4 Michael Stiassny was appointed as a director of TOWER on 12 October 2012

• 5 The Group Investment Committee was disestablished on 23 July 2013 following the sale of the Investment business

18 TOWER Limited and TOWER Capital Limited annual reports 2013

Promoting ethical and responsible behaviour

Ethical and responsible behaviour

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

• avoiding situations in which personal 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 confidentiality of all TOWER non-public information, and

• complying with all applicable legal requirements and ensuring that behaviour is appropriate while conducting TOWER’s business.

Any person who becomes aware of a breach or suspected breach of the Code of Ethics is required to report it immediately in accordance with the Policy.

In addition to the Code of Ethics, TOWER has a Fraud Policy which is applicable to all staff. The Policy includes a whistleblower process and 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.

Insurance (Prudential Supervision) Act 2010

The New Zealand insurance industry is regulated by the Reserve Bank of New Zealand, under the Insurance (Prudential Supervision) Act 2010 (IPSA). All companies carrying on insurance business in New Zealand must hold a licence. The relevant TOWER Group companies are TOWER Insurance Limited (fire and general) and TOWER Life (N.Z.) Limited (legacy life). These companies hold full licences under IPSA. Another company in the TOWER Group, TOWER Operations Limited (formerly TOWER Health & Life Limited), ceased to carry on insurance business following the sale of its life insurance business to Fidelity Life Assurance Limited, and no longer holds a licence.

Key elements of the insurance prudential supervision regime include minimum solvency requirements and regular reporting to the Reserve Bank, the need for directors and other relevant officers to meet fit and proper standards, and governance and risk management requirements.

Each of the Boards of TOWER Insurance Limited and TOWER Life (N.Z.) Limited:

• are governed by a Board Charter

• comprise the same directors as the Board of TOWER Limited, and

• have two standing committees, being the Audit and Risk Committee and the Remuneration and Appointments Committee, which are governed by written terms of reference.

Further information on the governance of TOWER Insurance Limited and TOWER Life (N.Z.) Limited will be contained in the annual reports of those companies, which will be registered with the Companies Office.

Further information on the insurance prudential supervision regime can be found on the Reserve Bank website www.rbnz.govt.nz.

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.

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 under ‘Corporate Governance’.

Diversity Policy

Throughout the year, TOWER introduced a Diversity Policy which has been designed to ensure that diversity is encouraged, respected and embraced in our day-today business practices. Our people bring different experiences, backgrounds and skills to our business. TOWER believes that by valuing diversity, this will help drive our performance culture, brand and shareholder returns. The overall goal is an inclusive, flexible workplace with people motivated to do their very best for our customers and for each other. Nurturing an environment that values and promotes diversity will help improve the quality of our decision making, productivity, and collaboration.

The Board is responsible for overseeing the implementation of the Diversity Policy, with delegation to the Remuneration and Appointment Committee to review and report annually on the status of diversity within TOWER and policy effectiveness. The

19

Board has not formally evaluated the performance against the Policy or diversity objectives, as the Policy has not been in place for the full year. However, a progress update will be reported in the half-year report, with a formal evaluation and report in 2014.

The following table shows gender representation across TOWER as at 30 November 2013:

	2013	2012
GROUP	% BY	% BY
	GROUP	GROUP
Board of Directors
Male	100.00%	88.90%
Female	0.00%	11.10%
Executive leadership team
Male	75.00%	66.67%
Female	25.00%	33.33%
Senior management
Male	51.43%	64.29%
Female	48.57%	35.71%
Employees
Male	41.51%	37.94%
Female	58.49%	62.06%
Total company
Male	42.34%	42.35%
Female	57.66%	57.65%

Market and shareholder communication

TOWER recognises that public confidence in the integrity of TOWER is based on continuous, full and open disclosure of information about its activities to the market and relevant stakeholders. TOWER’s Corporate Disclosure Policy provides for a planned, 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.

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.

Announcements of financial results, changes in profit forecasts and other material market announcements require Board approval. TOWER’s website, www.tower.co.nz, provides information to shareholders and investors about the TOWER 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.

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:

TOWER Insurance Limited Financial Strength Rating A- (Excellent) Issuer Credit Rating a- Effective 25 July 2013

TOWER Life (N.Z.) Limited Financial Strength Rating A- (Excellent) Issuer Credit Rating a- Effective 25 July 2013

TOWER Limited Issuer Credit Rating bbb- (Good) Effective 25 July 2013

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. TOWER faces a range of risks that are inherent to the business activities undertaken. TOWER stakeholders, including shareholders, clients, staff and suppliers require assurance that TOWER will manage its exposure to risk. Executive and senior management and staff must be able to demonstrate that all reasonable steps have been taken to effectively manage TOWER’s risks.

20 TOWER Limited and TOWER Capital Limited annual reports 2013

Group Risk & Compliance Framework

The Group Risk & Compliance Framework Policy sets out TOWER’s commitment to managing risk and compliance, and provides an overview of the core components of the Framework including roles and responsibilities and requirements that must be met.

This Framework applies to TOWER and all of its subsidiaries and related companies, and all staff and contractors employed by TOWER and any of its subsidiaries. Effective management of risk and compliance is essential to ensure that TOWER remains a viable business and is able to achieve its objectives. This Framework is integral in providing guidance to management and staff of TOWER in dealing with its risk and compliance obligations.

Internal audit

TOWER contracts an independent chartered accounting firm to carry out the internal audit function reporting to the Chairman of the Group Audit and Risk 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 TOWER Group.

The Internal Audit Policy formally records the delegations the Group Audit and Risk Committee has made to the internal auditor in relation to the internal control systems and processes of the Group businesses. The Group Audit and Risk Committee approves the appointment of the internal auditor following the Chief Executive Officer’s recommendation.

The internal auditors help the Board and the TOWER 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 2013 to audit the TOWER and TOWER Group financial statements.

provision of non-audit services by the external auditor. This policy specifies which services the external auditor may and may not provide TOWER. The Policy is overseen by the Group Audit and Risk Committee. 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 TOWER Group during the financial year did not, in TOWER’s opinion, affect auditor independence. PwC is also required to provide the Group Audit and Risk Committee with an annual certification of its continued independence, and in particular confirm that it has not carried out any engagements during the year which would impair its professional independence.

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

Details of PwC fees for audit and other services provided to the TOWER Group, are set out in note 8 of the TOWER Limited financial statements.

Group corporate governance policies and procedures

To support the Board’s aims of developing and fostering corporate governance practices which are consistent with best practice, TOWER has developed a number of Group corporate governance policies that apply to all directors and employees of TOWER. Where indicated copies are available on TOWER’s website at www.tower.co.nz under the ‘Corporate Governance’ section.

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 Chief Executive Officer and senior executives. The following section discusses TOWER’s remuneration policies and arrangements for non-executive directors, the Chief Executive Officer, the senior executives and staff in general.

A formal engagement letter with PwC sets out the respective obligations and responsibilities of PwC and TOWER in relation to preparation and audit of financial statements. The Board also has a formal External Audit Independence Policy that includes the

21

Role of the Remuneration and Appointments Committee

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 Chief Executive Officer

• setting non-executive directors’ remuneration

director’s number of years service by nine and multiplying the result by the director’s remuneration for a three year period. Susie Staley was paid an allowance of $101,101 on her retirement. To be eligible for a retirement allowance a director needed to be in office for at least three years prior to 1 October 2003. For this reason no other director is eligible for a retirement allowance.

2012/2013 directors’ remuneration and benefits of TOWER and its subsidiaries

• setting Board committee members’ fees, and

• determining remuneration packages of senior executives, following recommendations from the Chief Executive Officer.

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 reflect the complexity of the insurance and financial 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.

BOARD/COMMITTEE	CHAIRMAN	MEMBER
Base fee – Board of directors	$130,000	$78,570
Audit and Risk Committee	$15,000	$9,000
Investment Committee1	$7,500	$5,000
Remuneration and Appointments Committee2	$7,500	$5,000

	DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER AND ITS SUBSIDIARIES	DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER AND ITS SUBSIDIARIES	DIRECTORS’ REMUNERATION AND BENEFITS OF TOWER AND ITS SUBSIDIARIES
	FOR THE YEAR TO 30 SEPTEMBER 2013	FEES $	OTHER $
	John Spencer	91,820
	Susie Staley	184,380
	Graham Stuart	86,070
	Mike Jefferies	92,570
	Mike Allen	78,570
	Steve Smith	122,285
	Michael Stiassny	122,285
	David Hancock	45,792	173,6371
	Rob Flannagan		1,795,8582
	Aniseto Chan Ting	1,8013
	Rodney Reid	4,6973
	Alden Godinet	3,0243
	Garth McIlwain	1,3654

1. Salary

2. Salary and incentive/retirement benefits

3. Fees earned in capacity as director of National Pacific Insurance Limited

4. Fees earned in capacity as director of TOWER Insurance (PNG) Limited

Notes

• 1 The Investment Committee was disestablished on 23 July 2013 following the sale of the Investments business

• 2 The Board determined that from 1 December 2012 no fees would be payable for sitting on the Remuneration and Appointments Committee

Additional fees may be paid to non-executive directors for one-off tasks and/or additional appointments 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.

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

1. Susie Staley retired as a director of TOWER on 21 March 2013 and earned a pro rated amount of director’s fees to that date together with her retirement allowance.

2. Rob Flannagan resigned as a director of TOWER on 2 July 2013.

3. David Hancock was appointed Chief Executive Officer of TOWER on 2 July 2013 and earned a pro rated amount of director’s fees to that date. Following his appointment Mr Hancock ceased to receive directors fees and received the remuneration discussed in the next section.

4. Aniseto Chan Ting retired as a director of National Pacific Insurance Limited with effect from 22 January 2013 and earned a pro rated amount of director’s fees to that date.

5. Alden Godinet was appointed as a director of National Pacific Insurance Limited with effect from 22 January 2013.

6. Garth McIlwan retired as a director of TOWER Insurance (PNG) Limited with effect from 26 September 2013.

22 TOWER Limited and TOWER Capital Limited annual reports 2013

1. Fees include base fees and additional fees accrued in the financial year for one-off tasks and additional appointments, including participation in due diligence committees

Group Managing Director/Chief Executive Officer and senior executive remuneration

The Board’s policy for remunerating the Chief Executive Officer and other key executives is to provide market based remuneration packages comprising a blend of fixed and incentive based remuneration with clear links between individual and company performance, and reward. Remuneration packages currently comprise a mixture of fixed and performance-based remuneration in the form of a group profit share. The Remuneration and Appointments Committee reviews the remuneration packages of the Chief Executive Officer and other senior executives at least annually.

The policy is intended to encourage meeting the short and long term objectives for TOWER. The Chief Executive Officer (and the former role of Group Managing Director) do not receive directors’ fees. The amounts shown in the directors’ remuneration and benefits table on page 22 for Rob Flannagan (who resigned as Group Managing Director on 2 July 2013) and David Hancock (who was appointed as Chief Executive Officer on 2 July 2013) are the total remuneration paid to them in the year ended 30 September 2013. Rob Flannagan’s remuneration consisted of base salary (including payment in lieu of notice and accrued leave) of $1,595,858.52 and a short term performance incentive of $200,000 in respect of TOWER’s performance for the year ended 30 September 2012. Upon David Hancock’s appointment as Chief Executive Officer he ceased to receive director’s fees and his remuneration since that date consists of base salary of $173,637. No short term performance incentive is payable in respect of the year ended 30 September 2013. He has a long term incentive in the form of a $500,000 bonus if key performance indicators are met.

FROM	TO	2012/13
100,000	109,999	24
110,000	119,999	18
120,000	129,999	17
130,000	139,999	12
140,000	149,999	12
150,000	159,999	11
160,000	169,999	5
170,000	179,999	3
180,000	189,999	3
190,000	199,999	3
200,000	209,999	7
210,000	219,999	1
220,000	229,999	5
230,000	239,999	1
240,000	249,999	2
250,000	259,999	2
260,000	269,999	3
310,000	319,999	3
330,000	339,999	1
350,000	359,999	1
390,000	399,999	1
400,000	409,999	1
450,000	459,999	2
490,000	499,999	1
540,000	549,999	1
770,000	779,000	1
Total		141

Employee remuneration

Set out in the following table are the number of employees or former employees of a member of the TOWER Group, not being directors or former directors, who received remuneration and other benefits valued at or exceeding $100,000 for the year ended 30 September 2013. Remuneration includes redundancy payments and termination payments made during the year to employees whose remuneration would not otherwise have been included in the table.

The remuneration bands are expressed in New Zealand Dollars.

23

Disclosures

Interests register

Each company in the TOWER 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 certificate in relation to that vote pursuant to the Companies Act 1993, or the matter relates to a grant of an indemnity pursuant to s162 of the Companies Act 1993.

General disclosures of interest

During the financial year directors of TOWER and TOWER Capital disclosed interest, or a cessation of interest (indicated by an asterisk (*)), 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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Michael Stiassny
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AXE Limited	Director
Mike Allen
Breakwater ConsultingLimited	Director
CanterburySpinners Limited	Director
Coatsplc	Chairman
GodfreyHirst NZ Limited	Director
Guinness Peat Group plc	Director
NZ Windfarms Limited	Director
NZWL-TRH Limited	Director
Tainui GroupHoldings Limited	Director
TRH Services Limited	Director
Waikato-Tainui Fisheries Limited	Director
WaterCare Services Limited	Director
Mike Jefferies
Capral Limited	Director*
ClearView Wealth Limited	Director*
OzGrowth Limited	Director
Touch Holdings Limited	Chairman
John Spencer
DairyNZ Limited	Director
DerbyStreet Limited	Director
Dexcel Holdings Limited	Director
Dispute Resolution Services Limited	Director
KiwiRail Holdings Limited	Chairman
Mitre10(New Zealand)Limited and subsidiarycompanies	Director
New Zealand Railways Corporation	Chairman
Raukawa Iwi Developments Limited	Chairman
TertiaryEducation Commission	Chairman
WEL Networks Limited and subsidiarycompanies	Chairman
Susie Staley
Chatsford Management Limited	Chairman
Steve Smith
Balle Bros GroupLimited	Director*
Crown Asset Management Limited	Director*
Elevation Capital Management	Director*
Fulton Hogan Limited and wholly owned subsidiary
companies	Director
HellabyHoldings Limited	Director
Kinrich Trust	Trustee

24 TOWER Limited and TOWER Capital Limited annual reports 2013

Kinrich Holdings Limited	Director
Summerlee Investments Limited	Director
Unison Securities Limited	Director
Pascaro Investments Limited	Director
Spanbild Holdings Limited and wholly owned subsidiary
companies	Director
Trebol Investments Limited/Rimu SA (Chile) and wholly
owned subsidiarycompanies	Director
Trebol Nominees Limited	Director
Unison Capital Advisors Limited	Director
Graham Stuart
Sealord GroupLimited and subsidiarycompanies	CEO/Director
Owaka Dairies Limited	Director
LeroyHoldings Limited	Director
Five River Dairies Limited	Director
Clear SkySyndicate Limited	Director

Specific disclosures of interests

During the financial 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 TOWER, TOWER has provided insurance for and indemnities to, directors and employees of the TOWER Group for losses from actions undertaken in the course of their duties. The insurance includes indemnity costs and expenses incurred to defend an action that falls outside the scope of the indemnity. Particulars have been entered in 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 2013 TOWER Limited directors held the following interests in TOWER Limited shares:

DIRECTOR	ORDINARY SHARES
	BENEFICIAL
Mike Allen	–
David Hancock1	–
Mike Jefferies	2,768
Steve Smith	11,538
John Spencer	17,247
Michael Stiassny2	102,919
Graham Stuart	7,692

• 1 David Hancock was appointed as a director of TOWER on 16 November 2012.

• David Hancock, in his capacity as a director of the trustee of the TOWER Executive Share Option Plan, also held 100,000 share options held by the trustee. These options have now expired.

• 2 Michael Stiassny was appointed as a director of TOWER on 12 October 2012.

Directors’ trading in TOWER securities

Directors disclosed the following acquisitions and disposals of relevant interests in TOWER securities during the financial year pursuant to section 148 of the Companies Act 1993. All disposals were share cancellations pursuant to the capital return in April 2013.

DIRECTOR	DATE INTEREST NUMBER ACQUIRED (DISPOSED) CONSI DERATION
Mike Allen	5/04/13 Associated Persons (20,884,423) $1.92
Mike Jefferies	5/04/13 Beneficial (831) $1.92
	5/04/13 Associated Persons (20,884,423) $1.92
Steve Smith	5/04/13 Beneficial (3,462) $1.92
John Spencer	5/04/13 Beneficial (5,174) $1.92
Michael Stiassny	5/04/13 Beneficial (876) $1.92
	10/06/13 Beneficial 45,584 $1.97
	11/06/13 Beneficial 54,416 $1.96
Graham Stuart	5/04/13 Beneficial (2,308) $1.92

At 30 September 2013, TOWER Capital directors held the following beneficial interests in TOWER Capital Senior Bonds:

DIRECTOR	HOLDING
John Spencer	$50,000

Buy-backs

TOWER is not, at the date of this annual report, undertaking any on-market share buy-backs. It is, however, intending to return to shareholders $70 million of capital by way of an off-market, prorata voluntary share buy-back.

25

TOWER subsidiary company director disclosures

The following persons held office as directors of subsidiary companies at 30 September 2013. Those who retired during the year are indicated with an (R).

TOWER SUBSIDIARY COMPANY	DIRECTOR DISCLOSURES
	M Allen, R Flannagan (R), M Jefferies, S Smith, J
TOWER Capital Limited	Spencer, G Stuart, S Staley (R), D Hancock,
	M Stiassny
TOWER Financial Services Group Limited	M Boggs (R), R Flannagan (R), B Walsh (R), M Allen, D Hancock, M Jefferies, S Smith, J Spencer, G Stuart, M Stiassny
TOWER Option Scheme Limited	M Boggs, R Flannagan (R), B Walsh, D Hancock
The National Insurance
Company of New	M Boggs, R Flannagan (R), B Walsh, D Hancock
Zealand Limited
TOWER New Zealand Limited	M Boggs, R Flannagan (R), B Walsh, D Hancock
TOWER Operations
Limited (formerly TOWER	M Boggs, R Flannagan (R), B Walsh
Health & Life Limited)
	M Boggs (R), R Flannagan (R), B Walsh (R),
TOWER Life (N.Z.) Limited	M Allen, M Jefferies, S Smith, J Spencer, G Stuart,
	D Hancock, M Stiassny
	M Boggs (R), R Flannagan (R), B Walsh (R),
TOWER Insurance Limited	M Allen, M Jefferies, S Smith, J Spencer, G Stuart,
	D Hancock, M Stiassny
National Insurance
Company (Holdings)	P Absell, M Boggs, R Flannagan (R), D Hancock
Limited
Southern Pacific Insurance Company (Fiji)Limited	P Absell, M Boggs, R Flannagan (R), D Hancock
TOWER Insurance (Fiji) Limited	P Absell, M Boggs, R Flannagan (R), D Hancock
TOWER Insurance (Cook Islands)Limited	M Boggs, R Flannagan (R), B Walsh, D Hancock
TOWER Insurance (PNG)	W Beilby, M Boggs, R Flannagan (R), G McIlwain
Limited	(R), B Walsh, D Hancock
Southern Cross Marine Limited	W Beilby, M Boggs, R Flannagan (R), B Walsh
National Pacific Insurance	M Boggs, R Flannagan (R) , L Ting (R),
Limited	D Williamson, R Reid
National Pacific Insurance	M Boggs, R Flannagan (R) , L Ting (R),
(Tonga)Limited	D Williamson, R Reid

1 On 1 October 2013, Bronwyn Walsh resigned all her directorships of TOWER subsidiary companies.

Apart from TOWER Capital and some overseas subsidiaries, that 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 their 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 23. Auditor fees are paid on behalf of the Group are as disclosed in the financial statements.

Shareholder and exchange disclosures

Shareholder analysis

TOWER’s shares are quoted on both the NZSX and ASX. As at 30 November 2013, 28,743 TOWER shareholders held less than A$500 of TOWER shares (ie less than a marketable parcel as defined in the ASX Listing Rules), holding a total of 4,833,947 TOWER shares.

Total voting securities

As at 30 November 2013, TOWER had 207,193,438 ordinary shares and 100,000 share options on issue (the share options expired on 2 December 2013). 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. As at 30 November 2013 there was one holder of options. These options expired without being exercised on 2 December 2013.

Substantial security holders

The names and holdings of TOWER’s substantial security holders as at 30 November 2013 are:

NAME	TOTAL
Accident Compensation Corporation	15,437,376
AMP Capital Investors(NZ)Limited	20,905,197
Devon Funds Management Limited	24,335,707
Harbour Asset Management	13,304,000
Milford Asset Management Limited	15,643,291
New Zealand Superannuation Fund	15,715,700
Salt Funds Management Limited	10,393,121

Principal shareholders

The names and holdings of the 20 largest registered TOWER shareholders as at 30 November 2013 are:

	NAME	TOTAL	%
1	BNP Paribas Nominees(NZ)Limited	28,239,441	13.62
2	TEA Custodians Limited	20,368,281	9.83
3	New Zealand Superannuation Fund Nominees Limited	15,727,189	7.59
4	Accident Compensation Corporation	15,437,376	7.45
5	JPMorgan Chase Bank NA NZ Branch	14,115,743	6.81
6	Citibank Nominees(New Zealand)Limited	7,311,580	3.52
7	Westpac NZ Shares 2002 Wholesale Trust	6,389,122	3.08

26 TOWER Limited and TOWER Capital Limited annual reports 2013

8	National Nominees New Zealand Limited	6,127,797	2.95
9	BNP Paribas Nominees(NZ)Limited	4,300,030	2.07
10	BT NZ Unit Trust Nominees Limited	3,103,022	1.49
11	HSBC Nominees(New Zealand)Limited	2,570,956	1.24
12	FNZ Custodians Limited	1,487,361	0.71
13	HSBC Nominees(New Zealand)Limited A/C State Street	1,316,199	0.63
14	Investment Custodial Services Limited	1,224,315	0.59
15	CiticorpNominees PtyLimited	1,211,857	0.58
16	New Zealand Permanent Trustees Limited	1,135,000	0.54
17	Investment Custodial Services Limited	1,123,575	0.54
18	National Nominees Limited	1,103,939	0.53
19	Forsyth Barr Custodians Limited	1,076,720	0.51
20	Christopher Ian Wilson & Chilworth Trustee Limited	1,000,000	0.48

TOWER Limited Shareholder Statistics (as at 30 November 2013)

				HOLDING
	HOLDER	HOLDER	HOLDING	QUANTITY
HOLDING RANGE	COUNT	COUNT %	QUANTITY	%
1 to 1,000	42,014	84.22	12,173,686	5.88
1,001 to 5,000	5,943	11.91	12,078,683	5.83
5,001 to 10,000	903	1.81	6,421,724	3.1
10,001 to 100,000	937	1.88	23,234,081	11.21
100,001 to 9,999,999,999,999	90	0.18	153,285,264	73.98
Total	49,887	100	207,193,438	100

TOWER Capital Limited Bondholder Statistics (as at 30 November 2013)

				HOLDING
	HOLDER	HOLDER	HOLDING	QUANTITY
HOLDING RANGE	COUNT	COUNT %	QUANTITY	%
1 to 5,000	220	13.24	1,096,000	1.34
5,001 to 10,000	418	25.15	4,028,000	4.93
10,001 to 50,000	841	50.6	23,791,000	29.1
50,001 to 100,000	110	6.62	9,323,000	11.4
100,001 to 9,999,999,999,999	73	4.39	43,521,000	53.23
Total	1,662	100	81,759,000	100

TOWER Limited Optionholder Statistics (as at 30 November 2013)

				HOLDING
	HOLDER	HOLDER	HOLDING	QUANTITY
HOLDING RANGE	COUNT	COUNT %	QUANTITY	%
1 to 1,000	-	-	-	-
1,001 to 5,000	-	-	-	-
5,001 to 10,000	-	-	-	-
10,001 to 100,000	1	100	100,000	100
100,001 and over	-	-	-	-
Total	1	100	100,000	100

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 defined circumstances) and a compulsory acquisition once a shareholder owns or controls 90% or more of the voting rights in TOWER.

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

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

Corporations Act 2001 (Australia)

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 five 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 specified 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

27

• 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.

Please note that the DRP will not operate for the 2013 final dividend payment and all shareholders will receive their dividends in cash.

The Annual Report is signed on behalf of the Board by

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Michael Stiassny Chairman

David Hancock Executive Director

28 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Limited Financial Statements

For the year ended 30 September 2013

Performance

Financial Statements	29
Independent Auditor’s Report	30
Income Statements	32
Statements of Comprehensive Income	33
Balance Sheets	34
Statements of Changes in Equity	35
Statements of Cash Flows	37
Notes to the Financial Statements	38

1. Summary of significant		23. Distributions to shareholders	56
accounting policies	38	24. Segmental Reporting	56
2. Critical accounting judgements		25. Life insurance business	57
and estimates	45	26. General insurance business	62
3. Impact of amendments to NZ IFRS	46	27. Financial instrument categories	65
4. Premium revenue	47	28. Risk management and
5. Investment revenue	47	financial instrument information	66
6. Fee and other revenue	47	29. Capital risk management	72
7. Claims expense	47	30. Operating leases	73
8. Other expenses	47	31. Cash and cash equivalents	73
9. Taxation	48	32. Contingent liabilities	73
10. Receivables	48	33. Capital commitments	74
11. Intangible assets	50	34. Share based payments	74
12. Investment in subsidiaries	51	35. Transactions and balances
13. Deferred acquisition costs (non life)	52	with related parties	74
14. Property, plant and equipment	52	36. Investment linked and non-investment	linked
15. Payables	53	business of life insurance companies	75
16. Provisions	53	37. Earnings per share	75
17. Interest bearing liabilities	54	38. Business combination	75
18. Insurance liabilities	54	39. Impact of Canterbury earthquakes	76
19. Contributed equity	55	40. Subsequent events	76
20. Accumulated profits/losses	55	41. Discontinued operations and
21. Reserves	55	disposal groups held for sale	76
22. Net assets per share	55

29

TOWER Limited Independent Auditor’s Report

For the year ended 30 September 2013

==> picture [124 x 117] intentionally omitted <==

Independent Auditors’ Report to the shareholders of TOWER Limited

Report on the Financial Statements

We have audited the financial statements of TOWER Limited (“the Company”) on pages 32 to 80, which comprise the balance sheets as at 30 September 2013, the income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and the notes to the financial statements that include a summary of significant 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 2013 or from time to time during the financial year.

Directors’ Responsibility for the Financial Statements

The Directors are responsible for the preparation of these financial 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 financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Company and the Group’s preparation of financial 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 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 financial statements.

We believe that the audit evidence we have obtained is sufficient 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.

PricewaterhouseCoopers , 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 (9) 355 8000, F: +64 (9) 355 8001, www.pwc.com/nz

30 TOWER Limited and TOWER Capital Limited annual reports 2013

==> picture [125 x 117] intentionally omitted <==

Independent Auditors’ Report TOWER Limited

Opinion

In our opinion, the financial statements on pages 32 to 80:

• (i) comply with generally accepted accounting practice in New Zealand; and

• (ii) comply with International Financial Reporting Standards; and

• (iii) give a true and fair view of the financial position of the Company and the Group as at 30 September 2013 and their financial performance and cash flows 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 financial statements for the year ended 30 September 2013:

• (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 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.

==> picture [107 x 38] intentionally omitted <==

Chartered Accountants Auckland 26 November 2013

PwC

31

TOWER Limited Income Statements

For the year ended 30 September 2013

Revenue	NOTE	GROUP COMPANY
		2013 2012 2013 2012
		$000 $000 $000 $000
Premium revenue from insurance contracts		267,160 238,859 — —
Less: Outwards reinsurance expense		(48,617) (41,137) — —
Netpremium revenue	4	218,543 197,722 — —
Investment revenue	5	15,057 21,718 179,728 22,137
Fee and other revenue	6	393 158 — —
Net operatingrevenue		233,993 219,598 179,728 22,137
Expenses
Claims expense		198,818 169,135 — —
Less: Reinsurance recoveries revenue		(52,253) (44,580) — —
Net claims expense	7	146,565 124,555 — —
Management and sales expenses	8(A) 72,069 59,811 813 693
Net claims and operatingexpenses	218,634 184,366 813 693
Financingcosts	8(B) 7,869 7,903 — —
Total expenses	226,503 192,269 813 693
Profit before taxation	7,490 27,329 178,915 21,444
Tax expense attributed to shareholders’profits	9(A) (7,071) (7,925) (129) (1,054)
Profit for theyear from continuingoperations		419 19,404 178,786 20,390
(Loss)/profit for theyear from discontinued operations	41	(2,981) 36,420 — —
Profit from disposal of subsidiaries	41	36,937 — — —
Profit for theyear		34,375 55,824 178,786 20,390
Profit attributed to:
Shareholders		34,245 55,339 178,786 20,390
Minorityinterests		130 485 — —
		34,375 55,824 178,786 20,390
Basic and diluted earningsper share for continuingoperations	37	CENTS CENTS 0.12 7.10 14.24 13.66
Basic and diluted earningsper share from discontinued operations	37

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

32 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Limited Statements of Comprehensive Income

For the year ended 30 September 2013

Profit for theyear	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
	34,375 55,824 178,786 20,390
Other comprehensive income:
Items that maybe reclassified subsequentlytoprofit or loss:
Gain on asset revaluation	715 327 — —
Gain transferred to income statement from asset sold	(467) — — —
Deferred income tax relatingto asset revaluation	(218) (91) — —
Deferred income tax relatingto asset sold	87 — — —
Currencytranslation differences	(6,453) (115) — —
Other comprehensive(loss)/income net of taxation	(6,336) 121 — —
Total comprehensive income for theyear	28,039 55,945 178,786 20,390
Total comprehensive income attributed to:
Shareholders	27,916 56,252 178,786 20,390
Minorityinterests	123 (307) — —
	28,039 55,945 178,786 20,390
Total comprehensive income attributed equityshareholders arises from:
Continuingoperations	31,020 19,525 178,786 20,390
Assets of disposalgroupheld for sale	(2,981) 36,420 — —
	28,039 55,945 178,786 20,390

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

33

TOWER Limited Balance Sheets

As at 30 September 2013

Assets	NOTE	GROUP COMPANY
		2013 2012 2013 2012
		$000 $000 $000 $000
Cash and cash equivalents	31(A) 341,624 186,477 1,507 72,928
Receivables	10 380,957 532,162 20,008 2,252
Financial assets at fair value throughprofit or loss	27 147,437 853,427 — —
Derivative financial assets	27 122 91,026 — —
Liabilities ceded under reinsurance	25 — 17,617 — —
Property,plant and equipment	14 4,879 5,529 — —
Current tax assets	10,713 3,615 2,181 1,271
Deferred acquisition costs	13 18,211 23,467 — —
Investments in subsidiaries	12 — — 235,254 235,237
Deferred tax assets	9(C) 23,652 15,906 — —
Intangible assets	11 30,174 68,822 — —
	957,769 1,798,048 258,950 311,688
Assets of disposalgroups classified as held for sale	41 738,801 167,546 — —
Total Assets	1,696,570 1,965,594 258,950 311,688
Liabilities
Payables	15 45,036 56,772 104,077 190,154
Current tax liabilities	9(B) 1,654 — — —
Provisions	16 12,213 7,097 — —
Derivative financial liabilities	27 — 170 — —
Interest bearingliabilities	17 82,791 81,990 — —
Insurance liabilities	18 451,905 563,779 — —
Deferred tax liabilities	9(C) 5,464 47,472 — —
Life insurance contract liabilities	25 — 591,458 — —
Life investment contract liabilities	25 — 27,476 — —
	599,063 1,376,214 104,077 190,154
Liabilities of disposalgroups classified as held for sale	41 716,430 90,591 — —
Total Liabilities	1,315,493 1,466,805 104,077 190,154
Net Assets	381,077 498,789 154,873 121,534
Equity
Contributed equity	19 453,935 572,805 453,935 572,805
Accumulatedprofit/(losses)	20 42,983 33,546 (186,106) (340,085)
Reserves	21 (117,103) (109,005) (112,956) (111,186)
Total equityattributed to shareholders	379,815 497,346 154,873 121,534
Minorityinterests	1,262 1,443 — —
Total Equity	381,077 498,789 154,873 121,534

The financial statements were approved for issue by the Board on 26 November 2013

Michael P Stiassny Graham R Stuart

Chairman Director

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

34 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Limited Statements of Changes in Equity

For the year ended 30 September 2013

GROUP	ATTRIBUTED TO SHAREHOLDERS CONTRIBUTED EQUITY ACCUMULATED LOSSES/PROFITS RESERVES TOTAL MINORITY INTERESTS TOTAL EQUITY
YEAR ENDED 30 SEPTEMBER 2013 NOTE
	$000 $000 $000 $000 $000 $000
At the beginningof theyear	572,805 33,546 (109,005) 497,346 1,443 498,789
Comprehensive income
Profit for theyear	— 34,245 — 34,245 130 34,375
Other comprehensive income
Gain on asset revaluation	— — 715 715 — 715
Gain transferred to income statement from asset sold	(467) (467) — (467)
Deferred income tax relatingto asset revaluation	— — (218) (218) — (218)
Deferred income tax relatingto asset sold	87 87 — 87
Currencytranslation differences	— — (6,446) (6,446) (7) (6,453)
Total comprehensive income	— 34,245 (6,329) 27,916 123 28,039
Transactions with shareholders
Capital repaymentplan 19 (119,228) — — (119,228) — (119,228)
Shares issued under employee share options scheme 19 358 — — 358 — 358
Movement in share basedpayment reserve 20, 21 — 1,697 (1,770) (73) — (73)
Dividendspaid 20 — (26,505) — (26,505) — (26,505)
Minorityinterest dividendpaid — — — — (304) (304)
Other — — 1 1 — 1
Total transactions with shareholders (118,870) (24,808) (1,769) (145,447) (304) (145,751)
At the end of theyear 453,935 42,983 (117,103) 379,815 1,262 381,077
YEAR ENDED 30 SEPTEMBER 2012
At the beginningof theyear 567,031 (4,352) (109,688) 452,991 2,526 455,517
Comprehensive income
Profit for theyear — 55,339 — 55,339 485 55,824
Other comprehensive income
Gains on asset revaluation — — 327 327 — 327
Deferred income tax relatingto asset revaluation — — (91) (91) — (91)
Currencytranslation differences — — 677 677 (792) (115)
Total comprehensive income — 55,339 913 56,252 (307) 55,945
Transactions with shareholders
Shares issued under dividend reinvestmentplan 19 5,774 — — 5,774 — 5,774
Movement in share basedpayment reserve 20, 21 — 322 (230) 92 — 92
Dividendspaid 20 — (18,622) — (18,622) — (18,622)
Minorityinterest dividendpaid — — — — (392) (392)
Other — 859 — 859 (384) 475
Total transactions with shareholders 5,774 (17,441) (230) (11,897) (776) (12,673)
At the end of theyear 572,805 33,546 (109,005) 497,346 1,443 498,789

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

35

TOWER Limited Statements of Changes in Equity (continued)

For the year ended 30 September 2013

		CONTRIBUTED	ACCUMULATED
COMPANY		EQUITY	LOSSES	RESERVES	TOTAL EQUITY
YEAR ENDED 30 SEPTEMBER 2013	NOTE	$000	$000	$000	$000
At the beginningof theyear		572,805	(340,085)	(111,186)	121,534
Comprehensive income
Profit for theyear		—	178,786	—	178,786
Total comprehensive income		—	178,786	—	178,786
Transactions with shareholders
Capital repaymentplan	19	(119,228)	—	—	(119,228)
Shares issued under employee share options scheme	19	358	—	—	358
Movement in share basedpayment reserve	20, 21	—	1,697	(1,770)	(73)
Dividendspaid	20	—	(26,505)	—	(26,505)
Other		—	1	—	1
Total transactions with shareholders		(118,870)	(24,807)	(1,770)	(145,447)
At the end of theyear		453,935	(186,106)	(112,956)	154,873
YEAR ENDED 30 SEPTEMBER 2012
At the beginningof theyear		567,031	(342,786)	(110,956)	113,289
Comprehensive income
Profit for theyear		—	20,390	—	20,390
Total comprehensive income		—	20,390	—	20,390
Transactions with shareholders
Shares issued under dividend reinvestmentplan	19	5,774	—	—	5,774
Movement in share basedpayment reserve	20, 21	—	322	(230)	92
Dividendspaid	20	—	(18,622)	—	(18,622)
Other		—	611	—	611
Total transactions with shareholders		5,774	(17,689)	(230)	(12,145)
At the end of theyear		572,805	(340,085)	(111,186)	121,534

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

36 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Limited Statements of Cash Flows

For the year ended 30 September 2013

Cash flows from operatingactivities	NOT	GROUP COMPANY
		2013 2012 2013 2012
		E $000 $000 $000 $000
Premiums received		378,947 480,212 — —
Interest received		38,981 36,415 1,528 3,218
Dividends received		1,710 2,138 — 18,960
Investment income		21,660 63,319 — —
Non-life companyfee income		16,304 33,297 — —
Reinsurance received		178,492 147,116 — —
Reinsurancepaid		(69,416) (65,430) — —
Claimspaid		(399,880) (439,607) — —
Payments to suppliers and employees		(156,481) (170,996) (14) (26)
Interestpaid		(7,068) (7,175) — —
Income taxpaid		(13,306) (8,619) — —
Net cash inflow/(outflow)from operatingactivities	31(B) (10,057) 70,670 1,514 22,152
Cash flows from investingactivities
Net(payments)/receipts for financial assets	126,058 (71,799) — —
Netpayments forpurchase ofproperty,plant and equipment and intangible asset	s (11,628) (12,915) — —
Cash from acquisition of subsidiary	— 3,389 — —
Cash disposed with sale of subsidiaries	(58,101) — — —
Proceeds from sale of subsidiaries	253,895 — — —
Net cash(outflow)/inflow from investingactivities	310,224 (81,325) — —
Cash flows from financingactivities
Proceeds from issue of share capital	276 — 276 —
Dividendspaid	(26,505) (12,848) (26,505) (12,848)
Payment of supplementarydividends	— (200) — (200)
Payment of minorityinterest dividends	(304) (392) — —
Capital repayment	(119,227) — (119,227) —
Investment in subsidiary	— — — (20,000)
Net advances from subsidiaries	— — 72,521 (6,115)
Net cash outflow from financingactivities	(145,760) (13,440) (72,935) (39,163)
Net(decrease)/increase in cash and cash equivalents	154,407 (24,095) (71,421) (17,011)
Foreign exchange movement in cash	(4,118) (152) — —
Cash and cash equivalents at the beginningofyear	186,477 223,981 72,928 89,939
Cash reclassified aspart of sale	13,257 — — —
Cash reclassified to disposalgroupheld for sale	(8,399) (13,257) — —
Cash and cash equivalents at the end ofyear	31(A) 341,624 186,477 1,507 72,928

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

37

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Summary of significant accounting policies

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

TOWER Limited (the Company) is a profit-oriented company incorporated in New Zealand under the New Zealand Companies Act 1993. The Company is listed on the New Zealand and Australian Stock Exchanges. The Company is an issuer under the Financial Reporting Act 1993. The Company and its subsidiaries together are referred to in this financial report as TOWER, or the Group, or the consolidated entity. The address of its registered office is 22 Fanshawe Street, Auckland, New Zealand.

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

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

On 30 November 2012, TOWER Limited sold its health insurance business, TOWER Medical Insurance Limited. The sale of TOWER Medical Insurance Limited has resulted in the health insurance business segment being treated as a discontinued operation, which was disclosed as a disposal group held for sale at 30 September 2012. The sale is disclosed in more detail in note 41(A).

On 26 February 2013, TOWER Limited announced the sale of its investment business comprising, TOWER Managed Funds Limited, TOWER Managed Funds Investments Limited, TOWER Employee Benefits Limited, TOWER Asset Management Limited and TOWER Investments Limited. The sale was completed on 2 April 2013 and resulted in the investment business segment being treated as a discontinued operation in these financial statements. The sale is disclosed in more detail in note 41(B).

On 10 May 2013, TOWER Limited announced the sale of most of its nonparticipating life insurance business to Fidelity Life Assurance Company Limited. The sale was completed on 1 August 2013 and resulted in the non-participating life business segment being treated as a discontinued operation, which has been disclosed as a discontinued operation in these financial statements. The sale is disclosed in more detail in note 41(C).

During the period the directors of TOWER Insurance Limited (a subsidiary of the Company), approved the disposal of the Company’s general insurance run-off business in its Australian branch to an Australian domiciled entity. The transaction will include disposing of all policies written or assumed by the branch and all the associated assets and liabilities under those policies. Subsequent to the disposal of the policy liabilities and related assets, the balance of the Australian branch assets will be repatriated to New Zealand and the operations of the branch will be discontinued. The Australian branch of TOWER Insurance Limited has been disclosed as a disposal group held for sale in these financial statements. The sale is disclosed in more detail in note 41(D).

At 30 September 2013 TOWER Limited was marketing its remaining participating life insurance business for sale. Consequently the participating life business segment is being treated as a discontinued operation, which has been disclosed as a disposal group held for sale in these financial statements. The proposed sale is disclosed in more detail in note 41(E).

As disclosed in accounting policy (AH) Comparatives, the sale of TOWER businesses has resulted in the reclassification of balances into two line items. Income statement balances for 2013 and 2012 years have been reclassified

into either, ‘Profit for the year from discontinued operations’ or ‘Profit from disposal of subsidiaries’. 2013 balance sheet items have been reclassified into two lines ‘Assets of disposal group classified as held for sale’ and ‘Liabilities of disposal group classified as held for sale’. The cash flow statement continues to include related cash flows from discontinued operations within each line item. A summary of cash flows from discontinued operations is presented in the relevant sections of note 41 – Discontinued operations, which contains full details of the business disposals.

Compliance with International Financial Reporting Standards (IFRS)

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

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

The Company’s owners or others do not have the power to amend the financial statements after they have been authorised for issue.

Principles of consolidation

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 September 2013 and the results of all subsidiaries for the year then ended.

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

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

The acquisition of controlled entities from external parties is accounted for using the acquisition method of accounting. The acquisition of entities under common control is accounted for using the predecessor values method. 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.

When the group ceases to have control any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss.

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

Investment in subsidaries

Investments in subsidiaries are accounted for at cost less impairment. Cost also includes directly 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 classified as either life insurance contracts or life investment contracts. Contracts that include both investment and insurance elements are separated into these two elements and reported accordingly.

38 TOWER Limited and TOWER Capital Limited annual reports 2013

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

(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

Life investment contracts include investment-linked contracts where the benefit amount is directly linked to the market value of the investments held. While the underlying assets are registered in the name of the life insurer and the investment-linked policy owner has no direct access to the specific assets, the contractual arrangements are such that the 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 benefits, both vested and unvested, are treated as expenses when incurred and liabilities until paid.

Specific accounting policies

(A) Premium revenue

(i) Life insurance contracts

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

(ii) Life investment contracts

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

• (iii) 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

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

(D) Claims expense

• (i) Life insurance contracts

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

• (ii) Life investment contracts

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

• (iii) General insurance contracts

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

(E) Basis of expense apportionment

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

The apportionment process is adopted by applying the following methodology:

• (i) Expenses that can be directly identifiable and attributable to a particular class of business are not apportioned.

• (ii) Commission expenses that cannot be allocated to a class of business, for example volume bonuses, are apportioned on the basis of new business and renewal commissions of each class, allowing for limits implied by the basis of adviser remuneration.

• (iii) Investment expenses are apportioned to the classes of business on the mean balance of assets under management.

• (iv) Other expenses that cannot be allocated to a particular class of business are apportioned to 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.

Investment revenue is recognised as follows:

39

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Summary of significant accounting policies (continued)

(F) Policy acquisition costs

• (i) Life insurance contracts

In determining the life insurance contract liabilities, the deferral and future recovery of acquisition costs 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. 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 benefit. 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 and are recognised on an effective interest method basis.

(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 profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

• (ii) Deferred tax

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

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

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

(iii) Tax consolidation

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

• (iv) Income tax expense

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

• (v) 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 28% (2012: 28%). 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 (five years in most cases). Under the previous tax regime, the life office base was subject to tax on investment income less expenses plus underwriting income, and tax was calculated on the policyholder base as benefits accrued to policyholders under the policies. The life insurer paid tax on the higher of the two bases at the company tax rate applying at the time.

40 TOWER Limited and TOWER Capital Limited annual reports 2013

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

(K) Foreign currency

• (i) Functional and presentation currencies

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

• (ii) Transactions and balances

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

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

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

(iii) Consolidation

For the purpose of preparing consolidated financial statements the assets and liabilities of subsidiaries with a functional currency different to the Company are translated at the closing rate at the balance sheet date. Income and expense items for each subsidiary are translated at a weighted average of exchange rates over the period, as a surrogate for the spot rates at transaction dates. Exchange differences are taken to the Foreign Currency Translation Reserve and recognised in the statement of comprehensive income and the statement of changes in equity.

(L) Cash and cash equivalents

Cash and cash equivalents includes cash on hand and deposits held at call with financial institutions, other short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within cash and cash equivalents on the balance sheet if the net position is an asset due to TOWER Group’s right to offset overdrafts within its banking facility.

(M) Property, plant and equipment

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

Land and buildings are shown at fair value, based on valuations by external independent appraisers less subsequent depreciation for buildings. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. In the prior year land and buildings were shown at cost.

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.

	Computer equipment	3 - 5 years
	Office equipment and furniture Motor vehicles	5 years 5 years
	Buildings	50 - 100 years
	Leasehold property improvements	3 - 12 years

(N) Assets backing insurance business

The Group has determined that:

• all assets of the life insurance companies are assets backing the policy liabilities of the life insurance business including life insurance contract liabilities and life investment contract liabilities, with the exception of investments in operating subsidiaries

• 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 investments in operating subsidiaries.

These assets are managed in accordance with approved investment mandate agreements on a fair value basis and are reported to the Board on this basis. They have been measured at fair value through profit or loss wherever the applicable standard allows.

• Fair value is determined as follows:

• cash assets and bank overdrafts are carried at face value which approximates fair value

• shares, fixed interest securities, options and units in trusts listed on stock exchanges are valued at the quoted bid price of the instrument at balance sheet date

• unlisted fixed interest securities are recorded at amounts based on valuations using rates of interest equivalent to the yields obtainable on comparable traded investments at balance date

• unlisted unit trusts are recorded at fund managers’ quoted redemption prices, 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.

41

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Summary of significant accounting policies (continued)

(O) Earnings per share

• (i) Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the year, adjusted for bonus elements of ordinary shares issued during the year.

• (ii) Diluted earnings per share

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

(P) Intangibles

• (i) Goodwill

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

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

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

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

(Q) Impairment of non financial assets

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

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

(R) Financial instruments

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

All purchases and sales of financial assets classified as fair value through profit or loss that require delivery within the timeframe established by regulation or market convention (“regular way” purchases and sales) are recognised at trade date, which is the date the Group commits to purchase or sell the assets. Loans and 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 financial assets with fixed or determinable payments that are not quoted on an active market. The Group’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet. Loans and receivables are measured 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 profit or loss

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

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

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

42 TOWER Limited and TOWER Capital Limited annual reports 2013

(iii) Fair value

The fair value of the Group’s financial 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 significance 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 financial 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 flows from the investments have expired or have been transferred and the group has transferred substantially all risks and rewards of ownership.

(T) Leased assets

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

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

(U) 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.

(V) Payables

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

(S) Impairment of financial assets

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

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

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

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

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

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

(W) Provisions

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

(X) Employee entitlements

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

(Y) Derivatives

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

43

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Summary of significant accounting policies (continued)

(Z) 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 significant insurance risk. Life investment contracts are those contracts with no insurance risk, but which give rise to a financial asset and/or liability under NZ IAS 39. Contracts that contain a discretionary participating feature are also classified as life insurance contracts.

• (i) Life investment contract liabilities

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

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

• (ii) Life insurance contract liabilities

The financial reporting methodology used to determine the value of life insurance contract liabilities is referred to as Margin on Services (MoS). Under MoS the excess of premium received over claims and expenses, ‘the profit margin’, is recognised over the life of the contract in a manner that reflects the pattern of risk accepted from the policyholder ‘the service’, hence the term Margin on Services.

Life insurance contract liabilities are determined using either the projection method or accumulation method as referred to in note 26. Under the projection method the policy liability is calculated as the net present value of these projected cash flows using best estimate assumptions about the future. When the benefits under the life insurance contract liability are linked to the assets backing it, the discount rate applied is based on the expected future earnings rate on those assets. Where the benefits are not linked to the performance of the backing assets, a risk free discount rate is used. The risk free discount rate is determined by the Appointed 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.

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

(AB) Contributed equity

• (i) Ordinary share capital

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

(AC) Share based payments

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

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

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

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

(AA) 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 inflation and superimposed inflation and discounted 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.

(AD) 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 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 identified as the Company’s Board of Directors.

44 TOWER Limited and TOWER Capital Limited annual reports 2013

(AE) Cash flows

The statements of cash flows present the net cash flows for financial assets, property, plant and equipment, intangible assets and advances 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 flows 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.

(AF) Discontinued operations and disposal groups

Assets and liabilities of a disposal group are classified as held for sale if their carrying amount will be recovered or settled principally through a sale transaction rather than through continuing use. A disposal group is defined as a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated. This condition is regarded as being met only when the sale is highly probable and the assets or businesses are available for immediate sale in their present condition or is a subsidiary acquired exclusively with a view to resale.

As required by accounting standards assets and liabilities of a disposal group are measured at the lower of carrying amount and fair value less costs to sell and disclosed in aggregate on the balance sheet as single line items. Items in the Income Statements and Statements of Comprehensive Income relating to discontinued operations are shown individually on the face of the statements, however profit for the year is separated between continuing and discontinued operations.

• Cash flows associated with discontinued operations are disclosed in note 41.

(AG) Business combinations

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

• If there is negative goodwill then this is recognised directly in the income statement.

(AH) Comparatives

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

As required by NZ IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, the sale of TOWER businesses has resulted in the reclassification of balances into two line items. Income statement balances for 2013 and 2012 years have been reclassified into either, ‘Profit for the year from discontinued operations’ or ‘Profit from disposal of subsidiaries’. 2013 balance sheet items have been reclassified into two lines ‘Assets of disposal group classified as held for sale’ and ‘Liabilities of disposal group classified as held for sale’. The cash flow statement continues to include related cash flows from discontinued operations within each line item. A summary of cash flows from discontinued operations is presented in the relevant section note 41 – Discontinued operations, which contains full details of the business disposals.

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) Life insurance policy liabilities

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

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

• the cost of providing benefits and administering these insurance contracts

• mortality and morbidity experience on life insurance products, including enhancements to policyholder benefits

• discontinuance experience, which affects the Group’s ability to recover the cost of acquiring new business over the lives of the contracts, and

• the amounts credited to policyholders’ accounts compared to the returns on invested assets through asset-liability management and strategic and tactical asset allocation.

In addition, factors such as regulation, competition, interest rates, taxes, securities market conditions and general economic conditions affect the level of these liabilities. In some contracts, the Group shares experience on mortality, morbidity, persistency and investment results with its customers, which can offset the impact of these factors on profitability from those products. Details of specific actuarial policies and methods are set out in note 25.

(B) Claims liabilities under general insurance contracts

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

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

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

45

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Summary of significant accounting policies (continued)

2. 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:

3. 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

Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. Deferred tax assets are recognised for all unused tax losses to the extent it is probable that taxable profits will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised based on the likely timing and quantum of future taxable profits.

3. Impact of amendments to NZ IFRS

• changes in the legal environment

• the effects of inflation

• changes in the mix of business

• the impact of large losses

• movements in industry benchmarks, and

• technological developments.

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

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

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

Provisions are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based on the gross provisions. Details of specific assumptions used in deriving the outstanding claims liability at year end are detailed in note 26.

(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 after 1 October 2013 or later periods, and the Group has not early adopted them. The Group expects to adopt the following new standards on 1 October after the effective date.

• NZ IFRS 9 ‘Financial Instruments’ (effective from 1 January 2015). The standard partly replaces NZ IAS 39 and introduces requirements for classifying and measuring financial 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 financial statements.

• NZ IFRS 10 ‘Consolidated Financial statements’ (effective from 1 January 2013). The standard requires a parent to present consolidated financial statements as those of a single economic entity, replacing the requirements previously contained in NZ IAS 27 Consolidated and Separate Financial Statements. The standard is not expected to have a material impact on the financial 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 financial 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.

(C) Assets arising from reinsurance contracts

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

(D) Taxation

The Group is subject to income taxes in New Zealand and jurisdictions where it has foreign operations. Significant management judgement is required in determining the worldwide provision for income taxes. There are some transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group estimates its tax liabilities based on its understanding of tax law in each relevant jurisdiction.

• (B) Standards, amendments and interpretations to existing standards effective 2013 or early adopted by the Group.

The Group has adopted the following new and amended IFRS’s as of 1 October 2012:

• NZ IAS 1 ‘Presentation of Financial Statements (effective from 1 January 2013). This revised standard amendment requires entities to group items presented in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss in subsequent periods. The revised standard has not had a material impact on the financial statements.

• Improvements to NZ IFRS 2009 -2011 cycle includes various amendments effective for periods beginning on or after 1 January 2012. The amendments have not had a material impact on the financial statements.

46 TOWER Limited and TOWER Capital Limited annual reports 2013

4. Premium revenue

General insurancepremiums	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
	267,160 238,859 — —
Premium revenue from insurance contracts	267,160 238,859 — —
Less: Outwards reinsurance expense	(48,617) (41,137) — —
Total netpremium revenue	218,543 197,722

6. Fee and other revenue

	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Investment and management fees	85 — — —
Other revenue	308 158 — —
Total fee and other revenue	393 158 — —

7. Claims expense

5. Investment revenue

	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Fixed interest securities1
Interest income	16,750 15,192 1,252 3,165
Net realisedgain	3,100 8,272 — —
Net unrealised loss	(6,455) (3,596) — —
	13,395 19,868 1,252 3,165
Equitysecurities1
Dividend income	231 141 178,453 18,960
Net realised loss	461 — — —
Net unrealisedgain	196 1,356 — —
	888 1,497 178,453 18,960
Propertysecurities1
Propertyincome	105 212 — —
Net realisedgain	3,215 810 — —
Net unrealised loss	(2,729) (615) — —
	591 407 — —
Other2
Other investment income	— 12 23 12
Net realisedgain	(63) (4) — —
Net unrealisedgain/(loss)	246 (62) — —
	183 (54) 23 12
Total investment revenue
Total investment revenue	17,086 15,557 179,728 22,137
Total net realisedgain	6,713 9,078 — —
Total net unrealised loss	(8,742) (2,917) — —
	15,057 21,718 179,728 22,137

• 1 The income and loss in these categories has been generated by financial assets designated on initial recognition at fair value through profit or loss.

• 2 Other investment gains and losses has been generated by derivative financial assets and financial liabilities classified as held for trading at fair value through profit or loss.

	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
General insurance claims	198,818 169,135 — —
Less: Reinsurance recoveries revenue	(52,253) (44,580) — —
Total net claims expense	146,565 124,555 — —

8. Other expenses

(A) Management and sales expenses

	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Non-life expenses	72,069 59,811 813 693
Total management and sales expenses	72,069 59,811 813 693
Included in total management and sales expenses are the following:
Amortisation of non-life deferred acquisition costs	17,086 23,166 — —
Bad debts written off	219 55 — —
Change inprovision for doubtful debts	161 92 — —
Amortisation of software	3,648 2,697 — —
Depreciation:
Office equipment and furniture	323 513 — —
Motor vehicles	292 389 — —
Computer equipment	1,214 1,305 — —
Directors’ fees	824 624 724 624
Operatingleases	4,413 4,227 — —
Employee benefits expense	47,242 54,648 — —
Gain/(loss) on disposal of property, plant and equipment	(2,140) 131 — —
Auditors' remuneration
Feespaid to Company's auditors:

47

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

8. Other expenses (continued)

	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Audit of financial statements	761 1,046 — —
Other assurance related services	160 40 — —
Tax related services	— 49 — —
Non-assurance advisoryrelated services	43 7 — —
Feespaid to subsidiary's auditors:
Audit of financial statements	37 30 — —

Other assurance related services in the current year relate to work performed on the sale of TOWER’s investment business and strategic review initiatives.

In the prior year other assurance related services related predominantly to work performed on the sale of TOWER Medical Insurance Limited.

(B) Financing costs

	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Interest expense	7,750 7,677 — —
Other costs	119 226 — —
Total financingcosts	7,869 7,903 — —

	The tax expense recognised can be reconciled to the accounting profit	The tax expense recognised can be reconciled to the accounting profit	as
	follows:
	Profit before taxation from continuing operations	7,490 27,329 178,915	21,444
	Income tax at the current rate of 28%	2,097 7,652 50,096	6,004
	Taxation effect of non deductible
	expenses / non-assessable revenue:
	Life insurance companies permanent
	differences	(33) — —		—
	Recognition ofpriorperiod current tax	(340) (181) —		358
	Non deductible (income)/losses from
	PIEs	(78) 28 —		—
	Non deductible expenditure Non taxable dividend from subsidiaries	423 153 — — —(49,967)	— (5,308)
	Foreign tax credits write-off	3,592 — —		—
	Other	1,410 273 —		—
	Income tax expense	7,071 7,925 129	1,054

The Group taxation expense includes both tax on shareholder profits and on returns attributed to policyholders. The allocation of tax expense between shareholders and policyholders has been disclosed in the income statement.

(B) Current Tax Liabilities

Current tax liabilities of $1,654,000 relate to taxes payable to off shore tax authorities in the Pacific Islands.

9. Taxation

(A) Current tax expense

Analysis of taxation expense	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Current taxation	7,446 6,018 129 696
Deferred taxation	(34) 2,089 — —
Underprovided inprioryears	(341) (182) — 358
Income tax expense for theyear	7,071 7,925 129 1,054
Income tax expense attributed to shareholders	7,071 7,925 129 1,054
	7,071 7,925 129 1,054

48 TOWER Limited and TOWER Capital Limited annual reports 2013

(C) Deferred tax assets and liabilities

2013	GROUP
	OPENING BALANCE AT 1 OCTOBER CHARGED/ (CREDITED) TO INCOME STATEMENT CREDITED TO STATEMENT OF COMPREHENSIVE INCOME ACQUIRED ON ACQUISITION OF SUBSIDIARY DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD FOR SALE CLOSING BALANCE AT 30 SEPTEMBER
	$000 $000 $000 $000 $000 $000
Movements in deferred tax assets
Provisions and accruals	1,759 721 — — 1,267 3,747
Tax losses	11,703 5,298 — — (6,539) 10,462
Insurance liabilities	1,177 (1,177) — — —
Fixed assets	1,248 (4,356) — — 12,551 9,443
Other	19 — — — (19) —
Total deferred tax assets	15,906 486 — — 7,260 23,652
Movements in deferred tax liabilities
Deferred acquistion costs 5,923 298 — — (1,787) 4,434
Unrealisedgains 1,148 (274) — — (874) —
Life insurance contract liabilities 39,784 — — —(39,784) —
Other 617 428 131 — (146) 1,030
Total deferred tax liabilities 47,472 452 131 — (42,591) 5,464
Net deferred tax (31,566) 34 (131) — 49,851 18,188
2012
Movements in deferred tax assets
Provisions and accruals 1,415 421 — — (77) 1,759
Tax losses — 26 — 11,677 — 11,703
Insurance liabilities 15,686 (70) — — (14,439) 1,177
Fixed assets 1,682 (434) — — — 1,248
Other 511 (492) — — — 19
Total deferred tax assets 19,294 (549) — 11,677 (14,516) 15,906
Movements in deferred tax liabilities
Deferred acquistion costs 14,052 802 — — (8,931) 5,923
Unrealisedgains 1,294 (130) — (16) — 1,148
Life insurance contract liabilities 32,687 7,097 — — — 39,784
Other 737 (211) 91 — — 617
Total deferred tax liabilities 48,770 7,558 91 (16) (8,931) 47,472
Net deferred tax (29,476) (8,107) (91) 11,693 (5,585) (31,566)

49

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Taxation (continued)

9. Taxation_(continued)_
Net deferred tax	GROUP
	2013 2012
	$000 $000
Expected to crystallise in the next 12 months	3,173 4,840
Not expected to crystallise in the nex 12 months	t 15,015(36,406)
	18,188(31,566)

Deferred tax liabilities of $1,355,000 have not been recognised in respect of temporary differences associated with investments in subsidiaries (2012: liabilities of $3,758,000).

(D) Imputation credits

The Group imputation credit account reflects the imputation credits held by the Company as the representative member of the Group.

	GROUP
	2013 2012
	$000 $000
Imputation credits available for use in subsequent reporting periods	361 337

The above amounts represent the balance of the imputation account as at the end of the reporting period, adjusted for:

• i) Imputation credits that will arise from the payment of the amount of the provision for income tax;

• ii) Imputation debits that will arise from the payment of dividends recognised as a liability at the reporting date; and

• iii) Imputation credits that will arise from the receipt of dividends recognised as receivables at the reporting date.

The company and its New Zealand subsidiaries have formed a tax consolidated group. The consolidated group imputation credit account balance reflects the imputation credits available to all members of the group.

10. Receivables

Reinsurance recoveryreceivables	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
	257,310 376,427 — —
Outstanding premiums and trade receivables	114,535 139,235 — —
Unsettled investment sales	601 857 — —
Relatedpartyreceivables	— — 20,008 1,975
Other	8,511 15,643 — 277
Total receivables	380,957 532,162 20,008 2,252
Analysed as:
Current	310,629 363,267 20,008 2,252
Non current	70,328 168,895 — —
	380,957 532,162 20,008 2,252

	Outstanding premiums and trade receivables above are presented net of	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 duringthe reporting period was as follows:
	Outstanding premiums and trade receivables	141,413 141,187 —	—
	Allowance for doubtful debts	(2,113) (1,952) —	—
	Transferred to discontinued operation	(24,765) — —	—
		114,535 139,235 —	—
	Balance at 1 October	1,952 2,057 —	—
	Provisions added duringtheyear	567 249 —	—
	Impairment loss recognised during
	theyear	(219) (55) —	—
	Provisions released during the year Reclassified to disposal groups held for sale	(187) (23) — — (276) —	— —
	Balance at 30 September	2,113 1,952 —	—

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.

50 TOWER Limited and TOWER Capital Limited annual reports 2013

11. Intangible assets

Impairment testing for goodwill

						Iit tti f dill
GROUP				SOFTWARE		mparmen esng or goow
Year ended 30 September 2013	GOODWILL $000	ACQUIRED $000	INTERNALLY DEVELOPED $000	UNDER DEVELOPMENT $000	TOTAL $000	Goodwill is allocated to general insurance cash generating unit. The carrying amount of goodwill allocated to the cash generating unit is shown below: GENERAL INSURANCE 2013 2012 $000 $000
Cost:
						Carryingamount ofgoodwill 17,744 17,444
At 1 October 2012	17,744	3,485	59,798	5,877	86,904
Additions	—	632	—	9,268	9,900	Goodwill is subject to impairment testing at the cash-generating unit level
Disposals	—	—	(1,588)	—	(1,588)	every six months. No impairment loss has been recognised in 2013 as a
Impairment of assets	—	—	(40,000)	(4,900)	(44,900)	result of the impairment review (2012: Nil).
At 30 September 2013	17,744	4,117	18,210	10,245	50,316	Impairment review method overview
Accumulated amortisation:						General Insurance
At 1 October 2012	—	(2,545)	(15,537)	—	(18,082)	The recoverable amount of the general insurance business has been
Amortisation charge	—	(635)	(3,013)	—	(3,648)	assessed with reference to its appraisal value to determine its value in use. A base discount rate of 10% was used in the calculation (2012: 10.1%).
Amortisation on disposals	—	—	1,588	—	1,588	Other assumptions used are consistent with the actuarial assumptions in
At 30 September 2013	—	(3,180)	(16,962)	— (20,142)		note 26 in respect of TOWER Insurance. The projected cash flows have been determined using a steady average growth rate of 4% (2012: 4%). The cash
At cost	17,744	4,117	18,210	10,245	50,316	flows were projected over the expected life of the policies. The projected
Accumulated amortisation	—	(3,180)	(16,962)	—	(20,142)	cash flows are determined based on past performances and management
Net book value at						expectations for market developments.
30 September 2013	17,744	937	1,248	10,245	30,174	Sensitivity to changes in assumptions
						Management considers that the recoverable amount from the general
GROUP				SOFTWARE		insurance business, as determined by the appraisal value, will exceed the
Year ended 30 September 2012	GOODWILL	ACQUIRED	INTERNALLY DEVELOPED	UNDER DEVELOPMENT	TOTAL	carrying value under a reasonable range of adverse scenarios. 12. Investment in subsidiaries
	$000	$000	$000	$000	$000	COMPANY
Cost: At 1 October 2011	30,811	2,790	15,004	39,479	88,084	2013 2012 $000 $000
						Investments in controlled entities carried at cost 235,254 235,237
Additions	—	653	—	11,192	11,845
Reclassified to disposal group
held for sale	(13,067)	—	—	—	(13,067)	The table below lists TOWER Limited subsidiary companies and controlled
Transfers	—	42	44,794	(44,794)	42	entities. All entities have a balance date of 30 September.
At 30 September 2012	17,744	3,485	59,798	5,877	86,904	Principal trading subsidiary companies and controlled entries at 30 September 2013 and 2012 are as follows:
Accumulated amortisation:
At 1 October 2011	—	(1,764)	(13,579)	—	(15,343)	NAME OF COMPANY HOLDINGS NATURE OF BUSINESS
Amortisation charge	—	(739)	(1,958)	—	(2,697)	INCORPORATED IN NEW ZEALAND 2013 2012
Transfers	—	(42)	—	—	(42)	TOWER Asset Management Investment management
						Limited — 100% services(sold 2 April 2013)
At 30 September 2012	—	(2,545)	(15,537)	— (18,082)
At cost	17,744	3,485	59,798	5,877	86,904	TOWER New Zealand Limited 100% 100% Management services Non operating company
Accumulated amortisation	—	(2,545)	(15,537)	—	(18,082)	(2012: Term and disability
Net book value at 30 September 2012	17,744	940	44,261	5,877	68,822	TOWER Health & Life Limited 100% 100% insurance) TOWER Insurance Limited 100% 100% Fire andgeneral insurance

51

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

12. Investment in subsidiaries (continued)

13. Deferred acquisition costs (non life)

NAME OF COMPANY HOLDINGS NATURE OF BUSINESS INCORPORATED IN NEW ZEALAND 2013 2012 TOWER Investments Limited — 100% Holding company (sold 2 April 2013 TOWER Life(N.Z.)Limited 100% 100% Life insurance and superannuation management TOWER Managed Funds Limited — 100% Life insurance administration and personal superannuation management (sold 2 April 2013) TOWER Medical Insurance Limited — 100% Health insurance (sold 30 November 2012) TOWER Financial Services GroupLimited 100% 100% Holdingcompany TOWER Option Scheme Limited 100% 100% Trustee for executive share options TOWER Capital Limited 100% 100% Holding company for fixed rate senior unsecured bonds TOWER Employee Benefits Limited — 100% Holding company (sold 2 April 2013) TOWER Managed Funds Investment Limited — 100% Holding company (sold 2 April 2013) TAM International Trust Income Fund 100% 100% Unitised equity investment trust INCORPORATED IN FIJI TOWER Insurance (Fiji) Limited 100% 100% Fire andgeneral insurance INCORPORATED IN COOK ISLANDS TOWER Insurance (Cook Islands)Limited 100% 100% Fire andgeneral insurance INCORPORATED IN PAPUA NEW GUNEA TOWER Insurance (PNG) Limited 100% 100% Fire andgeneral insurance INCORPORATED IN SAMOA National Pacific Insurance Limited 71% 71% Fire andgeneral insurance	. q Balance at 1 October	. q Balance at 1 October
			GROUP COMPANY
			2013 2012 2013 2012
			$000 $000 $000 $000
			23,467 42,383 — —
	Acquisition costs deferred duringtheyear		18,211 26,617 — —
	Currentperiod amortisation		(17,086) (23,166) — —
	Reclassified as discontinued operations		(6,381) (22,367) — —
	Balance at 30 September		18,211 23,467 — —
	Analysed as:
	Current		18,211 17,783 — —
	Non current		— 5,684 — —
			18,211 23,467 — —
	14. Property, plant and equipment
	Year ended 30 September 2013 Cost:	GROUP
		LAND AND BUILDINGS OFFICE EQUIPMENT AND FURNITURE MOTOR VEHICLES COMPUTER EQUIPMENT TOTAL
		$000 $000 $000 $000 $000
	At 1 October 2012	2,207 7,620 2,021 9,775 21,623
	Additions	— 257 17 1,330 1,604
	Revaluation	715 — — — 715
	Disposals	(533) (1,064) (627) (405) (2,629)
	Foreign exchange movements	(109) (80) (126) (34) (349)
	At 30 September 2013	2,280 6,733 1,285 10,666 20,964
	Accumulated Depreciation:
	At 1 October 2012	— (6,727) (1,096) (8,271) (16,094)
	Depreciation charge	— (323) (292) (1,214) (1,829)
	Disposals	— 941 380 325 1,646
	Foreign exchange movements	— 71 90 31 192
	At 30 September 2013	— (6,038) (918) (9,129) (16,085)
	At 30 September 2013
	At cost	2,280 6,733 1,285 10,666 20,964
	Accumulated depreciation	— (6,038) (918) (9,129) (16,085)
	Net book value at 30 September 2013	2,280 695 367 1,537 4,879

		GROUP
	Year ended	LAND AND BUILDINGS	FURNITURE	OFFICE EQUIPMENT AND	MOTOR VEHICLES	COMPUTER EQUIPMENT	TOTAL
	30 September 2013	$000		$000	$000	$000	$000
	Cost:
	At 1 October 2012	2,207	7,620		2,021	9,775	21,623
	Additions	—		257	17	1,330	1,604
	Revaluation	715		—	—	—	715
	Disposals	(533)	(1,064)		(627)	(405)	(2,629)
	Foreign exchange movements	(109)		(80)	(126)	(34)	(349)
	At 30 September 2013	2,280	6,733		1,285	10,666	20,964
	Accumulated Depreciation:
	At 1 October 2012	—	(6,727)		(1,096)	(8,271)	(16,094)
	Depreciation charge	—		(323)	(292)	(1,214)	(1,829)
	Disposals	—		941	380	325	1,646
	Foreign exchange movements	—		71	90	31	192
	At 30 September 2013	—	(6,038)		(918)	(9,129)	(16,085)
	At 30 September 2013
	At cost	2,280	6,733		1,285	10,666	20,964
	Accumulated depreciation	—	(6,038)		(918)	(9,129)	(16,085)
	Net book value at 30
	September 2013	2,280		695	367	1,537	4,879

52 TOWER Limited and TOWER Capital Limited annual reports 2013

15. Payables

		1 Paables
Year ended 30 September 2013 Cost:	GROUP LAND AND BUILDINGS OFFICE EQUIPMENT AND FURNITURE MOTOR VEHICLES COMPUTER EQUIPMENT TOTAL $000 $000 $000 $000 $000 1,938 7,460 1,902 9,408 20,708 — 323 397 582 1,302 327 — — — 327 — (102) (269) (172) (543) (58) (61) (9) (1) (129) — — — (42) (42) 2,207 7,620 2,021 9,775 21,623 — (6,304) (969) (7,137) (14,410) — (513) (389) (1,305) (2,207) — 37 263 130 430 — 53 (1) (1) 51 — — — 42 42 — (6,727) (1,096) (8,271) (16,094) 2,207 7,620 2,021 9,775 21,623 — (6,727) (1,096) (8,271) (16,094) 2,207 893 925 1,504 5,529	5. y Tradepayables	NOTE
				GROUP COMPANY
				2013 2012 2013 2012
				$000 $000 $000 $000
				11,902 22,435 — —
		Reinsurancepayables		5,864 8,583 — —
		Unsettled investment purchases		— 21 — —
At 1 October 2011
Additions		Otherpayables		27,270 25,733 1,732 1,554
Revaluation		Relatedparty payables	35	— — 102,345 188,600
Disposals		Totalpayables		45,036 56,772 104,077 190,154
Foreign exchange movements		Analysed as:
Transfers		Current		45,036 56,772 104,077 190,154
At 30 September 2012		Non current		— — — —
Accumulated Depreciation:				45,036 56,772 104,077 190,154
At 1 October 2011		16. Provisions
Depreciation charge
Disposals
Foreign exchange movements
Transfers		Business separation		GROUP COMPANY
				2013 2012 2013 2012
At 30 September 2012				$000 $000 $000 $000
At 30 September 2012				9,257 2 — —
At cost		Employee benefits		2,956 7,095 — —
Accumulated depreciation		Totalprovisions		12,213 7,097 — —
Net book value at 30 September 2012		Analysed as:
		Current		12,075 7,097 — —
		Non current		138 — — —
				12,213 7,097 — —

		GROUP	COMPANY
		2013 2012 2013	2012
		$000 $000 $000	$000
	Business separation	9,257 2 —	—
	Employee benefits	2,956 7,095 —	—
	Totalprovisions	12,213 7,097 —	—
	Analysed as:
	Current	12,075 7,097 —	—
	Non current	138 — —	—
		12,213 7,097 —	—

Land and buildings are all located in Fiji and are stated at fair value. Fair value is determined using a replacement cost approach whereby the depreciated replacement cost of improvements is added to the leasehold interest in the land. This value is then adjusted to take into account recent market activity. Valuation of the commercial building was performed as at 16 August 2013 by Rolle Associates, registered valuers in Fiji. There has been no material movement in the valuation between 16 August and 30 September 2013.

Employee benefits

Employee benefits include provisions for holiday pay and long service leave.

The residential property was sold effective 30 September 2013 and as a result is presented as a disposal in the table above.

Movements in provisions

Movements in each class of provision other than employee benefits during the financial year are set out below:

Had land and buildings been recognised under the cost model the carrying amount would have been $1,145,000 (2012: $1,868,000). The revaluation surplus for the period is recorded in other comprehensive income. There are no restrictions on the distribution of this balance to shareholders.

Business separation	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Openingbalance at 1 October	2 57 — —
Additions	21,115 — — —
Amount utilised in theyear	(11,860) (55) — —
Closingbalance at 30 September	9,257 2 — —

The Company does not hold any property, plant and equipment.

53

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

16. Provisions (continued)

Health business

Separation costs of $3,213,000 relating directly to the sale of the health business were provided for during the year ended 30 September 2013. $2,841,000 of the provision has been utilised for legal, consultancy and IT related costs. The remaining balance is expected to be fully utilised by November 2013.

Investments business

Separation costs of $4,878,000 relating directly to the sale of the investments business were provided for during the year ended 30 September 2013. $3,434,000 of the provision has been utilised for legal, consultancy and IT related separation costs. The remaining balance is expected to be fully utilised by March 2014.

Non-participating life business

Separation costs of $10,145,000 relating directly to the sale of the nonparticipating life business were provided for during the year ended 30 September 2013. $5,584,000 of the provision has been utilised for legal, consultancy and IT related separation costs. The remaining is expected to be fully utilised by June 2015.

Remaining life business

Separation costs of $2,880,000 relating directly to the sale of the remaining life business were provided for at 30 September 2013. The provision relates to legal, consultancy and IT related separation costs and is expected to be fully utilised by September 2014.

Further details of the discontinued operations to which these provisions relate are disclosed in note 41.

17. Interest bearing liabilities

Fixed rate senior unsecured bonds	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
	83,219 83,219 — —
Unamortised capitalised costs	(428) (1,229) — —
	82,791 81,990 — —
Analysed as:
Current	82,791 659 — —
Non current	— 81,331 — —
	82,791 81,990 — —

Fixed rate senior unsecured bonds

The fair value of fixed rate senior unsecured bonds as at 30 September 2013 is $83,692,000 (2012: $86,104,000). This has been estimated using the method outlined in note 28 (D).

18. Insurance liabilities

Unearned premiums – general insurance	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
	136,915 127,309 — —
Outstanding claims – general and health insurance	314,990 427,396 — —
Outstandingclaims – life and other — 9,074 — —
451,905 563,779 — —
Analysed as:
Current 345,926 396,926 — —
Non current 105,979 166,853 — —
451,905 563,779 — —
The table below includes the reconciliation of the unearned premiums as at balance date:
Unearned premiums - general insurance
Opening balance at 1 October 2012 127,309 108,430 — —
Premiums written 265,259 257,738 — —
Premiums earned (254,701) (238,859) — —
Other (952) — — —
Closing balance at 30 September 2013 136,915 127,309 — —
Unearnedpremiums - health
Opening balance at 1 October 2012 — 15,959 — —
Premiums written — 145,711 — —
Premiums earned —(146,230) — —
Reclassified to disposal groupheld for sale —(15,440) — —
Closing balance at 30 September 2013 — — — —

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

The above total of $82,791,000 includes $1,460,000 of accrued interest (2012: $1,460,000). The Group capitalised $3,499,000 of costs associated with the issuance of the bonds. These costs are amortised over the five year term of the bonds using the effective interest method. The bonds are carried at amortised cost using the effective interest method. The amortised issuance costs during the period to 30 September 2013 were $800,500 (2012: $727,000)

54 TOWER Limited and TOWER Capital Limited annual reports 2013

19. Contributed equity

21. Reserves

	GROUP	COMPANY	GROUP	COMPANY
	2013 2012 2013	2012	2013 2012 2013	2012
	$000 $000 $000	$000	$000 $000 $000	$000
Ordinary share capital (fully paid)	453,935 572,805 453,935	572,805	Foreign currencytranslation reserve(FCTR)
Total contributed			Balance at 1 October 1,945 1,268 —	—
equity	453,935 572,805 453,935	572,805	Currency translation differences
	NUMBER OF SHARES NUMBER OF SHARES		arisingduringtheyear (6,446) 677 —	—
Represented by:			Balance at 30 September (4,501) 1,945 —	—
Ordinaryshares	207,193,438 269,091,094 207,193,438 269,091,094		Exchange differences arising on translation of foreign controlled entities are
Movements in ordinaryshares Balance at 1 October 269,091,094 265,176,580 269,091,094 265,176,580			taken to the FCTR as described in note 1(K). The reserve is recognised in profit and loss when the net investment is disposed of.
Dividend reinvestment			Share basedpayments reserve
plan shares issued	— 3,914,514 —	3,914,514	Balance at 1 October 1,814 2,044 1,814	2,044
Capital repaymentplan	(62,097,656) —(62,097,656)	—	Movement in share based
Employee share options scheme shares issued	200,000 — 200,000	—	payments reserve (1,770) (230) (1,770) Balance at 30 September 44 1,814 44	(230) 1,814
Balance at 30 September	207,193,438 269,091,094 207,193,438 269,091,094 $000 $000 $000 $000		The share based payments reserve is used to recognise the fair value issued but not exercised.	of options
Movements in ordinaryshare capital			Separation reserve (113,000) (113,000) (113,000)	(113,000)
Balance at 1 October	572,805 567,031 572,805	567,031	The separation reserve was created in 2007 at the time of the demerger of the
Dividend reinvestment			New Zealand and Australian businesses in accordance with a ruling provided
plan shares issued	— 5,774 —	5,774	by the Australian Tax Office (ATO). It will be carried forward indefinitely	as a non
Capital repaymentplan	(119,228) — (119,228)	—	equity reserve to meet the requirements of the ATO.
Employee share options scheme shares issued	358 — 358	—	Asset revaluation reserves Openingbalance at 1 October 236 — —	—
Balance at 30 September	453,935 572,805 453,935	572,805	Gain on revaluation 498 — — Gain transferred to income	—

	Asset revaluation reserves
	Openingbalance at 1 October	236 — —	—
	Gain on revaluation	498 — —	—
	Gain transferred to income
	statement from asset sold	(380) 236 —	—
	Balance at 30 September	354 236 —	—

All shares rank equally with one vote attached to each share. There is no par value for each share.

	The asset revaluation reserve is used to recognise unrealised gains on the value	The asset revaluation reserve is used to recognise unrealised gains on the value
	of land and buildings above their initial cost.
	Total reserves (117,103) (109,005) (112,956)	(111,186)

20. Accumulated profits/losses

Accumulatedprofits/(losses)	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Balance at 1 October	33,546 (4,352) (340,085) (342,786)
Profit for theyear	34,245 55,339 178,786 20,390
Movement in share based payments reserve	1,697 322 1,697 322
Dividendspaid	(26,505) (18,622) (26,505) (18,622)
Other	— 859 1 611
Balance at 30 September	42,983 33,546(186,106) (340,085)

22. Net assets per share

Net assetsper share(dollars)	GROUP COMPANY
	2013 2012 2013 2012
	1.84 1.85 0.75 0.45
Net tangible assetsper share(dollars)	1.53 1.67 0.75 0.45

Net assets per share represents the value of the Group’s total net 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. Assets from the disposal group are included in the calculation.

55

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

23. Distributions to shareholders

Dividend payments

On 29 November 2012 the Directors declared a final dividend of 6 cents per share for the 2012 financial year. The dividend was paid on 1 February 2013. The total amount payable was $16,145,466. There were no imputation credits attached to the dividend and TOWER did not offer its Dividend Reinvestment Plan for this dividend.

An interim dividend of 5 cents per share was declared by the Board of Directors on 27 May 2013 for the half year ended 31 March 2013. There were no imputation credits attached to the dividend and TOWER did not offer its Dividend Reinvestment Plan for this dividend. The total amount payable was $10,359,672. The dividend was paid on 1 July 2013.

Return of Capital

On 8 April 2013 TOWER announced the cancellation of 3 in every 13 ordinary TOWER shares listed on the ASX and NZX exchanges and registered in the name of each TOWER ordinary shareholder. This resulted in the cancellation of 62,097,656 shares, leaving 206,993,438 shares on issue immediately following the cancellation. This cancellation occurred pursuant to the return of capital arrangement approved by TOWER Limited shareholders at the Annual Shareholders’ Meeting held on 21 March 2013. TOWER shares traded on an ‘ex return of capital’ basis on ASX from 28 March 2013 and on NZX from 3 April 2013.

On 12 April 2013, TOWER paid NZ$1.92 for each share cancelled. Shareholders received total payments of NZ$119,227,500 for all shares cancelled. Australian shareholders received approximately AUD$1.55 per cancelled share (based on a NZD/AUD exchange rate of 0.8065 as at the record date).

24. Segmental Reporting

30 SEPTEMBER 2013	NEW ZEALAND GENERAL INSURANCE PACIFIC GENERAL INSURANCE OTHER (HOLDING COMPANIES AND ELIMINATIONS) TOTAL
	$000 $000 $000 $000
Revenue – external	181,683 45,539 6,771 233,993
Revenue – internal	2,614 (2,609) (5) —
Total revenue	184,297 42,930 6,766 233,993
Earnings before interest, tax, depreciation and amortisation	(919) 13,580 8,175 20,836
Interest expense	— — (7,869) (7,869)
Depreciation and amortisation	(2) (236) (5,239) (5,477)
Profit before income tax	(921) 13,344 (4,933) 7,490
Income tax(expense)/credit(1)	186 (8,772) 1,515 (7,071)
Profit for theyear	(735) 4,572 (3,418) 419
Total assets	707,623 67,503 182,643 957,769
Total liabilities	471,045 45,282 82,736 599,063
Acquisition of property, plant and equipment, intangibles and other non current assets	(4) 159 11,349 11,504

30 SEPTEMBER 2012	NEW ZEALAND GENERAL INSURANCE PACIFIC GENERAL INSURANCE OTHER (HOLDING COMPANIES AND ELIMINATIONS) TOTAL
	$000 $000 $000 $000
Revenue – external	172,000 39,822 7,776 219,598
Revenue – internal	(398) 551 (153) —
Total revenue	171,602 40,373 7,623 219,598
Earnings before interest, tax, depreciation and amortisation	7,702 14,776 17,658 40,136
Interest expense	74 (156) (7,821) (7,903)
Depreciation and amortisation	— (236) (4,668) (4,904)
Profit before income tax	7,776 14,384 5,169 27,329
Income tax(expense)/credit1	(3,982) (2,608) (1,335) (7,925)
Profit for theyear	3,794 11,776 3,834 19,404
Total assets2	644,201 120,746 1,033,101 1,798,048
Total liabilities	552,347 50,974 772,893 1,376,214
Acquisition of property, plant and equipment, intangibles and other non current assets	— 299 12,848 13,147

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

2 The investment businesses, Australian liabilities, non-participating and remaining life business has been excluded from the above disclosure as the results, assets and liabilities of this segment are contained within note 41.

Description of segments and other segment information

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

New Zealand general insurance includes all fire and general insurance business written in New Zealand. Pacific general insurance includes all fire and general insurance business with customers in the Pacific Islands written by TOWER insurance subsidiaries and branches operations. Other includes head office expenses, financing costs and eliminations. The health, investments and life businesses have been excluded from the above disclosure as the results of these segments are contained within note 41.

TOWER Group operates predominantly in two geographical segments, New Zealand and the Pacific region. The operations in the United Kingdom and the United States do not represent a significant 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 (excluding disposal group held for sale) is $188,454,000 (2012: $179,776,000) and total revenue from external customers from other countries is $45,539,000 (2012: $39,822,000).

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

56 TOWER Limited and TOWER Capital Limited annual reports 2013

25. Life insurance business

2 Life insurance business
5. On 10 May 2013, TOWER Limited announced the sale of most of its non- participating life insurance business to Fidelity Life Assurance Company Limited. The sale was completed on 1 August 2013 and resulted in the non-participating life business segment being treated as a discontinued operation, which has been disclosed as a discontinued operation in these financial statements. The sale is disclosed in more detail in note 41(C). At 30 September 2013 TOWER Limited was marketing its remaining participating life insurance business for sale. Consequently the participating life business segment is being treated as a discontinued operation, which has been disclosed as a disposal group held for sale in these financial statements. The sale is disclosed in more detail in note 41(E). TOWER Health & Life Limited ceased to be a licensed insurer in August 2013 following the sale and legal transfer of all of its insurance business to Fidelity Life Assurance Company Limited. As it is no longer an insurance company, it has no solvency obligations. (A) Policy liabilities GROUP COMPANY 2013 2012 2013 2012 $000 $000 $000 $000 Life insurance contract liabilities Value of policy liabilities – Projection Method Futurepolicybenefits 547,606 939,446 — — Future bonuses 127,649 122,385 — — Future expenses 26,515 177,095 — — Reinsurance — (4,146) — — Futureprofit margins 32,387 163,702 — — Futurepremiums (99,905) (857,603) — — 634,252 540,879 — — Value of policy liabilities – Accumulation Method Futurepolicybenefits 1,047 10,488 — — Unvestedpolicybenefits 25,646 22,475 — — Net policy liabilities – life insurance contracts 660,945 573,842 — —	GROUP COMPANY 2013 2012 2013 2012 $000 $000 $000 $000 Reconciliation of movements in life insurance contractpolicyliabilities	GROUP COMPANY
		2013 2012 2013 2012
		$000 $000 $000 $000
	Gross life insurance liabilities at 1 October 591,458 587,476 — —
	Increase in liabilities ceded under reinsurance (13,470) (2,409) — —
	Increase/(decrease) in life insurance contract liabilities recognised in the income statement (29,079) 6,470 — —
	Deposits recognised as an increase in policyliabilities 14 20 — —
	Withdrawals recognised as a decrease in policyliabilities (230) (99) — —
	Reclassified as discontinued operation (548,693) — — —
	Gross life insurance liabilities at 30 September — 591,458 — —
	Life investment contract liabilities
	Value of policy liabilities – Accumulation Method
	Futurepolicybenefits 23,589 27,476 — —
	Gross policy liabilities – life investment contracts 23,589 27,476 — —
	Reconciliation of movements in investment contractpolicyliabilities
Value of policy liabilities – Projection Method
	Gross life investment contract liabilities at 1 October 27,476 28,084 — —
Futurepolicybenefits
	Increase/(decrease) in life investment contract liabilities recognised in the income statement 2,474 2,408 — —
Future bonuses
Future expenses
	Deposits recognised as an increase in policyliabilities 383 345 — —
Reinsurance
Futureprofit margins	Withdrawals recognised as a decrease in policyliabilities (6,744) (3,361) — —
Futurepremiums
	Reclassified as discontinued operation (23,589) — — —
	Gross life investment contract liabilities at 30 September — 27,476 — —
Value of policy liabilities – Accumulation Method
	Totalgrosspolicyliabilities — 618,934 — —
Futurepolicybenefits
	Liabilities ceded under reinsurance
Unvestedpolicybenefits
	Balance at 1 October 17,617 20,026 — —
Net policy liabilities – life insurance contracts
	Movement in income statement (13,470) (2,409) — —
	Reclassified as discontinued operation (4,147) — — —
	Balance at 30 September — 17,617 — —
	Netpolicyliabilities — 601,317 — —
	Grosspolicyliabilities analysed as: — —
	Current — 18,606 — —
	Non current — 600,328 — —
	— 618,934 — —
	Liabilities ceded under reinsurance analysed as:
	Current — 7,405 — —
	Non current — 10,212 — —
	— 17,617 — —

57

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

25. Life insurance business (continued)

The Group has designated life investment contract liabilities at fair value through profit or loss. The impact on the fair value of these liabilities resulting from changes in credit risk recognised during the year is nil (2012: 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 reflected in the movement in the fair value of these contracts.

On 26 August 2013 the Reserve Bank of New Zealand imposed a condition of license requirement for TOWER Life (N.Z.) Limited to maintain a minimum solvency margin of $15.0 million.

The methodology and bases for determining the Solvency Margin are in accordance with the requirements of the Solvency Standard for Life Insurance Business published by the Reserve Bank of New Zealand.

(B) Analysis of life insurance and life investment contract results

Life insurance contracts	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Plannedprofit margins	1,829 11,937 — —
Experienceprofit/loss	9,842 11,170 — —
Capitalised loss recognition	— 198 — —
Investment earnings on assets in excess ofpolicyliabilities of life companies	552 9,164 — —
Operating profit after tax attributable to shareholders arising from life insurance contracts	12,223 32,469 — —
Life investment contracts
Plannedprofit margins	309 25 — —
Experienceprofit	15 236 — —
Operating profit after tax attributable to shareholders arising from life investment contracts	324 261 — —

All operating profit after tax arising from life insurance and life investment contracts is attributed to the shareholders.

(C) Solvency requirements of life funds

The minimum solvency capital required to be retained to meet solvency requirements under the Insurance (Prudential Supervision) Act 2010 are shown below. The actual solvency capital exceeds the minimum requirements by $23.7 million.

	TOWER	TOWER
	LIFE (NZ)	HEALTH & LIFE
2013	$000	$000
Actual SolvencyCapital	29,779	—
Minimum SolvencyCapital	6,053	—
SolvencyMargin	23,726	—
Excess assets to meet solvencyrequirement	23,726	—
2012	1$000	$000
Actual SolvencyCapital	12,415	179,338
Minimum SolvencyCapital	11,494	144,312
SolvencyMargin	921	35,026
Excess assets to meet solvencyrequirement	921	35,026

(D) Summary of significant actuarial methods and assumptions – life insurance

The effective date of the policy liabilities and solvency reserves calculation is 30 September 2013. The Appointed Actuary, Charles Hett, FNZSA, FIA, Head of Actuarial Services, Deloitte, has calculated policy liabilities for TOWER Life (N.Z.) Limited. The actuary is satisfied as to the accuracy of the data from which the policy liabilities have been determined. This note summarises the assumptions made and the methods adopted for the calculation of policy liabilities and solvency requirements.

(a) Policy liabilities

Policy liabilities for the life insurance business of TOWER Life (N.Z.) 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 benefits and expenses after receiving expected future premiums and investment earnings.

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

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

Methods used to value policy liabilities

(i) Projection method

The projection method uses expected cash flows (premiums, investment income, redemptions or benefit payments, expenses) plus profit 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 benefit 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 non-participating investment account policies, the policy liability is determined as the policy account balance including accrued interest to the balance date, plus investment fluctuation reserves subject to a minimum of the current surrender value.

1 TOWER Life (N.Z.) Limited’s 2012 solvency calculation included the nonparticipating life business which was sold on 1 August 2013.

58 TOWER Limited and TOWER Capital Limited annual reports 2013

Methods used

Methods used Where the policy liability is determined by the projection method, actuarial standards require profit to be related to one or more financially measurable indicators of the provision of service (or related income) called ‘profit carriers’. The profit carriers adopted for the major product groups are shown in the table below: MAJOR PRODUCT GROUPS METHOD PROFIT CARRIERS (FOR BUSINESS VALUED USING PROJECTION METHOD) Traditionalparticipating Projection Cost of supportable bonus Traditional non-participating, renewal and level term and mortgage repayment insurance Projection Expected death claims Annuities Projection Expected annuity payments Individual lump sum life insurance risk (life, temporary and permanent disability and trauma) and disability income protection insurance Projection Expected claims Non-participating investment account Accumulation 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 significant changes in the assumptions: REQUIRED ASSUMPTION BASIS OF ASSUMPTION (BY PRODUCT GROUP) ASSUMPTION Discount rates for participating business As the value of benefits is contractually linked to the 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 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. The discount rates used are as follows: September 2013 : 3.6% net of tax September 2012 : 3.1% net of tax Discount rates for non- participating life insurance contracts Risk free discount rates have been adopted for life insurance contracts where the benefits 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 assumed net of investment management expenses. The discount rates used are as follows: Risk Business (discount rates gross of tax) September 2013: Discontinued operation September 2012:. 3% to 3.5% Annuities (discount rates net of tax) September 2013: 3.3% September 2012: 2.6% Inflation Benefit indexation is before allowance for the proportion of policyholders who take up indexation. Benefit Indexation September 2013: 2.0% September 2012: 2.0% Expense inflation September 2013: 2.0% September 2012: 2.0%	REQUIRED ASSUMPTION BASIS OF ASSUMPTION (BY PRODUCT GROUP) ASSUMPTION
	Future expenses Future maintenance expenses have been set based on experience analyses conducted by the various companies as well as the actuary’s expectations of future expense levels. Future investment expenses have been assumed to be at the same percentage of assets under management as currently applies. Per policy expenses Participating Business: September 2013: Discontinued operation September 2012: $50 p.a. Risk business: September 2013: Discontinued operation September 2012: $55 to $226 p.a. Annuities: September 2013: $55 p.a. September 2012: $55 p.a.
	Rates of taxation Rates of taxation have been assumed to remain as under current legislation or legislation substantively enacted at the valuation date. Risk policy liabilities have been calculated on a gross of tax basis. As such there is no allowance for tax within those policy liabilities (excluding GST). GST has been allowed for at the current rate applicable. The corporate tax rate used is: September 2013: 28% September 2012: 28% GST rate: September 2013: 15% September 2012: 15%
	Mortality – participating business Mortality assumption is based on NZ97 table adjusted for company experience. No changes were made to assumptions at September 2013. Factors applied to NZ97: September 2013: 46% to 77% September 2012: 46% to 77%
	Mortality – risk products Mortality assumption is based on NZ07 table adjusted for company experience. No changes were made to assumptions at September 2013. Mortality rates for main risk product lines: Factors applied to NZ97: September 2013: 20.6%to 84% for non- smokers. Additional loading for smokers. September 2012: 20.6%to 84% for non- smokers. Additional loadingfor smokers.
	Mortality – annuities Mortality assumption is based on PML80C10 table projected to 1994 and adjusted for company experience. Factors were applied to take into account both historical (from 1994) and prospective mortality improvement. No changes were made to assumptions at September 2013. Historical and Future Improvement factors: September 2013: 1% to 3% p.a. depending on age and sex. September 2012: 1% to 3% p.a. depending on age and sex.
	Disability – lump sum (Trauma) Based upon recent company and reinsurer experience adjusting for different product definitions. Some wholesale schemes use specific company experience. September 2013: 105% to 139% of reinsurance tables September 2012: 105% to 139% of reinsurance tables
	Disability income Standard morbidity tables (CIDA) adjusted for company experience. Specific company experience is used for certain wholesale schemes. There has been no material change to incidence. September 2013: CIDA85 adjusted September 2012: CIDA85 adjusted

59

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Life insurance business (continued)

25. Life insu	rance business_(continued)_
REQUIRED ASSUMPTION Discontinu- ances	BASIS OF ASSUMPTION (BY PRODUCT GROUP) Assumed discontinuance rates vary by sub-grouping within a class and vary according to the length of time tranches of business have been in- force and other relevant factors	ASSUMPTION Annual discontinuance rates for main risk product lines: September 2013: 0% to 15% p.a.
		September 2012: 0% to
		15% p.a.
		In both years additional
		discontinuances were
		assumed for ages over 65years.
Surrender	Surrender values are based on
values Rates	currentpractice. Assumed future supportable bonus	Future supportable bonus
of future	rates included in policyholder liabilities	rates as a percentage of
supportable	were set such that the present value	Sum Assured:
participating benefits	of policyholder liabilities, allowing for the shareholders’ right to participate in distributions, equals the value of assets supporting the business. Distributions are split between policyholders and shareholders with the valuation allowing for shareholders to share in distributions.	September 2013: 0.4% to 2.6% September 2012: 0.2% to 1.3% Future supportable bonus rates as a percentage of Reversionary Bonus:
	The rate of shareholder participation	September 2013: 0.5%
	is 25% of the value of bonuses	to 0.6%
	distributed to participating policyholders subject to policy conditions.	September 2012: 0.5% to 0.6%
	Additional policy bonuses will emerge from the assets representing policyholders’ unvested benefits.	Future terminal bonus: September 2013: 10.6% to 34.3%
		September 2012: 10.6%
		to 34.3%
Premium rates	Premium rates are assumed to be equivalent to those being charged by	Discontinued operation
	the Groupat the reportingdate.

Effect of changes in actuarial assumptions during the reporting period

The liabilities for life insurance contracts include the value of future profit margins that are to be released over future reporting periods. For participating business, the impact of assumption changes is absorbed by the value of future supportable bonus. The current period contract liability is impacted by the change in cost of current period supportable bonus.

The impact of the assumption changes in the current period on future profit margins in respect of life insurance contracts (excluding new business contracts which are measured using assumptions at the valuation date) are shown below. Where the values of future profit margins are insufficient to absorb the assumption changes, the resulting losses are recognised in the current year via a change in the contract liability. These losses may be reversed in subsequent periods should experience improve.

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

The impact of assumption changes for life insurance contracts made during the year is shown below.

2013	CHANGE IN FUTURE SHAREHOLDER PROFIT MARGINS CHANGE IN NEXT FINANCIAL YEAR’S SHAREHOLDER PLANNED PROFIT CHANGE IN CURRENT PERIOD CONTRACT LIABILITY CHANGE IN CURRENT PERIOD SHAREHOLDER PROFIT
	$000 $000 $000 $000
Assumption change
Mortalityand Morbidity	— — — —
Discontinuances	— — — —
Expenses	— — — —
Tax	— — — —
Other	— — — —
2012
Assumption change
Mortalityand Morbidity	— — — —
Discontinuances	(27,610) (1,791) — —
Expenses	10,894 504 (1,201) 201
Tax	— — — —
Other	— — — —

(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 An increase in the level or inflationary growth of expenses over Expense risk assumed levels will decrease profit and shareholder equity. Depending on the profile 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 fixed interest investments. The impact on profit and shareholder equity depends on the relative profiles of Interest rate risk assets and liabilities, to the extent that these are not matched. For insurance contracts providing death benefits, greater mortality rates would lead to higher levels of claims, increasing associated claims costs and therefore reducing profit and Mortality rates shareholder equity. 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 Morbidity rates increase claim costs, reducing profit and shareholder equity. 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 profit and shareholder equity. However, due to the interplay between the factors, there is not always an Discontinuance adverse outcome from an increase in discontinuance rates. For benefits which are not contractually linked to the Market risk underlying assets, the Group is exposed to market risk.

60 TOWER Limited and TOWER Capital Limited annual reports 2013

The valuations included in the reported results are calculated using certain assumptions about these variables 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 profit or loss and equity net of reinsurance to changes in assumptions.

VARIABLE Mortality	CHANGE IN FOLLOWING FINANCIAL YEAR’S SHAREHOLDER PROFIT AND EQUITY NET OF REINSURANCE
	2013 2012
	+ 10% – 10% + 10% – 10%
	$000 $000 $000 $000
	(84) 84 (1,042) 1,042
Morbidityclaims costs	— — (622) 622
Annuitant mortality	155 (155) 188 (188)
Lapses and surrenders	65 (65) (801) 801
Renewal expenses	(35) 35 (994) 994

The impact from changes to interest rates has been reflected in note 29 (F).

(d) Life insurance risk

The life insurance business of the Group involves a number of non-financial risks concerned with the pricing, acceptance and management of the mortality, morbidity and longevity risks accepted from policyholders. Financial risks involving the Group are in note 28.

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 Appointed Actuary. Tight controls are also maintained over claims management practices to ensure the correct and timely payment of insurance claims.

(i) Underwriting management procedures

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

(ii) Claim management procedures

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

(iii) Reinsurance management procedures

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

(iv)Terms and conditions of life insurance contracts

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

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

(e) 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.

(f) Liquidity risk and future net cash outflows

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

61

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

25. Life insurance business (continued)

(B) Net general insurance claims incurred

25. Life insurance	business_(continued)_
	TOTAL LESS THAN ONE YEAR ONE TO TWO YEARS TWO TO THREE YEARS THREE TO FIVE YEARS OVER FIVE YEARS
	$000 $000 $000 $000 $000 $000
30 September 2013	569,490 32,630 30,999 28,742 53,703 423,416
30 September 2012	201,098 778 1,421 2,697 5,945 190,257

		2013		2012
		RISKS BORNE IN CURRENT YEAR RISKS BORNE IN PRIOR YEARS TOTAL	RISKS BORNE IN CURRENT YEAR	RISKS BORNE IN PRIOR YEARS	TOTAL
		$000 $000 $000	$000	$000	$000
	Gross claims expense
	Direct claims –
	undiscounted	131,045 65,395 196,440	119,568	46,326	165,894
	Movement in discount Gross claims expense	(410) 2,788 2,378 130,635 68,183 198,818	(132) 119,436	3,106 49,432	2,974 168,868
	Reinsurance and other recoveries
	Reinsurance and other
	recoveries revenue –
	undiscounted	(6,844) (44,961) (51,805)	(4,975)	(39,586)	(44,561)
	Movement in discount Reinsurance recoveries	25 (100) (75) (6,819) (45,061) (51,880)	4 (4,971)	(23) (39,609)	(19) (44,580)
	Net claims incurred	123,816 23,122 146,938	114,465	9,823	124,288

(g) Insurer financial strength rating

TOWER Health & Life Limited and TOWER Life (NZ) Limited have insurer financial strength ratings of ‘A-’ (Excellent) issued by international rating agency A.M. Best Company Inc. with effective dates of 25 July 2013.

Following the sale of TOWER Health & Life Limited’s life insurance business and subsequent cancellation of its insurance licence in August, TOWER Health & Life Limited had its financial strength rating withdrawn by A.M. Best Company Inc. effective 30 August 2013 as it was no longer an insurance company with policyholder related insurance liabilities or risks.

26. General insurance business

These disclosures include an analysis of general insurance business, and where relevant include amounts relating to the health business which has been reclassified as disposal group held for sale

		Net claims incurred 123,816 23,122 146,938 114,465 9,823 124,288
(A) Analysis of general insurance operating result Premium revenue	GROUP COMPANY 2013 2012 2013 2012 $000 $000 $000 $000 267,160 238,859 — — (48,617) (41,137) — — 218,543 197,722 — — 198,818 168,868 — — (51,880) (44,580) — — 146,938 124,288 — — 36,281 35,621 — — 35,226 32,170 — — 98 5,643 — — 12,325 16,518 — — 12,423 22,161 — — 12,423 22,161 — —	Current year amounts relates to risks borne in the current financial year. Prior peri amounts relate to a reassessment of the risks borne in all previous financial years including those arising due to the Christchurch earthquakes. Refer to note 39. GROUP COMPANY 2013 2012 2013 2012 $000 $000 $000 $000 Central estimate of expected present value of futurepayments for claims incurred 56,996 69,775 — — Risk margin 19,350 6,248 — — Claims handlingcosts 3,061 7,007 — — 79,407 83,030 — — Discount (2,792) (12,329) — — Outstandingclaims liability 76,615 70,701 — — (C) Outstandin claims
Outward reinsurance expense
Netpremium income
Claims expense
Reinsurance recoveries
Net claims incurred
		Risk margin
Acquisition costs
		Claims handlingcosts
Other underwritingexpenses
Underwritingresult
		Discount
Investment and other income
		Outstandingclaims liability
Operating profit before taxation
		(C) Outstandin claims
Profit before taxation from general insurance

Current year amounts relates to risks borne in the current financial year. Prior period amounts relate to a reassessment of the risks borne in all previous financial years including those arising due to the Christchurch earthquakes. Refer to note 39.

(C) Outstanding claims

(a) Assumptions adopted in calculation of general insurance provisions

Estimates of the outstanding claims as at 30 September 2013 have been carried out by the following Actuaries:

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

C. Hett, FIA, FNZSA, Head of Actuarial Services, Deloitte

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

62 TOWER Limited and TOWER Capital Limited annual reports 2013

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

Inflation rates for succeeding year	2013 2012
	1.5% to 3.75% 1.5% to 4.25%
Inflation rates for following years	1.5% to 3.75% 1.5% to 4.25%
Discount rates for succeeding year	4.0% to 6.25% 2.9% to 6.75%
Discount rates for following years	4.0% to 6.75% 2.9% to 6.75%
Claims handlingexpense ratio	3.28% to 13.15% 4.7% to 22.97%
Risk margin	6.47% to 10.71% 15% to 25%

In addition to the risk margin range shown above, the total risk margin also includes $15,900,000 associated with the Christchurch earthquake.

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

Short tail claims	within 1year	within 1year
Longtail claims in the Pacific Islands	1.02 to 2.96years 1.05 to 2.36years
Inwards reinsurance	greater than 10 years	15.2years

Inflation rate

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

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

Discount rate

General insurance outstanding claims liabilities are discounted to present value using a risk free rate relevant to the term of the liability and the jurisdiction.

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 outstanding claim liability also includes a risk margin that relates to the inherent uncertainty in the central estimate of the future payments.

Risk margins are determined on a basis that reflects TOWER’s business. Regard is given to the robustness of the valuation models, the reliability and volume of available data, past experience of the insurer and the industry and the characteristics of the classes of business written.

Uncertainty in claims is represented as a volatility measure in relation to the central estimate. The volatility measure is derived after consideration of statistical modelling and benchmarking to industry analysis. The measure of the volatility is referred to as the coefficient of variation, defined as the standard deviation of the distribution of future cash flows divided by the mean.

Risk margins are calculated jurisdiction separately for long tail and shorttail business and aggregated for the portfolio. The risk margin for all classes when aggregated is less than the sum of the individual risk margins. This reflects the benefit of diversification. The measure of the parameter used to derive the diversification benefit is referred to as correlation, which is adopted with regard to industry analysis, historical experience and actuarial judgement.

The risk margins applied to future claims payments are determined with the objective of achieving at least 75% probability of sufficiency for both the outstanding claims liability and the unexpired risk liability.

The following analysis is in respect of the general and health insurance businesses:

e materials and goods insured as well as labour ese costs are expected to increase at a level between ice Index (CPI) indices and wage inflation.	The following analysis is in respect of the general and businesses:	health insuranc	e
	2013		2012
	GROSS REINSURANCE NET GROSS	REINSURANCE	NET
	$000 $000 $000 $000	$000	$000
Reconciliation of movements in discounted outstandingclaims liability
Balance brought forward	427,396 (356,695) 70,701 522,633	(441,367)	81,266
Effect of change in foreign exchange rates	(3,708) 3,830 122 (5,336)	190	(5,146)
Effect of changes in assumptions	(17,690) 271 (17,419) 3,480	(657)	2,823
Decrease in claims incurred anticipated overyear	— — — (4,092)	—	(4,092)
Incurred claims recognised in the income statement	198,818 (51,880) 146,938 272,789	(44,878)	227,911
Claim(payment)/ recoveries duringtheyear	(289,826) 166,099 (123,727) (351,120)	130,017	(221,103)
Reclassified as disposalgroupheld for sale	— — — (10,958)	—	(10,958)
Balance carried forward	314,990 (238,375) 76,615 427,396	(356,695)	70,701
Reconciliation of undiscounted claims to liabilityfor outstandingclaims
Outstandingclaims undiscounted	6,235 (130) 6,105 29,720	(3,892)	25,828
Discount	(2,482) 66 (2,416) (13,874)	1,791	(12,083)
Outstandingclaims	3,753 (64) 3,689 15,846	(2,101)	13,745
Short tail outstandingclaims	72,926		56,956
Total outstandingclaims asper balance sheet	76,615		70,701

63

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

26. General insurance business (continued)

(b) Sensitivity analysis

Generally all insurance business entered into is short tail in nature. Key sensitivities relate to the volume of claims and in particular those for significant events such as earthquakes or weather events.

The Group has exposure to some historic inwards reinsurance business and, while this business is not large, it is sensitive to claims experience, timing of claims and changes in assumptions. The movement in any of these key variables will impact the performance and equity of the Group. The business written is long tail in nature and therefore it will be more impacted by changes in assumptions over time. The following table describes how a change in each assumption for the inwards reinsurance business will affect the net insurance liabilities and shows an analysis of the sensitivity of the profit or loss and equity to changes in assumptions related to this business.

The prior year comparatives included the long tail business in Australia which is being held for sale.

	CHANGE IN FOLLOWING FINANCIAL YEAR’S SHAREHOLDER PROFIT AND EQUITY NET OF REINSURANCE
VARIABLE	MOVEMENT 2013 2012
Claim settlementperiod	$000 $000
	+ 0.5years (16) (267)
	- 0.5years 16 275
Claims expenses ratio	increase of 1% 13 122
	decrease of 1% (13) (122)
Inflation rates	increase of 1% 24 2,074
	decrease of 1% (23) (1,685)
Discount rates	increase of 1% (22) (1,745)
	decrease of 1% 23 2,119

(c) Future net cash out flows

The following table shows the expected run-off pattern of net undiscounted outstanding claims.

	2013 2012
	HEALTH INSURANCE GENERAL INSURANCE TOTAL HEALTH INSURANCE GENERAL INSURANCE TOTAL
	$000 $000 $000 $000 $000 $000
Expected Claims Run Off
Reclassified as disposal group held for sale — — — (10,958) — (10,958)
Within 3 months — 23,588 23,588 10,958 28,997 39,955
3 to 6 months — 7,596 7,596 — 9,985 9,985
6 to 12 months — 5,627 5,627 — 9,917 9,917
After 12 months — 39,804 39,804 — 21,802 21,802
Total — 76,615 76,615 — 70,701 70,701

(D) Risk management policies and procedures

The financial condition and operations of the general insurance business are affected by a number of key risks including insurance risk, interest rate risk, currency risk, market risk, financial risk, compliance risk, fiscal risk and operational risk, refer to note 28. 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 financial performance of the insurance operations and to ensure sound business practices are in place for underwriting risks and claims management;

The key processes and controls in place to mitigate risk arising from writing general insurance contracts include:

• comprehensive management information systems and actuarial models using historical information to calculate premiums and monitor claims

• monitoring natural disasters such as earthquakes, floods, storms and other catastrophes using models, and

• the use of reinsurance to limit the Group’s exposure to individual catastrophic risks.

(b) Concentration of insurance risk

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

(c) Development of claims

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

ULTIMATE CLAIMS COST ESTIMATE	INCIDENT YEAR
	PRIOR 2009 2010 2011 2012 2013 TOTAL
	$000 $000 $000 $000 $000 $000 $000
At end of incident year	120,934 110,287 113,814 113,839 123,816
Oneyear later	121,734 109,078 127,689 117,277 —
Twoyears later	120,395 108,277 147,024 — —
Threeyears later	120,354 108,968 — —
Fouryears later	120,330 — — — —
Current estimate of ultimate claims cost	120,330 108,968 147,024 117,277 123,816
Cumulative payments	(119,913) (108,085) (128,720) (114,201) (94,428)

64 TOWER Limited and TOWER Capital Limited annual reports 2013

(H) Solvency requirements

									(H) Solvenc reuirements
			INCIDENT YEAR						y q
	PRIOR	2009	2010	2011	2012		2013 TOTAL		The minimum solvency capital required to be retained to me
ULTIMATE CLAIMS									requirements under the Insurance (Prudential Supervision) A
COST ESTIMATE	$000	$000	$000	$000	$000		$000 $000		below. The actual solvency capital exceeds the minimum req
Undiscounted central estimate	4,928	417	884	18,303	3,076		29,388 56,996		TOWER Insurance Limited general insurance group by $117
Discount to present
value	(2,307)	(11)	(13)	(30)	(47)		(384) (2,792)		2013 2012
Discounted central									$000 $000
estimate	2,621	406	871	18,273	3,029		29,004 54,204		Actual SolvencyCapital 195,993 120,902
Claims handlingexpense							3,061		Minimum SolvencyCapital 78,805 81,894
Risk margin							19,350		SolvencyMargin 117,188 39,008
Net outstandingclaims liabilities							76,615
Reinsurance recoveries on outstanding other recoveries			claims	liabilities	and		238,375		On 27 August 2013 the Reserve Bank of New Zealand impo of license requirement for TOWER Insurance Limited to main
Gross outstandingclaims liabilities							314,990		solvency margin of $80.0 million.

The minimum solvency capital required to be retained to meet solvency requirements under the Insurance (Prudential Supervision) Act 2010 are shown below. The actual solvency capital exceeds the minimum requirements for TOWER Insurance Limited general insurance group by $117.2 million.

On 27 August 2013 the Reserve Bank of New Zealand imposed a condition of license requirement for TOWER Insurance Limited to maintain a minimum solvency margin of $80.0 million.

The methodology and bases for determining the Solvency Margin are in accordance with the requirements of the Solvency Standard for Non-life Insurance Business published by the Reserve Bank of New Zealand.

(E) Liability adequacy test

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

27. Financial instrument categories

The analysis of financial assets and liabilities into their categories and classes is set out in the following tables.

GROUP
TOTAL LOANS AND RECEIVA- BLES	FAIR VALUE THROUGH PROFIT OR LOSS
	DESIGNATED HELD FOR TRADING
As at 30 September 2013 $000 $000	$000 $000
Financial assets
Cash and cash equivalents 341,624 341,624	— —
Reinsurance recoveries receivable 257,310 257,310	— —
Outstanding premiums and trade receivables 114,535 114,535	— —
Unsettled investments sale 601 601	— —
Other receivables 4,865 4,865	— —
Derivative financial assets 122 —	— 122
Investment in equitysecurities 1,685 —	1,685 —
Investment in fixed interest securities 144,897 —	144,897 —
Investment in property securities 855 —	855 —
Total financial assets 866,494 718,935 147,437 122

If the unearned premium liability less related deferred acquisition costs exceeds the present value of the expected future cash flows plus the additional risk margin to reflect the inherent uncertainty in the central estimate then the unearned premium liability is deemed to be sufficient. The risk margins applied to future claims were determined with the objective of achieving at least 75% probability of sufficiency of the unexpired risk liability using the same methodology as described above.

		CENTRAL
	ESTIMATE CLAIM
	% OF PREMIUM 2013 2012		RISK MARGIN 2013 2012
General Insurance	43.7%	42.3%	11.8%	11.4%

Unearned premium liabilities as at 30 September 2013 were sufficient (2012: sufficient).

(F) Insurer financial strength rating

TOWER Insurance Limited has an insurer financial strength rating of ‘A-’ (Excellent) issued by international rating agency A.M. Best Company Inc. with an effective date of 25 July 2013.

(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 financial significance for TOWER is a major Wellington earthquake. Each year, as part of setting the coming year’s reinsurance cover, comprehensive modelling of the event probability and amount of the Group’s exposure is undertaken.

65

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

27. Financial instrument categories (continued)

GROUP
	TOTAL		LOANS	FAIR VALUE THROUGH
			AND	PROFIT OR LOSS
			RECEIVA- BLES			HELD FOR
				DESIGNATED		TRADING
As at 30 September 2012	$000		$000	$000		$000
Financial assets
Cash and cash equivalents	186,477		186,477	—		—
Reinsurance recoveries
receivable	376,427		376,427	—		—
Outstanding premiums and trade receivables	139,235		139,235	—		—
Unsettled investments sale	857		857	—		—
Other receivables	10,928		10,928	—		—
Derivative financial assets	91,026		—	—		91,026
Investment in equitysecurities	97,617		—	97,617		—
Investment in fixed interest
securities	700,609		—	700,609		—
Investment in property
securities	55,201		—	55,201		—
Total financial assets	1,658,377		713,924	853,427		91,026
GROUP
	TOTAL		FAIR VALUE THROUGH			FINANCIAL
			PROFIT OR LOSS			LIABILITIES
						AT AM-
				HELD FOR		ORTISED
			DESIG NATED	TRADING		COST
As at 30 September 2013	$000		$000	$000		$000
Financial liabilities
Tradepayables	11,902		—	—		11,902
Reinsurancepayables	5,864		—	—		5,864
Unsettled investment purchases	—		—	—		—
Otherpayables	6,204		—	—		6,204
Interest bearingliabilities	82,791		—	—		82,791
Derivative financial liabilities	—		—	—		—
Life investment contract liabilities	—		—	—		—
Total financial liabilities	106,761		—	—		106,761
As at 30 September 2012
Financial assets
Tradepayables	22,237		—	—		22,237
Reinsurancepayables	8,583		—	—		8,583
Unsettled investment
purchases	21		—	—		21
Otherpayables	12,720		—	—		12,720
Interest bearingliabilities	81,990		—	—		81,990
Derivative financial liabilities	170		—	170		—
Life investment contract
liabilities	27,476		27,476	—		—
Total financial liabilities	153,197		27,476	170		125,551

GROUP				COMPANY
TOTAL LOANS AND RECEIVA- BLES		FAIR VALUE THROUGH PROFIT OR LOSS		As at 30 September 2013	TOTAL LOANS AND RECEIV ABLES
		DESIGNATED HELD FOR TRADING			$000 $000
				Financial assets
As at 30 September 2012 $000 $000		$000 $000
				Cash and cash equivalents	1,507 1,507
Financial assets
				Other receivables	— —
Cash and cash equivalents 186,477 186,477		— —
				Relatedpartyreceivables	20,008 20,008
Reinsurance recoveries receivable 376,427 376,427		— —
				Total financial assets	21,515 21,515
Outstanding premiums and trade receivables 139,235 139,235		— —		As at 30 September 2012
				Financial assets
Unsettled investments sale 857 857		— —
				Cash and cash equivalents	72,928 72,928
Other receivables 10,928 10,928		— —
				Other receivables	277 277
Derivative financial assets 91,026 —		— 91,026
				Relatedpartyreceivables	1,975 1,975
Investment in equitysecurities 97,617 —		97,617 —
				Total financial assets	75,180 75,180
Investment in fixed interest securities 700,609 —		700,609 —
Investment in property securities 55,201 —		55,201 —
				COMPANY
Total financial assets 1,658,377 713,924 853,427 91,026					TOTAL FINANCIAL LIABILITIES AT AMORTISED COST
GROUP					$000 $000
TOTAL	FAIR VALUE THROUGH PROFIT OR LOSS FINANCIAL LIABILITIES AT AM- ORTISED COST DESIG NATED HELD FOR TRADING			As at 30 September 2013
				Financial liabilities
				Otherpayables	1,732 1,732
As at 30 September 2013 $000	$000 $000 $000			Relatedparty payables	102,345 102,345
Financial liabilities
				Total financial liabilities	104,077 104,077
Tradepayables 11,902	— — 11,902
				As at 30 September 2012
Reinsurancepayables 5,864	— — 5,864			Financial liabilities
Unsettled investment purchases —	— — —			Otherpayables	1,554 1,554
Otherpayables 6,204	— — 6,204			Relatedparty payables	188,600 188,600
Interest bearingliabilities 82,791	— — 82,791			Total financial liabilities	190,154 190,154
Derivative financial liabilities —	— — —
Life investment contract liabilities —	— — —
Total financial liabilities 106,761 — — 106,761
As at 30 September 2012
Financial assets
Tradepayables 22,237 — — 22,237
Reinsurancepayables 8,583 — — 8,583
Unsettled investment purchases 21 — — 21
Otherpayables 12,720 — — 12,720
Interest bearingliabilities 81,990 — — 81,990
Derivative financial liabilities 170 — 170 —
Life investment contract liabilities 27,476 27,476 — —
Total financial liabilities 153,197 27,476 170 125,551

28. Risk management and financial instrument information

The financial condition and operating results of the Group are affected by a number of key financial and non-financial risks. Financial risks include market risk, credit risk, financing and liquidity risk. The non-financial risks include insurance risk, compliance risk and operational risk. The Group’s objectives and policies in respect of insurance risks are disclosed in notes 25 and 26, while the managing of financial and other non financial risks are set out in the remainder of this section.

TOWER’s objective is to satisfactorily manage these risks in line with the Board approved Group Risk and Compliance framework policy. Various procedures are in place to help identify, mitigate and monitor the risks faced by the Group. Business managers are responsible for understanding and managing their risks including operational and compliance risk. The consolidated entity’s exposure to all high and critical risks is reported monthly to the board and quarterly to the Group Audit and Risk Committee.

66 TOWER Limited and TOWER Capital Limited annual reports 2013

The Board has delegated to the Group Audit and Risk Committee the responsibility to review the effectiveness and efficiency of management processes, internal audit services, group risk management and internal financial controls and systems as part of their duties. A Group Risk and Compliance team is in place in an oversight and advisory capacity and to manage the risk and compliance framework.

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. The Board is responsible for:

The Board is responsible for the management of the interest rate risk arising from external borrowings. As at 30 September 2013 there were no interest rate swaps in place in relation to external borrowings (2012: nil). The Group manages interest rate risk arising from its interest bearing investments in accordance with Group Investment Committee approved policies.

General insurance

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

• 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 counterparty approvals, and the scope of financial instruments to be used in the management of TOWER’s investments

• reviewing the appointment of external investment managers

• monitoring investment and fund manager performance, and

• monitoring compliance with investment policies and client mandates.

(A) Market risk

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

The impact of reasonably possible changes in market risk on the Group shareholders’ profit and equity is included in note 28(F) below.

(i) Currency risk

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

TOWER’s principal transactions are carried out in New Zealand Dollars and its exposure to foreign exchange risk arises primarily with respect to the Pacific Island General Insurance business.

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

The Board sets limits for the management of currency risk arising from its investments based on prudent international asset management practice. Regular reviews are conducted to ensure that these limits are adhered to. In accordance with this policy, TOWER does not hedge the currency risk arising from translation of the financial statements of foreign operations other than through net investments in 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’s and British Pounds. The notional amounts and contractual cash flows of these derivatives are included in note 28(E) below.

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 profits.

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

• For a portion of the life investment contract business, the mismatch between the value of financial 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 solvency as advised by the Appointed 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 diversification of the investment portfolio, which is done in accordance with the limits set by investment mandates and monitored by the Board.

(B) Credit risk

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

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

The Company has no significant exposure to credit risk. Credit exposure in respect of the Company’s cash balances is limited to institutions with minimum AA credit ratings.

(ii) Interest rate risk

Interest rate risk is the risk that the value or future value cash flows of a financial instrument will fluctuate because of changes in interest rates.

67

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

28. Risk management and financial instrument information (continued)

(i) Credit risk concentration

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

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

	Group1	361,555	486,671
	Group2	—	—
	Group3	12,499	38,712
	Total counterparties with no external credit rating	374,054	525,383
	Total financial assets neither past due nor impaired with credit exposure	849,379	1,484,064

New Zealandgovernment	CARRYING VALUE
	2013 2012
	$000 $000
	13,773 58,965
Othergovernment agencies	23,635 109,141
Banks	447,835 778,296
Financial institutions	1,920 11,466
Other non-investment related receivable	373,077 508,554
Other industries	3,114 39,137
Total financial assets with credit exposure	863,354 1,505,559

Group 1 – trade debtors outstanding for less than 6 months

Group 2 – trade debtors outstanding for more than 6 months with no defaults in the past Group 3 – unrated investments

TOWER invests in a number of Pacific region investment markets through its Pacific Islands operations to comply with 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. These investments represent the majority of the value included in the ‘Below BBB’ and unrated categories in the table above.

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

None of the financial assets that are fully performing have been renegotiated in the past year (2012: Nil).

(ii) Maximum exposure to credit risk

The Group’s maximum exposure to credit risk without taking account of any collateral or any other credit enhancements, is as follows:

Cash and cash equivalents	CARRYING VALUE
	2013 2012
	$000 $000
	341,624 186,477
Loans and receivables	376,711 527,447
Financial assets at fair value throughprofit or loss	144,897 700,609
Derivative financial assets	122 91,026
Total credit risk	863,354 1,505,559

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

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

Credit exposure bycredit rating	CARRYING VALUE
	2013 2012
	$000 $000
AAA	59,602 315,839
AA	397,872 605,413
A	5,053 21,850
Below BBB	12,798 15,579
Total counterparties with external credit rating by Standard and Poor’s	475,325 958,681

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

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

	PAST DUE BUT NOT IMPAIRED
	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 2013
Reinsurance recoveries receivable	80 474 620 3,509 4,683
Outstanding premiums and trade receivables	5,550 2,434 1,098 210 9,292
Total	5,630 2,908 1,718 3,719 13,975
As at 30 September 2012
Reinsurance recoveries receivable	2,854 1,113 853 2,750 7,570
Outstanding premiums and trade receivables	8,250 3,428 1,679 568 13,925
Total	11,104 4,541 2,532 3,318 21,495

The parent company does not have past due financial assets as at 30 September 2013 (2012: Nil).

(vi) Financial assets that are individually impaired

	CARRYING VALUE
	2013 2012
	$000 $000
Outstanding premiums and trade receivables	— —
Total	— —

68 TOWER Limited and TOWER Capital Limited annual reports 2013

(C) Financing and liquidity risk

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

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

(i) Financial liabilities and guarantees by contractual maturity

The table below summarises the Group’s financial 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 flows that include interest payments and exclude the impact of netting agreements.

• 1 Please see note 29(E) for total cash flows for forward foreign exchange contracts

GROUP

	GROUP
		CARRYING VALUE	TOTAL CONTRACTUAL CASH FLOWS	LESS THAN ONE YEAR	ONE TO TWO YEARS	TWO TO FOUR YEARS	OVER FIVE YEARS	ON DEMAND
	As at 30 September 2013	$000	$000	$000	$000	$000	$000	$000
	Financial liabilities andguarantees
	Tradepayables	11,902	11,902	11,902	—	—	—	—
	Reinsurancepayables	5,864	5,864	5,864	—	—	—	—
	Unsettled investmentpurchases	—	—	—	—	—	—	—
	Otherpayables	6,204	6,204	6,204	—	—	—	—
	Derivative financial liabilities1	—	—	—	—	—	—	—
	Interest bearingliabilities	82,791	85,510	85,510	—	—	—	—
	Life investment contract liabilities	—	—	—	—	—	—	—
	Funds investedguarantee	—	—	—	—	—	—	—
	Total financial liabilities andguarantees	106,761	109,480	109,480	—	—	—	—
	As at 30 September 2012
	Financial liabilities andguarantees
	Tradepayables	22,237	22,237	22,237	—	—	—	—
	Reinsurancepayables	8,583	8,583	8,583	—	—	—	—
	Unsettled investmentpurchases	21	21	21	—	—	—	—
	Otherpayables	12,720	12,720	12,720	—	—	—	—
	Derivative financial liabilities(1)	170	5,599	5,498	67	34	—	—
	Interest bearingliabilities	81,990	92,460	6,950	85,510	—	—	—
	Life investment contract liabilities	27,476	27,476	—	—	—	—	27,476
	Funds investedguarantee	880	880	—	—	—	—	880
	Total financial liabilities andguarantees	154,077	169,976	56,009	85,577	34	—	28,356

COMPANY
As at 30 September 2013	CARRYING VALUE TOTAL CONTRACTUAL CASH FLOWS $000 $000		LESS THAN ONE YEAR $000	ON DEMAND $000
Financial liabilities
Relatedparty payables	102,345	102,345	—	102,345
Otherpayables	1,735	1,732	1,732	—
Total financial liabilities	—	—	—	—
As at 30 September 2013
Financial liabilities
Relatedparty payables	188,600	188,600	—	188,600
Otherpayables	1,554	1,554	1,554	—
Total financial liabilities	190,154	190,154	1,554	188,600

(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. Refer below for details of valuation methods used for each category of financial assets and liabilities.

The carrying amounts of all financial assets and liabilities reasonably approximate their fair values with the exception of senior unsecured bonds which is disclosed in note 17.

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

(i) Cash and cash equivalents

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

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

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

69

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

28. Risk management and financial instrument information (continued)

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

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

(iv) Derivative financial liabilities

The fair value of derivative financial liabilities is determined by 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.

GROUP As at 30 September 2013	TOTAL $000	LEVEL 1 $000	LEVEL 2 $000	LEVEL 3 $000
Assets
Derivative financial assets	122	—	122	—
Investment in equitysecurities	1,685	—	—	1,685
Investments in fixed Interest securities	144,897	—	144,897	—
Investments inpropertysecurities	855	—	855	—
Total financial assets	147,559	—	145,874	1,685
Liabilities
Derivative financial liabilities	—	—	—	—
Life investment contract liabilities	—	—	—	—
Total financial liabilities	—	—	—	—
As at 30 September 2012
Assets
Derivative financial assets	91,026	—	91,026	—
Investment in equitysecurities	97,617	46,334	48,032	3,251
Investments in fixed Interest securities	700,609	—	700,609	—
Investments inpropertysecurities	55,201	—	55,201	—
Total financial assets	944,453	46,334	894,868	3,251
Liabilities
Derivative financial liabilities	170	—	170	—
Life investment contract liabilities	27,476	—	27,476	—
Total financial liabilities	27,646	—	27,646	—

The fair value of financial 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 financial assets held by the Group is the current bid price. These instruments are included in Level 1.

The fair value of financial 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 specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2.

If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. At 30 September 2013, the level 3 category includes an investment in equity securities of $1,685,000 (2012: $3,251,000). Previously these investments were included in level 2 and were immaterial. This investment is unlisted and its fair value is calculated based on the net assets of the investment as per its most recently available financial information.

The following table represents the changes in Level 3 instruments for the year ended 30 September 2013.

	INVESTMENT IN EQUITY SECURITIES
Openingbalance	2013 2012
	$000 $000
	3,251 —
Total gains and losses recognised in profit and loss	(1,050) 1,052
Foreign currencymovement	(516) 67
Transfers in/out	— 2,132
Closingbalance	1,685 3,251

The following table shows the sensitivity of Level 3 measurements to reasonably possible favourable or unfavourable changes in assumptions used to determine the fair value of the financial asset. If the market value of the investment in equity securities were to change by +/- 10% the impact is outlined below:

2013	CARRYING AMOUNT FAVOUR ABLE CHANGES OF 10% UNFAVOUR ABLE CHANGES OF 10%
	$000 $000 $000
Investment in equitysecurities	1,685 169 (169)
2012
Investment in equitysecurities	3,251 325 (325)

Specific valuation techniques used to value financial instruments include:

• 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 flows based on observable yield curves.

• Other techniques, such as discounted cash flow analysis, are used to determine fair value for remaining financial instruments.

70 TOWER Limited and TOWER Capital Limited annual reports 2013

(E) Derivative financial instruments

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

Derivative financial 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 flows based on the terms and maturity of each contract using market interest rates. The average interest rate is based on the outstanding balances at the start of the financial year.

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

Less than 1year	AVERAGE CONTRACTED FIXED NOTIONAL PRINCIPAL AMOUNT FAIR VALUE
	2013 2012 2013 2012 2013 2012
	% % $000 $000 $000 $000
	0% 0% — — — —
1 to 2years	0% 0% — — — —
2 to 5years	0% 3% 10,400 10,400 34,208 —
over 5years	0% 7% — 360,588 — 91,026
	10,400 370,988 34,208 91,026

Foreign exchange forward contracts are settled on a gross basis. All contracts mature within 12 months of the reporting date and their carrying values reasonably approximate undiscounted cash flows because the impact of discounting is not significant.

GROUP		TOTAL
	CONTRACTUAL		LESS THAN
	CASH FLOWS		ONE YEAR
As at 30 September 2013		$000		$000
Forward foreign exchange contracts
Outflow		—		—
Inflow		—		—
As at 30 September 2012
Forward foreign exchange contracts
Outflow	(62,948)		(62,948)
Inflow	63,173			63,173

(i) Interest rate

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

Change in variables	2013 2012
	IMPACT ON IMPACT ON
	PROFIT AFTER TAX EQUITY PROFIT AFTER TAX EQUITY
	$000 $000 $000 $000
+50 basispoints	(879) (879) (3,145) (3,145)
–50 basispoints	584 584 3,262 3,262

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

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

The impact of changes in market interest rates presented here excludes insurance contract liabilities, which are also affected by the changes in market interest rates that determine the discount rates applicable to these contracts.

The table below provides a sensitivity analysis in respect of changes in interest rates as applied to insurance contract liabilities. A combined effect is necessary to appreciate the sensitivity of the Group’s profit to movements in interest rates.

Change in variables	2013 2012
	IMPACT ON IMPACT ON
	PROFIT AFTER TAX EQUITY PROFIT AFTER TAX EQUITY
	$000 $000 $000 $000
+50 basispoints	— — (4,375) (4,375)
–50 basispoints	— — 4,343 4,343

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

(ii) Foreign currency

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

(F) Sensitivity analysis

The analysis below demonstrates the impact of changes in interest rates, exchange rates and equity prices on profit after tax and equity on continuing business. 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.

71

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Risk management and financial instrument information (continued)

	2013		2012		2013		2012
	IMPACT ON		IMPACT ON		IMPACT ON	IMPACT ON
	PROFIT	PROFIT			PROFIT	PROFIT
	AFTER TAX EQUITY $000 $000	AFTER TAX $000	EQUITY $000		AFTER TAX EQUITY $000 $000	AFTER TAX $000	EQUITY $000
Change in variables 10% appreciation of New Zealand				Change in variables
dollar	291 (6,812)	970	(10,435)	+10%propertyfunds and other unit trusts	59 59	787	787
10% depreciation of New Zealand dollar	(274) 8,408	(1,182)	12,757	–10%propertyfunds and other unit trusts	(59) (59)	(787)	(787)
				+10% in International equities	— —	130	130
The dollar impact of the change in	currency movements is	determined	by	–10% in International equities	— —	(130)	(130)

The dollar impact of the change in currency movements is determined by applying the sensitivity to the value of the unhedged international assets. The risks assumed and methods used for deriving sensitivity information and significant variables have been applied consistently over the reporting period included in the analysis.

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

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

(iii) Equity price

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

29. Capital risk management

The table below demonstrates the impact of a 10% movement in New Zealand equities on the profit after tax and equity of the Group. The potential impact is assumed as at the reporting date.

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

Change in variables	2013 2012 IMPACT ON IMPACT ON PROFIT AFTER TAX EQUITY PROFIT AFTER TAX EQUITY $000 $000 $000 $000 — — 44 44 — — (44) (44) New Zealand equities is determined by	returns for shareholders and benefits for other stakeholders of th The Group’s capital resources include ordinary shareholders’ eq bearing liabilities. GROUP 2013 2012 $000 $000 Interest bearingliabilities(Note 17) 82,791 81,990	returns for shareholders and benefits for other stakeholders of th The Group’s capital resources include ordinary shareholders’ eq bearing liabilities. GROUP 2013 2012 $000 $000 Interest bearingliabilities(Note 17) 82,791 81,990
			GROUP
			2013 2012
+10% in New Zealand equities			$000 $000
–10% in New Zealand equities			82,791 81,990
The dollar impact of the change in		TOWER shareholder equity	379,815 497,346
		Total capital resources	462,606 579,336

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

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 significant variables have been applied consistently over the two reporting periods included in the analysis.

The Group measures adequacy of their capital against Solvency Standards for Non-life Insurance and Life Insurance Business (the solvency standards) published by the Reserve Bank of New Zealand (RBNZ) alongside additional capital held to meet RBNZ minimum requirements and any further capital as determined by the Board.

(iv) Other price

Other price sensitivity includes sensitivity to unit price fluctuations. 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 profit or loss.

From August 2013 the Group is required to maintain a minimum solvency margin of no less than $80,000,000 in TOWER Insurance Limited and $15,000,000 in TOWER Life (N.Z.) Limited. The actual solvency capital as determined under the solvency standards should exceed the minimum solvency capital level by at least these amounts. The amount retained as minimum solvency capital is shown in note 25 (C) and note 26 (H).

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

During the year ended 30 September 2013 the Group complied with all externally imposed capital requirements.

The Group holds assets in excess of the levels specified by the various solvency requirements 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 Audit and Risk Committee.

72 TOWER Limited and TOWER Capital Limited annual reports 2013

30. Operating leases

As lessee	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Rent paid under non-cancellable operating leases duringtheyear	4,413 4,227 — —
Rent payable under non-cancellable operating leases to the end of the lease terms are:
– Not later than oneyear	4,703 5,694 — —
– Later than one year and not later than fiveyears	1,569 2,524 — —
– Later than fiveyears	293 553 — —
	6,565 8,771 — —

Operating lease payments represent the future rentals payable for office space under current leases. Initial leases were for an average of four years with rental rates reviewed every two to six years.

31. Cash and cash equivalents

(A) Reconciliation of cash at the end of the year

Cash at bank and in hand Deposits at call	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
	15,100 22,763 1,507 2,448
	326,524 163,714 — 70,480
Total cash and cash equivalents	341,624 186,477 1,507 72,928

The effective interest rate for deposits at call is 3.0% (2012: 3.0%). The balances primarily mature within three months of balance date.

(B) Reconciliation of profit for the period to net cash flows from operating activities

	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
Profit after tax for theyear	34,375 55,824 178,786 20,390
Add/(less)non-cash items
Depreciation of property, plant and equipment	1,829 2,207 — —
Amortisation of software	3,648 2,697 — —
Change in life insurance and life investment contract liabilities	(25,316) 5,783 — —
Unrealisedgain on financial assets	41,902 (20,106) — —
Share based payments expense and movement in fair value of employee share option derivative	17 92 — —
Decrease in deferred tax	(13,959) 8,198 — —
(Gain)/loss on disposal of property, plant and equipment 420 (131) — —
Intangible asset impairment net of tax 32,328 — — —
Grossgain on sale of subsidiaries (96,056) — — —
(20,812) 54,564 178,786 20,390
Add/(less) movements in working capital (excluding the effects of exchange differences on consolidation)
Decrease in receivables 106,464 64,434 277 53
(Decrease)/increase inpayables (87,379) (66,013) (177,549) 1,709
(Increase)/decrease in taxation (9,130) 16,958 — —
9,955 15,379 (177,272) 1,762
Add other items classified as financingactivities
Decrease in capitalised costs 800 727 — —
Net cash inflow/(outflow) from operatingactivities (10,057) 70,670 1,514 22,152

32. Contingent liabilities

The Group has the following contingent liabilities as at 30 September 2013 (2012: Nil).

TOWER Limited has a contingent liability at 30 September 2013 in respect of guarantee obligations arising under the Sale and Purchase Agreement for the sale of non-participating life insurance business to Fidelity Life Assurance Company Limited. This contingent liability is limited to $10 million in aggregate and is only in respect of claims notified within four months of the transaction’s completion (i.e. between 1 August 2013 and 1 December 2013).

The Group is occasionally subject to claims and disputes as a commercial outcome of conducting its insurance business. Provisions are recorded for these claims or disputes when it is probable that an outflow of resources will be required to settle any obligations. Best estimates are included within claims reserves for any litigation that has arisen in the usual course of business.

73

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

33. Capital commitments

The Group has capital commitments of approximately $2,556,000 at reporting date related to software under development (2012: $6,792,000).

34. Share based payments

The Company has one active executive share option scheme. The equity settled conditions 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 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. The holders of the options are not entitled to dividends or have other shareholder benefits, including voting rights.

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

			NUMBER OF OPTIONS	NUMBER OF OPTIONS		WEIGHTED	WEIGHTED
	30 September						AVERAGE EXERCISE
	2012	TRANCHE D	TRANCHE E	TRANCHE F	TRANCHE G	TRANCHE I	PRICE
	Outstanding at
	start ofyear	300,000	3,000,000	500,000	200,000	300,000	$1.97
	Forfeited Outstanding at the end of	(300,000)	—	(200,000)	—	—	$2.32
	theyear	—	3,000,000	300,000	200,000	300,000	$1.92
	Exercisable at
	the end of the
	year	—	3,000,000	300,000	200,000	—	$1.92

All tranches have been fully vested as at 30 September 2013. The weighted average share price at the date of exercise of share options in 2013 was $1.38. The exercise prices for options outstanding as at 30 September 2013 is $2.10 (2012: range from $1.38 to $2.10) and the weighted average remaining contractual life is 2 months (2012: 0.5 years).

TERMS OF SHARE SCHEMES	TRANCHE F
Exerciseprice after rights issue	$2.10
Grant date	11-Dec-07
Vestingdate	1-Dec-10
Expirydate	1-Dec-13
Expected volatility	20%
Risk free rate	5.71%
Amount expensed during2013year($000)	—
Amount expensed during2012year($000)	—

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

The expected life is based on best estimates of management allowing for nontransferability, exercise restrictions and behavioural considerations. No share options were issued in 2013 (2012: Nil).

Amounts expensed during the 2013 year of $17,354 related to Tranche I share options that were later forfeited.

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

of the year.
30 September 2013	NUMBER OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICE TRANCHE E TRANCHE F TRANCHE G TRANCHE I
Outstanding at start ofyear	3,000,000 300,000 200,000 300,000 $1.92
Granted
Forfeited	(3,000,000) (200,000) —(300,000) $1.95
Exercised	(200,000) $1.38
Outstanding at the end of theyear	— 100,000 — — $2.10
Exercisable at the end of theyear	— 100,000 — — $2.10

35. Transactions and balances with related parties

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

Up until 29 September 2013, Guinness Peat Group Plc (GPG) held approximately 34% of TOWER’s shares, which made 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. As with all shareholders, GPG participated in the return of capital arrangement approved by TOWER Limited shareholders at the Annual Shareholders’ Meeting on 21 March 2013, and had 3 in every 13 of its ordinary shares cancelled. TOWER paid $1.92 for each share cancelled.

(A) Subsidiaries

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

RELATED PARTY	2013 2012 NATURE OF RELATIONSHIP TYPE OF TRANSACTION $000 $000
TOWER Financial Services GroupLimited
	—(178,453) Subsidiary Advance
TOWER New Zealand Limited 20,008 (10,147) Subsidiary Advance
TOWER consolidated tax groupmembers — 1,975 Subsidiary Tax losses
TOWER Health & Life Limited (102,346) — Subsidiary Loan

The receivable owing from TOWER consolidated tax group members in 2013 of nil (2012: $1,975,000) represents the benefit 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 12 except for TOWER Option Scheme Limited are members of the TOWER consolidated tax group.

74 TOWER Limited and TOWER Capital Limited annual reports 2013

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:

RELATED PARTY	2013 2012 NATURE OF RELATIONSHIP TYPE OF TRANSACTION $000 $000
TOWER New Zealand Limited
	29,333(8,133) Subsidiary Settlement/ Advance
TOWER Financial Services GroupLimited	178,453 18,960 Subsidiary Dividend
TOWER Health & Life Limited(102,346) — Subsidiary Loan
TOWER New Zealand Limited (1,153) (5,030) Subsidiary Group tax loss offset

(B) Key management personnel compensation

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

Salaries and other short-term employee benefitspaid	GROUP COMPANY
	2013 2012 2013 2012
	$000 $000 $000 $000
	3,384 3,342 — —
Termination benefits	1,042 273 — —
Share basedpayments	17 89 — —
Independent directors fees1	824 624 724 624
	5,267 4,328 724 624

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

(C) Loans to key management personnel

There have been no loans made to directors of the Company and other key management personnel of the Group, including their personally related parties (2012: Nil).

(D) Other transactions with key management personnel

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

36. Investment linked and non-investment linked business of life insurance companies

36. Investment linked insurance companies	and non-investment linked business of life
GROUP	2013 2012
Investment assets	INVESTMENT LINKED NON- INVESTMENT LINKED INVESTMENT LINKED NON- INVESTMENT LINKED
	$000 $000 $000 $000
	— — 27,476 838,347
Other assets	— — — 17,617
Policyholder liabilities	— — (27,476) (591,457)
Other liabilities	— — — (57,906)
Net assets	— — — 206,601
Retained earnings	— — — 189,065

Investment revenue allocated to policyholders was nil (2012: $3,177,000) due to the sale of the non-participating life business as disclosed in discontinued operations note 41.

37. Earnings per share

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

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

There was no dilutive impact of outstanding share options on basic earnings per share for 2013 (2012: Nil).

	GROUP
	2013 2012
	$000 $000
Profit attributable to shareholders	34,245 55,339
Weighted average number of ordinary shares for basic and diluted earningsper share
	NUMBER OF SHARES NUMBER OF SHARES
	207,193,438 266,639,339
Basic and diluted earnings per share from continuingoperations
	CENTS CENTS
	0.12 7.10
Basic and diluted earnings per share from discontinued operations	14.24 13.66

38. Business combination

There have been no business combinations in the current financial year to 30 September 2013.

On 24 September 2012, TOWER Life (N.Z.) Limited moved from 52% to 100% ownership of the units in TAM International Income Fund (the Fund), a unitised equity investment trust.

The Fund is held for the benefit of policyholders, and during the 6 day period from 24 September 2012 to 30 September 2012 it reported revenues of ($967,000) and a net loss of ($1.04 million). If the increase in units held to 100% had occurred on 1 October 2011, revenues from the Fund would have been $19.2m and profit would have been $19.8m.

No cash was paid as consideration for the additional ownership. Control was obtained through the withdrawal of funds by other members of the Fund.

The assets and liabilities arising from the acquisition at 24 September were as follows:

Cash and cash equivalents	FAIR VALUE ACQUIREE’S CARRYING AMOUNT
	$000 $000
	3,389 3,389
Receivables	1,857 1,857
Financial assets at fair value through profit and loss	161,669 161,669

75

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Business combination (continued)

Other assets – intercompany receivable	FAIR VALUE ACQUIREE’S CARRYING AMOUNT
	$000 $000
	11 11
Deferred tax asset	11,693 11,693
Total assets	178,619 178,619
Payables	84,352 84,352
Total liabilities	84,352 84,352
Net assets	94,267 94,267

39. Impact of Canterbury earthquakes

For the year ended 30 September 2013, the income statement includes gross incurred claims and claims management team expenses of $72,245,982 (2012: $64,986,944) less reinsurance recoveries of $51,878,598 (2012: $46,094,128) in respect of the 4 September 2010, 22 February 2011, 13 June 2011 and 23 December 2011 earthquakes, resulting in a pre tax net claims related expense of $20,367,384 (2012: $18,892,816). Of this pre tax net claims related expense $19,700,000 is a result of the 22 February 2011 earthquake and $667,384 is a result of the 23 December 2011 earthquake. The net risk margin disclosed in note 23 includes $15,900,000 associated with the Canterbury earthquakes.

In October 2013, TOWER Limited confirmed the successful placement of its reinsurance programme for the TOWER Limited Group for the 2013/14 financial year. The programme again involves reinsurance cover for two catastrophe events. TOWER has continued to enhance its reinsurance programme, with the limit for 2013/14 increased to $585 million per event (2012: $525 million) (the excess for an event in 2013/14 is $10.0 million compared with $11.7 million for the 2012/13 programme).

40. Subsequent events

Dividend declared

On 26 November 2013 the Directors declared a dividend of 6 cents per share. There will be no imputation credits attached to the dividend. The dividend will be paid on 3 February 2014 (Payment Date) to all shareholders on the register as at 5pm on Tuesday, 22 January 2014 (Record Date). The estimated dividend payable is $12,432,000 based on the share register at 30 September 2013.

TOWER will not be operating the Dividend Reinvestment Plan for the final dividend. TOWER will withhold resident and non-resident withholding tax where applicable.

Return of capital

On 25 November 2013 the Board passed a resolution approving the return of approximately $70 million of capital to shareholders via an off market, pro rata buy back. A formal offer document to shareholders will be issued in December 2013.

Statutory fund

On 1 October 2013, TOWER Life (N.Z) Limited established a statutory fund in accordance with the Insurance (Prudential Supervision) Act 2010 (IPSA). All life insurance policies within TOWER Life (N.Z.) Limited at 1 October are referable to the fund, named Statutory Fund No. 1. Assets sufficient to meet TOWER Life (N.Z.) Limited’s minimum solvency requirements calculated under Reserve Bank requirements have been transferred to Statutory Fund No. 1 on establishment.

The purpose of a statutory fund is to ensure that the funds received and paid out in respect of life insurance policies are separately identifiable as being part of the statutory fund.

41. Discontinued operations and disposal groups held for sale

Consolidated results of discontinued operations/disposal groups are as follows:

		2013	2012
		$000	$000
	Profit for theyear from discontinued operations/disposalgroups
	(Loss)/profit for theyear from discontinued operations:
	Health businessA	940	13,250
	Investments businessB	4,007	6,959
	Non-Participatinglife businessC	(3,655)	15,955
	Australian liabilitiesD	(7,114)	(2,332)
	Participatinglife businessE	2,841	2,587
	(Loss)/profit from discontinued operations	(2,981)	36,420
	Profit/(loss)from disposal of subsidiaries
	Health businessA	17,553	—
	Investments businessB	66,626	—
	Non-Participatinglife businessC	(12,483)	—
	Participatinglife business attributable costE	(2,431)
	Impairment of intangible assets1	(32,328) 36,937	— —
	Profit from discontinued operations/disposalgroups	33,956	36,420
	Net assets/(liabilities)held for sale:
	Health businessA	—	76,955
	Australian liabilitiesD	(17,068)	—
	Participatinglife businessE	39,439	—
	Total net assets held for sale	22,371	76,955

1 Management have reviewed the carrying value of intangible assets in light of recent business disposals. Following this review, an impairment of $44.9 million ($32.3 million net of tax) was recorded against the carrying value of Intangible assets – software. This impairment has been expensed in the 30 September 2013 results reducing the profit from discontinued operations/ disposal groups.

(A) Sale of TOWER Medical Insurance Limited

On 30 November 2012, TOWER Limited sold its health insurance business, TOWER Medical Insurance Limited to Australian health insurer, nib holdings limited for approximately $102 million. The sale followed a strategic review of TOWER Group’s businesses announced earlier in 2012. The sale of TOWER Medical Insurance Limited has resulted in the health insurance business segment being treated as a discontinued operation of the Group.

Operating results for the two months prior to sale of TOWER Medical Insurance Limited have been removed from individual lines in the financial statements and notes, as required by accounting standards, and have been presented

76 TOWER Limited and TOWER Capital Limited annual reports 2013

as a discontinued operation. A more detailed breakdown of the financial performance, position and cash flows of TOWER Medical Insurance Limited is presented below.

The results of the health business were as follows:

The results of the health business were as follows:
Premium revenue from insurance contracts	2013 2012
	$000 $000
	24,812 146,230
Investment revenue	1,047 5,761
Net operatingrevenue	25,859 151,991
Claims expense	18,718 97,199
Net claims expense	18,718 97,199
Decrease inpolicyliabilities	(667) (510)
Management and sales expenses	6,503 36,899
Net claims and operatingexpenses	24,554 133,588
Profit before taxation	1,305 18,403
Income tax expense	(365) (5,153)
Profit after tax from discontinued operations	940 13,250
Cash flows of the health business:
Operatingcash inflow	3,068 10,783
Investingcash inflow/(outflow)	41,230 (18,691)
Financingcash(outflow)	— (7,000)
Total cash inflow/(outflow)	44,298 (14,909)

The financial position of the health business was as follows:

Assets	30 NOVEMBER 30 SEPTEMBER
	2013 2012
	$000 $000
Cash and cash equivalents	57,557 13,257
Receivables	2,669 2,576
Financial assets at fair value throughprofit or loss	47,653 88,914
Derivative financial assets	3,306 3,318
Deferred commission	9,680 9,530
Deferred acquisition costs	22,456 22,367
Deferred tax asset	14,421 14,517
Attributedgoodwill	13,067 13,067
Total assets	170,809 167,546
Liabilities
Payables	2,713 1,834
Current tax liability	— 234
Insurance liabilities	28,910 26,397
Derivative financial liability	62 34
Deferred tax liability	8,998 8,931
Premiumpayback liability	52,494 53,161

Total liabilities	30 NOVEMBER 30 SEPTEMBER
	2013 2012
	$000 $000
	93,177 90,591
Net assets	77,632 76,955

Profit on disposal

Cash consideration received	2013
	$000
	102,346
Net assets at 30 September 2012	76,955
Profit after tax to 30 November 2012	940
Net assets at 30 November 2012	77,895
Grossprofit on disposal	24,451
Less directlyattributable costs of sale	(7,235)
Tax directlyattributable to costs of sale	337
	(6,898)
Profit on disposal	17,553

(B) Sale of TOWER investments business

On 26 February 2013, TOWER Limited announced the sale of its investments business comprising, TOWER Managed Funds Limited, TOWER Managed Funds Investments Limited, TOWER Employee Benefits Limited, TOWER Asset Management Limited and TOWER Investments Limited, to Fisher Funds Management Limited for approximately $79 million. The sale followed a strategic review of TOWER Group’s businesses announced in 2012. The sale has resulted in the investments business segment being treated as a discontinued operation of the Group. Completion of the sale occurred on 2 April 2013.

The operating results of the investments business have been removed from individual lines in the financial statements and notes, as required by accounting standards, and have been presented as a discontinued operation. A more detailed breakdown of the financial performance, position and cash flows of the investments business is presented below.

The results of the investments business were as follows:

Investment revenue	2013 2012
	$000 $000
	123 77
Fee and other revenue	17,996 35,340
Net operatingrevenue	18,119 35,417
Management and sales expenses	12,517 25,751
Net claims and operatingexpenses	12,517 25,751
Profit before taxation	5,602 9,666
Income tax expense	(1,595) (2,707)

77

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Discontinued operations and disposal groups held for sale (continued)

41. Discontinued operations and disposal groups held	for sale_(continued)_
Profit after tax from discontinued operations	2013 2012
	$000 $000
	4,007 6,959
Cash flows of investment business
Operatingcash inflow	246 5,083
Investingcash(outflow)/inflow	(63) 105
Financingcash outflow	(236) (6,800)
Total cash outflow	(53) (1,612)

The financial position of the investments business immediately prior to sale was as follows:

Assets disposed	1 APRIL
	2013
	$000
Cash and cash equivalents	543
Receivables	4,235
Property,plant and equipment	65
Deferred acquisition costs	6,091
Deferred tax asset	315
Total assets	11,249
Liabilities disposed
Payables	1,085
Provisions	1,759
Deferred tax liability	1,691
Total liabilities	4,535
Net assets	6,714
Profit on disposal

Cash consideration receivable	2013
	$000
	79,708
Net assets at 1 April 2013	6,714
Net assets on disposal	6,714
Grossprofit on disposal	72,994
Less directlyattributable costs of sale	(6,877)
Tax directlyattributable to costs of sale	509
	(6,368)
Profit on disposal	66,626

(C) Sale of non-participating life business

On 10 May 2013, TOWER Limited announced the sale of most of its nonparticipating life insurance business to Fidelity Life Assurance Company Limited for the aggregate value to TOWER, including cash consideration and release of capital, of $189 million. The sale followed a strategic review of TOWER Group’s businesses announced in 2012. The sale has resulted in the non-participating life business segment being treated as a discontinued operation of the Group. Completion of the sale occurred on 1 August 2013.

At 30 September 2013, the Provisional net asset figure and Profit on disposal calculation remain provisional until confirmed in accordance with transaction documents.

The provisional operating results and financial position of the non-participating life business have been removed from individual lines in the financial statements and notes, as required by accounting standards, and have been presented as a discontinued operation and disposal group held for sale. A more detailed breakdown of the financial performance, position and cash flows of the nonparticipating life business is presented below.

The results of the non-participating life business were as follows:

Premium revenue from insurance contracts	2013 2012
	$000 $000
	72,614 83,184
Less: Outwards reinsurance expense	(19,279) (19,981)
Net operatingrevenue	53,335 63,203
Claims expense	33,900 36,939
Less: reinsurance recoveries revenue	(13,242) (14,877)
Net claims expense	20,658 22,062
Decrease inpolicyliabilities	9,388(23,744)
Management and sales expenses	33,315 50,018
Net claims and operatingexpenses	63,361 48,336
(Loss)/profit before taxation	(10,026) 14,866
Income tax credit	6,371 1,089
(Loss)/profit after tax from discontinued operations	(3,655) 15,955
Cash flows of the non-participatingLife business:
Operatingcash inflow	(1,851) 39,237
Total cash inflow	(1,851) 39,237

The financial position of the non-participating life business was as follows:

Assets	1 AUGUST
	2013
	$000
Receivables	2,500
Liabilities ceded under reinsurance	20,099
Total assets	22,599

78 TOWER Limited and TOWER Capital Limited annual reports 2013

Liabilities	1 AUGUST
	2013
	$000
Payables	83
Deferred tax liability	37,721
Life insurance contract liabilities1	(88,435)
Total liabilities	(50,631)
Provisional net assets	73,230

• 1 The Individual risk business presented as discontinued operations includes negative insurance liabilities arising from the net present value of the future cash flows of current inforce life insurance policies.

Profit on disposal	2013
	$000
Cash consideration received	71,841
Provisional net assets as at 1 August 2013	73,230
Gross loss on disposal	(1,389)
Less directlyattributable costs of sale	(12,696)
Tax directlyattributable to costs of sale	1,602
	(11,094)
Loss on disposal	(12,483)

The results associated with the Australian liabilities were as follows:

Assets	2013
	$000
Reinsurance receivables	622
Total assets	622
Liabilities
Insurance liabilities	17,690
Total liabilities	17,690
Net liabilities	(17,068)

Cash flows associated with the Australian liabilities:

	2013 2012
	$000 $000
Operatingcash outflow	(3,006) 7
Total cash outflow	(3,006) 7

(D) Disposal of Australian liabilities

These financial statements present the Group’s general insurance run-off business in its Australian branch as a discontinued operation and disposal group held for sale. The Australian branch insurance liabilities will be disposed to a third party, subject to a court approved scheme of arrangement. The transaction will include disposing of all policies written or assumed by the branch and all the associated liabilities under those policies. Net claims expense in the current year includes $6,031,000 resulting from the revaluation of these associated liabilities to fair value.

The sale amount will be settled in cash on the transfer date, which will be determined by an Australian Federal Court subject to approval of the scheme. Subsequent to the disposal of the policy liabilities, the balance of the Australian branch assets will be repatriated to New Zealand and the operations of the branch will be discontinued.

branch will be discontinued.
Claims expense	2013 2012
	$000 $000
	6,718 2,363
Less: reinsurance recoveries revenue	340 (298)
Net claims expense	7,058 2,065
Management and sales expenses	56 267
Net claims and operatingexpenses	7,114 2,332
Loss before taxation	(7,114) (2,332)
Income tax expense	— —
Loss after tax from discontinued operations	(7,114) (2,332)

79

TOWER Limited Notes to the Financial Statements

For the year ended 30 September 2013

41. Discontinued operations and disposal groups held for sale (continued)

(E) TOWER Life (N.Z.) Limited held for sale

At 30 September 2013 TOWER Limited was marketing its remaining participating life insurance business for sale. The decision to actively market followed a strategic review of TOWER Group’s businesses announced in 2012. The decision has resulted in the remaining TOWER Life (N.Z.) business segment being treated as a discontinued operation of the Group.

The operating results and financial position of the life business have been removed from individual lines in the financial statements and notes, as required by accounting standards, and have been presented as a discontinued operation and disposal group held for sale. A more detailed breakdown of the financial performance, position and cash flows of the non-participating life business is presented below.

The results of the remaining life business were as follows:

Premium revenue from insurance contracts	2013 2012
	$000 $000
	9,771 11,003
Less: Outwards reinsurance expense	53 35
Netpremium revenue	9,824 11,038
Investment revenue	4,045 97,126
Management fees	73 12
Net operatingrevenue	13,942 108,176
Claims expense	39,041 45,431
Less: reinsurance recoveries revenue	— (87)
Net claims expense	39,041 45,344
Decrease inpolicyliabilities	(27,807) 32,622
Management and sales expenses	5,135 7,747
Net claims and operatingexpenses	16,369 85,713
(Loss)/profit before taxation	(2,427) 22,463
Income tax credit	5,268(19,876)
Profit after tax from discontinued operations 2,841 2,587
Cash flows of the remainingLife business
Operatingcash inflow (22,008) 11,154
Investingcash inflow/(outflow) 8,831(18,033)
Financingcash(outflow) 14,091 (6,460)
Total cash inflow 914(13,339)

The financial position of the remaining life business was as follows:

Assets	2013
	$000
Cash and cash equivalents	8,399
Receivables	36,452
Financial assets at fair value through profit or loss	625,663
Derivative financial assets	48,082
Current tax asset	3,479
Deferred tax asset	16,104
Total assets	738,179
Liabilities
Payables	1,971
Provisions	57
Insurance liabilities	7,008
Derivative financial liability	5,086
Deferred tax liabilities	84
Life insurance contract liabilities	660,945
Life investment contract liabilities	23,589
Total liabilities	698,740
Net assets	39,439
Costs of sale:
Directlyattributable costs of sale	(2,880)
Tax directlyattributable to costs of sale	449
Total liabilities	(2,431)

80 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Limited Capital Limited Financial Statements

For the year ended 3 0 September 20131 March 2013

Performance

IntroductionFinancial Statements 81 Highlights Independent Auditor’s Report 82 ChairState m ae n t of C’s rep o rt on bmpreh e nsive Income 84half of directors B usiala n ess review ce Sheet 85 Guide to TOWER Limited income statement Statement of Changes in Equity 86 Guide to TOWER Limited balance sheet Statement of Cash Flows 86 Notes to the Financial Statements 87 Our company Board of Directors Group executive team Focusing on our people Community commitment

1. Impact of amendments to NZ IFRS 2

2. Other expenses

4

6

14 7. Interest bearing liabilities 15

1. Related party transactions and balances

2. Segmental reporting 18

3. Financial instruments categories

22

1. Risk management information

2. Reconciliation of profit for the year to net 24

cash flows from operating activities 26

Corporate governance

1. Subsequent events

Corporate governance at TOWER 30 Audit and risk management at TOWER 37 Remuneration at TOWER 38 Interests’ disclosures 42 45

Shareholding and exchange disclosures 45 Other matters 47 Performance TOWER Limited Table of contents 49 TOWER Limited Auditor’s Report 50 TOWER Limited Financial Statements 52 TOWER Capital Limited Table of contents 127 TOWER Capital Limited Auditor’s Report 128 TOWER Capital Limited Financial Statements 130 TOWER directory 145

“We had several conversations regarding our policy and conditions etc. Each and every time that we spoke to a customer service person - they were all fantastic. Friendly but also all very well informed and they gave us concise information to help us.”

TOWER Customer

81

TOWER Capital Limited Independent Auditor’s Report

For the year ended 30 September 2013

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Independent Auditors’ Report

to the shareholder of TOWER Capital Limited

Report on the Financial Statements

We have audited the financial statements of TOWER Capital Limited on pages 84 to 93, which comprise the balance sheet as at 30 September 2013, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and the notes to the financial statements that include a summary of significant accounting policies and other explanatory information.

Directors’ Responsibility for the Financial Statements

The Directors are responsible for the preparation of these financial 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 financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial 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 financial 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 financial statements.

We believe that the audit evidence we have obtained is sufficient 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.

PricewaterhouseCoopers , 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 (9) 355 8000, F: +64 (9) 355 8001, www.pwc.com/nz

82 TOWER Limited and TOWER Capital Limited annual reports 2013

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Independent Auditors’ Report

TOWER Capital Limited

Opinion

In our opinion, the financial statements on pages 84 to 93:

• (i) comply with generally accepted accounting practice in New Zealand;

• (ii) comply with International Financial Reporting Standards; and

• (iii) give a true and fair view of the financial position of the Company as at 30 September 2013 and its financial performance and cash flows 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 financial statements for the year ended 30 September 2013:

• (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 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 for our audit work, for this report or for the opinions we have formed.

==> picture [106 x 38] intentionally omitted <==

Chartered Accountants Auckland 26 November 2013

PwC

83

TOWER Capital Limited Statement of Comprehensive Income

For the year ended 30 September 2013

Investment revenue	NOTE	2013 2012
		$000 $000
Interest income	4	8,176 8,176
Total investment revenue		8,176 8,176
Operatingexpenses
Operatingexpenses		21 20
Total operatingexpenses		21 20
Financingcosts
Interest expense		6,950 6,950
Amortisation of capitalised costs		800 727
Total financingcosts		7,750 7,677
Profit before tax		405 479
Income tax expense	5(a) (113) (134)
Totalprofit and comprehensive income for theyear attributed to shareholders	292 345

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

84 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Capital Limited Balance Sheet

As at 30 September 2013

Assets	NOTE	2013 2012
		$000 $000
Cash and cash equivalents		461 —
Relatedpartyreceivables	6	84,489 84,641
Deferred tax asset	5(b) 2 —
Total assets	84,952 84,641
Liabilities
Bank overdraft	— 558
Interest bearingliabilities	7 82,791 81,990
Deferred tax liabilities	5(b) 120 344
Total liabilities	82,911 82,892
Net assets	2,041 1,749
Equity
Retained earnings	2,041 1,749
Total equity	2,041 1,749

The financial statements were approved for issue by the Board on 26 November 2013.

==> picture [78 x 45] intentionally omitted <==

Michael P Stiassny Chairman

==> picture [106 x 28] intentionally omitted <==

Graham R Stuart Director

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

85

TOWER Capital Limited Statement of Changes in Equity

For the year ended 30 September 2013

Retained earnings	TOTAL EQUITY RETAINED EARNINGS
	2013 2012
	$000 $000
At the beginningof theyear	1,749 1,404
Comprehensive income for theyear
Profit for theyear	292 345
At the end of theyear	2,041 1,749

Statement of Cash Flows

For the financial year ended 30 September 2013

Cash flows from operatingactivities	NOTE	2013 2012
		$000 $000
Interest received		8,176 8,176
Interestpaid		(6,950) (6,950)
Payments to suppliers and employees		(359) (730)
Net cash inflow from operatingactivities	13	867 496
Cash flows from investingactivities
Net advances to relatedparties		152 (2,007)
Net cash inflow/(outflow)from investingactivities		152 (2,007)
Net increase/(decrease)in cash and cash equivalents		1,019 (1,511)
Cash and cash equivalents at the beginningof theyear		(558) 953
Cash and cash equivalents at the end of theyear		461 (558)

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

86 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Capital Limited Notes to the Financial Statements For the year ended 30 September 2013

1. Summary of significant accounting policies

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

TOWER Capital Limited (‘the Company’) is a profit-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 office is 22 Fanshawe Street, Auckland, New Zealand.

Basis of preparation

This general purpose financial 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 financial reporting standards as appropriate for profit-oriented entities.

Compliance with International Financial Reporting Standards

The financial statements and notes of TOWER Capital Limited comply with International Financial Reporting Standards.

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

The Company’s owners or others do not have the power to amend the financial statements after they have been authorised for issue.

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.

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

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

(iii) Tax consolidation

TOWER 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.

(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.

(E) GST

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

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

(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.

(F) Functional and presentation currency

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

(D) Taxation

(i) Current tax

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

(ii) Deferred tax

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

(G) Cash and cash equivalents

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

(H) Financial instruments and fair value

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

87

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2013

1. Summary of significant accounting policies (continued)

Loans and receivables

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

(N) Cash flows

The statement of cash flows presents the net cash flows for advances to related parties. The Company considers that knowledge of gross receipts and payments is not essential to understanding the activities of the Company and it is considered acceptable to report only the net cash flows 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.

(I) 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 flows of the asset have been impacted as a result of one or more events that occurred after the initial recognition of the financial asset.

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

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

In respect of financial assets carried at amortised cost, with the exception of trade receivables, the impairment loss is reversed through the statement of comprehensive income to the extent that the carrying amount of the financial asset 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.

(J) 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.

(K) Payables

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

(L) 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 outflow of resources will be required to settle the obligation. Provisions are recognised at the best estimate of future cash flows discounted to present value where the effect is material.

(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 decision-maker 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 identified 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.

• The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Company’s accounting periods beginning on or after 1 October 2013 or later periods, and the Company has not early adopted them. The Company expects to adopt the following new standards on 1 October after the effective date.

• NZ IFRS 9 ‘Financial Instruments’ (effective from 1 January 2015). The standard partly replaces NZ IAS 39 and introduces requirements for classifying and measuring financial 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 financial statements.

• (b) Standards, amendments and interpretations to existing standards effective 2013 or early adopted by the Company.

• The Company has adopted the following new and amended IFRS’s as of 1 October 2012:

• NZ IAS 1 ‘Presentation of Financial Statements (effective from 1 January 2013). This revised standard amendment requires entities to group items presented in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss in subsequent periods. The revised standard has not had a material impact on the financial statements.

• Improvements to NZ IFRS 2009 – 2011 cycle includes various amendments effective for periods beginning on or after 1 January 2012. The amendments have not had a material impact on the financial statements.

(M) Contributed equity

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

88 TOWER Limited and TOWER Capital Limited annual reports 2013

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 (2012: Nil). TOWER New Zealand Limited paid all fees for audit services provided to TOWER Capital Limited.

4. Interest income

	2013 2012
	$000 $000
Interest income – relatedparty (Note 6)	8,176 8,176
Total interest income	8,176 8,176

5. Taxation

(a) Analysis of taxation expense

Current taxation	2013 2012
	$000 $000
	(339) (338)
Deferred taxation	226 204
Income tax expense	(113) (134)
Profit before tax	405 479
Income tax expense at current rate of 28%	113 134
Income tax expense	113 134

2012	OPENING BALANCE AT 1 OCTOBER CHARGED/(CREDITED) TO STATEMENT OF COMPREHENSIVE INCOME CLOSING BALANCE AT 30 SEPTEMBER	OPENING BALANCE AT 1 OCTOBER CHARGED/(CREDITED) TO STATEMENT OF COMPREHENSIVE INCOME CLOSING BALANCE AT 30 SEPTEMBER
	$000 $000 $000
Movements in deferred tax liabilities
Unamortised capitalised bonds issue costs	548 (204) 344
Total deferred tax liabilities	548 (204) 344
Net deferred tax	(548) 204 (344)
Deferred liabilities are analysed as
		2013 2012
		$000 $000
Expected to crystallise in the next 12 months		120 63
Not expected to crystallise in the next 12 months		(2) 281
		118 344

(c) Imputation credit account

TOWER Limited, the ultimate parent company of the Company, holds an imputation credit account as the representative member of the TOWER consolidated tax group to which the Company belongs.

6. Related party transactions and balances

(a) Subsidiaries

(b) Deferred tax

2013	OPENING BALANCE AT 1 OCTOBER CHARGED/(CREDITED) TO STATEMENT OF COMPREHENSIVE INCOME CLOSING BALANCE AT 30 SEPTEMBER
	$000 $000 $000
Movements in deferred tax asset
Tax losses	— 2 2
Total deferred tax liabilities	— 2 2
Movements in deferred tax liabilities
Unamortised capitalised bonds issue costs	344 (224) 120
Total deferred tax liabilities	334 (224) 120
Net deferred tax	(344) 226 (118)

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:

RELATED PARTY	2013 2012 NATURE OF RELATIONSHIP TYPE OF TRANSACTION $000 $000
TOWER Financial Services GroupLimited	83,975 83,975 Subsidiary of TOWER Limited Loan/ Advance
TOWER New Zealand Limited	514 666 Subsidiary of 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 fixed interest rate of 10% per annum. The loan is payable on demand and the above total includes accrued interest of $2,216,000 (2012: $2,216,000).

The balance owing to TOWER New Zealand Limited represents expenses paid on behalf of the Company. The balance is non-interest bearing and is payable on demand.

89

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2013

6. Related party transactions and balances (continued)

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

RELATED PARTY	2013 2012 NATURE OF RELATIONSHIP TYPE OF TRANSACTION $000 $000
TOWER Financial Services GroupLimited	8,176 8,176 Subsidiary of TOWER Limited Interest on loan
TOWER New Zealand Limited	(152) 2,007 Subsidiary of TOWER Limited Other expenses and advances
TOWER Limited	(168) (709) Parent Tax losses offset

(b) Directors trading in TOWER securities

TOWER Capital directors held the following beneficial interest in TOWER Capital Senior Bonds:

8. Contributed equity

Issued share capital(ordinaryshares)	NUMBER OF SHARES
	2013 2012
	1,000 1,000

Shares have been issued for nil consideration on incorporation. Each share ranks equally with one vote attached to each share.

9. Tangible assets value per bond

Tangible assetsper bond	2013 2012
	$ $
	1.04 1.04

DIRECTOR	HOLDING
	2013 2012
	$ $
John Spencer	50,000 50,000
Susie Staley*	— 65,000

• Susie Staley resigned as a director of TOWER on 21 March 2013

7. Interest Bearing Liabilities

Fixed rate senior unsecured bonds	2013 2012
	$000 $000
	83,219 83,219
Unamortised capitalised costs	(428) (1,229)
	82,791 81,990
Analysed as:
Current	82,791 659
Non current	— 81,331
	82,791 81,990

Fixed rate senior unsecured bonds

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

The above total of $82,791,000 includes $1,460,000 of accrued interest (2012: $1,460,000). The Company capitalised $3,499,000 of costs associated with the issuance of the bonds. These costs are amortised over the five year term of the bonds using the effective interest method. The bonds are carried at amortised cost using the effective interest method. The amortised costs during the period to 30 September 2013 were $800,500 (2012: $727,000).

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

10. 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 in one geographical segment, New Zealand. Consequently no segmental information is presented.

11. Financial instruments categories

The analysis of financial assets and liabilities into their categories and classes is set out in the following table:

Financial Assets	TOTAL LOANS AND RECEIVABLES
	$000 $000
As at 30 September 2013
Cash and cash equivalents	461 461
Relatedpartyreceivables	84,489 84,489
Total financial assets	84,950 84,950
As at 30 September 2012
Relatedpartyreceivables	84,641 84,641
Total financial assets	84,641 84,641

The fair value of fixed rate senior unsecured bonds as at 30 September 2013 is $83,692,000 (2012: $86,104,000), this has been estimated using the method outlined in Note 12 (d).

90 TOWER Limited and TOWER Capital Limited annual reports 2013

Financial Liabilities	TOTAL FINANCIAL LIABILITIES AT AMORTISED COST
	$000 $000
As at 30 September 2013
Interest bearingliabilities	82,791 82,791
Total financial liabilities	82,791 82,7691
As at 30 September 2012
Bank overdraft	558 558
Interest bearingliabilities	81,990 81,990
Total financial liabilities	82,548 82,548

(iii) Price risk

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

(b) Credit risk

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

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

(i) Credit risk concentration

In the event of liquidation or the cessation of trade, interest bearing liabilities have priority over related party claims over financial assets.

12. Risk management information

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

These risks are managed through the parent company’s (TOWER Limited) risk management policy. TOWER’s objective is to satisfactorily manage these risks in line with the Board approved Group Risk and Compliance framework policy. Various procedures are in place to help identify, mitigate and monitor the risks faced by the Company. Business managers are responsible for understanding and managing their risks including operational and compliance risk. The consolidated entity’s exposure to all high and critical risks is reported monthly to the board and quarterly to the TOWER Group’s Audit and Risk Committee.

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

(a) Market risk

Market risk is the risk of change in the fair value of financial instruments from fluctuations 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 specific to an individual financial instrument or its issuer or factors affecting all financial instruments traded in a market.

(i) Interest rate risk

Interest rate risk is the risk that the value or future cash flows of a financial instrument will fluctuate because of changes in interest rates.

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

Concentration of credit risk exists when the Company enters into contracts or financial instruments with a number of counterparties that are engaged in similar business activities or exposed to similar economic factors that might affect their ability to meet contractual obligations. 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 significant concentrations of credit risk are outlined by counterparty below.

Banks	CARRYING VALUE
	2013 2012
	$000 $000
	461 —
Relatedpartyreceivable	84,489 84,641
Total financial assets with credit exposure	84,950 84,641

(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 financial assets held by the Company at the reporting date, which is as follows:

Asset	CARRYING VALUE
	2013 2012
	$000 $000
Cash and cash equivalents	461 —
Relatedpartyreceivable	84,489 84,641
Total credit risk	84,950 84,641

(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.

91

TOWER Capital Limited Notes to the Financial Statements

For the year ended 30 September 2013

12. Risk management information (continued)

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

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

Credit exposure bycredit rating	CARRYING VALUE
	2013 2012
	$000 $000
AA	461 —
Relatedparties with no credit rating	84,489 84,641
	84,950 84,641

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

None of the financial assets that are fully performing has been renegotiated in the past period (2012: Nil).

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

None of the financial assets are past due (2012: Nil).

(vi) Financial assets that are individually impaired

None of the financial assets are individually impaired (2012: Nil).

(c) Financing and liquidity risk

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

To mitigate financing and liquidity risk the Company maintains sufficient current assets to ensure that it can meet its debt obligations and other cash outflows on a timely basis.

Financial assets and liabilities by expected and contractual maturity

The tables below summarise the Company’s financial 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 flows that include interest payments and exclude the impact of netting agreements.

Expected cash flows

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

	CARRYING VALUE TOTAL EXPECTED CASH FLOWS LESS THAN ONE YEAR ONE TO TWO YEARS TWO TO THREE YEARS
	$000 $000 $000 $000 $000
As at 30 September 2013
Financial assets
Cash and cash equivalents	461 461 461 — —
Relatedpartyreceivables	84,489 86,350 86,350
Total financial assets	84,950 86,811 86,811 — —
Financial liabilities
Interest bearingliabilities	82,791 85,510 85,510 — —
Total financial liabilities	82,791 85,510 85,510 — —
As at 30 September 2012
Financial assets
Relatedpartyreceivables	84,641 94,678 8,842 85,836 —
Total financial assets	84,641 94,678 8,842 85,836 —
Financial liabilities
Bank overdraft	558 558 558 — —
Interest bearingliabilities	81,990 92,460 6,950 85,510 —
Total financial liabilities	82,548 93,018 7,508 85,510 —

Contractual cash flows

The table below presents the maturity analysis of the Company’s financial assets and liabilities on a contractual cash flow basis.

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$000 $000 $000 $000 $000
As at 30 September 2013
Financial assets
Cash and cash equivalents 461 461 461 — —
Related party receivables 84,489 84,489 84,489 — —
Total financial assets 84,950 84,950 84,950 — —
VALUE CARRYING CASH FLOWS CONTRACTUAL TOTAL ONE YEAR LESS THAN TWO YEARS ONE TO THREE YEARS TWO TO
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92 TOWER Limited and TOWER Capital Limited annual reports 2013

	CARRYING VALUE TOTAL CONTRACTUAL CASH FLOWS LESS THAN ONE YEAR ONE TO TWO YEARS TWO TO THREE YEARS
	$000 $000 $000 $000 $000
Financial liabilities
Interest bearingliabilities	82,791 85,510 85,510 — —
Total financial liabilities	82,791 85,510 85,510 — —
As at 30 September 2012
Financial assets
Relatedpartyreceivables	84,641 84,641 84,641 — —
Total financial assets	84,641 84,641 84,641 — —
Financial liabilities
Payable	558 558 558 — —
Interest bearingliabilities	81,990 92,460 6,950 85,510 —
Total financial liabilities	82,548 93,018 7,508 85,510 —

(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 financial instruments that are not traded in an active market is determined using valuation techniques referred to below:

The carrying amounts of all financial 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 financial instruments.

(i) Cash and cash equivalents

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

(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 payment obligations 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.

	2013 2012
	$000 $000
As at 30 September
Interest bearingliabilities	82,791 81,990
Retained earnings	2,041 1,749
Total capital resources	84,832 83,739

13. Reconciliation of profit for the year to net cash flows from operating activities

Netprofit after tax for theyear	2013 2012
	$000 $000
	292 345
Add/(less)non cash items
Decrease in deferred tax	(226) (204)
Add/(less)movements in workingcapital
Decrease inpayables	— —
Increase/(decrease)in taxation	1 (372)
Decrease in receivables	— —
	1 (372)
Add other items classified as financingactivities
Decrease in capitalised costs	800 727
Net cash inflow from operatingactivities	867 496

(ii) Related party receivables and payables

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

(iii) Interest bearing liabilities

The fair value of fixed rate senior unsecured bonds is determined by reference to the average quoted market price of the underlying debt securities at the end of the period.

14. Contingent Liabilities

There were no contingent liabilities as at 30 September 2013 (2012: Nil).

15. Capital commitments

There were no capital commitments as at 30 September 2013 (2012: Nil).

(e) Sensitivity analysis

No sensitivity analysis has been disclosed as there is no impact on the shareholder profit 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 fixed interest rates. Other related party balances are interest free payables.

16. Subsequent events

There have been no material events subsequent to 30 September 2013.

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94 TOWER Limited and TOWER Capital Limited annual reports 2013

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95

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96 TOWER Limited and TOWER Capital Limited annual reports 2013

TOWER Directory

Enquiries

For customer enquiries, call TOWER on 0800 808 808 or visit www.tower.co.nz For investor enquiries: Angela Laurenson Corporate Services Manager Telephone: +64 9 369 2000 Email: investor.relations@tower.co.nz Website: www.tower.co.nz

Board of Directors

Michael Stiassny (Chairman) David Hancock (CEO) Mike Allen Mike Jefferies Steve Smith John Spencer Graham Stuart

Chief Financial Officer and Company Secretarial Michael Boggs

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

Auditor PricewaterhouseCoopers

Banker Westpac New Zealand Limited

Solicitor

DLA Phillips Fox

Company numbers

TOWER Limited (Incorporated in New Zealand)

NZ Incorporation 979635 NZBN 9429 0374 84576 ARBN 088 481 234

TOWER Capital Limited

NZ Incorporation 2198245 NZBN 9429 0324 41505

Stock exchanges

The Company’s ordinary shares are listed on the NZSX and the ASX.

Registrar

New Zealand

Computershare Investor Services Limited Level 2, 159 Hurstmere Road, Takapuna, Auckland 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 3329 Melbourne Vic 3000

Freephone within Australia: 1800 501 366 Telephone Australia: +61 3 9415 4083 Facsimile Australia: +61 3 9473 2500 Email: enquiry@computershare.co.nz

Website: www.investorcentre.com/nz

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

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.

TOWER Limited and TOWER Capital Limited Investor Relations

Angela Laurenson Corporate Services Manager Telephone: +64 9 369 2000 Facsimile: +64 9 369 2160 Email: investor.relations@tower.co.nz Website: www.tower.co.nz

Registrar

Computershare Investor Services Limited Freephone within New Zealand: 0800 222 065 Telephone New Zealand: +64 9 488 8777 Freephone within Australia: 1800 501 366 Telephone Australia: +61 3 9415 4083 Email: enquiry@computershare.co.nz Website: www.investorcentre.com/nz